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<P style="FONT-SIZE: 14pt; MARGIN: 0px; LINE-HEIGHT: 16pt"
align=center><B>UNITED STATES SECURITIES AND EXCHANGE COMMISSION</B></P>
<P style="FONT-SIZE: 11pt; MARGIN: 0px; LINE-HEIGHT: 13pt"
align=center><B>Washington, D.C. &nbsp;20549</B></P>
<P style="MARGIN: 0px" align=center><BR></P>
<P style="FONT-SIZE: 14pt; MARGIN: 0px; LINE-HEIGHT: 16pt" align=center><B>FORM
8-K</B></P>
<P style="MARGIN: 0px" align=center><BR></P>
<P style="FONT-SIZE: 11pt; MARGIN: 0px; LINE-HEIGHT: 13pt" align=center>CURRENT
REPORT</P>
<P style="FONT-SIZE: 11pt; MARGIN: 0px; LINE-HEIGHT: 13pt" align=center>PURSUANT
TO SECTION 13 OR 15(d) OF </P>
<P style="FONT-SIZE: 11pt; MARGIN: 0px; LINE-HEIGHT: 13pt" align=center>THE
SECURITIES EXCHANGE ACT OF 1934</P>
<P style="MARGIN: 0px" align=center><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt" align=center>Date of
Report: &nbsp;April 2, 2009</P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt" align=center>Date of
Earliest Event Reported: &nbsp;March 30, 2009</P>
<P style="MARGIN: 0px" align=center><BR></P>
<P style="FONT-SIZE: 18.5pt; MARGIN: 0px; LINE-HEIGHT: 20.5pt"
align=center><B>AdCare Health Systems, Inc.</B></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt"
align=center><I>(Exact Name of Registrant as specified in its Charter)</I></P>
<P style="MARGIN: 0px" align=center><BR></P>
<TABLE style="FONT-SIZE: 10pt" cellSpacing=0 align=center>
<TR style="DISPLAY: none; FONT-SIZE: 0px" height=0>
<TD width=400></TD>
<TD width=357></TD></TR>
<TR>
<TD vAlign=bottom width=400>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px; LINE-HEIGHT: 12.5pt"
align=center><B>Ohio</B></P></TD>
<TD vAlign=bottom width=357>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px; LINE-HEIGHT: 12.5pt"
align=center><B>31-1332119</B></P></TD></TR>
<TR>
<TD vAlign=top width=400>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px; LINE-HEIGHT: 12.5pt"
align=center><I>(State or other jurisdiction of</I></P>
<P
style="FONT-SIZE: 10.5pt; MARGIN: 0px; TEXT-INDENT: 87px; LINE-HEIGHT: 12.5pt"><I>incorporation
or organization)</I></P></TD>
<TD vAlign=top width=357>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px; LINE-HEIGHT: 12.5pt"
align=center><I>(I.R.S. Employer Identification No.)</I></P></TD></TR>
<TR>
<TD vAlign=bottom width=400>
<P style="MARGIN: 0px" align=center><BR></P>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px; LINE-HEIGHT: 12.5pt"
align=center><B>5057 Troy Rd, Springfield, OH</B></P></TD>
<TD vAlign=bottom width=357>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px; LINE-HEIGHT: 12.5pt"
align=center><B>45502-9032</B></P></TD></TR>
<TR>
<TD vAlign=top width=400>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px; LINE-HEIGHT: 12.5pt"
align=center><I>(Address of principal executive offices)</I></P></TD>
<TD vAlign=top width=357>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px; LINE-HEIGHT: 12.5pt"
align=center><I>(Zip Code)</I></P></TD></TR></TABLE>
<P style="MARGIN: 0px" align=center><BR></P>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px; LINE-HEIGHT: 12.5pt"
align=center><B>Registrant&#146;s Telephone Number, Including Area Code</B></P>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px; LINE-HEIGHT: 12.5pt"
align=center><B>(937) 964-8974</B></P>
<P style="MARGIN: 0px"><BR></P>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; LINE-HEIGHT: 12.5pt"
align=justify>Check the appropriate box below if the form 8-K filing is intended
to simultaneously satisfy the filing obligation of the registrant under any of
the following provisions (See General Instruction A2. below):</P>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; LINE-HEIGHT: 12.5pt"
align=justify>[ &nbsp;] &nbsp;Written communications pursuant to Rule 425 under
the Securities Act (17 CFR 230.425)</P>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; LINE-HEIGHT: 12.5pt"
align=justify>[ &nbsp;] &nbsp;Soliciting material pursuant to Rule 14a-12 under
the Exchange Act (17 CFR 240.14a-12)</P>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; LINE-HEIGHT: 12.5pt"
align=justify>[ &nbsp;] Pre-commencement communications pursuant to Rule
14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)</P>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; LINE-HEIGHT: 12.5pt"
align=justify>[ &nbsp;] &nbsp;Pre-commencement communications pursuant to Rule
13e-4(c) under the Exchange Act (17 CFR 240.13e-4 (c)).</P>
<P style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 16px" align=justify><BR><BR></P>
<P style="MARGIN: 0px" align=center><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt" align=center>1</P>
<P style="MARGIN: 0px"><BR></P>
<HR style="MARGIN-TOP: 9px; MARGIN-BOTTOM: 9px" noShade SIZE=1>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; PAGE-BREAK-BEFORE: always; LINE-HEIGHT: 12.5pt"
align=justify><B>Item 2.02. &nbsp;Financial Statements and Exhibits.</B></P>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; LINE-HEIGHT: 12.5pt"
align=justify>On Tuesday, March 31, 2009, AdCare Health Systems, Inc. (the
&#147;Company&#148;) issued a press release announcing its financial results for the year
ended December 31, 2008.&nbsp; A copy of this press release is furnished as
Exhibit 99.1 hereto.&nbsp; Pursuant to the rules and regulations of the
Securities and Exchange Commission, the information in this Current Report on
Form 8-K, including the attached exhibit and the information set forth therein,
shall not be deemed &#147;filed&#148; for purposes of Section 18 of the Securities
Exchange Act of 1934, nor shall it be deemed to be incorporated by reference in
any filing under the Securities Act of 1933 or the Securities Exchange Act of
1934, regardless of any general incorporation language in such filing.</P>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; LINE-HEIGHT: 12.5pt"
align=justify><B>Item 5.02 &nbsp;Departure of Directors or Certain Officers;
&nbsp;Election of Directors; &nbsp;Appointment of Certain Officers;
&nbsp;Compensatory Arrangements of Certain Officers</B></P>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; LINE-HEIGHT: 12.5pt"
align=justify>On Monday, March 30, 2009, we received notice of resignation from
our Director, Merle Grace Kearns. &nbsp;Mrs. Kearns&#146; resignation was for
personal reasons.</P>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; LINE-HEIGHT: 12.5pt"
align=justify><B>Item 9.01. &nbsp;Financial Statements and Exhibits.</B></P>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; TEXT-INDENT: 48px; LINE-HEIGHT: 12.5pt"
align=justify>Exhibits</P>
<TABLE style="FONT-SIZE: 10pt" cellSpacing=0>
<TR style="DISPLAY: none; FONT-SIZE: 0px" height=0>
<TD width=127></TD>
<TD width=511></TD></TR>
<TR>
<TD vAlign=top width=127>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; LINE-HEIGHT: 12.5pt"
align=justify><U>Exhibit Number</U></P></TD>
<TD vAlign=top width=511>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; LINE-HEIGHT: 12.5pt"
align=justify><U>Description of Exhibit</U></P></TD></TR>
<TR>
<TD vAlign=top width=127>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; LINE-HEIGHT: 12.5pt"
align=justify>99.1</P></TD>
<TD vAlign=top width=511>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; LINE-HEIGHT: 12.5pt"
align=justify>Press Release dated March 31, 2009</P></TD></TR></TABLE>
<P style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 14px" align=justify><BR></P>
<P style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 16px" align=center><BR><BR></P>
<P style="MARGIN: 0px" align=center><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt" align=center>2</P>
<P style="MARGIN: 0px"><BR></P>
<HR style="MARGIN-TOP: 9px; MARGIN-BOTTOM: 9px" noShade SIZE=1>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; PAGE-BREAK-BEFORE: always; TEXT-INDENT: 48px; LINE-HEIGHT: 12.5pt"
align=center>SIGNATURES</P>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; TEXT-INDENT: 48px; LINE-HEIGHT: 12.5pt"
