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 13 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 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, dividend and other income, interest and other expenses and certain corporate expenses.

Key Statistical Data For the Three Months Ended September 30, 2009 and 2008:

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

Senior living communities:

                                                 Three months ended September 30,
(dollars in thousands, except average
daily rate)                                 2009         2008       $ Change     % Change
Senior living revenue                     $ 253,699    $ 239,867    $  13,832         5.8 %
Senior living wages and benefits           (130,266 )   (119,792 )    (10,474 )      (8.7 )%
Other senior living operating expenses      (62,903 )    (60,820 )     (2,083 )      (3.4 )%
Rent expense                                (41,958 )    (39,028 )     (2,930 )      (7.5 )%
Depreciation and amortization expense        (2,971 )     (2,476 )       (495 )     (20.0 )%
Interest and other expense                     (200 )       (359 )        159        44.3 %
Interest, dividend and other income               9          106          (97 )     (91.5 )%
Senior living income from continuing
operations                                $  15,410    $  17,498    $  (2,088 )     (11.9 )%

No. of communities (end of period)              206          198            8         4.0 %
No. of living units (end of period)          21,953       21,031          922         4.4 %
Occupancy %                                    86.1 %       88.3 %        n/a        (2.2 )%
Average daily rate                        $  145.83    $  142.74    $    3.09         2.2 %
Percent of senior living revenue from
Medicare                                       14.2 %       13.7 %        n/a         0.5 %
Percent of senior living revenue from
Medicaid                                       16.5 %       16.5 %        n/a         0.0 %
Percent of senior living revenue from
private and other sources                      69.3 %       69.8 %        n/a        (0.5 )%

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

                                                  Three months ended September 30,
(dollars in thousands, except average
daily rates)                                2009         2008        $ Change     % Change
Senior living revenue                     $ 242,438    $ 238,004    $    4,434         1.9 %
Senior living wages and benefits           (124,740 )   (119,062 )      (5,678 )      (4.8 )%
Other senior living operating expenses      (59,962 )    (60,442 )         480         0.8 %
No. of communities (end of period)              188          188           n/a           -
No. of living units (end of period)          20,510       20,510           n/a           -
Occupancy %                                    86.6 %       88.2 %         n/a        (1.6 )%
Average daily rate                        $  148.33    $  143.24    $     5.09         3.6 %
Percent of senior living revenue from
Medicare                                       14.6 %       13.8 %         n/a         0.8 %
Percent of senior living revenue from
Medicaid                                       17.1 %       16.7 %         n/a         0.4 %
Percent of senior living revenue from
private and other sources                      68.3 %       69.5 %         n/a        (1.2 )%

Rehabilitation hospitals:

                                                 Three months ended September 30,
(dollars in thousands)                      2009         2008       $ Change     % Change
Rehabilitation hospital revenues          $  24,641    $ 23,938    $      703         2.9 %
Rehabilitation hospital expenses            (22,363 )   (22,332 )         (31 )      (0.1 )%
Rent expense                                 (2,562 )    (2,690 )         128         4.8 %
Depreciation and amortization expense           (22 )      (314 )         292        93.0 %
Rehabilitation hospital income (loss)
from continuing operations                $    (306 )  $ (1,398 )  $    1,092        78.1 %

Corporate and other:(1)

                                                  Three months ended September 30,
(dollars in thousands)                      2009         2008        $ Change     % Change
Institutional pharmacy revenue            $  18,868    $  16,814    $    2,054        12.2 %
Institutional pharmacy expenses             (18,296 )    (17,368 )        (928 )      (5.3 )%
Depreciation and amortization expense        (1,010 )       (894 )        (116 )     (13.0 )%
General and administrative expense(2)       (13,465 )    (11,948 )      (1,517 )     (12.7 )%
Unrealized loss on investments in
trading securities                             (238 )     (1,733 )       1,495        86.3 %
Unrealized gain on UBS put right
related to auction rate securities              455            -           455           -
Equity in losses of Affiliates
Insurance Company                               (23 )          -           (23 )         -
Gain on early extinguishment of debt          3,031          743         2,288       307.9 %
Gain on sale of available for sale
securities                                      795            -           795           -
Impairment on investments in available
for sale securities                               -       (3,019 )       3,019       100.0 %
Interest, dividend and other income             470          965          (495 )     (51.3 )%
Interest and other expense                     (764 )     (1,337 )         573        42.9 %
(Provision) benefit for income taxes           (565 )         90          (655 )     727.8 %
Corporate and Other income (loss) from
continuing operations                     $ (10,742 )  $ (17,687 )  $    6,945        39.3 %

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

Consolidated:



                                                 Three months ended September 30,
(dollars in thousands)                      2009         2008       $ Change     % Change
Summary of revenue:
Senior living revenue                     $ 253,699    $ 239,867    $  13,832         5.8 %
Rehabilitation hospital revenue              24,641       23,938          703         2.9 %
Corporate and other                          18,868       16,814        2,054        12.2 %
Total revenue                             $ 297,208    $ 280,619    $  16,589         5.9 %

Summary of income from continuing
operations:
Senior living communities                 $  15,410    $  17,498    $  (2,088 )     (11.9 )%
Rehabilitation hospitals                       (306 )     (1,398 )      1,092        78.1 %
Corporate and other                         (10,742 )    (17,687 )      6,945        39.3 %
Income from continuing operations         $   4,362    $  (1,587 )  $   5,949       374.9 %

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

Senior living communities:

The 5.8% increase in senior living revenue for the three months ended September 30, 2009 was due primarily to revenues from the 18 communities we began to operate after July 1, 2008 plus increased per diem charges, offset by a decrease in occupancy. The 1.9% increase in senior living revenue at the communities that we have operated continuously since July 1, 2008, or our comparable communities, was due primarily to increased per diem charges, partially offset by a decrease in occupancy.

Our 8.7% increase in senior living wages and benefits costs for the three months ended September 30, 2009 was primarily due to wages and benefits from the communities we began to operate after July 1, 2008 and higher than historical workers compensation and health insurance costs at our comparable communities. The 3.4% increase in other senior living operating expenses, which include utilities, housekeeping, dietary, maintenance, insurance and community level administrative costs, primarily resulted from expenses at the communities we began to operate on or after July 1, 2008. The senior living wages and benefits costs for our comparable communities increased by 4.8% as moderate wage increases were outweighed by higher than historical workers compensation and health insurance costs. Other senior living operating costs at our comparable communities decreased by 0.8% due primarily to decreases in food and pharmacy expenses, offset by higher therapy costs. The 7.5% rent expense increase was primarily due to the 11 communities that we began to lease after July 1, 2008 and our payment of additional rent for senior living community capital improvements purchased by Senior Housing since July 1, 2008, offset by a reduction in rent in connection with the Lease Realignment Agreement.

The 20.0% increase in depreciation and amortization expense for the three months ended September 30, 2009 was primarily attributable to higher depreciation associated with our acquisition of seven communities and other capital expenditures (net of sales of capital improvements to Senior Housing) after July 1, 2008, including our purchase of furniture and fixtures for our owned communities, offset by the sale of certain personal property to Senior Housing pursuant to the Lease Realignment Agreement.

Interest and other expense decreased by 44.3%, for the three months ended September 30, 2009 primarily due to our September 2008 prepayment of two HUD insured mortgages secured by one of our communities.

Rehabilitation hospitals:

The 2.9% increase in rehabilitation hospital revenues for the three months ended September 30, 2009 was primarily due to increased third party insurance provider rates, improved management of patient lengths of stay and increased Medicare reimbursement from higher acuity patients, offset by a decrease in occupancy.

The 0.1% increase in rehabilitation hospital expenses for the three months ended September 30, 2009 was primarily due to increases in labor and benefit expenses due to wage increases and increased insurance costs, offset by staffing reductions.

The 4.8% increase in rent expense for the three months ended September 30, 2009 was due to our payment of additional rent for rehabilitation hospital capital improvements purchased by Senior Housing after July 1, 2008, offset by rent reductions pursuant to the Lease Realignment Agreement.

The 93.0% decrease in depreciation and amortization expense for the three months ended September 30, 2009 was primarily attributable to our write off of long lived assets in the fourth quarter of 2008, offset by depreciation associated with the purchase of computers and related software (net of sales of capital improvements to Senior Housing).

Corporate and other:

The 12.2% increase in institutional pharmacy revenues for the three months ended September 30, 2009 was primarily due to adding new customers, partially offset by decreased revenues per prescription due to a higher percentage of sales of generic drugs.

The 5.3% increase in institutional pharmacy expenses for the three months ended September 30, 2009 was primarily due to increases in cost of sales, due to higher pharmacy sales and labor and benefit expenses associated with servicing additional customers.

The 12.7% increase in general and administrative expenses for the three months ended September 30, 2009 was primarily the result of increased regional support costs and expenses associated with communities we began to operate in 2008.

The 13.0% increase in depreciation and amortization expense for the three months ended September 30, 2009 was primarily attributable to our purchase of furniture and fixtures, computers and related software for our pharmacies and at corporate and regional offices.

Our interest, dividend and other income decreased by $495,000, or 51.3%, for the three months ended September 30, 2009 primarily as a result of lower yields realized on our investments.

