RESULTS OF OPERATIONS

Our reportable segments consist of our senior living community business and our rehabilitation hospital business. In the senior living community segment, we operate independent living, congregate care and assisted living communities and skilled nursing facilities. Our rehabilitation hospital segment provides inpatient medical rehabilitation services at our two hospital locations and three satellite locations and outpatient medical rehabilitation services at 18 affiliated outpatient clinics. We do not consider our pharmacy operations to be a significant, separately reportable segment of our business but we report our pharmacy revenues and expense as separate items within our corporate and other activities. All of our operations and assets are located in the United States except with regard to our two captive insurance companies which participate in our liability insurance programs and are located outside the United States in Bermuda and the Cayman Islands.

We use segment operating profit as an important measure to evaluate our performance and for internal business decision making purposes. Segment operating profit excludes interest and other income, interest expense and certain corporate expenses.

Key Statistical Data (for the three months ended September 30, 2008 and 2007):

The following tables present a summary of our operations for the three months ended September 30, 2008 and 2007:

Senior living communities:

                                                     Three months ended September 30,
(in thousands, except average daily rate)      2008         2007        $ Change     % Change
Senior living revenue                        $ 241,190    $ 203,656    $   37,534        18.4 %
Senior living wages and benefits              (120,704 )   (100,659 )     (20,045 )      19.9 %
Other senior living operating expenses         (61,228 )    (50,988 )     (10,240 )      20.1 %
Rent expense                                   (39,055 )    (29,943 )      (9,112 )      30.4 %
Depreciation and amortization                   (2,483 )     (2,405 )         (78 )       3.2 %
Interest expense                                  (359 )       (279 )         (80 )      28.7 %
Interest and other income                          417          463           (46 )      (9.9 )%
Gain on extinguishment of debt                     743            -           743         n/a
Impairment on investments in available
for sale securities                             (3,019 )          -        (3,019 )       n/a
Senior living income from continuing
operations                                      15,502       19,845        (4,343 )     (21.9 )%

No. of communities (end of period)                 202          163            39        23.9 %
No. of living units (end of period)             21,340       18,084         3,256        18.0 %
Occupancy %                                       88.2 %       90.4 %         n/a        (2.2 )%
Average daily rate                           $  142.77    $  136.75    $     6.02         4.4 %
Percent of senior living revenue from
Medicare                                          13.8 %       15.0 %         n/a        (1.2 )%
Percent of senior living revenue from
Medicaid                                          16.7 %       18.5 %         n/a        (1.8 )%
Percent of senior living revenue from
private and other sources                         69.5 %       66.5 %         n/a         3.0 %

Comparable communities (senior living communities that we have operated continuously since July 1, 2007):

                                                      Three months ended September 30,
(in thousands, except average daily rates)      2008         2007        $ Change     % Change
Senior living revenue                         $ 209,464    $ 203,656    $    5,808         2.9 %
Senior living community expenses               (160,052 )   (151,647 )      (8,405 )       5.5 %
No. of communities (end of period)                  163          163             -           -
No. of living units (end of period)              18,041       18,041             -           -
Occupancy %                                        88.5 %       90.4 %           -        (1.9 )%
Average daily rate                            $  144.03    $  136.75    $     7.28         5.3 %
Percent of senior living revenue from
Medicare                                           15.5 %       15.0 %         n/a         0.5 %
Percent of senior living revenue from
Medicaid                                           18.3 %       18.5 %         n/a        (0.2 )%
Percent of senior living revenue from
private and other sources                          66.2 %       66.5 %         n/a        (0.3 )%

Rehabilitation hospitals:

                                                Three months ended September 30,
(in thousands)                               2008       2007     $ Change    % Change
Hospital revenues                          $ 23,938   $ 25,361   $  (1,423 )     (5.6 )%
Hospital expenses                           (22,332 )  (22,588 )       256       (1.1 )%
Rent expense                                 (2,690 )   (2,564 )      (126 )      4.9 %
Depreciation and amortization                  (314 )     (294 )       (20 )      6.8 %
Hospital loss from continuing operations     (1,398 )      (85 )    (1,313 )  1,544.7 %

