LTC PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share amounts)

See accompanying notes.

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Amounts in thousands, except per share amounts)

(Unaudited)

NOTE:  Quarterly and year-to-date computations of per share amounts are made independently.  Therefore, the sum of per share amounts for the quarters may not agree with the per share amounts for the year.  Computations of per share amounts from continuing operations, discontinued operations and net income are made independently.  Therefore, the sum of per share amounts from continuing operations and discontinued operations may not agree with the per share amounts from net income available to common stockholders.

See accompanying notes.

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

See accompanying notes.

5

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.              General

LTC Properties, Inc., a Maryland corporation, is a real estate investment trust (or REIT) that invests primarily in long term care properties through mortgage loans, property lease transactions and other investments.

In accordance with “plain English” guidelines provided by the Securities and Exchange Commission, whenever we refer to “our company” or to “us,” or use the terms “we” or “our,” we are referring to LTC Properties, Inc. and/or its subsidiaries.

We have prepared consolidated financial statements included herein without audit (except for the balance sheet at December 31, 20052006 which is audited) and in the opinion of management have included all adjustments necessary for a fair presentation of the results of operations for the three and nine months ended September 30,March 31, 2007 and 2006 and 2005 pursuant to the rules and regulations of the Securities and Exchange Commission.  The accompanying consolidated financial statements include the accounts of our company, its wholly-owned subsidiaries and controlled partnership.  All significant intercompany accounts and transactions have been eliminated in consolidation.  Control over the partnership is based on the provisions of the partnership agreement that provide us with a controlling financial interest in the partnership.  Under the terms of the partnership agreement, our company, as general partner, is responsible for the management of the partnership’s assets, business and affairs.  Certain of our rights and duties in management of the partnership include making all operating decisions, setting the capital budget, executing all contracts, making all employment decisions, and handling the purchase and disposition of assets.  The general partner is responsible for the ongoing, major, and central operations of the partnership and makes all management decisions.  In addition, the general partner assumes the risk for all operating losses, capital losses, and is entitled to substantially all capital gains (i.e., appreciation).

The limited partners have virtually no rights and are precluded from taking part in the operation, management or control of the partnership.  The limited partners are also precluded from transferring their partnership interests without the express permission of the general partner.  However, we can transfer our interest without consultation or permission of the limited partners.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to rules and regulations governing the presentation of interim financial statements; however, we believe that the disclosures in the accompanying financial statements are adequate to make the information presented not misleading.

Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation and as required by Statement of Financial Accounting Standards (or SFAS) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”  The results of operations for the three and nine months ended September 30, 2006March 31, 2007 are not necessarily indicative of the results for a full year.

No provision has been made for federal or state income taxes.  Our company qualifies as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended.  As such, we are not taxed on income that is distributed to our stockholders.  See

In July 2006, the FASB issued Interpretation No. 48, Note 8.  Commitments and Contingencies“Accounting for Uncertainty in Income Taxes”. (or FIN 48), which clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial

statements.  FIN 48 utilizes a two-step approach for evaluating tax positions.  Recognition (step one) occurs when a company concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination.  Measurement (step two) is only addressed if step one has been satisfied (i.e., the position is more likely than not to be sustained).  Under step two, the tax benefit is measured as the largest amount of benefit (determined on a cumulative probability basis) that is more likely than not to be realized upon ultimate settlement.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  Adoption of FIN 48 on January 1, 2007 did not have any effect on our consolidated financial statements.

2.              Real Estate Investments

Owned Properties.  At September 30, 2006,March 31, 2007, our investment in owned properties consisted of 6362 skilled nursing properties with a total of 7,3047,214 beds, 84 assisted living properties with a total of 3,744 units and one school in 23 states.

