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 and congregate care communities, assisted living communities and SNFs. Our rehabilitation hospital segment provides inpatient rehabilitation services at two hospital locations and three satellite locations and outpatient rehabilitation services at 14 outpatient clinics. We do not consider our institutional pharmacy operations to be a material, separately reportable segment of our business but we report our institutional 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 for our two captive insurance companies that participate in our workers' compensation and liability insurance programs and which are located 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 and other expense and certain corporate expenses.

Key Statistical Data (for the three months ended June 30, 2009 and 2008):

The following tables present a summary of our operations for the three months ended June 30, 2009 and 2008:

Senior living communities:

                                               Three months ended June 30,
(dollars in thousands, except
average daily rate)                   2009         2008       $ Change      % Change
Senior living revenue              $  253,169   $  227,752   $    25,417     11.2 %
Senior living wages and benefits     (129,983 )   (111,287 )     (18,696 )  (16.8 )%
Other senior living operating
expenses                              (60,135 )    (58,441 )      (1,694 )   (2.9 )%
Rent expense                          (41,788 )    (36,574 )      (5,214 )  (14.3 )%
Depreciation and amortization
expense                                (3,264 )     (2,442 )        (822 )  (33.7 )%
Interest and other expense               (201 )       (327 )         126     38.5 %
Interest, dividend and other
income                                     21           95           (74 )  (77.9 )%
Senior living income from
continuing operations              $   17,819   $   18,776   $      (957 )   (5.1 )%

No. of communities (end of
period)                                   207          179            28     15.6 %
No. of living units (end of
period)                                22,027       19,579         2,448     12.5 %
Occupancy %                              86.0 %       88.6 %         n/a     (2.6 )%
Average daily rate                 $   146.42   $   145.73   $      0.69      0.5 %
Percent of senior living revenue
from Medicare                            14.7 %       15.1 %         n/a     (0.4 )%
Percent of senior living revenue
from Medicaid                            16.5 %       16.8 %         n/a     (0.3 )%
Percent of senior living revenue
from private and other sources           68.8 %       68.1 %         n/a      0.7 %

Comparable communities (senior living communities that we have operated continuously since April 1, 2008):

                                               Three months ended June 30,
(dollars in thousands, except
average daily rates)                  2009          2008        $ Change     % Change
Senior living revenue              $   233,098   $   227,752   $    5,346      2.3 %
Senior living community expenses   $  (174,974 ) $  (169,728 ) $   (5,246 )   (3.1 )%
No. of communities (end of
period)                                    179           179            -        -
No. of living units (end of
period)                                 19,588        19,579            -        -
Occupancy %                               86.9 %        88.6 %        n/a     (1.7 )%
Average daily rate                 $    150.43   $    145.73   $     4.70      3.2 %
Percent of senior living revenue
from Medicare                             15.8 %        15.1 %        n/a      0.7 %
Percent of senior living revenue
from Medicaid                             17.7 %        16.8 %        n/a      0.9 %
Percent of senior living revenue
from private and other sources            66.5 %        68.1 %        n/a     (1.6 )%

Rehabilitation hospitals:

                                               Three months ended June 30,
(dollars in thousands)                2009         2008       $ Change      % Change
Rehabilitation hospital revenues   $   25,673   $   24,421   $     1,252      5.1 %
Rehabilitation hospital expenses      (22,749 )    (22,615 )        (134 )   (0.6 )%
Rent expense                           (2,838 )     (2,681 )        (157 )   (5.9 )%
Depreciation and amortization
expense                                   (16 )       (309 )         293     94.8 %
Rehabilitation hospital income
(loss) from continuing
operations                         $       70   $   (1,184 ) $     1,254    105.9 %

Corporate and Other:(1)

