10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

CHECK ONE:

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: September 30, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _______.

Commission file No.: 1-12996

Advocat Inc.

(exact name of registrant as specified in its charter)

Delaware	62-1559667
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)

1621 Galleria Boulevard, Brentwood, TN 37027
(Address of principal executive offices)       (Zip Code)

(615) 771-7575
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o           Accelerated filer þ           Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

5,877,287
(Outstanding shares of the issuer’s common stock as of November 1, 2007)

TABLE OF CONTENTS

EX-10.1 Operations Transfer Agreement

EX-10.2 Loan and Security Agreement

EX-10.3 Loan and Security Agreement

EX-10.4 Guaranty

EX-10.5 Revolving Credit Note

EX-10.6 Term Loan Note

EX-10.7 Fifth Amendment to Consolidated Amended and Restated Master Lease

EX-31.1 Certification of CEO

EX-31.2 Certification of CFO

EX-32 Certification of CEO and CFO

Part I. FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

ADVOCAT INC.

INTERIM CONSOLIDATED BALANCE SHEETS

(in thousands)

	September 30,			December 31,
	2007			2006
	(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	13,939		$	12,344
Receivables, less allowance for doubtful accounts of $2,254 and $2,122, respectively		23,531			16,902
Current portion of note receivable		619			534
Prepaid expenses and other current assets		2,577			2,706
Insurance refunds receivable		2,712			3,519
Deferred income taxes		2,985			1,785
Total current assets		46,363			37,790
PROPERTY AND EQUIPMENT, at cost		61,395			59,954
Less accumulated depreciation		(32,874	)		(32,757	)
Discontinued operations, net		1,455			1,576
Property and equipment, net		29,976			28,773
OTHER ASSETS:
Deferred income taxes		16,936			21,849
Note receivable, net of current portion		4,971			4,758
Deferred financing and other costs, net		1,300			905
Cash restricted for capital expenditures		—			864
Other assets		1,853			1,962
Acquired leasehold interest, net		9,703			—
Total other assets		34,763			30,338
	$	111,102		$	96,901
CURRENT LIABILITIES:
Current portion of long-term debt	$	3,922		$	4,587
Short-term debt		—			2,662
Trade accounts payable		5,816			4,566
Accrued expenses:
Payroll and employee benefits		10,571			9,363
Current portion of self-insurance reserves		4,100			4,838
Other current liabilities		5,030			3,600
Total current liabilities		29,439			29,616
NONCURRENT LIABILITIES:
Long-term debt, less current portion		34,617			24,267
Self-insurance reserves, less current portion		17,031			22,159
Other noncurrent liabilities		8,353			5,733
Total noncurrent liabilities		60,001			52,159
COMMITMENTS AND CONTINGENCIES
SERIES C REDEEMABLE PREFERRED STOCK
$.10 par value, 5,000 shares authorized, issued and outstanding, including premium of $5,097 and $6,371 at September 30, 2007 and December 31, 2006, respectively.		10,015			11,289
SHAREHOLDERS’ EQUITY:
Series A preferred stock, authorized 200,000 shares, $.10 par value, none issued and outstanding		—			—
Common stock, authorized 20,000,000 shares, $.01 par value, 5,877,000 and 5,866,000 shares issued and outstanding, respectively		59			59
Paid-in capital		15,637			15,123
Accumulated deficit		(4,049	)		(11,345	)
Total shareholders’ equity		11,647			3,837
	$	111,102		$	96,901

The accompanying notes are an integral part of these interim consolidated balance sheets.

2

ADVOCAT INC.

INTERIM CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts, unaudited)

	Three Months Ended September 30,
	2007			2006
PATIENT REVENUES, net	$	63,884		$	53,394
EXPENSES:
Operating		49,239			41,328
Lease		5,162			3,860
Professional liability		(6	)		782
General and administrative		4,073			3,906
Stock-based compensation		195			92
Depreciation and amortization		1,033			898
Post acquisition integration costs		326			—
Total expenses		60,022			50,866
OPERATING INCOME		3,862			2,528
OTHER INCOME (EXPENSE):
Foreign currency transaction gain		330			29
Interest income		264			146
Interest expense		(956	)		(892	)
Debt retirement costs		(116	)		(194	)
		(478	)		(911	)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		3,384			1,617
PROVISION (BENEFIT) FOR INCOME TAXES		1,363			(7,972	)
NET INCOME FROM CONTINUING OPERATIONS		2,021			9,589
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
Operating loss, net of taxes of $(10) and $0, respectively		(100	)		(143	)
Gain (loss) on sale, net of taxes of $17 and $0, respectively		28			(2	)
Discontinued operations		(72	)		(145	)
NET INCOME		1,949			9,444
PREFERRED STOCK DIVIDENDS		86			86
NET INCOME FOR COMMON STOCK	$	1,863		$	9,358
NET INCOME PER COMMON SHARE:
Per common share — basic
Continuing operations	$	0.33		$	1.64
Discontinued operations		(0.01	)		(0.02	)
	$	0.32		$	1.62
Per common share — diluted
Continuing operations	$	0.32		$	1.41
Discontinued operations		(0.02	)		(0.02	)
	$	0.30		$	1.39
WEIGHTED AVERAGE COMMON SHARES:
Basic		5,877			5,801
Diluted		6,136			6,783

The accompanying notes are an integral part of these interim consolidated financial statements.

3

ADVOCAT INC.

INTERIM CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts, unaudited)

	Nine Months Ended September 30,
	2007			2006
PATIENT REVENUES, net	$	173,857		$	159,464
EXPENSES:
Operating		132,875			121,606
Lease		14,369			11,513
Professional liability		(2,961	)		(5,476	)
General and administrative		12,168			11,103
Stock-based compensation		454			5,104
Depreciation and amortization		2,874			2,750
Post acquisition integration costs		326			—
Total expenses		160,105			146,600
OPERATING INCOME		13,752			12,864
OTHER INCOME (EXPENSE):
Foreign currency transaction gain		743			269
Other income		—			207
Interest income		771			494
Interest expense		(2,548	)		(2,768	)
Debt retirement costs		(116	)		(194	)
		(1,150	)		(1,992	)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		12,602			10,872
PROVISION (BENEFIT) FOR INCOME TAXES		4,940			(9,088	)
NET INCOME FROM CONTINUING OPERATIONS		7,662			19,960
NET LOSS FROM DISCONTINUED OPERATIONS:
Operating loss, net of taxes of $(10) and $0, respectively		(101	)		(257	)
Loss on sale, net of taxes of $(6) and $0, respectively		(7	)		(122	)
Discontinued operations		(108	)		(379	)
NET INCOME		7,554			19,581
PREFERRED STOCK DIVIDENDS		258			254
NET INCOME FOR COMMON STOCK	$	7,296		$	19,327
NET INCOME PER COMMON SHARE:
Per common share — basic
Continuing operations	$	1.26		$	3.42
Discontinued operations		(0.02	)		(0.07	)
	$	1.24		$	3.35
Per common share — diluted
Continuing operations	$	1.21		$	3.00
Discontinued operations		(0.02	)		(0.06	)
	$	1.19		$	2.94
WEIGHTED AVERAGE COMMON SHARES:
Basic		5,874			5,763
Diluted		6,131			6,622

The accompanying notes are an integral part of these interim consolidated financial statements.

4

ADVOCAT INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands and unaudited)

	Nine Months Ended September 30,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,554		$	19,581
Discontinued operations		(108	)		(379	)
Net income from continuing operations		7,662			19,960
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization		2,874			2,750
Provision for doubtful accounts		809			1,231
Deferred income tax provision (benefit)		3,713			(9,263	)
Provision for (benefit from) self-insured professional liability, net of cash payments		(6,010	)		(8,116	)
Stock-based compensation		454			5,104
Amortization of deferred balances		221			185
Provision for leases in excess of cash payments		1,753			14
Gain on sale of bed license		—			(207	)
Foreign currency transaction gain		(743	)		(269	)
Debt retirement costs		116			194
Non-cash interest expense		—			86
Non-cash interest income		(99	)		(236	)
Net cash provided by operating activities before changes in other assets and liabilities		10,750			11,433
Changes in other assets and liabilities affecting operating activities:
Receivables, net		(7,520	)		(1,781	)
Prepaid expenses and other assets		449			(748	)
Trade accounts payable and accrued expenses		2,965			(1,548	)
Net cash provided by continuing operations		6,644			7,356
Discontinued operations		(21	)		203
Net cash provided by operating activities		6,623			7,559
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(4,015	)		(2,168	)
Acquisition of leasehold interest		(9,218	)		—
Proceeds from sale of discontinued operations and bed license		180			10,431
Decrease (increase) in restricted cash deposits		247			(110	)
Note receivable issued		(1,800	)		—
Notes receivable collection		2,500			718
Decrease (increase) in cash restricted for capital expenditures		864			(1,108	)
Deposits and other deferred balances		417			(18	)
Net cash provided by (used in) continuing operations		(10,825	)		7,745
Discontinued operations		—			(24	)
Net cash provided by (used in) investing activities		(10,825	)		7,721
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt obligations		(9,353	)		(44,637	)
Proceeds from issuance of debt		16,500			30,625
Proceeds from exercise of stock options		60			373
Payment of preferred stock dividends		(258	)		—
Payment for preferred stock restructuring		(326	)		—
Financing costs		(826	)		(764	)
Net cash provided by (used in) financing activities		5,797			(14,403	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		1,595			877
CASH AND CASH EQUIVALENTS, beginning of period		12,344			7,070
CASH AND CASH EQUIVALENTS, end of period	$	13,939		$	7,947
SUPPLEMENTAL INFORMATION:
Cash payments of interest	$	2,294		$	2,626
Cash payments of income taxes	$	838		$	356
NON-CASH TRANSACTIONS:

During the nine month period ended September 30, 2006 the Company accrued, but did not pay, preferred stock dividends of $254,000.

The accompanying notes are an integral part of these interim consolidated financial statements.

5

ADVOCAT INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007 AND 2006

1. BUSINESS

Advocat Inc. (together with its subsidiaries, “Advocat” or the “Company”) provides long-term care services to nursing center patients in eight states, primarily in the Southeast and Southwest. The Company’s centers provide a range of health care services to their patients and residents. In addition to the nursing, personal care and social services usually provided in long-term care centers, the Company offers a variety of comprehensive rehabilitation services as well as nutritional support services.

As of September 30, 2007, the Company’s continuing operations consist of 49 nursing centers with 5,671 licensed nursing beds and 66 assisted living units. The Company’s continuing operations include nine owned nursing centers and 40 leased nursing centers. The Company’s continuing operations include centers in Alabama, Arkansas, Florida, Kentucky, Ohio, Tennessee, Texas and West Virginia.

As further discussed in Note 3, the Company acquired the leasehold interests and operations of seven skilled nursing facilities effective August 11, 2007.

2. BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

The interim consolidated financial statements for the three and nine month periods ended September 30, 2007 and 2006, included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management of the Company, the accompanying interim consolidated financial statements reflect all normal, recurring adjustments necessary to present fairly the Company’s financial position at September 30, 2007 and the results of its operations and cash flows for the three and nine month periods ended September 30, 2007 and 2006. The Company’s consolidated balance sheet at December 31, 2006 was derived from the Company’s audited consolidated financial statements as of December 31, 2006.

The results of operations for the three and nine month periods ended September 30, 2007 and 2006 are not necessarily indicative of the operating results that may be expected for a full year. These interim consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

3. ACQUISITION

Effective August 11, 2007, the Company purchased the leasehold interests and operations of seven skilled nursing facilities from Senior Management Services of America North Texas, Inc. (“SMSA” or “SMSA Acquisition”) for a price of approximately $9,955,000, including approximately $8,570,000 in cash, the assumption of approximately $860,000 in liabilities, and transaction costs of $525,000. These facilities include 1,266 licensed nursing beds, with 1,105 nursing beds currently available for use. The SMSA facilities had unaudited revenues of approximately $52.1 million for the year ended December 31, 2006. The SMSA facilities are in the Company’s existing geographic and operational footprint and are expected to contribute to the Company’s growth strategy and existing base of operations.

The facilities were part of a larger organization that had been in bankruptcy since January 2007. Under the terms of the purchase agreement, the Company acquired the leases and leasehold interests in the facilities, inventory and certain equipment, but did not acquire working capital or assume liabilities, apart from certain obligations for employee paid-time-off benefits, specified lease related obligations and 2007 property taxes. As part of the acquisition terms, the Company loaned the seller $1,800,000 with repayment terms of up to one year to fund the seller’s immediate obligations under the confirmed bankruptcy plan of liquidation. As of September 30, 2007 the seller had repaid the loan in full and the loan was cancelled. The loan was secured by the accounts receivable of the seller, and provided for interest at 12.5% annually.

The facilities are leased from a subsidiary of Omega Healthcare Investors, Inc. (“Omega”). Prior to the SMSA Acquisition, the Company leased 28 facilities from Omega under a master lease. In connection with this acquisition, the Company amended its master lease to include the seven SMSA facilities. The substantive terms of the SMSA lease, including payment provisions and lease period including renewal options, were not changed by this amendment. The lease terms for the seven SMSA facilities provide for an initial term and

6

renewal periods at the Company’s option through May 31, 2035. The lease provides for annual increases in lease payments equal to the increase in the consumer price index, capped at 2.5%.

The SMSA Acquisition is accounted for using the purchase method of accounting. The purchase price of this transaction was allocated to assets acquired based upon their respective fair values and the liabilities assumed are based on the expected or paid settlement amounts. The purchase price allocation is subject to change during the twelve month period subsequent to the acquisition date for items including actual settlement of the assumed liabilities. The operating results have been included in the Company’s interim consolidated financial statements since the date of the acquisition.

The initial purchase price allocation resulted in an acquired leasehold interest intangible asset of approximately $9,752,000. The intangible asset is subject to amortization over the remaining life of the lease, including renewal periods, a period of approximately 28 years. Amortization expense of approximately $49,000 related to this intangible asset was recorded in the three months ended September 30, 2007.

In connection with the SMSA Acquisition, the Company recognized a pre-tax charge for post acquisition integration costs of $326,000 in the three months ended September 30, 2007. The Company incurred $180,000 of travel and other out-of-pocket expenses immediately following the acquisition related to integration activities and $146,000 in severance and relocation costs resulting from the Texas regional office restructuring necessitated by the acquisition.

The SMSA Acquisition was financed with proceeds of a new loan, as discussed in Note 9.

4. INSURANCE MATTERS

Professional Liability and Other Liability Insurance-

Due to the Company’s past claims experience and increasing cost of claims throughout the long-term care industry, the premiums paid by the Company for professional liability and other liability insurance to cover future periods exceeds the coverage purchased so that it costs more than $1 to purchase $1 of insurance coverage. For this reason, effective March 9, 2001, the Company has purchased professional liability insurance coverage for its facilities that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. As a result, the Company is effectively self-insured and expects to remain so for the foreseeable future.

The Company has essentially exhausted all general and professional liability insurance available for claims first made during the period from March 9, 2001 through March 9, 2007. For claims made during the period from March 10, 2007 through March 9, 2008, the Company maintains insurance with coverage limits of $100,000 per medical incident and total aggregate policy coverage limits of $500,000.

Reserve for Estimated Self-Insured Professional Liability Claims-

Because the Company anticipates that its actual liability for existing and anticipated claims will exceed the Company’s limited professional liability insurance coverage, the Company has recorded total liabilities for professional liability and other claims of $19,718,000 as of September 30, 2007. This accrual includes estimates of liability for incurred but not reported claims, estimates of liability for reported but unresolved claims, actual liabilities related to settlements, including settlements to be paid over time, and estimates of legal costs related to these claims. All losses are projected on an undiscounted basis.

The Company records its estimated liability for these professional liability claims based on the results of a third-party actuarial analysis. Each quarter, amounts are added to the accrual for estimates of anticipated liability for claims incurred during that period. These estimates are assessed and adjusted quarterly as claims are actually reported, as lawsuits are filed, and as those actions are actually resolved. As indicated by the chart of reserves by policy year set forth below, final determination of the Company’s actual liability for claims incurred in any given period is a process that takes years. At each quarter end, the Company records any revisions in estimates and differences between actual settlements and reserves, with changes in estimated losses being recorded in the consolidated statements of income in the period identified. Any increase in the accrual decreases income in the period, and any reduction in the accrual increases income during the period.

Although the Company retains a third-party actuarial firm to assist management in estimating the appropriate accrual for these claims, professional liability claims are inherently uncertain, and the liability associated with anticipated claims is very difficult to estimate.

7

As a result, the Company’s actual liabilities may vary significantly from the accrual, and the amount of the accrual has and may continue to fluctuate by a material amount in any given quarter. Each change in the amount of this accrual will directly affect the Company’s reported earnings and financial position for the period in which the change in accrual is made.

While each quarterly adjustment to the recorded liability for professional liability claims affects reported income, these changes do not directly affect the Company’s cash position because the accrual for these liabilities is not funded. A significant judgment entered against the Company in one or more legal actions could have a material adverse impact on the Company’s financial position and cash flows.

The following summarizes the Company’s accrual for professional liability and other claims for each policy year as of the end of the period:

	September 30,		December 31,
	2007		2006
Policy Year End March 9,
2008	$	3,454,000	$	—
2007		6,372,000		6,992,000
2006		4,027,000		7,629,000
2005		3,629,000		6,042,000
2004		1,454,000		3,228,000
2003 and earlier		782,000		1,826,000
	$	19,718,000	$	25,717,000

The Company’s cash expenditures for self-insured professional liability costs were $2,589,000 and $2,184,000 for the nine months ended September 30, 3007 and 2006, respectively.

Other Insurance-

With respect to workers compensation insurance, substantially all of the Company’s employees became covered under either an indemnity insurance plan or state-sponsored programs in May 1997. The Company is completely self-insured for workers compensation exposures prior to May 1997. The Company has been and remains a non-subscriber to the Texas workers compensation system and is, therefore, completely self-insured for employee injuries with respect to its Texas operations. The Company has provided reserves for the settlement of outstanding self-insured claims at amounts believed to be adequate. The liability recorded by the Company for the self-insured obligations under these plans is $411,000 as of September 30, 2007.

From June 30, 2003 until June 30, 2007, the Company entered into workers compensation insurance programs that provided coverage for claims incurred, with premium adjustments depending on incurred losses. The Company accounts for premium expense under these policies based on its estimate of the level of claims expected to be incurred. As of September 30, 2007, the Company has recorded estimated premium refunds due under these programs totaling approximately $2,712,000 included in “insurance refunds receivable” in the accompanying balance sheet. Any adjustments of future premiums for workers compensation policies and differences between actual settlements and reserves for self-insured obligations are included in expense in the period finalized. Effective July 1, 2007, the Company obtained a guaranteed cost policy for workers compensation insurance, under which expense will be equal to the premiums paid. As a result, there will be no premium refunds associated with this new policy.

The Company is self-insured for health insurance benefits for certain employees and dependents for amounts up to $150,000 per individual annually. The Company provides reserves for the settlement of outstanding self-insured health claims at amounts believed to be adequate. The liability for reported claims and estimates for incurred but unreported claims is $1,003,000 at September 30, 2007. The differences between actual settlements and reserves are included in expense in the period finalized.

5. STOCK-BASED COMPENSATION

In August 2007 and in connection with the SMSA Acquisition, the Compensation Committee of the Board of Directors approved and the Company granted 4,950 Stock only Stock Appreciation Rights (“SOSARs”) at an exercise price of $10.67, the market price of the Company’s common stock on the date the SOSARs were granted. This grant is in addition to the 107,700 SOSARs granted in March 2007 at an exercise price of $11.59. All SOSARs granted during 2007 will vest one-third on the first, second, and third anniversaries of the grant date.

8

As a result of the SOSARs granted in August and March, the Company recorded $170,000 and $381,000 in stock-based compensation expense for the three month and nine month periods ending September 30, 2007. As of September 30, 2007, there was approximately $763,000 of remaining compensation costs related to the SOSARs granted to be recognized over the remaining vesting period. The Company estimated the total recognized and unrecognized compensation using the Black-Scholes-Merton (“BSM”) option valuation model.

6. RECLASSIFICATIONS

As discussed in Note 7, the consolidated financial statements of the Company have been reclassified to reflect as discontinued operations certain divestitures and lease terminations.

7. DISCONTINUED OPERATIONS

Effective March 31, 2007 the Company terminated operations at its leased facility in Eureka Springs, Arkansas. The owner of the property, a subsidiary of Omega , sold the property and the Company cooperated in an orderly transition to the new owner.

The facility had low occupancy and operated at a loss. The facility had been leased subject to a master lease covering 29 nursing centers. Under the terms of that lease, the master lease rental payment was not reduced. The discontinued facility contributed revenues of $575,000 and $1,508,000 during the nine month periods ended September 30, 2007 and 2006, respectively. In 2003, the Company recorded an impairment charge of $178,000 to reduce the net book value of this property to its estimated realizable value, and there was no material loss recorded in connection with the lease termination.

In May 2006, the Company completed the sale of certain assets of eleven assisted living facilities located in North Carolina for a sales price of $11.0 million. In 2005, the Company recorded an impairment charge of $4,397,000 to reduce the net book value of these properties to their estimated realizable value, and no material gain or loss was recognized upon the completion of the sale in 2006. The Company closed its only remaining North Carolina assisted living facility in April 2006 and is continuing its efforts to sell this facility and land. In September 2007 the Company sold the bed license for the remaining North Carolina assisted living facility for a sales price of $183,000 and recognized a pretax gain on sale of discontinued operations of $45,000.

Each of these facilities and businesses constitute components under the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and, accordingly, the Company has reclassified the operations and disposed property of each of these components as discontinued operations for all periods presented in the Company’s interim consolidated financial statements.

8. EARNINGS PER SHARE

Information with respect to basic and diluted net income per common share is presented below:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Net income per common share:
Per common share — basic
Income from continuing operations	$	0.33		$	1.64		$	1.26		$	3.42
Gain (loss) from discontinued operations
Operating loss, net of taxes		(0.02	)		(0.02	)		(0.02	)		(0.05	)
Gain (loss) on sale, net of taxes		0.01			—			—			(0.02	)
Discontinued operations, net of taxes		(0.01	)		(0.02	)		(0.02	)		(0.07	)
Net income	$	0.32		$	1.62		$	1.24		$	3.35
Per common share — diluted
Income from continuing operations	$	0.32		$	1.41		$	1.21		$	3.00
Gain (loss) from discontinued operations
Operating loss, net of taxes		(0.02	)		(0.02	)		(0.02	)		(0.04	)
Gain (loss) on sale, net of taxes		—			—			—			(0.02	)
Discontinued operations, net of taxes		(0.02	)		(0.02	)		(0.02	)		(0.06	)
Net income	$	0.30		$	1.39		$	1.19		$	2.94

The impact of the weighted average SOSARs outstanding were not included in the computation of diluted earnings per common share because these securities would have been anti-dilutive due to the effects of stock based compensation charges that will be recognized in future periods. In addition, diluted earnings per common share in the three and nine months ended September 30, 2006 included the

9

impact of 642,000 and 635,000 dilutive shares, respectively, resulting from the assumed conversion of the Series B Convertible Preferred Stock. In 2006, the Series B Convertible Preferred Stock was exchanged for Series C Preferred Stock, which is not convertible into common shares and, therefore, no convertible preferred stock was outstanding during 2007.

9. LONG-TERM DEBT AND FINANCING TRANSACTION

In August 2007, the Company entered into an agreement with LaSalle Bank NA, for a $16,500,000 term loan to finance the SMSA Acquisition and repay certain existing indebtedness. The term loan has an interest rate of LIBOR plus 2.5%, a maturity of five years, and principal payments based on a ten year amortization, with additional payments based on cash flow from operations and amounts realized related to certain collateral. The term loan is secured by receivables and all other unencumbered assets of the Company, including land held for sale, insurance refunds receivable and notes receivable. In addition to financing the acquisition, the Company used proceeds from this term loan to retire a $4,027,000 term loan with an interest rate of LIBOR plus 6.25%, and a $2,534,000 subordinated note due in September 2007 with an interest rate of 7%, and expensed related deferred financing costs of $116,000 during the quarter ended September 30, 2007. The deferred financing costs written off relate to the debt that was retired and are reflected as debt retirement costs in the income statement.

In addition, the agreement with LaSalle also includes a $15,000,000 revolving credit facility that provides revolving credit loans as well as the issuance of letters of credit. The revolver is secured by accounts receivable and replaced the Company’s previous $2,300,000 line of credit. The revolver provides for a maximum draw of up to $21,000,000 during the first six months to finance start up working capital requirements of the SMSA Acquisition, after which period the maximum draw is reduced to $15,000,000. There are limits on the maximum amount of loans that may be outstanding under the revolver based on borrowing base restrictions. The revolver has a term of three years and bears interest at the Company’s option of LIBOR plus 2.25% or the bank’s prime lending rate. Annual fees for letters of credit issued under this revolver are 2.25% of the amount outstanding. Historically, the Company’s accounts receivable had been pledged as security primarily for the Company’s leases with Omega. Under this refinancing, the accounts receivable serve as the collateral for the new revolver as of September 30, 2007 and the Company has a letter of credit of approximately $8,117,000 to serve as a replacement security deposit for all of the Company’s leases with Omega. Considering this letter of credit and the borrowing base restrictions, the balance available for future revolving credit loans would be $7,073,000. Such amounts are available to fund the working capital needs of this transaction and future expansion opportunities. As of September 30, 2007, the Company had no borrowings outstanding under the revolving credit facility.

The Company’s debt agreements require that proceeds received upon certain asset dispositions be paid to reduce the balance. During the nine months ending September 30, 2007, additional principal payments of $2,441,000 were made from such proceeds.

The Company’s debt agreements contain various financial covenants the most restrictive of which relate to cash flow, debt service coverage ratios, liquidity and limits on the payment of dividends to shareholders. The Company is in compliance with such covenants at September 30, 2007.

10. SALE OF BED LICENSE

In January 2006, the Company sold 10 licensed beds which it owned in Kentucky but had not placed in service. The sales price was $260,000, and the Company recognized a gain of $207,000 on the sale, which is included in “other income” in the interim consolidated statements of income.

11. INCOME TAXES

Effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48” or “the interpretation”). This interpretation provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. The initial adoption of the interpretation had no impact on the Company’s financial statements.

In connection with the Canadian Customs and Revenue Agency (“CCRA”) audit of the Canadian 2003 and 2002 federal tax returns of Diversicare Canada Management Services Co., Inc. (“DCMS”), the Company’s Canadian subsidiary sold in 2004, CCRA has proposed certain adjustments to the Company’s tax returns. Under the terms of the sale of DCMS, the Company is liable for any liability that arises from these adjustments.

As of September 30, 2007, the amount of unrecognized tax benefits was $823,000. The unrecognized tax benefits are accrued in “other current liabilities.” The $129,000 increase in the amount of unrecognized tax benefits in the three month period ended

10

September 30, 2007 was related to the adjustment of the estimated liability and to the fluctuation of the exchange rate between US and Canadian currencies.

The Company has chosen to classify interest and penalties as a component separate from income tax expense in its consolidated statements of income.

12. EVENT SUBSEQUENT TO THE BALANCE SHEET DATE

In November 2007, the Company’s Board of Directors authorized the repurchase of up to $2,500,000 of the Company’s common stock pursuant to a plan under Rule 10b5-1 and in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. As of November 1, 2007, there were approximately 5,877,000 shares of common stock outstanding.

Share repurchases under this program are authorized through the earlier of one year from November 6, 2007 or the repurchase of the full amount authorized to be repurchased under the plan, subject to conditions specified in the plan. Repurchases may be made through open market or privately negotiated transactions in accordance with all applicable securities laws, rules, and regulations and will be funded from available working capital. The share repurchase program may be terminated at any time without prior notice.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Advocat Inc. provides long-term care services to nursing center patients in eight states, primarily in the Southeast and Southwest. Our centers provide a range of health care services to their patients and residents. In addition to the nursing, personal care and social services usually provided in long-term care centers, we offer a variety of comprehensive rehabilitation services as well as nutritional support services.

As of September 30, 2007, our continuing operations consist of 49 nursing centers with 5,671 licensed nursing beds and 66 assisted living units. As of September 30, 2007, our continuing operations included nine owned nursing centers and 40 leased nursing centers.

2007 Acquisition. Effective August 11, 2007, we purchased the leasehold interests and operations of seven skilled nursing facilities from Senior Management Services of America North Texas, Inc. for a price of approximately $10.0 million, including approximately $8.6 million in cash, the assumption of approximately $0.9 million in assumed liabilities, and transaction costs of $0.5 million. These facilities include 1,266 licensed nursing beds, with 1,105 nursing beds currently available for use. The SMSA facilities had unaudited revenues of approximately $52.1 million for the year ended December 31, 2006. The SMSA facilities are in our existing geographic and operational footprint and are expected to contribute to our growth strategy and existing base of operations.

Divestitures. We have undertaken certain divestitures through sale of assets and lease terminations. The divested operations have generally been poor performing properties. Effective March 31, 2007, we terminated our operations at a leased facility in Arkansas. The owner of the facility sold the property and we cooperated in an orderly transition to the new owner. In May 2006, we completed the sale of certain assets of eleven assisted living facilities located in North Carolina for a sales price of $11.0 million. We closed one remaining North Carolina assisted living facility in April 2006, and are continuing our efforts to sell this facility and land.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” our consolidated financial statements have been reclassified to reflect these divestitures as discontinued operations.

Basis of Financial Statements. Our patient revenues consist of the fees charged for the care of patients in the nursing centers we own and lease. Our operating expenses include the costs, other than lease, professional liability, depreciation and stock-based compensation expenses, incurred in the operation of the nursing centers we own and lease. Our general and administrative expenses consist of the costs of the corporate office and regional support functions.

Critical Accounting Policies and Judgments

A “critical accounting policy” is one which is both important to the understanding of our financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often requiring estimates about the effect of matters that are inherently uncertain. Our accounting policies that fit this definition include the following:

Revenues

Patient Revenues

The fees we charge patients in our nursing centers are recorded on an accrual basis. These rates are contractually adjusted with respect to individuals receiving benefits under federal and state-funded programs and other third-party payors. Rates under federal and state-funded programs are determined prospectively for each facility and may be based on the acuity of the care and services provided. These rates may be based on facility’s actual costs subject to program ceilings and other limitations or on established rates based on acuity and services provided as determined by the federal and state-funded programs. Amounts earned under federal and state programs with respect to nursing home patients are subject to review by the third-party payors which may result in

11

retroactive adjustments. In the opinion of management, adequate provision has been made for any adjustments that may result from such reviews. Retroactive adjustments, if any, are recorded when objectively determinable, generally within three years of the close of a reimbursement year depending upon the timing of appeals and third-party settlement reviews or audits.

Allowance for Doubtful Accounts

Our allowance for doubtful accounts is estimated utilizing current agings of accounts receivable, historical collections data and other factors. We monitor these factors and determine the estimated provision for doubtful accounts. Historical bad debts have generally resulted from uncollectible private balances, some uncollectible coinsurance and deductibles and other factors. Receivables that are deemed to be uncollectible are written off. The allowance for doubtful accounts balance is assessed on a quarterly basis, with changes in estimated losses being recorded in the consolidated statements of income in the period identified.

Professional Liability and Other Self-Insurance Reserves

Self-insurance reserves primarily represent the accrual for self-insured risks associated with general and professional liability claims, employee health insurance and workers compensation. Our health insurance reserve is based on known claims incurred and an estimate of incurred but unreported claims determined by an analysis of historical claims paid. Our workers compensation reserve relates primarily to periods of self insurance prior to May 1997 and consists of an estimate of the future costs to be incurred for the known claims. Expected insurance coverages are reflected as a reduction of the reserves. All of our self-insurance reserves are assessed and adjusted on a quarterly basis.

Accrual for Professional and General Liability Claims-

Because our actual liability for existing and anticipated professional liability and general liability claims will exceed our limited insurance coverage, we have recorded total liabilities for reported professional liability claims and estimates for incurred but unreported claims of $19.7 million as of September 30, 2007. This accrual includes estimates of liability for incurred but not reported claims, estimates of liability for reported but unresolved claims, actual liabilities related to settlements, including settlements to be paid over time, and estimates of related legal costs incurred and expected to be incurred. All losses are projected on an undiscounted basis.

We retain a third-party actuarial firm to estimate the appropriate accrual for incurred general and professional liability claims. For current periods, the actuary primarily uses historical data regarding the frequency and cost of our past claims over a multi-year period and information regarding our number of occupied beds to develop its estimates of our ultimate professional liability cost for current periods. The actuary estimates our professional liability accrual for past periods by using currently-known information to adjust the initial reserve that was created for that period.

On a quarterly basis, we obtain reports of claims and lawsuits that we have incurred from insurers and a third party claims administrator. These reports contain information relevant to the liability actually incurred to date with that claim as well as the third-party administrator’s estimate of the anticipated total cost of the claim. This information is reviewed by us and provided to the actuary. The actuary uses this information to determine the timing of claims reporting and the development of reserves, and compares the information obtained to its original estimates of liability. Based on the actual claim information obtained and on estimates regarding the number and cost of additional claims anticipated in the future, the reserve estimate for a particular prior period may be revised upward or downward on a quarterly basis. Final determination of our actual liability for claims incurred in any given period is a process that takes years. For information regarding the amount of accrual by period, see Note 4, “Insurance Matters,” in the Notes to the Interim Consolidated Financial Statements.

Although we retain a third-party actuarial firm to assist us, professional and general liability claims are inherently uncertain, and the liability associated with anticipated claims is very difficult to estimate. As a result, our actual liabilities may vary significantly from the accrual, and the amount of the accrual has and may continue to fluctuate by a material amount in any given quarter. Many factors could result in differences between amounts estimated and the ultimate amount of our loss for any period. One of the key assumptions in the actuarial analysis is that historical losses provide an accurate forecast of future losses. This assumption may not prove accurate, as changes in legislation such as tort reform, changes in our financial condition, changes in our risk management practices and other factors may affect the severity and frequency of claims incurred in future periods as compared to historical claims. Another key assumption is the limit of claims to a maximum of $4.5 million. The actuary has selected this limit based on our historical data. While most of our claims have been for amounts less than the $4.5 million, there have been claims at higher amounts, and there may be claims above this level in the future. The facts and circumstances of each claim vary significantly, and the amount of ultimate liability for an individual claim may vary due to many factors, including whether the case

12

can be settled by agreement, the quality of legal representation, the individual jurisdiction in which the claim is pending, and the views of the particular judge or jury deciding the case. To date, we have not experienced an uninsured loss in excess of this limit. In the event that we believe we have incurred a loss in excess of this limit, an adjustment to the reserves determined by the actuary would be necessary.

We believe that the use of actuarial methods described above provides a valid and reasonable method to estimate our liability for professional and general liability claims and that the expertise of a third- party actuary is required to estimate liabilities using this methodology.

Each quarter, we record in our consolidated statement of income for that period the estimated accrual for anticipated liability claims incurred in that period as well as any revisions in estimates and differences between actual settlements and accruals for prior periods. While each quarterly adjustment to the recorded liability for professional liability claims affects reported income, these changes do not directly affect our cash position because the accrual for these liabilities is not funded. A significant judgment entered against us in one or more of these legal actions could have a material adverse impact on our financial position and cash flows.

Professional liability costs are material to our financial position, and differences between estimates and the ultimate amount of loss may cause a material fluctuation in our reported results of operations. The liability recorded at September 30, 2007, was $19.7 million, compared to current assets of $46.4 million and total assets of $111.1 million. For the nine months ended September 30, 2007 and 2006, our professional liability expense was a negative $3.0 million and a negative $5.5 million, respectively, with the negative amounts representing net benefits resulting from downward revisions in previous estimates. Our cash expenditures for self insured professional liability costs were $2.6 million and $2.2 million for the nine months ended September 30, 2007 and 2006, respectively. These amounts are material in relation to our reported net income from continuing operations for the related periods of $7.7 million and $20.0 million, respectively.

Accrual for Other Self-Insured Claims-

With respect to workers compensation insurance, substantially all of our employees became covered under either an indemnity insurance plan or state-sponsored programs in May 1997. We are completely self-insured for workers compensation exposures prior to May 1997. We have been and remain a non-subscriber to the Texas workers compensation system and are, therefore, completely self-insured for employee injuries with respect to our Texas operations. We have provided reserves for the settlement of outstanding self-insured claims at amounts believed to be adequate. The liability we recorded for the self-insured obligations under these plans is $0.4 million as of September 30, 2007.

From June 30, 2003 until June 30, 2007, we entered into workers compensation insurance programs that provided coverage for claims incurred, with premium adjustments depending on incurred losses. We account for premium expense under these policies based on our estimate of the level of claims expected to be incurred. As of September 30, 2007, we have recorded estimated premium refunds due under these programs totaling approximately $2.7 million, included in “insurance refunds receivable” in the accompanying balance sheet. Any adjustments of future premiums for workers compensation policies and differences between actual settlements and reserves for self-insured obligations are included in expense in the period finalized. Effective July 1, 2007, we entered into a guaranteed cost policy for workers compensation insurance, under which expense will be equal to the premiums paid. As a result, there will be no premium refunds associated with this new policy.

We are self-insured for health insurance benefits for certain employees and dependents for amounts up to $150,000 per individual annually. We provide reserves for the settlement of outstanding self-insured health claims at amounts believed to be adequate. The liability for reported claims and estimates for incurred but unreported claims is $1.0 million at September 30, 2007. The differences between actual settlements and reserves are included in expense in the period finalized.

Asset Impairment

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we evaluate the recoverability of the carrying values of our properties on a property by property basis. On a quarterly basis, we review our properties for recoverability when events or circumstances, including significant physical changes in the property, significant adverse changes in general economic conditions, and significant deteriorations of the underlying cash flows of the property, indicate that the carrying amount of the property may not be recoverable. The need to recognize an impairment is based on estimated undiscounted future cash flows from a property compared to the carrying value of that property. If recognition of

13

impairment is necessary, it is measured as the amount by which the carrying amount of the property exceeds the fair value of the property.

Accounting for Business Combinations

We account for our acquisitions in accordance with SFAS No. 141, “Business Combinations” and related interpretations. Our current acquisition has been accounted for as a purchase business combination. Purchase accounting requires that we make certain valuations based on our experience, including determining the fair value and useful lives of assets acquired and the expected settlement amount of liabilities assumed based upon their respective fair values. These valuations are subject to change during the twelve month period subsequent to the acquisition date. Such valuations require us to make significant estimates, judgments and assumptions, including projections of future events and operating performance.

Stock-Based Compensation

We account for our stock-based compensation in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment,” using the modified prospective method, in which we recognize compensation cost for all share-based payments granted after the effective date, January 1, 2006. We record stock-based compensation expense by amortizing our unrecognized stock-based compensation on a straight-line basis over the remaining requisite service period. We calculated the recognized and unrecognized stock-based compensation using the Black-Scholes-Merton option valuation method, which requires us to use certain key assumptions to develop the fair value estimates. These key assumptions include expected volatility, risk-free interest rate, expected dividends and expected term.

Income Taxes

We follow SFAS No. 109, “Accounting for Income Taxes,” which requires an asset and liability approach for financial accounting and reporting of income taxes. Under this method, deferred tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax laws that will be in effect when the differences are expected to reverse. We assess the need for a valuation allowance to reduce the deferred tax assets by the amount we believe is more likely not to be utilized through the turnaround of existing temporary differences, future earnings, or a combination thereof, including certain net operating loss carryforwards we do not expect to realize due to change in ownership limitations.

Health Care Industry

The health care industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for patient services, quality of resident care and Medicare and Medicaid fraud and abuse. Over the last several years, government activity has increased with respect to investigations and allegations concerning possible violations by health care providers of fraud and abuse statutes and regulations as well as laws and regulations governing quality of care issues in the skilled nursing profession in general. Violations of these laws and regulations could result in exclusion from government health care programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Compliance with such laws and regulations is subject to ongoing government review and interpretation, as well as regulatory actions in which government agencies seek to impose fines and penalties. We are involved in regulatory actions of this type from time to time. Additionally, changes in these laws and regulations, such as reimbursement policies of Medicare and Medicaid programs as a result of budget cuts by federal and state governments or other legislative and regulatory actions, have had a material adverse effect on the industry and our consolidated financial position, results of operations, and cash flows. Future federal budget legislation and federal and state regulatory changes may further negatively impact us.

Medicare and Medicaid Reimbursement-

A significant portion of our revenues are derived from government-sponsored health insurance programs. Our nursing centers derive revenues under Medicaid, Medicare and private pay sources. We employ specialists in reimbursement at the corporate level to monitor regulatory developments, to comply with reporting requirements, and to ensure that proper payments are made to our operated nursing centers. It is generally recognized that all government-funded programs have been and will continue to be under cost containment pressures, but the extent to which these pressures will affect our future reimbursement is unknown.

14

Certain per person annual Medicare Part B reimbursement limits on therapy services became effective January 1, 2006. Subject to certain exceptions, the limits impose a $1,740 per patient annual ceiling on physical and speech therapy services, and a separate $1,740 per patient annual ceiling on occupational therapy services. The Centers for Medicare and Medicaid Services (“CMS”) established an exception process to permit therapy services in certain situations, and the majority of services provided by us are reimbursed under the exceptions. On December 9, 2006, Congress passed the Tax Relief and Health Care Act of 2006 (TRHCA), which includes an extension of the existing exceptions process through December 31, 2007. If the exception process is discontinued after 2007, it is expected that the reimbursement limitations will reduce therapy revenues, and negatively impact our operating results and cash flows. The TRHCA also reduces the maximum federal matching under Medicare provider assessments to 5.5% of aggregate Medicaid outlays. This reduction in funding will become effective for fiscal years beginning after January 1, 2008.

Congress has implemented an annual market basket adjustment designed to increase Medicare reimbursement for the effects of inflation. CMS issued a final rule which includes a 3.3% market basket adjustment increase effective October 1, 2007. The actual amount of the market basket adjustment is based on several factors and varies for each individual center. The market basket adjustment became effective October 1, 2007, and is expected to result in an average increase in revenue of approximately 4.0% for our facilities as a group, and is expected to increase our revenue by approximately $0.3 million per month. However, the United States Congress is expected to pass a Medicare bill during the fourth quarter that may reduce or eliminate the market basket adjustment beginning January 1, 2008.

The Federal Deficit Reduction Act of 2005 mandates reducing by 30% the amount that Medicare reimburses nursing centers and other non-hospital providers for bad debts arising from uncollectible Medicare coinsurance and deductibles for those individuals that are not dually eligible for Medicare and Medicaid. The reduction is to be phased in over a three year period with 10% during fiscal 2006, 20% during fiscal 2007 and 30% thereafter. This provision is not expected to have a material impact on the Company.

Reduction in health care spending has become a national priority in the United States, and the field of health care regulation and reimbursement is a rapidly evolving one. For the nine months ended September 30, 2007, we derived 31.2% and 56.2% of our total patient and resident revenues related to continuing operations from the Medicare and Medicaid programs, respectively. Any health care reforms that significantly limit rates of reimbursement under these programs could, therefore, have a material adverse effect on our profitability. We are unable to predict which reform proposals or reimbursement limitations will be adopted in the future, or the effect such changes would have on our operations.

We will attempt to increase revenues from non-governmental sources to the extent capital is available to do so, if at all. However, private payors, including managed care payors, are increasingly demanding that providers accept discounted fees or assume all or a portion of the financial risk for the delivery of health care services. Such measures may include capitated payments, which can result in significant losses to health care providers if patients require expensive treatment not adequately covered by the capitated rate.

Licensure and other Health Care Laws-

All our nursing centers must be licensed by the state in which they are located in order to accept patients, regardless of payor source. In most states, nursing homes are subject to certificate of need laws, which require us to obtain government approval for the construction of new nursing homes or the addition of new licensed beds to existing homes. Our nursing centers must comply with detailed statutory and regulatory requirements on an ongoing basis in order to qualify for licensure, as well as for certification as a provider eligible to receive payments from the Medicare and Medicaid programs. Generally, the requirements for licensure and Medicare/Medicaid certification are similar and relate to quality and adequacy of personnel, quality of medical care, record keeping, dietary services, resident rights, and the physical condition of the facility and the adequacy of the equipment used therein. Each facility is subject to periodic inspections, known as “surveys” by health care regulators, to determine compliance with all applicable licensure and certification standards. Such requirements are both subjective and subject to change. If the survey concludes that there are deficiencies in compliance, the facility is subject to various sanctions, including but not limited to monetary fines and penalties, suspension of new admissions, non-payment for new admissions and loss of licensure or certification. Generally, however, once a facility receives written notice of any compliance deficiencies, it may submit a written plan of correction and is given a reasonable opportunity to correct the deficiencies. There can be no assurance that, in the future, we will be able to maintain such licenses and certifications for our facilities or that we will not be required to expend significant sums in order to comply with regulatory requirements.

15

Contractual Obligations and Commercial Commitments

We have certain contractual obligations of continuing operations as of September 30, 2007, summarized by the period in which payment is due, as follows (dollar amounts in thousands):

			Less than		2 to 3		4 to 5		After 5
Contractual Obligations	Total		1 year		Years		Years		Years
Long-term debt obligations (1)	$	50,289	$	7,198	$	12,280	$	30,811	$	—
Series C Preferred Stock (2)	$	5,951	$	344	$	689	$	4,918	$	—
Elimination of Preferred Stock Conversion feature (3)	$	7,555	$	687	$	1,374	$	1,374	$	4,120
Operating leases	$	595,766	$	20,820	$	42,466	$	42,093	$	490,387
Required capital expenditures under mortgage loans (4)	$	938	$	245	$	490	$	203	$	—
Required capital expenditures under operating leases (5)	$	32,369	$	1,121	$	2,204	$	2,111	$	26,933
Total	$	692,868	$	30,415	$	59,503	$	81,510	$	521,440

⁽¹⁾ Long-term debt obligations include scheduled future payments of principal and interest of long-term debt.

⁽²⁾ Series C Preferred Stock includes quarterly dividend payments and redemption value at preferred shareholder’s earliest redemption date.

⁽³⁾ Payments for the elimination of preferred stock conversion feature.

⁽⁴⁾ Includes expenditure requirements for capital maintenance under mortgage loan covenants.

⁽⁵⁾ Includes capital expenditure requirements under operating leases.

We have employment agreements with certain members of management that provide for the payment to these members of amounts up to 2.5 times their annual salary in the event of a termination without cause, a constructive discharge (as defined), or upon a change of control of the Company (as defined). The maximum contingent liability under these agreements is approximately $1.8 million. The terms of such agreements are from one to three years and automatically renew for one year if not terminated by us or the employee. In addition, upon the occurrence of any triggering event, these certain members of management may elect to require that we purchase equity awards granted to them for a purchase price equal to the difference in the fair market value of our common stock at the date of termination versus the stated exercise price. Based on the closing price of our stock on September 30, 2007, the maximum contingent liability for the repurchase of the currently vested options is approximately $1.6 million. No amounts have been accrued for this contingent liability.

Results of Operations

As discussed in the overview at the start of Management’s Discussion and Analysis of Financial Condition and Results of Operations, we have completed certain divestitures as well as a recent acquisition. We have reclassified our consolidated financial statements to present the divestitures as discontinued operations for all periods presented. We have also defined our same center operations in light of these divestitures and acquisition. Same center information excludes the operations of the SMSA facilities, and excludes all discontinued operations.

16

The following tables present the unaudited interim statements of income and related data for the three and nine month periods ended September 30, 2007 and 2006 for the Company, and include the results of the SMSA Acquisition beginning August 11, 2007, the effective date of the acquisition:

(in thousands)	Three Months Ended September 30,
	2007			2006			Change			%
PATIENT REVENUES, net	$	63,884		$	53,394		$	10,490			19.6	%
EXPENSES:
Operating		49,239			41,328			7,911			19.1	%
Lease		5,162			3,860			1,302			33.7	%
Professional liability		(6	)		782			(788	)		(100.8	)%
General and administrative		4,073			3,906			167			4.3	%
Stock-based compensation		195			92			103			112.0	%
Depreciation and amortization		1,033			898			135			15.0	%
Post acquisition integration costs		326			—			326			100.0	%
Total expenses		60,022			50,866			9,156			18.0	%
OPERATING INCOME		3,862			2,528			1,334			52.8	%
OTHER INCOME (EXPENSE):
Foreign currency transaction gain		330			29			301			1,037.9	%
Interest income		264			146			118			80.8	%
Interest expense		(956	)		(892	)		(64	)		7.2	%
Debt retirement costs		(116	)		(194	)		78			(40.2	)%
		(478	)		(911	)		433			(47.5	)%
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		3,384			1,617			1,767			109.3	%
PROVISION (BENEFIT) FOR INCOME TAXES		1,363			(7,972	)		9,335			(117.0	)%
NET INCOME FROM CONTINUING OPERATIONS	$	2,021		$	9,589		$	(7,568	)		(78.9	)%

(in thousands)	Nine Months Ended September 30,
	2007			2006			Change			%
PATIENT REVENUES, net	$	173,857		$	159,464		$	14,393			9.0	%
EXPENSES:
Operating		132,875			121,606			11,269			9.3	%
Lease		14,369			11,513			2,856			24.8	%
Professional liability		(2,961	)		(5,476	)		2,515			(45.9	)%
General and administrative		12,168			11,103			1,065			9.6	%
Stock-based compensation		454			5,104			(4,650	)		(91.1	)%
Depreciation and amortization		2,874			2,750			124			4.5	%
Post acquisition integration costs		326			—			326			100.0	%
Total expenses		160,105			146,600			13,505			9.2	%
OPERATING INCOME		13,752			12,864			888			6.9	%
OTHER INCOME (EXPENSE):
Foreign currency transaction gain		743			269			474			176.2	%
Other income		—			207			(207	)		(100.0	)%
Interest income		771			494			277			56.1	%
Interest expense		(2,548	)		(2,768	)		220			(7.9	)%
Debt retirement costs		(116	)		(194	)		78			(40.2	)%
		(1,150	)		(1,992	)		842			(42.3	)%
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		12,602			10,872			1,730			15.9	%
PROVISION (BENEFIT) FOR INCOME TAXES		4,940			(9,088	)		14,028			(154.4	)%
NET INCOME FROM CONTINUING OPERATIONS	$	7,662		$	19,960		$	(12,298	)		(61.6	)%

17

	Three Months Ended						Nine Months Ended
Percentage of Net Revenues	September 30,						September 30,
	2007			2006			2007			2006
PATIENT REVENUES, net		100.0	%		100.0	%		100.0	%		100.0	%
EXPENSES:
Operating		77.1			77.4			76.4			76.3
Lease		8.1			7.2			8.3			7.2
Professional liability		—			1.5			(1.7	)		(3.4	)
General and administrative		6.4			7.3			6.9			7.0
Stock-based compensation		0.3			0.2			0.3			3.1
Depreciation and amortization		1.6			1.7			1.7			1.7
Post acquisition integration costs		0.5			—			0.2			—
Total expenses		94.0			95.3			92.1			91.9
OPERATING INCOME		6.0			4.7			7.9			8.1
OTHER INCOME (EXPENSE):
Foreign currency transaction gain		0.5			0.1			0.4			0.2
Other income		—			—			—			0.1
Interest income		0.4			0.3			0.4			0.3
Interest expense		(1.4	)		(1.7	)		(1.4	)		(1.8	)
Debt retirement costs		(0.2	)		(0.4	)		(0.1	)		(0.1	)
		(0.7	)		(1.7	)		(0.7	)		(1.3	)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		5.3			3.0			7.2			6.8
PROVISION (BENEFIT) FOR INCOME TAXES		2.1			(15.0	)		2.8			(5.7	)
NET INCOME FROM CONTINUING OPERATIONS		3.2	%		18.0	%		4.4	%		12.5	%

As a supplement to the tables above, the following tables present the unaudited interim statements of income from continuing operations before income taxes and related data for the three and nine month periods ended September 30, 2007 and 2006 on a same center basis, excluding the effects of the SMSA Acquisition and discontinued operations.

(in thousands)	Three Months Ended September 30,
	2007			2006			Change			%
PATIENT REVENUES, net	$	57,289		$	53,394		$	3,895			7.3	%
EXPENSES:
Operating		43,302			41,328			1,974			4.8	%
Lease		4,634			3,860			774			20.1	%
Professional liability		(90	)		782			(872	)		(111.5	)%
General and administrative		3,994			3,906			88			2.3	%
Stock-based compensation		191			92			99			107.6	%
Depreciation and amortization		944			898			46			5.1	%
Post acquisition integration costs		—			—			—			—
Total expenses		52,975			50,866			2,109			4.1	%
OPERATING INCOME		4,314			2,528			1,786			70.6	%
OTHER INCOME (EXPENSE):
Foreign currency transaction gain		330			29			301			1,037.9	%
Interest income		264			146			118			80.8	%
Interest expense		(819	)		(892	)		73			(8.2	)%
Debt retirement costs		(116	)		(194	)		78			(40.2	)%
		(341	)		(911	)		570			(62.6	)%
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	$	3,973		$	1,617		$	2,356			145.7	%

18

(in thousands)	Nine Months Ended September 30,
	2007			2006			Change			%
PATIENT REVENUES, net	$	167,262		$	159,464		$	7,798			4.9	%
EXPENSES:
Operating		126,938			121,606			5,332			4.4	%
Lease		13,841			11,513			2,328			20.2	%
Professional liability		(3,045	)		(5,476	)		2,431			(44.4	)%
General and administrative		12,089			11,103			986			8.9	%
Stock-based compensation		450			5,104			(4,654	)		(91.2	)%
Depreciation and amortization		2,785			2,750			35			1.3	%
Post acquisition integration costs		—			—			—			—
Total expenses		153,058			146,600			6,458			4.4	%
OPERATING INCOME		14,204			12,864			1,340			10.4	%
OTHER INCOME (EXPENSE):
Foreign currency transaction gain		743			269			474			176.2	%
Other income		—			207			(207	)		(100.0	)%
Interest income		771			494			277			56.1	%
Interest expense		(2,411	)		(2,768	)		357			(12.9	)%
Debt retirement costs		(116	)		(194	)		78			(40.2	)%
		(1,013	)		(1,992	)		979			(49.1	)%
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	$	13,191		$	10,872		$	2,319			21.3	%

Three Months Ended September 30, 2007 Compared With Three Months Ended September 30, 2006

As noted in the overview, we have entered into certain divestiture transactions in recent periods, and our consolidated financial statements have been reclassified to present such transactions as discontinued operations. Accordingly, the related revenue, expenses, assets, liabilities and cash flows have been reported separately, and the discussion below addresses principally the results of our continuing operations.

Patient Revenues. Patient revenues increased to $63.9 million in 2007 from $53.4 million in 2006, an increase of $10.5 million, or 19.6%. Revenues related to the SMSA Acquisition were $6.6 million in 2007. Same center patient revenues increased to $57.3 million in 2007 from $53.4 million in 2006, an increase of $3.9 million, or 7.3%. This increase is due primarily to increased Medicaid rates in certain states and Medicare rate increases.

The following table summarizes key revenue and census statistics for the quarter and segregates effects of the SMSA Acquisition. Results for the SMSA Acquisition are included beginning August 11, 2007, the effective date of the acquisition.

19

	Three Months Ended
	September 30,
	2007			2006
Skilled nursing occupancy:
Same center		79.1	%		78.8	%
SMSA Acquisition		68.4	%		n/a
Total continuing operations		77.6	%		78.8	%
Medicare census as percent of total:
Same center		13.1	%		13.0	%
SMSA Acquisition		12.0	%		n/a
Total continuing operations		13.0	%		13.0	%
Medicare revenues as percent of total:
Same center		29.7	%		29.3	%
SMSA Acquisition		33.1	%		n/a
Total continuing operations		30.0	%		29.3	%
Medicaid revenues as percent of total:
Same center		57.9	%		57.6	%
SMSA Acquisition		46.0	%		n/a
Total continuing operations		56.7	%		57.6	%
Medicare average rate per day:
Same center	$	351.51		$	320.53
SMSA Acquisition	$	375.13			n/a
Total continuing operations	$	354.12		$	320.53
Medicaid average rate per day:
Same center	$	142.04		$	133.67
SMSA Acquisition	$	109.62			n/a
Total continuing operations	$	138.59		$	133.67

On a same center basis, the Company’s average rate per day for Medicare Part A patients increased 9.7% in 2007 compared to 2006 as a result of annual inflation adjustments and the acuity levels of Medicare patients in our nursing centers, which were higher in 2007 than in 2006. Our average rate per day for Medicaid patients increased 6.3% in 2007 compared to 2006 as a result of increasing patient acuity levels, certain state increases to offset minimum wage adjustments, effects of stock based compensation charges and other rate increases in certain states.

Operating expense. Operating expense increased to $49.2 million in 2007 from $41.3 million in 2006, an increase of $7.9 million, or 19.1%. As a percentage of patient revenues, operating expense decreased to approximately 77.1% of revenue in 2007, compared to 77.4% of revenue in 2006. Operating expense related to the SMSA Acquisition was $5.9 million in 2007. Same center operating expense increased to $43.3 million in 2007 from $41.3 million in 2006, an increase of $2.0 million, or 4.8%. This increase is primarily attributable to cost increases related to wages and benefits.

The largest component of operating expenses is wages, which increased to $29.4 million in 2007 from $25.0 million in 2006, an increase of $4.4 million, or 17.6%. Wages related to the SMSA Acquisition were approximately $3.4 million. Same center wages increased approximately $1.0 million, or 4.1%, primarily due to increases in wages as a result of competitive labor markets in most of the areas in which we operate, regular merit and inflationary raises for personnel,(increase of approximately 3.5% for the period) and labor costs associated with increases in patient acuity levels.

Employee health insurance costs were approximately $0.2 million higher in 2007 compared to 2006 on a same center basis, an increase of approximately 22%. The Company is self insured for the first $150,000 in claims per employee each year. Employee health insurance costs can vary significantly from year to year.

These increased costs were partially offset by reductions in workers compensation costs. Costs of workers compensation insurance were approximately $0.3 million lower in 2007 compared to 2006 on a same center basis, due to better than expected claims experience.

The remaining increases in same center operating expense are primarily due to increases in patient acuity levels.

20

Lease expense. Lease expense increased to $5.2 million in 2007 from $3.9 million in 2006. Lease expense related to the SMSA Acquisition was $0.5 million for 2007. Same center lease expense increased to $4.6 million in 2007 from $3.9 million in 2006, an increase of $0.7 million. Effective October 1, 2006, we renewed a master lease covering 28 nursing centers. This resulted in an increase in lease expense of $0.6 million during 2007 for the effects of recording scheduled rent increases on a straight-line basis over the term of the renewal period. This increase has no effect on cash rent payments at the start of the lease term, and will only result in additional cash outlay as the 3 percent annual increases take effect each year. In addition, there was an increase in lease expense of $0.1 million resulting from rent increases for lessor funded property renovations.

Professional liability. Professional liability expense in 2007 resulted in a benefit of $6,000, compared to an expense of $782,000 in 2006, a decrease in expense of $788,000. Professional liability expense related to the SMSA Acquisition was $84,000. Same center professional liability expense in 2007 resulted in a benefit of $90,000, compared to an expense of $782,000 in 2006, a decrease in expense of $872,000. Our cash expenditures for professional liability costs were $0.7 million and $1.0 million for the three month periods ended September 30, 2007 and 2006, respectively. During 2007, our total recorded liabilities for self-insured professional liability risks declined to $19.7 million at September 30, 2007, down from $25.7 million at December 31, 2006.

General and administrative expense. General and administrative expense increased to $4.1 million in 2007 compared to $3.9 million in 2006, an increase of $0.2 million, or 4.3%. General and administrative expense related to the SMSA Acquisition was $0.1 million. Same center general and administrative expense increased to $4.0 million in 2007 from $3.9 million in 2006, an increase of $0.1 million, or 2.3%. There was an increase to compensation costs of approximately $0.2 million. This cost increase was partially offset by a reduction in costs of compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 of $0.3 million. The majority of our costs of Sarbanes-Oxley compliance in 2006 were incurred in the third and fourth quarters.

As a percentage of total net revenues, general and administrative expense decreased to approximately 6.4% in 2007, compared to 7.3% in 2006.

Stock-based compensation. During 2007, we recorded stock-based compensation expense of $0.2 million, compared to $0.1 million in stock-based compensation during the same period of 2006.

Depreciation and amortization. Depreciation and amortization expense was approximately $1.0 million in 2007 compared to $0.9 million during 2006. The increase in 2007 is primarily due to depreciation and amortization expenses related to the SMSA Acquisition.

Post acquisition integration costs. In connection with the SMSA Acquisition, we recognized a pre-tax charge for post acquisition integration costs of $0.3 million in the three months ended September 30, 2007. We incurred $0.2 million of travel and other out-of-pocket expenses incurred immediately following the acquisition related to integration activities and $0.1 million in severance and relocation costs resulting from the Texas regional office restructuring necessitated by the acquisition.

Foreign currency transaction gain. A foreign currency transaction gain of $330,000 was recorded in 2007, compared to $29,000 in 2006. These gains result primarily from foreign currency translation of a note receivable from the sale of our Canadian operations in 2004.

Interest expense. Interest expense increased to $1.0 million in 2007 from $0.9 million in 2006, an increase of $0.1 million or 7.2%. The increased debt associated with the SMSA Acquisition resulted in an increase in interest expense of approximately $137,000, and fees for letters of credit issued in 2007 were approximately $26,000. These increases were partially offset by reductions in interest resulting from principal payments and reduced interest for debt refinanced in August 2007.

Debt retirement costs. Debt retirement costs of $0.1 and $0.2 million in 2007 and 2006 are related to unamortized deferred finance costs of refinanced loans that were written off following the refinancing transactions we completed in August 2007 and August 2006.

Income from continuing operations before income taxes; income from continuing operations per common share. As a result of the above, continuing operations reported income before income taxes of $3.4 million in 2007 compared to $1.6 million in 2006. The provision for income taxes was $1.4 million in 2007, compared to a benefit for income taxes of $8.0 million in 2006. Our effective tax rate differs materially from the statutory rate in 2006 mainly due to changes in our valuation allowance for net deferred tax assets. During 2006, we recorded a deferred tax benefit to reduce deferred tax asset valuation allowances, based on improvements in our financial position and our updated forecast of income available to support the turnaround of existing net operating loss carryforward credits. In future periods, we will continue to assess the need for and adequacy of the remaining valuation allowance. The basic and

21

diluted income per common share from continuing operations were $0.33 and $0.32, respectively, in 2007, as compared to a basic and diluted income per common share from continuing operations of $1.64 and $1.41, respectively, in 2006.

Income from discontinued operations. As discussed in the overview at the start of Management’s Discussion and Analysis of Financial Condition and Results of Operations, we have completed certain divestitures, and have reclassified our consolidated financial statements to present these divestitures as discontinued operations for all periods presented. The operating loss from discontinued operations, net of taxes, was approximately $100,000 in 2007, compared to a loss of $143,000 in 2006. The disposition of discontinued operations resulted in a gain of $28,000 in 2007 and a loss of $2,000 in 2006.

Nine Months Ended September 30, 2007 Compared With Nine Months Ended September 30, 2006

As noted in the overview, we have entered into certain divestiture transactions in recent periods, and our consolidated financial statements have been reclassified to present such transactions as discontinued operations. Accordingly, the related revenue, expenses, assets, liabilities and cash flows have been reported separately, and the discussion below addresses principally the results of our continuing operations.

Patient Revenues. Patient revenues increased to $173.9 million in 2007 from $159.5 million in 2006, an increase of $14.4 million, or 9.0%. Revenues related to the SMSA Acquisition were $6.6 million in 2007. Same center patient revenues increased to $167.3 million in 2007 from $159.5 million in 2006, an increase of $7.8 million, or 4.9%. This increase is primarily due to increased Medicaid rates in certain states and Medicare rate increases.

The following table summarizes key revenue and census statistics for the quarter and segregates effects of the SMSA Acquisition. Results for the SMSA Acquisition are included beginning August 11, 2007, the effective date of the acquisition.

	Nine Months Ended
	September 30,
	2007			2006
Skilled nursing occupancy:
Same center		78.7	%		78.6	%
SMSA Acquisition		68.4	%		n/a
Total continuing operations		78.2	%		78.6	%
Medicare census as percent of total:
Same center		14.0	%		13.9	%
SMSA Acquisition		12.0	%		n/a
Total continuing operations		13.9	%		13.9	%
Medicare revenues as percent of total:
Same center		31.1	%		30.6	%
SMSA Acquisition		33.1	%		n/a
Total continuing operations		31.2	%		30.6	%
Medicaid revenues as percent of total:
Same center		56.6	%		56.2	%
SMSA Acquisition		46.0	%		n/a
Total continuing operations		56.2	%		56.2	%
Medicare average rate per day:
Same center	$	344.88		$	321.87
SMSA Acquisition	$	375.13			n/a
Total continuing operations	$	346.04		$	321.87
Medicaid average rate per day:
Same center	$	139.05		$	132.85
SMSA Acquisition	$	109.62			n/a
Total continuing operations	$	137.89		$	132.85

22

On a same center basis, the Company’s average rate per day for Medicare Part A patients increased 7.1% in 2007 compared to 2006 as a result of annual inflation adjustments and the acuity levels of Medicare patients in our nursing centers, which were higher in 2007 than in 2006. Our average rate per day for Medicaid patients increased 4.7% in 2007 compared to 2006 as a result of increasing patient acuity levels, certain state increases to offset minimum wage adjustments, effects of stock based compensation charges and other rate increases in certain states.

Operating expense. Operating expense increased to $132.9 million in 2007 from $121.6 million in 2006, an increase of $11.3 million, or 9.3%. As a percentage of patient revenues, operating expense increased to 76.4% of revenue in 2007 compared to 76.3% of revenue in 2006. Operating expense related to the SMSA Acquisition was $5.9 million in 2007. Same center operating expense increased to $126.9 million in 2007 from $121.6 million in 2006, an increase of $5.3 million, or 4.4%. This increase is primarily attributable to cost increases related to wages and benefits, partially offset by reductions in bad debt expenses and costs of workers compensation insurance.

The largest component of operating expenses is wages, which increased to $79.3 million in 2007 from $72.4 million in 2006, an increase of $6.9 million, or 9.5%. Wages related to the SMSA Acquisition were approximately $3.4 million. Same center wages increased approximately $3.5 million, or 4.8%, primarily due to increases in wages as a result of competitive labor markets in most of the areas in which we operate, regular merit and inflationary raises for personnel (increase of approximately 3.7% for the period), and labor costs associated with increases in patient acuity levels.

Employee health insurance costs were approximately $0.5 million higher in 2007 compared to 2006 on a same center basis, an increase of approximately 16.2%. The Company is self insured for the first $150,000 in claims per employee each year. Employee health insurance costs can vary significantly from year to year.

These increased costs were partially offset by reductions in bad debt expense and workers compensation insurance. Bad debt expense was $0.4 million lower in 2007 compared to 2006, on a same center basis. Costs of workers compensation insurance were approximately $0.5 million lower in 2007 compared to 2006 on a same center basis, due to better than expected claims experience.

The remaining increases in operating expense are primarily due to the effects of increases in patient acuity levels.

Lease expense. Lease expense increased to $14.4 million in 2007 from $11.5 million in 2006. Lease expense related to the SMSA Acquisition was $0.5 million for 2007. Same center lease expense increased to $13.8 million in 2007 from $11.5 million in 2006. Effective October 1, 2006, we renewed a master lease covering 28 nursing centers. This resulted in an increase in lease expense of $1.8 million during 2007 for the effects of recording scheduled rent increases on a straight-line basis over the term of the renewal period. This increase has no effect on cash rent payments at the start of the lease term, and will only result in additional cash outlay as the 3 percent annual increases take effect each year. In addition, there was an increase in lease expense of $0.4 million resulting from rent increases for lessor funded property renovations.

Professional liability. Professional liability expense in 2007 resulted in a benefit of $3.0 million, compared to a benefit of $5.5 million in 2006, a decrease in benefit of $2.5 million. Professional liability expense related to the SMSA Acquisition was $0.1 million. Our cash expenditures for professional liability costs were $2.6 million and $2.2 million for the nine month periods ended September 30, 2007 and 2006, respectively. During 2007, our total recorded liabilities for self-insured professional liability declined to $19.7 million at September 30, 2007, down from $25.7 million at December 31, 2006.