Corporate and Other (1):



                                                   Three months ended September 30,
(in thousands)                                2008         2007        $ Change     % Change
Pharmacy revenue                           $   16,814    $  15,581    $    1,233         7.9 %
Pharmacy expenses                             (17,368 )    (14,722 )      (2,646 )      18.0 %
Depreciation and amortization                    (894 )       (852 )         (42 )       4.9 %
General and administrative (2)                (11,948 )    (10,757 )      (1,191 )      11.1 %
Unrealized loss on investments in
trading securities                             (1,733 )          -        (1,733 )       n/a
Interest and other income                         654        1,048          (394 )     (37.6 )%
Interest expense                               (1,337 )     (1,185 )        (152 )      12.8 %
Provision for income taxes                         90         (277 )         367      (132.5 )%
Corporate and Other loss from
continuing operations                         (15,722 )    (11,164 )      (4,558 )      40.8 %

(2) General and administrative expenses are not attributable to a specific segment and include items such as corporate payroll and benefits and outside service expenses supporting home office activities.

Consolidated:



                                                   Three months ended September 30,
(in thousands)                               2008         2007        $ Change     % Change
Summary of revenue:
Senior living revenue                      $ 241,190    $ 203,656    $   37,534        18.4 %
Hospital revenue                              23,938       25,361        (1,423 )      (5.6 )%
Corporate and Other                           16,814       15,581         1,223         7.9 %
Total revenue                                281,942      244,598        37,344        15.3 %

Summary of income from continuing
operations:
Senior living communities                     15,502       19,845        (4,343 )     (21.9 )%
Rehabilitation hospitals                      (1,398 )        (85 )      (1,313 )   1,544.7 %
Corporate and Other                          (15,722 )    (11,164 )      (4,558 )      40.8 %
Income (loss) from continuing
operations                                    (1,618 )      8,596       (10,214 )    (118.8 )%

Three Months Ended September 30, 2008, Compared To Three Months Ended September 30, 2007

Senior living communities:

The 18.4% increase in senior living revenue for the three months ended September 30, 2008 was due primarily to revenues from the 39 communities we began to operate in the first nine months of 2008 and increased per diem charges, partially offset by a decrease in occupancy. The 2.9% increase in senior living revenue at the communities

that we have operated continuously since July 1, 2007 was due primarily to increased per diem charges, partially offset by a decrease in occupancy.

The 19.9% increase in senior living wages and benefits costs for the three months ended September 30, 2008 was primarily due to wages and benefits from the 39 communities we began to operate in the first nine months of 2008 and wage increases. The 20.1% increase in other senior living operating expenses, which include utilities, housekeeping, dietary, maintenance, insurance and community level administrative costs, primarily resulted from the other operating expenses at the 39 communities we began to operate in the first nine months of 2008. The senior living community expenses for the senior living communities that we have operated continuously since July 1, 2007 have increased by 5.5%, principally due to increases in workers compensation, therapy services and utility expenses. The 30.4% rent expense increase was due to the 36 leased communities that we began to operate in the first nine months of 2008 and our payment of additional rent for senior living community capital improvements purchased by Senior Housing since July 1, 2007.

The 3.2% increase in depreciation and amortization expense for the three months ended September 30, 2008 was primarily attributable to our purchase of furniture and fixtures for our communities.

During the three months ended September 30, 2008, we recognized an other than temporary loss of $3.0 million on investments in available for sale securities held by our captive insurance companies.

Rehabilitation hospitals:

The 5.6% decrease in hospital revenues for the three months ended September 30, 2008 was primarily due to Medicare reimbursement rates as well as the closing of several unprofitable outpatient clinics offset by an increase in census. The 1.1% decrease in hospital expenses for the three months ended September 30, 2008 was primarily due to reductions in labor and benefit expenses and the closing of several unprofitable outpatient clinics.

The 4.9% rent expense increase for the three months ended September 30, 2008 was due to our payment of additional rent for hospital capital improvements purchased by Senior Housing since July 1, 2007.