                                               Three months ended June 30,
(dollars in thousands)                2009         2008       $ Change      % Change
Institutional pharmacy revenue     $   18,285   $   18,281   $         4        -
Institutional pharmacy expenses       (18,288 )    (17,347 )        (941 )   (5.4 )%
Depreciation and amortization
expense                                  (988 )       (891 )         (97 )  (10.9 )%
General and administrative
expense(2)                            (13,007 )    (11,722 )      (1,285 )  (11.0 )%
Unrealized gain (loss) on
investments in trading
securities                                195       (1,096 )       1,291    117.8 %
Unrealized gain on UBS put right
related to auction rate
securities                                239            -           239        -
Equity in losses of Affiliates
Insurance Company                        (109 )          -          (109 )      -
Gain on early extinguishment of
debt                                    6,106            -         6,106        -
Interest, dividend and other
income                                    763        1,207          (444 )  (36.8 )%
Interest and other expense             (1,045 )     (1,273 )         228     17.9 %
Provision for income taxes               (993 )       (444 )        (549 ) (123.6 )%
Corporate and Other income
(loss) from continuing
operations                         $   (8,842 ) $  (13,285 ) $     4,443     33.4 %

(2) General and administrative expenses are not attributable to a specific segment and include items such as corporate payroll and benefits and third party service expenses.

Consolidated:



                                              Three months ended June 30,
(dollars in thousands)                2009         2008       $ Change     % Change
Summary of revenue:
Senior living revenue              $  253,169   $  227,752   $   25,417     11.2 %
Rehabilitation hospital revenue        25,673       24,421        1,252      5.1 %
Corporate and other                    18,285       18,281            4      0.0 %
Total revenue                      $  297,127   $  270,454   $   26,673      9.9 %

Summary of income from
continuing operations:
Senior living communities          $   17,819   $   18,776   $     (957 )   (5.1 )%
Rehabilitation hospitals                   70       (1,184 )      1,254    105.9 %
Corporate and other                    (8,842 )    (13,285 )      4,443     33.4 %
Income from continuing
operations                         $    9,047   $    4,307   $    4,740    110.1 %

Three Months Ended June 30, 2009, Compared to Three Months Ended June 30, 2008

Senior living communities:

The 11.2% increase in senior living revenue for the three months ended June 30, 2009 was due primarily to revenues from the 28 communities we began to operate after April 1, 2008 plus increased per diem charges, partially offset by a decrease in occupancy. The 2.3% increase in senior living revenue at the communities that we have operated continuously since April 1, 2008, or our comparable communities, was due primarily to increased per diem charges, partially offset by a decrease in occupancy.

Our 16.8% increase in senior living wages and benefits costs for the three months ended June 30, 2009 was primarily due to wages and benefits from the communities we began to operate after April 1, 2008 and wage increases. The 2.9% 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 communities we began to operate after April 1, 2008. The senior living community expenses for our comparable communities have increased by 3.1%, due primarily to increases in wages and benefits. The 14.3% rent expense increase was due to the 18 communities that we began to lease after April 1, 2008 and our payment of additional rent for senior living community capital improvements purchased by Senior Housing since April 1, 2008.

The 33.7% increase in depreciation and amortization expense for the three months ended June 30, 2009 was primarily attributable to our acquisition of ten communities after April 1, 2008 and our purchase of furniture and fixtures for our owned communities.

Rehabilitation hospitals:

The 5.1% increase in rehabilitation hospital revenues for the three months ended June 30, 2009 was primarily due to higher revenue from Medicare's low income reimbursement program, increases in third party insurance provider rates, and our improved management of patient lengths of stay partially offset by a decrease in occupancy and lower Medicare rate payments.

The 0.6% increase in rehabilitation hospital expenses for the three months ended June 30, 2009 was primarily due to increases in labor and benefit expenses.

The 5.9% increase in rent expense for the three months ended June 30, 2009 was due to our payment of additional rent for rehabilitation hospital capital improvements purchased by Senior Housing after April 1, 2008.

The 94.8% decrease in depreciation and amortization expense for the three months ended June 30, 2009 was primarily attributable to our write off of long lived assets in the fourth quarter of 2008, partially offset by our purchase of computers and related information technology equipment.

Corporate and other:

Institutional pharmacy revenues were flat for the three months ended June 30, 2009 as compared to 2008, primarily due to the positive impact of adding new customers offset by lower Medicare Part A patient population and decreased revenues per prescription.