General and administrative expense. General and administrative expense increased to $12.2 million in 2007 from $11.1 million in 2006, an increase of $1.1 million or 9.6%. General and administrative expense related to the SMSA Acquisition was $0.1 million in 2007. Same center general and administrative expense increased to $12.1 million in 2007 from $11.1 million in 2006, an increase of $1.0 million, or 8.9%. The increase is primarily attributable to increased compensation costs.

As a percentage of total net revenues, general and administrative expense was approximately 7.0% of revenue in both 2007 and 2006.

Stock-based compensation. During 2007, we recorded stock-based compensation expense of $0.5 million, compared to $5.1 million in stock-based compensation during the same period of 2006.

Depreciation and amortization. Depreciation and amortization expense was approximately $2.9 million in 2007 and $2.8 million in 2006. The increase in 2007 is primarily due to depreciation and amortization expenses related to the SMSA Acquisition.

Post acquisition integration costs. In connection with the SMSA Acquisition, we recognized a pre-tax charge for post acquisition integration costs of $0.3 million in the three months ended September 30, 2007. We incurred $0.2 million of travel and other out-of-

23

pocket expenses incurred immediately following the acquisition related to integration activities and $0.1 million in severance and relocation costs resulting from the Texas regional office restructuring necessitated by the acquisition.

Foreign currency transaction gain. A foreign currency transaction gain of $743,000 was recorded in 2007, compared to $269,000 in 2006. These gains result primarily from foreign currency translation of a note receivable from the sale of our Canadian operations in 2004.

Interest expense. Interest expense decreased to $2.5 million in 2007 from $2.8 million in 2006, a decrease of $0.3 million or 7.9%. Interest expense decreased as a result of payments of debt from proceeds of the sale of discontinued operations, principal payments made in connection with a refinancing transaction in August 2006, and other principal payments. These decreases were partially offset by debt increases associated with our SMSA Acquisition, which resulted in interest expense increases of approximately $0.1 million in 2007, and fees for letters of credit issued in 2007.

Debt retirement costs. Debt retirement costs of $0.1 and $0.2 million in 2007 and 2006 are related to unamortized deferred finance costs of refinanced loans that were written off following the refinancing transactions we completed in August 2007 and August 2006.

Income from continuing operations before income taxes; income from continuing operations per common share. As a result of the above, continuing operations reported income before income taxes of $12.6 million in 2007 compared to $10.9 million in 2006. The provision for income taxes was $4.9 million in 2007, compared to a benefit for income taxes of $9.1 million in 2006. Our effective tax rate differs materially from the statutory rate in 2006 mainly due to changes in our valuation allowance for net deferred tax assets. During 2006, we recorded a deferred tax benefit to reduce deferred tax asset valuation allowances, based on improvements in our financial position and our updated forecast of income available to support the turnaround of existing net operating loss carryforward credits. In future periods, we will continue to assess the need for and adequacy of the remaining valuation allowance. The basic and diluted income per common share from continuing operations were $1.26 and $1.21, respectively, in 2007, as compared to a basic and diluted income per common share from continuing operations of $3.42 and $3.00, respectively, in 2006.

Income from discontinued operations. As discussed in the overview at the start of Management’s Discussion and Analysis of Financial Condition and Results of Operations, we have completed certain divestitures, and have reclassified our consolidated financial statements to present these divestitures as discontinued operations for all periods presented. Operating loss of discontinued operations, net of taxes, was approximately $101,000 in 2007, compared to a loss of $257,000 in 2006. The disposition of discontinued operations and completions of lease terminations resulted in a loss of $7,000, net of taxes, in 2007, compared to a loss of $122,000 in 2006.

Liquidity and Capital Resources

As of September 30, 2007, we had $38.5 million of outstanding borrowings, including $3.9 million in current scheduled payments of long-term debt. Current scheduled payments of long-term debt include payments required by our loan agreements from net proceeds received upon certain asset dispositions and operating cash flow. During the nine months ending September 30, 2007, additional principal payments of $2.4 million were made from such proceeds.

In August 2007, we entered into an agreement with LaSalle Bank NA, for a $16.5 million term loan to finance the SMSA acquisition and repay certain existing indebtedness. The term loan has an interest rate of LIBOR plus 2.5%, a maturity of five years, and principal payments based on a ten year amortization, with additional payments based on cash flow from operations and amounts realized related to certain collateral. The term loan is secured by receivables and all other unencumbered assets of the company, including land held for sale, insurance refunds receivable and notes receivable. In addition to financing the acquisition, we used proceeds from this term loan to retire a $4.0 million term loan that had an interest rate of LIBOR plus 6.25%, and a $2.5 million subordinated note due in September 2007 that had an interest rate of 7%.

In addition, the agreement with LaSalle also includes a $15 million revolving credit facility that provides revolving credit loans as well as the issuance of letters of credit. The revolver is secured by accounts receivable and replaced our previous $2.3 million line of credit. The revolver provides for a maximum draw of up to $21 million during the first six months to finance start up working capital requirements of the SMSA Acquisition, after which period the maximum draw is reduced to $15 million. There are limits on the maximum amount of loans that may be outstanding under the revolver based on borrowing base restrictions. The revolver has a term of three years and bears interest at our option of LIBOR plus 2.25% or the bank’s prime lending rate. Annual fees for letters of credit issued under this revolver are 2.25% of the amount outstanding. Historically, our accounts receivable had been pledged as security primarily for our leases with Omega. Under this refinancing, the accounts receivable serve as the collateral for the new revolver and we have issued a letter of credit of approximately $8.1 million to serve as a replacement security deposit for all of our leases with Omega. Considering this letter of credit

24

and the borrowing base limits at September 30, 2007, the balance available for future revolving credit loans would be $7.1 million. Such amounts are available to fund the working capital needs of this transaction and future expansion opportunities. As of September 30, 2007, we had no borrowings outstanding under our revolving credit facility.

Our debt agreements contain various financial covenants the most restrictive of which relate to cash flow, debt service coverage ratios, liquidity and limits on the payment of dividends to shareholders. We are in compliance with such covenants at September 30, 2007.

We have numerous pending liability claims, disputes and legal actions for professional liability and other related issues. Due to our past claim experience and increasing cost of claims throughout the long-term care industry, the premiums paid by us for professional liability and other liability insurance to cover future periods exceeds the coverage purchased so that it costs more than $1 to purchase $1 of insurance coverage. For this reason, since March 9, 2001, we have purchased professional liability insurance coverage for our facilities that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. As a result, we are effectively self-insured and expect to remain so for the foreseeable future.

We have essentially exhausted all general and professional liability insurance available for claims first made during the period from March 9, 2001 through March 9, 2007. For claims made during the period from March 10, 2007 through March 9, 2008, we maintain insurance coverage limits of $100,000 per medical incident and total aggregate policy coverage limits of $500,000.

As of September 30, 2007, we have recorded total liabilities for reported and settled professional liability claims and estimates for incurred but unreported claims of $19.7 million. A significant judgment entered against us in one or more of these legal actions could have a material adverse impact on our financial position and cash flows. Settlements of currently pending claims will require additional cash expenditures.

In November 2007, the Company’s Board of Directors authorized the repurchase of up to $2.5 million of our common stock pursuant to a plan under Rule 10b5-1 and in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. As of November 1, 2007, there were approximately 5.9 million shares of common stock outstanding.

Share repurchases under this program are authorized through the earlier of one year from November 6, 2007 or the repurchase of the full amount authorized to be repurchased under the plan, subject to conditions specified in the plan. Repurchases may be made through open market or privately negotiated transactions in accordance with all applicable securities laws, rules, and regulations and will be funded from available working capital. The share repurchase program may be terminated at any time without prior notice.

Net cash provided by operating activities of continuing operations before changes in other assets and liabilities totaled $10.8 million and $11.4 million in the nine month periods ended September 30, 2007 and 2006, respectively. These amounts primarily represent the net cash flows from operations. The effects of working capital changes were to use $4.2 million and $4.0 million of cash, respectively, in the nine month periods ended September 30, 2007 and 2006, resulting in net cash provided by continuing operations of $6.6 million and $7.4 million, respectively, in the nine month periods ended September 30, 2007 and 2006. Discontinued operations used cash of $21,000 and provided cash of $0.2 million in the nine month periods ended September 30, 2007 and 2006, respectively.

Investing activities of continuing operations used cash of $10.8 million and provided cash of $7.7 million in the nine month periods ended September 30, 2007 and 2006, respectively. These amounts primarily represent proceeds from the sale of discontinued operations in 2006, net of cash used for the SMSA Acquisition and for purchases of property, plant and equipment. We have used between $3.0 million and $4.1 million for capital expenditures of continuing operations in each of the three calendar years ending December 31, 2006. Such expenditures were primarily for facility improvements and equipment, which were financed principally through working capital. For the year ending December 31, 2007, we anticipate that capital expenditures for improvements and equipment for our existing facility operations will be higher as we complete facility renovations at certain owned facilities. Investing activities of discontinued operations used no cash in the first nine months of 2007 and $24,000 in cash in 2006.

Financing activities of continuing operations provided cash of $5.8 million and used cash of $14.4 million in the nine month periods ended September 30, 2007 and 2006, respectively. These amounts include proceeds from the issuance of debt and payments to retire existing debt. Proceeds from the sale of discontinued operations were used to repay debt. There were no cash flows from financing activities of discontinued operations in 2007 or 2006. No interest costs or debt were allocated to discontinued operations.

Facility Renovations

During 2005 we began an initiative to complete strategic renovations of certain facilities to improve occupancy, quality of care and profitability. We developed a plan to that began with those facilities with the greatest potential for benefit, and began the renovation program during the third quarter of 2005. As of September 30, 2007, we have completed renovation projects at seven facilities. We have 3 additional renovation projects in progress.

A total of $9.3 million has been spent on these renovation programs to date, with $7.2 million spent on facilities leased from Omega and $2.1 million spent on owned facilities. The amounts spent on the facilities leased from Omega are financed through increased rent, and are not reflected as capital expenditures.

For the six facilities with renovations completed before the beginning of the third quarter 2007, third quarter occupancy improved from 61.5% in 2006 to 68.1% in 2007, and Medicare census as a percent of total increased from 13.9% in 2006 to 16.4% in 2007. No

25

assurance can be given that these facilities will continue to show such occupancy or revenue mix improvement or that the other renovated facilities will experience similar improvements.

West Virginia Facility Option Agreement

We have entered into an option agreement to purchase certain assets of a skilled nursing facility in West Virginia. During 2007, we made an application to state regulatory authorities to allow us to operate the facility, and construct a new 90 bed replacement facility. In the event our application is approved, we will seek to arrange financing and begin construction of the replacement facility.

Receivables

Our operations could be adversely affected if we experience significant delays in reimbursement from Medicare, Medicaid and other third-party revenue sources. Our future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash, accounts receivable and inventories) and current liabilities (principally accounts payable and accrued expenses). In that regard, accounts receivable can have a significant impact on our liquidity. Continued efforts by governmental and third-party payors to contain or reduce the acceleration of costs by monitoring reimbursement rates, by increasing medical review of bills for services, or by negotiating reduced contract rates, as well as any delay by us in the processing of our invoices, could adversely affect our liquidity and results of operations.

Accounts receivable attributable to patient services of continuing operations totaled $25.4 million at September 30, 2007, compared to $18.5 million at December 31, 2006, representing approximately 32 and 31 days in accounts receivable at each period end, respectively. The SMSA Acquisition resulted in an increase in accounts receivable of approximately $4.8 million at September 30, 2007. As part of the procedural Medicare and Medicaid change of ownership process, payments from Medicaid and Medicare for SMSA facilities were temporarily delayed, resulting in an increase in receivables as of September 30, 2007. Without the effects of these payment delays, accounts receivable would have represented approximately 29 days at September 30, 2007.

The allowance for bad debt was $2.3 million at September 30, 2007, compared to $2.1 million at December 31, 2006. We continually evaluate the adequacy of our bad debt reserves based on patient mix trends, aging of older balances, payment terms and delays with regard to third-party payors, collateral and deposit resources, as well as other factors. We continue to evaluate and implement additional procedures to strengthen our collection efforts and reduce the incidence of uncollectible accounts.

Inflation

We do not believe that our operations have been materially affected by inflation. We expect salary and wage increases for our skilled staff to continue to be higher than average salary and wage increases, as is common in the health care industry.

Off-Balance Sheet Arrangements

We had letters of credit outstanding of approximately $8.1 million as of September 30, 2007, which serve as a security deposit for our facility leases with Omega. The letters of credit were issued in connection with our revolving credit facility. Our accounts receivable serve as the collateral for this revolving credit facility.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157; “Fair Value Measurements” (“SFAS No. 157”). This new standard provides guidance for using fair value to measure assets and liabilities and establishes a fair value hierarchy that prioritizes the information used to develop the measurements. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. The provisions of SFAS No. 157 are effective for entities as of the beginning of a fiscal year that begins after November 15, 2007. Earlier application is permitted, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. We do not expect the adoption of this new standard to have a material impact on our financial position.

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 No. 159”). This new standard permits entities to choose to measure many financial instruments and certain other items at fair value. Most provisions of SFAS No. 159 will only impact those entities that elect the fair value option or have investments accounted for under FASB Statement No. 115. The provisions of SFAS No. 159 are effective for entities as of the beginning of a fiscal year that begins after November 15, 2007. Earlier application is permitted,

26

provided that the reporting entity also elects to apply the provisions of SFAS No. 157. We do not expect the adoption of this new standard to have a material impact on our financial position.

Forward-Looking Statements

The foregoing discussion and analysis provides information deemed by Management to be relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2006. Certain statements made by or on behalf of us, including those contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by the forward-looking statements made herein. In addition to any assumptions and other factors referred to specifically in connection with such statements, other factors could cause our actual results to differ materially from the results expressed or implied in any forward-looking statements including, but not limited to, our ability to integrate the seven skilled nursing facilities acquired from Senior Management Services of America North Texas, Inc. into our business and achieve the anticipated cost savings, changes in governmental reimbursement, government regulation and health care reforms, the increased cost of borrowing under our credit agreements, ability to control ultimate professional liability costs, the accuracy of our estimate of our anticipated professional liability expense, the impact of future licensing surveys, the outcome of regulatory proceedings alleging violations of laws and regulations governing quality of care or violations of other laws and regulations applicable to our business, our ability to control costs, changes to our valuation of deferred tax assets, changes in occupancy rates in our facilities, changing economic conditions as well as others. Investors also should refer to the risks identified in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Part II “Item 1A — Risk Factors” below as well as risks identified in our Form 10-K for the year ended December 31, 2006 for a discussion of various risk factors of the Company and that are inherent in the health care industry. Given these risks and uncertainties, we can give no assurances that these forward-looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them. These assumptions may not materialize to the extent assumed, and risks and uncertainties may cause actual results to be different from anticipated results. These risks and uncertainties also may result in changes to the Company’s business plans and prospects. Such cautionary statements identify important factors that could cause our actual results to materially differ from those projected in forward-looking statements. In addition, we disclaim any intent or obligation to update these forward-looking statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The chief market risk factor affecting our financial condition and operating results is interest rate risk. As of September 30, 2007, we had outstanding borrowings of approximately $38.5 million, all of which is at variable rates of interest. In the event that interest rates were to change 1%, the impact on future pre-tax cash flows would be approximately $0.4 million annually, representing the impact of increased or decreased interest expense on variable rate debt.

We have a note receivable denominated in Canadian dollars related to the sale of our Canadian operations. This note is currently recorded on our balance sheet at $5.6 million US based on the outstanding balance of the note and the exchange rate as of September 30, 2007. We also have recorded certain liabilities of $0.8 million US that are denominated in Canadian dollars. The carrying value of the note and the liabilities in our financial statements will be increased or decreased each period based on fluctuations in the exchange rate between US and Canadian currencies, and the effect of such changes will be included as income or loss in our statement of income in the period of change. In the nine month periods ended September 30, 2007 and 2006, we reported transaction gains of $743,000 and $269,000, respectively, as a result of the effect of changes in the currency exchange rates on this note. A further change of 1% in the exchange rate between US and Canadian currencies would result in a corresponding increase or decrease to pre-tax earnings of approximately $48,000.

ITEM 4. CONTROLS AND PROCEDURES

Advocat, with the participation of our principal executive and financial officers has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of September 30, 2007. Based on this evaluation, the principal executive and financial officers have determined that such disclosure controls and procedures are effective to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

27

There has been no change (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal control over financial reporting that has occurred during our fiscal quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

28

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

The provision of health care services entails an inherent risk of liability. Participants in the health care industry are subject to an increasing number of lawsuits alleging malpractice, product liability, or related legal theories, many of which involve large claims and significant defense costs. The entire long-term care profession in the United States has experienced a dramatic increase in claims related to alleged negligence in providing care to its patients and we are no exception in this regard. We have numerous pending liability claims, disputes and legal actions for professional liability and other related issues. It is expected that we will continue to be subject to such suits as a result of the nature of our business. Further, as with all health care providers, we are periodically subject to regulatory actions seeking fines and penalties for alleged violations of health care laws and are potentially subject to the increased scrutiny of regulators for issues related to compliance with health care fraud and abuse laws.

As of September 30, 2007, we are engaged in 21 professional liability lawsuits. Three of these matters are currently scheduled for trial within the next year. The ultimate results of any of our professional liability claims and disputes cannot be predicted. We have limited, and sometimes no, professional liability insurance with regard to most of these claims. A significant judgment entered against us in one or more of these legal actions could have a material adverse impact on our financial position and cash flows.

We cannot currently predict with certainty the ultimate impact of any of the above cases on our financial condition, cash flows or results of operations. An unfavorable outcome in any of the lawsuits, any regulatory action, any investigation or lawsuit alleging violations of fraud and abuse laws or of elderly abuse laws or any state or Federal False Claims Act case could have a material adverse impact on our financial condition, cash flows or results of operations and could also subject us to fines, penalties and damages. Moreover, we could be excluded from the Medicare, Medicaid or other state or federally-funded health care programs, which would also have a material adverse impact on our financial condition, cash flows or results of operations.

ITEM 1A. RISK FACTORS

Information regarding risk factors appears in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements,” in Part I — Item 2 of this Form 10-Q and in “Risk Factors” in Part I — Item 1A of our Report on Form 10-K for the fiscal year ended December 31, 2006. In addition to the risk factors previously disclosed in our Report on Form 10-K, the following factor could cause our results to differ from our expectations.

If we are unable to successfully integrate the business operations of the SMSA facilities into our business operations, we will not realize the anticipated potential benefits from the acquisition and our business could be adversely affected.

The acquisition of the facilities from SMSA involves the integration of seven nursing homes that have previously been operated by a different management group. Successful integration of these acquired facilities with our other operations will depend on our ability to consolidate operations, systems and procedures, eliminate redundancies and reduce costs. If we are unable to do so, we will not realize the anticipated potential benefits of the acquisition and our business and results of operations would be adversely affected. Difficulties could include the loss of key employees, increased demands on our management, financial, technical and other resources, the disruption of our and the new facilities’ ongoing businesses, a decline in occupancy, unanticipated cost increases and possible inconsistencies in standards, controls, procedures and policies. The acquisition could result in the diversion of management’s attention from our ongoing operations. In addition, a number of factors beyond our control could prevent us from realizing any efficiencies and cost savings we expect.

ITEM 6. EXHIBITS

The exhibits filed as part of this report on Form 10-Q are listed in the Exhibit Index immediately following the signature page.

29

SIGNATURES

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

ADVOCAT INC. November 6, 2007
By:	/s/ William R. Council, III
	William R. Council, III
	President and Chief Executive Officer, Principal Executive Officer and An Officer Duly Authorized to Sign on Behalf of the Registrant

By:	/s/ L. Glynn Riddle, Jr.
	L. Glynn Riddle, Jr.
	Executive Vice President and Chief Financial Officer, Secretary, Principal Accounting Officer and An Officer Duly Authorized to Sign on Behalf of the Registrant

30

Exhibit
Number	Description of Exhibits
3.1	Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement No. 33-76150 on Form S-1)
3.2	Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement No. 33-76150 on Form S-1)
3.3	Amendment to Certificate of Incorporation dated March 23, 1995 (incorporated by reference to Exhibit A of Exhibit 1 to the Company’s Form 8-A filed March 30, 1995)
3.4	Certificate of Designation of Registrant (incorporated by reference to Exhibit 3.4 to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2001)
3.5	Certificate of Designation of Registrant (incorporated by reference to Exhibit 3.5 to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2006).
4.1	Form of Common Stock Certificate (incorporated by reference to Exhibit 4 to the Company’s Registration Statement No. 33-76150 on Form S-1)
4.2	Amended and Restated Rights Agreement dated as of December 7, 1998 (incorporated by reference to Exhibit 1 to Form 8-A/A filed December 7, 1998)
10.1	Operations Transfer Agreement effective as of July 20, 2007, by and among certain subsidiaries of the Company, and Senior Management Services of America North Texas, Inc., a Texas corporation, Senior Management Services of Estates at Fort Worth, Inc., a Texas corporation, Senior Management Services of Doctors at Dallas, Inc., a Texas corporation, Senior Management Services of Humble, Inc., a Texas corporation, Senior Management Services of Katy, Inc., a Texas corporation, Senior Management Services of Treemont, Inc., a Texas corporation, Senior Management Services of Heritage Oaks at Ballinger, Inc., a Texas corporation, and Senior Management Services of Normandy at San Antonio, Inc., a Texas corporation
10.2	Loan and Security Agreement made as of August 10, 2007, between Diversicare Leasing Corp., a Tennessee corporation, and Bridge Associates LLC, as trustee for the SMSA Creditors’ Trust, a Texas trust.

Exhibit
Number	Description of Exhibits
10.3	Loan and Security Agreement dated as of August 10, 2007, is by and among the Company and certain subsidiaries and LaSalle Bank National Association, a national banking association
10.4	Guaranty dated as of August 10, 2007, by Advocat Inc., a Delaware corporation to and for the benefit of LaSalle Bank National Association, a national banking association
10.5	Revolving Credit Note dated August 10, 2007 in the principal amount of $21,000,000.00 from the Company and certain subsidiaries to LaSalle Bank National Association, a national banking association
10.6	Term Loan Note dated August 10, 2007 in the principal amount of $16,500,000.00 from the Company and certain subsidiaries to LaSalle Bank National Association, a national banking association
10.7	Fifth Amendment to Consolidated Amended and Restated Master Lease dated as of August 10, 2007 by and between Sterling Acquisition Corp., a Kentucky corporation and Diversicare Leasing Corp., a Tennessee corporation
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b).

EX-10.1

Exhibit 10.1

OPERATIONS TRANSFER AGREEMENT

     This OPERATIONS TRANSFER AGREEMENT (“Agreement”), is entered into effective as of July 20, 2007, by and among DIVERSICARE TREEMONT, LLC, a Delaware limited liability company (“Diversicare Treemont”), DIVERSICARE DOCTORS, LLC, a Delaware limited liability company (“Diversicare Doctors”), DIVERSICARE ESTATES, LLC, a Delaware limited liability company (“Diversicare Estates”), DIVERSICARE KATY, LLC, a Delaware limited liability company (“Diversicare Katy”), DIVERSICARE HUMBLE, LLC, a Delaware limited liability company (“Diversicare Humble”), DIVERSICARE NORMANDY TERRACE, LLC, a Delaware limited liability company (“Diversicare Normandy”), and DIVERSICARE BALLINGER, LLC, a Delaware limited liability company (“Diversicare Ballinger”) (each of the forgoing are individually a “New Operator” and collectively the “New Operators”), DIVERSICARE TEXAS I, LLC, a Delaware limited liability company (“Diversicare Texas”) (Diversicare Texas and the New Operators are collectively the “Diversicare Parties”), and SENIOR MANAGEMENT SERVICES OF AMERICA NORTH TEXAS, INC., a Texas corporation (“SMS North Texas”), SENIOR MANAGEMENT SERVICES OF ESTATES AT FORT WORTH, INC., a Texas corporation (“SMS Estates”), SENIOR MANAGEMENT SERVICES OF DOCTORS AT DALLAS, INC., a Texas corporation (“SMS Doctors”), SENIOR MANAGEMENT SERVICES OF HUMBLE, INC., a Texas corporation (“SMS Humble”), SENIOR MANAGEMENT SERVICES OF KATY, INC., a Texas corporation (“SMS Katy”), SENIOR MANAGEMENT SERVICES OF TREEMONT, INC., a Texas corporation (“SMS Treemont”), SENIOR MANAGEMENT SERVICES OF HERITAGE OAKS AT BALLINGER, INC., a Texas corporation (“SMS Heritage Oaks”), and SENIOR MANAGEMENT SERVICES OF NORMANDY AT SAN ANTONIO, INC., a Texas corporation (“SMS Normandy”) (SMS Estates, SMS Doctors, SMS Humble, SMS Katy, SMS Treemont, SMS Heritage Oaks and SMS Normandy are each individually a “Transferor” and collectively the “Transferors”) (SMS North Texas and the Transferors are collectively the “SMS Parties”). This Agreement shall be deemed a separate and distinct agreement by and between each SMS Party and its corresponding Diversicare Party.

RECITALS

     A. Transferors currently operate seven (7) skilled nursing facilities as follows: SMS Treemont operates Treemont Nursing and Rehabilitation Center, 5550 Harvest Hill Road, Suite 500, Dallas, Texas (the “Treemont Facility”); SMS Doctors operates Doctors Healthcare Center, 9009 White Rock Trail, Dallas, Texas (the “Doctors Facility”); SMS Estates operates Estates Healthcare Center, 201 Sycamore School Road, Fort Worth, Texas (the “Estates Facility”); SMS Katy operates Oakmont Nursing and Rehabilitation Center of Katy, 1525 Tull Drive, Katy, Texas (the “Katy Facility”); SMS Humble operates Oakmont Nursing and Rehabilitation Center of Humble, 8450 Will Clayton Parkway, Humble, Texas (the “Humble Facility”); SMS Normandy operates Normandy Terrace Nursing and Rehabilitation Center, 841 Rice Road, San Antonio, Texas (the “Normandy Terrace Facility”); and SMS Heritage Oaks operates Heritage Oaks Nursing and Rehabilitation Center, 2001 6th Street, Ballinger, Texas (the “Heritage Oaks Facility”) (each of the foregoing is individually a “Facility” and collectively the “Facilities”).

     B. Each respective Transferor is also the employer of each Facility’s employees (the “Employees”).

     C. SMS North Texas leases all of the Facilities from OHI Asset (TX), LLC (“Omega”) pursuant to a Consolidated Master Lease dated as of June 1, 2005 (the “Omega Lease”).

     D. Each Transferor subleases its respective Facility from SMS North Texas pursuant to a Sublease dated April 30, 2004 (each herein a “Sublease” and collectively the “Subleases”).

     E. On January 17, 2007, the SMS Parties filed a voluntary petition for relief under chapter 11 of title 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Northern District of Texas (the “Bankruptcy Court”).

     F. Pursuant to that certain First Amended Chapter 11 Plan Proposed by the Debtors, dated May 17, 2007 (the “Plan”), SMS North Texas and the Transferors propose to transfer operations of the Facilities and sell or assign certain assets associated therewith to Diversicare Texas and the New Operators. Capitalized terms used but not defined herein have the meanings assigned to them in the Plan or Appendix 1 to the First Amended Disclosure Statement in Support of Chapter 11 Plan Proposed by the Debtors, dated June 17, 2007 (as amended, modified or restated, the “Disclosure Statement”).

     G. The transfer of (i) the Omega Lease to Diversicare Texas and (ii) the operations of the Facilities from the Transferors to the New Operators shall be effective as of 12:01 a.m. local time on the day immediately following the date of the Closing (as defined in Section 4.1) (the “Transfer Date”).

     H. Diversicare Texas, SMS North Texas, Transferors and New Operators desire to enter into this Agreement in order to assign the Omega Lease from SMS North Texas to Diversicare Texas and facilitate, effective as of the Transfer Date, the orderly transition of each Facility’s operations, and the sale of certain assets, from Transferors to New Operators.

AGREEMENT

     NOW, THEREFORE, in consideration of the mutual promises contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree that:

SECTION 1
PURCHASE AND SALE OF BUSINESS OPERATION

     1.1 Purchase Price. On the terms and subject to the conditions set forth in this Agreement, in consideration for (i) the assignment to Diversicare Texas of the Omega Lease and Subleases and (ii) the transfer to each New Operator of the Acquired Assets (as defined below) and any and all business activities of each Transferor associated with such Transferor’s operation of its respective Facility (individually a “Business” and collectively the “Businesses”), the Diversicare Parties will pay to the SMS Parties the following:

2

          (a) Base Purchase Price. At Closing, the Diversicare Parties will pay the following amounts to the SMS Parties (collectively, the “Base Purchase Price”):

               (i) $8,500,00.00; and

               (ii) plus $70,000.00 as the parties’ agreed-upon value of the usable inventory (at cost) located in the Facilities on the Closing Date (as defined below).

          (b) Additional Purchase Price. In addition to the Base Purchase Price, at Closing the Diversicare Parties will assume and agree to pay to the applicable third party or otherwise perform the following obligations of the SMS Parties as additional consideration for the Acquired Assets (herein, the “Additional Purchase Price”):

               (i) the obligation of SMS North Texas to provide a Security Deposit in the amount of $826,875 pursuant to Section 38.1 of the Omega Lease;

               (ii) the sum of up to $108,837.32 to pay the unpaid balances owing on the vehicles listed on Schedule 1.3(b), but excluding any vehicles not used at the Facilities;

               (iii) the 2007 real and personal property taxes related to the Facilities;

               (iv) an amount sufficient to assume the paid time off liabilities for the Retained Employees (as defined in Section 3.4 below) identified on Schedule 1.1(b)(iv) to be attached hereto by the parties at Closing; and

               (v) the cure amounts for the Assumed Contracts listed on Schedule 1.1(b)(v); provided, however, that except as provided in Section 1.1(b)(i) above, all cure amounts required to assume and assign the Omega Lease shall be paid at Closing by the SMS Parties.

     The Base Purchase Price and the Additional Purchase Price are collectively, the “Purchase Price”. The Base Purchase Price shall be payable at Closing in immediately available funds by wire transfer to the account designated in writing by the SMS Parties. The parties agree to reasonably allocate the Purchase Price among the various components of the Acquired Assets.

     1.2 Deposit. Simultaneously with the execution and delivery of this Agreement to the SMS Parties (but in any event no later than July 20, 2007), the Diversicare Parties shall submit a cashier’s check in the amount of $250,000.00 (the “Deposit”) payable to Senior Management Services of Treemont, Inc. The Deposit shall be held by the SMS Parties until Closing or until such amount is returned in accordance with the provisions of this Agreement or the Bid Procedures set forth in the Disclosure Statement. If the Diversicare Parties are the Purchaser, the Deposit shall be applied against, and the Base Purchase Price reduced by, such amount.

     1.3 Acquired Assets. On the Transfer Date (as defined in Section 4.2 below) and subject to the terms and conditions of this Agreement, (i) Diversicare Texas will purchase and acquire from SMS North Texas, and SMS North Texas shall transfer, assign and convey to Diversicare Texas, all of SMS North Texas’s right, title and interest as tenant under the Omega Lease and as sublessor under the Sublease, and (ii) each New Operator will purchase and acquire from Transferor, and Transferor will sell, assign, transfer and deliver, or cause to be sold,

3

assigned, transferred and delivered, to New Operator, free and clear of all liens, claims, encumbrances and interests, all right, title and interest in, to and under all of the assets, property, rights, licenses and business, wherever located, real, personal or mixed, tangible or intangible, owned, held or used in the conduct of the Business by each Transferor as the same will exist on the Closing Date (collectively, the “Acquired Assets”), including, all right, title and interest of each Transferor in, to, and under the following assets:

          (a) Equipment. All the furnishings, furniture, supplies, tools, equipment, and other tangible personal property of every kind and description owned or used by any Transferor in operating its Facility, including that equipment listed on Schedule 1.3(a), (collectively, the “Equipment”). The SMS Parties represent and warrant that, to the SMS Parties’ knowledge, all of the Equipment is owned by the respective Transferors and none is subject to any equipment lease except as expressly noted on Schedule 1.3(a).

          (b) Vehicles. All vehicles listed on Schedule 1.3(b), all of which shall be owned (and not leased) by a Transferor or an affiliate thereof immediately prior to Closing. To the extent vehicles listed on Schedule 1.3(b) are owned by Serenity Management Services, Inc., such vehicles shall be deemed to be acquired by the New Operators of the Facilities where such vehicles are located.

          (c) Inventory. All inventory and supplies, including perishables and expendables owned or used by any Transferor in the operation of its Facility, whether or not carried on the Books and Records (the “Inventory”).

          (d) Intellectual Property. All (i) trademarks, service marks, copyrights, and all applications and registrations therefore, and any trade, registered, or assumed names, including the names “Treemont Nursing and Rehabilitation Center”, “Doctors Healthcare Center”, “Estates Healthcare Center”, “Oakmont Nursing and Rehabilitation Center of Katy”, “Oakmont Nursing and Rehabilitation Center of Humble”, “Normandy Terrace Nursing and Rehabilitation Center”, and “Heritage Oaks Nursing and Rehabilitation Center”, any and all derivatives thereof, (ii) any Internet website domain names; (iii) trade secrets, know how, methods and other intellectual property rights and intangible property; (iv) software and computer programs; and (v) any other confidential or proprietary information relating to the Business (collectively, the “Intellectual Property”).

          (e) Omega Lease. All rights under the Omega Lease and all subleases executed in connection therewith and such other rights and obligations as set forth in greater detail in the Assumption and Assignment of Leasehold Interests, to be executed and delivered at Closing (the “Lease Assignment”).

          (f) Contract Rights. All rights under the executory contracts and unexpired leases (collectively, the “Assumed Contracts”) listed on Schedule 1.3(f). No obligation under any contract or lease is expressly or impliedly assumed except to the extent it is specifically listed on Schedule 1.3(f). The Diversicare Parties may amend Schedule 1.3(f) to remove contracts or leases at any time before Closing by written notice to the SMS Parties.

4

          (g) Permits, Etc. Each Transferor’s transferable federal, state and local permits, authorizations, franchises, licenses, registrations, qualifications, consents, approvals, waivers and all agency listings owned or used by Transferor in the operation of its Facility (collectively, the “Permits”), but expressly excluding any Permits designated as excluded from the Acquired Assets.

          (h) Books, Records and Information. All confidential information, files, manuals, information, records (including financial, personnel, payroll and patient records), billing records, data, databases, plans, books, ledgers, business plans, projections, documents, lists, and any other recorded knowledge (whether in hard or electronic copy) pertaining to the Acquired Assets and/or to the Business, including without limitation all employment files, medical records with respect to Residents of its Facility, cost reports, surveys with plans of correction, copies of historical financial records, electronic files, and any other operational data solely related to the operation of and located at such Facility as authorized, and to the extent permissible, by applicable law (collectively, “Books and Records”), other than the SMS Parties’ tax filings and related records and any books and records which Transferor is required by law to retain.

          (i) Unlisted Assets. All other assets and Facilities not specifically identified in this Section 1.3 that are used in conducting the Business or owned by any SMS Party and not specifically excluded under the terms of this Agreement.

     1.4 Excluded Assets. Notwithstanding Section 1.3 above, the assets of the SMS Parties identified in this Section 1.4 (the “Excluded Assets”) are not included in the Acquired Assets and will not be sold or transferred to the Diversicare Parties hereunder.

          (a) Receivables. All notes receivable, accounts receivable, cost report settlements receivable and other receivables or amounts of any kind that are payable or due any SMS Party and any and all rights of any SMS Party which secure or guarantee payment of same, subject to the transfer and settlement process set forth in Section 3.5 below.

          (b) Cash and Security; Deposits. All of SMS Parties’ cash and cash equivalents, petty cash, security and utility deposits and prepaid expenses, wherever located, including, without limitation, any amounts currently held by Omega as a Security Deposit pursuant to Section 38.1 of the Omega Lease.

          (c) Contracts. Any executory contracts and unexpired leases not included in the Assumed Contracts (herein the “Excluded Contracts”).

          (d) Organizational Records. Each SMS Party’s tax returns and other records having to do with the organization of such SMS Party.

          (e) Excluded Permits. The Transferor’s Medicaid provider numbers and related provider agreements.

          (f) Claims, Etc. To the extent such rights existed prior to the Transfer Date, all of SMS Parties’ setoff and recoupment rights against third parties that assert claims against the SMS Parties’ estates, to the extent the SMS Parties elect to assert such rights.

5

          (g) Rights under this Agreement. The rights which accrue or will accrue to the SMS Parties under this Agreement.

          (h) Causes of Action. Causes of action that arise in favor of the SMS Parties on and prior to the Transfer Date, including those causes of action arising under §§ 544, 547, 548, 549, 550 and 553 of the Bankruptcy Code.

     1.5 Excluded Liabilities. Except as expressly provided in this Agreement, the Diversicare Parties shall not assume any claims, lawsuits, liabilities, obligations, or debts of the SMS Parties or any other person (“Excluded Liabilities”), including without limitation: (a) malpractice or other tort claims to the extent based on acts or omissions of any SMS Party occurring on or before the Transfer Date, or claims for breach of contract to the extent based on acts or omissions of any SMS Party occurring on or before the Transfer Date; (b) any accounts payable, taxes, or other obligation or liability of any SMS Party to pay money incurred by SMS Party on or prior to the Transfer Date, including without limitation all Medicaid, Medicare, Veterans Administration and other overpayments, if any, relating to periods prior to the Transfer Date; (c) any claims, lawsuits, liabilities or obligations regarding the Resident funds (as set forth in Section 3.2) occurring or related to occurrences prior to the Transfer Date; (d) all costs or obligations required to cure any defaults under the Omega Lease other than the security deposit obligation expressly assumed under Section 1.1(b)(i) above; and (e) any other obligations or liabilities incurred by any SMS Party prior to the Transfer Date, subject to the obligations of the New Operators under any Assumed Contracts.

SECTION 2
DELIVERIES UPON CLOSING DATE

     2.1 SMS Parties’ Deliveries Upon Closing Date. The SMS Parties shall deliver the following to the applicable Diversicare Party on the Closing Date (as defined in Section 4.1 below):

          (a) The accounting of Resident funds required by Section 3.2 hereof.

          (b) The Confirmation Order (as defined in Section 9.4(a) below), the Cure Amount Order and evidence of compliance with Section 2.4(d) below.

          (c) Duly executed Bills of Sale with respect to the Acquired Assets, Assignment and Assumption Agreements with respect to the Assumed Contracts, the Lease Assignment, and Certificates of Title covering the vehicles identified on Schedule 1.3(b), each sufficient to convey title to the Acquired Assets, free and clear of all liens, in form and substance acceptable to the New Operators.

          (d) A closing statement (the “Closing Statement”) setting forth the calculation of the Base Purchase Price, the then known prorations set forth in Sections 2.3 and 3.6, the Resident fund accounting set forth in Section 3.2 and any Base Purchase Price adjustments pursuant to Section 3.4(b), subject to adjustment pursuant to Section 3.8.

          (e) The Collection Services Agreement in mutually acceptable form setting forth the parties agreements with respect to billing and collection services to be provided by

6

Diversicare Management Services Co., an affiliate of the Diversicare Parties, after the Transfer Date.

          (f) All documents required to evidence the Post Confirmation Credit Facility to be provided by Diversicare Leasing Corp. to the Liquidating Trust in the original principal amount of up to $2,200,000.00.

          (g) Possession of the Acquired Assets.

     2.2 Diversicare Parties’ Deliveries Upon Closing. The Diversicare Parties shall deliver to the SMS Parties at the Closing:

          (a) The payment in immediately available funds of the Base Purchase Price subject to any adjustment set forth on the Closing Statement. The Diversicare Parties and the SMS Parties agree that the Deposit will be applied to the payment of the Base Purchase Price and so reflected on the closing statement.

          (b) The Collection Services Agreement in mutually acceptable form setting forth the parties agreements with respect to billing and collection services to be provided by Diversicare Management Services Co., an affiliate of the Diversicare Parties, after the Transfer Date.

          (c) All documents required to evidence the Post Confirmation Credit Facility to be provided by Diversicare Leasing Corp. to the Liquidating Trust in the original principal amount of up to $2,200,000.00.

          (d) All other documents and agreements necessary to consummate the transactions described herein.

     2.3 Prorations. Utilities that are the responsibility of the SMS Parties shall be metered as of the date of Closing, with the SMS Parties responsible for accrued utility expenses so determined and the Diversicare Parties responsible for utility expenses accruing from and after the date of Closing as well as the transfer of service to the Diversicare Parties’ account as of the date of the Closing. If any statement or invoice necessary to make the foregoing determination has not yet been received and the amount due thereunder is not otherwise ascertainable, then proration and payment therefor will be deferred and addressed pursuant to Section 3.8 of this Agreement.

     2.4 Conditions to the Diversicare Parties’ Obligation to Close. The obligations of the Diversicare Parties under this Agreement are subject to the satisfaction, on or prior to the Closing Date, of all the following conditions, compliance with which, or the occurrence of which, may be waived in writing, in whole or in part, by the Diversicare Parties:

          (a) Representations, Warranties and Covenants.

               (i) Continued Accuracy of Representations and Warranties. All representations and warranties of the SMS Parties contained in this Agreement will be true and

7

correct in all material respects as of the Closing Date with the same force and effect as if made on and as of the Closing Date.

               (ii) Performance of Agreements. The SMS Parties will have performed and satisfied all covenants and conditions in all material respects required by this Agreement to be performed or satisfied by it on or prior to the Closing Date.

          (b) Confirmation Order. The Bankruptcy Court will have entered either (i) the Confirmation Order (as defined in Section 9.4(a)), which will not have been stayed, modified, reversed or amended in any manner adverse to the Diversicare Parties, and all other orders, approvals and consents from the Bankruptcy Court required to transfer the Facilities or (ii) an order in form substantially similar to the Confirmation Order approving the transactions described herein, which order will not have been stayed, modified, reversed or amended in any manner adverse to the Diversicare Parties, and all other orders, approvals and consents from the Bankruptcy Court required to consummate the transactions described herein.

          (c) Deleted.

          (d) Cure Amount Order. The Bankruptcy Court shall have entered a final order setting forth the cure amounts for each Assumed Contract (the “Cure Amount Order”).

          (e) Other Documents. The SMS Parties will have executed and delivered to the Diversicare Parties such other documents, bills of sale, assignments and other instruments of transfer or conveyance as may be necessary to evidence and effect the sale, assignment, transfer, conveyance and delivery of the Acquired Assets to the Diversicare Parties or as reasonably requested by the Diversicare Parties.

          (f) Change of Ownership Approval. The appropriate state agency or agencies will have accepted for interim approval the New Operators’ change of ownership application for the operation of the Facilities as skilled nursing facilities.

          (g) Material Adverse Change. No material adverse change shall have occurred with respect to the Facilities, taken as a whole, their financial condition or the Acquired Assets, between the date of this Agreement and the Closing Date.

     2.5 Conditions to the SMS Parties’ Obligations to Close. The obligations of the SMS Parties hereunder are subject to the satisfaction, on or prior to the Closing Date, of all of the following conditions, compliance with which, or the occurrence of which, may be waived, in writing, in whole or in part by the SMS Parties.

          (a) Representations, Warranties and Covenants.

               (i) Continued Accuracy of Representations and Warranties. All representations and warranties of the Diversicare Parties contained in this Agreement will be true in all respects as of the Closing Date with the same force and effect as if made on and as of the Closing Date.

8

               (ii) Performance of Agreements. The Diversicare Parties will have performed and satisfied all covenants and conditions required by this Agreement to be performed or satisfied by it on or prior to the Closing Date, including payment of the Purchase Price.

          (b) Confirmation Order. The Bankruptcy Court will have entered (i) the Confirmation Order, which will not have been stayed, modified, reversed or amended in any manner adverse to the Diversicare Parties, and all other orders, approvals and consents from the Bankruptcy Court required to transfer the Acquired Assets or (ii) an order in form substantially similar to the Confirmation Order reasonably satisfactory to the Diversicare Parties approving the transactions described herein, which order will not have been stayed, modified, reversed or amended in any manner adverse to the Diversicare Parties, and all other orders, approvals and consents from the Bankruptcy Court required to consummate the transactions described herein.

          (c) Post Confirmation Credit Facility. The parties will have executed and delivered all documents necessary to consummate the Post Confirmation Credit Facility.

SECTION 3
TRANSFER OF OPERATIONS

     3.1 Effectiveness of Transfer; Cooperation.

          (a) The transfer of (i) operations of each Facility from the applicable Transferor to the applicable New Operator, (ii) the assignment of the Omega Lease from SMS North Texas to Diversicare Texas and (iii) the assignment of the Subleases from each Transferor to the corresponding New Operator shall become effective as 12:01 a.m. local time on the Transfer Date.

          (b) The parties hereto agree to cooperate with each other to effect an orderly transfer of the operations of each Facility. Following the execution hereof, each Transferor shall, at the applicable New Operator’s sole expense, use commercially reasonable efforts to cooperate with such New Operator to furnish all requested documentation and to execute all documents and consents reasonably necessary for such New Operator to obtain any required licenses, agreements, certificates and consents, necessary to operate the Facility not already in possession of such New Operator, from third parties and government program agencies. Each New Operator shall promptly apply for issuance of all such required licenses and shall complete all change of ownership applications for its Transferor’s existing Medicare provider numbers and agreements and apply for the New Operator’s own Medicaid provider numbers and agreements.

     3.2 Resident Funds; Advance Payments.

          (a) Prior to Closing, and subject to adjustment by Transferors and New Operators within thirty (30) days following the Transfer Date, each Transferor will provide its New Operator with an accounting of all funds belonging to Residents (defined below) at its Facility that are held by such Transferor in a custodial capacity and an accounting of all advance payments received by each of them pertaining to Residents at such Facility. Such accounting will set forth the names of the Residents for whom such funds are held and the amounts held on behalf of each Resident, and shall be true, correct and complete as of the Transfer Date. In this Agreement, “Residents” shall mean all residents of any Facility pursuant to agreements and

9

arrangements with the applicable Transferor entered into in the ordinary course of such Transferor’s business.

          (b) On the Closing Date, each Transferor shall transfer such funds to a bank account designated by its New Operator, and such New Operator shall promptly acknowledge the receipt thereof and upon such transfer shall assume all of Transferor’s financial and custodial obligations with respect to such amounts deposited. As of the date of receipt of such funds, each Transferor is relieved of all fiduciary and custodial obligations with respect to such funds actually transferred to its New Operator and such New Operator shall assume all such obligations and be directly accountable to the Residents with respect to all transferred funds.

          (c) With respect to such trust accounts for Residents, upon its receipt thereof, each New Operator shall assume custody of such accounts and agrees to treat such accounts in the fiduciary capacity required by law. Each New Operator agrees to indemnify and hold its Transferor harmless from all liabilities, claims, and demands that may be asserted against such Transferor in connection with all amounts received by such New Operator pursuant to this Section 3.2 and New Operator’s treatment of such amounts following the Closing Date (collectively, the “Assumed Obligations”).

          (d) Notwithstanding the above, the New Operators will not assume liability for amounts due to Residents of any Facility on or before the Transfer Date who are listed (whether by individual Resident name or in another manner) as creditors in the Transferor’s bankruptcy case, to the extent a Resident’s claim is listed as a liability of the Transferor’s bankruptcy case. At the Closing, Transferor shall provide New Operator with a list of all such Residents and amounts as of the Transfer Date.

     3.3 Final Cost Reports. Each Transferor shall prepare and file with the appropriate governmental authorities a final cost reports for its Facility (and any other cost reports for periods ending on or before the Transfer Date that are not yet filed) within the time frame required by law. Each such cost report shall be prepared in accordance with all applicable laws and regulations. Each New Operator shall cooperate with the appropriate Transferor, the Plan Agent and their respective agents, representatives and advisors, in filing such final cost reports and any appeals related thereto and shall make any information related to such matters in its possession available to such Transferor or the Plan Agent.

     3.4 Employees.

          (a) Each Transferor shall terminate the employment of all of its Employees effective as of the Transfer Date and, except as set forth in Section 3.4(b) below, shall pay all wages and benefits due as of the Transfer Date to all of the Employees in accordance with Transferor’s standard policies and applicable laws to the extent permitted by the Bankruptcy Court. Following the Transfer Date, Transferors shall have no liability or obligation to continue any benefits provided to Employees prior to the date thereof under any employee benefit program offered by any SMS Party, except to the extent required by applicable law and ordered by the Bankruptcy Court.

10

          (b) Each Transferor will provide its New Operator with a list of Facility Employees at least five (5) business days prior to the Closing Date (“Transferor’s Employees”). The New Operator shall rehire, or cause to be rehired, at least the minimum number of such Transferor’s Employees necessary to avoid creating any obligation under the WARN Act (defined in Section 3.4(c) below) on the part of the Transferor; provided, that the SMS Parties shall provide to the Diversicare Parties a complete list of all Employees terminated in the ninety (90) day period ending on the Closing Date. The New Operators shall provide the Transferors at least two (2) business days prior to the Closing Date with a list of Employees to whom they do not intend to offer employment. Those Employees employed by a New Operator or its designee shall be referred to as the “Retained Employees.” Nothing herein is otherwise intended to limit or restrict changes in services or positions of any Retained Employees after the Transfer Date so long as such changes are made in compliance with the WARN Act. As to the Retained Employees only, New Operators or their designees shall assume, and be obligated to pay when due, any and all earned or accrued paid time off earned prior to the Transfer Date as provided in Section 1.1(b)(iv). To the extent any Transferor’s Employee is not a Retained Employee as of the Transfer Date, the Transferors shall retain any liability for, and be obligated to pay any and all earned or accrued vacation and other paid time off to such Transferor’s Employee, subject to applicable limits under the Bankruptcy Code.

          (c) New Operator and Transferor acknowledge and agree that the provisions of Section 3.4(b) are designed, in part, to ensure that Transferor is not required to give notice to Employees of the Facility of the “closure” thereof under the Worker Adjustment and Retraining Notification Act (the “WARN Act”) or any other comparable state law. Nothing in this Section 3.4(c) shall, however, create any rights in favor of any person not a party hereto, including but not limited to the Transferor’s Employees of the Facility, or constitute an employment agreement or condition of employment for any of Transferor’s Employees, regardless of that person’s status upon or after the Transfer Date.

     3.5 Accounts Receivable. At Closing, each Transferor shall give the appropriate New Operator control over its depository accounts where payments are received with respect to its accounts receivable for the purpose of administering the terms of this Section 3.5. Each New Operator is hereby authorized to receive and has the right to collect all receivables arising from services rendered at its Facility on and after the Transfer Date. In connection with such collections, each New Operator shall endorse and deposit the same into New Operator bank account for the Facility under the name and control of New Operator (a “New Operator Account”). As soon as practicable after the Transfer Date, each New Operator shall (to the extent permitted by law) instruct account debtors of its Facility to make payment directly into the New Operator Account for that Facility. Any payments received by any Transferor or New Operator after the Transfer Date with respect to a Facility from third party payors, such as the Medicare program, the Medicaid program, the Veteran’s Administration, or managed care companies or health maintenance organizations or from or on behalf of private pay patients, shall be handled as follows:

          (a) if such payments either specifically indicate on the accompanying remittance advice, or if the parties reasonably agree, that they relate to the period prior to the Transfer Date, then (A) in the event that such payments are received by a New Operator, the New Operator shall promptly deposit such payments for the benefit of the appropriate Transferor

11

by wiring said amounts in accordance with the wire transfer instructions provided by Transferor (“Transferor Account”) (but in any event, not later than ten (10) business days following the receipt of such payment, and until so deposited, shall be held in trust for the benefit of Transferor) and (B) in the event that such payments are received by a Transferor, such Transferor shall retain the payments;

          (b) if such payments specifically indicate on the accompanying remittance advice, or if the parties reasonably agree that they relate to the period after the Transfer Date, then (A) in the event that such payments are received by a New Operator, such New Operator shall deposit the payments in its New Operator Account and (B) in the event that such payments are received by a Transferor, such Transferor shall promptly forward such payments to the New Operator Account (but in any event, not later than ten (10) business days following the receipt of such payment, and until so forwarded, shall be held in trust for the benefit of New Operator);

          (c) if such payments indicate on the accompanying remittance advice, or if the parties reasonably agree, that they relate to periods both prior to and after the Transfer Date, the New Operator shall retain the portion thereof which relates to the period on and after the Transfer Date and the balance shall be promptly deposited into Transferor Account (within ten (10) business days following the receipt of such payment) and such Transferor shall promptly following receipt by the Transferor of any payments related to periods both prior to and after the Transfer Date (within ten (10) business days following the receipt of such funds) forward to the appropriate New Operator Account the amount of such payment relating to the period on and after the Transfer Date; and

          (d) for private pay patients, if the accompanying remittance advice does not indicate the period to which payment relates or if there is no accompanying remittance advice and if the parties do not agree as to how to apply such payment, then 100% of such amounts collected shall be applied to current services provided at the Facility. For all other payment sources, if the accompanying remittance advice does not indicate the period to which a payment relates or if there is no accompanying remittance advice and if the parties do not otherwise agree as to how to apply such payment, then 100% of such amount collected within the first 30 days after the Transfer Date from an account that is not identifiable, using best efforts, shall be deemed to have been collected in respect of an account receivable that was due to a Transferor in respect of services provided prior to the Transfer Date (and such Transferor shall be permitted to retain such proceeds, without limitation). If any amount shall be collected after the 30th day after the Transfer Date from an account that is not identifiable, using best efforts, as being in payment of a post-Transfer Date receivable, then 100% of such amount shall be deemed to have been collected as a New Operator’s accounts receivable (and such New Operator shall be permitted to retain such proceeds, without limitation).

To the extent either party receives any proceeds from the accounts receivable of the other party, the parties acknowledge that the party receiving the payment belonging to the other party shall hold the payment in trust. Except as specifically provided in this Agreement, neither party shall have any right to offset or recoupment with respect to such accounts receivable, and any party erroneously receiving a payment belonging to the other party shall have no right, title or interest whatsoever in the payment and shall remit the same to the other as provided herein.

12

Notwithstanding any provision of this Agreement to the contrary, so long as any amounts remain outstanding under the Post Confirmation Credit Facility, then any amounts determined to relate to the period prior to the Transfer Date shall be applied to repayment of the Post Confirmation Credit Facility, in accordance with the terms thereof.

     3.6 Payment of Operating Costs, Prorations and Deposits. Each New Operator shall be responsible for, and shall pay on a timely basis, any claims or charges which are due to third parties arising from the use, operation or control of its Facility from and after the Transfer Date. Revenues and expenses for the billing period in which this Agreement is executed, including rent prepaid under Omega Lease, shall be prorated between the applicable SMS Parties and Diversicare Parties as of the Transfer Date. All such prorations shall be made on the basis of actual days elapsed in the relevant accounting or revenue period and shall be based on the most recent information available to the SMS Parties and Diversicare Parties. Utility charges that are not metered and read on the Transfer Date shall be estimated based on prior charges, and shall be re-prorated upon receipt of statements therefor. In general, such prorations shall be made so as to reimburse the SMS Parties for actual prepaid expense items, and to charge the SMS Parties for prepaid revenue items, to the extent that the same are attributable to periods after the Transfer Date.

     3.7 Treatment of Prorations. The accounts of all SMS Parties and Diversicare Parties created pursuant to the prorations provided for in the preceding Section 3.6 shall be netted against each other. Any net positive balance remaining for utility charges and prepaid expenses shall be transmitted by the Diversicare Parties to the SMS Parties, as appropriate, in immediately available funds and any negative balance shall be transmitted by the SMS Parties to the Diversicare Parties, as appropriate, in immediately available funds.

     3.8 Future Settlement. All amounts owing from a Diversicare Party to an SMS Party, excluding amounts in respect of Section 3.5 hereof, that require adjustment after the date of the Closing Statement, including without limitation, re-prorations according to Section 3.6 hereof, shall be settled three (3) months after the Transfer Date. Any adjustments owed by any SMS Party to any Diversicare Party, may be offset against any sums owed to that SMS Party or any other SMS Party by any Diversicare Party under Section 3.5. Any adjustment owed by any Diversicare Party to any SMS party may be offset against any sums owed to that Diversicare Party or any other Diversicare Party by any SMS Party under Section 3.5. In case of any such offset, the offsetting party shall provide promptly to the other party reasonable information and documentation to support the offset. If, thereafter, an SMS Party determines that any further adjustment is to be made, the SMS Party shall submit a statement to the Diversicare Party setting forth any and all such items and the calculation of the amounts due hereunder. Such statement shall be submitted with appropriate backup materials. For such amounts owed by a Diversicare Party to an SMS Party, a Diversicare Party shall have thirty (30) days from the date of receipt of such statement to tender payment to the SMS Party or to question or dispute in writing any item thereon. Any disputes regarding future settlement that cannot be resolved between the SMS Parties and the Diversicare Parties shall be resolved by the Bankruptcy Court.

     3.9 Medicare; Medicaid; Veterans Administration. Each Transferor and New Operator understand that reimbursements from Medicare, Medicaid, and other third party payors for items/services provided/rendered after the Transfer Date may continue to be issued to

13

Transferors for a period of time. The amounts included in any such Medicare, Medicaid, or Veterans Administration checks received by a New Operator or Transferor shall be treated as accounts receivable in accordance with Section 3.5 of this Agreement. Pursuant to Section 3.5 above, the new Operators shall have control over the Transferors’ depository accounts in order to administer the terms of Section 3.5 with respect to such collections. In the event that a new Operator collects any such reimbursement, the New Operator shall immediately notify Transferor, in the manner set out in the “Notices” portion of this Agreement, of the receipt of any reimbursements owed to Transferor, and of the receipt of any correspondence or other notice from the Texas Department of Aging and Disability Services, from the Texas Health and Human Services Commission, from the Centers for Medicare & Medicaid Services, including but not limited to any intermediary thereof (“CMS”), from Medicaid, Medicare, the Veterans Administration, or any other third party payor, of any dispute regarding, intent to recoup, or intent to pay additional amounts for services provided by Transferor prior to the Transfer Date, and shall fully cooperate with Transferor to defend against any action that attempts to recoup payments or require payments from the Transferor.

     3.10 Transfer of Records; Access To Policy and Procedures Manuals. Each SMS Party shall transfer to its corresponding Diversicare Party, in the same condition as currently maintained, the Books and Records; provided, however, that (a) each SMS Party shall be entitled to keep such copies of all the foregoing as it deems necessary; (b) the Diversicare Parties shall have no claim or right of indemnity against the SMS Parties arising from the condition or quality of the records so transferred, including claims based on their completeness or accuracy; and (c) the SMS Parties shall be under no duty to update or service the hardware, software or data base contained in computers, if any, remaining on the premises.

     3.11 Deposits. All deposits, if any, held by a utility or other party to an executory contract shall remain the property of the applicable SMS Party, and the applicable Diversicare Party shall be required to post its own replacement deposits on the Transfer Date or promptly thereafter, as required by the corresponding utilities or contract counterparties.

     3.12 Compliance with Laws. The parties shall comply in all material respects with all applicable laws, and with all applicable rules and regulations of all governmental authorities, in conjunction with the execution, delivery and performance of this Agreement and the transactions contemplated hereby.

     3.13 Residents; Resident Records. On and after the Transfer Date, each New Operator shall be solely responsible for caring for the Residents of its Facility. Each New Operator shall preserve the existence and maintain the confidentiality of the Resident records transferred to each New Operator pursuant to this Agreement in accordance with federal and state law.

     3.14 Accounts Payable. Each New Operator shall establish its own accounts and agrees to pay for supplies and other goods or equipment ordered and received at its Facility on and subsequent to the Transfer Date in order to maintain services to its Residents.

     3.15 Access to Resident Records. Subsequent to the Transfer Date, upon reasonable advance notice and during normal business hours, the Diversicare Parties shall allow the SMS Parties and their respective agents and representatives, at the SMS Parties’ sole cost and expense,

14

to have reasonable access to (upon reasonable prior written notice and in compliance with applicable law), and to make copies of, the Books and Records, to the extent reasonably necessary to enable the SMS Parties to investigate and defend malpractice, employee or other claims, to file or defend cost reports and tax returns, to verify accounts receivable collections due to any SMS Party, or for such other reasonable and lawful purposes as identified by an SMS Party or the Plan Agent. Each Diversicare Party will maintain the Books and Records to the extent required by law, but in no event less than seven (7) years with respect to Resident records and no less than six (6) years with respect to other records.

     3.16 Regulatory Inspections; Surveys; Licensure Costs. Each New Operator shall be solely responsible for and shall bear all costs and expenses incurred in connection with any requirements of regulatory inspections or surveys conducted after the Transfer Date and implementing any plans of correction relating to matters first identified on such post-Transfer Date surveys or inspections. In addition, New Operator shall be responsible for all costs and expenses incurred in connection with its acquisition of the Licenses. These include, but are not limited to, changes, if any, required to bring any Facility into compliance with any Life Safety Code applicable to such Facility. Transferors represent and warrant that, to the best of their knowledge, all current outstanding survey deficiencies, including any Life Safety Code deficiencies are set forth on the Facilities’ most recent Medicare/Medicaid surveys, true and correct copies of which have been provided to the DMS Parties.

     3.17 Remittances, Mail and Other Communications. All remittances, mail and other communications relating to the Excluded Assets or Liabilities received by a Diversicare Party at any time after the Transfer Date shall be promptly turned over to the applicable SMS Party. All remittances, mail and other communications relating to the operations of any Facility following the Transfer Date received by an SMS Party or its affiliates at any time after the Transfer Date shall be promptly turned over to the applicable Diversicare Party.

     3.18 Admission Agreements. Each Transferor hereby assigns to New Operator, and New Operator hereby accepts assignment of all Admission Agreements pertaining to Residents (the “Admission Agreements”), provided that each Transferor shall retain such rights in the Admission Agreements as are necessary for such Transferor to collect and enforce each Transferor’s Accounts Receivable.

     3.19 Confidentiality and HIPAA Compliance. The parties to this Agreement acknowledge and agree that the definition of “health care operations” set forth in Section 164.501 of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) permits the parties to use and disclose individually identifiable Resident and Employee health information in order to assure a smooth transition of Facility operations. The parties agree to comply with, and to cause their respective employees, subcontractors and agents to comply with, applicable state and federal laws and regulations relating to the security, protection and privacy of individually identifiable health care information, including, without limitation, the regulations promulgated pursuant to HIPAA, and any amendments to those regulations that may occur from time to time. Each New Operator agrees that its employees, subcontractors, and agents shall maintain the confidentiality of Resident and Employee records and medical information, in accordance with applicable state and federal laws, rules and regulations. Each New Operator and its employees, subcontractors, or agents agree not to disclose protected health information to any

15

third party except where permitted or required by law or where the Resident or Employee expressly approves such disclosure in writing.

SECTION 4
CLOSING AND TRANSFER DATES

     4.1 Closing Date. The “Closing Date” shall be the date on which transactions contemplated in this Agreement shall be consummated (the “Closing”), and all documents necessary in connection therewith shall be executed and delivered.

     4.2 Transfer Date. The transfer of the operations of the Facility from each Transferor to New Operator shall be effective as of 12:01 a.m. local time on the day immediately following the Closing Date (the “Transfer Date”).

     4.3 Time and Place of Closing. The Closing Date shall occur simultaneously with the Effective Date of the Plan, but in no event later than Friday, August 10, 2007. The Closing shall take place at the offices of Gardere Wynne Sewell LLP, 1601 Elm Street, Suite 3000, Dallas, Texas 75201 or at such other time and place as designated by the parties.

SECTION 5
REPRESENTATIONS AND WARRANTIES OF THE DIVERSICARE PARTIES

     The Diversicare Parties hereby make the representations and warranties indicated below to the SMS Parties:

     5.1 Authority, Validity and Binding Effect. Each Diversicare Party will have as of the execution of this Agreement all necessary corporate or limited liability company power and authority to operate its Facility and to carry on its business as it is now being conducted. Each Diversicare Party has all necessary corporate or limited liability company power and authority, as the case may be, to enter into this Agreement and to execute all documents and instruments referred to herein or contemplated hereby and all necessary action has been taken to authorize the individuals executing this Agreement on each of their behalf to do so. This Agreement has been duly and validly executed and delivered by each Diversicare Party and is enforceable against it in accordance with its terms.

     5.2 No Defaults. The execution and delivery of this Agreement and any documents contemplated hereby by each Diversicare Party, and the performance of its obligations hereunder and thereunder, does not and will not:

          (a) conflict with or result in any material breach of the provisions of, or constitute a default under any Diversicare Party’s governing documents;

          (b) violate any material restriction to which a Diversicare Party is subject or, without the giving of notice, passage of time, or both, violate (or give rise to any right of termination, cancellation or acceleration under) any material license, authorization or permit or other material agreement or instrument to which a Diversicare Party is a party which will not be satisfied or terminated prior to the date hereof as a result of the transactions contemplated by this Agreement, or result in the termination of any such instrument or termination of any provisions

16

in such instruments that will result in the impairment of any Diversicare Party’s rights under such instruments (it is understood and agreed that in connection with this representation and warranty that New Operator will schedule any item covered by this representation and warranty if such item contains a restriction on transfer of the Facility); and

          (c) constitute a violation of any applicable material resolution, rule, regulation, law, statute or ordinance of any administrative agency or governmental authority, or of any judgment, decree, writ, injunction or order of any court to which any Diversicare Party is subject or by which its assets are bound, or any credit agreement or other financing arrangement to which any Diversicare Party, or any of their respective affiliates are a party.

     5.3 No Litigation. There are no actions, suits, claims, governmental investigations or other legal or administrative proceedings, or any orders, decrees or judgments in progress, pending or in effect, or to the knowledge of any Diversicare Party, threatened against, any Diversicare Party relating to the transactions contemplated by this Agreement.

     5.4 Financial Capacity. Subject to Section 2.4(h), each Diversicare Party shall, at Closing, have the financial capacity to consummate the transactions contemplated herein on the Closing Date.

     5.5 Accuracy of Representations and Warranties. Each representation and warranty of the Diversicare Parties hereunder is true, complete and correct in all respects as of the date hereof.

SECTION 6
REPRESENTATIONS AND WARRANTIES OF THE SMS PARTIES

     Except as expressly provided herein, the Diversicare Parties hereby acknowledge and agree that the Diversicare Parties have conducted their own due diligence investigation of the Business and the Acquired Assets and that they will acquire the Acquired Assets “AS IS, WHERE IS”, except for representations and warranties contained herein. The Diversicare Parties will not have any recourse to any of the officers, managers, attorneys, or advisors of Transferors in the event any of the representations or warranties made herein, or deemed made herein, are inaccurate in any respect as at any time of expression thereof, except in the event such inaccuracy is the result of fraud or the intentional misrepresentation or omission of fact. The Diversicare Parties specifically acknowledge and agree that if any information provided in the Plan or Disclosure Statement is applicable to any Section hereof, then such information shall be deemed to have been provided to the Diversicare Parties with respect to all such Sections hereof. Subject to the foregoing, the SMS Parties hereby represent and warrant as follows to the Diversicare Parties:

     6.1 Authority, Validity and Binding Effect. Upon receipt of approval of the Bankruptcy Court, the SMS Parties have all necessary power and authority to enter into this Agreement and to execute all documents and instruments referred to herein or contemplated hereby and all necessary action has been taken to authorize the individuals executing this Agreement to do so. This Agreement has been duly and validly executed and delivered by the SMS Parties and is enforceable against the SMS Parties in accordance with its terms.

17

     6.2 Accuracy of Representations and Warranties. Each representation and warranty of the SMS Parties hereunder is true to the knowledge of the SMS Parties, as of the date hereof.

     6.3 Contract Rights. To the knowledge of the SMS Parties, as of the date hereof, all executory contracts and unexpired leases of the SMS Parties with respect to the Business, Equipment, Inventory or any other aspect of the operations of the Facilities are listed on Exhibit A to the Cure Amounts Motion (as amended) or have been otherwise identified by the SMS Parties to the Diversicare Parties

     6.4 Survey Deficiencies. To the knowledge of the SMS Parties, as of the date hereof, the Diversicare Parties have been notified or otherwise provided information concerning all current, uncorrected survey deficiencies at the Facilities.

     6.5 As Is—Where Is. Except as set forth in this Section 6, the SMS Parties make no representation or warranty whatsoever, express or implied, including any implied warranty or representation as to condition, merchantability or suitability of any Acquired Asset, which survives Closing.