align=justify>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 hereto duly authorized.</P>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; LINE-HEIGHT: 12.5pt"
align=justify>Date: &nbsp;April 2, 2009</P>
<P
style="MARGIN-TOP: 0px; PADDING-LEFT: 336px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; LINE-HEIGHT: 12.5pt">ADCARE
HEALTH SYSTEMS, INC.</P>
<P
style="MARGIN-TOP: 0px; PADDING-LEFT: 336px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; LINE-HEIGHT: 12.5pt">By:<U>
&nbsp;/s/ Scott Cunningham</U></P>
<P
style="MARGIN-TOP: 0px; PADDING-LEFT: 336px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; LINE-HEIGHT: 12.5pt">Name:
Scott Cunningham</P>
<P
style="MARGIN-TOP: 0px; PADDING-LEFT: 336px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; LINE-HEIGHT: 12.5pt">Title:
&nbsp;Chief Financial Officer</P>
<P style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 13px" align=center><BR><BR></P>
<P style="MARGIN: 0px" align=center><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt" align=center>3</P>
<P style="MARGIN: 0px"><BR></P>
<HR style="MARGIN-TOP: 9px; MARGIN-BOTTOM: 9px" noShade SIZE=1>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 10.5pt; MARGIN-BOTTOM: 14px; PAGE-BREAK-BEFORE: always; LINE-HEIGHT: 12.5pt"
align=center><B>EXHIBIT INDEX</B></P>
<TABLE style="FONT-SIZE: 10pt" cellSpacing=0>
<TR style="DISPLAY: none; FONT-SIZE: 0px" height=0>
<TD width=84></TD>
<TD width=18></TD>
<TD width=298></TD>
<TD width=17></TD>
<TD width=301></TD></TR>
<TR>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=84>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px; LINE-HEIGHT: 10.5pt"><B>Exhibit
No.</B></P></TD>
<TD vAlign=top width=18>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px; LINE-HEIGHT: 10.5pt"
align=center><B></B>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=617
colSpan=3>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px; LINE-HEIGHT: 10.5pt"
align=center><B>Description</B></P></TD></TR>
<TR>
<TD vAlign=top width=84>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px">&nbsp;</P></TD>
<TD vAlign=top width=18>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px">&nbsp;</P></TD>
<TD vAlign=top width=298>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px">&nbsp;</P></TD>
<TD vAlign=top width=17>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px">&nbsp;</P></TD>
<TD vAlign=top width=301>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px">&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=84>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px; LINE-HEIGHT: 12.5pt"
align=center>99.1</P></TD>
<TD vAlign=top width=18>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px">&nbsp;</P></TD>
<TD vAlign=top width=617 colSpan=3>
<P style="FONT-SIZE: 10.5pt; MARGIN: 0px; LINE-HEIGHT: 12.5pt">AdCare
Health Systems, Inc. Press Release, dated March 31,
2009.</P></TD></TR></TABLE>
<P
style="MARGIN-TOP: 0px; FONT-SIZE: 12pt; MARGIN-BOTTOM: 16px; LINE-HEIGHT: 10.5pt">&nbsp;</P>
<P style="MARGIN: 0px" align=right><BR><BR></P>
<P style="MARGIN: 0px" align=center><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt" align=center>4</P>
<P style="MARGIN: 0px"><BR></P>
<HR style="MARGIN-TOP: 9px; MARGIN-BOTTOM: 9px" noShade SIZE=1>
<P
style="FONT-SIZE: 12pt; PAGE-BREAK-BEFORE: always; MARGIN: 0px; LINE-HEIGHT: 14pt"
align=right>Exhibit 99.1</P>
<P style="MARGIN: 0px"><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt">News Release</P>
<P style="MARGIN: 0px"><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt"
align=center><B>AdCare Health Systems, Inc. Reports Financial Results for
2008</B></P>
<P style="MARGIN: 0px"><BR></P>
<P style="MARGIN: 0px"><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt">SPRINGFIELD, OHIO,
&nbsp;March 31, 2009 /PRNewswire-FirstCall/ -- AdCare Health Systems, Inc. (NYSE
AMEX: ADK), an Ohio based long term care, home care and management company today
reported financial results for its year ending December 31, 2008.</P>
<P style="MARGIN: 0px"><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt">Revenues for the year
ended December 31, 2008 were $24,793,294 as compared to $23,667,756 in 2007, an
increase of $1,125,538 or 4.8%. &nbsp;The improvement was primarily due to
increased rental charges at the Company&#146;s assisted living and skilled nursing
facilities, maintaining occupancy levels and the acquisition of the New Lincoln
Lodge, a long term care facility located in Columbus, Ohio which also resulted
in a gain of approximately of $414,000. </P>
<P style="MARGIN: 0px"><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt">The loss from
continuing operations for the year ended December 31, 2008 was $1,076,178 as
compared to the loss from continuing operations of $627,552 for 2007, which
resulted in an increase in the loss of $448,626. &nbsp;However, a majority of
the loss in 2008 is attributable to non-cash charges for warrant and option
expenses of $791,835. &nbsp;Approximately $210,000 was expensed as unamortized
financing costs associated with the HUD refinancing of four long term care
properties and $170,007 was accounted for as a deferred tax expense in
connection with the Assured Home Health acquisition in 2005. &nbsp;Also, the
Company accrued $162,000 in payroll expenses related to the retirement of the
COO in September of last year. &nbsp;We anticipate that in 2009, non-cash
charges should be significantly lower than in 2008. &nbsp;</P>
<P style="MARGIN: 0px"><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt">The net loss for the
year ended December 31, 2008 was $1,076,178 as compared to a loss of $218,928
for 2007. However, the 2007 loss was reduced by recognizing a gain of $619,605
on the sale of assets in discontinued operations. &nbsp;Basic and diluted net
loss per share for 2008 was $0.28 as compared to a basic and diluted net loss
per share of $0.05 for 2007. &nbsp;AdCare&#146;s net cash flow from operations for
2008 was $439,442, compared with a net cash use of $107,337 in 2007. &nbsp;</P>
<P style="MARGIN: 0px"><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt">David A. Tenwick,
Chairman of AdCare, stated, &#147;AdCare&#146;s loss for 2008 was greatly affected by
non-cash charges, unamortized financing and deferred tax expenses. &nbsp;The
Company also took significant steps to position itself for a positive year in
2009. &nbsp;Despite the tightening credit market and deterioration of the
economy in general, we were able to successfully refinance three of our assisted
living facilities and one of our nursing homes with long term, non-recourse HUD
financings, completing the expansion and rehabilitation of our 50-bed nursing
home located in Greenfield, Ohio, acquiring the remaining ownership interests in
our 30-unit assisted living facility located in Van Wert, Ohio and the
acquisition of the New Lincoln Lodge. &nbsp;We believe this demonstrates that
AdCare&#146;s balance sheet is stronger than many of our larger competitors.&#148;
&nbsp;Mr. Tenwick further stated, &#147;The home health division changed and
implemented its business strategy in 2008 to concentrate its operations in
programs with stronger profit margins while reducing participation in home
health programs that generate little marginal profit.&#148;</P>
<P style="MARGIN: 0px"><BR></P>
<P style="MARGIN: 0px"><BR></P>
<P style="MARGIN: 0px"><BR><BR></P>
<P style="MARGIN: 0px" align=center><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt" align=center>5</P>
<P style="MARGIN: 0px"><BR></P>
<HR style="MARGIN-TOP: 9px; MARGIN-BOTTOM: 9px" noShade SIZE=1>
<P
style="FONT-SIZE: 12pt; PAGE-BREAK-BEFORE: always; MARGIN: 0px; LINE-HEIGHT: 14pt"><B>About
AdCare Health Systems, Inc.</B></P>
<P style="MARGIN: 0px"><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt">AdCare Health
Systems, Inc. (NYSE Alternext US: ADK) develops, owns and manages assisted
living facilities, nursing homes and retirement communities and provides home
health care services. &nbsp;Prior to becoming a publicly traded company in
November of 2006, AdCare operated as a private company for 18 years.