The 6.8% increase in depreciation and amortization expense for the three months ended September 30, 2008 was primarily attributable to our purchase of information technology systems for our rehabilitation hospitals.

Corporate and other:

The 7.9% increase in pharmacy revenues and the 18.0% increase in pharmacy expenses for the three months ended September 30, 2008, was primarily the result of adding new customers from both our existing senior living and third party operated communities. The increase in pharmacy revenues was partially offset by the establishment of a contractual allowance reserve of $993,000. We recorded this allowance in order to fairly state the realizable value of our pharmacy receivables which are primarily billed under Medicare Part D.

The 11.1% increase in general and administrative expenses for the three months ended September 30, 2008 over the same period in 2007 arose primarily from the 39 communities we began to operate in 2008.

The 4.9% increase in depreciation and amortization expense for the three months ended September 30, 2008 was primarily attributable to our purchase of furniture and fixtures and information technology systems for our pharmacies and corporate and regional offices.

During the three months ended September 30, 2008, we recognized an unrealized loss of $1.8 million on investments in trading securities related to our holdings of auction rate securities.

Our interest and other income decreased by $394,000, or 37.6%, for the three months ended September 30, 2008, compared to the three months ended September 30, 2007, primarily as a result of lower interest rates earned on our investments.

For the three months ended September 30, 2008, we recognized a tax benefit of $90,000, which includes a tax benefit of $601,000 to account for the application of tax credits that offset alternative minimum taxes, and $451,000 of certain state taxes that are payable without regard to our tax loss carry forwards. The tax benefit also includes

$60,000 related to a non-cash deferred tax liability arising from the amortization of goodwill for tax purposes but not for book purposes.

Key Statistical Data (for the nine months ended September 30, 2008 and 2007):

The following tables present a summary of our operations for the nine months ended September 30, 2008 and 2007:

Senior living communities:

                                                      Nine months ended September 30,
(in thousands, except average daily rates)      2008         2007        $ Change     % Change
Senior living revenue                         $ 686,559    $ 601,319    $   85,240        14.2 %
Senior living wages and benefits               (341,593 )   (306,497 )     (35,096 )      11.5 %
Other senior living operating expenses         (173,317 )   (149,399 )     (23,918 )      16.0 %
Rent expense                                   (108,443 )    (89,042 )     (19,401 )      21.8 %
Depreciation and amortization                    (7,370 )     (6,926 )        (444 )       6.4 %
Interest expense                                   (992 )       (935 )         (57 )       6.1 %
Interest and other income                         2,194        1,244           950        76.4 %
Impairment on investments in available for
sale securities                                  (3,019 )          -        (3,019 )       n/a
Gain on extinguishment of debt                      743        4,491        (3,748 )     (83.5 )%
Senior living income from continuing
operations                                       54,762       54,255           507         0.9 %

No. of communities (end of period)                  202          163            39        23.9 %
No. of living units (end of period)              21,340       18,084         3,256        18.0 %
Occupancy %                                        88.9 %       90.4 %         n/a        (1.5 )%
Average daily rate                            $  143.07    $  136.25    $     6.82         5.0 %
Percent of net revenues from residents
from Medicare                                      15.0 %       15.3 %         n/a        (0.3 )%
Percent of net revenues from residents
from Medicaid                                      17.1 %       18.2 %         n/a        (1.1 )%
Percent of net revenues from residents
from private and other sources                     67.9 %       66.5 %         n/a        (1.4 )%

Comparable communities (communities that we operated continuously since January 1, 2007):

                                                      Nine months ended September 30,
(in thousands, except average daily rates)      2008         2007        $ Change     % Change
Net revenues from residents                   $ 625,725    $ 600,675    $   25,050         4.2 %
Community expenses                             (471,879 )   (455,334 )     (16,545 )       3.6 %
No. of communities (end of period)                  162          162             -           -
No. of living units (end of period)              17,985       17,985             -           -
Occupancy %                                        89.1 %       90.4 %         n/a        (1.3 )%
Average daily rate                            $  143.95    $  136.25    $     7.70         5.7 %
Percent of net revenues from residents
from Medicare                                      16.1 %       15.3 %         n/a         0.8 %
Percent of net revenues from residents
from Medicaid                                      18.0 %       18.2 %         n/a        (0.2 )%
Percent of net revenues from residents
from private and other sources                     65.9 %       66.5 %         n/a        (0.6 )%