SECTION 7
TERMINATION

     7.1 Grounds for Termination. Notwithstanding any contrary provision contained herein, this Agreement may be terminated and the transactions contemplated hereby may be abandoned by:

          (a) written agreement of the parties at any time before the Closing;

          (b) either the SMS Parties or the Diversicare Parties (a) if a bid other than the Diversicare Parties’ bid is approved by the Bankruptcy Court and subsequently consummated, (b) if any Facility is damaged or destroyed by reason of fire, casualty or any other cause whatsoever prior to the Closing and cannot be repaired or restored to its pre-casualty condition by the SMS Parties prior to the Closing for a cost not in excess of $100,000; or (c) a material portion of any Facility necessary for the operation of the corresponding Transferor’s Business becomes subject to a taking by virtue of eminent domain (or any action to so take is commenced);

          (c) either the SMS Parties or the Diversicare Parties, (a) at any time after August 9, 2007, if the Confirmation Order has not been entered by such date provided the SMS Parties will not have the right to terminate to the extent the SMS Parties have failed to diligently pursue the entry of the Confirmation Order), (b) immediately upon notice to the other party, if any law or regulation makes the consummation of the transactions contemplated hereby illegal or otherwise prohibited or consummating the transactions contemplated hereby would violate any non-appealable final order, decree or judgment of any court or governmental authority having competent jurisdiction, or (c) at any time prior to the conclusion of the Auction, if the Diversicare Parties have not removed the condition set forth in Section 2.4(h);

          (d) the Diversicare Parties (a) at any time before the Closing, if any condition listed in Section 2.4 has become incapable of fulfillment or cure and has not been waived by the

18

Diversicare Parties, provided that the Diversicare Parties are not then in breach of this Agreement; (b) at any time after August 15, 2007, if the Closing fails to occur by such date, unless (i) the failure is due to the action or inaction of, or breach of this Agreement by, the Diversicare Parties or (ii) Omega consents to an extension of time pursuant to 11 U.S.C. § 365(d)(4)(B)(ii); provided such extension expires on or before September 15, 2007; or (c) if the Closing has not occurred as the result of the SMS Parties’ failure to consummate the transactions contemplated hereunder within five (5) days after the satisfaction of the conditions listed in Section 2.4, provided that the Diversicare Parties are not in breach hereunder and are ready to close; and

          (e) the SMS Parties (a) at any time before the Closing, if any condition listed in Section 2.5 have become incapable of fulfillment or cure and have not been waived by the SMS Parties, provided that the SMS Parties are not then in breach of this Agreement; (b) at any time after August 15, 2007, if the Closing fails to occur by such date, unless (i) the failure is due to the action or inaction of, or breach of this Agreement by, the SMS Parties or (ii) Omega consents to an extension of time pursuant to 11 U.S.C. § 365(d)(4)(B)(ii); provided such extension expires on or before September 15, 2007; or (c) if the Closing has not occurred as the result of the failure of the Diversicare Parties to consummate the transactions contemplated hereunder within five (5) days after the satisfaction of the conditions set forth in Section 2.5, so long as the SMS Parties are not in breach hereunder and are ready to close.

     7.2 Effect of Termination. If this Agreement is terminated under Section 7.1, the party terminating will promptly provide written notice thereof to the other party and this Agreement will thereafter become void and have no further force and effect and, except for those provisions that expressly survive the termination of this Agreement, all further obligations of the parties to each other under this Agreement will terminate without further obligation or liability, except as provided in this Section 7.2. The Deposit shall be treated as follows:

          (a) If this Agreement is terminated under Section 7.1(a), the Deposit shall be disbursed as provided in the written agreement pursuant to which such termination is effected.

          (b) If this Agreement is terminated under Section 7.1(b), (c) or (d), the Deposit shall be disbursed to the Diversicare Parties.

          (c) If this Agreement is terminated under Section 7.1(e), the Deposit shall be disbursed to the SMS Parties.

          (d) Survival. Section 7.2 will survive termination of this Agreement.

     7.3 Effect of Casualty/Condemnation. If, at any time after the date of this Agreement and prior to Closing, (a) any Facility is destroyed or suffers any damage, whether by reason of fire, casualty or any other cause whatsoever, or (b) a material portion of any Facility necessary for the operation becomes subject to a taking by virtue of eminent domain (or any action to so take is commenced), and (c) this Agreement is not terminated by the Diversicare Parties or the SMS Parties pursuant to Section 7.1(b), then the Closing shall nevertheless occur on the scheduled date for Closing without adjustment to Purchase Price, except that:

19

          (a) In the event of an occurrence described in clause (a) above of Section 7.3 of less than $100,000, the SMS Parties shall, at their option and in their sole discretion, either (a) at the SMS Parties’ expense, repair or restore the Facilities to at least its condition as existed immediately prior to such occurrence or (b) afford the Diversicare Parties a credit against the Purchase Price in the amount equal to the amount determined as of the Closing Date reasonably necessary to effect such repair and restoration (provided that the SMS Parties shall in either event retain all rights to any insurance proceeds payable thereon). If the damage is greater than $100,000, then the Diversicare Parties, at their option shall cause the SMS Parties to either (x) at the SMS Parties’ expense, repair or restore any Facility to at least its condition as existed immediately prior to such occurrence or (y) afford the Diversicare Parties a credit against the Purchase Price in the amount equal to the amount determined as of the Closing Date reasonably necessary to effect such repair and restoration, to the extent the Diversicare Parties do not terminate the Agreement (provided that the SMS Parties shall in either event retain all rights to any insurance proceeds payable thereon); provided, that if the SMS Parties determine that they are unable to comply with such request because (a) they are not able to make arrangements with Omega acceptable to all parties allowing insurance proceeds to be used for such repair or restoration, and/or (b) the required Purchase Price reduction would not be permitted by the Plan or otherwise invalidate any approvals necessary for the consummation of the transactions contemplated by this Agreement, then either party may terminate this Agreement by written notice to the other.

          (b) In the event of an occurrence described in clause (b) of Section 7.3 and the parties do not elect to terminate, then, at Closing, the SMS Parties shall assign to the Diversicare Parties all of the SMS Parties’ right, title and interest in and to the condemnation award payable to the SMS Parties as a result of such taking, or, if such award is paid to the SMS Parties prior to Closing, the SMS Parties shall afford the Diversicare Parties a credit against the Purchase Price in the amount of such award so paid to the SMS Parties.

     7.4 Default. In the event the SMS Parties or the Diversicare Parties default in their respective obligations under this Agreement, the other parties will have remedies available at law or in equity.

SECTION 8
EXPIRATION OF REPRESENTATIONS AND WARRANTIES

     8.1 Expiration of Representations, Warranties and Covenants. The representations, warranties and (except as set forth in the following sentence) covenants set forth in this Agreement shall terminate and expire, and shall cease to be of any force or effect, on the Closing Date; all liability of the parties hereto with respect to such representations, warranties and covenants shall thereupon be extinguished. Those covenants that contemplate actions to be taken or obligations in effect after the Closing or termination of this Agreement, as the case may be, shall survive in accordance with their terms and to the extent so contemplated. THE NEW OPERATORS ACKNOWLEDGE THAT THEY HAVE HAD SUFFICIENT OPPORTUNITY TO MAKE WHATEVER INVESTIGATION MAY BE NECESSARY AND ADVISABLE FOR PURPOSES OF DETERMINING WHETHER OR NOT TO ENTER INTO THIS AGREEMENT.

20

SECTION 9
COVENANTS

     9.1 Access. Prior to the Closing, the SMS Parties will allow the Diversicare Parties and its agents to (A) have access to the Facilities and (B) conduct physical inspections, environmental and other assessments and deemed necessary by the Diversicare Parties or their lender. The SMS Parties will deliver such additional information relating to the Facilities that is in the possession of the SMS Parties as reasonably requested by the Diversicare Parties representatives. Prior to Closing, and for a reasonable period thereafter, the SMS Parties shall provide the Diversicare Parties with access to the SMS Parties’ electronic records and software for purposes of allowing the Diversicare Parties to transfer applicable information to its payroll software and American Health Tech system.

     9.2 Operation Prior to Closing. Subject to its obligations under the Bankruptcy Code, the SMS Parties agree, from the date hereof until the Closing, to maintain the Facilities in good repair consistent with their condition on the date of this Agreement (ordinary wear and tear and damage by casualty excepted) and operate them in the ordinary course. Between the date hereof and the Closing Date, the SMS Parties shall diligently pursue correction of all outstanding survey deficiencies pertaining to the operation of the Facilities.

     9.3 Notice of Breaches. Promptly after gaining knowledge thereof, the SMS Parties will notify the Diversicare Parties of any material breaches or violations by the SMS Parties, whether intentional or unintentional, of the representations, warranties, covenants or other terms, conditions or restrictions of this Agreement applicable to the SMS Parties.

     9.4 Bankruptcy Court Approvals.

          (a) Bankruptcy Court Confirmation Order. The SMS Parties and the Diversicare Parties shall have obtained final approval in the Bankruptcy Cases of the transactions contemplated by this Agreement. Without limiting the foregoing, the Bankruptcy Court shall have entered a final order or orders (the “Confirmation Order”) (i) approving the transactions described herein and authorizing the SMS Parties to sell the Acquired Assets (which comprise substantially all of the SMS Parties’ remaining assets) to the Diversicare Parties pursuant to this Agreement free and clear of any and all liens, claims, charges, encumbrances, mortgages, pledges, security interests and other interests (including any and all “claims and interests” in the Company Assets within the meaning of Section 363(f) of the Bankruptcy Code), other than those expressly assumed by the Diversicare Parties in this Agreement, and otherwise free and clear of claims and liabilities; (ii) expressly providing that at Closing all of the SMS Parties’ right, title and interest in the Acquired Assets shall vest in the Diversicare Parties in accordance with this Agreement; (iii) expressly providing that all liens, claims, charges, encumbrances, mortgages, pledges, security interests and other interests (including any and all “claims and interests” in the Company Assets within the meaning of Section 363(f) of the Bankruptcy Code) existing as of the Closing shall be released from the Acquired Assets and attach to the proceeds of this transaction without recourse to the Diversicare Parties; (iv) authorizing SMS North Texas to assume and assign pursuant to Section 365 of the Bankruptcy Code, the Omega Lease and authorizing the SMS Parties to assume and assign the Assumed Contracts to the Diversicare Parties pursuant to this Agreement; (v) making a determination that the Diversicare Parties are

21

good faith purchasers and sound business reasons exist for the transaction; (vi) expressly providing that, pursuant to Bankruptcy Rule of Procedure 3020(e), Section 363(m) of the Bankruptcy Code and other applicable authority, the Confirmation Order approving the consummation of this Agreement is not stayed for any period and that the reversal or modification on appeal of the Confirmation Order shall not affect the validity of the sale of the Acquired Assets or assignment of assumed leases to the Diversicare Parties pursuant to this Agreement, whether or not the Diversicare Parties knew of the pendency of the appeal, unless such authorization and sale are stayed pending appeal; (vii) finding that adequate and proper notice was given to all parties entitled to receive notice in connection with the transactions contemplated by this Agreement, including without limitation appropriate notice to all parties to executory contracts to be assumed and assigned to the Diversicare Parties pursuant to this Agreement; (viii) finding that the Diversicare Parties is not a successor in interest to any of the SMS Parties and shall not be liable for any liabilities, torts, of debts of the SMS Parties, other than the Assumed Liabilities under this Agreement; (ix) pursuant to 11 U.S.C. § 1146, the transaction shall be free and clear of any sales, use, value added, documentary, stamp, registration, transfer, conveyance, excise, recording, license and other similar taxes and fees (including without limitation any goods and services tax) and (x) containing such other provisions as are reasonably requested by the Diversicare Parties.

          (b) Best Efforts. The SMS Parties shall have used their reasonable best efforts to obtain the Confirmation Order. The SMS Parties shall also have complied in all material respects with all requirements of the Bankruptcy Code, including without limitation appropriate notice to all parties entitled thereto, relating to obtaining the Confirmation Order and approval of the transactions contemplated by this Agreement.

     9.5 Expenses. Except as otherwise provided in this Agreement, each party will bear all of its own expenses incurred by it in connection with this Agreement and the transactions contemplated thereby, including legal, accounting, and investment advisor fees and travel expenses.

SECTION 10
MISCELLANEOUS

     10.1 Regulatory Filings. Simultaneously with the execution and delivery of this Agreement (but in no event later than July 20, 2007), New Operators shall deliver to Transferors any necessary filings or notices to be provided to the appropriate governmental entities in connection with the transactions contemplated herein, including any required notice associated with a proposed change of ownership (“CHOW Application”) of the Transferors. Upon the entry of the Confirmation Order approving New Operators as the “Purchaser,” such filings or notices, including all CHOW Applications, shall be delivered by Transferors to the appropriate governmental agency or agencies.

     10.2 Further Assurances. Each of the parties hereto agrees to execute and deliver any and all further agreements, documents or instruments necessary to effectuate this Agreement and the transactions referred to herein, contemplated hereby or reasonably requested by the other party to perfect or evidence their rights hereunder.

22

     10.3 Notices. All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be personally delivered, or sent by overnight commercial delivery service (provided a receipt is available with respect to such delivery), or mailed by first-class registered or certified mail, return receipt requested, postage prepaid (and shall be effective when received, if sent by personal delivery or by facsimile transmission or by overnight delivery service, or on the third (3rd) day after mailing, if mailed):

If to the SMS Parties, to:

Senior Management Services of North Texas, Inc.
c/o Gardere Wynne Sewell LLP
1601 Elm Street, Suite 3000
Dallas, Texas 75201
Attn: Deirdre B. Ruckman/Notice Enclosed
Telephone No.: (214) 999-4250
Facsimile No.: (214) 999-3250

If to the Diversicare Parties:

c/o Advocat Inc.
1621 Galleria Boulevard
Brentwood, Tennessee 37027-2926
Attn: William R. Council, President
Telephone No.: (615) 771-7575
Facsimile No.: (615) 771-7409

with a copy to:

Harwell Howard Hyne Gabbert & Manner, P.C.
315 Deaderick Street, Suite 1800
Nashville, Tennessee 37238
Attn: Glenn B. Rose

or to such other person or address as any party hereto shall furnish to the other parties hereto in writing pursuant to this Section 10.4.

     10.4 Entire Agreement; Amendment; Waiver. This Agreement, together with the other agreements referred to herein, constitutes the entire understanding between the parties with respect to the subject matter hereof, superseding all negotiations, prior discussions and preliminary agreements. This Agreement may not be modified or amended except in writing signed by the SMS Parties and the Diversicare Parties. No waiver of any term, provision or condition of this Agreement, in any one or more instances, shall be deemed to be or be construed as a further or continuing waiver of any such term, provision or condition or as a waiver of any other term, provision or condition of this Agreement. No failure to act shall be construed as a waiver of any term, provision, condition or rights granted hereunder.

23

     10.5 Assignment. Neither this Agreement nor the rights, duties or obligations arising hereunder shall be assignable or delegable by either party hereto without the express prior written consent of the other party hereto; provided, however, that if any Diversicare Party seeks to assign any or all of its rights and delegate any or all of its duties under this Agreement to any affiliate, such consent from the SMS Parties shall not be unreasonably withheld. In no event shall any such assignment relieve any Diversicare Party of its obligations under this Agreement. Subject to the foregoing, this Agreement and the rights and obligations set forth herein shall inure to the benefit of, and be binding upon, the parties hereto and each of their respective successors and permitted assigns.

     10.6 Joint Venture; Third Party Beneficiaries. Nothing contained herein shall be construed as forming a joint venture or partnership between the parties hereto with respect to the subject matter hereof. The parties hereto do not intend that any third party shall have any rights under this Agreement.

     10.7 Broker’s Fees. The SMS Parties have not engaged any agent, broker or similar entity to act on their behalf in connection with the transactions contemplated herein, and no SMS Party shall pay any fee to any agent, broker or similar entity in connection herewith.

     10.8 Representation By Counsel. The parties hereto acknowledge that they have been represented by independent legal counsel of their choosing throughout all of the negotiations which preceded the execution of this Agreement, and that each party has executed this Agreement with the consent and on the advice of such independent legal counsel. This Agreement is a negotiated document. As a result, any rule of construction providing for any ambiguity in the terms of this Agreement to be construed against the draftsperson of this Agreement shall be inapplicable to the interpretation of this Agreement.

     10.9 Captions. The section headings contained herein are for convenience only and shall not be considered or referred to in resolving questions of interpretation.

     10.10 Counterparts. This Agreement may be executed and delivered (including by facsimile transmittal, which for purposes of this Agreement shall be deemed to be an original signature) in one or more counterparts and all such counterparts taken together shall constitute a single original Agreement.

     10.11 Governing Law. This Agreement shall be governed by the laws of the State of Texas as to, including, but not limited to, matters of validity, construction, effect and performance but exclusive of its conflicts of laws provisions.

     10.12 Enforceability. Subject to approval by the Bankruptcy Court, this Agreement constitutes the valid and legally binding obligation of the Diversicare Parties and the SMS Parties, enforceable in accordance with its terms, except as such enforceability may be limited by equitable principals and by applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws relating to or affecting the rights of creditors generally.

     10.13 Jurisdiction. Each party hereto acknowledges the jurisdiction of the Bankruptcy Court, and consents to the jurisdiction of the courts of the State of Texas or, as applicable, if it can acquire jurisdiction, the United States District Court for the Northern District of Texas as to

24

claims arising under or brought in connection with this Agreement and the transactions contemplated herein.

     10.14 Waiver of Jury Trial. EACH OF THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL ACTION BROUGHT ON OR WITH RESPECT TO THIS AGREEMENT, INCLUDING TO ENFORCE OR DEFEND ANY RIGHTS HEREUNDER, AND AGREES THAT ANY SUCH ACTION SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

[Signature Pages Follow]

25

Exhibit 10.1

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement on July ___, 2007 but to be effective as of the day and year first above written.

SMS PARTIES:

		SENIOR MANAGEMENT SERVICES OF AMERICA II, INC.
		By: Name:	/s/ Louis E. Robichaux, IV Louis E. Robichaux, IV
		Title:	Chief Restructuring Officer
SENIOR MANAGEMENT SERVICES OR AMERICA NORTH TEXAS, INC.		SENIOR MANAGEMENT SERVICES OF HERITAGE OAKS AT BALLINGER, INC.
By: Name:	/s/ Louis E. Robichaux, IV Louis E. Robichaux, IV	By: Name:	/s/ Louis E. Robichaux, IV Louis E. Robichaux, IV
Title:	Chief Restructuring Officer	Title:	Chief Restructuring Officer
SENIOR MANAGEMENT SERVICES OF ESTATES AT FORT WORTH, INC.		SENIOR MANAGEMENT SERVICES OF KATY, INC.
By:	/s/ Louis E. Robichaux, IV	By:	/s/ Louis E. Robichaux, IV
Name:	Louis E. Robichaux, IV	Name:	Louis E. Robichaux, IV
Title:	Chief Restructuring Officer	Title:	Chief Restructuring Officer
SENIOR MANAGEMENT SERVICES OF HUMBLE, INC.		SENIOR MANAGEMENT SERVICES OF TREEMONT, INC.
By:	/s/ Louis E. Robichaux, IV	By:	/s/ Louis E. Robichaux, IV
Name:	Louis E. Robichaux, IV	Name:	Louis E. Robichaux, IV
Title:	Chief Restructuring Officer	Title:	Chief Restructuring Officer
SENIOR MANAGEMENT SERVICES OF DOCTORS AT DALLAS, INC.		SENIOR MANAGEMENT SERVICES OF NORMANDY AT SAN ANTONIO, INC.
By:	/s/ Louis E. Robichaux, IV	By:	/s/ Louis E. Robichaux, IV
Name:	Louis E. Robichaux, IV	Name:	Louis E. Robichaux, IV
Title:	Chief Restructuring Officer	Title:	Chief Restructuring Officer

[ Signature Page to Operations Transfer Agreement ]

Exhibit 10.1

DIVERSICARE PARTIES:

DIVERSICARE TEXAS I, LLC
By:	/s/ William R. Council, III
Title:	President
DIVERSICARE BALLINGER, LLC DIVERSICARE DOCTORS, LLC DIVERSICARE ESTATES, LLC DIVERSICARE HUMBLE, LLC DIVERSICARE KATY, LLC DIVERSICARE NORMANDY TERRACE, LLC DIVERSICARE TREEMONT, LLC
BY:	DIVERSICARE TEXAS I, LLC the sole member
	By:	/s/ William R. Council, III
	Title:	President

[Signature Page to Operations Transfer Agreement]

Exhibit 10.1

     The undersigned joins in the execution of this Agreement for the purpose of agreeing to transfer to the Diversicare Parties any interest it may have in the vehicles listed in Schedule 1.3(b).

SERENITY MANAGEMENT SERVICES, INC.
By: Name:	/s/ Louis E. Robichaux, IV Louis E. Robichaux, IV
Title:	Chief Restructuring Officer

[Signature Page to Operations Transfer Agreement]

Exhibit 10.1

LIST OF SCHEDULES

Schedule 1.1(b)(iv)	PTO for Retained Employees
Schedule 1.1(b)(v)	Cure Amounts
Schedule 1.3(a)	Equipment
Schedule 1.3(b)	Vehicles and Pay-off Amounts
Schedule 1.3(f)	Assumed Contracts and Cure Costs

EX-10.2

Exhibit 10.2

LOAN AND SECURITY AGREEMENT

     THIS LOAN AND SECURITY AGREEMENT (the “Agreement”), made as of August 10, 2007, between Diversicare Leasing Corp., a Tennessee corporation, hereinafter referred to as the “Lender”, and Bridge Associates LLC, as trustee for the SMSA Creditors’ Trust, a Texas trust, hereinafter referred to as “Borrower”.

     WHEREAS, twenty-four entities (individually the “Debtor” and collectively the “Debtors”) filed voluntary chapter 11 petitions on January 17, 2007, and these bankruptcy cases are being jointly administered in the case of Senior Management Services of Treemont, Inc., Bankruptcy Case No. 07-30230, in the U.S. Bankruptcy Court for the Northern District of Texas;

     WHEREAS, a Liquidating Trust (as defined in the Modified Plan and sometimes referred to herein as the “SMSA Creditors’ Trust”) has been established pursuant to the terms of the First Amended Chapter 11 Plan Proposed dated June 17, 2007 jointly filed by the Debtors, which plan was modified and filed as the First Amended Modified Chapter 11 Plan Proposed by the Debtors (the “Modified Plan”);

     WHEREAS, on August 1, 2007, the Bankruptcy Court held a hearing on the Modified Plan and entered an order confirming the Modified Plan on such date (the “Confirmation Order”);

     WHEREAS, Borrower is the duly appointed and serving trustee of the SMSA Creditors’ Trust, as well as the Plan Agent (as defined in the Modified Plan);

     WHEREAS, Lender has agreed to loan to Borrower up to Two Million Two Hundred Thousand Dollars ($2,200,000.00) (the “Loan”); and

     WHEREAS, as a condition to the Loan, Borrower has agreed to grant Lender a first priority security interest in certain collateral described herein;

     NOW, THEREFORE, for good and valuable consideration Lender and Borrower hereby agree as follows:

I. CREDIT FACILITY

     1.1 Subject to the terms and conditions of this Agreement, Lender will loan to Borrower the amount of up to Two Million Two Hundred Thousand Dollars ($2,200,000.00) (the “Indebtedness”).

     1.2 This Loan is not a revolving credit facility. Each dollar advanced by the Lender shall reduce the amount available to Borrower regardless of whether or not any monies previously advanced have been repaid. Lender shall have no obligation to re-advance any amount that has been previously advanced and repaid.

     1.3 This Loan shall be evidenced by a promissory note (the “Note”) in favor of the Lender bearing interest at the rate of twelve and one-half percent (12.5%) per annum. All

[Signature Page — Loan and Security Agreement ]

amounts of principal, interest, fees and expenses remaining outstanding pursuant to the Note shall be payable in full by no later than August 10, 2008.

     1.4 This Loan is secured by a first priority security interest in certain collateral as described below.

     1.5 The monies advanced hereunder shall only be used to pay undisputed or court-approved Administrative Expenses, Priority Claims, Priority Tax Claims, Convenience Claims, Miscellaneous Secured Claims and periodic payments due to undisputed or court-approved Class 1 Priority Claims pursuant to the Modified Plan and to pay reasonable and legitimate expenses of the Plan Agent/Trustee, including attorneys’ fees, incurred after the effective date of the Modified Plan.

     1.6 The Borrower, may request advances from the Lender to pay when due any of the items identified in paragraph 1.5 hereof when the Debtors and the Borrower do not have sufficient cash to pay these claims or expenses. Requests for advances shall be made in writing and delivered to Lender by facsimile, email or overnight delivery at the following address:

c/o Advocat Inc.
1621 Galleria Boulevard
Brentwood, Tennessee 37027-2926
Attn: Glynn Riddle, CFO
Facsimile: (615) 771-7409
Email: griddle@Advocat-Inc.com

     Each request for an advance against the principal amount of the Loan shall state the amount of cash currently held by the Borrower and Debtors, shall identify the nature and amount of the claims or expenses that are then due for payment, and shall be signed by the Borrower as an acknowledgement that the information set forth in the request is true to the best of the Borrower’s knowledge, information and belief. The Lender shall advance the sum requested to the Borrower by wire transfer within three business days of the receipt of the request for an advance until such time as a maximum of $2,200,000 has been advanced to the Borrower; provided, however that notwithstanding any other provision in this Agreement, the Note, the Confirmation Order or any other document or instrument to the contrary, no advances shall be made hereunder above a maximum of $1,950,000 unless the parties mutually agree at the time of such advance. No advances hereunder shall be made prior to the Closing Date. Upon the full execution of this Agreement and the satisfaction of the conditions to closing set forth in Section IV, Lender shall provide an initial funding under the Loan in the amount of $1,800,000.

          1.7 Lender shall wire approved and appropriate advances pursuant to the following account:

Senior Management Services of Palestine, Inc.
Plains Capital Bank
Dallas, Texas
ABA#111 322 994
Acct #3100005713
Name of Account: Palestine Operating Account

II. SECURITY INTEREST AND RIGHTS

     2.1 The Borrower hereby absolutely assigns to Lender and grants to Lender a security interest in the following property whether now or hereafter arising, whether now owned or hereafter acquired and wherever located (hereinafter collectively referred to as the “Collateral”):

          a. All accounts, accounts receivable and contract rights providing for payments of money to any Debtor or Borrower, including specifically, but without limitation, healthcare insurance and all other receivables and amounts due from private insurance programs, federal and state health care reimbursement programs, including all Medicare and Medicaid programs, as well as all amounts due to any Debtor or the Borrower with respect to current cost reports, prior year cost reports, and terminating cost reports, if any (collectively the “Accounts”), chattel paper, documents, and instruments evidencing the Accounts, and all intangible personal property relating to the recordation, monitoring, collection, servicing and payment of Accounts and data processing contracts, computer software licenses, cash management contracts and other contracts and licenses relating to the servicing of Accounts. Notwithstanding the foregoing, “Accounts” as used herein shall be limited to those Accounts of the Debtors described on Exhibit A; and

          b. All proceeds, products, rents and profits of or from any and all of the property described in paragraph 2.1a. and, to the extent not otherwise included, all payments under insurance (whether or not Lender is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term “proceeds” includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary.

     All of which hereinafter sometimes is referred to collectively as the “Collateral.”

     2.2 Lender shall have the right, in accordance with the terms of the Collection Services Agreement between the parties of even date herewith, to collect the Accounts or proceeds therefrom, and apply same to the Indebtedness as provided in the Note.

III. BORROWER’S COVENANTS AND WARRANTIES

     3.1 Affirmative Covenants and Warranties. The Borrower hereby covenants and warrants that:

          a. Borrower is a limited liability company organized and existing under the laws of the State of Delaware; Borrower’s place of business, principal residence and chief executive office is located in New York at 747 Third Avenue, Suite 32A, New York, New York 10017. Any notices hereunder may be sent to the address appearing after Borrower’s signature. Borrower will notify Lender promptly in writing of any change in the location of its principal place of business or its status as Trustee of the SMSA Creditors’ Trust or Plan Agent (as defined in the Modified Plan).

          b. Borrower is the owner of the Collateral free from any adverse lien, except for the existing lien of OHI Asset (SMS) Lender, Inc., pursuant to the Debtor-in-Possession

Financing Agreement dated May 4, 2007, the outstanding balance of which, if any, shall be paid in full by the Borrower in accordance with the Modified Plan prior to requesting any advances from Lender on this Loan. Borrower will defend the Collateral against all claims and demands of all persons at any time claiming or asserting a lien, security interest, or claim against any the Collateral or the proceeds thereof.

          c. Attached as Exhibit B to this Agreement is the Borrower’s good faith, best estimate of a budget reflecting the timing and anticipated amount of advances to be requested pursuant to paragraph 1.6 hereof, including the initial request being made as of the date of this Agreement.

          d. So long as any amount remains due and owing to Lender related to this Indebtedness, then Borrower shall make no distributions to claimants or creditors other than those expressly authorized and identified in paragraph 1.5 hereof.

          e. If any of Borrower’s Accounts should be evidenced by promissory notes, trade acceptances, or other instruments for the payment of money, Borrower immediately upon demand by Lender will deliver same to Lender, appropriately endorsed to Lender’s order. Regardless of the form of such endorsement, Borrower hereby waives presentment, demand, notice of dishonor, protest and notice of protest, and all other notices with respect thereto.

          f. Borrower will cooperate as reasonably requested by the Lender with the collection of the Accounts or providing any information or assistance necessary for the Lender to collect the Accounts.

          g. The Confirmation Order and the Modified Plan provide that the Collateral is free and clear of all liens, claims and encumbrances, and that the liens granted herein constitute duly perfected, first priority liens on and security interests in the Collateral. At the request of Lender, Borrower will join with Lender in executing one or more financing statements pursuant to the Uniform Commercial Code, in form satisfactory to Lender, and will pay the cost of filing or recording the same or this Agreement in all public offices wherever filing or recording is deemed by Lender to be necessary or desirable. A copy of this Security Agreement or copies of any financing statements executed herewith may be filed in lieu of originals in any public office.

          h. Neither the execution, the delivery nor the performance of this Agreement and all related documents by Borrower will constitute a default under or conflict with the trust agreement creating the SMSA Creditors’ Trust or any agreement, contract, document, or instrument to which Borrower is now a party. The execution of all necessary resolutions and other prerequisites of actions by the Borrower have been duly performed so that the individual executing this Agreement and related documents on behalf of Borrower is duly authorized to bind Borrower by his signature. By signing below on behalf of Borrower, the individual executing this Agreement on behalf of Borrower also personally makes the warranties set forth in the preceding sentence.

          i. Borrower will keep the Collateral free from any lien, security interest, or encumbrance hereto other than that granted to Lender herein and will not waste or destroy the Collateral or any part thereof.

          j. Borrower’s operations and activities are conducted in accordance with all applicable laws and regulations, and Borrower covenants that such activities shall continue to be so conducted.

          k. Borrower will execute such other assignments, security agreements, financing statements, and other documents that Lender may reasonably deem necessary to further evidence the obligations provided for herein or to perfect, extend, or clarify Lender’s rights in any property securing or intended to secure the Indebtedness. Lender is hereby appointed as Borrower’s attorney-in-fact with full power of substitution for the signing of financing statements and other similar filings with government offices for perfecting security interests granted hereby. Borrower acknowledges that this power of attorney is coupled with an interest and is irrevocable.

          l. To the knowledge of the Borrower, each of the Debtors and their agents kept accurate and complete records of the Accounts. Lender, or any of its Agents, shall have the right to call at Borrower’s place or places of business, at intervals to be determined by Lender and, without hindrance or delay, to inspect, audit, check, and make extracts from the books, records, journals, orders, receipts, correspondence, and other data relating to the Accounts or to any other transactions between the parties hereto.

          m. To the knowledge of the Borrower, each Account is based on an actual and bona fide rendition of services to customers, made by one or more of the Debtors.

          n. To the knowledge of the Borrower, each Account has been billed or will be billed by no later than August 31, 2007 and forwarded to the applicable account debtor for payment in accordance with applicable laws and is in compliance and conformance with any requisite procedures, requirements and regulations governing payment by such account debtor with respect to such Account, and, if due from a private insurance program or a federal or state healthcare reimbursement program, is properly payable directly to one or more of the Debtors.

          o. To the knowledge of the Borrower, the customers of the Debtors have accepted the services, owe and are obligated to pay the full amounts stated in the invoices representing the Accounts according to their terms, without dispute, offset, defense, counterclaim or contra, except for (i) disputes and other matters arising in the ordinary course of business and (ii) offsets and deductions relating to Accounts owed or owing by Medicare and Medicaid account debtors that may arise under applicable law. Specifically, but without limitation, each Debtor has the requisite provider number or other permit to bill all third-party payor programs in which each Debtor participates and currently bills. To the knowledge of the Borrower, there is no investigation, audit, claim review or other action pending or threatened which could result in non-payment by any such third-party payor.

          p. Upon demand, Borrower will advance to Lender, or, at Lender’s option, reimburse Lender, for the following expenses incurred on or after the Closing Date:

               (i) All taxes that Lender may be required to pay because of the Indebtedness or because of Lender’s interest in any Collateral securing the payment of the Indebtedness;

               (ii) All court costs and other reasonable expenses that Lender may incur in connection with the administration, or enforcement of this Agreement or of any other document pertaining to the Indebtedness;

               (iii) All court costs and other reasonable expenses incurred after an Event of Default (as such term is defined in paragraph 8.1) in collecting any part of the Indebtedness;

               (iv) All court costs and other reasonable expenses arising from any litigation, investigation, or administrative proceeding (whether or not Lender is a party thereto) that Lender may incur as a result of the Indebtedness or as a result of Lender’s association with Borrower;

               (v) All court costs and other reasonable expenses incurred in defending any claim asserted against Lender related to the Indebtedness, the Loan or the Collateral securing the Indebtedness and Loan; and

               (vi) Reasonable attorneys’ fees incurred in connection with any of the foregoing.

     If Lender pays any of the foregoing expenses, they shall become a part of the Indebtedness and shall bear interest at the rate set forth in the Note. This paragraph shall remain in full effect regardless of the full payment of the Indebtedness, the purported termination of this Agreement, the delivery of the executed original of this Agreement to Borrower, or the content or accuracy of any representation made by Borrower to Lender. Provided, Lender may terminate this paragraph by executing and delivering to Borrower a written instrument of termination specifically referring to this paragraph.

          q. Borrower agrees to notify Lender promptly in writing of receipt of notice from any Account debtor, including without limitation any state or federal healthcare reimbursement program, of any dispute regarding such Account or any claim to recover or offset alleged overpayments against amounts due on the Accounts.

IV. CONDITIONS TO CLOSING

     4.1 Lender shall have no obligation to advance any sums to Borrower until each of the following conditions has been satisfied or waived by Lender in its sole discretion:

          a. The trust agreement constituting the SMSA Creditors’ Trust has been duly authorized and fully executed and a valid trust relationship has been formed thereby between the Borrower and the beneficiaries of the SMSA Creditors’ Trust.

          b. Title to the Collateral shall have been transferred to Borrower by each of the Debtors, and all prior liens and security interests on the Collateral shall have been satisfied and released.

          c. The Borrower and Lender shall have entered into the Collection Services Agreement.

          d. The Lender shall have received an opinion from the Borrower’s counsel indicating that upon the filing of a completed UCC-1 statement with the Delaware Secretary of State Lender will have a perfected security interest in the Collateral.

          e. The Borrower shall have executed and delivered to Lender a properly completed UCC-1 form sufficient for filing with the office of the Secretary of State for Texas; and

          f. The Borrower shall have signed a certificate indicating that no other creditor of the Borrower has been granted a consensual security interest in any of the Collateral.

V. PROTECTIVE ACTION

     5.1 At its option, Lender may discharge taxes, liens, security interests, or other encumbrances at any time levied or placed on the Collateral. Borrower agrees to reimburse Lender on demand for any payment made, or any expense incurred, by Lender pursuant to the foregoing authorization, together with interest thereon from date of payment at the rate, which is the rate set forth in the Note evidencing the loans hereunder.

VI. DEFAULT

     6.1 The occurrence of any of the events specified herein below shall make all sums of interest and principal remaining on the Indebtedness immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or other notices or demands of any kind or character, except as hereinafter specified:

          a. Default in the punctual payment when due of any of the Indebtedness and continuation of said default for a period of five consecutive calendar days;

          b. Default in the due performance or observance by it of any term or covenant hereunder and such default shall continue unremedied for a period of 15 days after written notice to the Borrower by Lender;

          c. Any covenant, warranty, representation, or statement made or furnished to Lender by or on behalf of Borrower or in connection with this Agreement proving to have been false in any material respect when made or furnished;

          d. Any default by Borrower of its obligations under the Collection Services Agreement of even date herewith between Borrower and Diversicare Management Services Co., an affiliate of Lender, which default is not cured in accordance with the terms of the cure period, if any, set forth in that agreement; and

          e. Any default by any of the Debtors under the Blocked Account Agreement of even date herewith by and among Lender, PlainsCapital Bank, and certain of the Debtors defined as the “Borrowers” therein, which default is not cured in accordance with the terms of the cure period, if any, set forth in that agreement.

     6.2 Upon the occurrence of any Event of Default and notwithstanding any language herein to the contrary, Lender shall have absolutely no obligation to make any additional advances on the Loan.

VII. REMEDIES

     7.1 Upon the occurrence of an Event of Default and at any time thereafter, Lender shall have all the rights and remedies of a secured party under the Uniform Commercial Code and any other right Lender may have at law or equity. Lender may require Borrower to assemble the Collateral and make it available to Lender at a place or places, to be designated by Lender, reasonably convenient to both parties. Unless the Collateral threatens to decline speedily in value, or is of a type customarily sold on a recognized market, Lender will give Borrower reasonable notice of the time and place of any public sale thereof or of the time after which any private sale or any other intended disposition thereof is to be made. The requirements of reasonable notice shall be met if such notice is mailed, postage prepaid, to the address of Borrower shown at the end of this Agreement at least ten (10) days before the time of the sale or disposition. Borrower agrees to pay all expenses of retaking, holding, preparing for sale, and selling the Collateral, together with any court costs and Lender’s reasonable attorney’s fees; all such expenses, costs and fees shall be deemed part of the Indebtedness. Lender may exercise its lien upon and right of setoff against any monies, credits, deposits or instruments that Lender may have in its possession and which belong to Borrower or to any other person or entity liable for the payment of any or all of the Indebtedness. The remedies provided Lender in this Agreement are not exclusive of any other remedies that may be available to Lender under any other document or at law or equity.

     7.2 No delay or omission on the part of Lender in exercising any right hereunder or in demanding strict compliance with the terms of this Agreement shall operate as a waiver of such right or of any other right under this Agreement or of demanding strict compliance with the terms of this Agreement. No waiver by Lender of any default shall operate as a waiver of any other default or of the same default on a future occasion.

VIII. MISCELLANEOUS AND DEFINITIONS

     8.1 As used in this Agreement, the term:

          a. “Default” is any of the events specified in the Default section of this Agreement, whether or not any requirement for the giving of notice, the lapse of time or both has occurred.

          b. “Event of Default” means any of the events specified in the Default section of this Agreement provided that any requirement for the giving of notice, the lapse of time, or both has been satisfied.

          c. “Person” means an individual, partnership, corporation (including a business trust), a joint stock company, trust, estate, unincorporated association, joint venture, limited liability company, limited liability partnership or other entity, or a governmental authority.

     8.2 Upon satisfaction in full of the Indebtedness, Lender may notify the Borrower in writing of its intent to surrender to the Borrower any Accounts remaining outstanding. By no later than the thirtieth (30^th ) day following the date of the written notification from Lender of its intent to surrender Accounts, the Borrower may elect to retrieve such Accounts. Should Borrower fail to retrieve such Accounts by the thirtieth (30^th) day following the written notification by the Lender, then Lender may, in its sole discretion, cease all activities related to the collection of the Accounts or continue such collection actions in exchange for a collection fee of twenty percent (20%) of the amount collected, which shall be paid by offset from any amounts so collected.

     8.3 The captions contained in this Agreement are inserted only as a matter of convenience and shall not be construed as defining, limiting, extending, or describing the scope of this Agreement, any section hereof, or the intent of any provision hereof.

     8.4 All rights of Lender hereunder shall inure to the benefit of its successors and assigns, and all obligations of Borrower shall bind Borrower’s successors and assigns.

     8.5 Time is of the essence with regard to each and every provision of this Agreement.

     8.6 This Agreement, and the documents executed and delivered pursuant hereto, constitute the entire agreement between the parties, and may be amended only by a writing signed by all parties.

     8.7 If any provision of this Agreement shall be held invalid under any applicable law, such invalidity shall not affect any other provision of this Agreement that can be given effect without the invalid provision, and, to this end, the provisions hereof are severable.

     8.8 Lender may proceed against collateral securing the Indebtedness and against parties liable therefor in such order as it may elect, and neither Borrower nor any surety or guarantor for Borrower shall be entitled to require Lender to marshal assets. The benefit of any rule of law or equity to the contrary is hereby expressly waived.

     8.9 The validity, construction and enforcement of this Agreement and all other documents executed with respect to the Indebtedness shall be governed by, and shall be construed and enforced in accordance with, the internal laws of the State of Tennessee, without regard to conflicts of laws principals, except to the extent that the Uniform Commercial Code in the State of Texas provides that the validity or perfection of the security interest hereunder, or remedies hereunder, in respect of any particular Collateral are governed by the laws of a jurisdiction other than the State of Tennessee.

     8.10 Borrower acknowledges and understands that Lender’s rights under this Loan and Security Agreement and/or its security interests in the Collateral may be assigned to one or more entities that have loaned money to Lender.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered on their behalf by their duly authorized officers, on the date first set out above.

“LENDER”		“BORROWER”
DIVERSICARE LEASING CORP.		BRIDGE ASSOCIATES LLC, solely in its capacity as Trustee for the SMSA Creditors’ Trust
By:	/s/ L. Glynn Riddle	By:	/s/ Louis E. Robichaux, IV
Its:	EVP & CFO	Title:	Managing Director and Trustee’s Designee
		Notice Address:
		747 Third Avenue, Suite 32A New York, New York 10017 email: lrobichaux@bridgellc.com

     The undersigned Debtors, in consideration of benefits to be derived by them as a result of the Loan evidenced hereby, join in the execution of this Agreement for the purpose granting to Lender a lien on the Collateral, to the extent that the undersigned retain any rights with respect to the Collateral, and authorizing the Lender to file UCC financing statements to evidence said lien.

SENIOR MANAGEMENT SERVICES OF DOCTORS AT DALLAS, INC.
By:	/s/ Louis E. Robichaux, IV Louis E. Robichaux, IV
	Chief Restructuring Officer
SENIOR MANAGEMENT SERVICES OF ESTATES AT FORT WORTH, INC.
By:	/s/ Louis E. Robichaux, IV
	Louis E. Robichaux, IV
	Chief Restructuring Officer
SENIOR MANAGEMENT SERVICES OF HERITAGE OAKS AT BALLINGER, INC.
By:	/s/ Louis E. Robichaux, IV
	Louis E. Robichaux, IV
	Chief Restructuring Officer
SENIOR MANAGEMENT SERVICES OF HUMBLE, INC.
By:	/s/ Louis E. Robichaux, IV
	Louis E. Robichaux, IV
	Chief Restructuring Officer
SENIOR MANAGEMENT SERVICES OF KATY, INC.
By:	/s/ Louis E. Robichaux, IV
	Louis E. Robichaux, IV
	Chief Restructuring Officer
SENIOR MANAGEMENT SERVICES OF NORMANDY AT SAN ANTONIO, INC.
By:	/s/ Louis E. Robichaux, IV
	Louis E. Robichaux, IV
	Chief Restructuring Officer

SENIOR MANAGEMENT SERVICES OF TREEMONT, INC.
By:	/s/ Louis E. Robichaux, IV
	Louis E. Robichaux, IV
	Chief Restructuring Officer
SENIOR MANAGEMENT SERVICES OF SHREVEPORT, INC.
By:	/s/ Louis E. Robichaux, IV
	Louis E. Robichaux, IV
	Chief Restructuring Officer

EX-10.3

Exhibit 10.3

LOAN AND SECURITY AGREEMENT

dated as of August 10, 2007

by and among

DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation,
as a Borrower

and

those certain additional Borrowers set forth on Schedule 1 hereto,

and

LASALLE BANK NATIONAL ASSOCIATION,
as Lender

Exhibit 10.3

TABLE OF CONTENTS

	Page
1. DEFINITIONS		1
1.1 General Terms		1
1.2 Interpretation		25
2. COMMITMENTS; INTEREST; FEES		25
2.1 Revolving Loans		25
2.2 Term Loan		28
2.3 Reduction of Revolving Loan Commitment by the Revolving Loan Borrower		29
2.4 Principal Balance of Liabilities Not to Exceed the Maximum Facility		29
2.5 The Borrower’s Loan Account		29
2.6 Statements		30
2.7 Interest		30
2.8 Method for Making Payments		30
2.9 Term of this Agreement		31
2.10 Optional Prepayment of Loans		31
2.11 Limitation on Charges		31
2.12 Method of Selecting Rate Options; Additional Provisions Regarding Libor Loans		32
2.13 Setoff		32
2.14 Termination of Commitments by the Lender		33
2.15 Mandatory Prepayments		33
2.16 Closing Fee		33
2.17 Late Charge		33
2.18 L/C Fees		34

-i-

	Page
2.19 Unused Line Fee		34
3. CHANGE IN CIRCUMSTANCES		34
3.1 Yield Protection		34
3.2 Availability of Rate Options		35
3.3 Taxes		35
3.4 Funding Indemnification		36
3.5 Lender Statements		36
3.6 Basis for Determining Interest Rate Inadequate or Unfair		36
3.7 Illegality		36
4. ELIGIBILITY REQUIREMENTS; CASH COLLATERAL ACCOUNT; ATTORNEY-IN-FACT		36
4.1 Account Warranties; Schedule of Accounts		36
4.2 Account Covenants		37
4.3 Collection of Accounts and Payments		37
4.4 Appointment of the Lender as the Borrower’s Attorney-in-Fact		38
4.5 Notice to Account Debtors		39
4.6 Equipment Warranties		40
4.7 Equipment Records		40
5. CONDITIONS OF LOANS		40
5.1 Conditions to all Loans		40
5.2 Initial Loans		41
6. COLLATERAL		43
6.1 Security Interest		44
6.2 Preservation of Collateral and Perfection of Security Interests Therein		44
6.3 Loss of Value of Collateral		45
6.4 Right to File Financing Statements		45

	Page
6.5 Third Party Agreements		45
6.6 All Loans One Obligation		45
6.7 Commercial Tort Claim		46
7. REPRESENTATIONS AND WARRANTIES		46
7.1 Existence		46
7.2 Corporate Authority		46
7.3 Binding Effect		46
7.4 Financial Data.		47
7.5 Collateral		47
7.6 Solvency		47
7.7 Principal Place of Business; State of Organization		47
7.8 Other Names		47
7.9 Tax Liabilities		48
7.10 Loans		48
7.11 Margin Securities		48
7.12 Organizational Chart		48
7.13 Litigation and Proceedings		48
7.14 Other Agreements		48
7.15 Compliance with Laws and Regulations		48
7.16 Intellectual Property		49
7.17 Environmental Matters		49
7.18 Disclosure		49
7.19 Pension Related Matters		50
7.20 Perfected Security Interests		50
7.21 Acquisition Documents		50

	Page
7.22 Broker’s Fees		50
7.23 Investment Company Act		51
7.24 Transactions		51
7.25 Representations and Warranties in Acquisition Documents		51
7.26 Offenses and Penalties Under the Medicare/Medicaid Programs		51
7.27 Medicaid/Medicare and Private Insurance/Managed Care Contracts		51
7.28 Consideration		53
7.29 USA Patriot Act		53
7.30 Absence of Foreign or Enemy Status		53
7.31 HIPAA Compliance		53
7.32 Labor Matters		53
7.33 Capitalization		53
7.34 Government Contracts		54
7.35 OFAC		54
7.36 Commercial Leases		54
8. AFFIRMATIVE COVENANTS		54
8.1 Reports, Certificates and Other Information		54
8.2 Inspection; Audit Fees		57
8.3 Conduct of Business		57
8.4 Claims and Taxes		57
8.5 State of Incorporation or Formation		57
8.6 Liability and Malpractice Insurance		58
8.7 Property and Other Insurance		58
8.8 Environmental		59
8.9 Banking Relationship		59

	Page
8.10 Intellectual Property		59
8.11 Change of Location; Etc		60
8.12 Health Care Related Matters		60
8.13 US Patriot Act		60
8.14 Government Accounts		61
8.15 Further Assurances		61
8.16 Compliance with Anti-Terrorism Orders		61
8.17 Blocked Account Agreements and Account Debtors		61
9. NEGATIVE COVENANTS		62
9.1 Encumbrances		62
9.2 Indebtedness; Capital Expenditures		62
9.3 Consolidations, Mergers or Transactions		63
9.4 Investments or Loans		63
9.5 Guarantees		63
9.6 Disposal of Property		64
9.7 Use of Proceeds		64
9.8 Loans to Officers; Consulting and Management Fees		64
9.9 Dividends and Stock Redemptions		64
9.10 Payments in Respect of Subordinated Debt		65
9.11 Transactions with Affiliates		65
9.12 Financial Ratios		65
9.13 Change in Nature of Business		66
9.14 Other Agreements		66
9.15 Blocked Accounts and Lock Box Accounts		66
9.16 Amendments to Restricted Agreements		66

	Page
9.17 State of Incorporation or Formation		67
9.18 Environmental		67
9.19 Fiscal Year		67
9.20 Restrictions on Fundamental Changes		67
9.21 Margin Stock		67
9.22 Truth of Statements and Certificates		67
9.23 Negative Pledge Assets		68
10. HEALTH CARE MATTERS		68
10.1 Funds from Restricted Grants		68
10.2 Certificate of Need		68
10.3 Licenses. The Licenses		68
11. DEFAULT, RIGHTS AND REMEDIES OF THE LENDER		69
11.1 Event of Default		69
11.2 Acceleration		73
11.3 Rights and Remedies Generally		73
11.4 Entry Upon Premises and Access to Information		74
11.5 Sale or Other Disposition of Collateral by the Lender		74
11.6 Waivers (General)		75
11.7 Waiver of Notice		77
11.8 Injunctive Relief		77
11.9 Marshalling		77
11.10 Advice of Counsel		77
12. MISCELLANEOUS		78
12.1 Waiver		78
12.2 Costs and Attorneys’ Fees		78

	Page
12.3 Expenditures by the Lender		79
12.4 Custody and Preservation of Collateral		79
12.5 Reliance by the Lender		79
12.6 Assignability; Parties		79
12.7 Severability; Construction		80
12.8 Application of Payments		80
12.9 Marshalling; Payments Set Aside		80
12.10 Sections and Titles; UCC Termination Statements		80
12.11 Continuing Effect; Inconsistency		80
12.12 Notices		81
12.13 Equitable Relief		82
12.14 Entire Agreement		82
12.15 Participations and Assignments		82
12.16 Indemnity		82
12.17 Representations and Warranties		83
12.18 Counterparts; Electronically Transmitted Signatures		83
12.19 Limitation of Liability of Lender		83
12.20 Borrower Authorizing Accounting Firm		84
12.21 Joint and Several Liability; Binding Obligations		84
12.22 Confidentiality		87
12.23 Expenses and Taxes		88
12.24 Release		89
12.25 Time; Reliance		89
12.26 Relationship		89
12.27 Borrower Agent		90

	Page
12.28 Agent’s; Borrower Authorizing Accounting Firm		90
12.29 Additional Provisions		90
12.30 Nonliability of Lender		93
12.31 INTENTIONALLY OMITTED		94
12.32 SUBMISSION TO JURISDICTION; WAIVER OF VENUE		94
12.33 GOVERNING LAW		95
12.34 JURY TRIAL		95
SCHEDULES		96
EXHIBITS		105

LOAN AND SECURITY AGREEMENT

     This LOAN AND SECURITY AGREEMENT (this “Agreement”), dated as of August 10, 2007, is by and among those certain entities set forth on Schedule 1 hereto, which are signatories hereto (such entities individually and collectively, the “Borrower”), and LASALLE BANK NATIONAL ASSOCIATION, a national banking association (together with its successors and assigns, the “Lender”).

W I T N E S S E T H:

     WHEREAS, Advocat Inc., a Delaware corporation (“Parent”), legally and beneficially owns or controls, either directly, or indirectly through its subsidiaries, all of the issued and outstanding Stock of each Borrower;

     WHEREAS, pursuant to the terms of that certain Operations Transfer Agreement effective as of August ___, 2007 (the “Acquisition Agreement”), by and among the Diversicare Parties and SMS Parties (each as defined below), the Diversicare Parties desire (i) that certain Master Lease and Subleases (each as defined below) be transferred to one or more designated Diversicare Parties (the “Transfer”) and (ii) to acquire substantially all of the assets and businesses of the SMS Parties and (the “Acquisition” and together with the Transfer, the “Transactions”);

     WHEREAS, the Borrower has requested that the Lender provide the Borrower with (i) certain revolving loans in an aggregate amount of up to Fifteen Million and No/100 Dollars ($15,000,000.00) to support working capital needs of the Borrower, (ii) certain transition revolving loans in an aggregate amount of up to Six Million and No/100 Dollars ($6,000,000.00) to support working capital needs of the Borrower for the six months following the Acquisition, and (iii) a term loan of Sixteen Million Five Hundred Thousand and No/100 Dollars ($16,500,000.00), to refinance certain existing Indebtedness (as defined below) of the Borrower, partially finance the Transactions and pay certain fees, costs and expenses reasonably incurred in connection with the Transactions; and

     WHEREAS, the Lender is willing to make such loans to the Borrower, upon the terms and provisions and subject to the conditions set forth herein.

     NOW, THEREFORE, in consideration of the mutual agreements contained herein, and of any loans or other financial accommodations now or hereafter made to or for the benefit of the Borrower by the Lender, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto (intending to be legally bound) hereby agree as follows:

     1. DEFINITIONS.

          1.1 General Terms. When used herein, the following terms shall have the following meanings:

     “Account Debtor” means the Person who is obligated on or under an Account.

- 1 -

     “Accounts” means collectively (a) any right to payment of a monetary obligation, arising from the delivery of goods or the provision of services, (b) without duplication, any “account” (as that term is defined in the Code now or hereafter in effect), any accounts receivable (whether in the form of payments for services rendered or goods sold, rents, license fees or otherwise), any “health-care-insurance receivables” (as that term is defined in the Code now or hereafter in effect), any “payment intangibles” (as that term is defined in the Code now or hereafter in effect) and all other rights to payment and/or reimbursement of every kind and description, in each case arising from the delivery of goods or the provision of services, (c) all accounts, general intangibles, Intellectual Property, rights, remedies, guarantees, supporting obligations, letter of credit rights and security interests in respect of the foregoing, all rights of enforcement and collection, all books and records evidencing or related to the foregoing, and all rights under the Financing Agreements in respect of the foregoing, (d) all information and data compiled or derived by any Borrower or to which any Borrower is entitled in respect of or related to the foregoing, and (e) all proceeds of any of the foregoing.

     “Acquisition” shall have the meaning set forth in the Recitals hereto.

     “Acquisition Agreement” shall have the meaning set forth in the Recitals hereto.

     “Acquisition Documents” means, collectively, the Acquisition Agreement, any other acquisition agreements, transfer agreements, assignments and other documents, instruments, arrangements and agreements executed or delivered in connection therewith or otherwise in connection with, directly or indirectly, the Transactions, in each case as the same may be amended, restated, supplemented or otherwise modified in conformity with Section 9.16 of this Agreement.

     “Adjusted EBITDA” means the sum of (a) EBITDA, and (b) the amounts deducted (or less amounts added) in computing EBITDA for the period for (i) the non-cash provision (benefit) for self-insured professional and general liability expenses, (ii) non-cash rent expense, (iii) non-cash stock based compensation expense, and all other non-cash expenses reasonably approved by the Lender, less (c) the Cash Cost of Self-Insured Professional and General Liability.

     “Adjusted EBITDAR” means (a) Adjusted EBITDA plus (b) cash rent expense (rent expense adjusted to remove effects of non-cash rent).

     “Adjusted Leased Asset EBITDA” means Adjusted EBITDA measured solely for all Facilities other than the Facilities listed on Schedule 1.1(a).

     “Affiliate” means, with respect to any Person, any other Person directly or indirectly controlling (including, without limitation, all shareholders, members, directors, partners, managers, and officers of such Person), controlled by, or under direct or indirect common control with, such Person. A Person shall be deemed to control another Person if such first Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through ownership of voting securities, by contract or otherwise.

     “Agreement” means this Loan and Security Agreement as the same may be restated, modified, supplemented or amended from time to time.

- 2 -

     “Allocable Amount” shall have the meaning ascribed to such term in Section 12.21(g) hereof.

     “AmSouth Bank” means AmSouth Bank, division of Regions Bank.

     “AmSouth Blocked Account” means that certain blocked account established in the LaSalle Borrower’s name with AmSouth Bank pursuant to which Lender shave have control over the AmSouth Blocked Account in accordance with the AmSouth Blocked Account Agreement.

     “AmSouth Blocked Account Agreement” means that certain Deposit Account Control Agreement of even date herewith, by and among AmSouth Bank, a division of Regions Bank, the Borrower and Lender, as the same may be amended, restated, supplemented or otherwise modified from time to time.

     “AmSouth Letter of Credit” means that certain unsecured letter of credit issued by AmSouth Bank in favor of Wausau in the amount of Twenty Five Thousand and No/100 Dollars ($25,000.00).

     “Applicable Libor Margin” means, (a) with respect to Libor Loans that are Revolving Loans, an amount equal to two hundred twenty five (225) basis points; and (b) with respect to any part of the Term Loan that is a Libor Loan, an amount equal to two hundred fifty (250) basis points.

     “Bankruptcy Court” means the United States Bankruptcy Court for the Northern District of Texas.

     “Base Rate” means the corporate base rate of interest per annum identified from time to time by the Lender, as its base or prime rate, which rate shall not necessarily be the lowest rate of interest which the Lender charges its customers. Any change in the Base Rate shall be effective as of the effective date of such change.

     “Base Rate Loan” means a Loan that bears interest at an interest rate based on the Base Rate.

     “Base Rent” means the “Base Rent” as such term is defined in such Omega Master Lease Agreement.

     “Blocked Account Agreements” shall mean, collectively, the Commercial Blocked Account Agreement and Government Blocked Account Agreement.

     “Blocked Persons List” shall have the meaning ascribed to such term in Section 7.29 hereof.

     “Borrower Agent” means Diversicare Management Services Co., a Tennessee corporation.

- 3 -

     “Borrower Cash Management Program” means the business practice of Parent and Borrowers whereby cash receipts for Parent and Borrowers are transferred/swept into a central concentration account and all cash disbursements are funded by transfers from such central concentration account.

     “Borrowing Base” means, at any time, without duplication, an amount equal to up to eighty percent (80%) of the face amount (less discounts, credits and allowances which have knowingly been taken by or granted to Account Debtors in connection therewith) of all existing Eligible Accounts that are set forth in the Schedule of Accounts then most recently delivered by the Borrower to the Lender, which amount shall be reduced by one hundred percent (100%) of the face amount of all payments which the Borrower has received on or in connection with its Eligible Accounts since the date of such Schedule of Accounts.

     “Borrowing Date” means a date on which a Libor Loan is made hereunder.

     “Borrowing Notice” shall have the meaning ascribed to such term in Section 2.12 hereof.

     “Business Day” means (a) with respect to any borrowing, payment or rate selection of Libor Loans, a day other than Saturday or Sunday on which banks are open for business in Chicago, Illinois and on which dealings in United States dollars are carried on in the London interbank market, and (b) for all other purposes, a day other than Saturday or Sunday on which banks are open for business in Chicago, Illinois.

     “Capital Expenditures” means, as to any Person, any and all expenditures of such Person for fixed or capital assets, including, without limitation, the incurrence of Capitalized Lease Obligations, all as determined in accordance with GAAP, except that Capital Expenditures shall not include (i) expenditures for fixed or capital assets to the extent such expenditures are paid for or reimbursed from the proceeds of insurance, condemnation awards and other settlements in respect of lost, destroyed, damaged, condemned or stolen assets, (ii) expenditures for assets purchased substantially concurrently with the trade-in of existing assets to the extent of the trade-in credit thereof; and (iii) any payment of liabilities or incurrence of incidence comprising the purchase price for the acquisition, whether by purchase, merger, consolidation or otherwise, by Borrower of the assets of, or the equity interest in, a Person or a division, line of business or other business unit of a Person engaged in a business of the type conducted by Borrower as of the date hereof or in a business reasonably related thereto.

     “Capitalized Lease Obligations” means any amount payable with respect to any lease of any tangible or intangible property (whether real, personal or mixed), however denoted, which either (a) is required by GAAP to be reflected as a liability on the face of the balance sheet of the lessee thereunder, or (b) based on actual circumstances existing and ascertainable, either at the commencement of the term of such lease or at any subsequent time at which any property becomes subject thereto, can reasonably be anticipated to impose on such lessee substantially the same economic risks and burdens, having regard to such lessee’s obligations and the lessor’s rights thereunder both during and at the termination of such lease, as would be imposed on such lessee by any lease which is required to be so reflected or by the ownership of the leased property. For avoidance of doubt, prepaid leases shall not be deemed “Capital Lease Obligations” except to the extent required under GAAP.

- 4 -

     “Capmark” means Capmark Finance Inc., a California corporation (formerly known as GMAC Commercial Mortgage Corporation, a California corporation).

     “Capmark Debt Documents” means, collectively, the Capmark Mortgage, the note(s) issued pursuant thereto, and the documents, instruments and agreements executed or delivered in connection therewith (including, without limitation, the Capmark Mortgage Loan Documents), in each case as the same may be amended or modified in conformity with Section 9.16 of this Agreement.

     “Capmark Intercreditor Agreement” means that certain Intercreditor Agreement dated as of the date hereof by and among Capmark, Lender and Borrower, as the same may be amended, restated, supplemented or otherwise modified from time to time.

     “Capmark Mortgage” means the “Mortgage” as such term is defined in the Capmark Intercreditor Agreement.

     “Capmark Mortgage Loan” means the “Mortgage Loan” as such term is defined in the Capmark Intercreditor Agreement.

     “Capmark Mortgage Loan Documents” means the “Mortgage Loan Documents” as such term is defined in the Capmark Intercreditor Agreement.

     “Capmark Restricted Accounts” means the Accounts in which Capmark holds a security interest pursuant to the Capmark Debt Documents, which Accounts are described on Schedule 1.1(b) attached hereto.

     “Capmark Security Interest” means Capmark’s security interest in certain assets of the Borrower, the rights pertaining to and priorities of which are as specified in the Capmark Intercreditor Agreement.

     “Cash Collateral Account” shall have the meaning ascribed to such term in Section 4.3 hereof.

     “Cash Cost of Self-Insured Professional and General Liability” means the total cash expenditures associated with professional and general liability related settlements, legal fees and administration costs for all facilities owned or leased by the Borrower. For purposes of measuring the Cash Cost of Self-Insured Professional and General Liability for individual facilities or groups of facilities, these amounts shall be allocated on the basis of licensed beds of the facility or group of facilities in relation to the total number of licensed beds for all facilities owned or leased by the Borrower.

     “CERCLA” means the Comprehensive Environmental Release Compensation and Liability Act, 42 U.S.C. § 9601 et seq., as amended.

     “Certificates” shall have the meaning ascribed to such term in Section 5.2 hereof.

     “CHAMPUS” means the Civilian Health and Medical Program of the Uniformed Service, a part of TRICARE, a medical benefits program supervised by the U.S. Department of Defense.

- 5 -

     “Closing Date” means August 10, 2007.

     “Closing Fee” shall have the meaning ascribed to such term in Section 2.16 hereof.

     “CMS” means the Centers for Medicare and Medicaid Services of HHS and any Person succeeding to the functions thereof.

     “Collateral” shall have the meaning ascribed to such term in Section 6.1 hereof.

     “Commercial Blocked Account Agreement” means Lender’s standard blocked account agreement signed by the Borrower relating to the Commercial Blocked Account, to which payments on all Accounts, other than Government Accounts, are to be forwarded.

     “Commercial Leases” means the collective reference to all Leases other than admission agreements or residency agreements.

     “Commitments” means, collectively, the Revolving Loan Commitment and the Term Loan Commitment.

     “Compliance Certificate” shall have the meaning ascribed to such term in Section 8.1(c) hereof.

     “CON” shall have the meaning ascribed to such term in Section 10.2 hereof.

     “Credit Party” means each Borrower, the Guarantor, and each other Person that is or becomes primarily or secondarily liable for the Liabilities, whether as a principal, surety, guarantor, endorser or otherwise.

     “Credit Termination Date” means the earlier of (i) the Stated Maturity Date, (ii) such other date on which the Commitments shall terminate pursuant to Section 11.2 hereof, or (iii) such other date as is mutually agreed in writing between the Borrower and the Lender.

     “Default” means an event, circumstance or condition which through the passage of time or the service of notice or both would (assuming no action is taken to cure the same) mature into an Event of Default.

     “Default Rate” shall have the meaning ascribed to such term in Section 2.7(a) hereof.

     “Demand Deposit Account” shall have the meaning ascribed to such term in Section 4.3 hereof.

     “Deposit Accounts” means any deposit, securities, operating, lockbox, blocked or cash collateral account (including, without limitation, the Cash Collateral Account, the Demand Deposit Account, and the Commercial Blocked Account), together with any funds, instruments or other items credited to any such account from time to time, and all interest earned thereon.

     “Diversicare Parties” shall mean the “Diversicare Parties” as such term is defined in the Acquisition Agreement.

- 6 -

     “Duly Authorized Officer” means the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer and the Assistant Secretary of the Borrower.

     “EBITDA” means with respect to the Borrower, for any period of determination, the net earnings of the Borrower before nonrecurring items (in accordance with GAAP and as reasonably agreed to by the Lender), interest, taxes, depreciation, and amortization (including amortized transaction expense), all as determined in accordance with GAAP, consistently applied.

     “EBITDAR” means with respect to the Borrower, for any period of determination, the sum of the net earnings of the consolidated Borrower before nonrecurring items (in accordance with GAAP and as reasonably agreed to by the Lender), cash interest, taxes, depreciation, amortization and rent, all as determined in accordance with GAAP, consistently applied.

     “Eligible Accounts” means an Account owing to the Borrower which meets each of the following requirements, as determined by the Lender in its sole and absolute discretion:

          (a) Accounts which do not remain unpaid more than ninety (90) calendar days from the invoice date;

          (b) is to be paid pursuant to either a Medicaid Provider Agreement or a Medicare Provider Agreement, or is a liability of an Account Debtor which is (i) a commercial insurance company (or managed care company) acceptable to the Lender in its reasonable determination, organized under the laws of any jurisdiction in the United States and having its principal office in the United States, or (ii) any other institutional Account Debtor acceptable to the Lender, including health maintenance organizations, unions, or any other type of Account Debtor, not included in the categories of Account Debtors listed in the foregoing clause (i), organized under the laws of any jurisdiction in the United States, having its principal office in the United States, in either case, in which such obligor agrees to pay the Borrower for the applicable services rendered or performed or, if applicable, goods sold;

          (c) the Account Debtor of which has received notice to forward payment to either the Commercial Blocked Account and/or the Government Blocked Account, as applicable;

          (d) those Accounts of Borrower as to which the Lender has a first priority perfected Lien and that comply with all of the representations and warranties made to the Lender under this Agreement and the Financing Agreements;

          (e) to the extent such Account does not include any contingent payments;

          (f) to the extent such Account does not include late charges or finance charges, and is net of any contractual discount and/or Medicare/Medicaid fee schedule adjustments; and

          (g) which complies with such other terms and conditions as may be specified from time to time by the Lender in its reasonable discretion;

provided, however, the following Accounts of the Borrower are not Eligible Accounts:

- 7 -

          (i) Accounts to be paid pursuant to a Medicare Provider Agreement or Private Insurance/Managed Care Accounts, or any other otherwise Eligible Account, which, in either case, remain unpaid more than ninety (90) calendar days from the billing date; (ii) all Private Pay Accounts; (iii) Accounts with respect to which the Account Debtor is a director, officer, employee, equityholder, or Affiliate of the Borrower; (iv) Accounts with respect to which the Account Debtor is the United States of America or any department, agency or instrumentality thereof, unless such Account Debtor deposits all payments arising under the Government Accounts to the Government Blocked Account in accordance with the terms of the Government Blocked Account Agreement; (v) Accounts with respect to which the Account Debtor is not subject to service of process within the continental United States of America; (vi) Accounts known by Borrower (whether actual or constructive knowledge) to be in dispute (but only to the extent of such disputed amount) or with respect to which the Account Debtor has asserted, or the Borrower or the Lender has reason to believe the Account Debtor is entitled to assert, a counterclaim or right of setoff (but only to the extent of such counterclaim or setoff amount); (vii) Accounts with respect to which the prospect of payment or performance by the Account Debtor is or will be impaired, as determined by the Lender in the exercise of its reasonable discretion; (viii) Accounts that are not valid, legally enforceable obligations of the Account Debtor thereunder; (ix) Accounts with respect to which the Account Debtor is the subject of bankruptcy or a similar insolvency proceeding or has made an assignment for the benefit of creditors or whose assets have been conveyed to a receiver or trustee; (x) Accounts with respect to which the Account Debtor’s obligation to pay the Account is conditional upon the Account Debtor’s approval; (xi) Accounts which arise out of services or, if applicable, sales not made in the ordinary course of the Borrower’s business; (xii) Accounts with respect to which any document or agreement executed or delivered in connection therewith, or any procedure used in connection with any such document or agreement, fails in any material respect to comply with the requirements of applicable law, or with respect to which any representation or warranty contained in this Agreement is untrue or misleading in any material respect; (xiii) Accounts with respect to which Borrower is or may become liable to the Account Debtor for services rendered, or if applicable, goods sold, by the Account Debtor to Borrower, to the extent of Borrower’s existing or potential liability to such Account Debtor; (xiv) Medicaid pending Accounts; and (xv) the Capmark Restricted Accounts.

     provided, further, an Account which is at any time an Eligible Account, but which subsequently fails to meet any of the foregoing requirements for eligibility, shall forthwith cease to be an Eligible Account, and further, with respect to any Account, if the Lender at any time hereafter determines in its reasonable discretion that the prospect of payment or performance by the Account Debtor with respect thereto is materially impaired for any reason whatsoever, such Account shall cease to be an Eligible Account after notice of such determination is given to the Borrower.