&nbsp;AdCare&#146;s 920 employees provide high-quality care for patients and
residents residing in the 16 facilities that they manage, seven of which are
assisted living facilities, six skilled nursing centers and three independent
senior living communities. &nbsp;The Company has ownership interests in eight of
those facilities. &nbsp;In the ever expanding marketplace of long term care,
AdCare&#146;s mission is to provide quality healthcare services to the elderly.</P>
<P style="MARGIN: 0px"><BR></P>
<P
style="FONT-SIZE: 12pt; PADDING-BOTTOM: 4px; MARGIN: 0px; LINE-HEIGHT: 14pt; BORDER-BOTTOM: #000000 2px solid">Safe
Harbor Statement</P>
<P style="MARGIN: 0px"><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt">Statements contained
in this press release that are not historical facts may be forward-looking
statements within the meaning of federal law. &nbsp;Such forward-looking
statements reflect management&#146;s beliefs and assumptions and are based on
information currently available to management. &nbsp;The forward-looking
statements involve known and unknown &nbsp;risks, results, performance or
achievements of the Company to differ materially from those expressed or implied
in such statements. &nbsp;Such factors are identified in the public filings made
by the Company with the Securities and Exchange Commission and include the
Company&#146;s ability to secure lines of credit and/or an acquisition credit
facility, find suitable acquisition properties at favorable terms, changes in
the health care industry because of political and economic influences, changes
in regulations governing the industry, changes in reimbursement levels including
those under the Medicare and Medicaid programs and changes in the competitive
marketplace. &nbsp;There can be no assurance that such factors or other factors
will not affect the accuracy of such forward-looking statements.</P>
<P style="MARGIN: 0px"><BR></P>
<P
style="FONT-SIZE: 12pt; PADDING-BOTTOM: 4px; MARGIN: 0px; LINE-HEIGHT: 14pt; BORDER-BOTTOM: #000000 2px solid">Contact:</P>
<P style="MARGIN: 0px"><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt">April Spittle</P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt">Manager of Corporate
Communications</P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt">1-703-893-0021 ext.
108</P>
<P
style="FONT-SIZE: 12pt; MARGIN: 0px; COLOR: #0000ff; LINE-HEIGHT: 14pt"><U>aspittle@galencc.com</U><FONT
style="COLOR: #000000"></FONT></P>
<P
style="FONT-SIZE: 12pt; MARGIN: 0px; COLOR: #0000ff; LINE-HEIGHT: 14pt"><U>www.adcarehealth.com</U><FONT
style="COLOR: #000000"></FONT></P>
<P style="MARGIN: 0px"><BR></P>
<P style="MARGIN: 0px"><BR></P>
<P style="MARGIN: 0px"><BR><BR></P>
<P style="MARGIN: 0px" align=center><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt" align=center>6</P>
<P style="MARGIN: 0px"><BR></P>
<HR style="MARGIN-TOP: 9px; MARGIN-BOTTOM: 9px" noShade SIZE=1>
<P style="PAGE-BREAK-BEFORE: always; MARGIN: 0px"><BR></P>
<TABLE style="FONT-SIZE: 10pt" cellSpacing=0 align=center>
<TR style="DISPLAY: none; FONT-SIZE: 0px" height=0>
<TD width=17></TD>
<TD width=16></TD>
<TD width=17></TD>
<TD width=452></TD>
<TD width=87></TD>
<TD width=16></TD>
<TD width=87></TD></TR>
<TR>
<TD vAlign=top width=696 colSpan=7>
<P style="MARGIN: 0px" align=center><B>ADCARE HEALTH SYSTEMS, INC. AND
SUBSIDIARIES</B></P></TD></TR>
<TR>
<TD vAlign=top width=696 colSpan=7>
<P style="MARGIN: 0px" align=center>CONSOLIDATED BALANCE SHEETS</P></TD></TR>
<TR>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=top width=452>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=192
colSpan=3><P style="MARGIN: 0px" align=center>December 31, </P></TD></TR>
<TR>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=top width=452>
<P style="MARGIN: 0px" align=center><U>ASSETS</U></P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=87>
<P style="MARGIN: 0px" align=center>2008</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=center>2007</P></TD></TR>
<TR>
<TD vAlign=bottom width=503 colSpan=4>
<P style="MARGIN: 0px">Current Assets:</P></TD>
<TD vAlign=top width=87>
<P>&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=503 colSpan=4>
<P style="MARGIN: 0px">Cash and cash equivalents</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>&nbsp;$ 1,266,315&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>&nbsp;$
&nbsp;&nbsp;&nbsp;926,625&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=503 colSpan=4>
<P style="MARGIN: 0px">Certificate of deposit, restricted</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>-&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>209,637&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=503 colSpan=4>
<P style="MARGIN: 0px">Accounts receivable:</P></TD>
<TD vAlign=bottom width=87>
<P>&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=486 colSpan=3>
<P style="MARGIN: 0px">Long-term care resident receivables, net</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>2,008,847&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>2,115,364&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=486 colSpan=3>
<P style="MARGIN: 0px">Management, consulting and development receivables,
net</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>258,811&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>259,778&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=486 colSpan=3>
<P style="MARGIN: 0px">Advances and receivables from affiliates</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>17,635&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>27,558&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=503 colSpan=4>
<P style="MARGIN: 0px">Prepaid expenses and other</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>478,534&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>453,219&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=452>
<P style="MARGIN: 0px">Total current assets</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>4,030,142&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>3,992,181&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=452>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P>&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=503 colSpan=4>
<P style="MARGIN: 0px">Restricted cash</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>1,155,596&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>973,975&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=503 colSpan=4>
<P style="MARGIN: 0px">Property and equipment, net</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>16,772,660&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>14,425,868&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=503 colSpan=4>
<P style="MARGIN: 0px">Note receivable, net</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>-&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>221,413&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=503 colSpan=4>
<P style="MARGIN: 0px">License, net</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>1,189,307&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>1,189,307&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=503 colSpan=4>
<P style="MARGIN: 0px">Goodwill</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>2,679,482&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>2,638,193&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=503 colSpan=4>
<P style="MARGIN: 0px">Other assets</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>1,012,340&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>1,050,506&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=452>
<P style="MARGIN: 0px">Total Assets</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>$26,839,527&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>$24,491,443&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=top width=452>
<P style="MARGIN: 0px" align=center><U>LIABILITIES AND STOCKHOLDERS&#146;
EQUITY</U></P></TD>
<TD vAlign=bottom width=87>
<P>&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=503 colSpan=4>
<P style="MARGIN: 0px">Current Liabilities:</P></TD>
<TD vAlign=bottom width=87>
<P>&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=486 colSpan=3>
<P style="MARGIN: 0px">Current portion of notes payable and other
debt</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>&nbsp;$
&nbsp;&nbsp;&nbsp;713,323&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>$
&nbsp;&nbsp;&nbsp;&nbsp;773,279&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=486 colSpan=3>
<P style="MARGIN: 0px">Current portion of note payable to
stockholder</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>9,432&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>9,026&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=486 colSpan=3>
<P style="MARGIN: 0px">Accounts payable </P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>1,009,002&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>1,416,313&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=486 colSpan=3>
<P style="MARGIN: 0px">Accrued expenses</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>2,838,407&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>2,060,222&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=486 colSpan=3>
<P style="MARGIN: 0px">Forward purchase contract</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>-&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>900,000&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=452>
<P style="MARGIN: 0px">Total current liabilities</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>4,570,164&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>5,158,840&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=452>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P>&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=503 colSpan=4>
<P style="MARGIN: 0px">Notes payable and other debt, net of current
portion</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>16,974,788&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>12,813,338&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=503 colSpan=4>
<P style="MARGIN: 0px">Note payable to stockholder, net of current
portion</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>34,626&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>810,084&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=503 colSpan=4>
<P style="MARGIN: 0px">Other liabilities</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>299,314&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>559,509&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=503 colSpan=4>
<P style="MARGIN: 0px">Income tax payable</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>170,007&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>-&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=503 colSpan=4>
<P style="MARGIN: 0px">Minority Interest in Equity of Consolidated
