1159281--3/7/2007--FIVE_STAR_QUALITY_CARE

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RISKS RELATED TO OUR BUSINESS A small percentage decline in our revenues or increase in our expenses could have a material negative impact upon our operating results. We may not achieve the anticipated benefits of our termination of management agreements for the 30 communities that SLS previously managed for us. We may not achieve the anticipated benefits from our lease of the two rehabilitation hospitals. The rehabilitation hospitals may be subject to Medicare reclassification, resulting in lower Medicare rates. The failure of Medicare and Medicaid rates to match our costs will reduce our income. Our growth strategy may not succeed. The nature of our business exposes us to litigation risks. As a result, our insurance costs have increased and may continue to increase, and we self insure a large portion of our litigation risks. Our business is subject to extensive regulation which increases our costs and may result in losses. A significant increase in our labor costs may have a material adverse effect on us. Our business requires us to make significant capital expenditures to maintain and improve our facilities. Our business is highly competitive and we may be unable to operate profitably. We are subject to possible conflicts of interest; we have engaged in, and expect to continue to engage in, transactions with related parties. The limitations on the ownership of our shares and other anti-takeover provisions in our governing documents and in our material agreements may prevent our shareholders from receiving a takeover premium for their shares. Circumstances that adversely affect the ability of seniors to pay for our services could have a material adverse effect on us. The price of our common shares has fluctuated, and a number of factors may cause our common share price to decline. RISKS RELATED TO OUR NOTES The notes we issued in October 2006, and any notes we may issue in the future will be, effectively subordinated to the debts of our subsidiaries and to our secured debt. We may be required to prepay our debts at the option of note holders or upon a change of control. If we redeem the notes before maturity, and our noteholders may be unable to reinvest proceeds at the same or a higher rate. There may be no public market for our notes. Increased leverage may harm our financial condition and results of operations. Conversion rights of our outstanding notes may be detrimental to holders of our common shares. Future issuances of common shares and hedging activities may depress the trading price of our common shares. We do not intend to pay cash dividends on our common shares in the foreseeable future.

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1159281--3/7/2007--FIVE_STAR_QUALITY_CARE_INC