During the three months ended September 30, 2006,March 31, 2007, we purchasedinvested $1,200,000 under agreements to expand and renovate 12 properties operated by seven different operators.  The total commitment under these agreements is $8,700,000, of which $6,300,000 had been invested as of March 31, 2007.  These investments are at a 123-bedweighted average yield of 9.8%.  Also during the first quarter of 2007 we sold a closed, previously impaired skilled nursing property located in Washington for $7,124,000.  Additionally, we acquired a 100-bed skilled nursing property located in Arizona with a fair market value of approximately $3,410,000 in exchange for a 174-bed skilled nursing property in Arizona.  The sale of the 174-bed skilled nursing property resulted in a gain of $619,000.  The two new properties were leased to a third party underfor a ten-year master lease with two five-year renewal options at an initial effective yieldpurchase price of approximately 12.0% or approximately $1,273,000 and increases annually based upon the Consumer Price Index with$166,000.  As a maximum annual increase of 2.5%.

During the nine months ended September 30, 2006, we sold four assisted living properties with a total of 431 units located in four states and one 174-bed skilled nursing property located in Arizona.  We recognized a gain of $32,557,000 on the two transactions and received total net proceeds of $3,410,000 in property associated with the exchange described above and $54,035,000 in cash, after paying both closing costs and a $3,840,000 8.75% State of Oregon bond obligation related to one of the properties sold.  In 2005 we sold an option to purchase these four properties to Sunwest Management Inc. (or Sunwest) for $2,000,000.  In exchange for the right to purchase the properties for $58,500,000, we received $500,000 in cash and a note receivable for $1,500,000.  The proceeds from the sale of the purchase option have been applied to the proceedsresult of the sale, we recognized a net gain of the four properties.

During the nine months ended September 30, 2006, we acquired five skilled nursing properties in various states with a total of 373 beds for $13,536,000 in cash and $3,410,000 in property as described above.  These properties are leased to two third parties under 10-year master leases, each with two five-year renewal options.  The combined initial annual rent is approximately $1,932,000, an 11.4% current yield. Additionally, we have already signed agreements and begun to expand and renovate eight skilled nursing properties and one assisted living property operated by six different operators for a total commitment of $6,160,000, of which $1,564,000 was invested$149,000 during the third quarter.  These investments are at an average yield of approximately 10%.quarter ended March 31, 2007.

In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” properties held for sale at any reporting period include only those properties available for immediate sale in their present condition and for which management believes that it is probable that a sale of the property will be completed within one year.  Properties held for sale are carried at the lower of cost or fair value less estimated selling costs.  No depreciation expense is recognized on properties held for sale.  In addition, the operating results of real estate assets designated as held for sale and all gains and losses from real estate sold are included in discontinued operations in the consolidated statement of income.

Set forth in the table below are the components of the net income from discontinued operations (in thousands):

Mortgage Loans.  At September 30, 2006,March 31, 2007, we had investments in 5868 mortgage loans secured by first mortgages on 5857 skilled nursing properties with a total of 6,6496,586 beds, 10 assisted living properties with 705 units and one school located in 19 states.  At September 30, 2006,March 31, 2007, the mortgage loans had interest rates ranging from 6.6% to 13.1% and maturities ranging from 2007 to 2019.  In addition, some loans contain certain guarantees, provide for certain facility fees and generally have 25-year amortization schedules.  The majority of the mortgage loans provide for annual increases in the interest rate based upon a specified increase of 10 to 25 basis points.

During the ninethree months ended September 30, 2006,March 31, 2007, we received $26,638,000$1,067,000 plus accrued interest related to the payoff of twelve mortgage loans secured by nine skilled nursing properties and three assisted living properties located in various states and a partial principal pay down on one mortgage loan secured by onea skilled nursing property located in Georgia.  We also received $3,131,000$1,224,000 in regularly scheduled principal payments.

3.              Notes Receivable

During the three months ended September 30, 2006,March 31, 2007, we funded $200,000 under a $300,000 line of credit agreement with an operator.  This loan maturesreceived $629,000 in July 2007 and bears interest at 10.0%.  Also, we amended eleven loans held by one borrower, secured by certain assets including accounts receivable of the borrower, to reduce the outstanding balance by the total capital expenditure holdback of $492,000.  The capital expenditure holdback was capitalized to the related properties and the annual rent on the properties increased by 11% of the capital expenditure holdback or $55,000.