The 5.4% increase in institutional pharmacy expenses for the three months ended June 30, 2009 was primarily due to increases in labor and benefit expenses, adding new customers from our senior living and third party senior living communities and additional expenses related to the opening of a new business office and one satellite pharmacy located in Nebraska.

The 11.0% increase in general and administrative expenses for the three months ended June 30, 2009 was primarily the result of the costs associated with the 28 communities we began to operate after April 1, 2008.

The 10.9% increase in depreciation and amortization expense for the three months ended June 30, 2009 was primarily attributable to our purchase of furniture and fixtures and computers and related information technology equipment for our pharmacies and corporate and regional offices.

Our interest, dividend and other income decreased by $444,000, or 36.8%, for the three months ended June 30, 2009 primarily as a result of lower income yields realized on our investments, including lower interest and dividend income.

Our interest and other expense decreased by $228,000, or 17.9%, primarily as a result of our purchase and retirement of $59.3 million of our outstanding Notes during the six months ended June 30, 2009.

During the three months ended June 30, 2009, we recognized an unrealized gain of $195,000 on investments in trading securities comprised of ARS and an unrealized gain of $239,000 on the value of our UBS put right.

During the three months ended June 30, 2009, we retired $12.8 million par value of our outstanding Notes that we had purchased for $6.3 million, plus accrued interest. As a result of these purchases we recorded a gain on extinguishment of debt of $6.1 million, net of related unamortized costs, during the second quarter of 2009.

For the three months ended June 30, 2009, we recognized tax expenses of $993,000, which includes $158,000 of alternative minimum tax, tax expense of $673,000 for state taxes on operating income and state tax expense of $107,000 attributable to the gain on extinguishment of debt, each payable without regard to our tax loss carry forwards. Tax expense also includes $55,000 related to a non-cash deferred liability arising from the amortization of goodwill for tax purposes but not for book purposes.

Key Statistical Data (for the six months ended June 30, 2009 and 2008):

The following tables present a summary of our operations for the six months ended June 30, 2009 and 2008:

Senior living communities:

                                                                  Six months ended June 30,
(dollars in thousands, except average daily rate)      2009          2008         $ Change      % Change
Senior living revenue                               $   504,590   $   443,868   $     60,722     13.7 %
Senior living wages and benefits                       (257,526 )    (219,828 )      (37,698 )  (17.1 )%
Other senior living operating expenses                 (121,718 )    (111,637 )      (10,081 )   (9.0 )%
Rent expense                                            (82,972 )     (69,346 )      (13,626 )  (19.6 )%
Depreciation and amortization expense                    (6,419 )      (4,876 )       (1,543 )  (31.6 )%
Interest and other expense                                 (403 )        (633 )          230     36.3 %
Interest, dividend and other income                         293         1,044           (751 )  (71.9 )%
Senior living income from continuing operations     $    35,845   $    38,592   $     (2,747 )   (7.1 )%

No. of communities (end of period)                          207           179             28     15.6 %
No. of living units (end of period)                      22,027        19,579          2,448     12.5 %
Occupancy %                                                86.3 %        89.2 %          n/a     (2.9 )%
Average daily rate                                  $    146.33        143.19   $       3.14      2.2 %
Percent of senior living revenue from Medicare             14.8 %        15.6 %          n/a     (0.8 )%
Percent of senior living revenue from Medicaid             16.2 %        17.2 %          n/a     (1.0 )%
Percent of senior living revenue from private and
other sources                                              69.0 %        67.2 %          n/a      1.8 %

Comparable communities (senior living communities that we have operated continuously since January 1, 2008):