Entities</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>269,193&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>255,070&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=469 colSpan=2>
<P style="MARGIN: 0px">Total Liabilities</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>22,318,092&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>19,296,841&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=503 colSpan=4>
<P style="MARGIN: 0px">Stockholders' equity:</P></TD>
<TD vAlign=bottom width=87>
<P>&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=486 colSpan=3>
<P style="MARGIN: 0px">Preferred stock, no par value; 500,000 shares
authorized;</P></TD>
<TD vAlign=bottom width=87>
<P>&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=469 colSpan=2>
<P style="MARGIN: 0px">no shares issued or outstanding</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>-&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>-&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=486 colSpan=3>
<P style="MARGIN: 0px">Common stock and additional paid-in capital, no par
value;</P></TD>
<TD vAlign=bottom width=87>
<P>&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=486 colSpan=3>
<P style="MARGIN: 0px">14,500,000 shares authorized; 3,786,129 shares
issued and outstanding</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>14,766,967&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>14,063,956&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=486 colSpan=3>
<P style="MARGIN: 0px">Accumulated deficit</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>(10,245,532)</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>(9,169,354)</P></TD></TR>
<TR>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=469 colSpan=2>
<P style="MARGIN: 0px">Total stockholders' equity</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>4,521,435&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>4,894,602&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=17>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=469 colSpan=2>
<P style="MARGIN: 0px">Total liabilities and stockholders' equity</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>$26,839,527&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=bottom width=87>
<P style="MARGIN: 0px" align=right>$24,491,443&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=696 colSpan=7>
<P style="MARGIN: 0px" align=center>See notes to consolidated financial
statements</P></TD></TR></TABLE>
<P style="MARGIN: 0px"><BR></P>
<P style="MARGIN: 0px"><BR><BR></P>
<P style="MARGIN: 0px" align=center><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt" align=center>7</P>
<P style="MARGIN: 0px"><BR></P>
<HR style="MARGIN-TOP: 9px; MARGIN-BOTTOM: 9px" noShade SIZE=1>
<P style="PAGE-BREAK-BEFORE: always; MARGIN: 0px"><BR></P>
<TABLE style="FONT-SIZE: 10pt" cellSpacing=0 align=center>
<TR style="DISPLAY: none; FONT-SIZE: 0px" height=0>
<TD width=15></TD>
<TD width=16></TD>
<TD width=475></TD>
<TD width=84></TD>
<TD width=20></TD>
<TD width=83></TD></TR>
<TR>
<TD vAlign=top width=696 colSpan=6>
<P style="MARGIN: 0px" align=center><B>ADCARE HEALTH SYSTEMS, INC. AND
SUBSIDIARIES</B></P></TD></TR>
<TR>
<TD vAlign=top width=696 colSpan=6>
<P style="MARGIN: 0px" align=center>CONSOLIDATED STATEMENTS OF
OPERATIONS</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=top width=475>
<P>&nbsp;</P></TD>
<TD vAlign=top width=188 colSpan=3>
<P style="MARGIN: 0px" align=center>Year Ended</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=top width=475>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=188
colSpan=3><P style="MARGIN: 0px" align=center>December 31,</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=16>
<P>&nbsp;</P></TD>
<TD vAlign=top width=475>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=84>
<P style="MARGIN: 0px" align=center>2008</P></TD>
<TD vAlign=top width=20>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=83>
<P style="MARGIN: 0px" align=center>2007</P></TD></TR>
<TR>
<TD vAlign=bottom width=507 colSpan=3>
<P style="MARGIN: 0px">Revenues:</P></TD>
<TD vAlign=top width=84>
<P>&nbsp;</P></TD>
<TD vAlign=top width=20>
<P>&nbsp;</P></TD>
<TD vAlign=top width=83>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=491 colSpan=2>
<P style="MARGIN: 0px">Patient care revenues</P></TD>
<TD vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>$23,008,754&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>$21,928,808</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=491 colSpan=2>
<P style="MARGIN: 0px">Management, consulting and development fee
revenue</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>1,784,540&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>1,738,948&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=475>
<P style="MARGIN: 0px">Total revenue</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>24,793,294&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>23,667,756&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=475>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=84>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=507 colSpan=3>
<P style="MARGIN: 0px">Expenses:</P></TD>
<TD vAlign=bottom width=84>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=491 colSpan=2>
<P style="MARGIN: 0px">Payroll and related payroll costs</P></TD>
<TD vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>15,649,862&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>14,762,090&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=491 colSpan=2>
<P style="MARGIN: 0px">Other operating expenses</P></TD>
<TD vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>8,248,157&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>7,746,505&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=491 colSpan=2>
<P style="MARGIN: 0px">Depreciation and amortization</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>882,900&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>847,440&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=475>
<P style="MARGIN: 0px">Total expenses</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>24,780,919&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>23,356,035&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=475>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=84>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=507 colSpan=3>
<P style="MARGIN: 0px">Income from Operations</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>12,375&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>311,721&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=507 colSpan=3>
<P style="MARGIN: 0px">Other Income (Expense):</P></TD>
<TD vAlign=bottom width=84>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=491 colSpan=2>
<P style="MARGIN: 0px">Interest income</P></TD>
<TD vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>23,287&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>59,300&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=491 colSpan=2>
<P style="MARGIN: 0px">Interest expense, others</P></TD>
<TD vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>(1,265,622)</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>(978,731)</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=491 colSpan=2>
<P style="MARGIN: 0px">Interest expense, related parties</P></TD>
<TD vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>(36,446)</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>(66,432)</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=491 colSpan=2>
<P style="MARGIN: 0px">Minority interest in earnings of consolidated
entities</P></TD>
<TD vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>(57,919)</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>(94,811)</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=491 colSpan=2>
<P style="MARGIN: 0px">Other income (expense)</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>4,200&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>(37,014)</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=475>
<P style="MARGIN: 0px">Total other (expenses)</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>(1,332,500)</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>(1,117,688)</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=475>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=84>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=507 colSpan=3>
<P style="MARGIN: 0px">Gain on Acquisition</P></TD>
<TD vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>413,954&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>-&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=475>
<P>&nbsp;</P></TD>
<TD style="BORDER-TOP: #000000 1px solid" vAlign=bottom width=84>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD style="BORDER-TOP: #000000 1px solid" vAlign=bottom width=83>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=507 colSpan=3>
<P style="MARGIN: 0px">Loss from continuing operations before income
taxes</P></TD>
<TD vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>(906,171)</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>(805,967)</P></TD></TR>
<TR>
<TD vAlign=bottom width=507 colSpan=3>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=84>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=507 colSpan=3>
<P style="MARGIN: 0px">Income Tax Benefit (Expense)</P></TD>
<TD vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>(170,007)</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>178,415&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=507 colSpan=3>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=84>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=507 colSpan=3>
<P style="MARGIN: 0px">Loss from Continuing Operations</P></TD>
<TD style="BORDER-TOP: #000000 1px solid" vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>(1,076,178)</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD style="BORDER-TOP: #000000 1px solid" vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>(627,552)</P></TD></TR>
<TR>
<TD vAlign=bottom width=507 colSpan=3>
<P style="MARGIN: 0px">Discontinued Operations:</P></TD>
<TD vAlign=bottom width=84>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=491 colSpan=2>
<P style="MARGIN: 0px">Income from discontinued operations
&nbsp;(including gain on disposal of $619,605 in 2007)</P></TD>
<TD vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>-&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>587,039&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=491 colSpan=2>
<P style="MARGIN: 0px">Provision for income taxes</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>-&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>(178,415)</P></TD></TR>
<TR>
<TD vAlign=bottom width=507 colSpan=3>
<P style="MARGIN: 0px">Income on discontinued operations</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>-&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>&nbsp;&nbsp;408,624&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=507 colSpan=3>