During the nine months ended September 30, 2006, we funded $1,375,000principal payments under various loans and line of credit agreements with certain operators and received $711,000 in principal payments.

At December 31, 2005, we held a Promissory Note (or Note) from Sunwest in the amount of $1,500,000.  During the fourth quarter of 2005, we sold an option to purchase four of our assisted living properties to Sunwest.  The price of the option was $500,000 in cash and the Note.  During the first quarter of 2006, the option to purchase the properties was exercised and the proceeds from the payoff of the Note were applied to the purchase price of the four properties (see Note 2. Real Estate Investments).

During the first nine months of 2005, we received $22,309,000 in cash as payment in full for a note receivable and a related $500,000 mortgage loan, including accrued and unpaid interest through the payoff date.  As a result of the payoff, we recognized $3,667,000 in rental income related to past due rents that were not previously accrued, $2,335,000 of interest income related to past due interest that was not previously accrued, a $477,000 reimbursement for certain expenses paid on behalf of an operator in prior years, a $1,000,000 bonus accrual related to the realization of the value of the note receivable and

non-operating income of $6,217,000 ($3,610,000 of which was classified as Accumulated Comprehensive Income in the equity section of the balance sheet at December 31, 2004).  The $6,217,000 of non-operating income is net of $1,298,000 of legal and investment advisory fees related to the transaction that resulted in the note receivable payoff.operators.

4.              Marketable Securities

Investments in debt and marketable equity securities are accounted for in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (FAS No. 115) which requires that we categorize our investments as trading, available-for-sale or held-to-maturity.  At September 30, 2006, we had no trading securities.  During the nine months ended September 30, 2006, we purchased 60,000 shares of National Health Investors, Inc. (or NHI) common stock for a total of $1,440,000, or an average purchase price of $24.00 per share.  We categorized this investment in marketable equity securities as available-for-sale at the time of purchase.  In accordance with FAS No. 115, we record available-for-sale instruments at fair value, with unrealized gains and losses reported as a component of other comprehensive income until realized.  At September 30, 2006, the fair market value of our investment in this marketable equity security was $1,700,000.  Accordingly, during the third quarter of 2006, we recorded an unrealized gain of $86,000 for a total unrealized gain of $260,000 related to the increase in fair market value of our investment in marketable equity securities.  Based upon the current $0.48 per share quarterly dividend, the current yield of our investment in NHI common stock is 8.0%.  NHI is a healthcare REIT and as such the dividend income we receive from them is qualified income as defined by the Internal Revenue Code.  See page 10 of our Annual Report on Form 10-K for the year ended DecemberMarch 31, 2005, for a description of the income tests required by the Internal Revenue Code.

At September 30, 2006,2007, we had an investment in $10,000,000 face value of Skilled Healthcare Group, Inc. (or SHG) Senior Subordinated Notes with a face rate of 11.0% and an effective yield of 11.1%.  Interest on the notes is payable semi-annually in arrears and the notes mature on January 15, 2014.  One of our board members is the chief executive officer of SHG.  We account for this investment in marketable debt securities as held-to-maturity in accordance with FASSFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” at amortized cost, adjusted for any related premiums (discounts) over the estimated remaining period until maturity.

5.              Debt Obligations

At September 30, 2006March 31, 2007, we had no outstanding borrowings under our $90,000,000 Unsecured Revolving Credit Agreement.Agreement and the full amount was available for borrowing.  During the ninethree months ended September 30, 2006,March 31, 2007, pricing under the Unsecured Revolving Credit Agreement ranged betweenbased on our borrowing election was Prime Rate plus 0.50% or LIBOR plus 1.50% and LIBOR plus 2.50%.

During the nine months ended September 30, 2006, the company paid $3,840,000 in principal and accrued interest to fully repay the 8.75% State of Oregon bond obligation related to one of the properties sold as discussed in Note 2. Real Estate Investments.