                                                                     Six months ended June 30,
(dollars in thousands, except average daily rates)       2009           2008         $ Change       % Change
Senior living revenue                                $    434,782   $    426,742   $       8,040      1.9 %
Senior living community expenses                         (329,952 )     (319,373 )       (10,579 )   (3.3 )%
No. of communities (end of period)                            165            165               -      0.0 %
No. of living units (end of period)                        18,419         18,404              15      0.1 %
Occupancy %                                                  87.2 %         89.3 %           n/a     (2.1 )%
Average daily rate                                   $     149.52         142.69   $        6.83      4.8 %
Percent of senior living revenue from Medicare               16.7 %         16.0 %           n/a      0.7 %
Percent of senior living revenue from Medicaid               18.3 %         17.8 %           n/a      0.5 %
Percent of senior living revenue from private and
other sources                                                65.0 %         66.2 %           n/a     (1.2 )%

Rehabilitation hospitals:

                                               Six months ended June 30,
(dollars in thousands)                2009         2008       $ Change      % Change
Rehabilitation hospital revenues   $   50,367   $   49,165   $     1,202      2.4 %
Rehabilitation hospital expenses      (45,648 )    (45,207 )        (441 )   (1.0 )%
Rent expense                           (5,624 )     (5,331 )        (293 )   (5.5 )%
Depreciation and amortization
expense                                   (53 )       (617 )         564     91.4 %
Rehabilitation hospital loss
from continuing operations         $     (958 ) $   (1,990 ) $     1,032     51.9 %

Corporate and Other:(1)

                                               Six months ended June 30,
(dollars in thousands)                2009         2008       $ Change      % Change
Institutional pharmacy revenue     $   36,550   $   35,487   $     1,063      3.0 %
Institutional pharmacy expenses       (36,661 )    (33,550 )      (3,111 )   (9.3 )%
Depreciation and amortization
expense                                (1,972 )     (1,778 )        (194 )  (10.9 )%
General and administrative(2)         (25,449 )    (22,855 )      (2,594 )  (11.3 )%
Unrealized gain on investments
in trading securities                   3,711       (4,366 )       8,077    185.0 %
Unrealized loss on UBS put right
related to auction rate
securities                             (3,287 )          -        (3,287 )      -
Equity in losses of Affiliates
Insurance Company                        (109 )          -          (109 )      -
Impairment on investments in
available for sale securities          (2,947 )          -        (2,947 )      -
Gain on early extinguishment of
debt                                   31,231            -        31,231        -
Interest, dividend and other
income                                  1,622        2,752        (1,130 )  (41.1 )%
Interest and other expense             (2,023 )     (2,561 )         538     21.0 %
Provision for income taxes             (1,509 )     (1,010 )        (499 )   49.4 %
Corporate and Other loss from
continuing operations              $     (843 ) $  (27,881 ) $    27,038     97.0 %

(2) General and administrative expenses are not attributable to a specific segment and include items such as corporate payroll and benefits and third party service expenses.

Consolidated:



                                               Six months ended June 30,
(dollars in thousands)                2009         2008       $ Change      % Change
Summary of revenue:
Senior living revenue              $  504,590   $  443,868   $    60,722     13.7 %
Rehabilitation hospital revenue        50,367       49,165         1,202      2.4 %
Corporate and Other                    36,550       35,487         1,063      3.0 %
Total revenue                      $  591,507   $  528,520   $    62,987     11.9 %

Summary of income from
continuing operations:
Senior living communities          $   35,845   $   38,592   $    (2,747 )   (7.1 )%
Rehabilitation hospitals                 (958 )     (1,990 )       1,032     51.9 %
Corporate and Other                      (843 )    (27,881 )      27,038     97.0 %
Income from continuing
operations                         $   34,044   $    8,721   $    25,323    290.4 %

Six Months Ended June 30, 2009, Compared To Six Months Ended June 30, 2008

Senior living communities:

The 13.7% increase in senior living revenue for the six months ended June 30, 2009 was due primarily to revenues from the 42 communities we began to operate after January 1, 2008 and increased per diem charges, partially offset by a decrease in occupancy. The 1.9% increase in senior living revenue at the communities that we have operated continuously after January 1, 2008, or our comparable communities, was due primarily to increased per diem charges, partially offset by a decrease in occupancy.