<P style="MARGIN: 0px">Net loss</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>$(1,076,178)</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>$ &nbsp;&nbsp;(218,928)</P></TD></TR>
<TR>
<TD vAlign=bottom width=507 colSpan=3>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=84>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=507 colSpan=3>
<P style="PADDING-LEFT: 0px; MARGIN: 0px">Net (Loss) Income Per Share,
Basic and Diluted:</P></TD>
<TD vAlign=bottom width=84>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=491 colSpan=2>
<P style="MARGIN: 0px">Continuing operations</P></TD>
<TD vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>$
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(0.28)</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>$
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(0.16)</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=491 colSpan=2>
<P style="MARGIN: 0px">Discontinued operations</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>-&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>0.11&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=475>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>$
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(0.28)</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>$
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(0.05)</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=16>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=475>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=84>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=507 colSpan=3>
<P style="MARGIN: 0px">Weighted Average Common Shares Outstanding,</P></TD>
<TD vAlign=bottom width=84>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=83>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=491 colSpan=2>
<P style="MARGIN: 0px">Basic</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>3,786,129&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>3,786,129&nbsp;</P></TD></TR>
<TR>
<TD vAlign=bottom width=15>
<P>&nbsp;</P></TD>
<TD vAlign=bottom width=491 colSpan=2>
<P style="MARGIN: 0px">Diluted</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=bottom width=84>
<P style="MARGIN: 0px" align=right>3,786,129&nbsp;</P></TD>
<TD vAlign=bottom width=20>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=bottom width=83>
<P style="MARGIN: 0px" align=right>3,786,129&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=696 colSpan=6>
<P style="MARGIN: 0px" align=center>See notes to consolidated financial
statements</P></TD></TR></TABLE>
<P style="MARGIN: 0px"><BR></P>
<P style="MARGIN: 0px"><BR><BR></P>
<P style="MARGIN: 0px" align=center><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt" align=center>8</P>
<P style="MARGIN: 0px"><BR></P>
<HR style="MARGIN-TOP: 9px; MARGIN-BOTTOM: 9px" noShade SIZE=1>
<P style="PAGE-BREAK-BEFORE: always; MARGIN: 0px"><BR></P>
<TABLE style="FONT-SIZE: 10pt" cellSpacing=0 align=center>
<TR style="DISPLAY: none; FONT-SIZE: 0px" height=0>
<TD width=15></TD>
<TD width=15></TD>
<TD width=15></TD>
<TD width=15></TD>
<TD width=15></TD>
<TD width=15></TD>
<TD width=15></TD>
<TD width=379></TD>
<TD width=95></TD>
<TD width=15></TD>
<TD width=95></TD></TR>
<TR>
<TD vAlign=top width=696 colSpan=11>
<P style="MARGIN: 0px" align=center><B>ADCARE HEALTH SYSTEMS, INC. AND
SUBSIDIARIES</B></P></TD></TR>
<TR>
<TD vAlign=top width=696 colSpan=11>
<P style="MARGIN: 0px" align=center>CONSOLIDATED STATEMENTS OF CASH
FLOWS</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=379>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=379>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=379>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=205
colSpan=3><P style="MARGIN: 0px" align=center>Year Ended December
31,</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=379>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=95>
<P style="MARGIN: 0px" align=center>2008</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=95>
<P style="MARGIN: 0px" align=center>2007</P></TD></TR>
<TR>
<TD vAlign=top width=490 colSpan=8>
<P style="MARGIN: 0px">Cash flows from operating activities:</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=474 colSpan=7>
<P style="MARGIN: 0px">Net Loss</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>&nbsp;$ &nbsp;(1,076,178)</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>&nbsp;$
&nbsp;&nbsp;&nbsp;(218,928)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=474 colSpan=7>
<P style="MARGIN: 0px">Add back: &nbsp;income from discontinued
operations</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=95>
<P style="MARGIN: 0px" align=right>-</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=95>
<P style="MARGIN: 0px" align=right>(587,039)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=474 colSpan=7>
<P style="MARGIN: 0px">Net loss from continuing operations</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>&nbsp;$ &nbsp;(1,076,178)</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>&nbsp;$
&nbsp;&nbsp;&nbsp;(805,967)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=379>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=569 colSpan=8>
<P style="MARGIN: 0px">Adjustments to reconcile net loss from continuing
operations to net cash </P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=474 colSpan=7>
<P style="MARGIN: 0px">provided by (used in) operating activities:</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=442 colSpan=5>
<P style="MARGIN: 0px">Depreciation and amortization</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>882,900</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>847,440</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=442 colSpan=5>
<P style="MARGIN: 0px">Warrants issued for services</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>150,831</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;58,149</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=442 colSpan=5>
<P style="MARGIN: 0px">Stock option compensation expense</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>641,004</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;27,326</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=442 colSpan=5>
<P style="MARGIN: 0px">Minority interest</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;57,919</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;94,811</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=442 colSpan=5>
<P style="MARGIN: 0px">Note receivable forgiveness exchanged for
rent</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>9,000</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>36,000</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=442 colSpan=5>
<P style="MARGIN: 0px">Gain on acquisition</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>(413,952)</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>-</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=442 colSpan=5>
<P style="MARGIN: 0px">Changes in certain assets and liabilities:</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=427 colSpan=4>
<P style="MARGIN: 0px">Accounts receivable</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;111,805</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(162,737)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=427 colSpan=4>
<P style="MARGIN: 0px">Prepaid expenses and other</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(90,851)</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(171,461)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=427 colSpan=4>
<P style="MARGIN: 0px">Other assets</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(24,982)</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(50,737)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=427 colSpan=4>
<P style="MARGIN: 0px">Accounts payable and accrued expenses</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;300,635</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(350,232)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=427 colSpan=4>
<P style="MARGIN: 0px">Income tax liability</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>170,007</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>-</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=427 colSpan=4>
<P style="MARGIN: 0px">Other liabilities</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(278,696)</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;67,991</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=474 colSpan=7>
<P style="MARGIN: 0px">Net cash provided by (used in) operating activities
of continuing operations</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>439,442</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(409,417)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=474 colSpan=7>
<P style="MARGIN: 0px">Net cash provided by operating activities of
discontinued operations</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;-</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;302,080</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=474 colSpan=7>
<P style="MARGIN: 0px">Net cash provided by (used in) operating
activities</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=95>
<P style="MARGIN: 0px" align=right>439,442</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(107,337)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=379>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=490 colSpan=8>
<P style="MARGIN: 0px">Cash flow from investing activities:</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=458 colSpan=6>
<P style="MARGIN: 0px">Increase (decrease) in restricted cash</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>47,829</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(59,034)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=458 colSpan=6>
<P style="MARGIN: 0px">Forward purchase contract buyout</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>(941,289)</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>-</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=458 colSpan=6>
<P style="MARGIN: 0px">Distribution to minority shareholders</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>(50,000)</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>-</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=458 colSpan=6>
<P style="MARGIN: 0px">Purchase of minority interest investment</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px" align=right>(448)</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(11,382)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=458 colSpan=6>
<P style="MARGIN: 0px">Purchase of property plant and equipment</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;(477,092)</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;(1,042,402)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=474 colSpan=7>
<P style="MARGIN: 0px">Net cash used in investing activities of continuing