Our interest and other expense decreased by $573,000, or 42.9%, primarily as a result of our purchase and retirement of $74.9 million of our outstanding Notes during the nine months ended September 30, 2009.

During the three months ended September 30, 2009, we recognized:

† an unrealized loss of $238,000 on investments in trading securities principally related to our holdings of ARS;

† an unrealized gain of $455,000 on the value of our UBS Put Right; and

† a gain of $795,000 on sale of available for sale securities held by our captive insurance companies.

During the three months ended September 30, 2008, we recognized a loss due to an "other than temporary impairment" of $3.0 million on investments in securities held by our captive insurance companies.

During the three months ended September 30, 2009, we retired $15.6 million par value of our outstanding Notes that we had purchased for $12.2 million, plus accrued interest. As a result of these purchases we recorded a gain on extinguishment of debt of $3.0 million, net of related unamortized costs, during the third quarter of 2009.

For the three months ended September 30, 2009, we recognized tax expense of $565,000, which includes tax expense of $466,000 for state taxes on operating income and state tax expense of $73,000 attributable to the gain on extinguishment of debt, each payable without regard to our tax loss carry forwards. Tax expense also includes $26,000 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 Nine Months Ended September 30, 2009 and 2008:

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

Senior living communities:

                                                  Nine months ended September 30,
(dollars in thousands, except average
daily rate)                                 2009         2008       $ Change     % Change
Senior living revenue                     $ 757,305    $ 682,602    $  74,703        10.9 %
Senior living wages and benefits           (387,078 )   (338,809 )    (48,269 )     (14.2 )%
Other senior living operating expenses     (184,220 )   (172,108 )    (12,112 )      (7.0 )%
Rent expense                               (124,900 )   (108,359 )    (16,541 )     (15.3 )%
Depreciation and amortization expense        (9,388 )     (7,350 )     (2,038 )     (27.7 )%
Interest and other expense                     (603 )       (993 )        390        39.3 %
Interest, dividend and other income             302        1,152         (850 )     (73.8 )%
Senior living income from continuing
operations                                $  51,418    $  56,135    $  (4,717 )      (8.4 )%

No. of communities (end of period)              206          198            8         4.0 %
No. of living units (end of period)          21,953       21,031          922         4.4 %
Occupancy %                                    86.3 %       89.1 %        n/a        (2.8 )%
Average daily rate                        $  146.44    $  143.05    $    3.39         2.4 %
Percent of senior living revenue from
Medicare                                       14.5 %       14.9 %        n/a        (0.4 )%
Percent of senior living revenue from
Medicaid                                       16.3 %       16.9 %        n/a        (0.6 )%
Percent of senior living revenue from
private and other sources                      69.2 %       68.2 %        n/a         1.0 %

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

                                                  Nine months ended September 30,
(dollars in thousands, except average
daily rates)                                2009         2008       $ Change     % Change
Senior living revenue                     $ 651,857    $ 639,386    $  12,471         2.0 %
Senior living wages and benefits           (337,633 )   (318,074 )    (19,559 )      (6.1 )%
Other senior living operating expenses     (160,100 )   (162,789 )      2,689         1.7 %
No. of communities (end of period)              164          164          n/a           -
No. of living units (end of period)          18,345       18,345          n/a           -
Occupancy %                                    87.2 %       89.3 %        n/a        (2.1 )%
Average daily rate                        $  149.25    $  142.83    $    6.42         4.5 %
Percent of senior living revenue from
Medicare                                       16.4 %       15.7 %        n/a         0.7 %
Percent of senior living revenue from
Medicaid                                       18.4 %       17.9 %        n/a         0.5 %
Percent of senior living revenue from
private and other sources                      65.2 %       66.4 %        n/a        (1.2 )%

Rehabilitation hospitals:

                                                 Nine months ended September 30,
(dollars in thousands)                      2009        2008       $ Change     % Change
Rehabilitation hospital revenues          $ 75,008    $ 73,103    $    1,905         2.6 %
Rehabilitation hospital expenses           (68,011 )   (67,539 )        (472 )      (0.7 )%
Rent expense                                (8,186 )    (8,021 )        (165 )      (2.1 )%
Depreciation and amortization expense          (75 )      (931 )         856        91.9 %
Rehabilitation hospital loss from
continuing operations                     $ (1,264 )  $ (3,388 )  $    2,124        62.7 %

Corporate and other:(1)