Our 17.1% increase in senior living wages and benefits costs for the six months ended June 30, 2009 was primarily due to wages and benefits at the communities we began to operate after January 1, 2008 and wage increases. The 9.0% 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 communities we began to operate after January 1, 2008 and increased charges from various service providers. The senior living community expenses at our comparable communities have increased by 3.3%, due primarily to increases in wages and benefits. The 19.6% rent expense increase was due to the addition of 32 leased communities that we began to operate after January 1, 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, 2008.

The 31.6% increase in depreciation and amortization expense for the six months ended June 30, 2009 was primarily attributable to our acquisition of ten communities after January 1, 2008 and our purchase of furniture and fixtures for our owned communities.

Interest and other expense decreased by 36.3%, for the six months ended June 30, 2009, primarily due to our September 2008 prepayment of two HUD insured mortgages secured by one of our communities.

Our interest, dividend and other income decreased by $751,000, or 71.9%, for the six months ended June 30, 2009, compared to the six months ended June 30, 2008, primarily as a result of recognizing an $840,000 gain during the first quarter of 2008 related to a 2003 sale of a property that was previously deferred until the buyer paid in full our note receivable offset by lower yields on our investments.

Rehabilitation hospitals:

The 2.4% increase in rehabilitation hospital revenues for the six months ended June 30, 2009 was primarily due to higher revenue from Medicare's low income reimbursement program, increases in third party insurance provider rates, and our improved management of patient lengths of stay partially offset by a decrease in occupancy and lower Medicare rate payments.

The 1.0% increase in rehabilitation hospital expenses was primarily due to increases in labor and benefit expenses.

The 5.5% increase in rent expense for the six months ended June 30, 2009 was due to our payment of additional rent for rehabilitation hospital capital improvements purchased by Senior Housing since April 1, 2008.

The 91.4% decrease in depreciation and amortization expense for the six months ended June 30, 2009 was primarily attributable to our write off of long lived assets in the fourth quarter of 2008, partially offset by our purchase of computers and information technology equipment.

Corporate and other:

The 3.0% increase in institutional pharmacy revenues for the six months ended June 30, 2009 was primarily due to the positive impact of adding new customers partially offset lower Medicare Part A patient population and decreased revenues per prescription.

The 9.3% increase in institutional pharmacy expenses for the six months ended June 30, 2009 was primarily due to increases in labor and benefit expenses, adding new customers from our senior living and third party senior living communities and additional expenses related to the opening of a new business office and one satellite pharmacy located in Nebraska.

The 11.3% increase in general and administrative expenses for the six months ended June 30, 2009 was primarily the result of the costs associated with the 42 communities we began to operate after January 1, 2008.

The 10.9% increase in depreciation and amortization expense for the six months ended June 30, 2009 was primarily attributable to our purchase of furniture and fixtures and computers and related information technology equipment for our pharmacies and corporate and regional offices.

Our interest, dividend and other income decreased by $1.1 million, or 41.1%, for the six months ended June 30, 2009, compared to the six months ended June 30, 2008, primarily as a result of lower yields on our investments, including lower rates of interest and dividend income.

Our interest and other expense decreased by $538,000, primarily as a result of our purchase and retirement of $59.3 million of our outstanding Notes after December 31, 2008.

During the six months ended June 30, 2009, we recognized:

† an unrealized gain of $3.7 million on investments in trading securities principally related to our holdings of ARS;

†          an unrealized loss of $3.3 million on the value of our UBS put right;
and

†          an "other than temporary" loss of $2.9 million on investments in

During the six months ended June 30, 2009, we retired $59.3 million par value of our outstanding Notes that we purchased for $26.3 million, plus accrued interest. As a result of these purchases we recorded a gain on extinguishment of debt of $31.2 million.

For the six months ended June 30, 2009, we incurred tax expense of $1.5 million, which includes $158,000 of alternative minimum taxes, tax expense of $847,000 for state taxes on operating income and state tax expense of $437,000 attributable to the gain on extinguishment of debt each payable without regard to our tax loss carry forwards. Tax expense also includes $67,000 related to a non-cash deferred liability arising from the amortization of goodwill for tax purposes but not for book purposes. . . .