operations</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;(1,421,000)</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;(1,112,818)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=474 colSpan=7>
<P style="MARGIN: 0px">Net cash provided by investing activities of
discontinued operations:</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=458 colSpan=6>
<P style="MARGIN: 0px">Proceeds from sale of assets, net of associated
costs</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2,500</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=95>
<P style="MARGIN: 0px" align=right>591,329</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=474 colSpan=7>
<P style="MARGIN: 0px">Net cash used in investing activities</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;(1,418,500)</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(521,489)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=379>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=95>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=696 colSpan=11>
<P style="MARGIN: 0px" align=center>See notes to consolidated financial
statements</P></TD></TR></TABLE>
<P style="MARGIN: 0px"><BR></P>
<P style="MARGIN: 0px"><BR><BR></P>
<P style="MARGIN: 0px" align=center><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt" align=center>9</P>
<P style="MARGIN: 0px"><BR></P>
<HR style="MARGIN-TOP: 9px; MARGIN-BOTTOM: 9px" noShade SIZE=1>
<P style="PAGE-BREAK-BEFORE: always; MARGIN: 0px"><BR></P>
<TABLE style="FONT-SIZE: 10pt" cellSpacing=0 align=center>
<TR style="DISPLAY: none; FONT-SIZE: 0px" height=0>
<TD width=15></TD>
<TD width=15></TD>
<TD width=15></TD>
<TD width=15></TD>
<TD width=15></TD>
<TD width=15></TD>
<TD width=15></TD>
<TD width=376></TD>
<TD width=94></TD>
<TD width=19></TD>
<TD width=94></TD></TR>
<TR>
<TD vAlign=top width=696 colSpan=11>
<P style="MARGIN: 0px" align=center><B>ADCARE HEALTH SYSTEMS, INC. AND
SUBSIDIARIES.</B></P></TD></TR>
<TR>
<TD vAlign=top width=696 colSpan=11>
<P style="MARGIN: 0px" align=center>CONSOLIDATED STATEMENTS OF CASH
FLOWS</P></TD></TR>
<TR>
<TD vAlign=top width=696 colSpan=11>
<P style="MARGIN: 0px" align=center>(Continued)</P></TD></TR>
<TR>
<TD vAlign=top width=487 colSpan=8>
<P>&nbsp;</P></TD>
<TD vAlign=top width=208 colSpan=3>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=487 colSpan=8>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=208
colSpan=3><P style="MARGIN: 0px" align=center>Year Ended December
31,</P></TD></TR>
<TR>
<TD vAlign=top width=487 colSpan=8>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=94>
<P style="MARGIN: 0px; TEXT-INDENT: 33px">2008</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=94>
<P style="MARGIN: 0px" align=center>2007</P></TD></TR>
<TR>
<TD vAlign=top width=487 colSpan=8>
<P style="MARGIN: 0px">Cash flows from financing activities:</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=455 colSpan=6>
<P style="MARGIN: 0px">Proceeds from notes payable</P></TD>
<TD vAlign=top width=94>
<P style="MARGIN: 0px" align=right>6,469,171&nbsp;</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;91,197</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=455 colSpan=6>
<P style="MARGIN: 0px">Prepaid loan financing costs</P></TD>
<TD vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;-&nbsp;</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(172,857)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=455 colSpan=6>
<P style="MARGIN: 0px">Cash received upon exercise of warrants</P></TD>
<TD vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;-&nbsp;</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;20,000</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=455 colSpan=6>
<P style="MARGIN: 0px">Prepaid Financing Costs</P></TD>
<TD vAlign=top width=94>
<P style="MARGIN: 0px" align=right>159,130&nbsp;</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;-</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=455 colSpan=6>
<P style="MARGIN: 0px">Repayment of note payable to stockholder</P></TD>
<TD vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(760,000)</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(9,234)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=455 colSpan=6>
<P style="MARGIN: 0px">Repayment on notes payable</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(4,549,553)</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(497,335)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=471 colSpan=7>
<P style="MARGIN: 0px">Net cash provided by (used in) financing activities
of continuing operations</P></TD>
<TD vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;1,318,748</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(568,229)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=471 colSpan=7>
<P style="MARGIN: 0px">Net cash used in financing activities of
discontinued operations:</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=455 colSpan=6>
<P style="MARGIN: 0px">Repayment on notes payable of discontinued
operations</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;-</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(12,734)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=471 colSpan=7>
<P style="MARGIN: 0px">Net cash provided (used in) by financing
activities</P></TD>
<TD vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1, 318,748</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(580,963)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=376>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=487 colSpan=8>
<P style="MARGIN: 0px">Net &nbsp;Increase (Decrease) in Cash</P></TD>
<TD vAlign=top width=94>
<P style="MARGIN: 0px" align=right>339,690</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;(1,209,789)</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=376>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=487 colSpan=8>
<P style="MARGIN: 0px">Cash, Beginning</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;926,625</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 1px solid" vAlign=top width=94>
<P style="MARGIN: 0px"
align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2,136,414</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=376>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=487 colSpan=8>
<P style="MARGIN: 0px">Cash, Ending</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=top width=94>
<P style="MARGIN: 0px" align=right>&nbsp;$
&nbsp;&nbsp;&nbsp;&nbsp;1,266,315</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=top width=94>
<P style="MARGIN: 0px" align=right>$
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;926,625</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=376>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=487 colSpan=8>
<P style="MARGIN: 0px">Supplemental Disclosure of Cash Flow
Information:</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=471 colSpan=7>
<P style="MARGIN: 0px">Cash paid during the year for:</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=455 colSpan=6>
<P style="MARGIN: 0px">Interest</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=top width=94>
<P style="MARGIN: 0px" align=right>&nbsp;$
&nbsp;&nbsp;&nbsp;1,012,813</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=top width=94>
<P style="MARGIN: 0px" align=right>$ &nbsp;&nbsp;&nbsp;1,044,755</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=376>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=487 colSpan=8>
<P style="MARGIN: 0px">Supplemental Disclosure of Non-Cash
Activities:</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=471 colSpan=7>
<P style="MARGIN: 0px">Rent in exchange of note receivable
repayment</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=top width=94>
<P style="MARGIN: 0px" align=right>&nbsp;$
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;9,000</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=top width=94>
<P style="MARGIN: 0px" align=right>&nbsp;$
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;36,000</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=471 colSpan=7>
<P style="MARGIN: 0px">Payoff of existing mortgage at closing of
discontinued operations</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=top width=94>
<P style="MARGIN: 0px" align=right>-</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=top width=94>
<P style="MARGIN: 0px" align=right>&nbsp;$
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;609,839</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=471 colSpan=7>
<P style="MARGIN: 0px">Acquisition of assets in exchange for note
forgiveness</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=top width=94>
<P style="MARGIN: 0px" align=right>$ &nbsp;&nbsp;&nbsp;2,740,584</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=top width=94>
<P style="MARGIN: 0px" align=right>-</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=471 colSpan=7>
<P style="MARGIN: 0px">Purchase of business assets in exchange for
debt</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=top width=94>
<P style="MARGIN: 0px" align=right>&nbsp;$
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;266,300</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD style="BORDER-BOTTOM: #000000 3px double" vAlign=top width=94>
<P style="MARGIN: 0px" align=right>&nbsp;$
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;337,361</P></TD></TR>
<TR>
<TD vAlign=top width=15>
<P>&nbsp;</P></TD>
<TD vAlign=top width=471 colSpan=7>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD>
<TD vAlign=top width=19>
<P>&nbsp;</P></TD>
<TD vAlign=top width=94>
<P>&nbsp;</P></TD></TR>
<TR>
<TD vAlign=top width=696 colSpan=11>
<P style="MARGIN: 0px" align=center>See notes to consolidated financial
statements</P></TD></TR></TABLE>
<P style="MARGIN: 0px"><BR></P>
<P style="MARGIN: 0px"><BR></P>
<P style="MARGIN: 0px"><BR></P>
<H1>&nbsp;</H1>
<P style="MARGIN: 0px"><BR></P>
<P style="MARGIN: 0px"><BR></P>
<P style="MARGIN: 0px"><BR></P>
<P style="MARGIN: 0px"><BR><BR></P>
<P style="MARGIN: 0px" align=center><BR></P>
<P style="FONT-SIZE: 12pt; MARGIN: 0px; LINE-HEIGHT: 14pt" align=center>10</P>
<P
style="MARGIN: 0px"><BR></P></BODY>
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{"company-data": {"conformed-name": "ADCARE HEALTH SYSTEMS INC", "cik": "0001004724", "assigned-sic": "8051", "irs-number": "311332119", "state-of-incorporation": "OH"}, "filing-values": {"form-type": "8-K", "act": "34", "file-number": "001-33135", "film-number": "09727253"}, "business-address": {"street1": "5057 TROY RD", "city": "SPRINGFEILD", "state": "OH", "zip": "45502", "phone": "937-964-8974"}, "mail-address": {"street1": "5057 TROY RD", "city": "SPRINGFIELD", "state": "OH", "zip": "45502"}}
SECURITIES AND EXCHANGE COMMISSION
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM
8-K
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
Date of
Report:  April 2, 2009
Date of
Earliest Event Reported:  March 30, 2009
AdCare Health Systems, Inc.