                                                  Nine months ended September 30,
(dollars in thousands)                      2009         2008       $ Change     % Change
Institutional pharmacy revenue            $  55,418    $  52,301    $   3,117         6.0 %
Institutional pharmacy expenses             (54,957 )    (50,918 )     (4,039 )      (7.9 )%
Depreciation and amortization expense        (2,982 )     (2,673 )       (309 )     (11.6 )%
General and administrative(2)               (38,914 )    (34,803 )     (4,111 )     (11.8 )%
Unrealized gain on investments in
trading securities                            3,473       (6,099 )      9,572       156.9 %
Unrealized loss on UBS put right
related to auction rate securities           (2,832 )          -       (2,832 )         -
Equity in losses of Affiliates
Insurance Company                              (132 )          -         (132 )         -
Gain on early extinguishment of debt         34,262          743       33,519     4,511.3 %
Gain on sale of available for sale
securities                                      795            -          795           -
Impairment on investments in available
for sale securities                          (2,947 )     (3,019 )         72         2.4 %
Interest, dividend and other income           2,092        3,715       (1,623 )     (43.7 )%
Interest and other expense                   (2,787 )     (3,897 )      1,110        28.5 %
Provision for income taxes                   (2,074 )       (920 )     (1,154 )    (125.4 )%
Corporate and Other loss from
continuing operations                     $ (11,585 )  $ (45,570 )  $  33,985        74.6 %

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

Consolidated:



                                                  Nine months ended September 30,
(dollars in thousands)                      2009         2008       $ Change     % Change
Summary of revenue:
Senior living revenue                     $ 757,305    $ 682,602    $  74,703        10.9 %
Rehabilitation hospital revenue              75,008       73,103        1,905         2.6 %
Corporate and Other                          55,418       52,301        3,117         6.0 %
Total revenue                             $ 887,731    $ 808,006    $  79,725         9.9 %

Summary of income from continuing
operations:
Senior living communities                 $  51,418    $  56,135    $  (4,717 )      (8.4 )%
Rehabilitation hospitals                     (1,264 )     (3,388 )      2,124        62.7 %
Corporate and Other                         (11,585 )    (45,570 )     33,985        74.6 %
Income from continuing operations         $  38,569    $   7,177    $  31,392       437.4 %

Nine Months Ended September 30, 2009 Compared To Nine Months Ended September 30, 2008

Senior living communities:

The 10.9% increase in senior living revenue for the nine months ended September 30, 2009 was due primarily to revenues from the 42 communities we began to operate after January 1, 2008 and increased per diem charges offset by a decrease in occupancy. The 2.0% 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, offset by a decrease in occupancy.

Our 14.2% increase in senior living wages and benefits costs for the nine months ended September 30, 2009 was primarily due to wages and benefits at the communities we began to operate after January 1, 2008 and higher than historical workers compensation and health insurance costs at our comparable communities. The 7.0% 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 wages and benefits costs at our comparable communities increased by 6.1% as moderate wage increases were outweighed by higher than historical workers compensation and health insurance costs. Other operating expenses at our comparable communities decreased by 1.7% due primarily to decreases in food, pharmacy and purchase service expense, offset by higher therapy costs. The 15.3% rent expense increase was primarily due to the addition of 32 leased communities that we began to operate after January 1, 2008 and our payment of additional rent for senior living community capital improvements purchased by Senior Housing since January 1, 2008.

The 27.7% increase in depreciation and amortization expense for the nine months ended September 30, 2009 was primarily attributable to higher depreciation costs associated with our acquisition of ten communities and other capital expenditures (net of sales of capital improvements to Senior Housing) after January 1, 2008, including our purchase of furniture and fixtures for our owned communities, offset by the sale of certain personal property to Senior Housing pursuant to the Lease Realignment Agreement.

Interest and other expense decreased by 39.3%, for the nine months ended September 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 $850,000, or 73.8%, for the nine months ended September 30, 2009, compared to the nine months ended September 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, offset by lower yields on our investments.

Rehabilitation hospitals:

The 2.6% increase in rehabilitation hospital revenues for the nine months ended September 30, 2009 was primarily due to higher revenue from Medicare's low income reimbursement program, increased third party insurance provider rates, improved management of patient lengths of stay and increased Medicare reimbursement from higher acuity patients, offset by a decrease in occupancy.

The 0.7% increase in rehabilitation hospital expenses for the nine months ended September 30, 2009 was primarily due to increases in labor and benefit expenses due to wage increases and increased insurance costs, offset by staffing reductions.

The 2.1% increase in rent expense for the nine months ended September 30, 2009 was due to our payment of additional rent for rehabilitation hospital capital improvements purchased by Senior Housing since April 1, 2008, offset by rent reductions pursuant to the Lease Realignment Agreement.

The 91.9% decrease in depreciation and amortization expense for the nine months ended September 30, 2009 was primarily attributable to our write off of long lived assets in the fourth quarter of 2008, offset by depreciation associated with the purchase of computers and related software (net of sales of capital improvements to Senior Housing).

Corporate and other:

The 6.0% increase in institutional pharmacy revenues for the nine months ended . . .