6.Senior Mortgage Participation Payable

In 2002, we completed a loan participation transaction whereby we issued a $30,000,000 senior participating interest in 22 of our first mortgage loans that had a total unpaid principal balance of $58,627,000 (the “Participation Loan Pool”) to a private bank.  The Participation Loan Pool had a weighted average interest rate of 11.6% and a weighted average scheduled term to maturity of 77 months.  The senior participation balance is secured by the entire Participation Loan Pool.

The senior participation receives interest at a rate of 9.25% per annum, payable monthly in arrears, on the then outstanding principal balance of the senior participation.  In addition, the senior participation receives all mortgage principal collected on the Participation Loan Pool until the senior participation balance has been reduced to zero.  We retain interest received on the Participation Loan Pool in excess of the 9.25% paid to the senior participation.  The ultimate extinguishments of the senior participation are tied to the underlying maturities of loans in the Participation Loan Pool, which range from 4 to 143 months.  We have accounted for the participation transaction as a secured borrowing under SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”

During the nine months ended September 30, 2006, the senior participation received principal payments of $9,126,000, which included loan payoffs of $8,476,000 in the Participation Loan Pool.  During the same period last year the senior participation received principal payments of $3,650,000.  At September 30, 2006, 16 loans with a total principal balance of $30,567,000 remain in the Participation Loan Pool and $2,409,000 was outstanding under the senior mortgage participation.

7.              Stockholders’ Equity

Preferred Stock.  During the three nine months ended September 30, 2006March 31, 2007, holders of 46,2343,387 shares of our 8.5% Series E Cumulative Convertible Preferred Stock (Series E preferred stock) notified us of their electionelected to convert such shares into 692,468,774 shares of our common stock at the Series E preferred stock conversion rate of $12.50 per share.  Total shares reserved for issuance of common stock related to the conversion of Series E preferred stock were 612,882380,514 at September 30, 2006.March 31, 2007.  Subsequent to September 30, 2006,March 31, 2007, holders of 112,3986,499 shares of our Series E preferred stock notified us of their electionelected to convert such shares into 224,79612,998 shares of our common stock.  After these conversions, total shares reserved for issuance of common stock related to the conversion of Series E preferred stock were 388,086.367,516.

Common Stock.  During the three nine months ended September 30, 2006March 31, 2007, a total of 32,60030,000 stock options were exercised at a total option value of $189,000$161,000 and a total market value as of the dates of exercise of $713,000.  Also during 2006, we repurchased and retired 71,493 shares of common stock for an aggregate purchase price of $1,476,000 or $20.65 per share.  The shares were purchased on the open market under a Board authorization to purchase up to 5,000,000 shares.  Including these purchases, 2,604,393 shares have been purchased under this authorization.  Therefore, we continue to have an open Board authorization to purchase an additional 2,395,607 shares.$800,000.

Distributions.  We declared and paid the following cash dividends (in thousands):

(1)          Represents $0.12$0.125 per share per month for the thirdfirst quarter of 2006.  Common dividends for the fourth quarter of 2006 were declared subsequent to September 30, 2006.2007.

(2)          Represents $0.12 per share per month for the nine months ended September 30,first quarter of 2006.

(3)Represents $0.30 per share for the first quarter of 2005 and $0.11 per share per month in the second and third quarters of 2005.

(4)          The difference between declared and paid is the change in distributions payable on the balance sheet at September 30March 31 and December 31.

In October 2006,April 2007, we declared a monthly cash dividend of $0.12$0.125 per share on our common stock for the months of October, November,April, May and December 2006,June 2007, payable on OctoberApril 30, May 31 November 30, and DecemberJune 29, 2006,2007, respectively, to stockholders of record on OctoberApril 20, May 23 November 22, and December 22, 2006, respectively.June 21, 2007, respectively.

Other Equity.  Other equity consists of the following (in thousands):

During the nine months ended September 30, 2006, we received $226,000 in principal payments on a note receivable from a stockholder which represented payment in full on this loan.  At September 30, 2006, we no longer have any notes receivable from stockholders outstanding.