(Exact Name of Registrant as specified in its Charter)
Ohio
31-1332119
(State or other jurisdiction of
incorporation
or organization)
(I.R.S. Employer Identification No.)
5057 Troy Rd, Springfield, OH
45502-9032
(Address of principal executive offices)
(Zip Code)
Registrant's Telephone Number, Including Area Code
(937) 964-8974
Check the appropriate box below if the form 8-K filing is intended
to simultaneously satisfy the filing obligation of the registrant under any of
the following provisions (See General Instruction A2. below):
[  ]  Written communications pursuant to Rule 425 under
the Securities Act (17 CFR 230.425)
[  ]  Soliciting material pursuant to Rule 14a-12 under
the Exchange Act (17 CFR 240.14a-12)
[  ] Pre-commencement communications pursuant to Rule
14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)
[  ]  Pre-commencement communications pursuant to Rule
13e-4(c) under the Exchange Act (17 CFR 240.13e-4 (c)).
1
Item 2.02.  Financial Statements and Exhibits.
On Tuesday, March 31, 2009, AdCare Health Systems, Inc. (the
"Company") issued a press release announcing its financial results for the year
ended December 31, 2008.  A copy of this press release is furnished as
Exhibit 99.1 hereto.  Pursuant to the rules and regulations of the
Securities and Exchange Commission, the information in this Current Report on
Form 8-K, including the attached exhibit and the information set forth therein,
shall not be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, nor shall it be deemed to be incorporated by reference in
any filing under the Securities Act of 1933 or the Securities Exchange Act of
1934, regardless of any general incorporation language in such filing.
Item 5.02  Departure of Directors or Certain Officers;
 Election of Directors;  Appointment of Certain Officers;
 Compensatory Arrangements of Certain Officers
On Monday, March 30, 2009, we received notice of resignation from
our Director, Merle Grace Kearns.  Mrs. Kearns' resignation was for
personal reasons.
Item 9.01.  Financial Statements and Exhibits.
Exhibits
Exhibit Number
Description of Exhibit
99.1
Press Release dated March 31, 2009
2
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 hereto duly authorized.
Date:  April 2, 2009
ADCARE
HEALTH SYSTEMS, INC.
By:
/s/ Scott Cunningham
Name:
Scott Cunningham
Title:
 Chief Financial Officer
3
EXHIBIT INDEX
Exhibit
No.
Description
99.1
AdCare
Health Systems, Inc. Press Release, dated March 31,
2009.
4
Exhibit 99.1
News Release
AdCare Health Systems, Inc. Reports Financial Results for
2008
SPRINGFIELD, OHIO,
 March 31, 2009 /PRNewswire-FirstCall/ -- AdCare Health Systems, Inc. (NYSE
AMEX: ADK), an Ohio based long term care, home care and management company today
reported financial results for its year ending December 31, 2008.
Revenues for the year
ended December 31, 2008 were $24,793,294 as compared to $23,667,756 in 2007, an
increase of $1,125,538 or 4.8%.  The improvement was primarily due to
increased rental charges at the Company's assisted living and skilled nursing
facilities, maintaining occupancy levels and the acquisition of the New Lincoln
Lodge, a long term care facility located in Columbus, Ohio which also resulted
in a gain of approximately of $414,000.
The loss from
continuing operations for the year ended December 31, 2008 was $1,076,178 as
compared to the loss from continuing operations of $627,552 for 2007, which
resulted in an increase in the loss of $448,626.  However, a majority of
the loss in 2008 is attributable to non-cash charges for warrant and option
expenses of $791,835.  Approximately $210,000 was expensed as unamortized
financing costs associated with the HUD refinancing of four long term care
properties and $170,007 was accounted for as a deferred tax expense in
connection with the Assured Home Health acquisition in 2005.  Also, the
Company accrued $162,000 in payroll expenses related to the retirement of the
COO in September of last year.  We anticipate that in 2009, non-cash
charges should be significantly lower than in 2008.
The net loss for the
year ended December 31, 2008 was $1,076,178 as compared to a loss of $218,928
for 2007. However, the 2007 loss was reduced by recognizing a gain of $619,605
on the sale of assets in discontinued operations.  Basic and diluted net
loss per share for 2008 was $0.28 as compared to a basic and diluted net loss
per share of $0.05 for 2007.  AdCare's net cash flow from operations for
2008 was $439,442, compared with a net cash use of $107,337 in 2007.
David A. Tenwick,
Chairman of AdCare, stated, "AdCare's loss for 2008 was greatly affected by
non-cash charges, unamortized financing and deferred tax expenses.  The
Company also took significant steps to position itself for a positive year in
2009.  Despite the tightening credit market and deterioration of the
economy in general, we were able to successfully refinance three of our assisted
living facilities and one of our nursing homes with long term, non-recourse HUD
financings, completing the expansion and rehabilitation of our 50-bed nursing
home located in Greenfield, Ohio, acquiring the remaining ownership interests in
our 30-unit assisted living facility located in Van Wert, Ohio and the
acquisition of the New Lincoln Lodge.  We believe this demonstrates that
AdCare's balance sheet is stronger than many of our larger competitors."
 Mr. Tenwick further stated, "The home health division changed and
implemented its business strategy in 2008 to concentrate its operations in
programs with stronger profit margins while reducing participation in home
health programs that generate little marginal profit."
5
About
AdCare Health Systems, Inc.
AdCare Health
Systems, Inc. (NYSE Alternext US: ADK) develops, owns and manages assisted
living facilities, nursing homes and retirement communities and provides home
health care services.  Prior to becoming a publicly traded company in
November of 2006, AdCare operated as a private company for 18 years.
 AdCare's 920 employees provide high-quality care for patients and
residents residing in the 16 facilities that they manage, seven of which are
assisted living facilities, six skilled nursing centers and three independent
senior living communities.  The Company has ownership interests in eight of
those facilities.  In the ever expanding marketplace of long term care,
AdCare's mission is to provide quality healthcare services to the elderly.