Rehabilitation hospitals:

                                                Nine months ended September 30,
(in thousands)                               2008       2007     $ Change    % Change
Hospital revenues                          $ 73,103   $ 76,711   $  (3,608 )     (4.7 )%
Hospital expenses                           (67,539 )  (69,585 )     2,046       (2.9 )%
Rent expense                                 (8,021 )   (7,695 )      (326 )      4.2 %
Depreciation and amortization                  (931 )     (787 )      (144 )     18.3 %
Hospital loss from continuing operations     (3,388 )   (1,356 )    (2,032 )    149.9 %

Corporate and Other (1):



                                                  Nine months ended September 30,
(in thousands)                             2008          2007        $ Change      % Change
Pharmacy revenue                        $   52,301    $   43,734    $     8,567         19.6 %
Pharmacy expenses                          (50,918 )     (41,835 )       (9,083 )       21.7 %
Depreciation and amortization               (2,672 )      (2,227 )         (445 )       20.0 %
General and administrative (2)             (34,803 )     (31,703 )       (3,100 )        9.8 %
Unrealized loss on investments in
trading securities                          (6,099 )           -         (6,099 )        n/a
Interest and other income                    2,673         3,099           (426 )      (13.7 )%
Interest expense                            (3,898 )      (3,984 )           86         (2.2 )%
Provision for income taxes                    (920 )        (760 )         (160 )       21.1 %
Corporate and Other loss from
continuing operations                      (44,336 )     (33,676 )      (10,660 )       31.7 %

(2) General and administrative expenses are not attributable to a specific segment and include items such as corporate payroll and benefits and outside service expenses supporting home office activities.

Consolidated:



                                                  Nine months ended September 30,
(in thousands)                             2008          2007        $ Change      % Change
Summary of revenue:
Senior living revenue                   $  686,559    $  601,319    $    85,240         14.2 %
Hospital revenue                            73,103        76,711         (3,608 )       (4.7 )%
Corporate and Other                         52,301        43,734          8,567         19.6 %
Total revenue                              811,963       721,764         90,199         12.5 %
Summary of income from continuing
operations:
Senior living communities                   54,762        54,255            507          0.9 %
Rehabilitation hospitals                    (3,388 )      (1,356 )       (2,032 )      149.9 %
Corporate and Other                        (44,336 )     (33,676 )      (10,660 )       31.7 %
Income (loss) from continuing
operations                                   7,038        19,223        (12,185 )      (63.4 )%

Nine Months Ended September 30, 2008, Compared To Nine Months Ended September 30, 2007

Senior living communities:

The 14.2% increase in senior living revenue for the nine months ended September 30, 2008 was due primarily to revenues from the 39 communities we began to operate in the first nine months of 2008 and increased per diem charges, partially offset by a decrease in occupancy. The 4.2% increase in senior living revenue at the communities that we have operated continuously since January 1, 2007 was due primarily to increased per diem charges, partially offset by a decrease in occupancy.

Our 11.5% increase in senior living wages and benefits costs for the nine months ended September 30, 2008 was primarily due to wages and benefits at the 39 communities we began to operate in the first nine months of 2008 and wage increases. The 16.0% increase in other senior living operating expenses, which include utilities, housekeeping, dietary, maintenance, insurance and community level administrative costs, primarily results from the other operating expenses at the 39 communities we began to operate in the first nine months of 2008 and increased charges from various service providers. The senior living community expenses for the senior living communities that we have operated continuously since January 1, 2007 have increased by 3.6%, due primarily to increases in therapy services and utility expenses. The 21.8% rent expense increase was due to the addition of 36 leased communities that we began to operate in the first nine months of 2008, our payment of percentage rent and our payment of additional rent for senior living community capital improvements purchased by Senior Housing since January 1, 2007.