During the nine months ended September 30, 2006, we reclassified $3,123,000 of deferred compensation to capital in excess of par value as required by SFAS No. 123 (revised 2004), “Share-Based Payment”, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”.  The deferred compensation was related to unvested restricted stock and unvested stock options previously accounted for under APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and SFAS No. 123, “Accounting for Stock-Based Compensation”.

During the three and nine months ended September 30, 2006, $237,000 and $716,000, respectively, of compensation expense was recognized related to the vesting of restricted stock. During the three and nine months ended September 30, 2005, $140,000 and $368,000, respectively, of compensation expense was recognized related to the vesting of restricted stock.

During the three and nine months ended September 30, 2006 we reclassified $167,000 and $548,000, respectively, of other comprehensive income to mortgage interest income.  The reclassification relates to the effective repurchase of mortgage loans underlying REMIC Certificates we owned in 2005.  Upon the mortgage loan repurchase, we began amortizing the accumulated comprehensive income as a yield adjustmentof $1,533,000 and $1,693,000 at March 31, 2007 and December 31, 2006, respectively.  This balance represents the net unrealized holding gains on available-for-sale REMIC Certificates recorded in 2005 when we repurchased the loans in the underlying loan pool.  This amount is being amortized to increase interest income over the remaining life of the mortgage loans.loans that we repurchased from the REMIC Pool.  See Note 6. Real Estate Investments to theour consolidated financial statements included in our 2005 Annual Report on Form 10-K for the year ended December 31, 2006 for further discussion.  In addition, duringdiscussion of the three and nine months ended September 30, 2006, we recorded $86,000 and $260,000, respectively,repurchase of unrealized gain related to the increase in fair market value ofloans underlying our investment in marketable equity securities (see Note 4. Marketable Securities for further discussion.)REMIC Certificates.

Stock-Based Compensation.  On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”.Effective January 1, 2006, we adopted SFAS No. 123(R) supersedes APB 25 and amends SFAS No. 95 “Statement of Cash Flows”.  Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123.  However, SFAS No. 123(R)which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  Pro forma disclosure is no longer an alternative.  As required by The Securities and Exchange Commission, we adoptedThus, for all options that vested during 2006, regardless of when they were granted, compensation expense was recognized during 2006 according to SFAS No. 123(R) on January 1, 2006.

SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:

1)              A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.

2)              A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

We adopted SFAS No. 123(R) using the “modified-prospective” method.  We adopted the fair-value-based method of accounting for share-based payments effective January 1, 2003, using the prospective method described in SFAS No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure” and therefore have recognized compensation expense related to all employee stock-based awards granted, modified or settled after January 1, 2003.

.  We use the Black-Scholes-Merton formula to estimate the value of stock options granted to employees.  This model requires management to make certain estimates including stock volatility, discount rate and the termination discount factor.  If management incorrectly estimates these variables, the results of operations could be affected.  Because SFAS No. 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on

During the effective date,quarters ended March 31, 2007 and because we adopted SFAS No. 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation cost for some previously granted awards that were not recognized under SFAS No. 123 are recognized under SFAS No. 123(R).  However, had we adopted SFAS No. 123(R) in prior periods, the impact2006, $17,000 and $15,000 of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share below.  SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized

compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as previously required.  Because we qualify as a REIT under the Internal Revenue Code of 1986, as amended, we are not subject to Federal income taxation.  Therefore, this new reporting requirement does not have an impact on our statement of cash flows.

Prior to January 1, 2003, we accounted for stock option grants in accordance with APB 25 and related Interpretations.  Historically, we granted stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant.  Under APB 25, because the exercise price of our employee stock options equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized.  Effective January 1, 2003, we adopted SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” on a prospective basis for all employee awards granted, modified or settled on or after January 1, 2003.

recognized related to the vesting of stock options.  No stock options were issued during the three or nine monthsquarters ended September 30,March 31, 2007 and 2006.  During the nine months ended September 30, 2005, 15,000 options to purchase common stock were granted at an exercise price of $19.62 and vest ratably over a three-year period.  Additionally, during the nine months ended September 30, 2005, 4,000 unvested options to purchase common stock were cancelled.  At September 30, 2006,March 31, 2007, the total number of stock options that are scheduled to vest through December 31, 2006, 2007 and 2008 is 6,600, 19,00014,000 and 5,000, respectively.  We have no stock options outstanding that are scheduled to vest beyond 2008.  The remaining compensation expense to be recognized related to the future service period of theseunvested outstanding stock options is approximately $64,000.$15,000.