     “Environmental Laws” means all federal, state, local, and foreign statutes, regulations, ordinances, and similar provisions having the force or effect of law, all judicial and administrative orders and determinations, and all common law concerning public health and safety, worker health and safety, pollution, or protection of the environment, including all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous materials, substances, or wastes, chemical substances, or mixtures,

- 8 -

pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise, or radiation, including, without limitation, the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq., as amended; CERCLA; the Toxic Substance Act, 15 U.S.C. § 2601 et seq., as amended; the Clean Water Act, 33 U.S.C. § 466 et seq., as amended; the Clean Air Act, 42 U.S.C. § 7401 et seq., as amended; state and federal superlien and environmental cleanup programs; and U. S. Department of Transportation regulations.

     “Environmental Notice” means any summons, citation, directive, information request, notice of potential responsibility, notice of violation or deficiency, order, claim, complaint, investigation, proceeding, judgment, letters or other communication, written or oral to the Borrower or any officer thereof, actual or threatened, from the United States Environmental Protection Agency or other federal, state or local agency or authority, or any other entity or individual, public or private, concerning any intentional or unintentional act or omission which involves Management of Hazardous Substances on or off the property of the Borrower which could result in the Borrower incurring a material liability or which could have a Material Adverse Effect, or the imposition of any Lien on property, or any alleged violation of or responsibility under Environmental Laws which could result in the Borrower incurring a material liability or which could have a Material Adverse Effect, and, after due inquiry and investigation, any knowledge of any facts which could give rise to any of the foregoing.

     “Equipment” means “equipment” as defined in the Code, including, without limitation, any and all of the Borrower’s machinery, equipment, vehicles, fixtures, furniture, computers, appliances, tools, and other tangible personal property (other than Inventory), whether located on the Borrower’s premises or located elsewhere, together with any and all accessions, parts and appurtenances thereto, whether presently owned or hereafter acquired by the Borrower.

     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended, together with the regulations thereunder.

     “ERISA Affiliate” means any corporation, trade or business, which together with the Borrower would be treated as a single employer under Section 4001 of ERISA.

     “Event of Default” shall have the meaning ascribed to such term in Section 11.1 hereof.

     “Excess Cash Flow” means, for any period, the excess of (a) Adjusted EBITDA for such period minus (b) the sum for such period of (1) scheduled principal and interest paid, (2) current income tax expense without regard to the provision or benefit for deferred income taxes, (3) Capital Expenditures, and (4) the Required Dividends and Redemption Amounts.

     “Facility” or “Facilities” shall mean any one or more of the skilled nursing homes, assisted living facilities, retirement homes, rehabilitation centers, or senior adult care homes or facilities located on the Property and owned or operated by the Borrower in connection with their business. Set forth on Schedule 1.1(a) is a list of all Facilities in existence on the Closing Date owned or operated by the Borrower, including those Facilities acquired in the Acquisition.

     “Financing Agreements” means any and all agreements, instruments, certificates and documents, including, without limitation, security agreements, loan agreements, notes,

- 9 -

guarantees, keep well agreements, landlord waivers, mortgages, deeds of trust, subordination agreements, intercreditor agreements, pledges, powers of attorney, consents, assignments, collateral assignments, interest rate protection agreements, reimbursement agreements, contracts, notices, leases, collateral assignments of key man life insurance policies, financing statements and all other written matter (including, without limitation, the Revolving Credit Note, the Term Loan Note, any Subordination Agreement, the Intercreditor Agreement, the Guaranty, the Governmental Lockbox Agreement, the Commercial Blocked Account Agreement, any Hedging Agreement, the Certificates and the Master Letter of Credit Agreement), in each case evidencing, securing or relating to the Loans and the Liabilities, whether heretofore, now, or hereafter executed by or on behalf of the Borrower, any Affiliate, or any other Person, and delivered to or in favor of the Lender, together with all agreements and documents referred to therein or contemplated thereby, as each may be amended, modified or supplemented from time to time.

     “Fiscal Quarter” means the three (3) month period ending on March 31, June 30, September 30 and December 31 of each calendar year.

     “Fiscal Year” means the twelve (12) month period commencing on January 1 and ending on December 31 of each calendar year.

     “Fixed Charge Coverage Ratio” means, on any date of determination, the ratio of (a) Adjusted EBITDAR for the period of 12 consecutive months then ended, to (b) the sum of (i) rent expense of Borrower that has been paid during such period, (ii) interest expense of Borrower that has been paid during such period (including, without limitation, interest attributable to issued and outstanding Letters of Credit), (iii) regularly scheduled principal payments of Borrower to be made during such period, (iv) Net Capital Expenditures and (v) the aggregate amount of any and all distributions and advances to the Affiliates of the Borrower.

     “Fixed Charges” means, for any period, the sum of (a) cash interest expense for such period, plus (b) payments of principal with respect to all Indebtedness for borrowed money (including, without limitation, permitted payments of interest on the Capmark Mortgage Loan and any Subordinated Debt) and Capitalized Lease Obligations scheduled or otherwise required to be paid during such period, all as determined in accordance with GAAP, consistently applied.

     “GAAP” means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or any successor authority) that are applicable to the circumstances as of the date of determination.

     “General Intangibles” means “general intangibles” as defined in the Code, including, without limitation, any and all general intangibles, choses in action, causes of action, rights to the payment of money (other than Accounts), and all other intangible personal property of the Borrower of every kind and nature wherever located and whether currently owned or hereafter acquired by the Borrower (other than Accounts), including, without limitation, corporate or other business records, inventions, designs, patents, patent applications, service marks, service mark applications, trademark applications, brand names, trade names, trademarks and all goodwill symbolized thereby and relating thereto, trade styles, trade secrets, registrations, computer

- 10 -

software, advertising materials, distributions on certificated and uncertificated securities, investment property, securities entitlements, goodwill, operational manuals, product formulas for industrial processes, blueprints, drawings, copyrights, copyright applications, rights and benefits under contracts, licenses, license agreements, permits, approvals, authorizations which are associated with the operation of the Borrower’s business and granted by any Person, franchises, customer lists, deposit accounts, tax refunds, tax refund claims, and any letters of credit, guarantee claims, security interests or other security held by or granted to the Borrower to secure payment by an Account Debtor of any of Borrower’s Accounts, and, to the maximum extent permitted by applicable law, any recoveries or amounts received in connection with any litigation or settlement of any litigation.

     “Governing Documents” shall have the meaning ascribed to such term in Section 9.14 hereof.

     “Government Accounts” means Accounts on which any federal or state governmental unit or any intermediary for any federal or state governmental unit is the Account Debtor.

     “Governmental Approvals” means, collectively, all consents, licenses, and permits and all other authorizations or approvals required from any Governmental Authority to operate the Locations.

     “Governmental Authority” means and includes any federal, state, District of Columbia, county, municipal, or other government and any political subdivision, department, commission, board, bureau, agency or instrumentality thereof, whether domestic or foreign.

     “Government Blocked Account” shall have the meaning ascribed to such term in Section 4.4 hereof.

     “Government Blocked Account Agreement” means the blocked account agreement signed by the Borrower relating to the Government Blocked Account, to which payments on all Government Accounts are to be forwarded.

     “Guarantor” means Parent in its capacity as the guarantor pursuant to the Guaranty.

     “Guaranty” means that certain Guaranty of even date herewith by Guarantor in favor of the Lender, as the same may be amended, restated, reaffirmed, modified or supplemented from time to time.

     “Hazardous Substances” means hazardous substances, materials, wastes, and waste constituents and reaction by-products, pesticides, oil and other petroleum products, and toxic substances, including, without limitation, asbestos and PCBs, as those terms are defined pursuant to Environmental Laws.

     “Healthcare Laws” means all applicable Laws relating to the possession, control, warehousing, marketing, sale and distribution of pharmaceuticals, the operation of medical or senior housing facilities (such as, but not limited to, nursing homes, skilled nursing facilities, rehabilitation hospitals, intermediate care facilities, assisted living and adult care facilities), patient healthcare, patient healthcare information, patient abuse, the quality and adequacy of

- 11 -

medical care, rate setting, equipment, personnel, operating policies, fee splitting, including, without limitation, (a) all federal and state fraud and abuse laws, including, but not limited to the federal Anti-Kickback Statute (42 U.S.C. §1320a-7b(6)), the Stark Law (42 U.S.C. §1395nn), the civil False Claims Act (31 U.S.C. §3729 et seq.); (b) TRICARE; (c) HIPAA, (d) Medicare; (e)Medicaid; (f) quality, safety and accreditation standards and requirements of all applicable state laws or regulatory bodies; (g) all laws, policies, procedures, permits, requirements, certifications, and regulations pursuant to which licenses, approvals and accreditation certificates are issued in order to operate medical, senior housing facilities, assisted living facilities, or skilled nursing facilities; and (h) any and all other applicable health care laws, regulations, manual provisions, policies and administrative guidance, each of (a) through (h) as may be amended from time to time.

     “Hedging Agreement” means any interest rate, currency or commodity swap agreement, cap agreement or collar agreement, and any other agreement or arrangement designed to protect a Person against fluctuations in interest rates, currency exchange rates or commodity prices, in each case in form and substance satisfactory to the Lender, as the same may be amended or modified from time to time.

     “Hedging Obligation” means, with respect to any Person, any liability of such Person under any Hedging Agreement.

     “HHS” means the United States Department of Health and Human Services and any Person succeeding to the functions thereof.

     “HIPAA” means the Health Insurance Portability and Accountability Act of 1996, as the same may be amended, modified or supplemented from time to time, and any successor statute thereto, and any and all rules or regulations promulgated from time to time thereunder.

     “Indebtedness” with respect to any Person means, as of the date of determination thereof, (a) all of such Person’s indebtedness for borrowed money, (b) all indebtedness of such Person or any other Person secured by any Lien with respect to any property or asset owned or held by such Person, regardless whether the indebtedness secured thereby shall have been assumed by such Person or such Person has become liable for the payment thereof, (c) all Capitalized Lease Obligations of such Person and obligations or liabilities created or arising under conditional sale or other title retention agreement with respect to property used and/or acquired by Borrower even though the rights and remedies of the lessor, seller and/or lender thereunder are limited to repossession of such property, (d) all unfunded pension fund obligations and liabilities, (e) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (f) all obligations in respect of letters of credit, whether or not drawn, and bankers’ acceptances issued for the account of such Person, (g) deferred and/or accrued taxes and all unfunded pension fund obligations and liabilities, (h) all guarantees by such Person, or any undertaking by such Person to be liable for, the debts or obligations of any other Person, described in clauses (a) through (h), and (i) all Hedging Obligations of such Person.

     “Indemnified Parties” shall have the meaning ascribed to such term in Section 12.16 hereof.

- 12 -

     “Insurer” means a Person that insures a Patient against certain of the costs incurred in the receipt by such Patient of Medical Services, or that has an agreement with the Borrower to compensate the Borrower for providing goods or services to a Patient.

     “Intellectual Property” means all of the following in any jurisdiction throughout the world: (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, slogans, trade names, corporate names, Internet domain names, and rights in telephone numbers, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, (d) all mask works and all applications, registrations, and renewals in connection therewith, (e) all trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals), (f) all computer software (including source code, executable code, data, databases, and related documentation), (g) all material advertising and promotional materials, (h) all other proprietary rights, and (i) all copies and tangible embodiments thereof (in whatever form or medium).

     “Intercreditor Agreements” means, collectively, the Capmark Intercreditor Agreement and the Omega Intercreditor Agreements.

     “Inventory” means “inventory” as defined in the Code, including, without limitation, any and all inventory and goods of the Borrower, wheresoever located, whether now owned or hereafter acquired by the Borrower, which are held for sale or lease, furnished under any contract of service or held as raw materials, work-in-process or supplies, and all materials used or consumed in the Borrower’s business, and shall include such property the sale or other disposition of which has given rise to Accounts and which has been returned to or repossessed or stopped in transit by the Borrower.

     “Joint Liability Payment” shall have the meaning ascribed to such term in Section 12.21(g) hereof.

     “Laws” means, collectively, all federal, state and local laws, statutes, codes, ordinances, orders, rules and regulations, including judicial opinions or presidential authority in the applicable jurisdiction, now or hereafter in effect, and in each case as amended or supplemented from time to time.

     “L/C Fee” has the meaning ascribed to such term in Section 2.18 hereof.

     “Leased Asset Adjusted EBITDA” shall mean Adjusted EBITDA solely attributable to the Leased Assets. For purposes of determining Leased Asset Adjusted EBITDA, overhead costs of Diversicare Management Services, Co. and Parent shall be allocated on the basis of revenues of the Leased Assets in proportion to total consolidated revenues.

- 13 -

     “Leased Assets” shall mean those certain Leases set forth in reasonable detail on Schedule 1.1(e) hereto, plus the Facilities listed as Items 2 and 3 on Schedule 1.1(d), Negative Pledge Assets.

     “Leased Real Property” means all leasehold or subleasehold estates and other rights to use or occupy any land, buildings, structures, improvements, fixtures, or other interest in real property held by the Parent or Borrower.

     “Leases” means all leases, subleases, licenses, concessions and other agreements (written or oral), including all amendments, extensions, renewals, guaranties, and other agreements with respect thereto, pursuant to which the Borrower or Parent holds any Leased Real Property (including, without limitation, the Commercial Leases and Operating Leases).

     “Lender Parties” shall have the meaning ascribed to such term in Section 12.24 hereof.

     “Letter of Credit” means the “Letter of Credit” as such term is defined in the Master Letter of Credit Agreement.

     “Letter of Credit Obligations” means, at any time and without duplication, the sum of (a) the aggregate undrawn face amount of all Letters of Credit outstanding at such time plus (b) the aggregate amount of all drawings under Letters of Credit for which the Lender has not at such time been reimbursed (either by the Borrower or by a Revolving Loan made by the Lender).

     “Leverage Ratio” means, on any date of determination, the ratio of (a) the outstanding principal amount of the Term Loan plus all accrued but unpaid interest thereon to (b) Adjusted Leased Asset EBITDA. For purposes of this computation, Adjusted Leased Asset EBITDA will be adjusted to annualize actual results of the Acquisition until such time as a full twelve months of Acquisition results are included in the Leverage Ratio computation.

     “Liabilities” means any and all of each of the Borrower’s liabilities, obligations and Indebtedness to the Lender of any and every kind and nature, whether heretofore, now or hereafter owing, arising, due or payable and howsoever evidenced, created, incurred, acquired, or owing, whether primary, secondary, direct, indirect, contingent, absolute, fixed or otherwise (including, without limitation, payments of or for principal, interest, fees, costs, expenses, and/or indemnification, and obligations of performance) and whether arising or existing under written agreement, oral agreement, or by operation of law, including, without limitation, all of each Borrower’s Indebtedness, liabilities and obligations to the Lender under this Agreement (whether relating to any of the Loans or otherwise) or the Financing Agreements to which Borrower is a party, and any refinancings, substitutions, extensions, renewals, replacements and modifications for or of any or all of the foregoing.

     “Libor Base Rate” means a rate of interest equal to (a) the per annum rate of interest at which United States dollar deposits in an amount comparable to the amount of the relevant Libor Loan and for a period equal to the relevant Interest Period are offered in the London Interbank Eurodollar market at 11:00 A.M. (London time) two (2) Business Days prior to the commencement of such Libor Interest Period (or three (3) Business Days prior to the commencement of such Libor Interest Period if banks in London, England were not open and dealing in offshore United States dollars on such second preceding Business Day), as displayed

- 14 -

in the Bloomberg Financial Markets system (or other authoritative source selected by the Lender in its sole discretion) or, if the Bloomberg Financial Markets system or another authoritative source is not available, as the Libor Base Rate is otherwise determined by the Lender in its sole and absolute discretion, divided by (b) a number determined by subtracting from 1.00 the then stated maximum reserve percentage for determining reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency funding or liabilities as defined in Regulation D (or any successor category of liabilities under Regulation D), such rate to remain fixed for such Libor Interest Period. The Lender’s determination of the Libor Base Rate shall be conclusive, absent manifest error.

     “Libor Interest Period” means, with respect to a Libor Loan, a period of thirty (30) days commencing on a Business Day selected by the Borrower pursuant to this Agreement. Such Libor Interest Period shall end on (but exclude) the day which corresponds numerically to the date thirty (30) days thereafter; provided, however, that if a Libor Interest Period would otherwise end on a day that is not a Business Day, such Libor Interest Period shall end on the next succeeding Business Day; provided, further, that if such next succeeding Business Day occurs after the applicable period, such Libor Interest Period shall end on the immediately preceding Business Day.

     “Libor Loan” means a Loan which bears interest at a Libor Rate.

     “Libor Rate” means, with respect to a Libor Loan for the relevant Libor Interest Period, the sum of the Libor Base Rate applicable to that Libor Interest Period, plus the Applicable Libor Margin.

     “Licenses” shall have the meaning ascribed to such term in Section 10.2 hereof

     “Lien” means any lien, security interest, mortgage, pledge, hypothecation, collateral assignment, or other charge, encumbrance or preferential arrangement, including, without limitation, the retained security title of a conditional vendor or lessor.

     “Loan Account” shall have the meaning ascribed to such term in Section 2.5 hereof.

     “Loans” means, individually, either a Revolving Loan or the Term Loan, as applicable, and collectively, the Revolving Loans and the Term Loan, and any and all other advances made by the Lender to the Borrower pursuant to the terms of this Agreement or any other Financing Agreement.

     “Location” or “Locations” mean one or more of the healthcare or other facilities owned by the Borrower on the Property as identified on Schedule 1.1(c) hereto.

     “Manage” or “Management” means to generate, handle, manufacture, process, treat, store, use, re-use, refine, recycle, reclaim, blend or burn for energy recovery, incinerate, accumulate speculatively, transport, transfer, dispose of, release, threaten to release or abandon Hazardous Substances.

- 15 -

     “Management Agreements” means, collectively, those certain Management Agreements between Diversicare Management Services Co., as Manager, and each Borrower that is the owner or operator of a Facility, for the operation and management of the Facilities.

     “Master Lease” shall mean the “Master Lease” as such term is defined in the Acquisition Agreement.

     “Master Letter of Credit Agreement” shall have the meaning ascribed to such term in Section 2.1B hereto.

     “Material Adverse Change” or “Material Adverse Effect” means, with respect to any event, act, condition or occurrence of whatever nature (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), whether singly or in conjunction with any other event or events, act or acts, condition or conditions, occurrence or occurrences, whether or not related, any of the following: (a) a material adverse change in, or a material adverse effect upon, the financial condition, operations, business or properties of the Credit Parties, taken as a whole, (b) a material adverse change in, or a material adverse effect upon, the rights and remedies of the Lender under any Financing Agreement or the ability of the Credit Parties, taken as a whole, to perform their payment or other obligations under any Financing Agreement to which they are parties, (c) a material adverse change in, or a material adverse effect upon, the legality, validity or enforceability of any Financing Agreement, (d) a material adverse change in, or a material adverse effect upon, the existence, perfection or priority of any security interest granted in any Financing Agreement or the value of any material Collateral not resulting from any action or inaction by the Lender, (e) the termination of Borrower’s continued participation in a Medicare or Medicaid reimbursement program, which individually or in the aggregate, could reasonably be expected to result in a material adverse change or a material adverse effect described in the immediately preceding clauses (a) through (d) above, or (f) any other liability of the Credit Parties, or any one or more of them, in excess of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) in the aggregate as a result the final adjudication of one or more violations of any Healthcare Law which remains unpaid for a period of thirty (30) days, unless such liability is being contested or appealed by appropriate proceedings and Borrower has established appropriate reserves adequate for payment in the event such appeal or contest is ultimately unsuccessful, provided further that in the event such contest or appeal is ultimately unsuccessful, the Borrower shall pay the assessment no later than the deadline set forth by the applicable agency.

     “Maximum Facility” means (a) at any time on the Closing Date until February 10, 2008, an amount equal to Thirty Seven Million Five Hundred Thousand and No/100 Dollars ($37,500,000.00), and (b) at any time after February 10, 2008, an amount equal Thirty One Million Five Hundred Thousand and No/100 Dollars ($31,500,000.00).

     “Maximum Revolving Facility” means, (a) at any time on the Closing Date until February 10, 2008, an amount equal to Twenty One Million and No/100 Dollars ($21,000,000.00), and (b) at any time after February 10, 2008, an amount equal to Fifteen Million and No/100 Dollars ($15,000,000.00).

- 16 -

     “Medicaid Certification” means, with respect to Borrower, certification by the Medicaid program in each state in which the Borrower conducts business which is under or affected by the Medicaid Regulations that the Borrower complies with all of the applicable requirements for participation set forth in the Medicaid Regulations.

     “Medicaid Provider Agreement” means an agreement entered into with the Medicaid program in each state in which the Borrower conducts business which is under or affected by the Medicaid Regulations under which such state Medicaid program agrees to pay for covered services provided by the Borrower to Medicaid beneficiaries in accordance with the terms of such agreement and the Medicaid Regulations.

     “Medicaid Regulations” or “Medicaid” mean collectively all federal statutes (whether set forth in Title XIX of the Social Security Act or elsewhere) affecting the health insurance program established by Title XIX of the Social Security Act (42 U.S.C. §§ 1396, et seq.), together with all applicable provisions of all rules, regulations, manuals, final orders and administrative, reimbursement and other applicable guidelines of all governmental authorities, including HHS, CMS or the Office of the Inspector General of HHS, or any Person succeeding to the functions of any of the foregoing (whether or not having the force of law).

     “Medical Services” means medical and health care services provided to a Patient by any Borrower, including, but not limited to, medically necessary health care services provided to a Patient and performed by a Borrower which are covered by a policy of insurance issued by an Insurer, and including, but not limited to, physician services, nurse and therapist services, dental services, skilled nursing facility services, rehabilitation services, home health care services, behavioral health services, hospice services, medical equipment and pharmaceuticals.

     “Medicare Certification” means certification of CMS or a state agency or entity under contract with CMS that the Borrower complies with all of the applicable requirements for participation set forth in the Medicare Regulations.

     “Medicare Provider Agreement” means an agreement entered into with CMS or a state agency under contract with CMS under which CMS agrees to pay for covered services provided by the Borrower to Medicare beneficiaries in accordance with the terms of such agreement and the Medicare Regulations.

     “Medicare Regulations” or “Medicare” mean collectively all federal statutes (whether set forth in Title XVIII of the Social Security Act or elsewhere) affecting the health insurance program for the aged and disabled established by Title XVIII of the Social Security Act (42 U.S.C. § 1395, et seq.), together with all applicable provisions of all rules, regulations, manuals, final orders and administrative, reimbursement and other applicable guidelines of all governmental authorities, including HHS, CMS or the Office of the Inspector General of HHS, or any Person succeeding to the functions of any of the foregoing (whether or not having the force of law).

     “Morris Memorial” shall have the meaning ascribed to such term in Section 9.4 hereof.

     “Multiemployer Plan” shall have the meaning ascribed to such term in Section 7.19 hereof.

- 17 -

     “Negative Pledge Assets” means those certain assets set forth on Schedule 1.1.(d) hereto.

     “Net Capital Expenditures” means (a) Capital Expenditures minus (b) any financing used in connection with such expenditures.

     “Net Cash Proceeds” means, with respect to any transaction or event, an amount equal to the cash proceeds received by Borrower from or in respect of such transaction or event (including cash proceeds subsequently received (as and when received) in respect of any non-cash consideration of such transaction initially received), less: (a) any out-of-pocket expenses paid to a Person that are reasonably incurred by Borrower in connection therewith and (b) in the case of an asset disposition, reasonable selling expenses (including reasonable broker’s fees or commissions, reasonable legal fees, transfer and similar taxes), the amount of any Indebtedness secured by a Lien on the related asset and discharged from the proceeds of such asset disposition, any taxes paid or reasonably estimated by the Borrower to be payable by such Person in respect of such asset disposition (provided, that if the actual amount of taxes paid is less than the estimated amount, the difference shall immediately constitute Net Cash Proceeds), and amounts provided as a reserve, if any, in accordance with GAAP, against liabilities under any indemnification obligations or purchase price adjustment associated with such asset disposition (provided that, to the extent and at the time such amounts are released from such reserve, such amounts shall constitute Net Cash Proceeds).

     “Notes” means, individually, either the Revolving Credit Note or the Term Loan Note, as applicable, and collectively, the Revolving Credit Note and the Term Loan Note.

     “OFAC Lists” means, collectively, the Specially Designated Nationals and Blocked Persons List maintained by the Office of Foreign Asset Control, the Department of the Treasury pursuant to Executive Order No. 13224, 66 Fed. Reg. 49079 (Sept. 25, 2001) and/or any other list of terrorists or terrorist organizations maintained pursuant to any of the rules and regulations of or by the Office of Foreign Asset Control, the Department of the Treasury or pursuant to any other applicable Executive Orders.

     “Omega” means Omega Healthcare Investors, Inc., a Maryland corporation.

     “Omega Debt Documents” means, collectively, the Omega Master Lease Agreement, the Omega Senior Leases and the security agreements, pledges, documents, instruments and agreements executed in connection therewith, in each case as the same may be amended or modified in conformity with Section 9.16 of this Agreement.

     “Omega-Florida Intercreditor Agreement” means that certain Subordination and Intercreditor Agreement of even date herewith by and among Emerald-Cedar Hills, Inc., a Florida corporation, Emerald-Golfview, Inc., a Florida corporation, Emerald Southern Pines, Inc., a Florida corporation, Florida Lessor-Emerald, Inc., a Florida corporation, and their respective permitted successors and assigns, each in its capacity as a lessor under the applicable Omega Senior Leases, the Borrower, Omega and Lender.

     “Omega Intercreditor Agreements” means, collectively, the Omega-Sterling Intercreditor Agreement and the Omega-Florida Intercreditor Agreement.

- 18 -

     “Omega Letter of Credit” means that certain letter of credit issued by the Lender to Omega or its designee on terms and conditions satisfactory to the Lender in its sole and absolute discretion.

     “Omega Master Lease Agreement” means that certain Consolidated, Amended and Restated Master Lease dated as of November 8, 2000, by and between Diversicare Leasing Corp., a Tennessee corporation (“DLC”) and Sterling Acquisition Corp., a Kentucky corporation, as amended by that certain (a) First Amendment to Consolidated, Amended and Restated Master Lease dated as of September 30, 2001, by and between DLC and Omega, (b) Second Amendment to Consolidated, Amended and Restated Master Lease dated as of June 15, 2005, by and between DLC and Omega, (c) Third Amendment to Consolidated, Amended and Restated Master Lease dated as of October 20, 2006, by and between DLC and Omega, but effective as of October 1, 2006, (d) Fourth Amendment to Consolidated, Amended and Restated Master Lease dated as of April 1, 2007, by and between DLC and Omega and (e) that certain Fifth Amendment to Consolidated, Amended and Restated Master Lease dated as of August 10, 2007, by and between DLC and Omega.

     “Omega Security Interests” means the security interests of Omega and the Omega Senior Lessors in certain assets of the Borrower, the rights pertaining to and priorities of which are as specified in the Omega Intercreditor Agreements.

     “Omega Senior Leases” means the Commercial Leases described on Schedule 1.1(e) attached hereto.

     “Omega Senior Lessors” means, collectively, Sterling Acquisition Corp., a Kentucky corporation, Emerald-Cedar Hills, Inc., a Florida corporation, Emerald-Golfview, Inc., a Florida corporation, Emerald Southern Pines, Inc., a Florida corporation, Florida Lessor-Emerald, Inc., a Florida corporation, and their respective permitted successors and assigns, each in its capacity as a lessor under the Omega Senior Leases.

     “Omega-Sterling Increditor Agreement” means that certain Subordination and Intercreditor Agreement of even date herewith by and among the Borrower, Lender and Sterling Acquisition Corp., a Kentucky corporation, in its capacity as a lessor under the applicable Omega Senior Leases.

     “Operating Lease” means the collective reference to all Commercial Leases between the Borrower and the Operators, respectively, pursuant to which the Operators lease and operate each Location.

     “Operators” or “Operator” means the respective operators of the Locations, all of which are licensed under all applicable Healthcare Laws.

     “Parent” shall have the meaning ascribed to such term in the Recitals hereof.

     “Patient” means any Person receiving Medical Services from the Operators and all Persons legally liable to pay the Operators for such Medical Services other than Insurers or Governmental Authorities.

- 19 -

     “Patriot Act” shall have the meaning ascribed to such term in Section 8.16 hereof.

     “PBGC” shall have the meaning ascribed to such term in Section 7.19 hereof.

     “Permitted Liens” shall have the meaning ascribed to such term in Section 9.1 hereof.

     “Person” means any individual, sole proprietorship, partnership, joint venture, trust, limited liability company, unincorporated organization, association, corporation, institution, entity, party, or government (whether national, federal, state, provincial, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof).

     “Plan” shall have the meaning ascribed to such term in Section 7.19 hereof.

     “Pledge Agreements” means that certain (a) Pledge Agreement of even date herewith made by Parent in favor of the Lender (b) Pledge Agreement of even date herewith made by Diversicare Management Services Co., a Tennessee corporation, in favor of the Lender, (c) Pledge Agreement of even date herewith made by Advocat Finance, Inc., a Delaware corporation, in favor of the Lender, (d) Pledge Agreement of even date herewith made by Diversicare Leasing Corp., a Tennessee corporation, in favor of the Lender, (e) Pledge Agreement of even date herewith made by Diversicare Assisted Living Services, Inc., a Tennessee corporation, in favor of the Lender and (f) Pledge Agreement of even date herewith made by Diversicare Assisted Living Services NC, LLC, a Tennessee limited liability company, in favor of the Lender, each of the foregoing in form and substance reasonable satisfactory to the Lender, as the same may be modified, supplemented or amended from time to time in accordance with the terms hereof.

     “Pledgor” means the “Pledgor” as such term is respectively defined in each Pledge Agreement.

     “Possession Date” means the “Possession Date” as such term is defined in the Capmark Intercreditor Agreement.

     “Preferred Stock” means the 5,000 shares of Series C Preferred Stock of Parent issued to Omega pursuant to that certain Restructuring Stock Issuance and Subscription Agreement dated October 20, 2006.

     “Preferred Stock Certificate of Designation” means that certain Certificate of Designation of the Preferred Stock dated October 20, 2006, as in effect as of the date hereof.

     “Private Insurance/Managed Care Account” means Accounts owing from insurance companies or managed care companies to a Person for services provided or rendered by the Borrower to a Person where the Person has assigned the right to the Account to the Borrower.

     “Private Insurance/Managed Care Contracts” means contracts and agreements between the Borrower (or an Affiliate thereof) and insurance companies and/or managed care companies pursuant to which the Borrower has the right to make a claim for and receive payment for

- 20 -

services rendered or furnished to a Person that is an intended beneficiary of such contract or agreement.

     “Private Pay Accounts” means Accounts owing directly from an individual for services provided or rendered by the Borrower to such individual.

     “Prohibited Transaction” shall have the meaning ascribed to such term in ERISA.

     “Property” means any and all real property owned, leased, sub-leased or used at any time by Borrower.

     “Rate Option” means the Libor Rate or the Base Rate.

     “Release” means any actual or threatened spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing of Hazardous Substances into the environment, as “environment” is defined in CERCLA.

     “Released Parties” shall have the meaning ascribed to such term in Section 12.24 hereof.

     “Releasing Parties” shall have the meaning ascribed to such term in Section 12.24 hereof.

     “Required Dividends and Redemption Amounts” means (i) any amounts required to be paid as dividends on, or for the redemption (upon the option of the holder or, with Lender’s prior consent, the option of Parent) of, the 5,000 shares of Series C Preferred Stock of Parent issued to Omega pursuant to the Restructuring Stock Issuance and Subscription Agreement and the Preferred Stock Certificate of Designation and (ii) the amounts required to be included in Base Rent paid under the Omega Master Lease Agreement representing payments for the replacement of preferred stock previously owned by Omega with said Series C Preferred Stock pursuant to said Restructuring Stock Issuance and Subscription Agreement, which amounts are not included in rent expense in the income statement of the Credit Parties.

     “Respond” or “Response” means any action taken pursuant to Environmental Laws to correct, remove, remediate, cleanup, prevent, mitigate, monitor, evaluate, investigate or assess the Release of a Hazardous Substance.

     “Restricted Agreements” means, collectively, each Management Agreement, Acquisition Document, Capmark Debt Document, Omega Debt Document, Trust Loan Document, Commercial Lease, agreement, document or instrument entered into in connection with (directly or indirectly) the Cash Management Program, the Restructuring Stock Issuance and Subscription Agreement, the Preferred Stock Certificate of Designation, any other agreement, document or instrument between or among the Credit Parties and any agreement, document or instrument pertaining to (directly or indirectly) any of the foregoing.

     “Restrictions” shall have the meaning ascribed to such term in Section 10.3 hereof.

     “Restructuring Stock Issuance and Subscription Agreement” means that certain Restructuring Stock Issuance and Subscription Agreement dated October 20, 2006, by and between Parent and Omega, as in effect as of the date hereof.

- 21 -

     “Revolving Credit Note” shall have the meaning ascribed to such term in Section 2.1 hereof.

     “Revolving Loan Borrower” means, individually and collectively, those certain Persons set forth on Schedule 1 hereto.

     “Revolving Loan Commitment” shall have the meaning ascribed to such term in Section 2.1 hereof.

     “Revolving Loans” shall have the meaning ascribed to such term in Section 2.1 hereof.

     “Rose Terrace Acquired Assets” means those certain assets acquired in the Rose Terrace Acquisition, which shall be owned by Omega after the Rose Terrace Acquisition.

     “Rose Terrace Acquisition” means the acquisition of the Rose Terrace Assets for a purchase price of Eight Hundred Fifty Thousand and No/100 Dollars ($850,000.00).

     “Rose Terrace Lease” means the Borrower’s lease of the Rose Terrace Acquired Assets from Omega pursuant to an amendment to the Omega Master Lease Agreement.

     “Sale Order” means that certain final order of the Bankruptcy Court pursuant to which the Transactions are indefeasibly approved.

     “Schedule of Accounts” means an aged trial balance and reconciliation to the Borrowing Base in form and substance reasonably satisfactory to the Lender (which may at the Lender’s discretion include copies of original invoices) listing the Accounts of the Borrower, certified on behalf of the Borrower by a Duly Authorized Officer, to be delivered on a monthly basis to the Lender by the Borrower pursuant to Section 8.1(d) hereof.

     “Service Fee” shall have the meaning ascribed to such term in Section 8.9 hereof.

     “SMS Parties” shall mean the “SMS Parties” as such term is defined in the Acquisition Agreement.

     “Solvent” means, with respect to any Person on a particular date, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including contingent liabilities, of such Person; (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured; (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay as such debts and liabilities mature; and (d) such Person is not engaged in a business or transaction, and is not about to engage in a business or transaction, for which such Person’s property would constitute an unreasonably small capital. The amount of contingent liabilities (such as litigation, guaranties and pension plan liabilities) at any time shall be computed as the amount that, in light of all the facts and circumstances existing at the time, represents the amount that can be reasonably be expected to become an actual or matured liability, but shall not include incurred but not reported professional liability claims.

- 22 -

     “Stated Maturity Date” means (i) with respect to the Revolving Loans, August 10, 2010 and (ii) with respect to the Term Loan, August 10, 2012.

     “Stock” shall mean all certificated and uncertificated shares, options, warrants, general or limited partnership interests, membership interests or units, participation or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company or equivalent entity whether voting or nonvoting, including common stock, preferred stock, or any other “equity security” (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934).

     “Subleases” shall mean the “Subleases” as such term is defined in the Acquisition Agreement.

     “Subordinated Debt” means any and all Indebtedness owing by the Borrower to a third party that has been subordinated to the Liabilities in writing on terms and conditions satisfactory to the Lender in its sole and absolute discretion.

     “Subordination Agreement” means, collectively, those certain subordination agreements that have been and may in the future be entered into from time to time by holders of Subordinated Debt and the Lender, each in form and substance satisfactory to the Lender in its sole and absolute discretion, each as the same may be modified, supplemented, amended or restated from time to time.

     “Subsidiary” means, with respect to any Person, (i) any corporation of which an aggregate of more than fifty percent (50%) of the outstanding Stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, Stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned legally or beneficially by such Person and/or one or more Subsidiaries of such Person, or with respect to which any such Person has the right to vote or designate the vote of fifty percent (50%) or more of such Stock whether by proxy, agreement, operation of law or otherwise, and (ii) any partnership or limited liability company in which such Person or one or more Subsidiaries of such Person has an equity interest (whether in the form of voting or participation in profits or capital contribution) of more than fifty percent (50%) or of which any such Person is a general partner, managing member or manager or may exercise the powers of a general partner, managing member or manager.

     “Tax Code” shall have the meaning ascribed to such term in Section 7.19 hereof.

     “Taxes” shall have the meaning ascribed to such term in Section 3.3 hereof.

     “Tenant” means any tenant, resident or occupant under any Lease.

     “Term Loan” shall have the meaning ascribed to such term in Section 2.2 hereof.

     “Term Loan Borrower” means, individually and collectively, those certain Persons set forth on Schedule 1.1(f) hereto.

- 23 -

     “Term Loan Commitment” shall have the meaning ascribed to such term in Section 2.2 hereof.

     “Term Loan Note” shall have the meaning ascribed to such term in Section 2.2 hereof.

     “Transactions” shall have the meaning set forth in the Recitals hereto.

     “Transfer” shall have the meaning set forth in the Recitals hereto.

     “TRICARE” means the medical program for active duty members, qualified family members, CHAMPUS eligible retirees and their family members and survivors, of all uniformed services.

     “Trust Collection Services Agreement” means that certain Collection Services Agreement dated August 10, 2007, by and between Diversicare Management Services Co., a Tennessee corporation, and the Trustee.

     “Trustee” means Bridge Associates, LLC, as trustee for the SMSA Creditors Trust.

     “Trust Loan” means the “Loan” as such term is defined in the Trust Loan Agreement.

     “Trust Loan Agreement” means that certain Loan and Security Agreement dated August 10, 2007, by and among Diversicare Leasing Corp., a Tennessee corporation, and the Trustee.

     “Trust Loan Documents” means any and all agreements, instruments, certificates and documents, including, without limitation, security agreements, loan agreements, notes, guarantees, keep well agreements, landlord waivers, mortgages, deeds of trust, subordination agreements, intercreditor agreements, pledges, powers of attorney, consents, assignments, collateral assignments, interest rate protection agreements, reimbursement agreements, contracts, notices, leases, collateral assignments of key man life insurance policies, financing statements and all other written matter (including, without limitation, the Trust Loan Agreement, Trust Note and Trust Collection Services Agreement), in each case evidencing, securing or relating to the Trust Loan or any Indebtedness pertaining thereto, whether heretofore, now, or hereafter executed by or on behalf of the Trustee, any Affiliate, or any other Person, and delivered to or in favor of the Borrower, together with all agreements and documents referred to therein or contemplated thereby, as each may be amended, modified or supplemented from time to time.

     “Trust Note” means the “Note” as such term is defined in the Trust Loan Agreement.

     “Undrawn Revolving Loan Amount” means, as of any date of determination, an amount equal to (1) the Revolving Loan Commitments minus (2) the aggregate principal amount of the outstanding Revolving Loans as of such date of determination.

     “Uniform Commercial Code” or “UCC” or “Code” means the Uniform Commercial Code as the same may, from to time, be in effect in the State of Illinois; provided, however, that if, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of, or remedies with respect to, Lender’s Lien on the Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of Illinois, the term “Uniform

- 24 -

Commercial Code” or “UCC” or “Code” shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions of this Agreement or the other Financing Agreements relating to such attachment, perfection, priority or remedies and for purposes of definitions related to such provisions; provided further that, to the extent that the Uniform Commercial Code of a particular jurisdiction is used to define a term herein or in any Financing Agreement and such term is defined differently in different Articles or Divisions of such Uniform Commercial Code, then the definition of such term contained in Article or Division 9 of such Uniform Commercial Code shall control.

          1.2 Interpretation.

                         (1) All accounting terms used in this Agreement or the other Financing Agreements shall have, unless otherwise specifically provided herein or therein, the meaning customarily given such term in accordance with GAAP, and all financial computations thereunder shall be computed, unless otherwise specifically provided therein, in accordance with GAAP consistently applied; provided, however, that all financial covenants and calculations in the Financing Agreements shall be made in accordance with GAAP as in effect on the Closing Date unless Borrower and Lender shall otherwise specifically agree in writing. That certain items or computations are explicitly modified by the phrase “in accordance with GAAP” shall in no way be construed to limit the foregoing. Unless otherwise specified, references in this Agreement or any of the attachments hereto or appendices hereof to a Section, subsection or clause refer to such Section, subsection or clause as contained in this Agreement. The words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole, including all annexes, exhibits and schedules attached hereto, as the same may from time to time be amended, restated, modified or supplemented, and not to any particular section, subsection or clause contained in this Agreement or any such annex, exhibit or schedule.

                         (2) Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and the plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, feminine and neuter genders. The words “including”, “includes” and “include” shall be deemed to be followed by the words “without limitation”; the word “or” is not exclusive; references to Persons include their respective successors and assigns (to the extent and only to the extent permitted by the Financing Agreements) or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons; and all references to statutes and related regulations shall include any amendments of the same and any successor statutes and regulations. Whenever any provision in any Financing Agreement refers to the knowledge (or an analogous phrase) of Borrower, except as otherwise expressly provided for herein, such words are intended to signify that a Duly Authorized Officer of Borrower has actual knowledge or awareness of a particular fact or circumstance or that a prudent individual in the position of such Duly Authorized Officer of Borrower, would reasonably be expected to have known or been aware of such fact or circumstance in the course of performing his or her duties.

     2. COMMITMENTS; INTEREST; FEES.

          2.1 Revolving Loans. On the terms and subject to the conditions set forth in this Agreement, and provided there does not then exist a Default or an Event of Default, the

- 25 -

          Lender agrees to make revolving loans (such loans are collectively called “Revolving Loans” and individually called a “Revolving Loan”) to the Revolving Loan Borrower from time to time on and after the Closing Date and prior to the Credit Termination Date, so long as the aggregate amount of such advances outstanding at any time to the Revolving Loan Borrower do not exceed the lesser of: (i) the Maximum Revolving Facility at such time minus any reserves established by the Lender pursuant to Section 2.1(b) hereof and (ii) the Borrowing Base at such time minus any reserves established by the Lender pursuant to Section 2.1(b) hereof. The Revolving Loan Borrower shall have the right to repay and reborrow any of the Revolving Loans without premium or penalty (subject to Section 3.4 hereof); provided, however, that it shall be a condition precedent to any reborrowing that as of the date of any reborrowing (any such date herein called a “Reborrowing Date”) all of the conditions to borrowing set forth in Section 5.1 of this Agreement shall be satisfied and all representations and warranties made herein shall be true and correct in all material respects as of such Reborrowing Date. The Lender’s commitment hereunder to make Revolving Loans is hereinafter called the “Revolving Loan Commitment.” The payment obligations of the Revolving Loan Borrower to the Lender hereunder are and shall be joint and several as provided in Section 12.21 hereof. For the avoidance of doubt, on February ___, 2008 (1) the Maximum Revolving Facility shall be reduced to Fifteen Million and No/100 Dollars ($15,000,000.00) and (2) the outstanding principal amount of all Revolving Loans in excess of $15,000,000.00 shall be immediately due and payable.

                         (1) Each advance to the Revolving Loan Borrower under this Section 2.1 shall be in integral multiples of Ten Thousand Dollars ($10,000) and shall, on the day of such advance, be deposited, in immediately available funds, in the Revolving Loan Borrower’s demand deposit account with the Lender, or in such other account as the Borrower Agent may, from time to time, designate in writing with the Lender’s approval.

                         (2) The Borrower acknowledges and agrees that the Lender may from time to time (i) upon five (5) calendar days notice, increase or decrease the advance rates with respect to Eligible Accounts in the Lender’s reasonable discretion (provided, prior to a Default, the Lender will not reduce any such advance rate by more than ten percent (10%), but after the occurrence and during the period of any Default, the Lender may reduce any such advance rate in any amount in its reasonable discretion), and/or (ii) establish reserves against the Borrowing Base, the Eligible Accounts in the Lender’s reasonable discretion.

                         (3) The Revolving Loans shall be evidenced by a promissory note (hereinafter, as the same may be amended, modified or supplemented from time to time, and together with any renewals or extensions thereof or exchanges or substitutions therefor, called the “Revolving Credit Note”), duly executed and delivered by the Revolving Loan Borrower, substantially in the form set forth in Exhibit A attached hereto, with appropriate insertions, dated the Closing Date, payable to the order of the Lender in the principal amount of the Maximum Revolving Facility. THE PROVISIONS OF THE REVOLVING CREDIT NOTE NOTWITHSTANDING, THE REVOLVING LOANS THEN OUTSTANDING SHALL BECOME IMMEDIATELY DUE AND PAYABLE UPON THE EARLIEST TO OCCUR OF (X) STATED MATURITY DATE; (Y) THE ACCELERATION OF THE LIABILITIES PURSUANT TO SECTION 11.2 HEREOF; AND (Z) TERMINATION OF THIS AGREEMENT (WHETHER BY PREPAYMENT OR OTHERWISE) IN ACCORDANCE WITH ITS TERMS.

- 26 -

                         (4) Accrued interest on the Revolving Loans shall be due and payable and shall be made by the Revolving Loan Borrower to the Lender in accordance with Section 2.7 hereof. Monthly interest payments on the Revolving Loans shall be computed using the interest rate then in effect and based on the outstanding principal balance of the Revolving Loans. Upon maturity, the outstanding principal balance of the Revolving Loans shall be immediately due and payable, together with any remaining accrued interest thereon.

          2.1(B) Letters of Credit.

                    Subject to the terms and conditions of this Agreement and upon (i) the execution by Parent, the Borrower and the Lender of a Master Letter of Credit Agreement in form and substance acceptable to the Lender (together with all amendments, modifications and restatements thereof, the “Master Letter of Credit Agreement”), and (ii) the execution and delivery by the Borrower, and the acceptance by the Lender, in its sole and absolute discretion, of a Letter of Credit Application, the Lender agrees to issue for the account of the Borrower such Letters of Credit in the standard form of the Lender and otherwise in form and substance acceptable to the Lender, from time to time during the term of this Agreement, provided that the Letter of Credit Obligations may not at any time exceed, in the aggregate at any time, either (A) an undrawn face amount for Letters of Credit at any time outstanding equal to the Borrowing Base (minus any reserves established by the Lender pursuant to Section 2.1(c) hereof) minus the outstanding aggregate principal amount of the Revolving Loans (minus all Letter of Credit Obligations), or (B) Ten Million and No/100 Dollars ($10,000,000.00); provided further, the expiration date on any Letter of Credit will not be more than one (1) year from the date of issuance for such Letter of Credit and not later than the date that is five (5) Business Days prior to the Credit Termination Date. The amount of any payments made by the Lender with respect to draws made by a beneficiary under a Letter of Credit for which the Borrower has failed to reimburse the Lender upon the earlier of (1) the Lender’s demand for repayment, or (2) five (5) days from the date of such payment to such beneficiary by the Lender, shall be deemed to have been converted to a Revolving Loan as of the date such payment was made by the Lender to such beneficiary. Upon the occurrence of an Event of a Default and at the option of the Lender, all Letter of Credit Obligations shall be converted to Revolving Loans consisting of Base Rate Loans, all without demand, presentment, protest or notice of any kind, all of which are hereby waived by the Borrower. To the extent the provisions of the Master Letter of Credit Agreement differ from, or are inconsistent with, the terms of this Agreement, the provisions of this Agreement shall govern.

                    The Lender will, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment by the beneficiary under any Letter of Credit issued by the Lender to ascertain that the same appear on their face to be in conformity with the terms and conditions of such Letter of Credit. If, after examination, the Lender has determined that a demand for payment under such Letter of Credit does not conform to the terms and conditions of such Letter of Credit, then the Lender will, as soon as reasonably practicable, give notice to the beneficiary to the effect that negotiation was not in accordance with the terms and conditions of such Letter of Credit, stating the reasons therefor and that the relevant document is being held at the disposal of such beneficiary or is being returned to such beneficiary, as the Lender may elect. The beneficiary may attempt to correct any such nonconforming demand for payment under such Letter of Credit if, and to the extent that, such

- 27 -

beneficiary is entitled (without regard to the provisions of this sentence) and able to do so. If the Lender determines that a demand for payment under such Letter of Credit conforms to the terms and conditions of such Letter of Credit, then the Lender will make payment to the beneficiary in accordance with the terms of such Letter of Credit. The Lender has the right to require the beneficiary to surrender such Letter of Credit to Lender on the stated expiration date of such Letter of Credit.

                    As between the Borrower and the Lender, the Borrower assumes all risks of the acts and omissions of, or misuse of Letters of Credit by, the respective beneficiaries of the Letters of Credit. In furtherance and not in limitation of the foregoing, subject to the provisions of the Letter of Credit applications, the Lender will not be responsible: (i) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for or issuance of the Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; provided, however, that the Lender will examine such documents to insure conformity thereof with any demand for payment; (ii) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) for failure of the beneficiary of a Letter of Credit to comply fully with conditions required in order to draw upon such Letter of Credit; (iv) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex, facsimile or otherwise, except to the extent arising out of the Lender’s willful misconduct; (v) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit or of the proceeds thereof, except to the extent arising out of the Lender’s gross negligence or willful misconduct; (vi) for the misapplication by the beneficiary of a Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (vii) for any consequences arising from causes beyond the control of the Lender, including, without limitation, any acts by governmental authorities. In furtherance of the foregoing, and without limiting the generality thereof, the Borrower agrees to and shall indemnify and hold harmless the Lender (and each of its directors, stockholders, officers, employees, agents, and affiliates) from and against each and every claim, loss, cost, expense and liability which might arise against the Lender (or any such other Person) arising out of or in connection with any Letter of Credit or otherwise by reason of any transfer, sale, delivery, surrender or endorsement of any bill of lading, warehouse receipt or other document held by the Lender or for its account, except solely to the extent arising out of the Lender’s gross negligence or willful misconduct. None of the above affects, impairs or prevents the vesting of any of the Lender’s rights or powers under this Agreement or the Borrower’s obligation to make reimbursement.

          2.2 Term Loan. On the terms and subject to the conditions set forth in this Agreement, and provided there does not then exist a Default or an Event of Default, the Lender shall, immediately following the execution of this Agreement by the Borrower and the Lender, extend in one (1) advance a term loan (the “Term Loan”) to the Term Loan Borrower in an aggregate principal amount equal to Sixteen Million Five Hundred Thousand and No/100 Dollars ($16,500,000.00). The principal balance of the Term Loan shall be amortized over ten (10) years and shall be repaid in consecutive equal monthly installments of One Hundred Thirty Seven Thousand Five Hundred and No/100 Dollars ($137,500.00), together with interest accrued thereon, each payable on the first day of each calendar month, commencing on the first day of

- 28 -

the first month immediately following the Closing Date, and otherwise in accordance with Section 2.7 hereof, with a final installment of the aggregate unpaid principal balance of the Term Loan, together with interest accrued thereon, payable on the Credit Termination Date. Monthly interest payments on the Term Loan shall be computed using the interest rate then in effect and based on the outstanding principal balance of the Term Loan. Any amounts paid or applied to the principal balance of the Term Loan (whether by mandatory prepayment or otherwise) may not be reborrowed hereunder. The Lender’s commitment hereunder to make the Term Loan is hereinafter called the “Term Loan Commitment.” Upon maturity, the outstanding principal balance of the Term Loan shall be immediately due and payable, together with any remaining accrued interest thereon, to Lender by the Term Loan Borrower. The payment obligations of the Term Loan Borrower to the Lender hereunder are and shall be joint and several as provided in Section 12.21 hereof.

          The Term Loan shall be evidenced by a promissory note (hereinafter, as the same may be amended, modified or supplemented from time to time, and together with any renewals or extensions thereof or exchanges or substitutions therefor, called the “Term Loan Note”), duly executed and delivered by the Term Loan Borrower, substantially in the form set forth in Exhibit B attached hereto, with appropriate insertions, dated the Closing Date, payable to the order of the Lender in the principal amount of Sixteen Million Five Hundred Thousand and No/100 Dollars ($16,500,000.00). THE PROVISIONS OF THE TERM LOAN NOTE NOTWITHSTANDING, THE TERM LOAN SHALL BECOME IMMEDIATELY DUE AND PAYABLE UPON THE EARLIEST TO OCCUR OF (X) THE STATED MATURITY DATE; (Y) THE ACCELERATION OF THE LIABILITIES PURSUANT TO SECTION 11.2 HEREOF; AND (Z) THE TERMINATION OF THIS AGREEMENT (WHETHER BY PREPAYMENT OR OTHERWISE) IN ACCORDANCE WITH ITS TERMS.

          2.3 Reduction of Revolving Loan Commitment by the Revolving Loan Borrower. The Revolving Loan Borrower may from time to time, on at least five (5) Business Days’ prior written notice received by the Lender, permanently reduce the amount of the Revolving Loan Commitment but only upon first repaying the amount, if any, by which the aggregate unpaid principal amount of the Revolving Credit Note exceeds the then reduced amount of the Revolving Loan Commitment.

          2.4 Principal Balance of Liabilities Not to Exceed the Maximum Facility. The sum of the aggregate outstanding principal balance of the Loans to the Borrower made under this Agreement shall not, at any time, exceed the Maximum Facility. The Borrower agrees that if at any time any such excess shall arise, the Borrower shall immediately pay to the Lender such amount as may be necessary to eliminate such excess.

          2.5 The Borrower’s Loan Account. The Lender shall maintain a loan account (the “Loan Account”) on its books for the Borrower in which shall be recorded (a) all Loans made by the Lender to the Borrower pursuant to this Agreement, (b) all payments made by the Borrower on all such Loans, and (c) all other appropriate debits and credits as provided in this Agreement, including, without limitation, all fees, charges, expenses and interest. All entries in the Loan Account shall be made in accordance with the Lender’s customary accounting practices as in effect from time to time. The Borrower promises to pay the amount reflected as owing by Borrower under its Loan Account and all of its other obligations hereunder as such amounts

- 29 -

become due or are declared due pursuant to the terms of this Agreement. Notwithstanding the foregoing, the failure so to record any such amount or any error in so recording any such amount shall not limit or otherwise affect the Borrower’s obligations under this Agreement or under any of the Notes to repay the outstanding principal amount of any of the Loans together with all interest accruing thereon.

          2.6 Statements. All Loans to the Borrower, and all other debits and credits provided for in this Agreement, shall be evidenced by entries made by the Lender in its internal data control systems showing the date, amount and reason for each such debit or credit. Until such time as the Lender shall have rendered to the Borrower Agent written statements of account as provided herein, the balance in the Loan Account, as set forth on the Lender’s most recent computer printout, shall be rebuttably presumptive evidence of the amounts due and owing the Lender by the Borrower. From time to time the Lender shall render to the Borrower Agent a statement setting forth the balance of the Loan Account, including principal, interest, expenses and fees. Each such statement shall be subject to subsequent adjustment by the Lender but shall, absent manifest errors or omissions, be presumed correct and binding upon the Borrower.

          2.7 Interest. The Borrower agrees to pay to the Lender interest on the daily outstanding principal balance of (i) the Base Rate Loans at the Base Rate from time to time in effect, and (ii) the Libor Loans at the Libor Rate; provided, however, that immediately following the occurrence and during the continuance of an Event of Default, and notwithstanding any other provisions of this Agreement to the contrary, the Borrower agrees to pay to the Lender interest on the outstanding principal balance of the Loans at the per annum rate of three percent (3%) plus the rate otherwise payable hereunder with respect to such Loans (the “Default Rate”).

                         (1) Accrued interest on each Base Rate Loan shall be payable on the first calendar day of each month and at maturity, commencing with the first day of the calendar month after the initial disbursement of such loan. Accrued interest on each Libor Loan shall be payable on the last day of the Libor Interest Period relating to such Libor Loan and at maturity, commencing with the first such last day of the initial Libor Interest Period. Monthly interest payments on the Loans shall be computed using the interest rate then in effect and based on the outstanding principal balance of the Loans. Upon maturity, the outstanding principal balance of all Loans shall be immediately due and payable, together with any remaining accrued interest thereon. Interest shall be computed on the basis of a year of three hundred sixty (360) days for the actual number of days elapsed. If any payment of principal of, or interest on, any of the Notes falls due on a day that is not a Business Day, then such due date shall be extended to the next following Business Day, and additional interest shall accrue and be payable for the period of such extension.

          2.8 Method for Making Payments. All payments that the Borrower is required to make to the Lender under this Agreement or under any of the other Financing Agreements shall be made in immediately available funds not later than 1:00 p.m. (Chicago time) on the date of payment at the Lender’s office at 135 South LaSalle Street, Chicago, Illinois 60603, or at such other place as the Lender directs in writing from time to time, or, in the Lender’s sole and absolute discretion after the occurrence and during the continuance of any Default, by appropriate debits to the Loan Account. Borrower hereby irrevocably authorizes and instructs Lender after the occurrence and during the continuance of any Default to direct debit any of

- 30 -

Borrower’s operating accounts with Lender for all principal, interest, fees and expenses due hereunder with respect to the Loans and the other Liabilities. Payments made after 1:00 p.m. (Chicago time) shall be deemed to have been made on the next succeeding Business Day.

          2.9 Term of this Agreement. The Borrower shall have the right to terminate this Agreement following prepayment of all of the Liabilities as provided under Section 2.10 hereof; provided, however, that (a) all of the Lender’s rights and remedies under this Agreement, and (b) the Liens created under Section 6.1 hereof and under any of the other Financing Agreements, shall survive such termination until all of the Liabilities under this Agreement and the other Financing Agreements have been indefeasibly paid in full. In addition, the Liabilities may be accelerated as set forth in Section 11.2 hereof. Upon the effective date of termination, all of the Liabilities shall become immediately due and payable without notice or demand. Notwithstanding any termination, until all of the Liabilities hereunder shall have been indefeasibly paid and satisfied, the Lender shall be entitled to retain its Liens in and to all existing and future Collateral and the Borrower shall continue to remit collections of Accounts of the Borrower and proceeds as provided herein.

          2.10 Optional Prepayment of Loans.

                         (1) Borrower may, at its option, permanently prepay, without penalty or premium (other than as specified in Section 3.4 hereof), at any time during the term of this Agreement all or any portion of any of the Revolving Loans.

                         (2) Borrower may, at its option, permanently prepay, without penalty or premium (other than as specified in Section 3.4 hereof) at any time during the term of this Agreement all or any portion of the Term Loan, subject to the following conditions: (a) not less than three (3) days prior to the date upon which Borrower desires to make such prepayment, Borrower Agent shall deliver to the Lender a written notice of its intention to prepay all or such portion of the Term Loan which notice shall be irrevocable and state the amount of the prepayment and the prepayment date, and (b) the amount of any such prepayment will be in an amount of not less than Two Hundred Fifty Thousand Dollars ($250,000), and (c) Borrower shall, on a joint and several basis, pay to the Lender, concurrently with such payment, any amounts charged in accordance with Section 3.4 hereof. Prepayments of the Term Loan shall be applied against installments payable under the Term Note in the inverse order of maturity.

          2.11 Limitation on Charges. It being the intent of the parties that the rate of interest and all other charges to the Borrower be lawful, if for any reason the payment of a portion of the interest or other charges otherwise required to be paid under this Agreement would exceed the limit which the Lender may lawfully charge the Borrower, then the obligation to pay interest or other charges shall automatically be reduced to such limit and, if any amounts in excess of such limit shall have been paid, then such amounts shall at the sole option of the Lender either be refunded to the Borrowers or credited to the principal amount of the Liabilities (or any combination of the foregoing) so that under no circumstances shall the interest or other charges required to be paid by the Borrowers hereunder exceed the maximum rate allowed by applicable Laws, and Borrowers shall not have any action against Lender for any damages arising out of the payment or collection of any such excess interest.

- 31 -

          2.12 Method of Selecting Rate Options; Additional Provisions Regarding Libor Loans. Except as otherwise expressly provided for herein, the Term Loan shall bear interest at the Libor Rate. The Borrower may select a Libor Rate with respect to a Revolving Loan as provided in this Section 2.12; provided, however, that with respect to each and all Libor Loans made hereunder (i) the initial advance shall be in an amount not less than Five Hundred Thousand Dollars ($500,000) and in integral multiples of One Hundred Thousand Dollars ($100,000) thereafter; and (ii) there shall not exist at any one time outstanding more than three (3) separate traunches of Libor Loans. Revolving Loans shall bear interest at the Base Rate unless the Borrower provides a Borrowing Notice to the Lender in the form of Exhibit C, signed by a Duly Authorized Officer of the Borrower, irrevocably electing that all or a portion of the Revolving Loans are to bear interest at a Libor Rate (the “Borrowing Notice”). The Borrowing Notice shall be delivered to the Lender not later than two (2) Business Days before the Borrowing Date for each Libor Loan, specifying:

                         (1) The Borrowing Date, which shall be a Business Day, of such Loan;

                         (2) The type and aggregate amount of such Loan;

                         (3) The Rate Option selected for such Loan; and

                         (4) The Libor Interest Period applicable thereto.

     Each Libor Loan shall bear interest from and including the first day of the Libor Interest Period applicable thereto to (but not including) the last day of such Libor Interest Period at the interest rate determined as applicable to such Libor Loan. If at the end of an Libor Interest Period for an outstanding Libor Loan, the Borrower has failed to select a new Rate Option or to pay such Libor Loan, then such Loan, if a Revolving Loan, shall be automatically converted to a Base Rate Loan on and after the last day of such Libor Interest Period until paid or until the effective date of a new Rate Option with respect thereto selected by the Borrower. An outstanding Revolving Loan that is a Base Rate Loan may be converted to a Libor Loan at any time subject to the notice provisions applicable to the type of Loan selected. The Borrower may not select a Libor Rate for a Revolving Loan if there exists a Default or Event of Default. The Borrower shall select Libor Interest Periods with respect to Libor Loans so that such Libor Interest Period does not expire after the end of the Credit Termination Date.

          2.13 Setoff. Other than with respect to Government Accounts, Borrower agrees that Lender has all rights of setoff and banker’s liens provided by applicable law. The Borrower agrees that, if at any time (i) any amount owing by it under this Agreement or any Financing Agreement is then due and payable to the Lender, or (ii) or an Event of Default shall have occurred and be continuing, then the Lender or the holder of any promissory note issued hereunder, in its sole discretion, may set off against and apply to the payment of any and all Liabilities, any and all balances, credits, deposits, accounts or moneys of the Borrower then or thereafter with the Lender or such holder.

                         (1) Without limitation of Section 2.13(a) hereof, the Borrower agrees that, upon and after the occurrence of any Event of Default, the Lender is hereby

- 32 -

authorized, at any time and from time to time, without prior notice to the Borrower (provided, however, prior to an Event of Default the Lender shall use reasonable efforts to provide notice of any such action within a reasonable time thereafter but the Lender shall not be liable for any failure to provide such notice), (i) to set off against and to appropriate and apply to the payment of any and all Liabilities any and all amounts which the Lender is obligated to pay over to the Borrower (whether matured or unmatured, and, in the case of deposits, whether general or special, time or demand and however evidenced), and (ii) pending any such action, to the extent necessary, to deposit such amounts with the Lender as Collateral to secure such Liabilities and to dishonor any and all checks and other items drawn against any deposits so held as the Lender in its sole discretion may elect.

                         (2) The rights of the Lender under this Section 2.13 are in addition to all other rights and remedies which the Lender may otherwise have in equity or at law.

          2.14 Termination of Commitments by the Lender. On the date on which the Commitments terminate pursuant to Section 11.2 hereof, all Loans and other Liabilities shall become immediately due and payable, without presentment, demand or notice of any kind.

          2.15 Mandatory Prepayments.

                         (1) Within seventy-five (75) calendar days of the end of each Fiscal Year of Borrower, the Borrower shall make an annual prepayment of principal of the Term Loan in an amount equal to fifty percent (50%) of the Borrower’s Excess Cash Flow for the immediately preceding Fiscal Year; provided that the annual Excess Cash Flow prepayment computation for the year ending December 31, 2007, shall be for the period from the Closing Date through December 31, 2007.

                         (2) Upon receipt by Borrower of the proceeds of any sale or other disposition of any of the Negative Pledged Assets or Collateral, the Borrower shall make a prepayment of the Term Loan in an amount equal to fifty percent (50%) of the Net Cash Proceeds of such sale or disposition.

                         (3) The foregoing mandatory prepayments set forth in subsection (a) through (b) of this Section 2.15 shall be applied to outstanding installments of the Term Loan in the inverse order of maturity. Such mandatory prepayments shall not be subject to any prepayment penalty or charge. Nothing contained in this Section 2.15 shall be construed to permit the Borrower to consummate any transaction in violation of any other provision contained in this Agreement.

          2.16 Closing Fee. On the Closing Date, the Borrower shall pay to the Lender a one-time closing fee in the amount of Two Hundred Fifty Five Thousand and No/100 Dollars ($255,000.00) in immediately available funds, which fee shall be nonrefundable and deemed fully earned as of such date (“Closing Fee”).

          2.17 Late Charge. If any installment of principal or interest due hereunder shall become overdue for five (5) days after the date when due, the Borrower shall pay to the Lender on demand a “late charge” of five cents ($.05) for each dollar so overdue in order to defray part

- 33 -

of the increased cost of collection occasioned by any such late payment, as liquidated damages and not as a penalty.

          2.18 L/C Fees. For each Letter of Credit, the Borrower will pay to the Lender a fee (“L/C Fee”) equal to two and one-quarter percent (2.25%) per annum of the undrawn face amount of each Letter of Credit, provided, that the L/C Fee will not be less than the Lender’s standard minimum amount for such fees in effect at such time. The L/C Fee is and shall be payable monthly in arrears, on the last day of each month during which each such Letter of Credit remains outstanding. The L/C Fee will be computed on the basis of a 360 day year for the actual number of days elapsed. In addition, the Borrower will pay to the Lender all customary charges and out-of-pocket and additional expenses in connection with the issuance and administration of any Letters of Credit issued under this Agreement.

          2.19 Unused Line Fee. On or before the tenth (10th) day after the end of each calendar month beginning with the calendar month ending August 31, 2007, the Borrower shall pay to the Lender in cash a fee equal to the product of (a) one quarter of one percent (.25%) and (b) the Undrawn Revolving Loan Amount.