Safe
Harbor Statement
Statements contained
in this press release that are not historical facts may be forward-looking
statements within the meaning of federal law.  Such forward-looking
statements reflect management's beliefs and assumptions and are based on
information currently available to management.  The forward-looking
statements involve known and unknown  risks, results, performance or
achievements of the Company to differ materially from those expressed or implied
in such statements.  Such factors are identified in the public filings made
by the Company with the Securities and Exchange Commission and include the
Company's ability to secure lines of credit and/or an acquisition credit
facility, find suitable acquisition properties at favorable terms, changes in
the health care industry because of political and economic influences, changes
in regulations governing the industry, changes in reimbursement levels including
those under the Medicare and Medicaid programs and changes in the competitive
marketplace.  There can be no assurance that such factors or other factors
will not affect the accuracy of such forward-looking statements.
Contact:
April Spittle
Manager of Corporate
Communications
1-703-893-0021 ext.
108
aspittle@galencc.com
www.adcarehealth.com
6
ADCARE HEALTH SYSTEMS, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
2008
2007
Current Assets:
Cash and cash equivalents
$ 1,266,315
$
   926,625
Certificate of deposit, restricted
-
209,637
Accounts receivable:
Long-term care resident receivables, net
2,008,847
2,115,364
Management, consulting and development receivables,
net
258,811
259,778
Advances and receivables from affiliates
17,635
27,558
Prepaid expenses and other
478,534
453,219
Total current assets
4,030,142
3,992,181
Restricted cash
1,155,596
973,975
Property and equipment, net
16,772,660
14,425,868
Note receivable, net
-
221,413
License, net
1,189,307
1,189,307
Goodwill
2,679,482
2,638,193
Other assets
1,012,340
1,050,506
Total Assets
$26,839,527
$24,491,443
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Current portion of notes payable and other
debt
$
   713,323
$
    773,279
Current portion of note payable to
stockholder
9,432
9,026
Accounts payable
1,009,002
1,416,313
Accrued expenses
2,838,407
2,060,222
Forward purchase contract
-
900,000
Total current liabilities
4,570,164
5,158,840
Notes payable and other debt, net of current
portion
16,974,788
12,813,338
Note payable to stockholder, net of current
portion
34,626
810,084
Other liabilities
299,314
559,509
Income tax payable
170,007
-
Minority Interest in Equity of Consolidated
Entities
269,193
255,070
Total Liabilities
22,318,092
19,296,841
Stockholders' equity:
Preferred stock, no par value; 500,000 shares
authorized;
no shares issued or outstanding
-
-
Common stock and additional paid-in capital, no par
value;
14,500,000 shares authorized; 3,786,129 shares
issued and outstanding
14,766,967
14,063,956
Accumulated deficit
(10,245,532)
(9,169,354)
Total stockholders' equity
4,521,435
4,894,602
Total liabilities and stockholders' equity
$26,839,527
$24,491,443
See notes to consolidated financial
statements
7
ADCARE HEALTH SYSTEMS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
Year Ended
December 31,
2008
2007
Revenues:
Patient care revenues
$23,008,754
$21,928,808
Management, consulting and development fee
revenue
1,784,540
1,738,948
Total revenue
24,793,294
23,667,756
Expenses:
Payroll and related payroll costs
15,649,862
14,762,090
Other operating expenses
8,248,157
7,746,505
Depreciation and amortization
882,900
847,440
Total expenses
24,780,919
23,356,035
Income from Operations
12,375
311,721
Other Income (Expense):
Interest income
23,287
59,300
Interest expense, others
(1,265,622)
(978,731)
Interest expense, related parties
(36,446)
(66,432)
Minority interest in earnings of consolidated
entities
(57,919)
(94,811)
Other income (expense)
4,200
(37,014)
Total other (expenses)
(1,332,500)
(1,117,688)
Gain on Acquisition
413,954
-
Loss from continuing operations before income
taxes
(906,171)
(805,967)
Income Tax Benefit (Expense)
(170,007)
178,415
Loss from Continuing Operations
(1,076,178)
(627,552)
Discontinued Operations:
Income from discontinued operations
 (including gain on disposal of $619,605 in 2007)
-
587,039
Provision for income taxes
-
(178,415)
Income on discontinued operations
-
408,624
Net loss
$(1,076,178)
$   (218,928)
Net (Loss) Income Per Share,
Basic and Diluted:
Continuing operations
$
        (0.28)
$
        (0.16)
Discontinued operations
-
0.11
$
        (0.28)
$
        (0.05)
Weighted Average Common Shares Outstanding,
Basic
3,786,129
3,786,129
Diluted
3,786,129
3,786,129
See notes to consolidated financial
statements
8
ADCARE HEALTH SYSTEMS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
Year Ended December
31,
2008
2007
Cash flows from operating activities:
Net Loss
$  (1,076,178)
$
   (218,928)
Add back:  income from discontinued
operations
-
(587,039)
Net loss from continuing operations
$  (1,076,178)
$
   (805,967)
Adjustments to reconcile net loss from continuing
operations to net cash
provided by (used in) operating activities:
Depreciation and amortization
882,900
847,440
Warrants issued for services
150,831
58,149
Stock option compensation expense
641,004
27,326
Minority interest
57,919
94,811
Note receivable forgiveness exchanged for
rent
9,000
36,000
Gain on acquisition
(413,952)
-
Changes in certain assets and liabilities:
Accounts receivable
111,805
(162,737)
Prepaid expenses and other
(90,851)
(171,461)
Other assets
(24,982)
(50,737)
Accounts payable and accrued expenses
300,635
(350,232)
Income tax liability
170,007
-
Other liabilities
(278,696)
67,991
Net cash provided by (used in) operating activities
of continuing operations
439,442
(409,417)
Net cash provided by operating activities of
discontinued operations
-
302,080
Net cash provided by (used in) operating
activities
439,442
(107,337)
Cash flow from investing activities:
Increase (decrease) in restricted cash
47,829
(59,034)
Forward purchase contract buyout
(941,289)
-
Distribution to minority shareholders
(50,000)
-
Purchase of minority interest investment
(448)
(11,382)
Purchase of property plant and equipment
(477,092)
(1,042,402)
Net cash used in investing activities of continuing
operations
(1,421,000)
(1,112,818)
Net cash provided by investing activities of
discontinued operations:
Proceeds from sale of assets, net of associated
costs
2,500
591,329
Net cash used in investing activities
(1,418,500)
(521,489)
See notes to consolidated financial
statements
9
ADCARE HEALTH SYSTEMS, INC. AND
SUBSIDIARIES.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Continued)
Year Ended December
31,
2008
2007
Cash flows from financing activities:
Proceeds from notes payable
6,469,171
91,197
Prepaid loan financing costs
-
(172,857)
Cash received upon exercise of warrants
-
20,000
Prepaid Financing Costs
159,130
-
Repayment of note payable to stockholder
(760,000)
(9,234)
Repayment on notes payable
(4,549,553)
(497,335)
Net cash provided by (used in) financing activities
of continuing operations
1,318,748
(568,229)
Net cash used in financing activities of
discontinued operations:
Repayment on notes payable of discontinued
operations
-
(12,734)
Net cash provided (used in) by financing
activities
1, 318,748
(580,963)
Net  Increase (Decrease) in Cash
339,690
(1,209,789)
Cash, Beginning
926,625
2,136,414
Cash, Ending
$
    1,266,315
$
      926,625
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for:
Interest
$
   1,012,813
$    1,044,755
Supplemental Disclosure of Non-Cash
Activities:
Rent in exchange of note receivable
repayment
$
          9,000
$
        36,000
Payoff of existing mortgage at closing of
discontinued operations
-
$
      609,839
Acquisition of assets in exchange for note
forgiveness
$    2,740,584
-
Purchase of business assets in exchange for
debt
$
      266,300
$
      337,361
See notes to consolidated financial
statements
10