During the first quarter of 2007 we granted 40,000 shares of restricted common stock at $25.98 per share.  These shares vest ratably over a three-year period.  Also during the first quarter of 2007 we extended the vesting of 27,120 shares of unvested restricted stock to align the vesting dates with the

40,000 share grant previously discussed.  The following table illustrates the effectimpact on net income and earnings per share as if the fair value recognition provision of SFAS No. 123(R) had been applied to options granted under our stock option plans in all periods presented.  For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes-Merton option-pricing formula and amortized to expense over the options’ vesting periods (in thousands):

Total shares available for restricted shares is already reflected in net incomefuture grant under the 2004 Stock Option Plan, the 2004 Restricted Stock Plan and is the same under APB No. 251998 Equity Participation Plan as of March 31, 2007 were 470,000, 8,234 and SFAS No. 123(R).  Above pro forma disclosures are provided for 2005 because employee stock options issued prior to January 1, 2003, the date we adopted SFAS No. 148, were not accounted for using the fair value method during that period.  Disclosures are provided for 2006 for comparative purposes since share-based payments have been accounted for under SFAS No. 123(R)’s fair value method beginning January 1, 2006.

59,616, respectively.

8.7.              Commitments and Contingencies

At September 30, 2006, we accrued $950,000 related to a proposed closing agreement we have pending with the Internal Revenue Service (or IRS).  During the third quarter of 2006, we voluntarily approached the IRS to correct our filing for the year 2000, which is a closed year.  In September we submitted a closing agreement for IRS approval to correct a technical violation which occurred in the spring of 2000.

At September 30, 2006,March 31, 2007, we had the following commitments outstanding:

We committed to provide Alterra Healthcare Corporation (or Alterra) $2,500,000 over three years ending December 4, 2006,2009, to invest in leasehold improvements to properties they lease from us and an additional $2,500,000 over the next succeeding three years ending December 4, 2009 to expand properties they lease from us.  Both of these investmentsThis investment would be made at a 10% annual return to us.  To date Alterra has not requested any funds under this agreement.

We committed to provide Extendicare Healthcare Services, Inc. (or EHSI), under certain conditions, up to $5,000,000 per year, under certain conditions,throughout the term of the lease, for expansion of the 37 properties they lease from us.  Should we invest such funds, EHSI’s minimum rent would increase by an amount equal to (a) 9.5% plus the positive difference, if any, between the average yield on the U.S. Treasury 10-year note for the five days prior to funding, minus 420 basis points (expressed as a percentage), multiplied by (b) the amounts funded.  To date EHSI has not requested any funds under this agreement.

We committed to provide Center HealthcarePreferred Care, Inc. (or CHC) withPreferred Care) $3,000,000 for capital improvements on 25 of the skilled nursing properties they lease from us under a capital allowance ofmaster lease.  To date we have funded $358,000 under this agreement.  We also committed to invest up to $7,100,000 on specific projects on five skilled nursing properties.  Our commitment provided for CLC’sproperties they lease from us.  The minimum rent towill increase for each specific project by an amount equal to 11.0%11% of either (a) our final funding including capitalized interest during construction.  Subsequent to September 30, 2006,construction for three specific projects or (b) our periodic funding plus the related capitalized interest on each advance from the date funded through the end of the month for two specific projects.  To date we have funded $150,000$101,000 under this agreement.  See Note 11.  Subsequent EventsThese commitments expire on March 31, 2010.  We also committed to provide Preferred Care with a $500,000 capital allowance for a skilled nursing property they lease from us under a separate lease.  This commitment expires on June 30, 2007.  The minimum rent increases by the previous month’s capital funding multiplied by 10%.  To date no funds have been requested under this agreement.