     3. CHANGE IN CIRCUMSTANCES.

          3.1 Yield Protection. If, after the date of this Agreement, the adoption of any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any change therein, or any change in the interpretation or administration thereof, or the compliance of the Lender therewith, or Regulation D of the Board of Governors of the Federal Reserve System,

                         (1) subjects the Lender to any tax, duty, charge or withholding on or from payments due from the Borrower (excluding taxation of the overall net income or receipts of the Lender or any branch profits taxes), or changes the basis of taxation of payments to the Lender in respect of its Loans or other amounts due it hereunder, or

                         (2) imposes, modifies, or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, the Lender (other than reserves and assessments taken into account in determining the interest rate applicable to Libor Loans), or

                         (3) imposes any other condition the result of which is to increase the cost to the Lender of making, funding or maintaining advances or reduces any amount receivable by the Lender in connection with advances, or requires the Lender to make any payment calculated by reference to the amount of advances held or interest received by it, by an amount deemed material by the Lender, or

                         (4) affects the amount of capital required or expected to be maintained by the Lender or any corporation controlling the Lender and the Lender determines the amount of capital required is increased by or based upon the existence of this Agreement or its obligation to make Loans hereunder or of commitments of this type,

- 34 -

          then, within three (3) Business Days of demand by the Lender, the Borrower agrees to pay the Lender that portion of such increased expense incurred (including, in the case of clause (d), any reduction in the rate of return on capital to an amount below that which it could have achieved but for such law, rule, regulation, policy, guideline or directive and after taking into account the Lender’s policies as to capital adequacy) or reduction in an amount received which the Lender determines is attributable to making, funding and maintaining the Loans.

          3.2 Availability of Rate Options. If the Lender determines that maintenance of any of its Libor Loans would violate any applicable law, rule, regulation or directive of any government or any division, agency, body or department thereof, whether or not having the force of law, the Lender shall suspend the availability of the Libor Rate option and require any Libor Loans outstanding to be promptly converted to a Base Rate Loan subject to the Borrower’s compliance with Section 3.4 hereof; or if the Lender determines that (i) deposits of a type or maturity appropriate to match fund Libor Loans are not available, the Lender shall suspend the availability of the Libor Rate after the date of any such determination, or (ii) the Libor Rate does not accurately reflect the cost of making a Libor Loan, then, if for any reason whatsoever the provisions of Section 3.1 hereof are inapplicable, the Lender shall, at its option, suspend the availability of the Libor Rate after the date of any such determination or permit (solely in the case of clause (ii)) the Borrower to pay the Lender for any increased cost it may incur.

          3.3 Taxes. All payments by the Borrower under this Agreement shall be made free and clear of, and without deduction for, any present or future income, excise, stamp or other taxes, fees, levies, duties, withholdings or other charges of any nature whatsoever, now or hereafter imposed by any taxing authority, other than franchise taxes and taxes imposed on or measured by the Lender’s net income or receipts or branch profits taxes (such non-excluded items being called “Taxes”). If any withholding or deduction from any payment to be made by the Borrower hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then the Borrower shall:

                         (1) pay directly to the relevant authority the full amount required to be so withheld or deducted;

                         (2) promptly forward to the Lender an official receipt or other documentation satisfactory to the Lender evidencing such payment to such authority; and

                         (3) pay to the Lender such additional amount or amounts as is necessary to ensure that the net amount actually received by the Lender will equal the full amount the Lender would have received had no such withholding or deduction been required.

          Moreover, if any Taxes are directly asserted against the Lender with respect to any payment received by the Lender hereunder, the Lender may pay such Taxes and the Borrower agrees to promptly pay such additional amounts (including, without limitation, any penalties, interest or expenses) as is necessary in order that the net amount received by the Lender after the payment of such Taxes (including, without limitation, any Taxes on such additional amount) shall equal the amount the Lender would have received had not such Taxes been asserted.

- 35 -

          3.4 Funding Indemnification. If any payment of a Libor Loan occurs on a date that is not the last day of the applicable Libor Interest Period, whether because of acceleration, prepayment or otherwise, or a Libor Loan is not made on the date specified by the Borrower, the Borrower shall indemnify the Lender for any loss or cost incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain the Libor Loan.

          3.5 Lender Statements. The Lender shall deliver a written statement to the Borrower as to the amount due, if any, under Sections 3.1, 3.3 or 3.4 hereof. Such written statement shall set forth in reasonable detail the calculations upon which the Lender determined such amount and shall be final, conclusive and binding on the Borrower in the absence of demonstrable error. Unless otherwise provided herein, the amount specified in the written statement shall be payable on demand after receipt by the Borrower of the written statement.

          3.6 Basis for Determining Interest Rate Inadequate or Unfair. If with respect to any Libor Interest Period: (a) Lender reasonably determines (which determination shall be binding and conclusive on the Borrower) that by reason of circumstances affecting the interlender Libor Base market adequate and reasonable means do not exist for ascertaining the applicable Libor Base Rate; or (b) Lender determines that the Libor Base Rate will not adequately and fairly reflect the cost to Lender of maintaining or funding the Term Loan or any portion thereof for such Libor Interest Period, or that the making or funding of Libor Loans has become impracticable as a result of an event occurring after the date of this Agreement which in the opinion of Lender adversely affects such Loans, then, in either case, so long as such circumstances shall continue: (i) Lender shall not be under any obligation to make, convert into or continue Libor Loans and (ii) on the last day of the then current Libor Interest Period for each Libor Loan, each such Loan shall, unless then repaid in full, automatically convert to a Base Rate Loan. Lender shall promptly give the Borrower written notice of any determination made by it under this Section accompanied by a statement setting forth in reasonable detail the basis of such determination.

          3.7 Illegality. If any applicable law or regulation, or any interpretation thereof by any court or any governmental or other regulatory body charged with the administration thereof, should make it unlawful for Lender or its lending office to make, maintain or fund any Libor Loan, then the obligation of Lender to make, convert into or continue such Libor Loan shall, upon the effectiveness of such event, be suspended for the duration of such unlawfulness, and on the last day of the current Libor Interest Period for such Libor Loan (or, in any event, if Lender so requests, on such earlier date as may be required by the relevant law, regulation or interpretation), the Libor Loans shall, unless then repaid in full, automatically convert to Base Rate Loans.

     4. ELIGIBILITY REQUIREMENTS; CASH COLLATERAL ACCOUNT; ATTORNEY-IN-FACT.

          4.1 Account Warranties; Schedule of Accounts. The amounts shown on the Schedule of Accounts and all invoices and statements delivered to the Lender with respect to any Account, are and will be actually and absolutely owing to the Borrower and are and will not be contingent for any reason. There are no set-offs, counterclaims or disputes existing or asserted

- 36 -

with respect to any Accounts included on any Schedule of Accounts and the Borrower has not made any agreement with any Account Debtor for any deduction from such Account, except for discounts or allowances allowed by the Borrower in the ordinary course of business for prompt payment, all of which discounts or allowances are reflected in the calculation of the invoice related to such Account. There are no reserves against the collection of Accounts not set forth in the applicable Schedule of Accounts or the financial statements delivered pursuant to Section 8.1 hereof and there are no facts, events or occurrences which in any way impair the validity or enforcement of any of the Accounts or tend to reduce the amount payable thereunder from the amount of the invoice shown on any Schedule of Accounts, and on all contracts, invoices and statements delivered to the Lender with respect thereto.

                         (1) Verification of Accounts. The Lender shall have the right, at any time or times hereafter, in the name of the Lender or a nominee of the Lender, to verify the validity, amount or any other matter relating to any Accounts of the Borrower, by mail, telephone, facsimile or otherwise.

          4.2 Account Covenants. The Borrower shall promptly upon its learning thereof: (a) inform the Lender in writing of any delay in the Borrower’s performance of any of its obligations to any Account Debtor or of any assertion of any claims, offsets or counterclaims by any Account Debtor of the Borrower other than made in the ordinary course of business, either of which could have a Material Adverse Effect; (b) furnish to and inform the Lender of all adverse information relating to the financial condition of any Account Debtor of the Borrower which could have a Material Adverse Effect; and (c) notify the Lender in writing if any of its then existing Accounts scheduled to the Lender with respect to which the Lender has made an advance are no longer Eligible Accounts.

          4.3 Collection of Accounts and Payments. Within thirty (30) days of the Closing Date, a blocked account (the “Commercial Blocked Account”) shall have been established in the Borrower’s name with Lender, pursuant to which Lender shall have control over the Commercial Blocked Account in accordance with the Commercial Blocked Account Agreement, pursuant to which the Borrower shall direct (within forty-five (45) calendar days of the Closing Date) all Account Debtors (other than Account Debtors obligated on Government Accounts) to directly remit and to which the Borrower shall remit all payments on Accounts of the Borrower (other than Government Accounts) and in which the Borrower will immediately deposit all payments made for Inventory of the Borrower, if any, or services provided by the Borrower and all other proceeds of the Collateral in the identical form in which such payment was made, whether in cash or by check. In addition, on or prior to the Closing Date, a blocked account (the “Government Blocked Account”) shall have been established in the Borrower’s name with Lender, pursuant to which the Borrower shall have control over the Government Blocked Account in accordance with the Government Blocked Account Agreement, pursuant to which the Borrower shall direct (within forty-five (45) calendar days of the Closing Date) all Account Debtors obligated on Government Accounts to directly remit and to which the Borrower shall remit all payments on Government Accounts of the Borrower and all other proceeds of the foregoing Collateral in the identical form in which such payment was made, whether in cash or by check. All amounts deposited in the Commercial Blocked Account and the Government Blocked Account will be automatically transferred, on a daily basis, to a demand deposit account (the “Demand Deposit Account”). The Demand Deposit Account will be established in the

- 37 -

Borrower’s name with the Lender. Notwithstanding the foregoing, the Borrower hereby irrevocably authorizes the Lender upon the occurrence of a Default or an Event of Default to cause all amounts deposited in the Commercial Blocked Account to be automatically transferred, on a daily basis, to a concentration account at the Lender’s offices in Chicago, Illinois (the “Cash Collateral Account”) during the period of such Default or Event of Default. In addition, upon the occurrence of a Default or an Event of Default the Borrower shall transfer, on a daily basis, all amounts in the Government Blocked Account to the Cash Collateral Account during the period of such Default or Event of Default. The Borrower hereby agrees that all payments made to the Commercial Blocked Account, received in the Cash Collateral Account, or otherwise received by the Lender, whether in respect of the Accounts of the Borrower or as proceeds of other Collateral or otherwise, will be the sole and exclusive property of the Lender (to the extent of the Liabilities). The Borrower further agrees that all payments made to the Commercial Blocked Account and the Government Blocked Account and transferred to the Cash Collateral Account will be applied on account of the Liabilities of the Borrower as follows: (a) each day’s available balance in respect of checks and other instruments received by the Lender in the Cash Collateral Account or otherwise at its offices in Chicago, Illinois will be credited by the Lender (conditional upon final collection) to the Borrower’s Loan Account and shall reduce outstandings on the Revolving Loans two (2) Business Days’ after receipt by the Lender, and (b) all cash payments received by the Lender in the Cash Collateral Account or otherwise at its offices in Chicago, Illinois, including, without limitation, payments made by wire transfer of immediately available funds received by the Lender, will be credited by the Lender to the Borrower’s Loan Account on the receipt of immediately available funds by the Lender. If during the period of such Default or Event of Default, the Borrower (or any director, officer, employee, affiliate, or agent thereof) shall receive any payment from any Account Debtor (other than an Account Debtor obligated on a Government Account), the Borrower hereby agrees that all such payments shall be the sole and exclusive property of the Lender (to the extent of the Liabilities), and the Borrower shall hold such payments in trust as the Lender’s trustee and immediately deliver said payments to the Cash Collateral Account established pursuant to this Section and shall be applied in accordance with this Section. The Borrower agrees to pay to the Lender any and all reasonable fees, costs and expenses which the Lender incurs in connection with opening and maintaining the Commercial Blocked Account, the Government Blocked Account and the Cash Collateral Account for the Borrower and depositing for collection by the Lender any check or item of payment received and/or delivered to the Lender on account of the Borrower’s Liabilities. The Borrower shall cooperate with the Lender in the identification and reconciliation on a daily basis of all amounts received in the Commercial Blocked Account and the Government Blocked Account. If more than five percent (5%) of the amount of payments on the Accounts since the date of the most recent Revolving Loan is not identified or reconciled to the satisfaction of the Lender within five (5) Business Days of receipt, the Lender shall not be obligated to make further Revolving Loans until such amount is identified or is reconciled to the sole and absolute satisfaction of the Lender. The Lender may utilize its own staff or, if it deems necessary, engage an outside auditor, in either case at the Borrower’s expense, to make such examination and report as may be necessary to identify and reconcile such amount.

     4.4 Appointment of the Lender as the Borrower’s Attorney-in-Fact. The Borrower hereby irrevocably designates, makes, constitutes and appoints the Lender (and all Persons designated by the Lender in writing to the Borrower) as the Borrower’s true and lawful attorney-in-fact, and authorizes the Lender, in the Borrower’s or the Lender’s name, after an

- 38 -

Event of Default has occurred and is continuing to do the following: (a) at any time, (i) endorse the Borrower’s name upon any items of payment or proceeds thereof and deposit the same in the Lender’s account on account of the Borrower’s Liabilities, (ii) endorse the Borrower’s name upon any chattel paper, document, instrument, invoice, or similar document or agreement relating to any Account of the Borrower or any goods pertaining thereto to collect the proceeds thereof; (iii) sign the Borrower’s name on any verification of Accounts of the Borrower and notices thereof to Account Debtors (other than Account Debtors obligated on Government Accounts to the extent that it would otherwise violate applicable law to do so); (iv) take control in any manner of any item of payment on or proceeds of any Account of the Borrower and apply such item of payment or proceeds to the Liabilities, and (i) demand payment of any Accounts of the Borrower; (ii) enforce payment of Accounts of the Borrower by legal proceedings or otherwise; (iii) exercise all of the Borrower’s rights and remedies with respect to proceedings brought to collect any Account; (iv) sell or assign any Account of the Borrower upon such terms, for such amount and at such time or times as the Lender deems advisable, (v) settle, adjust, compromise, extend or renew any Account of the Borrower; (vi) discharge and release any Account of the Borrower; (vii) prepare, file and sign the Borrower’s name on any proof of claim in bankruptcy or other similar document against any Account Debtor (other than Account Debtors obligated on Government Accounts to the extent that it would otherwise violate applicable law to do so); (viii) have access to any lock box or postal box into which the Borrower’s mail is deposited, and open and process all payments on Accounts addressed to the Borrower and deposited therein, and (ix) do all other acts and things which are necessary, in the Lender’s reasonable discretion, to fulfill the Borrower’s obligations under this Agreement. The Borrower hereby ratifies and approves all acts under such power of attorney and neither Lender nor any other Person acting as Borrower’s attorney hereunder will be liable for any acts or omissions or for any error of judgment or mistake of fact or law made in good faith except as result of its gross negligence, willful misconduct or illegal activity. The appointment of Lender (and any of the Lender’s officers, employees or agents designated by the Lender) as Borrower’s attorney, and each and every one of Lender’s rights and powers, being coupled with an interest, are irrevocable until all of the Liabilities have been fully repaid and this Agreement shall have expired or been terminated in accordance with the terms hereunder. Notwithstanding anything to the contrary contained in this Section 4.4, any reference to “any Account of the Borrower” contained in this Section shall be deemed to exclude any Government Accounts to the extent that the failure to do so would violate applicable law. Without restricting the generality of the foregoing, after an Event of Default has occurred and is continuing, Borrower hereby appoints and constitutes the Lender its lawful attorney-in-fact with full power of substitution in the Property to use unadvanced funds remaining under the Notes or which may be reserved, escrowed or set aside for any purposes hereunder at any time, or to advance funds in excess of the face amount of the Notes, to pay, settle or compromise all existing bills and claims, which may be liens or security interests, or to avoid such bills and claims becoming liens against the Collateral; to execute all applications and certificates in the name of Borrower prosecute and defend all actions or proceedings in connection with the Collateral (including any Leases pertaining to Property); and to do any and every act which the Borrower might do in its own b ehalf; it being understood and agreed that this power of attorney shall be a power coupled with an interest and cannot be revoked.

          4.5 Notice to Account Debtors. Following the occurrence of a Default or Event of Default, the Lender may, in its sole discretion, at any time or times, without prior notice

- 39 -

to the Borrower, notify any or all Account Debtors of the Borrower (other than Account Debtors obligated on Government Accounts to the extent that it would otherwise violate applicable law to do so) that the Accounts of the Borrower have been assigned to the Lender, that the Lender has a Lien therein, and that all payments upon such Accounts be made directly to the Cash Collateral Account or otherwise directly to the Lender. Notwithstanding anything to the contrary contained in this Section 4.5, any reference to “Accounts of the Borrower” contained in this Section shall be deemed to exclude any Government Accounts to the extent that the failure to do so would violate applicable law.

          4.6 Equipment Warranties. The Borrower represents and warrants that (a) the Borrower’s Equipment is not subject to any Lien whatsoever except for the Permitted Liens; and (b) each item of Equipment that is material to the operations of Borrower is in working condition and repair, ordinary wear and tear excepted, and is currently used or usable in Borrower’s business.

          4.7 Equipment Records. The Borrower shall at all times hereafter keep correct and accurate records itemizing and describing the kind, type, age and condition of its Equipment, the Borrower’s cost therefor and accumulated depreciation thereon, and retirements, sales, or other dispositions thereof, all of which records shall be available during Borrower’s usual business hours at the request of the Lender.

     5. CONDITIONS OF LOANS.

          5.1 Conditions to all Loans. Notwithstanding any other term or provision contained in this Agreement, the making of any Loan provided for in this Agreement shall be conditioned upon the following:

                    (1) The Borrower’s Request. The Lender shall have received, (i) with respect to a request by Borrower for a Base Rate Loan, by no later than 11:00 a.m. (Chicago time) on the day on which such Loan is requested to be made hereunder, a telephonic request from any Person who the Lender reasonably believes is authorized by Borrower to make a borrowing request on behalf of Borrower, for a Loan in a specific amount, and (ii) with respect to a request by Borrower for a Libor Loan, by no later than 1:00 p.m. (Chicago time) two (2) Business Days prior to the day on which a Libor Loan is requested, the Borrowing Notice required under Section 2.12 hereof. In addition, each request for a Loan shall be accompanied or preceded by all other documents not previously delivered as required to be delivered to the Lender under Section 5.2 hereof, and a request for any Revolving Loan shall be accompanied or preceded by a borrowing base certificate from the Borrower, signed by a Duly Authorized Officer, in form and substance satisfactory to the Lender. The Lender shall have no liability to the Borrower or any other Person as a result of acting on any telephonic request that the Lender believes in good faith to have been made by any Person authorized by Borrower to make a borrowing request on behalf of Borrower.

                    (2) Financial Condition. No Material Adverse Change (or material adverse change, as determined by the Lender in its reasonable good faith discretion, in the prospects of Borrower) shall have occurred at any time or times subsequent to the most recent request for any Loan under this Agreement.

- 40 -

                    (3) No Default. Neither a Default nor an Event of Default shall have occurred and be continuing.

                    (4) Other Requirements. The Lender shall have received, in form and substance reasonably satisfactory to the Lender, all certificates, orders, authorities, consents, affidavits, schedules, instruments, agreements, financing statements, and other documents which are provided for hereunder or under or in connection with any Financing Agreement, or which the Lender may at any time reasonably request.

                    (5) Representations and Warranties. All of the representations and warranties contained in the Financing Agreements to which the Borrower is a party and in this Agreement (including, without limitation, those set forth in Section 7 hereof), shall be true and correct in all material respects (without duplication of materiality) as of the date the request for the Loan is made, as though made on and as of such date (unless expressly stated to relate to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date).

          5.2 Initial Loans. The Lender’s obligation to make the initial Revolving Loans and the Term Loan hereunder is, in addition to the conditions precedent specified in Section 5.1 hereof, subject to the satisfaction of each of the following conditions precedent:

                    (1) Fees and Expenses. The Borrower shall have paid all fees owed to the Lender and reimbursed the Lender for all costs, disbursements, fees and expenses due and payable hereunder on or before the Closing Date, including, without limitation, the Lender’s counsel fees provided for in Section 12.2(a) hereof.

                    (2) Documents. The Lender shall have received all of the following, each duly executed and delivered and dated the Closing Date, or such earlier date as shall be satisfactory to the Lender, each in form and substance reasonably satisfactory to the Lender in its sole determination:

                    (1) Financing Agreements. This Agreement, the Revolving Credit Note, the Term Loan Note, the Guaranty, each Pledge Agreement, the Intercreditor Agreements, the Subordination Agreements (if any), the Master Letter of Credit Agreement and such other Financing Agreements as the Lender may require.

                    (2) Resolutions; Incumbency and Signatures. Copies of resolutions of the Board of Directors of the Borrower, and, if required, the shareholder of the Borrower, authorizing or ratifying the execution, delivery and performance by the Borrower of this Agreement, the Financing Agreements to which the Borrower is a party and any other document provided for herein or therein to be executed by Borrower, certified by a Duly Authorized Officer. A certificate of a Duly Authorized Officer certifying the names of the officers of the Borrower authorized to make a borrowing request and sign this Agreement and the Financing Agreements to which the Borrower is a party, together with a sample of the true signature of each such officer; the Lender may conclusively rely on each such certificate until formally advised by a like certificate of any changes therein. A copy of resolutions of the Board

- 41 -

of Directors of Parent authorizing or ratifying the execution, delivery and performance by Parent of the Guaranty and its Pledge Agreement.

                    (3) Consents. Certified copies of all documents evidencing any necessary consents and governmental approvals, if any, with respect to this Agreement, the Financing Agreements, and any other documents provided for herein or therein to be executed by Borrower.

                    (4) Opinion of Counsel. An opinion of Harwell Howard Hyne Gabbert & Manner, the legal counsel to the Borrower and Parent, in form and substance reasonably satisfactory to Lender.

                    (5) [Intentionally Omitted]

                    (6) Financial Condition Certificate. A Financial Condition Certificate, in form and substance reasonably satisfactory to the Lender, signed on behalf of the Borrower by a Duly Authorized Officer of the Borrower.

                    (7) Governing Documents and Good Standings. Lender shall have received (i) copies, certified as correct and complete by the applicable state of organization of each Borrower and Guarantor, of the certificate of incorporation, certificate of formation or certificate of limited liability partnership, as applicable, of each Borrower and Guarantor, with any amendments to any of the foregoing, (ii) copies, certified as correct and complete by an authorized officer, member or partner of each Borrower and Guarantor, of all other documents necessary for performance of the obligations of Borrower and Guarantor under this Agreement and the other Financing Agreements, and (iii) certificates of good standing for each Borrower and Guarantor issued by the state of organization of each Borrower and Guarantor and by each state in which each Borrower and Guarantor is doing and currently intends to do business for which qualification is required (such certificates set forth in (i) through (iii), the “Certificates”).

                    (8) AmSouth Blocked Account Agreement. The duly signed AmSouth Blocked Account Agreement.

                    (9) UCC Financing Statements; Termination Statements; UCC Searches. UCC Financing Statements, as requested by the Lender, naming the Borrower as debtor and the Lender as secured party with respect to the Collateral, together with such UCC termination statements necessary to release all Liens (other than Permitted Liens) and other rights in favor of any Person (including AmSouth Bank and Omega) in any of the Collateral except the Lender, and other documents as the Lender deems necessary or appropriate, shall have been filed in all jurisdictions that the Lender deems necessary or advisable. UCC tax, lien, pending suit and judgment searches for the Borrower and each dated a date reasonably near to the Closing Date in all jurisdictions deemed necessary by the Lender, the results of which shall be satisfactory to the Lender in its sole and absolute determination.

                    (10) Insurance Certificates. Certificates from the Borrower’s insurance carriers evidencing that all required insurance coverage is in effect, each designating the Lender as an additional insured thereunder.

- 42 -

                    (11) Pay Off Letters. Pay Off Letters from Capmark, AmSouth Bank and Omega, each in form and substance reasonably satisfactory to Lender.

                    (12) Acquisition Documents. Correct and complete copies of the fully-executed Acquisition Documents (including all exhibits, schedules and appendices thereto).

                    (13) Capmark Debt Documents and Omega Debt Documents. Correct and complete copies of the fully-executed Capmark Debt Documents (including all exhibits, schedules and appendices thereto) and Omega Debt Documents (including all exhibits, schedules and appendices thereto).

                    (14) Bankruptcy Court Orders. A correct and complete copy of the Sale Order (including all exhibits, schedules and appendices thereto)and such final order or orders of the Bankruptcy Court indefeasibly approving the Trust Loan Documents (including all exhibits, schedules and appendices thereto).

                    (15) Trust Loan Documents. Correct and complete copies of the fully-executed Trust Loan Documents (including all exhibits, schedules and appendices thereto).

                    (16) Other. Such other documents, certificates and instruments as the Lender may reasonably request.

                    (3) Field Examinations. At the Lender’s sole option., the Lender shall have completed its field examinations of the Borrower’s books and records, assets, and operations which examinations will be satisfactory to the Lender in its sole and absolute discretion.

                    (4) Certificate. The Lender shall have received a certificate signed on behalf of the Borrower by a Duly Authorized Officer and dated the Closing Date certifying satisfaction of the conditions specified in Sections 5.1 and 5.2 hereof.

                    (5) Closing Fee. The Borrower shall have paid the Lender the Closing Fee.

                    (6) Commitment Letter. The Lender shall have delivered, performed and satisfied, in the sole discretion of the Lender, of any other items set forth in that certain commitment letter dated July ___, 2007, accepted by Guarantor on behalf of Borrower and made in favor of the Lender.

                    (7) Omega Letter of Credit. The Omega Letter of Credit shall have been issued to Omega on terms and conditions satisfactory to the Lender in its sole and absolute discretion.

                    (8) Miscellaneous. The Transactions shall have closed and funded concurrently with the transactions contemplated by this Agreement.

     6. COLLATERAL.

- 43 -

          6.1 Security Interest. Subject only to the Capmark Security Interests and the Omega Security Interests (the priorities with respect to each of which shall be as set forth in the Intercreditor Agreement applicable thereto), as security for the prompt and complete payment and performance of all of the Liabilities when due or declared due, the Borrower hereby grants, pledges, conveys and transfers to the Lender a continuing security interest in and to all of the Borrower’s right, title and interest in and to the following property and interests in property, whether now owned or existing or hereafter owned, arising or acquired, and wheresoever located (collectively, the “Collateral”), including without limitation, any such Collateral that is a part of the Acquired Assets (as defined in the Acquisition Agreement) acquired by Borrower in the Acquisition: (a) all of Borrower’s Accounts, including, without limitation, Health-Care-Insurance Receivables (as defined in the Code), but excluding Government Accounts solely to the extent Borrower is restricted from granting a security interest in such Government Accounts pursuant to applicable Federal and state law, contract rights, General Intangibles, tax refunds, chattel paper, instruments, notes, letters of credit, bills of lading, warehouse receipts, shipping documents, documents and documents of title, and all of the Borrower’s Tangible Chattel Paper, Documents, Electronic Chattel Paper, Letter-of-Credit Rights, Software, Supporting Obligations and Payment Intangibles (each as defined in the Code); (b) all of Borrower’s Deposit Accounts and other deposit accounts (general or special) with, and credits and other claims against, the Lender, or any other financial institution with which the Borrower maintains deposits; (c) all of the Borrower’s monies, and any and all other property and interests in property of the Borrower, including, without limitation, Investment Property, Instruments, Security Entitlements, Uncertificated Securities, Certificated Securities, Financial Assets, Chattel Paper and Documents (each as defined in the Code), now or hereafter coming into the actual possession, custody or control of the Lender or any agent or affiliate of the Lender in any way or for any purpose (whether for safekeeping, deposit, custody, pledge, transmission, collection or otherwise), and, independent of and in addition to the Lender’s rights of setoff (which the Borrower acknowledges), the balance of any account or any amount that may be owing from time to time by the Lender to the Borrower; (d) all insurance proceeds of or relating to any of the foregoing property and interests in property, and all insurance proceeds relating to any key man life insurance policy covering the life of any officer or employee of Borrower; (e) all proceeds and profits derived from the operation of the Borrower’s business (including, without limitation, the proceeds of Government Accounts); (f) all of the Borrower’s books and records, computer printouts, manuals and correspondence relating to any of the foregoing and to the Borrower’s business; (g) all accessions, improvements and additions to, substitutions for, and replacements, products, profits and proceeds of any of the foregoing; (h) the Negative Pledge Assets; and (i) any and all other unencumbered Equipment, Inventory, Goods (each as defined in the Code), motor vehicles and other property, real or personal (including, without limitation, any such property of the Borrower that is presently encumbered, but in the future becomes unencumbered).

          6.2 Preservation of Collateral and Perfection of Security Interests Therein. The Borrower agrees that it shall execute and deliver to the Lender, concurrently with the execution of this Agreement, and at any time or times hereafter at the request of the Lender, all financing statements (and the Borrower shall pay the cost of filing or recording the same in all public offices deemed necessary by the Lender) or other instruments and documents as the Lender may request, in a form satisfactory to the Lender, to perfect and keep perfected the Liens in the Collateral or to otherwise protect and preserve the Collateral and the Lender’s Liens

- 44 -

therein. If the Borrower fails to do so, the Lender is authorized to sign any such financing statements (or, if no signature is required in the filing jurisdiction, file such financing statements without the Borrower’s signature) as the Borrower’s agent. The Borrower further agrees that a carbon, photographic, photostatic or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement.

          6.3 Loss of Value of Collateral. The Borrower agrees to immediately notify the Lender of any material loss or depreciation in the value of the Collateral or any portion thereof.

          6.4 Right to File Financing Statements. Notwithstanding anything to the contrary contained herein, the Lender may at any time and from time to time file financing statements, “in-lieu” initial financing statements, continuation statements and amendments thereto that describe the Collateral in particular and which contain any other information required by the Code for the sufficiency or filing office acceptance of any financing statement, continuation statement or amendment, including whether the Borrower is an organization, the type of organization and any organization identification number issued to the Borrower. The Borrower agrees to furnish any such information to the Lender promptly upon request. Any such financing statements, continuation statements or amendments may be signed by the Lender on behalf of the Borrower and may be filed at any time with or without signature and in any jurisdiction as reasonably determined by the Lender. The Lender agrees to use its reasonable efforts to notify the Borrower of the Lender taking any such action provided in this Section; provided, however, the Borrower agrees that the failure of the Lender to so notify the Borrower for any reason shall not in any way invalidate the actions taken by the Lender pursuant to this Section.

          6.5 Third Party Agreements. The Borrower shall at any time and from time to time take such steps as the Lender may reasonably require for the Lender: (i) to obtain an acknowledgment, in form and substance reasonably satisfactory to the Lender, of any third party having possession of any of the Collateral that the third party holds for the benefit of the Lender, (ii) to obtain “control” (as defined in the Code) of any Investment Property, Deposit Accounts, Letter of Credit Rights or Electronic Chattel Paper (each as defined in the Code), with any agreements establishing control to be in form and substance reasonably satisfactory to the Lender, and (iii) otherwise to ensure the continued perfection and priority of the Lender’s security interest in any of the Collateral and of the preservation of its rights therein.

          6.6 All Loans One Obligation. All Liabilities of the Borrowers under this Agreement and each of the Financing Agreements are cross-collateralized and cross-defaulted. Payment of all sums and indebtedness to be paid by Borrower to Lender under this Agreement shall be secured by, among other things, the Financing Agreements. All loans or advances made to Borrower under this Agreement shall constitute one Loan, and all of Borrower’s Liabilities and other liabilities of Borrower to Lender shall constitute one general obligation secured by Lender’s Lien on all of the Collateral of Borrower and by all other liens heretofore, now, or at any time or times granted to Lender to secure the Loans. Borrower agrees that all of the rights of Lender set forth in this Agreement shall apply to any amendment, restatement or modification of, or supplement to, this Agreement, any supplements or exhibits hereto and the Financing Agreements, unless otherwise agreed in writing by the Lender.

- 45 -

          6.7 Commercial Tort Claim. If the Borrower shall at any time hereafter acquire a Commercial Tort Claim (as defined in the Code), the Borrower shall promptly notify the Lender of same in a writing signed by the Borrower (describing such claim in reasonable detail) and, subject only to the Capmark Security Interests, grant to the Lender in such writing (at the sole cost and expense of the Borrower) a continuing, first-priority security interest therein and in the proceeds thereof, with such writing to be in form and substance satisfactory to the Lender in its sole and absolute determination.

     7. REPRESENTATIONS AND WARRANTIES.

     The Borrower represents and warrants that as of the date of this Agreement, and continuing as long as any Liabilities remain outstanding, and (even if there shall be no such Liabilities outstanding) as long as this Agreement remains in effect:

          7.1 Existence. The Borrower is a corporation or limited liability company duly organized, validly existing and in good standing under the laws of the state of its incorporation or formation. The Borrower is duly (a) qualified and in good standing as a foreign corporation or foreign limited liability company and (b) authorized to do business in each jurisdiction where such qualification is required because of the nature of its activities or properties. The Borrower has all requisite power to carry on its business as now being conducted and as proposed to be conducted. Parent legally and beneficially owns or controls, either directly or indirectly through its subsidiaries, all of the issued and outstanding capital Stock of the Borrower.

          7.2 Corporate Authority. The execution and delivery by the Borrower of this Agreement and all of the other Financing Agreements to which Borrower is a party and the performance of its obligations hereunder and thereunder: (i) are within its powers; (ii) are duly authorized by the board of directors, mangers or members of the Borrower, each as applicable, and, if applicable, Parent; and (iii) are not in contravention of the terms of its operating agreement, bylaws, or of an indenture, agreement or undertaking to which it is a party or by which it or any of its property is bound. The execution and delivery by the Borrower of this Agreement and all of the other Financing Agreements to which it is a party and the performance of its obligations hereunder and thereunder: (i) do not require any governmental consent, registration or approval; (ii) do not contravene any contractual or governmental restriction binding upon it; and (iii) will not, except in favor of Lender, result in the imposition of any Lien upon any property of Borrower under any existing indenture, mortgage, deed of trust, loan or credit agreement or other material agreement or instrument to which it is a party or by which it or any of its property may be bound or affected.

          7.3 Binding Effect. This Agreement and all of the other Financing Agreements to which the Borrower is a party are the legal, valid and binding obligations of the Borrower and are enforceable against the Borrower in accordance with their respective terms, subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditor’s rights and remedies generally.

- 46 -

          7.4 Financial Data.

                    (1) All income statements, balance sheets, cash flow statements, statements of operations, and other financial data which have been or shall hereafter be furnished to the Lender for the purposes of or in connection with this Agreement do and will present fairly in all material respects in accordance with GAAP, consistently applied, the financial condition of the Borrower as of the dates thereof and the results of its operations for the period(s) covered thereby. The foregoing notwithstanding all unaudited financial statements furnished or to be furnished to the Lender by or on behalf of Borrower are not and will not be prepared in accordance with GAAP to the extent that such financial statements (a) are subject to cost report and other year-end audit adjustments, (b) do not contain footnotes, (c) were prepared without physical inventories, (d) are not restated for subsequent events, (e) may not contain a statement of construction in process, and (f) may not fully reflect the following liabilities: (i) vacation, holiday and similar accruals, (ii) liabilities payable in connection with workers’ compensation claims, (iii) liabilities payable to any employee welfare benefit plan (within the meaning of Section 3(1) of ERISA) maintained by Borrower or its affiliates on account of Borrower’s employees, (iv) federal, state and local income or franchise taxes and (v) bonuses payable to certain employees (collectively, the “GAAP Exceptions”).

                    (2) Since March 31, 2007, there has been no Material Adverse Change with respect to Borrower.

          7.5 Collateral. Except for the Permitted Liens, all of the Borrower’s assets and property (including, without limitation, the Collateral) is and will continue to be owned by Borrower (except for items of Inventory disposed of in the ordinary course of business and sales of Equipment being replaced in the ordinary course of business, or as a result of casualty loss or condemnation, with other Equipment with a value equal to or greater than the Equipment being sold), has been fully paid for and is free and clear of all Liens. No financing statement or other document similar in effect covering all or any part of the Collateral is on file in any recording or filing office, other than those identifying the Lender as the secured creditor or except for Permitted Liens. The organizational number assigned by the Secretary of State of the Borrower’s state of incorporation or formation, as applicable, is as set forth on Schedule 1 hereto.

          7.6 Solvency. The Borrower, as determined on a consolidated basis, is Solvent. The Borrower, as determined on a consolidated basis, will not be rendered insolvent by the execution and delivery of this Agreement or any Financing Agreement, or by completion of the transactions contemplated hereunder or thereunder.

          7.7 Principal Place of Business; State of Organization. Set forth on Schedule 1 hereto, is, as of the Closing Date, (a) the principal place of business and chief executive office of Borrower and (b) the Borrower’s state of incorporation or formation. The books and records of the Borrower are at the principal place of business and chief executive office of the Borrower.

          7.8 Other Names. As of the Closing Date the Borrower is not using, and shall not thereafter use, any name (including, without limitation, any trade name, trade style, assumed

- 47 -

name, division name or any similar name), other than the names set forth on Schedule 7.8 attached hereto.

          7.9 Tax Liabilities. The Borrower has filed all material federal, state and local tax reports and returns required by any law or regulation to be filed by it, except for extensions duly obtained, and has either duly paid all taxes, duties and charges indicated due on the basis of such returns and reports, or made adequate provision for the payment thereof, and the assessment of any material amount of additional taxes in excess of those paid and reported is not reasonably expected.

          7.10 Loans. Except as otherwise permitted by Section 9.2 hereof, the Borrower is not obligated on any loans or other Indebtedness.

          7.11 Margin Securities. The Borrower does not own any margin securities and none of the Loans advanced hereunder will be used for the purpose of purchasing or carrying any margin securities or for the purpose of reducing or retiring any Indebtedness which was originally incurred to purchase any margin securities or for any other purpose not permitted by Regulation U of the Board of Governors of the Federal Reserve System.

          7.12 Organizational Chart. Set forth on Schedule 7.12 hereto is a true and complete copy of an organizational chart setting forth the Borrower and each of its Subsidiaries and Affiliates as of the Closing Date.

          7.13 Litigation and Proceedings. As of the Closing Date (and on any date that a request for a Revolving Loan is made), no judgments are outstanding against the Borrower that could be an Event of Default under clause (e) of Section 11.1, nor is there as of such date pending, or to the best of Borrower’s knowledge, threatened, except, as of the Closing Date, as shown on Schedule 7.13 (and on any date that a request for a Revolving Loan is made, as Lender has from time to time been provided notice of in accordance with Section 8.1(e), below) any (i) litigation, suit, action or contested claim (other than a personal injury tort claim), or federal, state or municipal governmental proceeding, by or against the Borrower or any of its Property which if adversely determined could have a Material Adverse Effect, or (ii) any tort claim for personal injury, including death, against the Borrower as to which (a) litigation as been instituted and is pending or (b) or a request for medical records has been made upon Borrower by an attorney for the claimant on or after January 1, 2006.

          7.14 Other Agreements. The Borrower is not in default under or in breach of any agreement, contract, lease, or commitment to which it is a party or by which it is bound which could reasonably be expected to have a Material Adverse Effect. The Borrower does not know of any dispute regarding any agreement, contract, instrument, lease or commitment which could reasonably be expected to have a Material Adverse Effect.

          7.15 Compliance with Laws and Regulations. The execution and delivery by the Borrower of this Agreement and all of the other Financing Agreements to which it is a party and the performance of the Borrower’s obligations hereunder and thereunder are not in contravention of any applicable law, rule or regulation. The Borrower has obtained all licenses, authorizations, approvals, licenses and permits necessary in connection with the operation of its

- 48 -

business, except to the extent the failure to obtain any of the foregoing could reasonably be expected to not result in a Material Adverse Effect. The Borrower is in compliance with all laws, orders, rules, regulations and ordinances of all federal, foreign, state and local governmental authorities applicable to it and its business, operations, property, and assets, except to the extent any such non-compliance could reasonably be expected to not result in a Material Adverse Effect.

          7.16 Intellectual Property. As of the Closing Date and after giving effect to the Transactions, the Borrower does not own or otherwise possess any material Intellectual Property. To the Borrower’s best knowledge, none of its Intellectual Property infringes on the rights of any other Person; provided that the name “Diversicare” is shared in Canada with various Diversicare entities that were sold in 2004.

          7.17 Environmental Matters. The Borrower has not Managed Hazardous Substances on or off its Property other than in compliance with applicable Environmental Laws, except to the extent any such non-compliance could reasonably be expected to not result in a Material Adverse Effect. The Borrower has complied in all material respects with applicable Environmental Laws regarding transfer, construction on and operation of its business and Property, including, but not limited to, notifying authorities, observing restrictions on use, transferring, modifying or obtaining permits, licenses, approvals and registrations, making required notices, certifications and submissions, complying with financial liability requirements, and, except where not required to do so pursuant to any Commercial Lease, Managing Hazardous Substances and Responding to the presence or Release of Hazardous Substances connected with operation of its business or Property. The Borrower does not have any contingent liability with respect to the Management of any Hazardous Substance that could reasonably be expected to result in a Material Adverse Effect. During the term of this Agreement, the Borrower shall not permit others to, Manage, whether on or off Borrower’s Property, Hazardous Substances, except to the extent such Management does not or is not reasonably likely to result in or create a Material Adverse Effect. Except where not required to do so pursuant to any Commercial Lease, the Borrower shall take prompt action in material compliance with applicable Environmental Laws to Respond to the on-site or off-site Release of Hazardous Substances connected with operation of its business or Property. As of the Closing Date (and on any date that a request for a Revolving Loan is made), the Borrower has not received any Environmental Notice that could reasonably be expected to result in a Material Adverse Effect. Except as set forth on Schedule 7.17, to the knowledge of the Borrower, as of the Closing Date each SMS Party has complied in all material respects with Environmental Laws regarding transfer, construction on and operation of its business and property, including, but not limited to, notifying authorities, observing restrictions on use, transferring, modifying or obtaining permits, licenses, approvals and registrations, making required notices, certifications and submissions, complying with financial liability requirements, Managing Hazardous Substances and Responding to the presence or Release of Hazardous Substances connected with operation of its business or property.

          7.18 Disclosure. As of the Closing Date (and on any date that a request for a Revolving Loan is made), none of the representations or warranties made by the Borrower herein or in any Financing Agreement to which the Borrower is a party and no other written information provided or statements made by the Borrower or its representatives to the Lender contains any

- 49 -

untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. As of the Closing Date (and on any date that a request for a Revolving Loan is made), the Borrower has disclosed to the Lender all facts of which the Borrower has knowledge which might result in a Material Adverse Effect either prior or subsequent to the consummation of the Transactions or which, to Borrower’s knowledge, at any time hereafter might reasonably be expected to result in a Material Adverse Effect.

          7.19 Pension Related Matters. Each employee pension plan (other than a multiemployer plan within the meaning of Section 3(37) of ERISA and to which the Borrower or any ERISA Affiliate has or had any obligation to contribute (a “Multiemployer Plan”)) maintained by the Borrower or any of its ERISA Affiliates to which Title IV of ERISA applies and (a) which is maintained for employees of the Borrower or any of its ERISA Affiliates or (b) to which the Borrower or any of its ERISA Affiliates made, or was required to make, contributions at any time within the preceding five (5) years (a “Plan”), complies, and is administered in accordance, with its terms and all material applicable requirements of ERISA and of the Internal Revenue Code of 1986, as amended, and any successor statute thereto (the “Tax Code”), and with all material applicable rulings and regulations issued under the provisions of ERISA and the Tax Code setting forth those requirements. No “Reportable Event” or “Prohibited Transaction” (as each is defined in ERISA) or withdrawal from a Multiemployer Plan caused by the Borrower has occurred and no funding deficiency described in Section 302 of ERISA caused by the Borrower exists with respect to any Plan or Multiemployer Plan which could have a Material Adverse Effect. The Borrower and each ERISA Affiliate has satisfied all of their respective funding standards applicable to such Plans and Multiemployer Plans under Section 302 of ERISA and Section 412 of the Tax Code and the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA (“PBGC”) has not instituted any proceedings, and there exists no event or condition caused by the Borrower which would reasonably be expected to constitute grounds for the institution of proceedings by PBGC, to terminate any Plan or Multiemployer Plan under Section 4042 of ERISA which could have a Material Adverse Effect.

          7.20 Perfected Security Interests. The Lien in favor of the Lender provided pursuant to Section 6.1 hereof is a valid and perfected first priority security interest in the Collateral (subject only to the Permitted Liens and the terms of the Intercreditor Agreements), and all filings and other actions necessary to perfect such Lien have been or will be duly taken.

          7.21 Acquisition Documents. The Borrower has delivered correct and complete copies of the fully-signed Acquisition Documents to the Lender on or prior to the Closing Date. To the best of Borrower’s knowledge, no party to the Acquisition Agreements is in default or breach thereunder.

          7.22 Broker’s Fees. The Borrower does not have any obligation to any Person in respect of any finder’s, brokers or similar fee in connection with the Loans, the Acquisition Documents or this Agreement.

- 50 -

          7.23 Investment Company Act. The Borrower is not an “investment company” or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940, as amended.

          7.24 Transactions. On the Closing Date and concurrently with the making of the Term Loan hereunder, the Transactions intended to be consummated on the Closing Date will have been consummated in accordance with the terms of the Acquisition Agreements and the other relevant Acquisition Documents and in accordance with all applicable laws. All consents and approvals of, and filings and registrations with, and all other actions by, any governmental entity and (except where the failure to obtain or make the same could not reasonably be expected to have an adverse effect on the Transactions or any portion thereof or a Material Adverse Effect) each other Person required in order to make or consummate the Transactions have been obtained, given, filed or taken and are or will be in full force and effect.

          7.25 Representations and Warranties in Acquisition Documents. All representations and warranties made by the Diversicare Parties in the Acquisition Documents, and, to the Borrower’s knowledge, all representations made by each other Person in such agreements and documents (including, without limitation, the SMS Parties), are true and correct. None of such representations and warranties are inconsistent in any material respect with the representations and warranties of the Borrower made herein or in any other Financing Agreement.

          7.26 Offenses and Penalties Under the Medicare/Medicaid Programs. Except as listed on Schedule 7.26 attached hereto, as of the Closing Date, neither the Borrower nor any Affiliate and/or employee of the Borrower or any Affiliate is currently, to the best knowledge of the Borrower, after due inquiry, under investigation or prosecution for, nor has the Borrower or any Affiliate or, to the best Knowledge of Borrower, after due inquiry, any current employee of the Borrower or any Affiliate been convicted of: (a) any offense related to the delivery of an item or service under the Medicare or Medicaid programs; (b) a criminal offense related to neglect or abuse of patients in connection with the delivery of a health care item or service; (c) fraud, theft, embezzlement or other financial misconduct; (d) the obstruction of an investigation of any crime referred to in subsections (a) through (c) of this Section; or (e) unlawful manufacture, distribution, prescription, or dispensing of a controlled substance. Except as listed on Schedule 7.26, as of the Closing Date, neither the Borrower nor any Affiliate and/or, to the best Knowledge of Borrower, after due inquiry, any current employee of the Borrower or any Affiliate has been required to pay any civil money penalty under applicable laws regarding false, fraudulent or impermissible claims or payments to induce a reduction or limitation of health care services to beneficiaries of any state or federal health care program, nor, to the best knowledge of the Borrower, after due inquiry, is the Borrower nor any Affiliate and/or to the best Knowledge of Borrower, after due inquiry, any current employee of the Borrower or any Affiliate currently the subject of any investigation or proceeding that may result in such payment. Neither Borrower nor any Affiliate and/or employee of the Borrower or any Affiliate has been excluded from participation in the Medicare, Medicaid or maternal and Child Health Services Program, or any program funded under the “Block grants” to States for Social Services (Title XX) Program.

          7.27 Medicaid/Medicare and Private Insurance/Managed Care Contracts.

- 51 -

                    (1) The Borrower has:

                    (2) Obtained and maintains, or in the case of the Diversicare Parties will obtain and maintain, where appropriate, Medicaid Certification and Medicare Certification to the extent required for reimbursement under the Medicaid Regulations or the Medicare Regulations, as the case may be; and

                    (3) Entered into and maintains in good standing, or in the case of the Diversicare Parties will enter into and maintain, where appropriate, its Medicaid Provider Agreement and its Medicare Provider Agreement to the extent required for reimbursement under Medicaid Regulations or the Medicare Regulations, as the case may be, and its Private Insurance/Managed Care Contracts.

                    (4) There are no proceedings pending, or, to the best knowledge of the Borrower, after due inquiry, threatened by any governmental authority seeking to modify, revoke or suspend, to the extent required for reimbursement, any Medicaid Provider Agreement, Medicare Provider Agreement, Medicare Certification or Medicaid Certification. Since the date of the most recent Medicare Certification and Medicaid Certification, the Borrower has not taken any action that would have a material adverse effect on the Certification or the Medicare Provider Agreement or Medicaid Provider Agreement.

                    (5) Neither the Borrower nor any Affiliate of the Borrower nor any current officer or director of the foregoing has engaged in any of the following: (i) knowingly and willfully making or causing to be made a false statement or representation of a material fact in any application for any benefit or payment under Medicare or Medicaid; (ii) knowingly and willfully making or causing to be made any false statement or representation of a material fact for use in determining rights to any benefit or payment under Medicare or Medicaid; (iii) failing to disclose knowledge by a claimant of the occurrence of any event affecting the initial or continued right to any benefit or payment under Medicare or Medicaid on its own behalf or on behalf of another, with intent to secure such benefit or payment fraudulently; (iv) knowingly and willfully soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind or offering to pay such remuneration: (A) in return for referring any individual to a Person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in party by Medicare or Medicaid; or (B) in return for purchasing, leasing or ordering or arranging for or recommending the purchasing, leasing or ordering of any good, facility, service or item for which payment may be made in whole in part by Medicare or Medicaid.

                    (6) The Borrower is not out of material compliance with any applicable conditions of participation of the Medicare or Medicaid programs nor with any Private Insurance/Managed Care Contracts, nor does any condition exist or has any event occurred which, in itself, or with the giving of notice or lapse of time, or both, would reasonably be expected to result in the suspension, revocation, impairment, forfeiture or non-renewal of (i) any contract of the Borrower in connection with the Medicare or Medicaid programs or (ii) any Private Insurance/Managed Care Contracts.

- 52 -

          7.28 Consideration. Each Borrower is a direct or indirect subsidiary of Parent, and are Affiliates of each other. The Affiliates of the Borrower will derive substantial direct and indirect benefit (financial and otherwise) from funds made available to the Borrower pursuant to this Agreement, and it is and will be to such Affiliates’ advantage to assist the Borrower in procuring such funds from the Lender. Each of the Borrower’s Affiliates desires to induce the Lender to enter into this Agreement with the Borrower.

          7.29 USA Patriot Act. Borrower represents and warrants to Lender that neither the Borrower nor any of its Affiliates is identified in any list of known or suspected terrorists published by any United States government agency (collectively, as such lists may be amended or supplemented from time to time, referred to as the “Blocked Persons Lists”) including, without limitation, (a) the annex to Executive Order 13224 issued on September 23, 2001, and (b) the Specially Designated Nationals List published by the Office of Foreign Assets Control.

          7.30 Absence of Foreign or Enemy Status. Neither the Borrower nor any Affiliate of the Borrower is an “enemy” or an “ally of the enemy” within the meaning of Section 2 of the Trading with the Enemy Act (50 U.S.C. App. §§ 1 et seq.), as amended. Neither the Borrower nor any Affiliate of the Borrower is in violation of, nor will the use of any of the Loans violate, the Trading with the Enemy Act, as amended, or any executive orders, proclamations or regulations issued pursuant thereto, including, without limitation, regulations administered by the Office of Foreign Asset Control of the Department of the Treasury (31 C.F.R. Subtitle B, Chapter V).

          7.31 HIPAA Compliance. Borrower has not received any notice from any governmental authority that such governmental authority has imposed or intends to impose any enforcement actions, fines or penalties for any failure or alleged failure to comply with HIPAA, or its implementing regulations.

          7.32 Labor Matters. Except as shown on Schedule 7.32, as of the Closing Date, there are no strikes or other labor disputes pending or, to the knowledge of Borrower, threatened against any Affiliate of Borrower. Except as shown on Schedule 7.32, as of the Closing Date, hours worked and payments made to the employees of the Borrower and Affiliates of Borrower have not been in violation of the Fair Labor Standards Act or any other applicable Law dealing with such matters. All payments due from the Borrower or Affiliates of Borrower, or for which any claim may be made against any of them, on account of wages and employee and retiree health and welfare insurance and other benefits have been paid or accrued as a liability on their books, as the case may be. The consummation of the transactions contemplated by the Financing Agreements and the Acquisition Documents will not give rise to a right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which Borrower is a party or by which it is bound.

          7.33 Capitalization. The authorized Stock of each Borrower, as of the Closing Date, is set forth on Schedule 7.33 hereto. Guarantor or another Borrower, as the case may be, legally and beneficially owns all of the issued and outstanding Stock of each Borrower. All issued and outstanding Stock of the Borrower is duly authorized and validly issued, fully paid, nonassessable, free and clear of all Liens or pledges other than Permitted Liens, and such Stock was issued in compliance with all applicable state, federal and foreign laws concerning the

- 53 -

issuance of securities. No shares of the Stock of Borrower, other than those owned by Guarantor or Borrower, are issued and outstanding. There are no preemptive or other outstanding rights, options, warrants, conversion rights or similar agreements or understandings for the purchase or acquisition from Borrower of any equity securities of Borrower.

          7.34 Government Contracts. The Borrower is not a party to any contract or agreement (including, but not limited to, any Lease) that is subject to the Federal Assignment of Claims Act, as amended (31 U.S.C. Section 3727) or any similar state or local law.

          7.35 OFAC. Neither the Borrower, nor Guarantor, nor any beneficial owner of the Borrower or Guarantor, is currently listed on the OFAC Lists.

          7.36 Commercial Leases. As of the Closing Date, the Commercial Leases as to which a Borrower is the lessee and the expiration dates of their current terms are as set forth on Schedule 7.36 attached hereto. The Borrower has delivered correct and complete copies of the fully-signed Commercial Leases to the Lender on or prior to the Closing Date. The Borrower is not in default or breach of any Commercial Lease and, to the Borrower’s knowledge, no other party to any Commercial Lease is in default or breach thereunder.

     8. AFFIRMATIVE COVENANTS.

     The Borrower covenants and agrees that, as long as any Liabilities of the Borrower remain outstanding, and (even if there shall be no such Liabilities outstanding) as long as this Agreement remains in effect:

          8.1 Reports, Certificates and Other Information. The Borrower Agent shall deliver to the Lender:

                    (1) Financial Statements.

                    (2) On or before the seventy-fifth (75th) day after each of Parent’s Fiscal Years, a copy of the annual financial statements on a consolidated basis for Parent, duly certified and audited by independent certified public accountants of nationally recognized standing selected by the Borrower, together with the supporting consolidating statements for each Borrower, consisting of, at least, balance sheets and statements of income and cash flow for such period, prepared in conformity with GAAP. In lieu of its obligations hereunder, Parent may submit to Lender, upon its filing thereof, a copy of its form 10-K as filed with the United States Security and Exchange Commission.

                    (3) On or before the fortieth (40th) day of the end of each of Parent’s first, second and third Fiscal Quarters, a copy of internally prepared quarterly financial statements for Borrower prepared in accordance with GAAP and in a manner substantially consistent with the financial statements referred to in Section 8.1(a)(1) hereof (subject, however, to the GAAP Exceptions), signed on behalf of the Borrower by a Duly Authorized Officer and (i) consisting of, at least, an income statement, a balance sheet, and statement of cash flow as at the close of such Fiscal Quarter and statements of earnings for such Fiscal Quarter and for the period from the beginning of such Fiscal Year to the close of such Fiscal Quarter and (ii) accompanied by management analysis and actual vs. budget variance reports for the Leased Assets.

- 54 -

                    (4) Borrower Base Certificates. On or before the thirtieth (30th) day after the end of each calendar month, a borrowing base certificate (in form and substance satisfactory to the Lender), signed on behalf of the Borrower by a Duly Authorized Officer.

                    (5) Compliance Certificates. Contemporaneously with the furnishing of each quarterly financial statements, a duly completed compliance certificate with appropriate insertions, in form and substance satisfactory to the Lender (a “Compliance Certificate”), dated the date of such annual financial statement or such calendar month and signed on behalf of the Borrower by a Duly Authorized Officer, which Compliance Certificate shall state that no Default or Event of Default has occurred and is continuing, or, if there is any such event, describes it and the steps, if any, being taken to cure it. Each Compliance Certificate shall contain a computation of, and show compliance with, each of the financial ratios and restrictions set forth in Section 9.12 hereof (each such computation and calculation to be in form and substance acceptable to the Lender).

                    (6) Schedule of Accounts. On or before the tenth (10th) day of each calendar month, a Schedule of Accounts, as of the last day of the immediately preceding calendar month and in form and substance reasonably satisfactory to the Lender.

                    (7) Notice of Default, Regulatory Matters, Litigation Matters or Adverse Change in Business. Forthwith upon learning of the occurrence of any of the following, written notice thereof which describes the same and the steps being taken by the Borrower with respect thereto: (i) the occurrence of a Default or an Event of Default; (ii) the institution or threatened institution of, or any adverse determination in, any litigation (other than a personal injury tort claim), arbitration proceeding or governmental proceeding in which any injunctive relief or money damages is sought which if adversely determined could have a Material Adverse Effect; (iii) the receipt of any notice from any governmental agency concerning any violation or potential violation of any regulations, rules or laws applicable to Borrower which could have a Material Adverse Effect; or (iv) any Material Adverse Change. With regard to personal injury tort claims, upon request by Lender, Borrower shall review with Lender the occurrence of any personal injury or other action which could reasonably give rise to a personal injury tort claim against the Borrower as to which (i) litigation has been instituted and is pending or (ii) a request for medical records has been made upon Borrower by an attorney for the claimant on or after January 1, 2006.

                    (8) Insurance Reports. (i) At any time after a Default and upon the request of the Lender, a certificate signed by a Duly Authorized Officer that summarizes the property, casualty, liability and malpractice insurance policies carried by the Borrower, and (ii) written notification of any material change in any such insurance by the Borrower within five (5) Business Days after receipt of any notice (whether formal or informal) of such change by any of its insurers.

                    (9) Annual Projections. On or before the ninetieth (90th) day after each of Borrower’s Fiscal Years, an annual projection for the current Fiscal Year showing Borrower’s projected operating plan, revenues and expenses on a monthly basis and a balance

- 55 -

sheet and cash flow statement for the Borrower, in form and substance reasonably satisfactory to Lender.

                    (10) Affiliate Transactions. Upon the Lender’s reasonable request from time to time, a reasonably detailed description of each of the material transactions between the Borrower and any of its Affiliates during the time period reasonably requested by the Lender, which shall include, without limitation, the amount of money either paid or received, as applicable, by the Borrower in such transactions.

                    (11) Health Care. Furnish to the Lender each of the following, to the extent applicable: (i) upon Lender’s request, a copy of any healthcare related licensure and annual or biannual certification survey report and any statement of deficiencies and any survey (other than the annual or biannual survey) indicating a violation or deficiency, and within the time period required by the particular agency for submission, a copy of the plan of correction with respect thereof if such plan of correction is required by such agency issuing the statement of deficiency or notice of violation, and correct or cause to be corrected any deficiency or violation within the time period required for cure by such agency, subject to such agency’s normal appeal process, if such deficiency or violation could adversely affect either the right to continue participation in Medicare, Medicaid or other reimbursement programs for existing patients or the right to admit new Medicare patients, Medicaid patients or other reimbursement program patients or result in the loss or suspension of Borrower’s licenses and permits to operate Borrower’s business; (ii) within five (5) Business Days of the receipt by the Borrower, any and all notices disclosing an adverse finding from any licensing, certifying and/or reimbursement agencies that Borrower’s license, Medicare or Medicaid certification or entitlement to payments pursuant to any reimbursement contract or program of Borrower is being downgraded to a substandard category, revoked, or suspended, or that action is pending or being considered to downgrade to a substandard category, revoke, or suspend any rights pursuant to the Borrower’s license, certification or reimbursement contract or program; and (iii) upon request of Lender, a complete and accurate copy of the annual Medicaid, Medicare and other cost reports for Borrower.

                    (12) Interim Reports. Promptly upon receipt thereof, copies of any reports submitted to Parent or Borrower by the independent accountants in connection with any interim audit of the books of any such Person and copies of each management control letter provided to Parent or Borrower by independent accountants.

                    (13) Purchase Price Adjustments. Prior to the closing of the Acquisition, promptly upon such information becoming available, a summary of all purchase price and other monetary adjustments that are made pursuant to any of the Acquisition Documents, to the extent such amounts exceed Two Hundred and Fifty Thousand Dollars ($250,000).

                    (14) Other Information. Such other information, certificates, schedules, exhibits or documents (financial or otherwise) concerning the Borrower and its operations, business, properties, condition or otherwise as the Lender may reasonably request from time to time.

- 56 -

          8.2 Inspection; Audit Fees. Borrower will keep proper books of record and account in accordance with GAAP in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit (at the expense of the Borrower provided the Borrower shall be responsible for such reasonable expenses no more than one (1) time per year unless an Event of Default has occurred and is continuing), representatives of the Lender or any Person appointed by Lender to visit and inspect any of their respective properties, to examine and make abstracts or copies from any of their respective books and records (in each case excluding patient medical records and other records to the extent confidential or where such examination is prohibited under applicable Laws, including without limitation HIPPA), to conduct a collateral audit and analysis of their respective Inventory and Accounts and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants as often as may reasonably be desired. In the absence of an Event of Default, the Lender shall give the Borrower commercially reasonable prior written notice of such exercise. No notice shall be required during the existence and continuance of any Event of Default.

          8.3 Conduct of Business. The Borrower shall maintain its corporate existence, shall maintain in full force and effect all licenses, permits, authorizations, bonds, franchises, leases, patents, trademarks and other Intellectual Property, contracts and other rights necessary to the conduct of its business, shall continue in, and limit its operations to, the same general line of business as that currently conducted and shall comply with all applicable laws, orders, regulations and ordinances of all federal, foreign, state and local governmental authorities, except to the extent any such non-compliance could reasonably be expected to result in a Material Adverse Effect. The Borrower shall keep proper books of record and account in which full and true entries will be made of all dealings or transactions of or in relation to the business and affairs of the Borrower, in accordance with GAAP (subject, however, to the GAAP Exceptions), consistently applied.

          8.4 Claims and Taxes. The Borrower agrees to pay or cause to be paid all license fees, bonding premiums and related taxes and charges and shall pay or cause to be paid all of the Borrower’s real and personal property taxes, assessments and charges and all of the Borrower’s franchise, income, unemployment, use, excise, old age benefit, withholding, sales and other taxes and other governmental charges assessed against the Borrower, or payable by the Borrower, at such times and in such manner as to prevent any penalty from accruing or any Lien from attaching to its property, provided that the Borrower shall have the right to contest in good faith, by an appropriate proceeding promptly initiated and diligently conducted, the validity, amount or imposition of any such tax, assessment or charge, and upon such good faith contest to delay or refuse payment thereof, if (a) the Borrower establishes adequate reserves to cover such contested taxes, assessments or charges, and (b) such contest does not have a Material Adverse Effect.

          8.5 State of Incorporation or Formation. The Borrower’s state of incorporation or formation, as applicable, set forth on Schedule 1 hereto shall remain the Borrower’s state of incorporation or formation, as applicable, unless: (a) the Borrower provides the Lender with at least thirty (30) days prior written notice of any proposed change, (b) no Event of Default then exists or will exist immediately after such proposed change, and (c) the Borrower provides the Lender with, at Borrower’s sole cost and expense, such financing

- 57 -

statements, and if applicable, landlord waivers, bailee letters and processor letters, and such other agreements and documents as the Lender shall reasonably request in connection therewith.

          8.6 Liability and Malpractice Insurance. The Borrower shall maintain, at its expense, general liability and professional malpractice insurance through commercial insurance in such amounts and with such deductibles consistent with its past practices, and shall deliver to the Lender the original (or a certified) copy of each policy of insurance and evidence of the payment of all premiums therefor. Such policies of insurance shall contain an endorsement showing the Lender as additional insured thereunder. Lender acknowledges that general liability and professional malpractice insurance coverage is currently unavailable generally in the nursing home industry at commercially affordable rates and that the Borrower maintains and has in place general liability and malpractice insurance with single limit coverage of One Hundred Thousand Dollars ($100,000) per occurrence and Five Hundred Thousand Dollars ($500,000) cumulative. Lender agrees that until such time as insurance coverage is generally available in the nursing home industry at commercially affordable rates, Lender agrees to accept Borrower’s current coverage. Borrower shall provide Lender, (a) on an annual basis, information from its insurance representative, insurance carrier or from comparable insurance carriers regarding availability of insurance and (b) with respect to the insurance policies contemplated by this Section 8.6 and those certain insurance policies contemplated by Section 8.7 below, prompt (but in any event, within five (5) Business Days of any such occurrence) written notice of any alteration or cancellation of such insurance policy.

          8.7 Property and Other Insurance. The Borrower shall, at its expense, keep and maintain its assets material to the Business of Borrower insured against (i) loss or damage by fire, theft, explosion, spoilage and all other hazards and risks and (ii) business interruption, in such amounts with such deductibles (which may include self-insurance trusts) ordinarily insured against by other owners or users of such properties in similar businesses of comparable size operating in the same or similar locations but in all events as required by the Capmark Debt Documents, the Omega Debt Documents and any other Commercial Leases. Borrower, at Borrower’s expense, shall keep and maintain workers compensation insurance as may be required by applicable Laws. The Borrower Agent shall deliver to the Lender the original (or a certified) copy of each policy of insurance and evidence of payment of all premiums therefor. Such policies of insurance shall contain an endorsement showing the Lender as additional insured thereunder. Upon the occurrence of an Event of Default under this Agreement, the Borrower irrevocably makes, constitutes and appoints the Lender (and all officers, employees or agents designated by the Lender in writing to the Borrower) as the Borrower’s true and lawful attorney-in-fact for the purpose, subject at all times to the terms and conditions of the Capmark Debt Documents, Omega Debt Documents and any other Commercial Leases, of making, settling and adjusting claims on behalf of the Borrower under all such policies of insurance, endorsing the name of the Borrower on any check, draft, instrument or other item of payment received by the Borrower or the Lender pursuant to any such policies of insurance, and for making all determinations and decisions of Borrower with respect to such policies of insurance.

     UNLESS THE BORROWER PROVIDES THE LENDER WITH EVIDENCE OF THE INSURANCE COVERAGE REQUIRED BY THIS AGREEMENT WITHIN THREE BUSINESS DAYS FOLLOWING LENDER’S REQUEST, THE LENDER MAY PURCHASE INSURANCE AT THE BORROWER’S EXPENSE TO PROTECT THE LENDER’S

- 58 -

INTERESTS IN THE COLLATERAL. THIS INSURANCE MAY, BUT NEED NOT, PROTECT THE INTERESTS IN THE COLLATERAL. THE COVERAGE PURCHASED BY THE LENDER MAY NOT PAY ANY CLAIMS THAT THE BORROWER MAKES OR ANY CLAIM THAT IS MADE AGAINST THE BORROWER IN CONNECTION WITH THE COLLATERAL. THE BORROWER MAY LATER CANCEL ANY SUCH INSURANCE PURCHASED BY THE LENDER, BUT ONLY AFTER PROVIDING THE LENDER WITH EVIDENCE THAT THE BORROWER HAS OBTAINED INSURANCE AS REQUIRED BY THIS AGREEMENT. IF THE LENDER PURCHASES INSURANCE FOR THE COLLATERAL, THE BORROWER WILL BE RESPONSIBLE FOR THE COSTS OF THAT INSURANCE, INCLUDING INTEREST AND ANY OTHER CHARGES THAT THE LENDER MAY IMPOSE IN CONNECTION WITH THE PLACEMENT OF THE INSURANCE, UNTIL THE EFFECTIVE DATE OF THE CANCELLATION OR EXPIRATION OF THE INSURANCE. THE COSTS OF THE INSURANCE MAY BE ADDED TO THE LIABILITIES SECURED HEREBY. THE COSTS OF THE INSURANCE MAY BE MORE THAN THE COST OF INSURANCE THE BORROWER MAY BE ABLE TO OBTAIN ON ITS OWN.