The 6.4% increase in depreciation and amortization expense for the nine months ended September 30, 2008 was primarily attributable to our purchase of furniture and fixtures for our communities as well as the one community we acquired in April 2007 and three communities we acquired in July 2008.

Our interest and other income increased by $950,000, or 76.4%, for the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007, primarily as a result of recognizing an $840,000 gain related to a 2003 sale of a property that was previously deferred until the buyer paid in full our note receivable during the first quarter of 2008.

During the nine months ended September 30, 2008, we recognized an other than temporary loss of $3.0 million on investments in available for sale securities held by our captive insurance companies.

Rehabilitation hospitals:

The 4.7% decrease in hospital revenues for the nine months ended September 30, 2008 was primarily due to lower Medicare reimbursement rates as well as the closing of several unprofitable outpatient clinics offset by an increase in census. The 2.9% decrease in hospital expenses was primarily due to reductions in labor and benefit expenses and the closing of several unprofitable outpatient clinics.

The 4.2% rent expense increase in the nine months ended September 30, 2008 was due to our payment of additional rent for hospital capital improvements purchased by Senior Housing since January 1, 2007.

The 18.3% increase in depreciation and amortization expense for the nine months ended September 30, 2008 was primarily attributable to our purchase of furniture and fixtures and information technology systems for our rehabilitation hospitals.

Corporate and other:

The 19.6% and 21.7% increase in 2008 revenues and expenses, respectively, from our pharmacies for the nine months ended September 20, 2008 was primarily the result of adding new customers from both our existing senior living and third party communities. The increase in pharmacy revenues was partially offset by the establishment of a contractual allowance reserve of $993,000. We recorded this allowance in order to fairly state the realizable value of our pharmacy receivables which are primarily billed under Medicare Part D.

The 9.8% increase in general and administrative expenses for the nine months ended September 30, 2008 over the same period in 2007 primarily results from the administrative costs associated with the 39 communities we began to operate in the first nine months of 2008.

The 20.0% increase in depreciation and amortization expense for the nine months ended September 30, 2008 was primarily attributable to our purchase of furniture and fixtures and information technology systems for our pharmacies and corporate and regional offices.

During the nine months ended September 30, 2008, we recognized an unrealized loss of $6.2 million on investments in trading securities related to our holdings of auction rate securities.

Our interest and other income decreased by $426,000 or, 13.7%, for the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007, primarily as a result of lower cash available for investment and lower interest rates earned on our cash investments.

For the nine months ended September 30, 2008, we incurred tax expense of $920,000, which include (i) a tax benefit of $351,000 related to prior year refunds resulting from the application of tax credits that offset federal alternative minimum taxes, (ii) $1,088,000 of state taxes that are payable without regard to our tax loss carry forwards, and (iii) $183,000 related to a non-cash deferred tax liability arising from the amortization of goodwill for tax purposes but not for book purposes.

LIQUIDITY AND CAPITAL RESOURCES

Investments

At September 30, 2008, we had $68.8 million (par value of $74.8 million) invested in auction rate securities which we classified as long term investments in trading securities. Starting in February 2008, auctions affecting our student loan auction rate securities failed to close on their settlement dates. We do not know if future auctions for our auction rate securities will successfully close on future auction settlement dates. On March 31, 2008, we moved our auction rate securities from current assets to non-current assets due to our belief that the market for student loan collateralized instruments may take in excess of twelve months to recover.

Our auction rate securities consist primarily of bonds issued by various entities to fund student loans pursuant to the Federal Family Education Loan Program. The maturities of our auction rate securities range from 2032 to 2047. However, historically we have had the option to liquidate our investments in our auction rate securities whenever the interest rates are reset at auctions, usually every 35 days. All of our auction rate securities were rated "AAA" by at least one nationally recognized debt rating agency when we made these investments, and, to our knowledge, none of these ratings have been reduced. We and the broker dealer, who marketed the auction rate securities which we own, are presently monitoring developments in the auction rate . . .