We committed to provide a lessee an accounts receivable financing on a skilled nursing property.  The loan has a credit limit not to exceed $150,000, an interest rate of 10.0%, and matures on July 31, 2007.  To date $125,000 has been funded under this agreement.  Additionally, we have committed to invest $1,150,000 in capital improvements for this property.  The minimum rent will increase by an amount equal to 10.5% of our final funding including capitalized interest during construction.  This commitment expires June 30, 2007.  To date we have funded $411,000$933,000 under this agreement.

We committed to provide a lessee of a skilled nursing property accounts receivable financing.  The loan has a credit limit not to exceed $75,000 and an interest rate of 10.0%.  The commitment matures on June 30, 2007.  As of March 31, 2007, we had funded $25,000 under this agreement.  Subsequent to March 31, 2007, we funded $38,000 under this agreement. We committed to make certain capital improvements to be mutually agreed upon by us and the lessee on a skilled nursing property.  The lessee’s minimum rent will increase by an amount equal to 11.0% of our investment in these capital improvements.  To date we have funded $95,000 under this agreement.

We committed to provide a lessee with a capital allowance of $500,000 to improve athree skilled nursing property they lease from us.  This commitment expires on June 30, 2007.  Minimum rent increases by the capital funding multiplied by 10.0%.  To date no funds have been requested under this agreement.

We committed to provide a lessee with up to $2,500,000 to invest in capital improvements to renovate an existing closed skilled nursing property they currently lease from us.  The renovation is currently scheduled to be completed in May 2007.  To date $1,344,000 has been funded under this agreement.  As advances are funded the minimum rent increases by 9.5% of the advance.

Contingent upon an outcome of a bankruptcy proceeding, we committed to provide a lesseeproperties with the following:  (i) up to $260,000 to invest in capital improvements to a skilled nursing property they lease from

us; (ii) up to $735,000 to invest in capital improvements on two skilled nursing properties they lease from us, however, under this commitment, the monthly minimum rent will increase by the amount of the capital funding multiplied by 11.0%11%; and (iii) up to $3,000,000 to purchase land, construct and equip a new skilled nursing property in the general vicinity of an existing skilled nursing property they lease from us to replace the existing property.  The agreement provides us with a corresponding increase in the minimum rent of 11.0%11% multiplied by the amount funded plus capitalized interest costs associated with the construction of the new property.  These commitments expire on November 1, 2008.  To date no funds have been requested under these agreements.

We committed to provide a lessee with up to $410,000 to invest in capital improvements on two skilled nursing properties and one assisted living property.  The lessee’s minimum rent will increase by an amount equal to 10.0% of our funding.  To date $238,000 has been funded under this agreement.

We committed to provide a lessee with $1,700,000 to invest in capital improvements to renovate an existing skilled nursing property they currently lease from us.  The renovation is currently scheduled to be completed in March 2007.  The lessee’s minimum rent will increase by an amount equal to 10.0% of our final funding including capitalized interest during construction.  To date $489,000 has been funded under this agreement.

We committed to provide a lessee an accounts receivable financing on three skilled nursing properties.  The loan has a credit limit not to exceed $300,000, an interest rate of 10.0%, and matures on July 1, 2007.  To date $200,000$250,000 has been funded under this agreement.  Additionally, we have committed to invest $200,000$250,000 in capital improvements for these properties whichproperties. This commitment will expire on June 30, 2007.  MinimumThe minimum rent will increase by an amount equal to 10.25% of our final funding including capitalized interest during construction.  To date we have funded $88,000$209,000 under this agreement.

We committed to provide a lessee with $1,000,000 to invest in capital improvements on an assisted living property.  MinimumThe minimum rent will increaseincreases by the totalprevious month’s capital funding multiplied by 8.0%.  The improvement projects arecommitment will mature in February 2008.  To date $795,000 has been funded under this agreement.