          8.8 Environmental. The Borrower shall promptly notify and furnish Lender with a copy of any and all Environmental Notices which are received by it. Except where not required to do so pursuant to any Commercial Lease, the Borrower shall take prompt and appropriate action in response to any and all such Environmental Notices and shall promptly furnish Lender with a description of the Borrower’s Response thereto. The Borrower shall (a) obtain and maintain all permits required under all applicable federal, state, and local Environmental Laws, except as to which the failure to obtain or maintain would not have a Material Adverse Effect; and (b) except where not required to do so pursuant to any Commercial Lease, keep and maintain the Property and each portion thereof in compliance with, and not cause or permit the Property or any portion thereof to be in violation of, any Environmental Law, except as to which the failure to comply with or the violation of which, would not have a Material Adverse Effect.

          8.9 Banking Relationship. Except as otherwise provided in Section 4.3 hereof, within sixty (60) calendar days of the Closing Date, the Borrower shall have initiated the process to move and at all times thereafter maintain all of its primary deposit and operating accounts with the Lender and the Lender will act as the principal depository and remittance agent for the Borrower. The Borrower agrees to pay to the Lender reasonable and customary fees for banking services/cash management services (the “Service Fee”). The Lender shall be and hereby is authorized to charge any deposit or operating account of the Borrower in respect of the Service Fee.

          8.10 Intellectual Property. Subject to the terms of the Intercreditor Agreement, if after the Closing Date the Borrower shall own or otherwise possess any registered patents, copyrights, trademarks, trade names, or service marks other than those owned by Parent or incorporating the name of any SMS Party or any derivation thereof (or file an application to attempt to register any of the foregoing), the Borrower shall promptly notify the Lender in writing of same and execute and deliver any documents or instruments (at the Borrower’s sole cost and expense) reasonably required by Lender to perfect a security interest in and lien on any such federally registered Intellectual Property in favor of the Lender and assist in the filing of

- 59 -

such documents or instruments with the United States Patent and Trademark Office and/or United States Copyright Office or other applicable registrar.

          8.11 Change of Location; Etc. Any of the Collateral may be moved to another location within the continental United States (other than as disclosed to the Lender in writing on the Closing Date) so long as: (i) the Borrower provides the Lender with at least thirty (30) days prior written notice, (ii) no Event of Default then exists, and (iii) the Borrower provides the Lender with, at Borrower’s sole cost and expense, such financing statements, landlord waivers, bailee and processor letters and other such agreements and documents as the Lender shall reasonably request. The Borrower shall defend and protect the Collateral against and from all claims and demands of all Persons at any time claiming any interest therein adverse to the Lender. If the Borrower desires to change its principal place of business and chief executive office, the Borrower shall notify the Lender thereof in writing no later than thirty (30) days prior to such change and the Borrower shall provide the Lender with, at Borrower’s sole cost and expense, such financing statements and other documents as the Lender shall reasonably request in connection with such change. If the Borrower shall decide to change the location where its books and records are maintained, the Borrower shall notify the Lender thereof in writing no later than thirty (30) days prior to such change.

          8.12 Health Care Related Matters. The Borrower shall cause all licenses, permits, certificates of need, reimbursement contracts and programs, and any other agreements necessary for the use and operation of its business or as may be necessary for participation in Medicaid, Medicare and other applicable reimbursement programs, to remain in full force and effect, except to the extent that the failure to do so would not cause a Material Adverse Effect or a material adverse effect on the prospects of the Borrowers on a consolidated basis. The Borrower shall at all times maintain in full force and effect the Medicare Certification, the Medicaid Certification, the Medicare Provider Agreement and the Medicaid Provider Agreement, except to the extent that the failure to do so would not cause a Material Adverse Effect or a material adverse effect on the prospects of the Borrower on a consolidated basis. The Borrower shall comply at all times with the CMS, except to the extent that such failure to comply would not cause a Material Adverse Effect or a material adverse effect on the prospects of the Borrower on a consolidated basis. The Borrower shall take all necessary steps to protect personally identifiable health information for each patient substantially in accordance with the CMS laws and regulations, except to the extent that the failure to do so would not cause a Material Adverse Effect or a material adverse effect on the prospects of the Borrower on a consolidated basis.

          8.13 US Patriot Act. Borrower covenants to Lender that if Borrower becomes aware that it or any of its Affiliates is identified on any Blocked Persons List (as identified in Section 7.29 hereof), Borrower shall immediately notify Lender in writing of such information. Borrower further agrees that in the event any of them or any Affiliate is at any time identified on any Blocked Persons List, such event shall be an Event of Default, and shall entitle Lender to exercise any and all remedies provided in any Financing Agreements or otherwise permitted by law. In addition, Lender may immediately contact the Office of Foreign Assets Control and any other government agency Lender deems appropriate in order to comply with its obligations under any law, regulation, order or decree regulating or relating to terrorism and international money laundering.

- 60 -

          8.14 Government Accounts. If the Borrower desires Government Accounts to be considered Eligible Accounts, the Borrower shall take any and all action reasonably required by the Lender in order to provide the Lender with a perfected security interest in such Government Accounts and execute and deliver all documentation reasonably required by the Lender in connection therewith, including, without limitation, a Government Blocked Account Agreement.

          8.15 Further Assurances. The Borrower will, at its own cost and expense, cause to be promptly and duly taken, executed, acknowledged and delivered all such further acts, documents and assurances as may from time to time be necessary or as the Lender may from time to time reasonably request in order to carry out the intent and purposes of this Agreement and the other the Financing Agreements and the transactions contemplated thereby, including, subject to the terms of the Intercreditor Agreements, all such actions to establish, create, preserve, protect and perfect a first-priority Lien in favor of the Lender on the Collateral (including Collateral acquired after the date hereof), including on any and all unencumbered assets of Borrower whether now owned or hereafter acquired.

          8.16 Compliance with Anti-Terrorism Orders. Lender hereby notifies Borrowers that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56, signed into law October 26, 2001) (the “Patriot Act”), and the Lender’s policies and practices, the Lender is required to obtain, verify and record certain information and documentation that identifies each Borrower, which information includes the name and address of each Borrower and such other information that will allow the Lender to identify each Borrower in accordance with the Patriot Act. In addition, Borrowers shall (a) ensure that no Person who owns a controlling interest in or otherwise controls any Borrower is or shall be listed on the OFAC Lists, (b) not use or permit the use of the proceeds of the Loan to violate any of the foreign asset control regulations of OFAC or any enabling statute or Executive Order relating thereto, and (c) comply with all applicable Bank Secrecy Act laws and regulations, as amended. Borrower shall not permit the transfer of any interest in Borrower to any Person (or any beneficial owner of such entity) who is listed on the OFAC Lists. Borrower shall not knowingly enter into a Lease with any party who is listed on the OFAC Lists. Borrower shall immediately notify Lender if Borrower has knowledge that the Guarantor, manger or any member or beneficial owner of Borrower, Guarantor, Manager is listed on the OFAC Lists or (i) is indicted on or (ii) arraigned and held over on charges involving money laundering or predicate crimes to money laundering. Borrower shall immediately notify Lender if Borrower knows that any Tenant is listed on the OFAC Lists or (A) is convicted on, (B) pleads nolo contendere to, (C) is indicted on or (D) is arraigned and held over on charges involving money laundering or predicate crimes to money laundering.

          8.17 Blocked Account Agreements and Account Debtors.

                    (1) Within thirty (30) calendar days following the Closing Date, the Borrower shall have entered into the Blocked Account Agreements.

                    (2) Within forty-five (45) calendar days following the Closing Date, the Borrower shall instruct and direct each Account Debtor to send all payments with

- 61 -

respect to each Account to the Commercial Blocked Account and the Government Blocked Account, as the case may be, for deposit established pursuant to this Agreement.

     9. NEGATIVE COVENANTS.

     The Borrower covenants and agrees that as long as any Liabilities remain outstanding, and (even if there shall be no such Liabilities outstanding) as long as this Agreement remains in effect (unless the Lender shall give its prior written consent thereto):

          9.1 Encumbrances. The Borrower shall not create, incur, assume or suffer to exist any Lien of any nature whatsoever on any of its assets or property, including, without limitation, the Collateral, other than the following (“Permitted Liens”): (i) Liens securing the payment of taxes, either not yet due or the validity of which is being contested in good faith by appropriate proceedings, and as to which the Borrower shall, if appropriate under GAAP, have set aside on its books and records adequate reserves, provided, that such contest does not have a material adverse effect on the ability of the Borrower to pay any of the Liabilities, or the priority or value of the Lender’s Lien in the Collateral; (ii) deposits under workmen’s compensation, unemployment insurance, social security and other similar laws; (iii) Liens in favor of the Lender; (iv) liens imposed by law, such as mechanics’, materialmen’s, landlord’s, warehousemen’s, carriers’ and other similar liens, securing obligations incurred in the ordinary course of business that are not past due for more than thirty (30) calendar days, or that are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established, or that are not yet due and payable; (v) purchase money security interests upon or in any property acquired or held by the Borrower in the ordinary course of business to secure the purchase price of such property so long as: (a) the aggregate indebtedness relating to such purchase money security interests and Capitalized Lease Obligations does not at any time exceed Seven Hundred Fifty Thousand and No/100 Dollars ($750,000.00) in the aggregate at any time, (b) each such lien shall only attach to the property to be acquired; and (c) the indebtedness incurred shall not exceed one hundred percent (100%) of the purchase price of the item or items purchased; (v) pledges and deposits made in the ordinary course of business in compliance with workmen’s compensation laws, unemployment insurance and other social security laws or regulations, or deposits to secure performance of tenders, statutory obligations, trade contracts (other than for Indebtedness), leases (other than Capital Lease Obligations), surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of Borrower’s business as presently conducted; (vi) any Lien securing a judgment in excess of Two Hundred Fifty Thousand Dollars ($250,000.00) that remains unsatisfied or undischarged for more than thirty (30) days, unless such judgment is either (i) fully insured and such insurer has admitted liability or (ii) is being contested or appealed by appropriate proceedings and the enforcement of such judgment is stayed during the course of such contest or appeal, provided that Borrower has established reserves adequate for payment of such judgment and in the event such contest or appeal is ultimately unsuccessful pays such judgment within ten (10) days of the final, non-appealable ruling rendered in such contest or appeal; and (vii) Liens in favor of Capmark, Omega and the Omega Senior Lessors, subject in all cases to the provisions of the Intercreditor Agreements.

          9.2 Indebtedness; Capital Expenditures. Borrower shall not incur, create, assume, become or be liable in any manner with respect to, or permit to exist, any Indebtedness,

- 62 -

except (i) the Liabilities, (ii) the Mortgage Loan, (iii) the Commercial Leases, and any extensions or renewals thereof, (iv) trade obligations and normal accruals in the ordinary course of business not yet due and payable, (v) the indebtedness not to at any time exceed Seven Hundred Fifty Thousand and No/100 Dollars ($750,000.00) relating to the purchase money security interests and Capitalized Lease Obligations permitted pursuant to Section 9.1 hereof, (vi) intercompany Indebtedness of the Borrower to the extent permitted under Section 9.4, (vii) the AmSouth Letter of Credit and (viii) the Indebtedness incurred in connection with the Rose Terrace Lease.

          9.3 Consolidations, Mergers or Transactions. Other than the Transactions and the Rose Terrace Acquisition, the Borrower shall not be a party to any merger, consolidation, or exchange of Stock, or purchase or otherwise acquire all or substantially all of the assets or Stock of any class of, or any other evidence of an equity interest in, or any partnership, limited liability company, or joint venture interest in, any other Person, or sell, transfer, convey or lease all or any substantial part of its assets or property, or sell or assign, with or without recourse, any receivables. The Borrower shall not form or establish any Subsidiary without the Lender’s prior written consent. With prior notice to Lender, Borrower may dissolve an inactive Subsidiary that does not conduct any business operations and has assets with a book value not in excess of $10,000.00, provided that any assets are transferred to Parent or an existing Subsidiary which is a Borrower under this Agreement.

          9.4 Investments or Loans. The Borrower shall not make, incur, assume or permit to exist any loans or advances, or any investments in or to any other Person, except (i) investments in short-term direct obligations of the United States Government, agency or instrumentality thereof; or any (ii) investments in negotiable certificates of deposit issued by the Lender or by any other bank reasonably satisfactory to the Lender, payable to the order of the Borrower or to bearer, (iii) investments in commercial paper rated at least A-1 by Standard & Poor’s Corporation or P-1 by Moody’s Investors Service, Inc., or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments, (iv) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (i) through (iii), above; provided that, in each case, such investment is reasonably acceptable to the Lender, (iv) other short-term investments as may be permitted by Lender, (vi) loans or advances made by any Borrower to Parent or any other Borrower, (vii) loans and advances to employees permitted under Section 9.8; (viii) the Trust Loan and (ix) investments by the Borrowers in their respective Subsidiaries existing on the date hereof and additional investments by the Borrower in their respective Subsidiaries so long as such Subsidiary is a Borrower under this Agreement. Lender acknowledges that under the Option Agreement by and between Morris Memorial Convalescing and Crippled Children’s Home, Inc.(“Morris Memorial”) and Advocat Inc., Borrower has made and may continue to make from time to time certain advances in connection with the Rose Terrance Acquisition; provided that (a) the aggregate principal amount of such advances shall not exceed Eight Hundred Fifty Thousand Dollars ($850,000.00) and (b) any such advance in excess of Eight Hundred Fifty Thousand Dollars ($850,000.00) shall require Lender’s prior written consent.

          9.5 Guarantees. The Borrower shall not guarantee, endorse or otherwise in any way become or be responsible for obligations of any other Person, whether by agreement to purchase the Indebtedness of any other Person or through the purchase of goods, supplies or

- 63 -

services, or maintenance of working capital or other balance sheet covenants or conditions, or by way of stock purchase, capital contribution, advance or loan for the purpose of paying or discharging any Indebtedness or obligation of such other Person or otherwise, except (i) endorsements of negotiable instruments for collection in the ordinary course of business, and (ii) the Indebtedness permitted under Section 9.2, above. Lender acknowledges that the Borrower has guaranteed certain obligations for supplies purchases of Morris Memorial and acknowledges such guarantees do not violate this Section 9.2.

          9.6 Disposal of Property. The Borrower shall not sell, assign, lease, transfer or otherwise dispose of (whether in one transaction or a series of transactions) a material part of its properties, assets and rights to any Person except (a) sales of Inventory in the ordinary course of business, and (b) sales of Equipment being replaced in the ordinary course of business with other Equipment with a fair market value and orderly liquidation value equal to or greater than the Equipment being replaced.

          9.7 Use of Proceeds. The Borrower shall use the proceeds of the (a) Revolving Loan for working capital purposes and (b) Term Loan to (i) refinance certain existing Indebtedness (as defined below) of the Borrower, (ii) partially finance the Transactions and (iii) pay certain fees, costs and expenses reasonably incurred in connection with the Transactions.

          9.8 Loans to Officers; Consulting and Management Fees. The Borrower shall not make any loans to its officers, directors, shareholders, or employees or to any other Person, and the Borrower shall not pay any consulting, management fees or similar fees to its officers, directors, shareholders, manager, employees, or Affiliates or any other Person, whether for services rendered to the Borrower or otherwise; provided, however, the Borrower shall be permitted to (i) make advances to its employees in an aggregate amount not to exceed One Hundred Thousand Dollars ($100,000) in any Fiscal Year of Borrower for all such employees collectively, in each case, provided that both immediately before such contemplated payment(s) or after giving effect to any such payment(s) no Default or Event of Default shall exist or have occurred or result therefrom; (ii) pay reasonable outside directors fees; and (iii) pay the management fees permitted by the Management Agreements. Lender acknowledges that travel advances issued in the ordinary course of business do not constitute loans for purposes of this Section 9.8.

          9.9 Dividends and Stock Redemptions. The Borrower shall not (a) declare, make or pay any dividend or other distribution (whether in cash, property or rights or obligations) to or for the benefit of any officer, shareholder, director, or any Affiliate other than (i) to Guarantor and (ii) the Required Dividends and Redemption Amounts, (ii) distributions under the Borrower Cash Management Program, and (iii) payment of the management fees under the Management Agreements, or (b) purchase or redeem any of the Stock of the Borrower or any options or warrants with respect thereto, declare or pay any dividends or distributions thereon, or set aside any funds for any such purpose. Notwithstanding the foregoing or anything to the contrary contained herein, the foregoing declarations, payments, distributions, purchases or redemptions set forth in this Section 9.9 shall, in each case, be in both manner and amount consistent with the Borrower’s historical practices.

- 64 -

          9.10 Payments in Respect of Subordinated Debt.

                    (1) The Borrower shall not make any payment, directly or indirectly, to (i) Capmark (or any Affiliate or Subsidiary thereof) in contravention of the Capmark Intercreditor Agreement or (ii) Omega (or any Affiliate or Subsidiary thereof) in contravention of either Omega Intercreditor Agreement.

                    (2) The Borrower shall not make any payment in respect of any Indebtedness for borrowed money that is subordinated to the Liabilities (including, without limitation, the Subordinated Debt); provided, however, the Borrower shall be permitted to make solely those payments expressly permitted pursuant to the terms of the Subordination Agreements, in each case, as long as the Borrower is in compliance with Section 9.12 hereof both immediately before and after any such contemplated or actual payment, provided, further, that both immediately before any such contemplated payment or after giving effect to any such payments no Default or Event of Default shall exist or have occurred or result therefrom, unless otherwise permitted expressly under the terms of the Subordinations Agreements.

          9.11 Transactions with Affiliates. Except as expressly permitted under this Agreement, and except for the Management Agreements and payment of the fee permitted by the terms of the Management Agreements, and the cash management program of Borrower and its Affiliates, the Borrower shall not transfer any cash or property to any Affiliate or enter into any transaction, including, without limitation, the purchase, lease, sale or exchange of property or the rendering of any service to any Affiliate; provided, however, except as otherwise expressly restricted under this Agreement, that the Borrower may transfer cash or property to Affiliates and enter into transactions with Affiliates for fair value in the ordinary course of business pursuant to terms that are no less favorable to the Borrower than the terms upon which such transfers or transactions would have been made had such transfers or transactions been made to or with a Person that is not an Affiliate.

          9.12 Financial Ratios. Commencing with the Fiscal Quarter ending September 30, 2007 and continuing thereafter, the consolidated Borrower shall not:

                    (1) Minimum Fixed Charge Coverage Ratio. Permit its Fixed Charge Coverage Ratio to be less than 1.10 to 1.00, measured as of the last day of each Fiscal Quarter for the trailing twelve (12) month period.

                    (2) Minimum Adjusted EBITDA. Permit its Adjusted EBITDA to be less than Ten Million Five Hundred Thousand and No/100 Dollars ($10,500,000.00), measured as of the last day of each Fiscal Quarter for the trailing twelve (12) month period.

                    (3) Maximum Leverage Ratio. Permit the Leverage Ratio to be greater than (i) 1.75 to 1.00, for the period commencing on the Closing Date and continuing until the day of the two year anniversary of the Closing Date; (ii) 1.50 to 1.00, for the period commencing on the day immediately following the two year anniversary of the Closing Date and continuing until the day of the four year anniversary of the Closing Date, and (iii) 1.25 to 1.00

- 65 -

thereafter. The Leverage Ratio shall be measured as of the last day of each Fiscal Quarter for the trailing twelve (12) month period.

                    (4) Computation. The Borrower acknowledges and agrees that the calculation and computation of the foregoing financial ratios and covenants shall be pursuant to and in accordance with Section 8.1(c) hereof. For purposes of these computations, measurements of EBITDA will be adjusted to analyze actual results of the Acquisition until such time as a full twelve (12) months of Acquisition results are included in the computations.

          9.13 Change in Nature of Business. Borrower shall not engage, directly or indirectly, in any business other than providing residential long term care, assisted living and skilled nursing care.

          9.14 Other Agreements. The Borrower shall not enter into any agreement containing any provision which would be violated or breached by the performance of its obligations hereunder or under any Financing Agreement to which Borrower is a party or which would violate or breach any provision hereof or thereof, or that would or is reasonably likely to adversely affect the Lender’s interests or rights under this Agreement and the other Financing Agreements to which Borrower is a party or the likelihood that the Liabilities will be paid in full when due, nor shall the Borrower’s bylaws, articles of incorporation, operating agreement, partnership agreement or other governing document (each a “Governing Document”), as applicable, be amended or modified in any way that would violate or breach any provision hereof or of any Financing Agreement to which Borrower is a party, or that would or is reasonably likely to adversely affect the Lender’s interests or rights under this Agreement and the other Financing Agreements to which Borrower is a party or the likelihood that the Liabilities will be paid in full when due; provided, prior to any amendment or modification of any of the Borrower’s Governing Documents, the Borrower shall furnish a correct and complete copy of any such proposed amendment or modification to the Lender.

          9.15 Blocked Accounts and Lock Box Accounts. The Borrower shall not establish or open any other blocked account (other than the Commercial Blocked Account and the Government Blocked Account) or any lock box accounts after the Closing Date. The Borrower shall not amend, modify or otherwise change any terms of the Commercial Blocked Account Agreement or the Government Blocked Account Agreement, without the Lender’s prior written consent.

          9.16 Amendments to Restricted Agreements. The Borrower shall not amend, modify or supplement any Restricted Agreement, in any manner that would or is reasonably likely to adversely affect the Lender’s interests under this Agreement and the other Financing Agreements to which Borrower is a party, without the Lender’s prior written consent (including, without limitation, except as expressly permitted by the terms of the applicable Intercreditor Agreement, amending or modifying the Capmark Debt Documents or Omega Debt Documents in order to (a) increase the rate of interest on or fees payable in respect of the debt unless such increase is not due and payable prior to the date the Liabilities are repaid in full, (b) accelerate the date of any regularly scheduled fees, interest or principal payment on the debt, (c) shorten the final maturity date of the debt, (d) increase the principal amount of the debt, or (e) make the covenants or events of default contained in the Capmark Debt Documents or Omega Debt

- 66 -

Documents materially more restrictive). Within three (3) Business Days after entering into any non-adverse amendment, modification or supplement to any Restricted Agreement, the Borrower Agent shall deliver to the Lender a complete and correct copy of such amendment, modification or supplement.

          9.17 State of Incorporation or Formation. The Borrower shall not change its state of incorporation or formation, as applicable, from that set forth on Schedule 1 hereto.

          9.18 Environmental. Except as to environmental conditions for which it is not responsible pursuant to any Commercial Lease, the Borrower shall not permit the Property or any portion thereof to be involved in the use, generation, manufacture, storage, disposal or transportation of Hazardous Substances except in compliance in all material respects with all Environmental Laws.

          9.19 Fiscal Year. The Borrower shall not change its Fiscal Year.

          9.20 Restrictions on Fundamental Changes. Without duplication of any of the foregoing, Borrower shall not:

                    (1) liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution);

                    (2) transfer, assign, convey or grant to any other Person, other than another Borrower, the right to operate or control any Location, whether by lease, sublease, management agreement, joint venture agreement or otherwise;

                    (3) without providing Lender with thirty (30) days’ prior written notice, change its legal name;

                    (4) suffer or permit to occur any change in the legal or beneficial ownership of the capital stock, partnership interests or membership interests, or in the capital structure, or any material change in the organizational documents or governing documents, of Borrower;

                    (5) change the licensed operator, manager or property manager for any Property; or

                    (6) consent to or acknowledge any of the foregoing.

          9.21 Margin Stock. Borrower shall not carry or purchase any “margin security” within the meaning of Regulations U, T or X of the Board of Governors of the Federal Reserve System.

          9.22 Truth of Statements and Certificates. Borrower shall not furnish to the Lender any certificate or other document that contains any untrue statement of a material fact or that omits to state a material fact necessary to make it not misleading in light of the circumstances under which it was furnished.

- 67 -

          9.23 Negative Pledge Assets. Borrower shall not permit any Person to have a Lien on or security interest in any of the Negative Pledge Assets or any accessions, improvements, additions to, substitutions for and replacements for and products, profits and proceeds of any of the Negative Pledge Assets; provided Lender acknowledges that (i) Borrower has entered into a contract for the purchase and sale of the land and improvements comprising the Carolina Beach Facility to a third party purchaser and consents to such sale pursuant to the terms of said purchase contract and (ii) Borrower has sold its interest in the license/CON for the beds at the Carolina Beach Facility to a third party purchaser.

     The Borrower agrees that compliance with this Article 9 is a material inducement to the Lender’s advancing credit under this Agreement. The Borrower further agrees that in addition to all other remedies available to the Lender, the Lender shall be entitled to specific enforcement of the covenants in this Article 9, including injunctive relief.

     10. HEALTH CARE MATTERS.

     Without limiting the generality of any representation or warranty made in Article 7 or any covenant made in Articles 8 or 9, each Borrower represents and warrants on a joint and several basis to and covenants with the Lender, and shall be deemed to represent, warrant and covenant on each day on which any advance or accommodation in respect of any Loan is requested or made or any Liabilities shall be outstanding under this Agreement, that:

          10.1 Funds from Restricted Grants. None of the Property or the Collateral is subject to, and Borrower shall indemnify and hold the Lender harmless from and against, any liability in respect of amounts received by Borrower or others for the purchase or improvement of the Property or Collateral or any part thereof under restricted or conditioned grants or donations, including, without limitation, monies received under the Public Health Service Act, 42 U.S.C. Section 291 et seq.

          10.2 Certificate of Need. If required under applicable Law, each Borrower has and shall maintain in full force and effect a valid certificate of need (“CON”) or similar certificates, license, permit, registration, certification or approval issued by the State Regulator for the requisite number of beds in each Property (the “Licenses”). Borrower shall cause to be operated the Location and the Property in a manner such that the Licenses shall remain in full force and effect at all times, except to the extent the failure to do so would not cause a Material Adverse Effect or a material adverse effect on the prospects of the Borrowers on a consolidated basis. True and complete copies of the Licenses have been delivered to Lender.

          10.3 Licenses. The Licenses: (i) are and shall continue in full force and effect at all times throughout the term of the Term Loan and are and shall be free from restrictions or known conflicts which would materially impair the use or operation of any Property for its current use, and if any Licenses become provisional, probationary, conditional or restricted in any way (collectively “Restrictions”), Borrower shall take or cause to be taken prompt action to correct such Restrictions; (ii) may not be, and have not been, and will not be transferred to any location other than the Property; and (iii) other than the Capmark Security Interests and the Omega Security Interests have not been and will not be pledged as collateral security for any other loan or indebtedness. Except as may be required under and pursuant to the Capmark Debt

- 68 -

Documents and the Omega Debt Documents, Borrower shall do (or suffer to be done) any of the following:

               (1) Rescind, withdraw, revoke, amend, modify, supplement, or otherwise alter the nature, tenor or scope of the Licenses for any Property without Lender’s prior written consent;

               (2) Amend or otherwise change any Property’s licensed beds capacity and/or the number of beds approved by the State Regulator without Lender’s prior written consent; or

               (3) Replace, assign or transfer all or any part of any Property’s beds to another site or location (other than to any other Property) without Lender’s prior written consent.

     11. DEFAULT, RIGHTS AND REMEDIES OF THE LENDER.

          11.1 Event of Default . Any one or more of the following shall constitute an “Event of Default” under this Agreement:

               (1) the Borrower fails to pay (i) any principal or interest payable hereunder or under any of the Notes on the date due, declared due or demanded (including, without limitation, any amount due under Section 2.15) or (ii) any other amount payable to the Lender under this Agreement or under any other Financing Agreement to which the Borrower is a party (including, without limitation, any of the Notes) within five (5) calendar days after the date when any such payment is due and, with respect to clause (ii) only, such failure is not cured within five (5) calendar days after notice to Borrower by Lender;

               (2) the Borrower fails or neglects to perform, keep or observe any of the covenants, conditions or agreements set forth in (i) Sections 2.4, 4.4, 8.5, 8.6, 8.9, 8.11, or Section 8.12 hereof (ii) any Section of Article 9 hereof or (iii) any Section of Article 10 hereof and, with respect to such Sections in Article 10 only, such failure or neglect shall continue for a period of five (5) calendar days after the earlier of (1) the date the Borrower actually knew of such failure or neglect and (2) notice to the Borrower by the Lender.

               (3) the Borrower fails or neglects to perform, keep or observe any of the covenants, conditions, promises or agreements contained in this Agreement (other than those specified in Section 11.1(b) hereof) and such failure or neglect shall continue for a period of thirty (30) calendar days after the earlier of (i) the date the Borrower actually knew of such failure or neglect and (ii) notice to the Borrower by the Lender;

               (4) any representation or warranty heretofore, now or hereafter made by the Borrower in connection with this Agreement or any of the other Financing Agreements to which Borrower is a party is untrue, misleading or incorrect in any material respect, or any schedule, certificate, statement, report, financial data, notice, or writing furnished at any time by the Borrower to the Lender is untrue, misleading or incorrect in any material respect, on the date as of which the facts set forth therein are stated or certified;

- 69 -

               (5) a judgment, decree or order requiring payment in excess of Two Hundred Fifty Thousand Dollars ($250,000) shall be rendered against the Borrower and such judgment or order shall remain unsatisfied or undischarged and in effect for thirty (30) consecutive days without a stay of enforcement or execution, provided that this clause (e) shall not apply to any judgment, decree or order for which the Borrower is fully insured and with respect to which the insurer has admitted liability, or such judgment, decree or order is being contested or appealed by appropriate proceedings;

               (6) a notice of Lien, levy or assessment is filed or recorded with respect to any of the assets of the Borrower (including, without limitation, the Collateral), by the United States, or any department, agency or instrumentality thereof, or by any state, county, municipality or other governmental agency or any taxes or debts owing at any time or times hereafter to any one or more of them become a Lien, upon any of the assets of the Borrower (including, without limitation, the Collateral), provided that this clause (f) shall not apply to any Liens, levies, or assessments which a Borrower is contesting in good faith (provided the Borrower has complied with the provisions of clauses (a) and (b) of Section 8.4 hereof) or which relate to current taxes not yet due and payable;

               (7) any material portion of the Collateral is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors;

               (8) a proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law or statute is filed against the Borrower or any guarantor of the Liabilities, including Parent, and any such proceeding is not dismissed within sixty (60) days of the date of its filing, or a proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law or statute is filed by the Borrower or any guarantor of the Liabilities, including Parent, or the Borrower or any guarantor of the Liabilities, including Parent, makes an assignment for the benefit of creditors, or the Borrower or any guarantor of the Liabilities, including Parent, takes any action to authorize any of the foregoing;

               (9) except as permitted for an Inactive Subsidiary, the Borrower or Parent voluntarily or involuntarily dissolves or is dissolved, or its existence terminates or is terminated; provided that in the case of an administrative dissolution or revocation of existence for failure to file the proper reports or returns with the applicable governmental authorities, no Event of Default shall be deemed to have occurred if an application for reinstatement is (i) filed promptly (but in any event, within fifteen (15) calendar days) upon Parent or Borrower receiving notice of such dissolution or revocation from the applicable governmental authority and (ii) diligently pursued to completion (if reasonably capable of being completed), as determined by the Lender in its sole and absolute discretion;

               (10) the Credit Parties, taken as a whole, fail, at any time, to be Solvent;

               (11) the Borrower or any guarantor of the Liabilities, including Parent, is enjoined, restrained, or in any way prevented by the order of any court or any

- 70 -

administrative or regulatory agency from conducting all or any material part of its business affairs;

               (12) a breach by the Borrower shall occur under any agreement, document or instrument (other than an agreement, document or instrument evidencing the lending of money), whether heretofore, now or hereafter existing between the Borrower and any other Person and the effect of such breach if not cured within any applicable cure period will or is likely to have or create a Material Adverse Effect;

               (13) the Borrower shall fail to make any payment due on any other obligation for borrowed money or shall be in breach of any agreement evidencing the lending of money and the effect of such failure or breach if not cured within any applicable cure period would be to permit the acceleration of any obligation, liability or indebtedness in excess of Five Hundred Thousand Dollars ($500,000);

               (14) there shall be instituted in any court criminal proceedings against the Borrower, or the Borrower shall be indicted for any crime, in either case for which forfeiture of a material amount of its property is a potential penalty, unless (i) such actions are being contested or appealed in good faith by appropriate proceedings, (ii) the potential forfeiture has been stayed during the pendency of such proceeds, and (iii) no Medicare or Medicaid reimbursement obligations are materially adversely affected by such proceedings;

               (15) Parent shall at any time after the Closing Date have voting power over less than one hundred percent (100%) of the issued and outstanding Stock of Diversicare Management Services Co.;

               (16) any Lien securing the Liabilities shall, in whole or in part, cease to be a perfected first priority Lien (subject only to the Permitted Liens); this Agreement or any of the Financing Agreements to which the Borrower is a party, shall (except in accordance with its terms), in whole or in part, terminate, cease to be effective or cease to be the legally valid, binding and enforceable obligations of the Borrower; or the Borrower shall directly or indirectly, contest in any manner such effectiveness, validity, binding nature or enforceability;

               (17) any default or event of default shall occur under or pursuant to any Capmark Debt Document or Omega Debt Document, or any breach of, noncompliance with or default under any Intercreditor Agreement, any Subordination Agreement, or any other Financing Agreement (including, without limitation, the Guaranty, each Pledge Agreement and the Master Letter of Credit Agreement) by any party thereto (other than by the Lender), and the same is not cured or remedied within any applicable cure period, provided that if such default or event of default, breach, noncompliance or default, requires the giving of notice by Lender to any party in addition to or other than Borrower, Lender shall have provided Borrower with such notice at the same time as it provides such notice to such other party;

               (18) if the Borrower fails, within three (3) Business Days of receipt to forward any collections it receives with respect to any Accounts to the Commercial Blocked Account or the Government Blocked Account, as the case may be;

- 71 -

               (19) institution by the PBGC, the Borrower or any ERISA Affiliate of steps to terminate any Plan or to organize, withdraw from or terminate a Multiemployer Plan if as a result of such reorganization, withdrawal or termination, the Borrower or any ERISA Affiliate could be required to make a contribution to such Plan or Multiemployer Plan, or could incur a liability or obligation to such Plan or Multiemployer Plan, in excess of Two Hundred Fifty Thousand Dollars ($250,000), or (ii) a contribution failure occurs with respect to any Plan sufficient to give rise to a Lien under ERISA, which Lien is not fully discharged within fifteen (15) days;

               (20) a Material Adverse Change shall occur;

               (21) Borrower or any Affiliate of Borrower, shall challenge or contest, in any action, suit or proceeding, the validity or enforceability of this Agreement, or any of the other Financing Agreements, the legality or the enforceability of any of the Liabilities or the perfection or priority of any Lien granted to the Lender;

               (22) Parent shall revoke or attempt to revoke, terminate or contest its obligations under the Guaranty, or the Guaranty or any provision thereof shall cease to be in full force and effect in accordance with its terms and provisions;

               (23) Any Pledgor shall revoke or attempt to revoke, terminate or contest in any way any Pledge Agreement, or any provision thereof shall cease to be in full force and effect in accordance with its terms and provisions;

               (24) Borrower shall be prohibited or otherwise restrained from conducting the business theretofore conducted by it in any manner that has or could reasonably be expected to have or result in a Material Adverse Effect;

               (25) There shall occur with respect to the Operator of any Location any Medicare or Medicaid survey deficiencies at Level I, J, K, L or worse (i) which deficiencies are not cured within the amount of time permitted by the applicable reviewing agency; (ii) which result in the imposition by any Government Authority or the applicable state survey agency of sanctions in the form of either a program termination, temporary management, denial of payment for new admission (which continues for thirty (30) days or more or pertains to more than one Location) or facility closure and (iii) which sanctions could have a Material Adverse Effect as determined by Lender in its reasonable discretion. Upon the occurrence of such Event, Borrower shall submit to Lender its Plan of Correction for dealing with such Event, and shall periodically review its progress under the Plan of Correction with Lender. Provided that Lender remains satisfied with the progress under the Plan of Correction, then such Event shall not be an Event of Default unless formal notice is given by Lender to Borrower;

               (26) A state or federal regulatory agency shall have revoked any license, permit, certificate or Medicaid or Medicare qualification pertaining to the Real Property or any Location, regardless of whether such license, permit, certificate or qualification was held by or originally issued for the benefit of Borrower, a tenant or any other Person, the revocation of which could reasonably be expected to have a Material Adverse Effect;

- 72 -

               (27) Any material default by Borrower under the terms of any material Lease following the expiration of any applicable notice and cure period (if any);

               (28) William Council, Glynn Riddle or Ray Tyler shall not be senior officers of the Borrower and devote significant time and energy to the business of the Borrower; provided, however, it shall not constitute an Event of Default if any such individual shall fail for any reason to be a senior officer of the Borrower or fail to devote significant time and energy to the business of the Borrower, and such individual shall be promptly replaced by the Borrower, whether on an interim or permanent basis, with an individual with substantially similar skills and experience (but in no event later than within 90 calendar days of the former individual’s resignation, termination, permanent disability or death) and otherwise acceptable to the Lender in its reasonable and good faith determination;

               (29) Any subordination provision in any document or instrument governing Subordinated Debt, or any subordination provision in any guaranty by any Subsidiary of any Subordinated Debt, shall cease to be in full force and effect, or any Credit Party or any other Person (including the holder of any applicable Subordinated Debt) shall contest in any manner the validity, binding nature or enforceability of any such provision.

               (30) Any event shall occur (or fail to occur) that could result in the Possession Date occurring, as determined by the Lender in its sole and absolute discretion.

     Notwithstanding the foregoing, in the situations described in clauses (l), (t), (x) and (z), above, where an Event of Default is triggered by the occurrence of a Material Adverse Change or a Material Adverse Effect, events which could reasonably be expected to have or result in a Material Adverse Effect or Material Adverse Change, such occurrence shall not be deemed to be an Event of Default hereunder provided that Borrower shall within forty-eight (48) hours after the occurrence thereof submit to Lender in writing a plan of correction for dealing with such Material Adverse Change or Material Adverse Effect that is acceptable to Lender in its sole and absolute discretion, and, if such plan of correction is so acceptable, for so long as Lender remains satisfied in all respects with the progress under such plan of correction and until written notice that Lender is not so satisfied is given by Lender to Borrower.

          11.2 Acceleration. Upon the occurrence of any Event of Default described in Sections 11.1(h), (i), or (j), the Commitments (if they have not theretofore terminated) shall automatically and immediately terminate and all of the Liabilities shall immediately and automatically, without presentment, demand, protest or notice of any kind (all of which are hereby expressly waived), be immediately due and payable; and upon the occurrence of any other Event of Default, the Lender may at its sole option declare the Commitments (if they have not theretofore terminated) to be terminated and any or all of the Liabilities may, at the sole option of the Lender, and without presentment, demand, protest or notice of any kind (all of which are hereby expressly waived), be declared, and thereupon shall become, immediately due and payable, whereupon the Commitments shall immediately terminate. Upon the occurrence of any Default or Event of Default the Lender may, at its option, cease making any additional Revolving Loans.

          11.3 Rights and Remedies Generally.

- 73 -

               (1) Upon the occurrence of any Event of Default, the Lender shall have, in addition to any other rights and remedies contained in this Agreement and in any of the other Financing Agreements, all of the rights and remedies of a secured party under the Code or other applicable laws, all of which rights and remedies shall be cumulative, and non-exclusive, to the extent permitted by Law, including, without limitation, the right of Lender to sell, assign, or lease any or all of the Collateral. The exercise of any one right or remedy shall not be deemed a waiver or release of any other right or remedy, and the Lender, upon the occurrence of an Event of Default, may proceed against Borrower, and/or the Collateral, at any time, under any agreement, with any available remedy and in any order. All sums received from Borrower and/or the Collateral in respect of the Loans may be applied by the Lender to any Liabilities in such order of application and in such amounts as the Lender shall deem appropriate in its discretion. Borrower waives any right it may have to require the Lender to pursue any Person for any of the Liabilities.

               (2) Upon notice to Borrower after an Event of Default, Borrower at its own expense shall assemble all or any part of the Collateral as determined by Lender and make it available to Lender at any location designated by Lender. In such event, Borrower shall, at its sole cost and expense, store and keep any Collateral so assembled at such location pending further action by Lender and provide such security guards and maintenance services as shall be necessary to protect and preserve such Collateral. In addition to all such rights and remedies, the sale, lease or other disposition of the Collateral, or any part thereof, by the Lender after an Event of Default may be for cash, credit or any combination thereof, and the Lender may purchase all or any part of the Collateral at public or, if permitted by law, private sale, and in lieu of actual payment of such purchase price, may set-off the amount of such purchase price against the Liabilities of the Borrower then owing. Any sales of such Collateral may be adjourned from time to time with or without notice. The Lender may, in its sole discretion, cause the Collateral to remain on the Borrower’s premises, at the Borrower’s expense, pending sale or other disposition of such Collateral. The Lender shall have the right after an Event of Default to conduct such sales on the Borrower’s premises, at the Borrower’s expense, or elsewhere, on such occasion or occasions as the Lender may see fit.

          11.4 Entry Upon Premises and Access to Information. Upon the occurrence of any Event of Default, the Lender shall have the right to enter upon the premises of the Borrower where the Collateral is located without any obligation to pay rent to the Borrower, or any other place or places where such Collateral is believed to be located and kept, and remove such Collateral therefrom to the premises of the Lender or any agent of the Lender, for such time as the Lender may desire, in order to effectively collect or liquidate such Collateral. Upon the occurrence of any Event of Default, the Lender shall have the right to obtain access to the Borrower’s data processing equipment, computer hardware and software relating to the Collateral and subject to the privacy requirements and regulations of HIPPA and of any applicable state or federal patients bill of rights, to use all of the foregoing and the information contained therein in any manner the Lender deems appropriate. Upon the occurrence of any Event of Default, the Lender shall have the right to receive, open and process all mail addressed to the Borrower and relating to the Collateral.

          11.5 Sale or Other Disposition of Collateral by the Lender. Any notice required to be given by the Lender of a sale, lease or other disposition or other intended action by

- 74 -

the Lender, with respect to any of the Collateral, which is deposited in the United States mails, postage prepaid and duly addressed to the Borrower at the address specified in Section 12.12 hereof, at least ten (10) calendar days prior to such proposed action shall constitute fair and reasonable notice to the Borrower of any such action. The net proceeds realized by the Lender upon any such sale or other disposition, after deduction for the expense of retaking, holding, preparing for sale, selling or the like and the attorneys’ and paralegal’ fees and legal expenses incurred by the Lender in connection therewith, shall be applied as provided herein toward satisfaction of the Liabilities, including, without limitation, such Liabilities described in Sections 8.2 and 11.2 hereof. The Lender shall account to the Borrower for any surplus realized upon such sale or other disposition, and the Borrower shall remain liable for any deficiency. The commencement of any action, legal or equitable, or the rendering of any judgment or decree for any deficiency shall not affect the Lender’s Liens in the Collateral until the Liabilities are fully paid. The Borrower agrees that the Lender has no obligation to preserve rights to the Collateral against any other Person. If and to the extent applicable, the Lender is hereby granted a license or other right to use, without charge, the Borrower’s labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trade styles, trademarks, service marks and advertising matter or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale and selling any such Collateral, and the Borrower’s rights and benefits under all licenses and franchise agreements, if any, shall inure to the Lender’s benefit until the Liabilities of the Borrower are paid in full. Borrower covenants and agrees not to interfere with or impose any obstacle to Lender’s exercise of its rights and remedies with respect to the Collateral.

          11.6 Waivers (General).

               (1) Except as otherwise provided for in this Agreement and to the fullest extent permitted by applicable law, Borrower hereby waives: (i) presentment, demand and protest, and notice of presentment, dishonor, intent to accelerate, acceleration, protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of any or all Financing Agreements, the Notes or any other notes, commercial paper, Accounts, contracts, documents, instruments, chattel paper and guaranties at any time held by Lender on which Borrower may in any way be liable, and hereby ratifies and confirms whatever Lender may do in this regard; (ii) all rights to notice and a hearing prior to Lender’s taking possession or control of, or to Lender’s replevy, attachment or levy upon, any Collateral or any bond or security which might be required by any court prior to allowing Lender to exercise any of its remedies; and (iii) the benefit of all valuation, appraisal and exemption Laws. Borrower acknowledges that it has been advised by counsel of its choice and decision with respect to this Agreement, the other Financing Agreements and the transactions evidenced hereby and thereby.

               (2) Borrower for itself and all endorsers, guarantors and sureties and their heirs, legal representatives, successors and assigns, (i) agrees that its liability shall not be in any manner affected by any indulgence, extension of time, renewal, waiver, or modification granted or consented to by Lender; (ii) consents to any indulgences and all extensions of time, renewals, waivers, or modifications that may be granted by Lender with respect to the payment or other provisions of this Agreement, the Notes, and to any substitution, exchange or release of the Collateral, or any part thereof, with or without substitution, and agrees to the addition or release of any Borrower, endorsers, guarantors, or sureties, or whether

- 75 -

primarily or secondarily liable, without notice to Borrower and without affecting its liability hereunder; (iii) agrees that its liability shall be unconditional and without regard to the liability of any other tax; and (iv) expressly waives the benefit of any statute or rule of law or equity now provided, or which may hereafter be provided, which would produce a result contrary to or in conflict with the foregoing.

               (3) Each and every covenant and condition for the benefit of Lender contained in this Agreement and the other Financing Agreements may be waived by Lender; provided, however, that to the extent that Lender may have acquiesced in any noncompliance with any requirements or conditions precedent to the Closing of any Loan or to any subsequent disbursement of Loan proceeds, such acquiescence shall not be deemed to constitute a waiver by Lender of such requirements with respect to any future disbursements of Loan proceeds and Lender may at any time after such acquiescence require Borrower to comply with all such requirements. Any forbearance by Lender in exercising any right or remedy under any of the Financing Agreements, or otherwise afforded by applicable law, including any failure to accelerate the Maturity Date shall not be a waiver of or preclude the exercise of any right or remedy nor shall it serve as a novation of the Notes or as a reinstatement of the Loan or a waiver of such right of acceleration or the right to insist upon strict compliance of the terms of the Financing Agreements. Lender’s acceptance of payment of any sum secured by any of the Financing Agreements after the due date of such payment shall not be a waiver of Lender’s right to either require prompt payment when due of all other sums so secured or to declare a default for failure to make prompt payment. The procurement of insurance or the payment of taxes or other liens or charges by Lender shall not be a waiver of Lender’s right to accelerate the maturity of the Loan, nor shall Lender’s receipt of any condemnation awards, insurance proceeds, or damages under this Agreement operate to cure or waive Borrower’s or Guarantor’s default in payment of sums secured by any of the Financing Agreements.

               (4) Without limiting the generality of anything contained in this Agreement or the other Financing Agreements, Borrower agrees that if an Event of Default is continuing (i) Lender is not subject to any “one action” or “election of remedies” law or rule, and (ii) all liens and other rights, remedies or privileges provided to Lender shall remain in full force and effect until Lender has exhausted all of its remedies against the Collateral and any other properties owned by Borrower and the Financing Agreements and other security instruments or agreements securing the Loan has been foreclosed, sold and/or otherwise realized upon in satisfaction of Borrower’s obligations under the Notes.

               (5) Nothing contained herein or in any other Financing Agreement shall be construed as requiring Lender to resort to any part of the Collateral for the satisfaction of any of Borrower’s obligations under the Financing Agreements in preference or priority to any other Collateral, and Lender may seek satisfaction out of all of the Collateral or any part thereof, in its absolute discretion in respect of Borrower’s obligations under the Financing Agreements. In addition, Lender shall have the right from time to time to partially foreclose upon any Collateral in any manner and for any amounts secured by the Financing Agreements then due and payable as determined by Lender in its sole discretion, including, without limitation, the following circumstances: (i) if Borrower defaults beyond any applicable grace period in the payment of one or more scheduled payments of principal and interest, Lender may foreclose upon all or any part of the Collateral to recover such delinquent payments, or (ii)

- 76 -

if Lender elects to accelerate less than the entire outstanding principal balance of the Notes, Lender may foreclose all or any part of the Collateral to recover so much of the principal balance of the Notes as Lender may accelerate and such other sums secured by one or more of the Financing Agreements as Lender may elect. Notwithstanding one or more partial foreclosures, any unforeclosed Collateral shall remain subject to the Financing Agreements to secure payment of sums secured by the Financing Agreements and not previously recovered.

               (6) To the fullest extent permitted by law, Borrower, for itself and its successors and assigns, waives in the event of foreclosure of any or all of the Collateral any equitable right otherwise available to Borrower which would require the separate sale of the any of the Collateral or require Lender to exhaust its remedies against any part of the Collateral before proceeding against any other part of the Collateral; and further in the event of such foreclosure Borrower does hereby expressly consent to and authorize, at the option of Lender, the foreclosure and sale either separately or together of each part of the Collateral.

          11.7 Waiver of Notice. UPON THE OCCURRENCE OF AN EVENT OF DEFAULT, THE BORROWER HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING OF ANY KIND PRIOR TO THE EXERCISE BY THE LENDER OF ITS RIGHTS TO REPOSSESS THE COLLATERAL WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON THE COLLATERAL WITHOUT PRIOR NOTICE OR HEARING.

          11.8 Injunctive Relief. The parties acknowledge and agree that, in the event of a breach or threatened breach of any Credit Party’s obligations under any Financing Agreements, Lender may have no adequate remedy in money damages and, accordingly, shall be entitled to an injunction (including without limitation, a temporary restraining order, preliminary injunction, writ of attachment, or order compelling an audit) against such breach or threatened breach, including, without limitation, maintaining the cash management and collection procedure described herein. However, no specification in this Agreement of a specific legal or equitable remedy shall be construed as a waiver or prohibition against any other legal or equitable remedies in the event of a breach or threatened breach of any provision of this Agreement. Each Credit Party waives the requirement of the posting of any bond in connection with such injunctive relief.

          11.9 Marshalling. Lender shall have no obligation to marshal any assets in favor of any Credit Party, or against or in payment of any of the other Liabilities or any other obligation owed to the Lender by any Credit Party.

               (1) Recourse to Borrower. Notwithstanding anything to the contrary contained herein or in any other Financing Agreement, the Loans shall be fully recourse to Borrower, and Lender shall be authorized, in its sole and absolute discretion, to enforce any or all of its remedies hereunder against Borrower, including all present and future revenue and assets of Borrower, whether or not such assets have been pledged as collateral for the Loans.

          11.10 Advice of Counsel. The Borrower acknowledges that it has been advised by its counsel with respect to this transaction and this Agreement, including, without limitation, all waivers contained herein.

- 77 -

     12. MISCELLANEOUS.

          12.1 Waiver. The Lender’s failure, at any time or times hereafter, to require strict performance by the Borrower of any provision of this Agreement shall not waive, affect or diminish any right of the Lender thereafter to demand strict compliance and performance therewith. Any suspension or waiver by the Lender of an Event of Default under this Agreement or a default under any of the other Financing Agreements shall not suspend, waive or affect any other Event of Default under this Agreement or any other default under any of the other Financing Agreements, whether the same is prior or subsequent thereto and whether of the same or of a different kind or character. None of the undertakings, agreements, warranties, covenants and representations of the Borrower contained in this Agreement or any of the other Financing Agreements and no Event of Default under this Agreement or default under any of the other Financing Agreements shall be deemed to have been suspended or waived by the Lender unless such suspension or waiver is in writing signed by an officer of the Lender, and directed to the Borrower specifying such suspension or waiver.

          12.2 Costs and Attorneys’ Fees.

               (1) The Borrower agrees to pay jointly and severally on demand all of the costs and expenses of the Lender (including, without limitation, the reasonable fees and out-of-pocket expenses of the Lender’s counsel, and all UCC filing and lien search fees, and, if applicable, real estate appraisal fees, survey fees, recording and title insurance costs, and any environmental report or analysis) in connection with the structuring, preparation, negotiation, execution, and delivery of: (i) this Agreement, the Financing Agreements and all other instruments, agreements, certificates or documents provided for herein or delivered or to be delivered hereunder, and (ii) any and all amendments, modifications, supplements and waivers executed and delivered pursuant hereto or any Financing Agreement or in connection herewith or therewith. The Borrower further agrees that the Lender, in its sole discretion, may deduct all such unpaid amounts from the aggregate proceeds of the Loans or debit such amounts from the operating accounts of the Borrower maintained with the Lender.

               (2) The costs and expenses that the Lender incurs in any manner or way with respect to the following shall be part of the Liabilities, payable jointly and severally by the Borrower on demand if at any time after the date of this Agreement the Lender: (i) employs counsel in good faith for advice or other representation, (ii) with respect to the amendment, modification or enforcement of this Agreement or the Financing Agreements, or with respect to any Collateral securing the Liabilities hereunder, (iii) to represent the Lender in any work-out or any type of restructuring of the Liabilities, or any litigation, contest, dispute, suit or proceeding or to commence, defend or intervene or to take any other action in or with respect to any litigation, contest, dispute, suit or proceeding (whether instituted by the Lender, the Borrower or any other Person) in any way or respect relating to this Agreement, the Financing Agreements, the Borrower’s affairs or any Collateral hereunder or (iv) to enforce any of the rights of the Lender with respect to the Borrower provided in this Agreement, under any of the Financing Agreements, or otherwise (whether at law or in equity); (v) takes any action to protect, preserve, store, ship, appraise, prepare for sale, collect, sell, liquidate or otherwise dispose of any Collateral hereunder; and/or (vi) seeks to enforce or enforces any of the rights and remedies of the Lender with respect to the Borrower or any guarantor of the Liabilities. Without

- 78 -

limiting the generality of the foregoing, such expenses, costs, charges and fees include: reasonable fees, costs and expenses of attorneys, accountants and consultants; court costs and expenses; court reporter fees, costs and expenses; long distance telephone charges; and courier and telecopier charges.

               (3) The Borrower further agrees to pay, and to save the Lender harmless from all liability for, any documentary stamp tax, intangible tax, or other stamp tax or taxes of any kind which may be payable in connection with or related to the execution or delivery of this Agreement, the Financing Agreements, the borrowings hereunder, the issuance of the Notes or of any other instruments, agreements, certificates or documents provided for herein or delivered or to be delivered hereunder or in connection herewith, provided that the Borrower shall not be liable for Lender’s income tax liabilities.

               (4) All of the Borrower’s obligations provided for in this Section 12.2 shall be Liabilities secured by the Collateral and shall survive repayment of the Loans or any termination of this Agreement or any Financing Agreements.

          12.3 Expenditures by the Lender. In the event the Borrower shall fail to pay taxes, insurance, audit fees and expenses, consulting fees, filing, recording and search fees, assessments, fees, costs or expenses which the Borrower is, under any of the terms hereof or of any of the other Financing Agreements, required to pay, or fails to keep the Collateral free from other Liens, except as permitted herein, the Lender may, in its sole discretion, pay or make expenditures for any or all of such purposes, and the amounts so expended, together with interest thereon at the Default Rate (from the date the obligation or liability of Borrower is charged or incurred until actually paid in full to Lender) and shall be part of the Liabilities of the Borrower, payable on demand and secured by the Collateral.

          12.4 Custody and Preservation of Collateral. The Lender shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral in its possession if it takes such action for that purpose as the Borrower shall request in writing, but failure by the Lender to comply with any such request shall not of itself be deemed a failure to exercise reasonable care, and no failure by the Lender to preserve or protect any right with respect to such Collateral against prior parties, or to do any act with respect to the preservation of such Collateral not so requested by a Borrower, shall of itself be deemed a failure to exercise reasonable care in the custody or preservation of such Collateral.

          12.5 Reliance by the Lender. The Borrower acknowledges that the Lender, in entering into this Agreement and agreeing to make Loans and otherwise extend credit to the Borrower hereunder, has relied upon the accuracy of the covenants, agreements, representations and warranties made herein by the Borrower and the information delivered by the Borrower to the Lender in connection herewith (including, without limitation, all financial information and data).

          12.6 Assignability; Parties. This Agreement (including, without limitation, any and all of the Borrower’s rights, obligations and liabilities hereunder) may not be assigned by the Borrower without the prior written consent of the Lender. Whenever in this Agreement there is reference made to any of the parties hereto, such reference shall be deemed to include, wherever

- 79 -

applicable, a reference to the successors and permitted assigns of the Borrower and the successors and assigns of the Lender.

          12.7 Severability; Construction. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Agreement. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement.

          12.8 Application of Payments. Notwithstanding any contrary provision contained in this Agreement or in any of the other Financing Agreements, after the occurrence of a Default or an Event of Default the Borrower irrevocably waives the right to direct the application of any and all payments at any time or times hereafter received by the Lender from the Borrower or with respect to any of the Collateral, and the Borrower does hereby irrevocably agree that the Lender shall have the continuing exclusive right to apply and reapply any and all payments received at any time or times hereafter, whether with respect to the Collateral or otherwise, against the Liabilities in such manner as the Lender may deem advisable, notwithstanding any entry by the Lender upon any of its books and records.

          12.9 Marshalling; Payments Set Aside. The Lender shall be under no obligation to marshal any assets in favor of the Borrower or any other Person or against or in payment of any or all of the Liabilities. To the extent that the Borrower makes a payment or payments to the Lender or the Lender enforces its Liens or exercises its rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

          12.10 Sections and Titles; UCC Termination Statements. The sections and titles contained in this Agreement shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. At such time as all of the Liabilities shall have been indefeasibly paid in full and this Agreement shall terminate in accordance with its terms, the Lender will, upon Borrower’s written request and at the Borrower’s cost and expense, promptly sign all Uniform Commercial Code termination statements reasonably required by the Borrower to evidence the termination of the Liens in the Collateral in favor of the Lender.

          12.11 Continuing Effect; Inconsistency. This Agreement, the Lender’s Liens in the Collateral, and all of the other Financing Agreements shall continue in full force and effect so long as any Liabilities shall be owed to the Lender, and (even if there shall be no such Liabilities

- 80 -

outstanding) so long as this Agreement has not been terminated as provided in Section 2.9 hereof. To the extent any terms or provisions contained in any Financing Agreement are inconsistent or conflict with the terms and provisions of this Agreement, the terms and provisions of this Agreement shall control and govern.

          12.12 Notices. Any notice or other communication required or permitted under this Agreement shall be in writing and personally delivered, mailed by registered or certified U.S. mail (return receipt requested and postage prepaid), sent by telecopier (with a confirming copy sent by regular mail), or sent by prepaid nationally recognized overnight courier service, and addressed to the relevant party at its address set forth below, or at such other address as such party may, by written notice, designate as its address for purposes of notice under this Agreement:

(1) If to the Lender, at:

LaSalle Bank National Association
135 South LaSalle Street
Chicago, Illinois 60603
Attention: Adam Panos
Telephone No.: 312-992-2871
Facsimile No.: 312-904-1294

With a copy to:

Duane Morris LLP
227 West Monroe St. — Suite 3400
Chicago, Illinois 60606
Attention: Brian P. Kerwin
Telephone No: 312-499-6737
Facsimile No: 312-499-6701

(2) If to the Borrower or Borrower Agent, at:

Advocat Inc.
1621 Galleria Boulevard
Brentwood, Tennessee 37027
Attention: Glynn Riddle
Telephone No.: 615-771-7575
Facsimile No.: 615-771-7409

With a copy to:

Harwell Howard Hyne Gabbert & Manner
315 Deaderick Street, Suite 1800
Nashville, Tennessee 37238
Attention: John N. Popham IV
Telephone No.: 615-251-1093

Facsimile No.: 615-251-1059

- 81 -

If mailed, notice shall be deemed to be given three (3) days after being sent, and if sent by personal delivery, telecopier or prepaid courier, notice shall be deemed to be given when delivered.

          12.13 Equitable Relief. The Borrower recognizes that, in the event the Borrower fails to perform, observe or discharge any of its obligations or liabilities under this Agreement, any remedy at law may prove to be inadequate relief to the Lender; therefore, the Borrower agrees that the Lender, if the Lender so requests, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages.

          12.14 Entire Agreement. This Agreement, together with the Financing Agreements executed in connection herewith, constitutes the entire agreement among the parties with respect to the subject matter hereof, and supersedes all prior written or oral understandings, discussions and agreements with respect thereto (including, without limitation, any term sheet or commitment letter). This Agreement may be amended or modified only by mutual agreement of the parties evidenced in writing and signed by the party to be charged therewith.

          12.15 Participations and Assignments. The Lender shall have the right, without the consent of the Borrower, to sell participations to one or more banks or other entities in, or assignments of, all or any portion of its rights, obligations, and interest under this Agreement, the Liabilities and any of the Financing Agreements. The Lender may furnish any information concerning the Borrower in the possession of the Lender from time to time to participants (including prospective participants).

          12.16 Indemnity. The Borrower agrees to jointly and severally defend, protect, indemnify and hold harmless the Lender and each and all of its officers, directors, employees, attorneys, affiliates, and agents (“Indemnified Parties”) from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, the fees and disbursements of counsel for the Indemnified Parties in connection with any investigative, administrative or judicial proceeding, whether or not the Indemnified Parties shall be designated by a party thereto, or otherwise), claim, cause of action, judgment, suit, action or proceeding, which may ever be imposed on, incurred by, or asserted against any Indemnified Party (whether direct, indirect or consequential, and whether based on any federal or state laws or other statutory regulations, including, without limitation, securities, environmental and commercial laws and regulations, under common law or at equitable cause, or on contract or otherwise) in any manner relating to or arising out of this Agreement or the other Financing Agreements, or any act, event or transaction related or attendant thereto, the making and the management of the Loans (including, without limitation, any liability under federal, state or local environmental laws or regulations) or the use or intended use of the proceeds of the Loans hereunder; provided, that the Borrower shall not have any obligation to any Indemnified Party hereunder with respect to matters caused by or resulting from the gross negligence, willful misconduct or illegal activity of such Indemnified Party. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Borrower shall contribute the maximum portion which it is permitted to pay

- 82 -

and satisfy under applicable law, to the payment and satisfaction of all matters incurred by the Indemnified Parties. Any liability, obligation, loss, damage, penalty, cost or expense incurred by the Indemnified Parties shall be paid to the Indemnified Parties on demand, together with interest thereon at the Default Rate from the date incurred by the Indemnified Parties until paid by the Borrower, be added to the Liabilities, and be secured by the Collateral. The provisions of and undertakings and indemnifications set out in this Section 12.16 shall survive the satisfaction and payment of the Liabilities of the Borrower and the termination of this Agreement. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO THE BORROWER OR TO ANY OTHER PARTY TO ANY FINANCING AGREEMENT, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR ANY OTHER FINANCING AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.

          12.17 Representations and Warranties. Notwithstanding anything to the contrary contained herein, (i) each representation or warranty contained in this Agreement or any of the other Financing Agreements shall survive the execution and delivery of this Agreement and the other Financing Agreements and the making of the Loans and the repayment of the Liabilities hereunder, and (ii) each representation and warranty contained in this Agreement and each other Financing Agreement shall be remade on the date of each Loan made hereunder.

          12.18 Counterparts; Electronically Transmitted Signatures. This Agreement and any amendment or supplement hereto or any waiver granted in connection herewith may be executed in any number of counterparts and by the different parties on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. Fax and other electronically transmitted signatures shall be deemed as legally effective as a signed original for all purposes.

          12.19 Limitation of Liability of Lender. It is hereby expressly agreed that:

               (1) Lender may conclusively rely and shall be protected in acting or refraining from acting upon any document, instrument, certificate, instruction or signature believed to be genuine and may assume and shall be protected in assuming that any Person purporting to give any notice or instructions in connection with any transaction to which this Agreement relates has been duly authorized to do so. Lender shall not be obligated to make any inquiry as to the authority, capacity, existence or identity of any Person purporting to have executed any such document or instrument or have made any such signature or purporting to give any such notice or instructions;

               (2) Lender shall not be liable for any acts, omissions, errors of judgment or mistakes of fact or law, including, without limitation, acts, omissions, errors or mistakes with respect to the Collateral, except for those arising out of or in connection with Lender’s gross negligence, willful misconduct or illegal activity. Without limiting the generality of the foregoing, Lender shall be under no obligation to take any steps necessary to preserve

- 83 -

rights in the Collateral against any other parties, but may do so at its option, and all expenses incurred in connection therewith shall be payable by Borrower; and

               (3) Lender shall not be liable for any action taken in good faith and believed to be authorized or within the rights or powers conferred by this Agreement and the other Financing Agreements.

          12.20 Borrower Authorizing Accounting Firm. Borrower shall authorize its accounting firm and/or service bureaus to provide Lender with such information as is requested by Lender in accordance with this Agreement. Borrower authorizes Lender to contact directly any such accounting firm and/or service bureaus to obtain such information.

          12.21 Joint and Several Liability; Binding Obligations.

               (1) Borrower is defined collectively to include all Persons constituting the Borrower; provided, however, that any references herein to “any Borrower”, “each Borrower” or similar references, shall be construed as a reference to each individual Person comprising the Borrower; provided, further, in case of any question as to which particular Person is to be deemed a Borrower in any given context for purposes of any term or provision contained in this Agreement, the Lender shall make such determination. Each Person comprising Borrower shall be jointly and severally liable for all of the liabilities and obligations of Borrower under this Agreement, regardless of which of the Borrowers actually receives the proceeds of the Loans or the benefit of any other extensions of credit hereunder, or the manner in which the Borrowers, or the Lender accounts therefor in their respective books and records. In addition, each entity comprising Borrower hereby acknowledges and agrees that all of the representations, warranties, covenants, obligations, conditions, agreements and other terms contained in this Agreement shall be applicable to and shall be binding upon and measured and enforceable individually against each Person comprising Borrower as well as all such Persons when taken together. By way of illustration, but without limiting the generality of the foregoing, the terms of Article XI of this Agreement are to be applied to each individual Person comprising the Borrower (as well as to all such Persons taken as a whole), such that the occurrence of any of the events described in Article XI of this Agreement as to any Person comprising the Borrower shall constitute an Event of Default even if such event has not occurred as to any other Persons comprising the Borrower or as to all such Persons taken as a whole (except as otherwise expressly provided therein by, for example, the use of the term “Material Adverse Effect”).

               (2) Each Borrower acknowledges that it will enjoy significant benefits from the business conducted by the other Borrowers because of, inter alia, their combined ability to bargain with other Persons including, without limitation, their ability to receive the credit facilities hereunder and other Financing Agreements which would not have been available to an individual Borrower acting alone. Each Borrower has determined that it is in its best interest to procure the Loans with the credit support of the other Borrowers as contemplated by this Agreement and the other Financing Agreements.

               (3) The Lender has advised the Borrowers that it is unwilling to enter into this Agreement and the other Financing Agreements and make available the Loans extended hereby or thereby to any Borrower unless each Borrower agrees, among other things, to

- 84 -

be jointly and severally liable for the due and proper payment of the Liabilities of each other Borrower under this Agreement and other Financing Agreements. Each Borrower has determined that it is in its best interest and in pursuit of its purposes that it so induce the Lender to extend credit pursuant to this Agreement and the other documents executed in connection herewith (i) because of the desirability to each Borrower of the Loans and the interest rates and the modes of borrowing available hereunder, (ii) because each Borrower may engage in transactions jointly with other Borrowers and (iii) because each Borrower may require, from time to time, access to funds under this Agreement for the purposes herein set forth. Each Borrower, individually, expressly understands, agrees and acknowledges, that the Loans would not be made available on the terms herein in the absence of the collective credit of all of the Persons constituting the Borrower, the joint and several liability of all such Persons, and the cross-collateralization of the collateral of all such Persons hereunder and under the other Financing Agreements. Accordingly, each Borrower, individually acknowledges that the benefit to each of the Persons comprising the Borrower as a whole constitutes reasonably equivalent value, regardless of the amount of the Loans actually borrowed by, advanced to, or the amount of collateral provided by, any individual Borrower.

               (4) Each Borrower has determined that it has and, after giving effect to the transactions contemplated by this Agreement and the other Financing Agreements (including, without limitation, the inter-Borrower arrangement set forth in this Section) will have, assets having a fair saleable value in excess of the amount required to pay its probable liability on its existing debts as they fall due for payment and that the sum of its debts is not and will not then be greater than all of its property at a fair valuation, that such Borrower has, and will have, access to adequate capital for the conduct of its business and the ability to pay its debts from time to time incurred in connection therewith as such debts mature and that the value of the benefits to be derived by such Borrower from the access to funds under this Agreement (including, without limitation, the inter-Borrower arrangement set forth in this Section) is reasonably equivalent to the obligations undertaken pursuant hereto.

               (5) The Borrower Agent (on behalf of each Borrower) shall maintain records specifying (a) all Liabilities incurred by each Borrower, (b) the date of such incurrence, (c) the date and amount of any payments made in respect of such Liabilities and (d) all inter-Borrower obligations pursuant to this Section. The Borrower Agent shall make copies of such records available to the Lender, upon request.

               (6) To the extent that applicable law otherwise would render the full amount of the joint and several obligations of any Borrower hereunder and under the other Financing Agreements invalid or unenforceable, such Borrower’s obligations hereunder and under the other Financing Agreements shall be limited to the maximum amount which does not result in such invalidity or unenforceability, provided, however, that each Borrower’s obligations hereunder and under the other Financing Agreements shall be presumptively valid and enforceable to their fullest extent in accordance with the terms hereof or thereof, as if this Section were not a part of this Agreement.

               (7) To the extent that any Borrower shall make a payment under this Section of all or any of the Liabilities (other than any Loan made to that Borrower for which it is primarily liable) (a “Joint Liability Payment”) which, taking into account all other

- 85 -

Joint Liability Payments then previously or concurrently made by any other Borrower, exceeds the amount which such Borrower would otherwise have paid if each Borrower had paid the aggregate Liabilities satisfied by such Joint Liability Payments in the same proportion that such Borrower’s “Allocable Amount” (as defined below) (as determined immediately prior to such Joint Liability Payments) bore to the aggregate Allocable Amounts of each of the Borrowers as determined immediately prior to the making of such Joint Liability Payments, then, following indefeasible payment in full in cash of the Liabilities and termination of the Loans, such Borrower shall be entitled to receive contribution and indemnification payments from, and be reimbursed by, each other Borrower for the amount of such excess, pro rata based upon their respective Allocable Amounts in effect immediately prior to such Joint Liability Payments. As of any date of determination, the “Allocable Amount” of any Borrower shall be equal to the maximum amount of the claim which could then be recovered from such Borrower under this Section without rendering such claim voidable or avoidable under Section 548 of Chapter 11 of the Bankruptcy Code or under any applicable state Uniform Fraudulent Transfer Act, Uniform Fraudulent Conveyance Act or similar statute or common law.

               (8) The term “Borrower” as used herein shall mean either one or more particular Borrowers or all of the Borrowers collectively as the Lender shall determine in its sole and absolute good faith discretion.

               (9) The term “Revolving Borrower” as used herein shall mean either one or more particular Revolving Borrowers or all of the Revolving Borrowers collectively as the Lender shall determine in its sole and absolute good faith discretion.

               (10) The term “Term Loan Borrower” as used herein shall mean either one or more particular Term Loan Borrowers or all of the Term Loan Borrowers collectively as the Lender shall determine in its sole and absolute good faith discretion.

               (11) Each Borrower hereby agrees that, except as hereinafter provided, its obligations hereunder shall be unconditional, irrespective of (i) the absence of any attempt to collect the Liabilities from any obligor or other action to enforce the same; (ii) the waiver or consent by Lender with respect to any provision of any instrument evidencing the Liabilities, or any part thereof, or any other agreement heretofore, now or hereafter executed by a Borrower and delivered to Lender; (iii) failure by Lender to take any steps to perfect and maintain its security interest in, or to preserve its rights to, any security or collateral for the Liabilities; (iv) the institution of any proceeding under the United States Bankruptcy Code, or any similar proceeding, by or against a Borrower or Lender’s election in any such proceeding of the application of Section 1111(b)(2) of the United States Bankruptcy Code; (v) any borrowing or grant of a security interest by a Borrower as debtor-in-possession, under Section 364 of the United States Bankruptcy Code; (vi) the disallowance, under Section 502 of the United States Bankruptcy Code, of all or any portion of Lender’s claim(s) for repayment of any of the Liabilities; or (vii) any other circumstance other than payment in full of the Liabilities which might otherwise constitute a legal or equitable discharge or defense of a guarantor or surety.

               (12) Until all Liabilities have been paid and satisfied in full, no payment made by or for the account of a Borrower including, without limitation, (i) a payment made by such Borrower on behalf of the liabilities of any other Borrower or (ii) a payment made

- 86 -

by any other Person under any guaranty, shall entitle such Borrower, by subrogation or otherwise, to any payment from any other Borrower or from or out of any other Borrower’s property and such Borrower shall not exercise any right or remedy against any other Borrower or any property of any other Borrower by reason of any performance of such Borrower of its joint and several obligations hereunder.

               (13) Any notice given by one Borrower hereunder shall constitute and be deemed to be notice given by all Borrowers, jointly and severally. Notice given by Lender to any one Borrower hereunder or pursuant to any Financing Agreements in accordance with the terms hereof or thereof shall constitute notice to each and every Borrower. The knowledge of one Borrower shall be imputed to all Borrowers and any consent by one Borrower shall constitute the consent of and shall bind all Borrowers.

               (14) This Section is intended only to define the relative rights of Borrower and nothing set forth in this Section is intended to or shall impair the obligations of Borrower, jointly and severally, to pay any amounts as and when the same shall become due and payable in accordance with the terms of this Agreement or any other Financing Agreements. Nothing contained in this Section shall limit the liability of any Borrower to pay the Loans made directly or indirectly to that Borrower and accrued interest, fees and expenses with respect thereto for which such Borrower shall be primarily liable.

               (15) The parties hereto acknowledge that the rights of contribution and indemnification hereunder shall constitute assets of each Borrower to which such contribution and indemnification is owing. The rights of any indemnifying Borrower against the other Borrowers under this Section shall be exercisable upon the full and indefeasible payment of the Liabilities and the termination of the Loans.

          12.22 Confidentiality. Borrower shall not disclose the contents of this Agreement and the other Financing Agreements to any third party (including, without limitation, any financial institution or intermediary) unless required by applicable Laws without Lender’s prior written consent, other than to Borrower’s officers, lawyers and other professional advisors on a need-to-know basis, Capmark and Omega, and in connection with any filings required to be made under any applicable federal or state securities laws or regulations (“Securities Laws”). Borrower agrees to inform all such Persons who receive information concerning this Agreement that such information is confidential and may not be disclosed to any other Person, except as required by applicable Laws, including Securities Laws. Notwithstanding the foregoing, any taxpayer (and each employee, representative or other agent of such taxpayer) may disclose to any and all Persons, without limitation of any kind, the tax treatment and tax structure (in each case, within the meaning of Treasury Regulation Section 1.6011-4) of the transactions contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to such taxpayer relating to such tax treatment and tax structure; provided that, with respect to any document or similar item that contains information concerning the tax treatment or tax structure of the transactions contemplated hereby as well as other information, this authorization shall only apply to such portions of the document or similar item that relate to the tax treatment or tax structure of such transaction. The preceding sentences in this Section 12.22 are intended to cause the transactions contemplated hereby to not be treated as having been offered under conditions of confidentiality for purposes of Section 1.6011-4(b)(3) (or any successor provision)

- 87 -

of the Treasury Regulations promulgated under Section 6011 of the Internal Revenue Code, as amended, and shall be construed in a manner consistent with such purpose. In addition, each party hereto acknowledges that it has no proprietary or exclusive rights to, to the extent applicable, the tax structure of the transactions contemplated hereby or any tax matter or tax idea related thereto.

          12.23 Expenses and Taxes.

               (1) Borrower agrees to jointly and severally pay (or cause Guarantor to pay) on demand all of the reasonable out-of-pocket costs and expenses of the Lender (including, without limitation, the reasonable fees and out-of-pocket expenses of the Lender’s counsel, and all UCC lien, tax, judgment, pending suit, and bankruptcy searches, UCC filings and fees for pre- and post-Closing UCC, title and other lien searches, real estate appraisal fees, field examination costs and fees, survey fees, recording and title insurance costs, and environmental report and analysis, and the costs of Intralinks or other similar transmission system, if applicable) in connection with the due diligence, structuring, preparation, negotiation, revision, execution, and delivery of: (i) this Agreement, the other Financing Agreements and all other instruments, agreements, certificates or documents provided for herein or therein or delivered or to be delivered hereunder or thereunder, and (ii) any and all amendments, modifications, supplements and waivers executed and delivered pursuant hereto or any other Financing Agreements or in connection herewith or therewith after the Closing Date. Lender, in its sole discretion, may deduct all such unpaid amounts from the aggregate proceeds of the Loans or debit such amounts from the operating accounts of Borrowers maintained with Lender. If Lender uses in-house counsel for any of these purposes, Borrower further agrees that its Liabilities hereunder and under the other Financing Agreements include reasonable charges for such work commensurate with the fees that would otherwise be charged by outside legal counsel selected by Lender for the work performed.

               (2) Borrower also agrees to jointly and severally pay all out-of-pocket charges and expenses incurred by Lender (including the court costs and fees and expenses of Lender’s counsel, advisers and consultants) in connection with (i) the administration, enforcement, protection or preservation of any right or claim of Lender (including any foreclosure sale, deed in lieu transaction or costs incurred in connection with any litigation or bankruptcy or administrative hearing and any appeals therefrom and any post-judgment enforcement action including, without limitation, supplementary proceedings in connection with the enforcement of this Agreement), (ii) recording, filing and registration fees and charges, mortgage or documentary taxes, UCC searches, title and survey charges, (iii) all fees and disbursements of Lender’s consultants as provided herein, (iv) the termination of this Agreement, (v) the creation, preservation, perfection, maintenance, amendment and termination of any Liens of Lender on the Collateral, (vi) the determination of whether or not Borrower has performed the obligations undertaken by Borrower hereunder or has satisfied any conditions precedent to the obligations of the Lender hereunder, and (vii) the collection of any amounts due under the Financing Agreements. If Lender uses in-house counsel for any of these purposes (i.e., for any task in connection with the enforcement, protection or preservation of any right or claim of Lender and the collection of any amounts due under its Financing Agreements), Borrower further agrees that its Liabilities under the Financing Agreements include reasonable charges for such

- 88 -

work commensurate with the fees that would otherwise be charged by outside legal counsel selected by Lender for the work performed.

               (3) Borrower shall pay all taxes (other than taxes based upon or measured by Lender’s income or revenues or any personal property tax or any branch profits tax), if any, in connection with the issuance of the Notes and the recording of any Financing Agreements. The obligations of Borrower under this clause (c) shall survive the payment of Borrower’s indebtedness under this Agreement and the termination of this Agreement. All of each Borrower’s obligations provided for in this Section 12.1 shall be Liabilities secured by the Collateral.

          12.24 Release. For and in consideration of any Loan and each advance or other financial accommodation hereunder, each Borrower, voluntarily, knowingly, unconditionally, and irrevocably, with specific and express intent, for and on behalf of itself and its agents, attorneys, heirs, successors, and assigns (collectively the “Releasing Parties”) does hereby fully and completely release, acquit and forever discharge the Lender, and each of its successors, assigns, heirs, affiliates, subsidiaries, parent companies, principals, directors, officers, employees, shareholders and agents (hereinafter called the “Lender Parties”), and any other person, firm, business, corporation, insurer, or association which may be responsible or liable for the acts or omissions of the Lender Parties, or who may be liable for the injury or damage resulting therefrom (collectively the “Released Parties”), of and from any and all actions, causes of action, suits, debts, disputes, damages, claims, obligations, liabilities, costs, expenses, fees (including, without limitation, reasonable attorneys’ fees) and demands of any kind whatsoever, at law or in equity, whether matured or unmatured, liquidated or unliquidated, vested or contingent, choate or inchoate, known or unknown that the Releasing Parties (or any of them) have or may have, against the Released Parties or any of them (whether directly or indirectly) relating to events occurring on or before the date of this Agreement, other than any claim as to which a final determination is made in a judicial proceeding (in which the Lender or any of the Released Parties have had an opportunity to be heard) which determination includes a specific finding that one of the Released Parties acted in a grossly negligent manner or with actual willful misconduct. Each Borrower acknowledges that the foregoing release is a material inducement to Lender’s decision to extend to Borrower the financial accommodations hereunder and has been relied upon by the Lender in agreeing to make the Loans and in making each advance of Loan proceeds hereunder.

          12.25 Time; Reliance. Time is of the essence in Borrower’s performance under this Agreement and all other Financing Agreements. Notwithstanding anything to the contrary contained in any Financing Agreement, if and to the extent any terms or provisions contained in any Financing Agreement are inconsistent or conflict with the terms and provisions of this Agreement, the terms and provisions of this Agreement shall control and govern.

          12.26 Relationship. The relationship between, on the one hand, the Lender, and the Borrower, on the other hand, shall be that of creditor-debtor only. No term in this Agreement or in the other Financing Agreements and no course of dealing between the parties shall be deemed to create any relationship of agency, partnership or joint venture or any fiduciary duty by the Lender to Borrower or any other party.

- 89 -

          12.27 Borrower Agent. Each Borrower hereby irrevocably appoints Borrower Agent as the borrowing agent and attorney-in-fact for all Borrowers which appointment shall remain in full force and effect unless and until Lender shall have received prior written notice signed by each Borrower that such appointment has been revoked and that another Borrower has been appointed Borrower Agent. Each Borrower hereby irrevocably appoints and authorizes the Borrower Agent (i) to provide Lender with all notices with respect to Loans obtained for the benefit of Borrower and all other notices and instructions under this Agreement and (ii) to take such action as Borrower Agent deems appropriate on its behalf to obtain Loans and to exercise such other powers as are reasonably incidental thereto to carry out the purposes of this Agreement. It is understood that the handling of the Loan Account and Collateral of Borrowers in a combined fashion, as more fully set forth in this Agreement, is done solely as an accommodation to Borrowers in order to utilize the collective borrowing powers of Borrowers in the most efficient and economical manner and at their request, and Lender shall not incur liability to any Borrower as a result hereof. Each Borrower expects to derive benefit, directly or indirectly, from the handling of the Loan Account and the Collateral in a combined fashion since the successful operation of each Borrower is dependent on the continued successful performance of the integrated group. To induce the Lender to do so, and in consideration thereof, but without limiting any other provision contained in this Agreement, each Borrower hereby jointly and severally agrees to indemnify Lender and hold Lender harmless against any and all liability, expense, loss or claim of damage or injury, made against Lender by any Borrower or by any third party or Person whosoever, arising from or incurred by reason of (a) the handling of the Loan Account and Collateral as herein provided, (b) the Lender’s relying on any instructions of the Borrower Agent, or (c) any other action taken by the Lender hereunder or under the other Financing Agreements, except that Borrowers will have no liability to the Lender under this Section with respect to any liability that has been finally determined by a court of competent jurisdiction to have resulted solely from the gross negligence, willful misconduct, or illegal activity of Lender.

          12.28 Agent’s; Borrower Authorizing Accounting Firm. In exercising any rights under the Financing Agreements or taking any actions provided for therein, the Lender may act through their respective employees, agents or independent contractors as authorized by the Lender. Borrower shall authorize its accounting firm and/or service bureaus to provide Lender with such information as is requested by Lender in accordance with this Agreement. Borrower authorizes the Lender to contact directly any such accounting firm and/or service bureaus to obtain such information.

          12.29 Additional Provisions.

               (1) Consents. Each Borrower, as joint and several primary obligor of the Liabilities directly incurred by any other Borrower, authorizes Lender, without giving notice to such Borrower or to any other Borrower (to the extent permitted hereunder) or obtaining such Borrower’s consent or any other Borrower’s consent (to the extent permitted hereunder) and without affecting the liability of such Borrower for the Liabilities directly incurred by the other Borrower, from time to time to:

               (2) compromise, settle, renew, extend the time for payment, change the manner or terms of payment, discharge the performance of, decline to enforce, or

- 90 -

release all or any of the Liabilities; grant other indulgences to any Borrower in respect thereof; or modify in any manner any documents relating to the Liabilities;

               (3) declare all Liabilities due and payable upon the occurrence and during the continuance of an Event of Default;

               (4) take and hold security for the performance of the Liabilities of any Borrower and exchange, enforce, waive and release any such security;

               (5) apply and reapply such security and direct the order or manner of sale thereof as Lender, in its sole discretion, may determine;

               (6) release, surrender or exchange any deposits or other property securing the Liabilities or on which Lender at any time may have a Lien; release, substitute or add any one or more endorsers or guarantors of the Liabilities of any other Borrower or such Borrower; or compromise, settle, renew, extend the time for payment, discharge the performance of, decline to enforce, or release all or any obligations of any such endorser or guarantor or other Person who is now or may hereafter be liable on any Liabilities or release, surrender or exchange any deposits or other property of any such Person;

               (7) apply payments received by Lender from any Borrower to any Liabilities, in such order as Lender shall determine, in its sole discretion; and

               (8) assign this Agreement in whole or in part.

               (9) Waivers. Each Borrower, as a primary, joint and several obligor with respect to the Liabilities directly incurred by any other Borrower, hereby waives:

               (10) any defense based upon any legal disability or other defense of any other Borrower, or by reason of the cessation or limitation of the liability of any other Borrower from any cause (other than full payment of all Liabilities), including, but not limited to, failure of consideration, breach of warranty, statute of frauds, statute of limitations, accord and satisfaction, and usury;

               (11) any defense based upon any legal disability or other defense of any other guarantor or other Person;

               (12) any defense based upon any lack of authority of the officers, directors, members, managers, partners or agents acting or purporting to act on behalf of any other Borrower or any principal of any other Borrower or any defect in the formation of any other Borrower or any principal of any other Borrower;

               (13) any defense based upon the application by any other Borrower of the proceeds of the Loans for purposes other than the purposes represented by such other Borrower to Lender or intended or understood by Lender or such Borrower;

               (14) any defense based on such Borrower’s rights, under statute or otherwise, to require Lender to sue any other Borrower or otherwise to exhaust its rights and

- 91 -

remedies against any other Borrower or any other Person or against any collateral before seeking to enforce its right to require such Borrower to satisfy the Liabilities of any other Borrower;

               (15) any defense based on Lender’s failure at any time to require strict performance by any Borrower of any provision of the Financing Agreements. Such Borrower agrees that no such failure shall waive, alter or diminish any right of Lender thereafter to demand strict compliance and performance therewith. Nothing contained herein shall prevent Lender from foreclosing on any Lien, or exercising any rights available to Lender thereunder, and the exercise of any such rights shall not constitute a legal or equitable discharge of such Borrower;

               (16) intentionally omitted;

               (17) any defense based upon Lender’s election of any remedy against such Borrower or any other Borrower or any of them; any defense based on the order in which Lender enforces its remedies;

               (18) any defense based on (A) Lender’s surrender, release, exchange, substitution, dealing with or taking any additional collateral, (B) Lender’s abstaining from taking advantage of or realizing upon any Lien or other guaranty, and (C) any impairment of collateral securing the Liabilities, including, but not limited to, Lender’s failure to perfect or maintain a Lien in such collateral;

               (19) any defense based upon Lender’s failure to disclose to such Borrower any information concerning any other Borrower’s financial condition or any other circumstances bearing on any other Borrower’s ability to pay the Liabilities;

               (20) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in any other respects more burdensome than that of a principal;

               (21) any defense based upon Lender’s election, in any proceeding instituted under the Bankruptcy Code, of the application of Bankruptcy Code §1111(b)(2) or any successor statute;

               (22) any defense based upon any borrowing or any grant of a security interest under Bankruptcy Code §364;

               (23) intentionally omitted;

               (24) except as otherwise expressly set forth herein : notice of acceptance hereof; notice of the existence, creation or acquisition of any Liability; notice of any Event of Default; notice of the amount of the Liabilities outstanding from time to time; notice of any other fact which might increase such Borrower’s risk; diligence; presentment; demand of payment; protest; filing of claims with a court in the event of any other Borrower’s receivership or bankruptcy and all other notices and demands to which such Borrower might otherwise be entitled (and agrees the same shall not have to be made on the other Borrower as a condition precedent to such Borrower’s obligations hereunder);

- 92 -

               (25) intentionally omitted;

               (26) any defense based on application of fraudulent conveyance or transfer law or shareholder distribution law to any of the Liabilities or the security therefor;

               (27) any defense based on Lender’s failure to seek relief from stay or adequate protection in any other Borrower’s bankruptcy proceeding or any other act or omission by Lender which impairs such Borrower’s prospective subrogation rights;

               (28) any defense based on legal prohibition of Lender’s acceleration of the maturity of the Liabilities during the occurrence of an Event of Default or any other legal prohibition on enforcement of any other right or remedy of Lender with respect to the Liabilities and the security therefor;

               (29) any defense available to a surety under applicable law; and

               (30) the benefit of any statute of limitations affecting the liability of such Borrower hereunder or the enforcement hereof.

               Each Borrower further agrees that its obligations hereunder shall not be impaired in any manner whatsoever by any bankruptcy, extensions, moratoria or other relief granted to any other Borrower pursuant to any statute presently in force or hereafter enacted.

               (31) Additional Waivers. Each Borrower authorizes Lender to exercise, in its sole discretion, any right, remedy or combination thereof which may then be available to Lender, since it is such Borrower’s intent that the Liabilities be absolute, independent and unconditional obligations of such Borrower under all circumstances. Notwithstanding any foreclosure of any Lien with respect to any or all of any property securing the Liabilities, whether by the exercise of the power of sale contained therein, by an action for judicial foreclosure or by an acceptance of a deed in lieu of foreclosure, each Borrower shall remain bound under such Borrower’s guaranty of the Liabilities directly incurred by any other Borrower.

               (32) Primary Obligations. This Agreement is a primary and original obligation of each of the Borrowers and each of the Borrowers shall be liable for all existing and future Liabilities of any other Borrower as fully as if such Liabilities were directly incurred by such Borrower.

          12.30 Nonliability of Lender. The relationship between the Borrowers on the one hand and the Lender on the other hand shall be solely that of borrower and lender. The Lender does not have any fiduciary relationship with or duty to any Credit Party arising out of or in connection with this Agreement or any of the other Financing Agreements, and the relationship between the Credit Parties, on the one hand, and the Lender, on the other hand, in connection herewith or therewith is solely that of debtor and creditor. The Lender does not undertake any responsibility to any Credit Party to review or inform any Credit Party of any matter in connection with any phase of any Credit Party’s business or operations. The Borrower Agent agrees, on behalf of itself and each other Borrower, that the Lender shall have no liability to any Credit Party (whether sounding in tort, contract or otherwise) for losses suffered by any

- 93 -

Credit Party in connection with, arising out of, or in any way related to the transactions contemplated and the relationship established by the Financing Agreements, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence, willful misconduct or illegal activity of the party from which recovery is sought. NO LENDER PARTY SHALL BE LIABLE FOR ANY DAMAGES ARISING FROM THE USE BY OTHERS OF ANY INFORMATION OR OTHER MATERIALS OBTAINED THROUGH INTRALINKS OR OTHER SIMILAR INFORMATION TRANSMISSION SYSTEMS IN CONNECTION WITH THIS AGREEMENT, NOR SHALL ANY LENDER PARTY HAVE ANY LIABILITY WITH RESPECT TO, AND THE BORROWER AGENT ON BEHALF OF ITSELF AND EACH OTHER CREDIT PARTY, HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE FOR ANY SPECIAL, PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES RELATING TO THIS AGREEMENT OR ANY OTHER FINANCING AGREEMENT OR ARISING OUT OF ITS ACTIVITIES IN CONNECTION HEREWITH OR THEREWITH (WHETHER BEFORE OR AFTER THE CLOSING DATE). Each Borrower and the Borrower Agent acknowledges that it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Financing Agreements to which it is a party. No joint venture is created hereby or by the other Financing Agreements or otherwise exists by virtue of the transactions contemplated hereby by the Lender or among the Credit Parties and the Lender.

          12.31 INTENTIONALLY OMITTED.

          12.32 SUBMISSION TO JURISDICTION; WAIVER OF VENUE. THE BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY:

               (1) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND THE OTHER FINANCING AGREEMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS AND APPELLATE COURTS FROM ANY THEREOF;

               (2) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING (i) ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME, (ii) THE RIGHT TO ASSERT OR IMPOSE ANY CLAIM, NONCOMPULSORY SET-OFF, COUNTERCLAIM OR CROSS-CLAIM IN RESPECT THEREOF IN SUCH PROCEEDING; PROVIDED, HOWEVER, THIS WAIVER DOES NOT PRECLUDE THE RIGHT TO ASSERT A DEFENSE IN SUCH ACTION OR PROCEEDING OR TO ASSERT OR IMPOSE ANY CLAIM, COUNTERCLAIM OR CROSS-CLAIM WHICH THE BORROWER WISHES TO

- 94 -

PURSUE IN A SEPARATE PROCEEDING AT ITS SOLE COST AND EXPENSE, AND (iii) ALL STATUTES OF LIMITATIONS WHICH MAY BE RELEVANT THERETO; AND

               (3) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, RETURN RECEIPT REQUESTED, TO THE BORROWER AT ITS ADDRESS SET FORTH ABOVE OR AT SUCH OTHER ADDRESS OF WHICH THE LENDER SHALL HAVE BEEN NOTIFIED PURSUANT THERETO. THE BORROWER AGREES THAT SUCH SERVICE, TO THE FULLEST EXTENT PERMITTED BY LAW (i) SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE BORROWER IN ANY SUIT, ACTION OR PROCEEDING, AND (ii) SHALL BE TAKEN AND HELD TO BE VALID PERSONAL SERVICE UPON AND PERSONAL DELIVERY TO THE BORROWER. SOLELY TO THE EXTENT PROVIDED BY APPLICABLE LAW, SHOULD THE BORROWER, AFTER BEING SERVED, FAIL TO APPEAR OR ANSWER TO ANY SUMMONS, COMPLAINT, PROCESS OR PAPERS SO SERVED WITHIN THE NUMBER OF DAYS PRESCRIBED BY LAW AFTER THE DELIVERY OR MAILING THEREOF, THE BORROWER SHALL BE DEEMED IN DEFAULT AND AN ORDER AND/OR JUDGMENT MAY BE ENTERED BY THE COURT AGAINST THE BORROWER AS DEMANDED OR PRAYED FOR IN SUCH SUMMONS, COMPLAINT, PROCESS OR PAPERS. NOTHING HEREIN SHALL AFFECT THE LENDER’S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR LIMIT THE LENDER’S RIGHT TO BRING PROCEEDINGS AGAINST THE BORROWER OR ITS PROPERTY IN ANY COURT OR ANY OTHER JURISDICTION.

          12.33 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ALL RESPECTS IN ACCORDANCE WITH, AND ENFORCED AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.

          12.34 JURY TRIAL. THE BORROWER AND THE LENDER HEREBY IRREVOCABLY AND KNOWINGLY WAIVE (TO THE FULLEST EXTENT PERMITTED BY LAW) ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING (INCLUDING, WITHOUT LIMITATION, ANY COUNTERCLAIM) ARISING OUT OF THIS AGREEMENT, THE FINANCING AGREEMENTS OR ANY OTHER AGREEMENTS OR TRANSACTIONS RELATED HERETO OR THERETO, INCLUDING, WITHOUT LIMITATION, ANY ACTION OR PROCEEDING (A) TO ENFORCE OR DEFEND ANY RIGHTS UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH, OR (B) ARISING FROM ANY DISPUTE OR CONTROVERSY IN CONNECTION WITH OR RELATED TO THIS AGREEMENT AND THE FINANCING AGREEMENTS. THE LENDER AND THE BORROWER AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT A JURY.

[Signature Page Follows]

- 95 -

     IN WITNESS WHEREOF, this Loan and Security Agreement has been duly executed as of the day and year first above written.

DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation, as Borrower Agent
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
ADVOCAT ANCILLARY SERVICES, INC., a Tennessee corporation
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
ADVOCAT FINANCE, INC., a Delaware corporation
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
ADVOCAT DISTRIBUTION SERVICES, INC., a Tennessee corporation
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer

- 96 -

DIVERSICARE ASSISTED LIVING SERVICES, INC., a Tennessee corporation
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE ASSISTED LIVING SERVICES NC, LLC, a Tennessee limited liability company
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE LEASING CORP., a Tennessee corporation
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
STERLING HEALTH CARE MANAGEMENT, INC., a Kentucky corporation
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
SENIOR CARE CEDAR HILLS, LLC, a Delaware limited liability company
BY:	SENIOR CARE FLORIDA LEASING, LLC, its sole member
	BY: DIVERSICARE LEASING CORP., its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer

- 97 -

SENIOR CARE GOLFCREST, LLC, a Delaware limited liability company
BY:	SENIOR CARE FLORIDA LEASING, LLC, its sole member
	BY: DIVERSICARE LEASING CORP., its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
SENIOR CARE GOLFVIEW, LLC, a Delaware limited liability company
BY:	SENIOR CARE FLORIDA LEASING, LLC, its sole member
	BY: DIVERSICARE LEASING CORP., its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
SENIOR CARE FLORIDA LEASING, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
SENIOR CARE SOUTHERN PINES, LLC, a Delaware limited liability company
BY:	SENIOR CARE FLORIDA LEASING, LLC, its sole member
	BY: DIVERSICARE LEASING CORP., its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE AFTON OAKS, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer

- 98 -

DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a Delaware limited liability company
BY:	DIVERSICARE ASSISTED LIVING SERVICES NC, LLC, its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC, a Delaware limited liability company
BY:	DIVERSICARE ASSISTED LIVING SERVICES NC, LLC, its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE BRIARCLIFF, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE CHISOLM, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE HARTFORD, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer

- 99 -

DIVERSICARE HILLCREST, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE LAMPASAS, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE PINEDALE, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE WINDSOR HOUSE, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE YORKTOWN, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer

- 100 -

DIVERSICARE BALLINGER, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE DOCTORS, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE ESTATES, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE HUMBLE, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE KATY, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer

- 101 -

DIVERSICARE NORMANDY TERRACE, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE TEXAS I, LLC, a Delaware limited liability company
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE TREEMONT, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE ROSE TERRACE, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING COPP., its sole member
By:	/s/ Glynn Riddle
Name:	Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer

LENDER: LASALLE BANK NATIONAL ASSOCIATION
By:	/s/ Adam Panos
	Adam Panos
	Assistant Vice President

- 102 -

LIST OF SCHEDULES AND EXHIBITS

SCHEDULES

Schedule 1	Borrowers
Schedule 1.1(a)	Facilities
Schedule 1.1(b)	Capmark Restricted Accounts
Schedule 1.1(c)	Locations
Schedule 1.1(d)	Negative Pledge Assets
Schedule 1.1(e)	Omega Leases
Schedule 1.1(f)	Term Loan Borrower
Schedule 7.8	Other Names
Schedule 7.12	Organizational Chart
Schedule 7.13	Litigation
Schedule 7.17	Environmental Matters
Schedule 7.26	Medicare and Medicaid Penalties
Schedule 7.32	Labor Matters
Schedule 7.33	Capitalization
Schedule 7.36	Commercial Leases

EXHIBITS

Exhibit A	Form of Revolving Credit Note
Exhibit B	Form of Term Loan Note
Exhibit C	Form of Borrowing Notice

- 103 -

EX-10.4

Exhibit 10.4

GUARANTY

     THIS GUARANTY (“Guaranty”) dated as of August 10, 2007, by ADVOCAT INC., a Delaware corporation (“Guarantor”), is to and for the benefit of LASALLE BANK NATIONAL ASSOCIATION, a national banking association (together with its successors and assigns, the “Lender”).

R E C I T A L S:

     A. DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation, (together with each (i) of the other borrowers set forth on Schedule 1 to the Loan Agreement (as defined below) and (ii) additional borrowers from time to time party to the Loan Agreement (whether pursuant to an amendment, written joinder or otherwise), individually and collectively referred to herein as, “Borrower”, has requested that the Lender make certain revolving loans and a term loan (individually and collectively, the “Loan”) to Borrower pursuant to and in accordance with that certain Loan and Security Agreement dated of even date herewith by and among Borrower and the Lender (as the same may be amended, supplemented, amended and restated or otherwise modified from time to time, the “Loan Agreement”); capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Loan Agreement.

     B. As security for repayment of the Loan, in addition to this Guaranty, certain other loan and security documents have been executed and delivered to the Lender. The Loan Agreement, the Revolving Credit Note, the Term Loan Note, the Blocked Account Agreements, this Guaranty, each other guaranty delivered in favor of the Lender in connection with the Loan Agreement, and any and all other instruments, agreements, and documents executed in conjunction herewith and therewith (including, without limitation, each of the “Financing Agreements” (as defined in the Loan Agreement)) are hereinafter sometimes collectively referred to herein as the “Loan Documents.”

     C. The Guarantor and Borrower are Affiliates of each other. Guarantor will derive substantial direct and indirect benefit (financial and otherwise) from the Loan made to Borrower under the Loan Agreement. The Guarantor desires to induce the Lender to make the Loan to Borrower.

     D. Lender is unwilling to make the Loan pursuant to the Loan Agreement unless Guarantor guarantees the payment of the principal and interest and all other amounts due or owing to the Lender provided in the Loan Agreement and other Loan Documents and the performance by Borrower of all of the covenants on Borrower’s part to be performed and observed pursuant to the terms thereof, and Guarantor has agreed to execute and deliver this Guaranty to Lender for its benefit.

     NOW, THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION RECEIVED, the adequacy and sufficiency of which is hereby acknowledged, and in further consideration of any advances, credit or other financial accommodation heretofore, now or that may hereafter at any time be extended to Borrower by Lender under, pursuant to or in connection with the Loan Documents, (a) Guarantor hereby, jointly and severally, together with each Other Guarantor (as defined in Section 3 below), and, unconditionally and irrevocably, guarantees,

irrespective of the validity or enforceability of any instrument, writing or agreement relating to or the subject of any such advances, financial accommodation or loans (including, but not limited to, the Loan Documents), and whether or not due or to become due before or after any bankruptcy or insolvency proceeding involving Borrower or would have become due but for Borrower’s bankruptcy proceeding, (i) the full and prompt payment to Lender at maturity, whether by acceleration or otherwise, and at all times thereafter of any and all “Liabilities” (as defined in the Loan Agreement) of every kind and nature of Borrower to Lender (arising out of or in connection with the Loan, the Loan Agreement, and each of the other Loan Documents to which Borrower (or any of its Affiliates) is a party, including, without limitation, for principal, interest, charges, fees, costs, expenses or otherwise), and whether or not due or to become due before or after any bankruptcy or insolvency proceeding involving Borrower or would have become due but for Borrower’s bankruptcy proceeding, howsoever evidenced, whether now existing or hereafter created or arising, directly or indirectly, primary or secondary, absolute or contingent, due or to become due, and howsoever owned, held or acquired, whether through discount, overdraft, purchase, direct loan or as collateral, or otherwise, and (ii) the prompt, full and faithful performance and discharge by Borrower of each and every of the terms, conditions, agreements, covenants, representations and warranties on the part of Borrower contained in any agreement, the Loan Agreement and each of the other Loan Documents to which Borrower is a party, and any other promissory notes, loan agreements, or security agreements, or in any modification or addenda thereto or substitution thereof in connection with any advance, credit or financial accommodation afforded by Lender to Borrower (collectively the “Guaranteed Liabilities”); and (b) Guarantor further agrees to pay all costs and expenses, legal and/or otherwise (including, but not limited to, court costs and reasonable attorneys’ fees and expenses), paid or incurred by Lender in endeavoring to collect the Guaranteed Liabilities, the Extraordinary Claims (as hereinbelow defined), or in either case, any part thereof, or in enforcing this Guaranty or in defending any suit based on any act of commission or omission of Lender with respect to the Indebtedness, the Collateral (as defined in the Loan Agreement), or this Guaranty or in connection with any Recovery Claim (as hereinbelow defined) (the “Enforcement Costs”); and (c) Guarantor further agrees to pay any and all costs, losses, damages and reasonable attorney’s fees incurred by the Lender in connection with any of the following: (i) misapplication or misappropriation of any insurance or condemnation proceeds; and (ii) Borrower or Guarantor institutes or becomes by virtue of a counterclaim a party to any case, action, suit, or proceeding which reduces, impedes or impairs Lender’s right of recourse to the Collateral or any part thereof or Borrower or Guarantor engages in any act, omission, or misrepresentation which has the effect of suspending, delaying, reducing, impeding, or impairing the Lender’s right of recourse to the Collateral or any part thereof (each of the aforesaid are collectively referred to as an “Extraordinary Claims”). The Guaranteed Liabilities, the Enforcement Costs, and the Extraordinary Claims are collectively referred to as the “Guaranteed Obligations.” Capitalized terms used herein and not otherwise defined herein shall have the meaning given to them in the Loan Agreement.

     Guarantor hereby further agrees as follows:

     1. Continuing Guaranty. This Guaranty includes any and all Guaranteed Obligations arising under successive transactions continuing, compromising, extending, increasing, modifying, releasing, or renewing the Guaranteed Obligations, changing the interest rate, payment terms, or other terms and conditions thereof, or creating new or additional

2

Guaranteed Obligations after prior Guaranteed Obligations have been satisfied in whole or in part. To the maximum extent permitted by law, Guarantor hereby waives any right to revoke this Guaranty as to future Liabilities. If such a revocation is effective notwithstanding the foregoing waiver, Guarantor acknowledges and agrees that (a) no such revocation shall be effective until written notice thereof has been received by Lender, (b) no such revocation shall apply to any Guaranteed Obligations in existence on such date (including, but not limited to, any subsequent continuation, extension, or renewal thereof, or change in the interest rate, payment terms, or other terms and conditions thereof), (c) no such revocation shall apply to any Guaranteed Obligations made or created after such date to the extent made or created pursuant to a legally binding commitment of Lender in existence on the date of such revocation, (d) no payment by Guarantor, Borrower, or from any other source, prior to the date of such revocation shall reduce the maximum obligation of Guarantor hereunder, and (e) any payment by Borrower or from any source other than Guarantor, subsequent to the date of such revocation, shall first be applied to that portion of the Guaranteed Obligations as to which the revocation is effective and which are not, therefore, guaranteed hereunder, and to the extent so applied shall not reduce the maximum obligation of Guarantor hereunder.

     2. Performance Under This Guaranty. If Borrower fails to make any payment of any Guaranteed Obligations on or before the due date thereof and after the expiration of the applicable notice and cure period, if any, or if Borrower shall fail, after the expiration of the applicable notice and cure period, if any, to perform, keep, observe, or fulfill any other obligation, covenant or agreement referred to or contained in any instrument, writing, document or agreement relating to the Guaranteed Obligations, Guarantor immediately shall cause such payment to be made or each of such obligations to be performed, kept, observed, or fulfilled to the extent such obligations constitute Guaranteed Obligations.

     3. Primary Obligations. This Guaranty is a primary and original obligation of Guarantor, is not merely the creation of a surety relationship, and is an absolute, unconditional, and continuing guaranty of payment and performance and not of collection which shall remain in full force and effect without respect to future changes in conditions, including any change of law or any invalidity or irregularity with respect to the issuance of any instrument, writing or agreement relating to the Guaranteed Obligations. Guarantor agrees that Guarantor is directly and severally with any other guarantors of the Guaranteed Obligations liable to Lender, that the obligations of Guarantor hereunder are independent of the obligations of Borrower or any other guarantor, and that a separate action may be brought against Guarantor whether such action is brought against Borrower or any other guarantor of Borrower’s Indebtedness, obligations or liabilities to Lender (each an “Other Guarantor”) or whether Borrower or any such Other Guarantor is joined in such action. Guarantor agrees that Guarantor’s liability hereunder shall be immediate and shall not be contingent upon the exercise or enforcement of any lien, security interest, mortgage or realization upon any security or collateral Lender may at any time possess. Guarantor agrees that any release which may be given by Lender to Borrower or any Other Guarantor shall not release Guarantor. Guarantor consents and agrees that Lender shall be under no obligation to marshal any assets of Borrower or any Other Guarantor in favor of said Guarantor, or against or in payment of any or all of the Guaranteed Obligations.

     4. Return of Payments. Guarantor agrees that, if at any time all or any part of any payment theretofore applied by Lender to any amounts due under the Loan or the Loan

3

Agreement is rescinded or returned by Lender for any reason whatsoever (including, without limitation, the insolvency, bankruptcy, liquidation or reorganization of any party), such amounts shall, for the purposes of this Guaranty, be deemed to have continued in existence to the extent of such payment, notwithstanding such application by Lender and this Guaranty shall continue to be effective or be reinstated, as the case may be, as to such amounts due under the Loan and the Loan Agreement, all as though such application by Lender had not been made.

     5. Waivers.

     (a) Guarantor hereby waives: (1) notice of acceptance hereof; (2) notice of any Loan or other financial accommodations made or extended to Borrower or the creation or existence of any Guaranteed Obligations; (3) notice of the amount of the Guaranteed Obligations, subject, however, to Guarantor’s right to make inquiry of Lender to ascertain the amount of the Guaranteed Obligations at any reasonable time; (4) notice of any adverse change in the financial condition of Borrower or of any other fact that might increase Guarantor’s risk hereunder; (5) notice of presentment for payment, demand, protest, and notice thereof as to any promissory notes or other instruments, writing or agreements evidencing Guaranteed Obligations; (6) notice of any event of default by Borrower under any instrument, writing or agreement with Lender including the Loan Documents; and (7) all other notices (except if such notice is specifically required to be given to Guarantor hereunder) and demands to which Guarantor might otherwise be entitled.

     (b) Guarantor hereby waives the right by statute or otherwise to require Lender to institute suit against Borrower or under any other guaranty; or to exhaust any rights and remedies which Lender has or may have against Borrower or under any other guaranty; provided, however, that nothing herein contained shall prevent Lender from suing on the Loan Agreement or foreclosing any security interest or lien created by any of the other Loan Documents, or from exercising any other rights thereunder, and if such commercial code sale or other remedy is availed of, only the net proceeds therefrom, after deduction of all charges and expenses of every kind and nature whatsoever relating to the proceedings or sale, shall be applied in reduction of the amount due on the Loan Agreement and other Loan Documents, and Lender shall not be required to institute or prosecute proceedings to cover any deficiency as a condition of any payment hereunder or enforcement hereof. At any sale of the security or collateral for the Loan, or any part thereof, whether by commercial code sale or otherwise, Lender may, at its discretion, purchase all or any part of such collateral offered for sale, for its own account, and may apply against the amount bid therefore the balance due it pursuant to the terms of the Loan Agreement and other Loan Documents. Guarantor further agrees that Guarantor is bound to the payment of all Guaranteed Obligations, whether now existing or hereafter accruing, as fully as if such Guaranteed Obligations were directly owing to Lender by Guarantor. Guarantor further waives any defense arising by reason of any disability or other defense (other than the defense that the Guaranteed Obligations shall have been fully and finally performed and indefeasibly paid) of Borrower or by reason of the cessation from any cause whatsoever of the liability of Borrower in respect thereof. Guarantor consents to any and all forbearances and extensions of the time of payment of the Loan Agreement or any of the other Loan Documents, and to any and all changes in the terms, covenants and conditions thereof hereafter made or granted, and to any part of the collateral therefor; it being the intention and agreement hereof that Guarantor shall remain unconditionally liable as a principal as, to and until the Guaranteed Obligations shall have been

4

fully repaid to Lender, and the terms, covenants and conditions of the Loan Agreement and of the other Loan Documents and all other notes, instruments, writing or agreements evidencing or securing the Guaranteed Obligations shall have been fully performed and observed, notwithstanding any act, omission or thing which might otherwise operate as a legal or equitable discharge of Borrower or Guarantor.

     (c) Guarantor hereby waives: (1) any rights to assert against Lender any defense (legal or equitable), setoff, counterclaim, or claim which Guarantor may now or at any time hereafter have against Borrower or any other party liable to Lender (other than the defense that the Guaranteed Obligations shall have been fully and finally performed and indefeasibly paid); and (2) any defense, setoff, counterclaim, or claim, of any kind or nature, arising directly or indirectly from the present or future lack of perfection, sufficiency, validity, or enforceability of the Guaranteed Obligations or any security therefor (including, but not limited to, any of the Loan Documents). Without limiting the generality of the foregoing or any other provisions of this Guaranty, Guarantor agrees that this Guaranty shall not be discharged, limited, impaired or affected by: (a) the transfer of all or any part of the personal property or real property described in any of the Loan Documents; (b) any sale, pledge, surrender, indulgence, alteration, substitution, exchange, modification or other disposition of any of the Guaranteed Obligations, all of which Lender is expressly authorized to make from time to time; (c) any failure, neglect or omission on the part of Lender to realize or protect any of the Guaranteed Obligations, or any personal property or real property or lien security given as security therefor, or to exercise any lien upon or right of appropriation of monies, credits or property of Borrower toward liquidation of the Indebtedness, or performance of the covenants guaranteed hereby; and (d) any proceedings with respect to the voluntary or involuntary liquidation, dissolution, sale or other disposition of all or substantially all the assets, the marshaling of assets and liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, imposition or readjustment of, or other similar proceedings affecting Borrower or any Other Guarantor or any of their respective assets, it being expressly understood and agreed that no such proceeding shall affect, modify, limit or discharge the liability or obligation of Guarantor hereunder in any manner whatsoever, and that Guarantor shall continue to remain absolutely liable under this Guaranty to the same extent, and in the same manner, as if such proceedings had not been instituted.

     (d) Guarantor hereby waives any right of subrogation Guarantor has or may have as against Borrower until all preference periods under all applicable laws have expired. In addition, Guarantor hereby waives any right to proceed against Borrower, now or hereafter for contribution, indemnity, reimbursement and any other suretyship rights and claims, whether direct or indirect, liquidated or contingent, whether arising under express or implied contract or by operation of law, which Guarantor may now have or hereafter have as against Borrower. Until the Guaranteed Obligations are indefeasibly paid in full hereunder, Guarantor also hereby waives any right to recourse to or with respect to any asset of Borrower. Guarantor agrees that in light of the immediately foregoing waivers, the execution of the Guaranty shall not be deemed to make Guarantor a “creditor” of Borrower, and that for purposes of Sections 547 and 550 of the Bankruptcy Code, Guarantor shall not be deemed a “creditor” of Borrower.

     6. Releases. No release or discharge of the Other Guarantor, or of any other person or entity, whether primarily or secondarily liable for or obligated with respect to the Guaranteed

5

Obligations, or the institution of bankruptcy, receivership, insolvency, reorganization, dissolution or liquidation proceedings by or against the Other Guarantor or any other person or entity, or the entry of any restraining or other order in any such proceeding, shall release or discharge Guarantor, unless and until all of the Guaranteed Obligations shall have been fully paid. Notwithstanding anything to the contrary contained herein, Lender agrees that the obligations of Guarantor under this Guaranty shall terminate, subject to Sections 4 and 8 hereof, at the earlier of such time as (a) Lender shall have received indefeasible payment in full in cash of all Guaranteed Liabilities and all other Guaranteed Obligations under this Guaranty and all financing arrangements and accommodations between Borrower and Lender shall have been irrevocably terminated and Lender has no obligations to make any loans, financial accommodations or advance any funds to Borrower which could constitute Liabilities. Release of this Guaranty, if it occurs, however, shall not affect, in any respect, the Loan or any other instrument securing or guarantying the Loan.

     7. Right of Setoff. Guarantor agrees that Lender has all rights of setoff and banker’s liens provided by applicable law. Following any default by Guarantor hereunder or an Event of Default by Borrower under the Loan Agreement, any and all moneys, credits, deposits, accounts, or other property belonging to the Guarantor in transit to or in the possession or under the control of Lender, or any agent or bailee of Lender, may, without notice and opportunity to be heard, be setoff against, and appropriated and applied against and towards the payment of any and all of the liabilities of Guarantor under this Guaranty. Following any default by Guarantor hereunder or an Event of Default by Borrower under the Loan Agreement, subject to the terms of the Intercreditor Agreements, Guarantor does hereby assign and transfer to Lender any and all cash, negotiable instruments, documents of title, chattel paper, securities, certificates of deposit, deposit accounts, other cash equivalents and other assets of said Guarantor in transit to, or in the possession or control of Lender, or any agent or bailee of Lender for any purpose and to apply the same on any or all of the Guaranteed Obligations. The rights of the Lender under this Section are in addition to all other rights and remedies which the Lender may otherwise have in equity or at law.

     8. Recovery Claim. Should a claim (“Recovery Claim”) be made upon Lender at any time for recovery of any amount received by Lender in payment of the Guaranteed Obligations (whether received from Borrower, Guarantor pursuant hereto, or otherwise) and should Lender repay all or part of said amount by reason of (a) any judgment, decree, or order of any court or administrative body having jurisdiction over Lender or any of its property; or (b) any reasonable settlement or compromise of any such Recovery Claim effected by Lender with the claimant (including Borrower), Guarantor shall remain liable to Lender for the amount so repaid to the same extent as if such amount had never originally been received by Lender, notwithstanding any termination hereof or the return of this document to Guarantor or the cancellation of any note or other instrument evidencing any of the Indebtedness.

     9. Assignments. In the event Lender shall sell, assign or transfer the Guaranteed Obligations, or any part hereof, or grant participations therein, each and every immediate or remote successive assignee, transferee, holder of or participant or other interests therein, of all or any part of the Guaranteed Obligations shall have the right to enforce this Guaranty by suit or otherwise for the benefit of such assignee, transferee, holder or participant, as fully as if such assignee, transferee, holder or participant were herein by name specifically given such rights,

6

powers and benefits; but Lender shall have an unimpaired, prior and superior right to enforce this Guaranty for its benefit as to so much of the guaranteed debt as it has not sold, assigned or transferred.

     10. Representations and Warranties. Guarantor agrees that the following shall constitute representations and warranties of Guarantor to Lender, which shall survive the execution and delivery hereof, and that Lender intends to make the Loan and other financial accommodations, if any, guaranteed hereby in reliance thereon:

     (a) Guarantor is not in default under any agreement to which Guarantor is a party, the effect of which will materially impair performance by the Guarantor of Guarantor’s obligations pursuant to and as contemplated by the terms of this Guaranty, and neither the execution and delivery of this Guaranty nor compliance with the terms and provisions of this Guaranty, will violate any law or any presently existing regulation, order, writ, injunction or decree of any court or governmental department, commission, board, bureau, agency or instrumentality, will conflict or will be inconsistent with, or will result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, instrument, document, agreement or contract of any kind which creates, represents, evidences or provides for any lien, charge or encumbrance upon any of the property or assets of the Guarantor, or any other indenture, mortgage, deed of trust, instrument, document, agreement or contract of any kind to which Guarantor is a party or by which Guarantor may be bound of which the Guarantor is a party or by which Guarantor may be bound, or in the event of any such conflict, the required consent or waiver of the other party or parties thereto has been validly granted, is in full force and effect and is valid and sufficient therefor. This Guaranty is the legal, valid and binding obligation of the Guarantor and is enforceable against the Guarantor in accordance with its terms.

     (b) Except as set forth on Schedule 10(b) hereof, there are no actions, suits or proceedings pending or to the best of Guarantor’s knowledge threatened against the Guarantor before any court or any governmental, administrative, regulatory, adjudicatory or arbitrational body or agency of any kind which will materially adversely affect performance by the Guarantor of Guarantor’s obligations pursuant to and as contemplated by the terms and provisions of this Guaranty.

     (c) Neither this Guaranty nor any document, financial statement (other than those of the SMSA Parties), credit information, written certificate or written statement heretofore furnished or required herein to be furnished to Lender by the Guarantor contains any untrue statement of material fact or omits to state a fact material to this Guaranty.

     (d) Guarantor is currently informed of the financial condition of Borrower and of all other circumstances which a diligent inquiry would reveal and which would bear upon the risk of nonpayment of the Guaranteed Obligations. Guarantor will continue to keep informed of the financial condition of Borrower and of all other circumstances which bear upon the risk of nonpayment or nonperformance of the Guaranteed Obligations.

     (e) As of the date hereof, the present fair saleable value of Guarantor’s assets is greater than the amount required to pay Guarantor’s total Indebtedness (contingent or otherwise),

7

and is greater than the amount that will be required to pay such Indebtedness as it matures and as it becomes absolute and matured. The transactions contemplated hereby were effectuated without actual intent to hinder, delay or defraud present or future creditors of Guarantor; it is Guarantor’s express intention that Guarantor will maintain a Solvent financial condition, giving effect to the Guaranteed Obligations incurred hereunder, as long as any of the Guaranteed Obligations remain outstanding or Guarantor is obligated to Lender in any other manner whatsoever. At all times until the Guaranteed Obligations remain satisfied and paid in full, the Guarantor shall keep and maintain assets sufficient to honor and pay any and all of the Guaranteed Obligations as and when due, subject to any express monetary limitation set forth herein.

     11. Subordination. Any rights of Guarantor, whether now existing or later arising, to receive payment on account of any Indebtedness (including interest) owed to Guarantor by Borrower, or to withdraw capital invested by Guarantor in Borrower, if any, or to receive and retain distributions from Borrower if and solely as expressly provided in the Loan Agreement, shall at all times be subordinate as to Lien and time of payment, and in all other respects to the full and prior repayment to Lender of all of the Liabilities owing to Lender pursuant to the Loan Agreement and the other Loan Documents (including, without limitation, the Loan). Except for dividends or distributions permitted by Section 9.9 of the Loan Agreement, Guarantor shall not be entitled to enforce or receive payment of any sums hereby subordinated until the Loan have been paid and performed in full, and any such sums received in violation of this Guaranty shall not be commingled with other monies of Guarantor and shall be received by Guarantor in trust for Lender.

     12. Payments; Application. All payments to be made hereunder by Guarantor shall be made in lawful money of the United States of America at the time of payment, shall be made in immediately available funds, and shall be made without deduction (whether for taxes or otherwise) or offset. All payments made by Guarantor hereunder shall be applied as follows; first, to all costs and expenses (including, but not limited to, reasonable attorneys’ fees, expenses and court costs) incurred by Lender in enforcing this Guaranty or in collecting the Guaranteed Obligations; second, to all accrued and unpaid interest and fees owing to Lender constituting Guaranteed Obligations; and third, to the balance of the Guaranteed Obligations.

     13. [Intentionally Omitted]

     14. Notices. Any notice or other communication required or permitted under this Guaranty shall be in writing and personally delivered, mailed by registered or certified U.S. mail (return receipt requested and postage prepaid), sent by telecopier (with a confirming copy sent by regular mail), or sent by prepaid nationally recognized overnight courier service, and addressed to the relevant party at its address set forth below, or at such other address as such party may, by written notice, designate as its address for purposes of notice under this Guaranty:

If to Lender, at:

LaSalle Bank National Association
135 South LaSalle Street
Chicago, Illinois 60603

8

Attention: Adam Panos
Telephone No.: 312-992-2871
Facsimile No.: 312-904-1294

With a copy to:

Duane Morris LLP
227 West Monroe St. — Suite 3400
Chicago, Illinois 60606
Attention: Brian P. Kerwin
Telephone No: 312-499-6737
Facsimile No: 312-499-6701

If to Guarantor, at:

Advocat Inc.
1621 Galleria Boulevard
Brentwood, Tennessee 37027
Attention: Glynn Riddle
Telephone No.: 615-771-7575
Facsimile No.: 615-771-7409

With a copy to:

Harwell Howard Hyne Gabbert & Manner
315 Deaderick Street, Suite 1800
Nashville, Tennessee 37238
Attention: John N. Popham IV
Telephone No.: 615-251-1093
Facsimile No.: 615-251-1059

If mailed, notice shall be deemed to be given three (3) days after being sent, and if sent by personal delivery, telecopier, or prepaid courier, notice shall be deemed to be given when delivered.

     15. Cumulative Remedies. No remedy under this Guaranty is intended to be exclusive of any other remedy, but each and every remedy shall be cumulative and in addition to any and every other remedy given hereunder and those provided by law or in equity. No delay or omission by Lender to exercise any right under this Guaranty shall impair any such right nor be construed to be a waiver thereof. No failure on the part of Lender to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right.

     16. Financial Information. Without limiting anything contained in this Guaranty, Guarantor agrees that, so long as any of the Guaranteed Obligations remain outstanding, Guarantor shall deliver to Lender, upon Lender’s written request and to the extent not included in

9

the Guarantor’s public filings with the United States Securities and Exchange Commission, on at least an annual basis, and at such other times as Lender may reasonably request, (i) financial statements (showing all changes in Guarantor’s financial condition which occurred during the preceding fiscal year and Guarantor’s current financial position), (ii) federal and state tax returns of Guarantor, as applicable, and (iii) such other financial information as Lender may reasonably request. Copies of annual tax returns shall be delivered to Lender upon Lender’s written request therefore. The failure of Guarantor to perform or observe any of its obligations hereunder within the period of time specified in any notice from Lender to Guarantor, which notice shall in no event be less than five (5) business days, advising Guarantor of such failure, shall constitute a default under this Guaranty and an Event of Default under the Loan Agreement and the other Loan Documents.

     17. Books and Records. Guarantor agrees that Lender’s books and records showing the Liabilities between Lender and Borrower shall be admissible in any action or proceeding and shall be binding upon Guarantor for the purpose of establishing the items therein set forth and shall constitute prima facie proof thereof absent manifest error.

     18. Interpretation and Severability of Provisions. The headings of sections and paragraphs in this Guaranty are for convenience of reference only and shall not be construed in any way to limit or define the content, scope or intent of the provisions hereof. As used in this Guaranty, the singular shall include the plural, and masculine, feminine and neuter pronouns shall be fully interchangeable, where the context so requires. Whenever the words “including”, “include or includes” are used in this Guaranty, they should be interpreted in a non-exclusive manner as though the words “, without limitation,” immediately followed the same. Wherever possible, each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law. If any provision of this Guaranty is prohibited or unenforceable under applicable law, such provision shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. As used herein, except in circumstances where under the Loan Documents the term is intended to mean or refer to all of the Borrowers or all of the Credit Parties on a consolidated basis, the term “Borrower” refers to any one or all of the Borrowers under the Loan Agreement, as applicable, provided, however, in the event of any disagreement between Lender and Guarantor as to whether or not a reference to Borrower means any or all of such Borrower(s) individually or collectively herein, and the circumstances are not covered by the Loan Documents, the Lender shall in reasonable good faith make such determination.

     19. Bankruptcy. So long as any Guaranteed Obligations shall be owing to Lender, Guarantor shall file in any bankruptcy or other proceeding against Borrower in which the filing of claims is required or permitted by law all claims which Guarantor may have against Borrower relating to any Indebtedness of Borrower to Guarantor and will assign to Lender all rights of Guarantor thereunder. If Guarantor does not file any such claim, Lender, as attorney-in-fact for Guarantor, is hereby authorized to do so in the name of Guarantor or, in Lender’s discretion, to assign the claim to a nominee and to cause proof of claim to be filed in the name of Lender’s nominee. The foregoing power of attorney is coupled with an interest and cannot be revoked. Lender or its nominee shall have the sole right to accept or reject any plan proposed in such proceeding and to take any other action which a party filing a claim is entitled to do. In all such cases, whether in administration, bankruptcy or otherwise, the person or persons authorized to

10

pay such claim shall pay to Lender the amount payable on such claim and, to the full extent necessary for that purpose, Guarantor hereby assigns to Lender all of Guarantor’s rights to any such payments or distributions to which Guarantor would otherwise be entitled; provided, however, Guarantor’s obligations hereunder shall not be satisfied except to the extent that Lender receives cash by reason of any such payment or distribution. If Lender receives anything hereunder other than cash, the same shall be held as collateral for amounts due under this Guaranty. At such time as all Guaranteed Obligations have been fully paid, any sums or other collateral received by Lender pursuant to this Section 19 remaining in the possession of Lender shall be paid or delivered to Guarantor.

     20. Additional and Independent Obligations. Guarantor’s obligations under this Guaranty are in addition to Guarantor’s obligations under any other existing or future guaranties, each of which shall remain in full force and effect until it is expressly modified or released in a writing signed by Lender. Guarantor’s obligations under this Guaranty are independent of those of Borrower and any Other Guarantor. Lender may bring a separate action against Guarantor without first proceeding against Borrower, any Other Guarantor, any other person or entity or any security that Lender may hold, and without pursuing any other remedy. Lender’s rights under this Guaranty shall not be exhausted by any action by Lender until all of the Indebtedness, liabilities and obligations owing to Lender pursuant to the Loan Agreement and the other Loan Documents (including, without limitation, the Loan and other Liabilities) have been indefeasibly paid in full in cash and otherwise performed in full and all financing arrangements and accommodations between Borrower and Lender shall have been irrevocably terminated and Lender has no obligations to make any loans, financial accommodations or advance any funds to Borrower which could constitute Liabilities.

     21. Costs and Expenses. If any lawsuit is commenced which arises out of or which relates to this Guaranty, the Loan Documents or the Loan, including, without limitation, any insolvency, bankruptcy or similar proceeding, Guarantor agrees to pay all of Lender’s costs and expenses, including, without limitation, reasonable attorneys’ fees which may be incurred in any effort to collect or enforce any term of this Guaranty. From the time(s) incurred until paid in full to Lender, all sums shall bear interest at the “Default Rate” set forth in the Loan Agreement.

     22. Entire Agreement; Amendments; Other Agreements. This Guaranty constitutes the entire agreement between Guarantor and Lender pertaining to the subject matter contained herein, and may not be altered, amended, or modified, nor may any provision hereof be waived or noncompliance therewith consented to, except by means of a writing executed by Guarantor as to which such consent or waiver is applicable and by Lender. Any such alteration, amendment, modification, waiver, or consent shall be effective only to the extent specified therein and for the specific purpose for which it is given. No course of dealing and no delay or waiver of any right or default under this Guaranty shall be deemed a waiver of any other similar or dissimilar right or default or otherwise prejudice the rights and remedies hereunder. The Guarantor shall not enter into any agreement containing any provision which would be violated or breached by the performance of Guarantor’s obligations hereunder or which would violate or breach any provision hereof, or that would or is reasonably likely to adversely affect the Lender’s interests or rights under this Guaranty. Time is of the essence for the payment and performance of this Guaranty. The recitals hereto are hereby made a part of and incorporated into this Guaranty by this reference thereto. A signature delivered or sent by facsimile or other

11

electronic transmission shall be as legally binding and enforceable as a signed original for any and all purposes.

     23. Successors and Assigns. This Guaranty shall be binding upon Guarantor’s representatives, heirs, legal beneficiaries, successors, and assigns, as applicable, and shall inure to the benefit of the successors and assigns of Lender; provided, however, Guarantor shall not be permitted to assign this Guaranty or any of Guarantor’s rights, liabilities or obligations hereunder without the prior written consent of the Lender. In the event of the dissolution, bankruptcy or failure to maintain a Solvent financial condition, as applicable, of the Guarantor, the Loan Agreement and any and all sums due thereunder, along with all of the other Guaranteed Obligations, shall at once, without any notice or demand from Lender, be due and payable.

     24. SUBMISSION OF JURISDICTION. THE GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY:

     (a) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT HEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS AND APPELLATE COURTS FROM ANY THEREOF;

     (b) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING (i) ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME, (ii) THE RIGHT TO ASSERT OR IMPOSE ANY CLAIM, NONCOMPULSORY SET-OFF, COUNTERCLAIM OR CROSS-CLAIM IN RESPECT THEREOF IN SUCH PROCEEDING; PROVIDED, HOWEVER, THIS WAIVER DOES NOT PRECLUDE THE RIGHT TO ASSERT A DEFENSE IN SUCH ACTION OR PROCEEDING OR TO ASSERT OR IMPOSE ANY CLAIM, COUNTERCLAIM OR CROSS-CLAIM WHICH THE GUARANTOR WISHES TO PURSUE IN A SEPARATE PROCEEDING AT ITS SOLE COST AND EXPENSE, AND (iii) ALL STATUTES OF LIMITATIONS WHICH MAY BE RELEVANT THERETO; AND

     (c) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, RETURN RECEIPT REQUESTED, TO THE GUARANTOR AT ITS ADDRESS SET FORTH ABOVE OR AT SUCH OTHER ADDRESS OF WHICH THE LENDER SHALL HAVE BEEN NOTIFIED PURSUANT THERETO. THE GUARANTOR AGREES THAT SUCH SERVICE, TO THE FULLEST EXTENT PERMITTED BY LAW (i) SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE GUARANTOR IN ANY SUIT, ACTION OR PROCEEDING, AND (ii) SHALL BE TAKEN AND HELD TO BE VALID PERSONAL SERVICE UPON AND PERSONAL DELIVERY TO THE GUARANTOR.

12

NOTHING HEREIN SHALL AFFECT THE LENDER’S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR LIMIT THE LENDER’S RIGHT TO BRING PROCEEDINGS AGAINST THE GUARANTOR OR ITS PROPERTY IN ANY COURT OR ANY OTHER JURISDICTION.

     25. GOVERNING LAW. THIS GUARANTY SHALL BE CONSTRUED IN ALL RESPECTS IN ACCORDANCE WITH, AND ENFORCED AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.

     26. JURY TRIAL. THE GUARANTOR AND THE LENDER HEREBY IRREVOCABLY AND KNOWINGLY WAIVE (TO THE FULLEST EXTENT PERMITTED BY LAW) ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING (INCLUDING, WITHOUT LIMITATION, ANY COUNTERCLAIM) ARISING OUT OF THIS GUARANTY OR ANY OTHER AGREEMENTS OR TRANSACTIONS RELATED HERETO, INCLUDING, WITHOUT LIMITATION, ANY ACTION OR PROCEEDING (A) TO ENFORCE OR DEFEND ANY RIGHTS UNDER OR IN CONNECTION WITH THIS GUARANTY OR ANY INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH, OR (B) ARISING FROM ANY DISPUTE OR CONTROVERSY IN CONNECTION WITH OR RELATED TO THIS GUARANTY. THE LENDER AND THE GUARANTOR AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT A JURY.

     27. No Pledge of Equity. Guarantor agrees that, so long as any of the Guaranteed Obligations remain outstanding, Guarantor shall remain the owner (either directly or through one of its Subsidiaries) of 100% of the equity in each Borrower; and without the prior written consent of Lender, Guarantor shall not assign, sell, convey, gift, transfer, pledge, hypothecate, grant a security interest in, encumber or in any other manner permit any lien (other than Permitted Liens) to exist in or on, all or any portion of the equity in or of any Borrower, except for those pledges to Capmark and the Omega Senior Lessors in effect on the date hereof.

     28. REVIEW BY GUARANTOR. The Guarantor acknowledges that Guarantor has thoroughly read and reviewed the terms and provisions of this Guaranty, and that such terms and provisions are clearly understood by the Guarantor, and has been fully and unconditionally consented to by the Guarantor with the full benefit and advice of counsel chosen by the Guarantor.

[Signature Page Follows]

13

Exhibit 10.4

     IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty as of the date set forth in the first paragraph hereof.

Guarantor:

ADVOCAT INC.

/s/ Glynn Riddle Name: Glynn Riddle

Title: EVP & CFO

[Signature Page — Guaranty]

EX-10.5

Exhibit 10.5

REVOLVING CREDIT NOTE

$21,000,000.00	August 10, 2007
	Chicago, Illinois

     FOR VALUE RECEIVED, those certain entities set forth on Schedule 1 hereto, which are signatories hereto (such entities individually and collectively, the “Revolving Loan Borrower”), hereby jointly and severally promise to pay to the order of LASALLE BANK NATIONAL ASSOCIATION, a national banking association (the “Lender”), at its office at 135 South LaSalle Street, Chicago, Illinois 60603, or at such other place as the holder hereof may designate in writing, in lawful money of the United States of America, the principal sum of Twenty-One Million and No/100 Dollars ($21,000,000.00), or such lesser principal sum as may then be owed by the Revolving Loan Borrower to the Lender hereunder, on or before August 10, 2010 (the “Stated Maturity Date”); provided, however, on February 10, 2008 (i) the Maximum Revolving Facility (as defined in the Loan Agreement (as defined below)) shall be reduced to Fifteen Million and No/100 Dollars ($15,000,000.00) and (ii) the outstanding principal amount of all Revolving Loans in excess of $15,000,000.00 shall be immediately due and payable.

     THE INDEBTEDNESS EVIDENCED HEREBY SHALL BECOME IMMEDIATELY DUE AND PAYABLE UPON THE EARLIEST TO OCCUR OF (X) THE STATED MATURITY DATE; (Y) THE ACCELERATION OF THE LIABILITIES (AS DEFINED IN THE LOAN AND SECURITY AGREEMENT OF EVEN DATE HEREWITH AMONG THE BORROWER (AS DEFINED IN THE LOAN AGREEMENT (AS DEFINED BELOW)) AND THE LENDER (AS AMENDED OR MODIFIED FROM TIME TO TIME, THE “LOAN AGREEMENT”)) PURSUANT TO SECTION 11.2 OF THE LOAN AGREEMENT; AND (Z) THE TERMINATION OF THE LOAN AGREEMENT (WHETHER BY PREPAYMENT OR OTHERWISE) IN ACCORDANCE WITH ITS TERMS. Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Loan Agreement.

     This Revolving Credit Note shall bear interest on the unpaid principal amount hereof from time to time outstanding from the date hereof until the Stated Maturity Date, or until maturity due to acceleration or otherwise and, after maturity, until paid, at the rates per annum and upon the terms specified in the Loan Agreement. Accrued interest on the Revolving Loans shall be due and payable and shall be made by the Revolving Loan Borrower to the Lender in accordance with Section 2.7 of the Loan Agreement. Interest payments on such Revolving Loans shall be computed using the interest rate then in effect pursuant to the Loan Agreement and based on the outstanding principal balance of the Revolving Loans. Upon maturity, the outstanding principal balance of the Revolving Loans shall be immediately due and payable, together with any remaining accrued interest thereon.

     All payments on account of indebtedness evidenced by this Revolving Credit Note shall be first applied to interest on the unpaid balance and the remainder to principal, unless otherwise specified in the Loan Agreement. Payments of both principal and interest hereunder are to be made in same day or immediately available funds.

     This Revolving Credit Note is the Revolving Credit Note referred to in the Loan Agreement, and is subject to all of the terms and conditions of the Loan Agreement, as such Loan Agreement may from time to time be amended, supplemented, or modified, which terms and conditions are hereby made a part of this Revolving Credit Note to the same extent and with the same force and effect as if they were fully set forth herein.

     Upon the occurrence or existence of any Event of Default (as such term is defined in the Loan Agreement), including the failure to pay any principal, interest and/or fees in accordance with the terms set forth in the Loan Agreement, which shall constitute an Event of Default under this Revolving Credit Note, the Lender shall be entitled, at its sole option, to accelerate the then outstanding indebtedness hereunder and take such other action as may be provided for in the Loan Agreement, any Financing Agreement or otherwise by law.

     The remedies of the holder hereof as provided in this Revolving Credit Note, in the Loan Agreement, and in any other Financing Agreement shall be cumulative and concurrent, and may be pursued singly, successively, or together against the Revolving Loan Borrower, and/or against any collateral or guarantor (including, without limitation, the Guarantor), at the sole discretion of the holder hereof.

     The Revolving Loan Borrower hereby waives presentment for payment, demand, notice of nonpayment, notice of dishonor, protest of any dishonor, notice of protest, and protest of this Revolving Credit Note and all other notices in connection with the delivery, acceptance, performance, default, or enforcement of the payment of this Revolving Credit Note, and agrees that its liability shall be unconditional without regard to the liability of any other party or person and shall not in any manner be affected by any indulgence, extension of time, renewal, waiver or modification granted or consented to by the holder hereof; and the Revolving Loan Borrower agrees that additional makers, endorsers, guarantors, or sureties may become parties hereto without notice to the Revolving Loan Borrower or affecting the Revolving Loan Borrower’s liability hereunder.

     It being the intent of the Lender and the Revolving Loan Borrower that the rate of interest and all other charges to the Revolving Loan Borrower be lawful, if for any reason the payment of a portion of the interest or other charges otherwise required to be paid under this Revolving Credit Note would exceed the limit which the Lender may lawfully charge the Revolving Loan Borrower, then the obligation to pay interest or other charges shall automatically be reduced to such limit and, if any amounts in excess of such limit shall have been paid, then such amounts shall at the option of the Lender either be refunded to the Revolving Loan Borrower or credited to the principal amount of this Revolving Credit Note so that under no circumstances shall the interest or other charges required to be paid by the Revolving Loan Borrower hereunder exceed the maximum rate allowed by law.

     The holder hereof shall not by any act of omission or commission be deemed to waive any of its rights or remedies hereunder unless such waiver be in writing and signed by the holder hereof (and then only to the extent specifically set forth therein). A waiver of any one event shall not be construed as continuing or as a bar to or waiver of such right or remedy on a subsequent event.

2

     Whenever possible, each provision of this Revolving Credit Note and the Loan Agreement shall be interpreted in such manner as to be effective and valid under Applicable Law, but if any provision of this Revolving Credit Note or the Loan Agreement shall be prohibited or invalid under such law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions of this Revolving Credit Note or the Loan Agreement.

     This Revolving Credit Note shall not be amended, supplemented or modified except pursuant to a writing signed by both Lender and Revolving Loan Borrower.

     Without limiting the expansiveness of any similar provision contained in the Loan Agreement, if at any time or times, Lender: (a) employs counsel in good faith for advice or other representation (i) with respect to this Revolving Credit Note, the Loan Agreement, any of the other Financing Agreements or any collateral securing this Revolving Credit Note, (ii) to represent Lender in any restructuring, workout, litigation, contest, dispute, suit or proceeding or to commence, defend or intervene or to take any other action in or with respect to any litigation, contest, dispute or proceeding (whether instituted by Lender, Revolving Loan Borrower or any other person or entity) in any way or respect relating to this Revolving Credit Note, the Loan Agreement, any of the other Financing Agreements, any collateral securing this Revolving Credit Note or Revolving Loan Borrower’s affairs, or (iii) to enforce any rights of Lender against Revolving Loan Borrower; (b) takes any action to protect, collect, sell, liquidate or otherwise dispose of any collateral securing this Revolving Credit Note; and/or (c) attempts to or enforces any of Lender’s rights and remedies against Revolving Loan Borrower; the costs and expenses incurred by Lender in any manner or way with respect to the foregoing shall be part of the indebtedness evidenced by this Revolving Credit Note, payable by Revolving Loan Borrower to Lender on demand. Without limiting the generality of the foregoing, such expenses and costs include: court costs, reasonable attorneys’ fees and expenses, and accountants’ fees and expenses.

     Payment of this Revolving Credit Note is secured by the Collateral.

     Payment of this Note has been guaranteed by Advocat Inc., a Delaware corporation (“Guarantor”), under a certain Guaranty dated of even date herewith. It is a covenant and condition hereof that in case Guarantor shall be declared a bankrupt, or shall file a petition in voluntary bankruptcy, or under Title 11 of the United States Code, or under any similar State or Federal law, or Guarantor files any declaration, answer or pleading admitting Guarantor’s insolvency or inability to pay or discharge Guarantor’s liabilities, or if a trustee or a receiver is appointed for Guarantor, or for the property or estate of Guarantor, or should any court take jurisdiction of Guarantor’s property or estate or should Guarantor make an assignment for the benefit of Guarantor’s, then upon the occurrence of any such event, the Lender or the holder of this Revolving Credit Note may declare that a default has occurred hereunder, and in consequences thereof the entire unpaid principal balance and all accrued and unpaid interest thereon shall be immediately due and payable; and in addition, the Lender or the holder of this Revolving Credit Note may avail itself of any other right or remedy reserved to it under or identified in the Loan Agreement and the Financing Agreements securing this Revolving Credit Note, and as set forth in law or equity.

3

     The Revolving Loan Borrower shall use the proceeds represented by this Revolving Credit Note solely for proper business purposes, and consistently with all Applicable Laws and statutes and the Loan Agreement. The Revolving Loan Borrower further covenants with the Lender that the Revolving Loan Borrower is not in the business of extending credit for the purpose of purchasing or carrying margin security (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds represented by this Revolving Credit Note will be used to purchase or carry any margin securities or to extend credit to others for the purpose of purchasing or carrying any margin securities.

     Any term or provision of this Revolving Credit Note, the Loan Agreement or any other Financing Agreement to the contrary notwithstanding, the maximum aggregate amount of the Liabilities for which any of the Revolving Loan Borrowers (which Liabilities are not direct borrowings or direct obligations of such Revolving Loan Borrower (the “Non-Direct Obligations”)) shall be liable shall not exceed the maximum amount for which such Revolving Loan Borrower can be liable without rendering such Non-Direct Obligations, as they relate to such Revolving Loan Borrower, voidable under Applicable Law relating to fraudulent conveyance or fraudulent transfer. To the extent that any Revolving Loan Borrower shall be required hereunder to pay a portion of its Non-Direct Obligations which shall exceed the greater of (i) the amount of the economic benefit actually received by such Revolving Loan Borrower from any of the loans evidenced hereby in respect of such Non-Direct Obligations, and (ii) the amount which such Revolving Loan Borrower would otherwise have paid if such Revolving Loan Borrower had paid the aggregate amount of the Non-Direct Obligations of such Revolving Loan Borrower (excluding the amount thereof repaid by the other Revolving Loan Borrowers) in the same proportion as such Revolving Loan Borrower’s net worth at the date of any applicable borrowing hereunder is sought bears to the aggregate net worth of all of the Revolving Loan Borrowers at the date of such applicable borrowing hereunder is sought, then such Revolving Loan Borrower shall be reimbursed by the other Revolving Loan Borrowers for the amount of such excess, pro rata based on the respective net worths of the Revolving Loan Borrowers at the date of such applicable borrowing with respect hereto is sought.

     This Revolving Credit Note shall inure to the benefit of Lender and its successors and assigns and shall be binding upon the Revolving Loan Borrower and its successors and permitted assigns. As used herein the term “Lender” shall mean and include the successors and assigns of the identified payee and the holder or holders of this Revolving Credit Note from time to time.

     THIS REVOLVING CREDIT NOTE SHALL BE CONSTRUED IN ALL RESPECTS IN ACCORDANCE WITH, AND ENFORCED AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.

     THE REVOLVING LOAN BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY:

          (a) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS REVOLVING CREDIT NOTE, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF

4

ILLINOIS, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS AND APPELLATE COURTS FROM ANY THEREOF;

          (b) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING (i) ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME, (ii) THE RIGHT TO ASSERT OR IMPOSE ANY CLAIM, NONCOMPULSORY SET-OFF, COUNTERCLAIM OR CROSS-CLAIM IN RESPECT THEREOF IN SUCH PROCEEDING; PROVIDED, HOWEVER, THIS WAIVER DOES NOT PRECLUDE THE RIGHT TO ASSERT A DEFENSE IN SUCH ACTION OR PROCEEDING OR TO ASSERT OR IMPOSE ANY CLAIM, COUNTERCLAIM OR CROSS-CLAIM WHICH THE REVOLVING LOAN BORROWER WISHES TO PURSUE IN A SEPARATE PROCEEDING AT ITS SOLE COST AND EXPENSE, AND (iii) ALL STATUTES OF LIMITATIONS WHICH MAY BE RELEVANT THERETO; AND

          (c) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, RETURN RECEIPT REQUESTED, TO THE REVOLVING LOAN BORROWER AT ITS ADDRESS SET FORTH IN THE LOAN AGREEMENT OR AT SUCH OTHER ADDRESS OF WHICH THE LENDER SHALL HAVE BEEN NOTIFIED PURSUANT THERETO. THE REVOLVING LOAN BORROWER AGREES THAT SUCH SERVICE, TO THE FULLEST EXTENT PERMITTED BY LAW (i) SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE REVOLVING LOAN BORROWER IN ANY SUIT, ACTION OR PROCEEDING, AND (ii) SHALL BE TAKEN AND HELD TO BE VALID PERSONAL SERVICE UPON AND PERSONAL DELIVERY TO THE REVOLVING LOAN BORROWER. SOLELY TO THE EXTENT PROVIDED BY APPLICABLE LAW, SHOULD THE REVOLVING LOAN BORROWER, AFTER BEING SERVED, FAIL TO APPEAR OR ANSWER TO ANY SUMMONS, COMPLAINT, PROCESS OR PAPERS SO SERVED WITHIN THE NUMBER OF DAYS PRESCRIBED BY LAW AFTER THE DELIVERY OR MAILING THEREOF, THE REVOLVING LOAN BORROWER SHALL BE DEEMED IN DEFAULT AND AN ORDER AND/OR JUDGMENT MAY BE ENTERED BY THE COURT AGAINST THE REVOLVING LOAN BORROWER AS DEMANDED OR PRAYED FOR IN SUCH SUMMONS, COMPLAINT, PROCESS OR PAPERS. NOTHING HEREIN SHALL AFFECT THE LENDER’S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR LIMIT THE LENDER’S RIGHT TO BRING PROCEEDINGS AGAINST THE REVOLVING LOAN BORROWER OR ITS PROPERTY IN ANY COURT OR ANY OTHER JURISDICTION.

     THE REVOLVING LOAN BORROWER (AND THE LENDER) HEREBY IRREVOCABLY AND KNOWINGLY WAIVE (TO THE FULLEST EXTENT PERMITTED BY LAW) ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING (INCLUDING, WITHOUT LIMITATION, ANY COUNTERCLAIM) ARISING OUT OF THIS REVOLVING CREDIT NOTE, ANY OF THE FINANCING

5

AGREEMENTS OR ANY OTHER AGREEMENTS OR TRANSACTIONS RELATED HERETO OR THERETO, INCLUDING, WITHOUT LIMITATION, ANY ACTION OR PROCEEDING (A) TO ENFORCE OR DEFEND ANY RIGHTS UNDER OR IN CONNECTION WITH THIS REVOLVING CREDIT NOTE OR ANY INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH, OR (B) ARISING FROM ANY DISPUTE OR CONTROVERSY IN CONNECTION WITH OR RELATED TO THIS REVOLVING CREDIT NOTE AND THE FINANCING AGREEMENTS. THE LENDER AND THE REVOLVING LOAN BORROWER AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT A JURY.

6

     IN WITNESS WHEREOF, each Revolving Loan Borrower has caused this Revolving Credit Note to be duly executed by its authorized officer as of the date first above written.

ADVOCAT ANCILLARY SERVICES, INC., a Tennessee corporation
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
ADVOCAT FINANCE, INC., a Delaware corporation
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
ADVOCAT DISTRIBUTION SERVICES, INC., a Tennessee corporation
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE ASSISTED LIVING SERVICES, INC., a Tennessee corporation
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer

7

DIVERSICARE ASSISTED LIVING SERVICES NC, LLC, a Tennessee limited liability company
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE LEASING CORP., a Tennessee corporation
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
STERLING HEALTH CARE MANAGEMENT, INC., a Kentucky corporation
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
SENIOR CARE CEDAR HILLS, LLC, a Delaware limited liability company
BY:	SENIOR CARE FLORIDA LEASING, LLC, its sole member
	BY:  DIVERSICARE LEASING CORP., its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
SENIOR CARE GOLFCREST, LLC, a Delaware limited liability company
BY:	SENIOR CARE FLORIDA LEASING, LLC, its sole member
	BY:  DIVERSICARE LEASING CORP., its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer

8

SENIOR CARE GOLFVIEW, LLC, a Delaware limited liability company
BY:	SENIOR CARE FLORIDA LEASING, LLC, its sole member
	BY:  DIVERSICARE LEASING CORP., its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
SENIOR CARE FLORIDA LEASING, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
SENIOR CARE SOUTHERN PINES, LLC, a Delaware limited liability company
BY:	SENIOR CARE FLORIDA LEASING, LLC, its sole member
	BY:  DIVERSICARE LEASING CORP., its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE AFTON OAKS, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a Delaware limited liability company
BY:	DIVERSICARE ASSISTED LIVING SERVICES NC, LLC, its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer

9

DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC, a Delaware limited liability company
BY:	DIVERSICARE ASSISTED LIVING SERVICES NC, LLC,its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE BRIARCLIFF, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE CHISOLM, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE HARTFORD, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE HILLCREST, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer

10

DIVERSICARE LAMPASAS, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE PINEDALE, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE WINDSOR HOUSE, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE YORKTOWN, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE BALLINGER, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC., its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer

11

DIVERSICARE DOCTORS, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE ESTATES, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE HUMBLE, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE KATY, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE NORMANDY TERRACE, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer

12

DIVERSICARE TEXAS I, LLC, a Delaware limited liability company
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE TREEMONT, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE ROSE TERRACE, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer

13

Schedule 1

REVOLVING LOAN BORROWERS

Advocat Ancillary Services, Inc.
Advocat Finance, Inc.
Diversicare Management Services Co.
Advocat Distribution Services, Inc.
Diversicare Assisted Living Services, Inc.
Diversicare Assisted Living Services NC, LLC
Diversicare Leasing Corp.
Sterling Health Care Management, Inc.
Senior Care Cedar Hills, LLC
Senior Care Golfcrest, LLC
Senior Care Golfview, LLC
Senior Care Florida Leasing, LLC
Senior Care Southern Pines, LLC
Diversicare Afton Oaks, LLC
Diversicare Assisted Living Services NC I, LLC
Diversicare Assisted Living Services NC II, LLC
Diversicare Briarcliff, LLC
Diversicare Chisolm, LLC
Diversicare Hartford, LLC
Diversicare Hillcrest, LLC,
Diversicare Lampasas, LLC
Diversicare Pinedale, LLC
Diversicare Windsor House, LLC
Diversicare Yorktown, LLC
Diversicare Ballinger, LLC
Diversicare Doctors, LLC
Diversicare Estates, LLC
Diversicare Humble, LLC
Diversicare Katy, LLC
Diversicare Normandy Terrace, LLC

14

Diversicare Texas I, LLC
Diversicare Treemont, LLC
Diversicare Rose Terrace, LLC

15

EX-10.6

Exhibit 10.6

TERM LOAN NOTE

$16,500,000.00	August 10, 2007
	Chicago, Illinois

     FOR VALUE RECEIVED, DIVERSICARE LEASING CORP., a Tennessee corporation, DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a Delaware limited liability company, DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC, a Delaware limited liability company, DIVERSICARE LAMPASAS, LLC, a Delaware limited liability company, DIVERSICARE YORKTOWN, LLC, a Delaware limited liability company, DIVERSICARE BALLINGER, LLC, a Delaware limited liability company, DIVERSICARE DOCTORS, LLC, a Delaware limited liability company, DIVERSICARE ESTATES, LLC, a Delaware limited liability company, DIVERSICARE HUMBLE, LLC, a Delaware limited liability company, DIVERSICARE KATY, LLC, a Delaware limited liability company, DIVERSICARE NORMANDY TERRACE, LLC, a Delaware limited liability company, DIVERSICARE TEXAS I, LLC, a Delaware limited liability company, DIVERSICARE TREEMONT, LLC, a Delaware limited liability company, DIVERSICARE ROSE TERRACE, LLC, a Delaware limited liability company (such entities individually and collectively, the “Term Loan Borrower”), hereby jointly and severally promise to pay to the order of LASALLE BANK NATIONAL ASSOCIATION, a national banking association (the “Lender”), at its office at 135 South LaSalle Street, Chicago, Illinois 60603, or at such other place as the holder hereof may designate in writing, in lawful money of the United States of America, the principal sum of Sixteen Million Five Hundred Thousand and No/100 Dollars ($16,500,000.00), or such lesser principal sum as may then be owed by the Term Loan Borrower to the Lender hereunder, on or before August 10, 2012 (the “Stated Maturity Date”).

     THE INDEBTEDNESS EVIDENCED HEREBY SHALL BECOME IMMEDIATELY DUE AND PAYABLE UPON THE EARLIEST TO OCCUR OF (X) THE STATED MATURITY DATE; (Y) THE ACCELERATION OF THE LIABILITIES (AS DEFINED IN THE LOAN AND SECURITY AGREEMENT OF EVEN DATE HEREWITH AMONG THE BORROWER (AS DEFINED IN THE LOAN AGREEMENT (AS DEFINED BELOW)) AND THE LENDER (AS AMENDED OR MODIFIED FROM TIME TO TIME, THE “LOAN AGREEMENT”)) PURSUANT TO SECTION 11.2 OF THE LOAN AGREEMENT; AND (Z) THE TERMINATION OF THE LOAN AGREEMENT (WHETHER BY PREPAYMENT OR OTHERWISE) IN ACCORDANCE WITH ITS TERMS. Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Loan Agreement.

     This Term Loan Note shall bear interest on the unpaid principal amount hereof from time to time outstanding from the date hereof until the Stated Maturity Date, or until maturity due to acceleration or otherwise and, after maturity, until paid, at the rates per annum and upon the terms specified in the Loan Agreement. Accrued interest on the Term Loan shall be due and payable and shall be made by the Term Loan Borrower to the Lender in accordance with Section 2.2 of the Loan Agreement. Interest payments on such Term Loan shall be computed using the interest rate then in effect pursuant to the Loan Agreement and based on the outstanding principal balance of the Term Loan.

The principal balance of the Term Loan shall be amortized over a ten (10) year period and shall be repaid in consecutive equal monthly installments of One Hundred Thirty Seven Thousand Five Hundred and No/100 Dollars ($137,500.00), together with interest accrued thereon, payable on the first day of each calendar month commencing on the first day of the calendar month immediately following the Closing Date and ending on the Stated Maturity Date, with a final payment of all remaining principal under, and all accrued and unpaid interest on, the Term Loan due and payable on the Credit Termination Date.

All payments on account of indebtedness evidenced by this Term Loan Note shall be first applied to interest on the unpaid balance and the remainder to principal, unless otherwise specified in the Loan Agreement. Payments of both principal and interest hereunder are to be made in same day or immediately available funds.

     This Term Loan Note is the Term Loan Note referred to in the Loan Agreement, and is subject to all of the terms and conditions of the Loan Agreement, as such Loan Agreement may from time to time be amended, supplemented, or modified, which terms and conditions are hereby made a part of this Term Loan Note to the same extent and with the same force and effect as if they were fully set forth herein.

     Upon the occurrence or existence of any Event of Default, including, without limitation, the failure to pay any principal, interest and/or fees in accordance with the terms set forth in the Loan Agreement, which shall constitute an Event of Default under this Term Loan Note, the Lender shall be entitled, at its sole option, to accelerate the then outstanding indebtedness hereunder and take such other action as may be provided for in the Loan Agreement, any Financing Agreements, or otherwise by law.

     The remedies of the holder hereof as provided in this Term Loan Note, in the Loan Agreement, and in any other Financing Agreements shall be cumulative and concurrent, and may be pursued singly, successively, or together against the Term Loan Borrower, and/or against any Collateral or guarantor (including, without limitation, the Guarantor), at the sole discretion of the holder hereof.

     The Term Loan Borrower hereby waives presentment for payment, demand, notice of nonpayment, notice of dishonor, protest of any dishonor, notice of protest, and protest of this Term Loan Note and all other notices in connection with the delivery, acceptance, performance, default, or enforcement of the payment of this Term Loan Note, and agrees that its liability shall be unconditional without regard to the liability of any other party or person and shall not in any manner be affected by any indulgence, extension of time, renewal, waiver or modification granted or consented to by the holder hereof; and the Term Loan Borrower agrees that additional makers, endorsers, guarantors, or sureties may become parties hereto without notice to the Term Loan Borrower or affecting the Term Loan Borrower’s liability hereunder.

     It being the intent of the Lender and the Term Loan Borrower that the rate of interest and all other charges to the Term Loan Borrower be lawful, if for any reason the payment of a portion of the interest or other charges otherwise required to be paid under this Term Loan Note would exceed the limit which the Lender may lawfully charge the Term Loan Borrower, then the obligation to pay interest or other charges shall automatically be reduced to such limit and, if any amounts in excess of such limit shall have been paid, then such amounts shall at the option of the

- 2 -

Lender either be refunded to the Term Loan Borrower or credited to the principal amount of this Term Loan Note so that under no circumstances shall the interest or other charges required to be paid by the Term Loan Borrower hereunder exceed the maximum rate allowed by law.

     The holder hereof shall not by any act of omission or commission be deemed to waive any of its rights or remedies hereunder unless such waiver be in writing and signed by the holder hereof (and then only to the extent specifically set forth therein). A waiver of any one event shall not be construed as continuing or as a bar to or waiver of such right or remedy on a subsequent event.

     Whenever possible, each provision of this Term Loan Note and the Loan Agreement shall be interpreted in such manner as to be effective and valid under Applicable Law, but if any provision of this Term Loan Note or the Loan Agreement shall be prohibited or invalid under such law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions of this Term Loan Note or the Loan Agreement.

     This Term Loan Note shall not be amended, supplemented or modified except pursuant to a writing signed by both Lender and Term Loan Borrower.

     Without limiting the expansiveness of any similar provision contained in the Loan Agreement, if at any time or times, Lender: (a) employs counsel in good faith for advice or other representation (i) with respect to this Term Loan Note, the Loan Agreement, any of the other Financing Agreements or any collateral securing this Term Loan Note, (ii) to represent Lender in any restructuring, workout, litigation, contest, dispute, suit or proceeding or to commence, defend or intervene or to take any other action in or with respect to any litigation, contest, dispute or proceeding (whether instituted by Lender, Term Loan Borrower or any other person or entity) in any way or respect relating to this Term Loan Note, the Loan Agreement, any of the other Financing Agreements, any collateral securing this Term Loan Note or Term Loan Borrower’s affairs, or (iii) to enforce any rights of Lender against Term Loan Borrower; (b) takes any action to protect, collect, sell, liquidate or otherwise dispose of any collateral securing this Term Loan Note; and/or (c) attempts to or enforces any of Lender’s rights and remedies against Term Loan Borrower; the costs and expenses incurred by Lender in any manner or way with respect to the foregoing shall be part of the indebtedness evidenced by this Term Loan Note, payable by Term Loan Borrower to Lender on demand. Without limiting the generality of the foregoing, such expenses and costs include: court costs, reasonable attorneys’ fees and expenses, and accountants’ fees and expenses.

     Payment of this Term Loan Note is secured by the Collateral.

     Payment of this Note has been guaranteed by Advocat Inc., a Delaware corporation (“Guarantor”), under a certain Guaranty dated of even date herewith. It is a covenant and condition hereof that in case Guarantor shall be declared a bankrupt, or shall file a petition in voluntary bankruptcy, or under Title 11 of the United States Code, or under any similar State or Federal law, or Guarantor files any declaration, answer or pleading admitting Guarantor’s insolvency or inability to pay or discharge Guarantor’s liabilities, or if a trustee or a receiver is appointed for Guarantor, or for the property or estate of Guarantor, or should any court take jurisdiction of Guarantor’s property or estate or should Guarantor make an assignment for the

- 3 -

benefit of Guarantor’s creditors, then upon the occurrence of any such event, the Lender or the holder of this Term Loan Note may declare that a default has occurred hereunder, and in consequences thereof the entire unpaid principal balance and all accrued and unpaid interest thereon shall be immediately due and payable; and in addition, the Lender or the holder of this Term Loan Note may avail itself of any other right or remedy reserved to it under or identified in the Loan Agreement and the Financing Agreements securing this Term Loan Note, and as provided in law or equity.

     The Term Loan Borrower shall use the proceeds represented by this Term Loan Note solely for proper business purposes, and consistently with all Applicable Laws and statutes. The Term Loan Borrower further covenants with the Lender that the Term Loan Borrower is not in the business of extending credit for the purpose of purchasing or carrying margin security (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds represented by this Term Loan Note will be used to purchase or carry any margin securities or to extend credit to others for the purpose of purchasing or carrying any margin securities.

     This Term Loan Note shall inure to the benefit of Lender and its successors and assigns and shall be binding upon the Term Loan Borrower and its successors and permitted assigns. As used herein the term “Lender” shall mean and include the successors and assigns of the identified payee and the holder or holders of this Term Loan Note from time to time.

     THIS TERM LOAN NOTE SHALL BE CONSTRUED IN ALL RESPECTS IN ACCORDANCE WITH, AND ENFORCED AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.

     THE TERM LOAN BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY:

     (a) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AMENDED AND RESTATED TERM LOAN NOTE, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS AND APPELLATE COURTS FROM ANY THEREOF;

     (b) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING (i) ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME, (ii) THE RIGHT TO ASSERT OR IMPOSE ANY CLAIM, NONCOMPULSORY SET-OFF, COUNTERCLAIM OR CROSS-CLAIM IN RESPECT THEREOF IN SUCH PROCEEDING; PROVIDED, HOWEVER, THIS WAIVER DOES NOT PRECLUDE THE RIGHT TO ASSERT A DEFENSE IN SUCH ACTION OR PROCEEDING

- 4 -

OR TO ASSERT OR IMPOSE ANY CLAIM, COUNTERCLAIM OR CROSS-CLAIM WHICH THE TERM LOAN BORROWER WISHES TO PURSUE IN A SEPARATE PROCEEDING AT ITS SOLE COST AND EXPENSE, AND (iii) ALL STATUTES OF LIMITATIONS WHICH MAY BE RELEVANT THERETO; AND

     (c) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, RETURN RECEIPT REQUESTED, TO THE TERM LOAN BORROWER AT ITS ADDRESS SET FORTH IN THE LOAN AGREEMENT OR AT SUCH OTHER ADDRESS OF WHICH THE LENDER SHALL HAVE BEEN NOTIFIED PURSUANT THERETO. THE TERM LOAN BORROWER AGREES THAT SUCH SERVICE, TO THE FULLEST EXTENT PERMITTED BY LAW (i) SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE TERM LOAN BORROWER IN ANY SUIT, ACTION OR PROCEEDING, AND (ii) SHALL BE TAKEN AND HELD TO BE VALID PERSONAL SERVICE UPON AND PERSONAL DELIVERY TO THE TERM LOAN BORROWER. SOLELY TO THE EXTENT PROVIDED BY APPLICABLE LAW, SHOULD THE TERM LOAN BORROWER, AFTER BEING SERVED, FAIL TO APPEAR OR ANSWER TO ANY SUMMONS, COMPLAINT, PROCESS OR PAPERS SO SERVED WITHIN THE NUMBER OF DAYS PRESCRIBED BY LAW AFTER THE DELIVERY OR MAILING THEREOF, THE TERM LOAN BORROWER SHALL BE DEEMED IN DEFAULT AND AN ORDER AND/OR JUDGMENT MAY BE ENTERED BY THE COURT AGAINST THE TERM LOAN BORROWER AS DEMANDED OR PRAYED FOR IN SUCH SUMMONS, COMPLAINT, PROCESS OR PAPERS. NOTHING HEREIN SHALL AFFECT THE LENDER’S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR LIMIT THE LENDER’S RIGHT TO BRING PROCEEDINGS AGAINST THE TERM LOAN BORROWER OR ITS PROPERTY IN ANY COURT OR ANY OTHER JURISDICTION.

     THE TERM LOAN BORROWER (AND THE LENDER) HEREBY IRREVOCABLY AND KNOWINGLY WAIVE (TO THE FULLEST EXTENT PERMITTED BY LAW) ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING (INCLUDING, WITHOUT LIMITATION, ANY COUNTERCLAIM) ARISING OUT OF THIS TERM LOAN NOTE, ANY OF THE FINANCING AGREEMENTS OR ANY OTHER AGREEMENTS OR TRANSACTIONS RELATED HERETO OR THERETO, INCLUDING, WITHOUT LIMITATION, ANY ACTION OR PROCEEDING (A) TO ENFORCE OR DEFEND ANY RIGHTS UNDER OR IN CONNECTION WITH THIS TERM LOAN NOTE OR ANY INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH, OR (B) ARISING FROM ANY DISPUTE OR CONTROVERSY IN CONNECTION WITH OR RELATED TO THIS TERM LOAN NOTE AND THE FINANCING AGREEMENTS. THE LENDER AND THE TERM LOAN BORROWER AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT A JURY.

[Signature Page Follows.]

- 5 -

Exhibit 10.6

     IN WITNESS WHEREOF, the Term Loan Borrower has caused this Term Loan Note to be duly executed by its authorized officer as of the date first above written.

DIVERSICARE LEASING CORP., a Tennessee corporation
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a Delaware limited liability company
BY:	DIVERSICARE ASSISTED LIVING SERVICES NC, LLC, its sole member
By: Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC, a Delaware limited liability company
BY:	DIVERSICARE ASSISTED LIVING SERVICES NC, LLC, its sole member
By: : Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE LAMPASAS, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By: : Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE YORKTOWN, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By: : Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE BALLINGER, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By: : Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE DOCTORS, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By: : Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE ESTATES, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By: : Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE HUMBLE, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By: : Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE KATY, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By: : Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE NORMANDY TERRACE, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By: : Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE TEXAS I, LLC, a Delaware limited liability company
By: : Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE TREEMONT, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
By: : Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer
DIVERSICARE ROSE TERRACE, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
By: : Name:	/s/ Glynn Riddle Glynn Riddle
Its:	Executive Vice President & Chief Financial Officer

EX-10.7

Exhibit 10.7

FIFTH AMENDMENT TO CONSOLIDATED

AMENDED AND RESTATED MASTER LEASE

     This Fifth Amendment to Consolidated Amended and Restated Master Lease (this “Amendment”) is executed and delivered as of August 10, 2007 by and between STERLING ACQUISITION CORP., a Kentucky corporation (“Lessor”), the address of which is 9690 Deereco Road, Suite 100, Timonium, MD 21093, and DIVERSICARE LEASING CORP., a Tennessee corporation, the address of which is 1621 Galleria Boulevard, Brentwood, TN 37027.

RECITALS:

     A. Lessee has executed and delivered to Lessor a Consolidated Amended and Restated Master Lease dated as of November 8, 2000, but effective as of October 1, 2000, as amended by a First Amendment to Consolidated Amended and Restated Master Lease dated as of September 30, 2001, a Second Amendment to Consolidated Amended and Restated Master Lease dated as of June 15, 2005 (the “Second Amendment”), a Third Amendment to Consolidated Amended and Restated Master Lease dated as of October 20, 2006 (the “Third Amendment”), and a Fourth Amendment to Consolidated Amended and Restated Master Lease dated as of April 1, 2007 (the “Existing Master Lease”) pursuant to which Lessee leased from Lessor certain healthcare facilities.

     B. Pursuant to that certain First Amended Chapter 11 Plan Proposed by the Debtors dated May 17, 2007 and an Operations Transfer Agreement effective as of July 20, 2007 among the Texas Sublessees (as defined below) and Senior Management Services of America North Texas, Inc., a Texas corporation (“SMSA”), and certain affiliates of SMSA, the Texas Sublessees are acquiring from SMSA its rights as tenant under that certain Consolidated Master Lease dated as of June 1, 2005 (the “SMSA Master Lease”) between SMSA and OHI Asset (TX), LLC, a Delaware limited liability company (“OHI Texas”). Pursuant to the SMSA Master Lease, SMSA had leased the Texas Facilities from OHI Texas.

     C. Concurrently with the execution of this Amendment, (i) OHI Texas and the Texas Sublessees have terminated the SMSA Master Lease and (ii) OHI Texas has transferred to Lessor the Texas Facilities to Lessor.

     D. Lessee and Lessor desire to amend the Existing Lease to add the Texas Facilities to the Existing Master Lease on the terms and conditions of this Amendment.

     NOW THEREFORE, the parties agree as follows:

1. Definitions.

     (a) Any capitalized term used but not defined in this Amendment will have the meaning assigned to such term in the Master Lease. From and after the date of this Amendment, each reference in the Existing Master Leases or the other Transaction Documents to the “Lease”

or “Master Lease” means, as applicable, the Existing Master Lease or Existing Master Leases as modified by this Amendment.

     (b) In addition to the other definitions contained herein, when used in this Amendment the following terms shall have the following meanings:

     Asbestos Clean-Up Costs: means the actual, out of pocket cost of completing a Required Asbestos Clean-Up, which amount does not include any amounts paid to Lessee or any Affiliate of Lessee without the written consent of Lessor.

     Asbestos Management Plans: means the Asbestos Management Plans dated March 19, 2004 for Lessor by ATC Associates, Inc. for the Doctors & Fort Worth Facilities.

     Doctors & Fort Worth Facilities: means Facilities commonly known as (i) Estates Healthcare Center located at 201 Sycamore School Road, Fort Worth, Texas 76134, and (ii) as Doctors Healthcare Center and located at 9009 White Rock Trail, Dallas, Texas 75238.

     Existing Asbestos Containing Materials: means the asbestos containing materials on the Doctors & Fort Worth Facilities identified in the Asbestos Management Plans.

     First Texas Renewal Term Expiration Date: September 30, 2030.

     Humble Facility: means the Facility commonly known as Oakmont Nursing and Rehabilitation Center of Humble located in Humble, Texas.

     Katy Facility: means the Facility commonly known as the Oakmont Nursing and Rehabilitation Center of Katy located in Katy, Texas.

     LaSalle: means LaSalle Bank National Association.

     LaSalle Loans: means the following loans and credit facilities extended by LaSalle to Lessee, the Sublessees and certain of their Affiliates: (i) certain revolving loans in an aggregate amount of up to Fifteen Million and No/100 Dollars ($15,000,000.00) to support working capital needs of Lessee, the Sublessees and certain of their Affiliates, (ii) certain transition revolving loans in an aggregate amount of up to Six Million and No/100 Dollars ($6,000,000.00) to support working capital needs of Lessee, the Sublessees and certain of their Affiliates for the six months following date of this Amendment (the “Temporary Revolving Loan”), and (iii) a term loan of Sixteen Million Five Hundred Thousand and No/100 Dollars ($16,500,000.00) (the “Term Loan”).

     Lien: means any interest in Property securing an obligation owed to, or a claim by, any Person (other than the owner of the Property), whether such interest shall be based on common law, statute, or contract, whether such interest shall be recorded or perfected, and whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances,

2

including, without limitation, judgment liens, the lien or security interest arising, from a mortgage, deed of trust, debenture, charge, guarantee, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, loan and security agreement, adverse claim or charge, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes, and also including reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, other title exceptions and encumbrances affecting any real property and the retained security title of a conditional vendor or lessor.

     Lease Documents: means the following documents: this Lease, the Guaranty, the Letter of Credit Agreement, the Security Agreement, the Pledge Agreements, the Subordination Agreements, Texas Pledge Agreements, Texas Sublessees Guaranty, Texas Sublessee Security Agreement, the Stock Issuance and Subscription Agreement, the Subordinated Note, and any security agreements, pledge agreements, letter of credit agreements, guarantees, notes or other documents which evidence, secure or otherwise relate to this Lease, or the transactions contemplated by this Lease; and any and all amendments, modifications, extensions and renewals of any of the foregoing documents

     Letter of Credit Agreement: means the Letter of Credit Agreement between Lessee and Lessor.

     Master Texas Sublessee: DIVERSICARE TEXAS I, LLC, Delaware limited liability company.

     Non-Texas Base Rent:

     (A) During the Initial Term, the Non-Texas Base Rent shall be:

(1) For the first Initial Term (being the period of October 1, 2000 thru September 30, 2006), the amount set forth for such period in the Master Lease as it existed prior to the Third Amendment;

(2) For the first (1^st) Lease Year of the first Renewal Term (October 1, 2006 thru September 30, 2007), the Base Amount plus the Improvement Allowance Adjustment Amount (as adjusted during such Lease Year);

(3) For each of the second (2^nd) through twelfth (12^th) Lease Years of the first Renewal Term, the lesser of (i) the Base Amount as of the end of first (1st) Lease Year of the Renewal Term plus Improvement Allowance Adjustment Amount, increased by a percentage equal to two (2) times the percentage increase in the CPI (if positive) from the commencement date of the first Renewal Term to the Adjustment Date in each of the second (2nd) through twelfth (12^th) Lease Years, as applicable (the “Adjustment Date”), and (ii) the product of the Base Amount as of the end of the first Lease Year plus the Improvement Allowance Adjustment Amount and the following factor:

3

Lease Year During
First Renewal Term	Applicable Factor
2		1.030
3		1.061
4		1.093
5		1.126
6		1.159
7		1.194
8		1.230
9		1.267
10		1.305
11		1.344
12		1.384

Under no circumstances will the Non-Texas Base Rent in any Lease Year be less than the Non-Texas Base Rent during the preceding Lease Year.

     (B) During the second Renewal Term, the Non-Texas Base Rent shall be:

     (1) For the first Lease Year of the second Renewal Term, the greater of (a) the Non-Texas Base Rent during the last Lease Year of the Initial Term and (b) the Fair Market Rent for the Facilities other than the Texas Facilities on the first day of such Renewal Term as agreed upon by Lessor and Lessee, or, if prior to the commencement of the Renewal Term they are unable to agree, as determined by an appraisal pursuant to Article XXXII of this Lease; provided, however, that the Non-Texas Base Rent for the first Lease Year of the second Renewal Term shall not exceed one hundred ten percent (110%) of the Non-Texas Base Rent for the Lease Year immediately preceding the commencement of the second Renewal Term; and

     (2) For each of the second (2^nd) through the twelfth (12^th) Lease Years during the second Renewal Term, the lesser of (i) the Non-Texas Base Rent for the first (1st) Lease Year of the second Renewal Term, increased by a percentage equal to two (2) times the percentage increase in the CPI (if positive) from the commencement date of the second Renewal Term to the Adjustment Date in each of the second (2^nd) through twelfth (12^th) Lease Years, as applicable (the “Adjustment Date”), and (ii) the product of the Non-Texas Base Rent during the first (1^st) Lease Year of the second Renewal Term and the following factor:

4

Lease Year During
Second Renewal Term	Applicable Factor
2		1.030
3		1.061
4		1.093
5		1.126
6		1.159
7		1.194
8		1.230
9		1.267
10		1.305
11		1.344
12		1.384

Under no circumstances will the Non-Texas Base Rent in any Lease Year during the Renewal Term be less than the Non-Texas Base Rent during the preceding Lease Year.

     Pre-Existing Hazardous Substances: means Hazardous Substances located on, under about or with respect to the Treemont Facility prior to February 1, 2003 or the Katy Facility prior to July 1, 2003 or the Humble Facility prior to July 1, 2003.

     Pre-Existing Environmental Conditions: means any Contamination or other environmental condition on, under, about or with respect to the Treemont Facility prior to February 1, 2003 or the Katy Facility prior to July 1, 2003 or the Humble Facility prior to July 1, 2003.

     Property: means any and all real, personal, or mixed property and assets, including, without limitation, all types of tangible and intangible property.

     Second Texas Renewal Term Expiration Date: May 31, 2035.

     Texas Base Rent: During the Term, the Texas Base Rent shall be:

     (1) For each month during the period from the Commencement Date for the Texas Facilities until January 31, 2008, Three Hundred Twenty Eight Thousand Five Hundred Ninety Two and 79/100 Dollars ($328,592.79), which equal an annual Base Rent of Three Million Nine Hundred Forty Three Thousand One Hundred Thirteen and 48/100 Dollars ($3,943,113.48) (the “Initial Texas Annualized Base Rent”);

     (3) For period from February 1, 2008 thru January 31, 2009, the Initial Texas Annualized Base Rent, increased by the product of (i) the Initial Texas Annualized Base Rent and (ii) the lesser of one (1) times the change in CPI (expressed as a percentage) and two and one-half percent (2.5%).

     (4) For the subsequent twelve month period (being February 1, 2009 thru January 31, 2010) and each succeeding twelve month (being February 1 thru January 31) until the end of the Term (including any Renewal Terms), the Texas Base Rent for the previous Lease Year, increased by the product of (i) the Texas Base Rent during the immediately preceding Lease Year and (ii) the lesser of one (1) times the increase, if any, in CPI (expressed as a percentage) and two and one-half percent (2.5%).

5

     Texas Facilities: means the Facilities located on the real property described in Exhibits A-1 through A-7 to this Amendment.

     Texas Pledge Agreements: means the Pledge Agreements dated as of the same date as this Amendment from the equity owners of the Texas Sublessees in favor Lessor.

     Texas Sublessees: means the Master Texas Sublessee and DIVERSICARE BALLINGER, LLC, Delaware limited liability company, DIVERSICARE DOCTORS, LLC, Delaware limited liability company, DIVERSICARE ESTATES, LLC, Delaware limited liability company, DIVERSICARE HUMBLE, LLC, Delaware limited liability company, DIVERSICARE KATY, LLC, Delaware limited liability company, DIVERSICARE NORMANDY TERRACE, LLC, Delaware limited liability company, and DIVERSICARE TREEMONT, LLC, Delaware limited liability company.

     Texas Sublessees Guaranty: means the Guaranty dated as of the same date as this Amendment from the Texas Sublessees in favor Lessor.

     Texas Sublessee Security Agreement: means the Security Agreement dated as of the same date as this Amendment from the Texas Sublessees in favor of Lessor.

     Non-Texas Facilities: means the Facilities leased pursuant to this Lease other than the Texas Facilities.

     (c) The following definitions defined in §2.1 of the Existing Master Lease are hereby amended in their entirety as follows:

     Base Rent: means the sum of (i) the Non-Texas Base Rent and (ii) the Texas Base Rent.

     Commencement Date: October 1, 2000 for the Non-Texas Facilities, and August 11, 2007 for the Texas Facilities.

     Expiration Date: means the First Renewal Term Expiration Date, the Second Renewal Term Expiration Date, the First Texas Renewal Term Expiration Date, or the Second Texas Renewal Term Expiration Date, as applicable.

     Facilit(y)(ies): Each health care facility on the Land, including the Leased Property associated with such Facility, and together, all such facilities on the Leased Properties; all of which Facilities are collectively listed on Exhibit B to this Amendment.

     Intercreditor Agreement: means the Subordination and Intercreditor Agreement of even date herewith by and between Lessor and LaSalle and any replacement intercreditor agreement between Lessor and any working capital lender to whom a first priority security interest in accounts receivable from the Facilities has been granted in accordance with the requirements of Section 39.5 of this Lease.

6

     Land: The real property described in listed on attached Exhibit A to the Existing Master Lease and Exhibit A to this Amendment.

     Permitted Encumbrances: Encumbrances listed on attached Exhibit C to the Existing Master Lease and Exhibit C to this Amendment.

     (d) The subparagraphs (m) and (r) of the definition of “Event of Default” set forth in Section 2.1 of the Existing Master Lease is hereby amended and restated as follows:

*      *      *

     (n) A default occurs under the any Texas Sublessee Guaranty, Texas Pledge Agreement, the Texas Sublessee Security Agreement, or the Letter of Credit Agreement, which default is not cured within the applicable cure period, if any.

*      *      *

     (r) LaSalle (or its successors and assigns) or any working capital lender to whom a first priority security interest in accounts receivable from the Facilities has been granted in accordance with the requirements of Section 39.5 of this Lease, declares an event of default under the loan documents evidencing or securing the LaSalle Loans or Line of Credit Documents, and accelerates any or all of the indebtedness evidenced and secured thereby, or commences any action against Lessee or Sublessee to realize on such lender’s interest in the accounts receivable from the Facilities.

     2. Renewal Options. Section 1.3 of the Existing Master Lease is hereby amended and restated as follows:

     1.3 Options to Renew.

     (a) Lessee is hereby granted two (2) options to renew this Lease (an “All Facilities Option”) for an additional, successive period of twelve (12) Lease Years, for a maximum Term if such options are exercised of thirty (30) Lease Years, on the following terms and conditions:

     (i) the second option to renew is exercisable only by Notice to Lessor at least three hundred sixty-five (365) days prior to the expiration of the first Renewal Term;

     (ii)  the absence of any Event of Default both at the time a renewal option is exercised and at the commencement of a Renewal Term is a condition precedent to any renewal of the Term;

     (iii) during a Renewal Term, all of the terms and conditions of this Lease shall remain in full force and effect; and

7

     (iv) Lessee may exercise its options to renew with respect to all (and no fewer than all) of the Leased Properties.

Lessee and Lessor acknowledge and agree that Lessee exercised the first All Facilities Option pursuant to the Third Amendment such that, as of the date of this Amendment, the Expiration Date of the current Term of this Lease for all of the Facilities, including the Texas Facilities, is the First Renewal Term Expiration Date of September 30, 2018.

     (b) Lessee is also hereby granted two (2) options to renew this Lease with respect to the Texas Facilities only (the “Texas Options”) until September 30, 2030, with respect to the first such Texas Option, and May 31, 2035, with respect to the second such Texas Option, on the following terms and conditions:

     (i) a Texas Option is exercisable only by Notice to Lessor at least three hundred sixty-five (365) days prior to the expiration of the prior period;

     (ii)  the absence of any Event of Default both at the time a Texas Option is exercised and at the commencement of a Renewal Term is a condition precedent to any renewal of the Term;

     (iii) during a Renewal Term, all of the terms and conditions of this Lease shall remain in full force and effect; provided, however, that the Base Rent shall be equal to the Texas Facilities Base Rent and the Security Deposit shall be reduced to an amount equal to the Texas Facilities Base Rent divided by four (4) (such that it is equal to three months Base Rent);

     (iv) Lessee may exercise its options to renew with respect to all (and no fewer than all) of the Texas Facilities, and as to no other Facilities; and

     (v) Lessee may not exercise a Texas Option for any period with respect to which Lessee exercises an All Facilities Option (for avoidance of doubt, because an All Facilities Option is exercised as to all of the Facilities, including the Texas Facilities, Lessee would not need to exercise a Texas Facilities Option for any period for which an All Facilities Option has been exercised).

3. Environmental Amendments. Notwithstanding anything to the contrary in this Lease, (i) Section 7.3 of the Existing Lease shall not apply to the Texas Facilities; and (ii) in lieu thereof, Lessee’s environmental obligations with regard to the Texas Facilities shall be governed by Exhibit D to this Amendment, which is incorporated herein by this reference.

4. Section 9.1.1 of the Existing Master Lease is hereby amended and restated in its entirety as follows:

8

     9.1.1 Lessee, at its expense, will keep the Leased Properties, and all landscaping, private roadways, sidewalks and curbs appurtenant thereto which are under Lessee’s control and Lessee’s Personal Property in good order and repair, whether or not the need for such repairs arises out of Lessee’s use, any prior use, the elements or the age of the Leased Property or any portion thereof, or any cause whatsoever except the act or negligence of Lessor, and with reasonable promptness shall make all necessary and appropriate repairs thereto of every kind and nature, whether interior or exterior, structural or non-structural, ordinary or extraordinary, foreseen or unforeseen or arising by reason of a condition existing prior to the Commencement Date (concealed or otherwise) or existing after February 1, 2003 with respect to the Treemont Facility, and July 1, 2003 with respect to the Katy Facility and the Humble Facility; provided, however, that Lessee shall be permitted to prosecute claims against Lessor’s predecessor in title for breach of any representation or warranty made to or on behalf of Lessor, or for latent defects in any Leased Property. Lessee shall at all times maintain, operate and otherwise manage the Leased Properties on a quality basis and in a manner consistent with the standards of the highest quality competing facilities in the market areas served by the Leased Properties. All repairs shall, to the extent reasonably achievable, be at least equivalent in quality to the original work or, subject to the provisions of Paragraph 9.1.4, below, the property to be repaired shall be replaced. Lessee will not take or omit to take any action the taking or omission of which might materially impair the value or the usefulness of the Leased Properties or any parts thereof for the Primary Intended Use.

5. Section 8.2.1.4 of the Existing Master Lease is hereby amended and restated in its entirety as follows:

          8.2.1.4 Equipment Financing. The aggregate amount of principal, interest and lease payments due from Lessee and/or Sublessee with respect to any equipment leases or financing secured by equipment utilized in the operation of the Facilities shall not at any time during the Term exceed $1,000,000.00 in any one Lease Year.

6. The Existing Master Lease is hereby amended to add the following new Section 8.2.5 as follows:

     8.2.5 Indebtedness. Neither Lessee nor any Sublessee will create, incur or suffer to exist any Debt which is secured by a Lien in any of the Property with respect to which Lessor has been granted a Lien in pursuant to the Lease Documents, except:

(i)	The equipment financing permitted under Section 8.2.1.4;
(ii)	The Line of Credit permitted under Section 39.5;
(iii)	The LaSalle Loans; and
(iv)	Any Debt owed to Lessor or any Affiliate of Lessor.

9

7. Section 8.5 of the Existing Master Lease is hereby amended and restated in its entirety as follows:

     8.5 Other Facilities. Neither Lessee nor any Affiliate shall own, operate or manage any nursing home, rest home, assisted living facility, subacute facility, retirement center or similar health care facility within a ten (10) mile radius of any Facility, other than any Facility which is a Leased Property under this Lease or which Lessee or any Affiliate of Lessee owns or operates as of the Commencement Date and set forth on Schedule C attached hereto.

8. Paragraph 5 of the Second Amended is hereby amended and restated in its entirety as follows:

     5. Insurance.

     (a) Lessor acknowledges that the liability insurance coverage and the malpractice insurance coverage required pursuant to Sections 13.2.4 and 13.2.5 of the Lease, are currently unavailable generally in the nursing home industry at commercially affordable rates and that Lessee currently maintains and has in place for all of the Facilities general liability and malpractice insurance with single limit coverage of One Hundred Thousand Dollars ($100,000.00) per occurrence and Five Hundred Thousand Dollars ($500,000.00) cumulative, with a deductible of Twenty Five Thousand Dollars ($25,000.00). Lessor hereby agrees that, the provisions of Sections 13.2.4 and 13.2.5 of the Lease to the contrary notwithstanding, until such time as the insurance coverage required therein is generally available in the nursing home industry at commercially affordable rates, Lessee shall not be required obtain the coverages required therein and Lessor agrees to accept Lessee’s current coverage in lieu thereof for the Non-Texas Facilities for the first Renewal Term of the Lease. Lessee shall not be deemed to be in default of the provisions of Article XIII of the Lease as a result thereof. Lessee shall provide Lessor, on an annual basis, information from its insurance carrier and from comparable insurance carriers of the costs of insurance premiums to meet Lessor’s insurance requirements. At such time as the premium amounts quoted are commercially affordable, Lessee shall immediately purchase any and all insurance policies necessary to meet the requirements of Sections 13.2.4 and 13.2.5 of the Lease. This provision does not relieve Lessee from its agreement of indemnity under Article XXI of the Lease nor does it modify the provisions thereof. Notwithstanding the foregoing, Lessee acknowledges and agrees that the provisions of this Paragraph 5 shall not be applicable in the event of any Transfer. Lessee acknowledges and agrees that Lessor shall have the right to withhold its consent to any proposed Transfer unless, among other things, the Transferee agrees to provide the insurance coverage required by the provisions of Sections 13.2.4 and 13.2.5 of the Lease.

     (b) Lessor hereby agrees that, the provisions of Sections 13.2.4 and 13.2.5 of the Lease to the contrary notwithstanding Lessee’s failure to obtain the coverages required by Sections 13.2.4 and 13.2.5 for the Texas Facilities shall not be an Event of

10

Default under this Lease. Lessee shall not be required to obtain the coverages required therein and Lessor agrees to accept such lesser coverage, if any, as Lessee elects to maintain for the Texas Facilities for the Term of the Lease, including any Renewal Term. This provision does not relieve Lessee from its agreement of indemnity under Article XXI of the Lease nor does it modify the provisions thereof.

9. Section 39.1 of the Existing Master Lease is hereby amended and restated in its entirety as follows:

     39.1 Security Deposit. Prior to the date of this Amendment, Lessor was holding as the Security Deposit the sum of $340,000 in cash. Concurrently with the delivery of this Amendment, (A) Lessor shall return to Lessee the $340,000 in cash, and (B) Lessee shall deliver to Lessor a Security Deposit in the amount equal to $8,116,726.10, in the form of an absolute, unconditional site draft letter of credit for a term of one (1) year (renewable automatically) issued by an “A” rated financial institution (“Security Deposit”), which Lessor shall hold as security for the full and faithful performance by Lessee of each and every term, provision, covenant and condition of this Lease in accordance with, and subject to, the terms and conditions of the Letter of Credit Agreement. If at any time the Security Deposit is in the form of cash, the Security Deposit shall be deposited by Lessor into an account which shall earn interest for the benefit of Lessee, which cash shall remain on deposit as security and be available to Lessor as provided in this Article. The Security Deposit shall not be considered an advance payment of Rent (or of any other sum payable to Lessee under this Lease) or a measure of Lessor’s damages in case of a default by Lessee. The Security Deposit shall not be considered a trust fund, and Lessee expressly acknowledges and agrees that Lessor is not acting as a trustee or in any fiduciary capacity in controlling or using the Security Deposit. Notwithstanding the foregoing, if at any time the Security Deposit is in the form of cash, then (i) Lessor shall maintain the Security Deposit separate and apart from Lessor’s general and/or other funds and (ii) provided that Lessee is not then in default, Lessor shall disburse to Lessee the earnings on the Security Deposit on a quarterly basis. The Security Deposit, less any portion thereof applied as provided in Section 39.3 or the Letter of Credit Agreement, shall be returned to Lessee within sixty (60) days following the expiration of the Term or earlier termination of this Lease.

10. Section 39.5 of the Existing Master Lease is hereby amended and restated in its entirety as follows:

     39.5 Line of Credit; A/R Replacement Security Deposit.

     (a) Line of Credit. Prior to the date of this Amendment, pursuant to the Security Agreement, Lessee has granted to Lessor a first priority security interest in the accounts receivable generated by the Facilities. LaSalle currently has a security interest in the accounts receivable from the Facilities to secure the LaSalle Loans. Lessor and LaSalle have entered into the Intercreditor Agreement pursuant to which Lessor has agreed to subordinate its security interest in the accounts receivable generated by the

11

Facilities. If Lessee and/or the Sublessees, or any Affiliate of Lessee (other than Affiliates who are the operators of the Florida Managed Facilities, as defined in the Settlement and Restructuring Agreement), obtain, concurrently with or after the date of this Amendment, a working capital line of credit (the “Line of Credit”) from a third-party working capital lender that requires that, in order to secure the Line of Credit, Lessee and/or the Sublessees must grant to the working capital lender a first priority security interest in the accounts receivable from the Facilities accruing during the Term, then Lessor will subordinate its security interest in the accounts receivable from the Facilities accruing during the Term to the security interest of such working capital lender, provided that:

     (i) The working capital lender executes and delivers to Lessor an intercreditor agreement in form and substance reasonably satisfactory to Lessor; and

     (ii) The lien of Lessor in accounts receivable from the Facilities shall be subordinated to the lien of the working capital lender therein only to the extent of amounts advanced from time to time by the working capital lender to Lessee and/or the Sublessees with respect to the Facilities and only in the amount of $17,400,000.00, plus interest, penalties and other charges under the loan documents evidencing the Line of Credit (the “Line of Credit Documents”) with respect to principal amounts advanced;

     (iii) Lessee delivers to Lessor the A/R Replacement Security Deposit and the Letter of Credit Agreement (as defined below);

     (iv) The LaSalle Loans have been repaid in full or, in the alternative, the Temporary Revolving Loan and the Term Loan have been repaid, and an amendment to the Intercreditor Agreement with the holder of the remaining LaSalle Loans is entered into providing for the priority cap contemplated by sub-paragraph 39(a)(ii) above (the “LaSalle Amendment”) in form and substance reasonably satisfactory to Lessor; and

     (v) As of the date of entry by Lessor into the intercreditor agreement of the LaSalle Amendment, no Event of Default has occurred and is continuing.

     (b) Lessee acknowledges and agrees that on the occurrence of a “Default”, “Event of Default” or similar event or occurrences which causes the lender under the Line of Credit Documents to accelerate any or all of the indebtedness thereby or to exercise any rights or remedies under such documents to realize on its interest in the accounts receivable from the Facilities, or to cease funding under the Line of Credit, which is not cured within any applicable cure period under the Line of Credit Documents or any written agreement by lender, shall constitute an Event of Default under this Lease.

     (c) Concurrently with the delivery of the intercreditor agreement by Lessor pursuant to Section 39.5(a)(i) above or the LaSalle Amendment, Lessee shall deliver to

12

Lessor a Security Deposit in an amount equal to the sum of (i) six (6) times the monthly Non-Texas Base Rent (the “Initial Amount”) plus (ii) three (3) times the monthly Texas Base Rent then payable under this Lease, in the form of an absolute, unconditional site draft letter of credit for a term of one (1) year (renewable automatically) issued by an “A” rated financial institution (“A/R Replacement Security Deposit”), which Lessor shall hold as security for the full and faithful performance by Lessee of each and every term, provision, covenant and condition of this Lease in accordance with, and subject to, the terms and conditions of the Letter of Credit Agreement. On August 31, 2008, and each subsequent anniversary of such date thereafter, the amount of the A/R Replacement Security Deposit required to be maintained by Lessee on deposit with Lessor shall be reduced by 16.66% (or 1/6) of the Initial Amount if and only if on the applicable anniversary date (i) Lessee has maintained a Stressed Coverage Ratio for the trailing twelve months of at least 1.45 and (ii) no Event of Default exists. Notwithstanding the foregoing, at no time shall the A/R Replacement Security Deposit be less than an amount equal to three times the monthly Base Rent payable under this Lease on the date of delivery of the A/R Replacement Security Deposit. Upon delivery to Lessor of the A/R Replacement Security Deposit and the intercreditor agreement pursuant to this Section 39.5(a)(i) or the LaSalle Amendment, the amount of the Security Deposit required under Section 39.1 shall be set equal to the A/R Replacement Security Deposit.

11. Single, indivisible Lease. The Master Lease constitutes one indivisible lease of the Leased Properties, and not separate leases governed by similar terms. The Leased Properties constitute one economic unit, and the Base Rent and all other provisions have been negotiated and agreed to based on a demise of all of the Leased Properties as a single, composite, inseparable transaction and would have been substantially different had separate leases or a divisible lease been intended. Except as expressly provided herein for specific, isolated purposes (and then only to the extent expressly otherwise stated), all provisions of this Lease apply equally and uniformly to all the Leased Properties as one unit. An Event of Default with respect to any Leased Property is an Event of Default as to all of the Leased Properties. The parties intend that the provisions of this Lease shall at all times be construed, interpreted and applied so as to carry out their mutual objective to create an indivisible lease of all the Leased Properties and, in particular but without limitation, that for purposes of any assumption, rejection or assignment of this Lease under 11 U.S.C. 365, this is one indivisible and non-severable lease and executory contract dealing with one legal and economic unit which must be assumed, rejected or assigned as a whole with respect to all (and only all) the Leased Properties covered hereby.

12. Representations and Warranties of Lessee. Lessee hereby represents and warrants to Lessor that (i) it has the right and power and is duly authorized to enter into this Agreement; and (ii) the execution of this Agreement does not and will not constitute a breach of any provision contained in any agreement or instrument to which Lessee is or may become a party or by which Lessee is or may be bound or affected

13. Execution and Counterparts. This Amendment may be executed in any number of counterparts, each of which, when so executed and delivered, shall be deemed to be an original, but when taken together shall constitute one and the same Amendment.

13

14. Headings. Section headings used in this Amendment are for reference only and shall not affect the construction of the Amendment.

15. Enforceability. Except as expressly and specifically set forth herein, the Existing Master Lease remains unmodified and in full force and effect. In the event of any discrepancy between the Existing Master Lease and this Amendment, the terms and conditions of this Amendment will control and the Existing Master Lease is deemed amended to conform hereto.

[SIGNATURE PAGES, ACKNOWLEDGEMENTS, AND JOINDER FOLLOW]

14

Signature Page to
FIFTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE

LESSOR:
STERLING ACQUISITION CORP., a
Kentucky corporation
By: Name:	/s/ Daniel J. Booth Daniel J. Booth
Title:	Chief Operating Officer

STATE OF MARYLAND	)
	)	ss.
COUNTY OF BALTIMORE	)

     This instrument was acknowledged before me on the 9th day of August, 2007, by _Daniel J. Booth                    , the COO of STERLING ACQUISITION CORP., a Kentucky corporation, on behalf of said company.

/s/ Judith A. Jacobs Notary Public, Baltimore County, Maryland

My commission expires: May 1, 2008

Signature Page 1 of  2

Signature Page to
FIFTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE

LESSEE:

DIVERSICARE LEASING CORP., a
Tennessee corporation
By: Name:	/s/ Glynn Riddle Glynn Riddle
Title:	EVP & CFO

STATE OF TENNESSEE	)
	)	SS
COUNTY OF WILLIAMSON	)

     This instrument was acknowledged before me on the 9^TH day of August, 2007, by Glynn Riddle, the EVP & CFO of DIVERSICARE LEASING CORP., a Tennessee corporation, on behalf of said company

/s/ Brenda Wimsatt Notary Public, Williamson County, Tennessee

My commission expires: 7/25/2009

Signature Page 2 of  2

Acknowledgement to
FIFTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE

     The undersigned hereby consent to the transactions contemplated by this Fifth Amendment to Consolidated Amended and Restated Master Lease (the “Fifth Amendment”), ratify and affirm their respective Guaranties, Pledge Agreements, Security Agreements, Subordination Agreements and other Transaction Documents, and acknowledge and agree that the performance of the Master Lease and obligations described therein are secured by their Guaranties, Pledge Agreements, Security Agreement, Subordination Agreement and other Transaction Documents on the same terms and conditions in effect prior to this Amendment.

ADVOCAT, INC. a Delaware corporation
By: Name:	/s/ Glynn Riddle Glynn Riddle
Title:	Executive Vice President and Chief
	Financial Officer

STATE OF TENNESSEE	)
	)	ss.
COUNTY OF WILLIAMSON	)

     The foregoing instrument was acknowledged before me this 9th day of August, 2007, by GLYNN RIDDLE , who is Executive Vice President and Chief Financial Officer of ADVOCAT, INC. a Delaware corporation, on behalf of the corporation, who acknowledged the same to be his or her free act and deed and the free act and deed of the corporation.

/s/ Brenda Wimsatt Notary Public, Williamson County, Tennessee

My Commission Expires: July 25, 2009

Acknowledgement — Page 1 of  4

Acknowledgement to
FIFTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE

DIVERSICARE MANAGEMENT SERVICES
CO., a Tennessee corporation
By: Name:	/s/ Glynn Riddle Glynn Riddle
Title:	Executive Vice President and Chief
	Financial Officer

STATE OF TENNESSEE	)
	)	ss.
COUNTY OF WILLIAMSON	)

     The foregoing instrument was acknowledged before me this 9th day of August, 2007, by Glynn Riddle, who is Executive Vice President and Chief Financial Officer of DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation, on behalf of the corporation, who acknowledged the same to be his or her free act and deed and the free act and deed of the corporation.

/s/ Brenda Wimsatt Notary Public, Williamson County, Tennessee

My Commission Expires: July 25, 2009

Acknowledgement — Page 2 of  4

Acknowledgement to
FIFTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE

ADVOCAT FINANCE INC., a Delaware corporation
By: Name:	/s/ Glynn Riddle Glynn Riddle
Title:	Executive Vice President and Chief
	Financial Officer

STATE OF TENNESSEE	)
	)	ss.
COUNTY OF WILLIAMSON	)

     The foregoing instrument was acknowledged before me this 9th day of August, 2007, by Glynn Riddle, who is Executive Vice President and Chief Financial Officer of ADVOCAT FINANCE INC., a Delaware corporation, on behalf of the corporation, who acknowledged the same to be his or her free act and deed and the free act and deed of the corporation.

/s/ Brenda Wimsatt Notary Public, Williamson County, Tennessee

My Commission Expires: July 25, 2009

Acknowledgement — Page 3 of  4

Acknowledgement to
FIFTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE

STERLING HEALTH CARE MANAGEMENT, INC., a Kentucky corporation
By: Name:	/s/ Glynn Riddle Glynn Riddle
Title:	Executive Vice President and Chief
	Financial Officer

STATE OF TENNESSEE	)
	)	ss.
COUNTY OF WILLIAMSON	)

     This foregoing instrument was acknowledged before me on the 9th day of August, 2007, by Glynn Riddle, who is Executive Vice President and Chief Financial Officer of STERLING HEALTH CARE MANAGEMENT, INC., a Kentucky corporation, on behalf of said corporation, who acknowledged the same to be his or her free act and deed and the free act and deed of the corporation.

/s/ Brenda Wimsatt Notary Public, Williamson County, Tennessee

My Commission Expires: July 25, 2009

Acknowledgement — Page 4 of  4

List of Exhibits and Schedules to
FIFTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE

Exhibit A Legal Description of Texas Facilities

Exhibit B List of Facilities and Facility Trade Names

Exhibit C Permitted Encumbrances for Texas Facilities

Exhibit D Texas Environmental Matters

Schedule C Excepted Facilities to Radius Requirements

Page 1 of  1

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, William R. Council, III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Advocat Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

November 6, 2007	/s/ William R. Council, III
	William R. Council, III
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, L. Glynn Riddle, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Advocat Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

November 6, 2007	/s/ L. Glynn Riddle, Jr.
	L. Glynn Riddle, Jr.
	Chief Financial Officer

EX-32

EXHIBIT 32

CERTIFICATION OF QUARTERLY REPORT ON FORM 10-Q
OF ADVOCAT INC.
FOR THE QUARTER ENDED SEPTEMBER 30, 2007

The undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the undersigned’s best knowledge and belief, the Quarterly Report on Form 10-Q for Advocat Inc. (the “Company”) for the period ending September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”):

(a)	fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(b)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This Certification is executed as of November 6, 2007.

/s/ William R. Council, III  

William R. Council, III 

Chief Executive Officer 

/s/ L. Glynn Riddle, Jr.  

L. Glynn Riddle, Jr. 

Chief Financial Officer 

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.