We committed to provide a lessee of a skilled nursing property with $500,000 to invest in capital improvements to the property they lease from us.  The commitment includes interest capitalized at 10% on each advance made from the disbursement date until the final distribution of the commitment.  The capital improvements must be completecompleted by February 21, 2008.December 31, 2007.  Upon final distribution of the capital allowance, minimum rent shall increase by the total commitment multiplied by 10%.  To date no funds have been requested under this agreement.

9.8.              Major Operators

We have twothree operators, based on properties subject to lease agreements and secured by mortgage loans that each represent between 10% and 20% of our total assets and three operators from each of which we derive over 10% of our rental revenue.  EHSI,revenue and interest income.

Beginning in the fourth quarter of 2006, Extendicare Services, Inc. (or EHSI), one of our major operators, effected a reorganization whereby it completed a spin-off of Assisted Living Concepts, Inc (or ALC).  ALC is now a NYSE traded public company operating assisted living centers. The remaining EHSI assets and operations were converted into a Canadian REIT (Extendicare REIT) listed on the wholly owned subsidiary of a publicly traded company,Toronto Stock Exchange (or TSX).  Both Extendicare Inc.  In addition, EHSI, although not publicly traded, files quarterly financial informationREIT and ALC continue to be parties to the leases with the Securities and Exchange Commission.  us.

Alterra Healthcare Corporation (or Alterra) is a wholly owned subsidiary of a publicly traded company, Brookdale Senior Living, Inc. (or Brookdale).

Our other operator is privately owned and thus no public financial information is available.   The following table summarizes EHSI’sExtendicare REIT and ALC’s (combined) and Brookdale’s assets, stockholders’ equity, annual revenue and net income from continuing operationsfinancial information as of orand for the threetwelve months ended June 30,December 31, 2006 per the lessee’soperators’ public filings:filings (audited, in thousands):

EHSI, a wholly owned subsidiary of Extendicare Inc.REIT and Assisted Living Concepts, a wholly owned subsidiary of EHSI,ALC, collectively lease 37 assisted living properties with a total of 1,427 units owned by us representing approximately 11.5%11.6%, or $66,553,000,$65,501,000 of our total assets at September 30, 2006March 31, 2007 and 19.7%15.4% of rental income and of interest income recognized in 20062007 excluding the effects of straight-line rent.

Alterra, a wholly owned subsidiary of Brookdale, leases 35 assisted living properties with a total of 1,416 units we ownowned by us representing approximately 11.3%11.5%, or $65,711,000,$64,750,000, of our total assets at September 30, 2006March 31, 2007 and 19.1%14.6% of rental revenue and of interest income recognized in 20062007 excluding the effects of straight-line rent.

Center HealthcarePreferred Care, Inc., (or CHC)Preferred Care), through various wholly owned subsidiaries, operates 2532 skilled nursing properties with a total of 3,0143,871 beds that we own or on which we hold a mortgagemortgages secured by a first trust deed.deeds.  This represents approximately 9.4%,11.0% or $54,686,000,$61,930,000 of our total assets at September 30, 2006as March 31, 2007 and 13.0%14.0% of rental revenue and interest income recognized to date in 20062007 excluding the effects of straight-line rent.  See Note 11. Subsequent Events.

Our financial position and our ability to make distributions may be adversely affected by financial difficulties experienced by Alterra, CHC, EHSIExtendicare REIT & ALC, Preferred Care, or any of our other lessees and borrowers, including any bankruptcies, inability to emerge from bankruptcy, insolvency or general downturn in business of any such operator, or in the event any such operator does not renew and/or extend its relationship with us or our borrowers when it expires.

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We believe that by the time we report 2006 year end results, we will have a more accurate estimation of the total cost, including legal fees and uncollectible amounts under the line of credit, if any, associated with this lease termination and this total amount will be amortized against rental income over the life of the Preferred Care master lease.

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

Executive Overview

Business

LTC Properties, Inc. a self-administered health care real estate investment trust (or REIT) commenced operations in 1992.  We invest primarily in long-term care and other health care related properties through mortgage loans, property lease transactions and other investments.  The following table summarizes our portfolio as of September 30, 2006:March 31, 2007: