UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


______________________





FORM
10-Q


(Mark
      One)x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT 1934





For the
quarterly period ended June 30, 2008





o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934





Commission
file number   1-14012





EMERITUS
CORPORATION


(Exact
name of registrant as specified in its charter)





WASHINGTON
            91-1605464(State
      or other jurisdiction
            (I.R.S
      Employerof
      incorporation or organization)
            Identification
      No.)





3131
Elliott Avenue, Suite 500


Seattle,
WA 98121


(Address
of principal executive offices)





(206)
298-2909


(Registrant’s
telephone number, including area code)


____________________________





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YesþNoo





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):





Large
accelerated fileroAccelerated
filerþNon-accelerated
fileroSmaller
reporting company o





Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YesoNoþ





As of
July 31, 2008, there were 39,076,593 shares of the Registrant’s Common Stock,
par value $0.0001, outstanding.








EMERITUS
      CORPORATIONTable of ContentsPart I.  Financial
  InformationPage No.Item 1.  Financial Statements
      (unaudited):
            1Condensed Consolidated Balance Sheets as of June 30, 2008, and
      December 31, 2007
            2Condensed Consolidated Statements of Operations for the three
      months and six months ended June 30, 2008 and 2007
            3Condensed Consolidated Statements of Cash Flows for the
      six months ended June 30, 2008 and 2007
            4Notes to Unaudited Condensed Consolidated Financial
      Statements
            5Item 2.
            Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
            18Item 3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            38Item 4.
            Controls and Procedures
            38Part II.  Other
InformationNote:
            Items
      2, 3, and 5 of Part II are omitted because they are not
      applicable.Item 1.
            Legal Proceedings
            39Item 1A.
            Risk Factors
            39Item 4.
            Submission of Matters to a Vote of Security
      Holders
            39Item 6.
            Exhibits
            39Signature
            41Index to Exhibits
            42










Table of Contents




PART I. Financial Information





Item 1.  Financial Statements (unaudited)








[The rest
of this page is intentionally left blank]





1


Table of Contents





EMERITUS
      CORPORATIONCONDENSED
      CONSOLIDATED BALANCE SHEETS(In
      thousands, except share data)ASSETSJune
      30,
            
            
            December
      31,2008
            
            
            2007(unaudited)Current
      Assets:Cash
      and cash equivalents
            
            $
            37,205
            
            
            $
            67,710Restricted
      cash in escrow
            
            
            10,782
            
            
            
            -Short-term
      investments
            
            
            2,231
            
            
            
            2,453Trade
      accounts receivable, net of allowance of $1,010 and $995
            
            
            4,970
            
            
            
            6,383Other
      receivables
            
            
            7,122
            
            
            
            11,510Tax,
      insurance, and maintenance escrows
            
            
            21,544
            
            
            
            18,566Prepaid
      workers' compensation
            
            
            19,498
            
            
            
            18,224Other
      prepaid expenses
            
            
            9,099
            
            
            
            10,744Property
      held for sale
            
            
            15,123
            
            
            
            –Total
      current assets
            
            
            127,574
            
            
            
            135,590Long-term
      investments
            
            
            6,928
            
            
            
            4,749Property
      and equipment, net of accumulated depreciation of $124,247 and
      $179,620
            
            
            1,633,857
            
            
            
            1,418,152Construction
      in progress
            
            
            17,978
            
            
            
            12,694Restricted
      deposits
            
            
            18,206
            
            
            
            19,808Lease
      and contract acquisition costs, net of amortization of $56,058 and
      $32,463
            
            
            30,707
            
            
            
            67,227Goodwill
            
            
            71,642
            
            
            
            70,659Other
      intangible assets, net of amortization of $9,863 and
$3,944
            
            
            136,855
            
            
            
            142,774Other
      assets, net
            
            
            24,231
            
            
            
            13,827Total
      assets
            
            $
            2,067,978
            
            
            $
            1,885,480LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      Liabilities:Current
      portion of long-term debt
            
            $
            24,270
            
            
            $
            22,613Current
      portion of capital lease and financing obligations
            
            
            10,043
            
            
            
            23,774Current
      portion of convertible debentures
            
            
            10,455
            
            
            
            10,455Trade
      accounts payable
            
            
            6,222
            
            
            
            7,844Accrued
      employee compensation and benefits
            
            
            41,200
            
            
            
            35,815Accrued
      interest
            
            
            5,751
            
            
            
            4,527Accrued
      real estate taxes
            
            
            8,843
            
            
            
            7,715Accrued
      professional and general liability
            
            
            14,790
            
            
            
            13,545Accrued
      income taxes
            
            
            4,480
            
            
            
            5,377Other
      accrued expenses
            
            
            11,698
            
            
            
            10,610Deferred
      revenue
            
            
            12,702
            
            
            
            10,446Unearned
      rental income
            
            
            14,526
            
            
            
            14,302Total
      current liabilities
            
            
            164,980
            
            
            
            167,023Long-term
      debt, less current portion
            
            
            1,231,520
            
            
            
            711,664Capital
      lease and financing obligations, less current portion
            
            
            224,269
            
            
            
            497,039Deferred
      gain on sale of communities
            
            
            5,072
            
            
            
            21,259Deferred
      rent
            
            
            10,461
            
            
            
            6,231Other
      long-term liabilities
            
            
            20,974
            
            
            
            23,757Total
      liabilities
            
            
            1,657,276
            
            
            
            1,426,973Commitments
      and contingenciesShareholders'
      Equity (Deficit):Preferred
      stock, $.0001 par value. Authorized 20,000,000 shares, none
      issuedCommon
      stock, $.0001 par value. Authorized 100,000,000 shares; issued and
      outstanding39,074,693
      and 39,030,597 shares at June 30, 2008, and December 31, 2007,
      respectively
            
            
            4
            
            
            
            4Additional
      paid-in capital
            
            
            717,593
            
            
            
            714,258Accumulated
      other comprehensive income
            
            
            62
            
            
            
            –Accumulated
      deficit
            
            
            (306,957
            )
            
            
            (255,755
            )Total
      shareholders' equity
            
            
            410,702
            
            
            
            458,507Total
      liabilities and shareholders' equity
            
            $
            2,067,978
            
            
            $
            1,885,480





See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements








2


Table of Contents








EMERITUS
      CORPORATIONCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)(In
      thousands, except per share data)Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenues:Community
      revenue
            
            $
            185,705
            
            
            $
            107,137
            
            
            $
            370,442
            
            
            $
            213,958Management
      fees
            
            
            1,223
            
            
            
            930
            
            
            
            2,382
            
            
            
            1,807Total
      operating revenues
            
            
            186,928
            
            
            
            108,067
            
            
            
            372,824
            
            
            
            215,765Expenses:Community
      operations (exclusive of depreciation and amortizationand
      facility lease expense shown separately below)
            
            
            119,526
            
            
            
            67,094
            
            
            
            240,612
            
            
            
            134,972General
      and administrative
            
            
            14,731
            
            
            
            11,221
            
            
            
            29,342
            
            
            
            21,336Depreciation
      and amortization
            
            
            29,451
            
            
            
            14,294
            
            
            
            60,355
            
            
            
            28,624Facility
      lease expense
            
            
            22,313
            
            
            
            7,317
            
            
            
            44,629
            
            
            
            17,450Total
      operating expenses
            
            
            186,021
            
            
            
            99,926
            
            
            
            374,938
            
            
            
            202,382Operating
      income (loss) from continuing operations
            
            
            907
            
            
            
            8,141
            
            
            
            (2,114
            )
            
            
            13,383Other
      income (expense):Interest
      income
            
            
            581
            
            
            
            599
            
            
            
            1,435
            
            
            
            1,182Interest
      expense
            
            
            (22,741
            )
            
            
            (16,801
            )
            
            
            (43,783
            )
            
            
            (30,333
            )Change
      in fair value of interest rate swaps
            
            
            972
            
            
            
            -
            
            
            
            135
            
            
            
            -Equity
      gains (losses) in unconsolidated joint ventures
            
            
            665
            
            
            
            7,065
            
            
            
            (857
            )
            
            
            6,496Other,
      net
            
            
            (580
            )
            
            
            742
            
            
            
            (172
            )
            
            
            28Net
      other expense
            
            
            (21,103
            )
            
            
            (8,395
            )
            
            
            (43,242
            )
            
            
            (22,627
            )Loss
      from continuing operations before income taxes
            
            
            (20,196
            )
            
            
            (254
            )
            
            
            (45,356
            )
            
            
            (9,244
            )Provision
      for income taxes
            
            
            (270
            )
            
            
            (1,044
            )
            
            
            (480
            )
            
            
            (1,320
            )Loss
      from continuing operations
            
            
            (20,466
            )
            
            
            (1,298
            )
            
            
            (45,836
            )
            
            
            (10,564
            )Loss
      from discontinued operations
            
            
            (4,768
            )
            
            
            (291
            )
            
            
            (5,366
            )
            
            
            (760
            )Net
      loss
            
            $
            (25,234
            )
            
            $
            (1,589
            )
            
            $
            (51,202
            )
            
            $
            (11,324
            )Basic
      and diluted loss per common share:Continuing
      operations
            
            $
            (0.53
            )
            
            $
            (0.06
            )
            
            $
            (1.17
            )
            
            $
            (0.57
            )Discontinued
      operations
            
            
            (0.12
            )
            
            
            (0.02
            )
            
            
            (0.14
            )
            
            
            (0.04
            )$
            (0.65
            )
            
            $
            (0.08
            )
            
            $
            (1.31
            )
            
            $
            (0.61
            )Weighted
      average common shares outstanding: - basic and diluted
            
            
            39,059
            
            
            
            18,971
            
            
            
            39,048
            
            
            
            18,674








See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements








3


Table of Contents




EMERITUS CORPORATIONCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)(In
      thousands)Six
      Months Ended June 30,2008
              
              
              2007Cash
      flows from operating activities:Net
      loss
              
              $
              (51,202
              )
              
              $
              (11,324
              )Adjustments
      to reconcile net loss to net cash provided byoperating
      activitiesDepreciation
      and amortization
              
              
              60,355
              
              
              
              29,195Amortization
      of above/below market rents
              
              
              5,048
              
              
              
              -Amortization
      of deferred gain
              
              
              (1,004
              )
              
              
              (1,103
              )Impairment
      of long-lived assets and investments
              
              
              4,277
              
              
              
              -Amortization
      of loan fees
              
              
              1,110
              
              
              
              591Convertible
      debenture cost payable
              
              
              -
              
              
              
              1,329Allowance
      for doubtful receivables
              
              
              801
              
              
              
              565Equity
      investment losses and distributions
              
              
              857
              
              
              
              939Stock
      option compensation
              
              
              2,818
              
              
              
              1,323Change
      in fair value of interest rate swap
              
              
              (135
              )
              
              
              -Other
              
              
              613
              
              
              
              265Changes
      in operating assets and liabilitiesDeferred
      revenue
              
              
              2,256
              
              
              
              85Deferred
      rent
              
              
              4,792
              
              
              
              317Change
      in operating assets and liabilities - other
              
              
              8,676
              
              
              
              1,368Net
      cash provided by operating activities
              
              
              39,262
              
              
              
              23,550Cash
      flows from investing activities:Acquisition
      of property and equipment
              
              
              (564,090
              )
              
              
              (196,104
              )Acquisition
      deposits
              
              
              (2,995
              )
              
              
              -Sale
      of property and equipment
              
              
              6,754
              
              
              
              -Lease
      and contract acquisition costs
              
              
              (686
              )
              
              
              (972
              )Payments
      from affiliates and other managed communities, net
              
              
              175
              
              
              
              629Investment
      in affiliates/other
              
              
              (2,974
              )
              
              
              (359
              )Net
      cash used in investing activities
              
              
              (563,816
              )
              
              
              (196,806
              )Cash
      flows from financing activities:Proceeds
      from sale of stock, net of issuance costs
              
              
              517
              
              
              
              873Decrease
      in restricted deposits
              
              
              1,708
              
              
              
              5,005Debt
      issuance and other financing costs
              
              
              (9,529
              )
              
              
              (2,981
              )Proceeds
      from long-term borrowings and financings
              
              
              661,544
              
              
              
              284,334Repayment
      of long-term borrowings and financings
              
              
              (140,031
              )
              
              
              (91,674
              )Cash
      in escrow for redemption of convertible debentures
              
              
              (10,782
              )
              
              
              -Repayment
      of capital lease and financing obligations
              
              
              (9,378
              )
              
              
              (10,383
              )Tax
      benefit of stock compensation
              
              
              –
              
              
              
              557Net
      cash provided by financing activities
              
              
              494,049
              
              
              
              185,731Net
      increase (decrease) in cash and cash equivalents
              
              
              (30,505
              )
              
              
              12,475Cash
      and cash equivalents at the beginning of the period
              
              
              67,710
              
              
              
              14,049Cash
      and cash equivalents at the end of the period
              
              $
              37,205
              
              
              $
              26,524Supplemental
      disclosure of cash flow information -Cash
      paid during the period for interest
              
              $
              41,570
              
              
              $
              29,453Cash
      paid during the period for income taxes
              
              
              1,405
              
              
              
              36Cash
      received during the period for income tax refunds
              
              
              2,496
              
              
              
              -Non-cash
      financing and investing activities:Adjustments
      related to purchase of leased properties:Capital
      and financing lease buyouts
              
              
              281,925
              
              
              
              20,818Deferred
      gains and losses
              
              
              15,462
              
              
              
              -Lease
      acquisition costs in a lease buyback
              
              
              13,570
              
              
              
              -Deferred
      rent
              
              
              562
              
              
              
              -Capital
      lease and financing obligations
              
              
              4,802
              
              
              
              1,503Unrealized
      gain on investment in marketable equity securities
              
              
              62
              
              
              
              -Conversion
      of convertible debentures
              
              
              -
              
              
              
              16,120Debt
      assumed in acquisitions
              
              
              -
              
              
              
              90,000




See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements






4


Table of Contents





EMERITUS CORPORATION


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


June 30,
2008





1.
            Description
      of Business





Emeritus
Corporation (Emeritus or the Company) is an assisted living and Alzheimer’s and
dementia care service provider that operates residential style communities
located throughout the United States.  These communities provide a
residential housing alternative for senior citizens who need help with the
activities of daily living, with an emphasis on assisted living and personal
care services.  As of June 30, 2008, the Company owned 149 communities
and leased 106 communities.  These 255 communities comprise the
communities included in the consolidated financial statements.





The
Company also provides management services to independent and related-party
owners of assisted living communities.  At June 30, 2008, the Company
managed 34 communities, of which 23 are owned by joint ventures in which the
Company has a financial interest.  Management agreements typically
provide for fees of from 5% to 6% of gross revenues, although a few have fees
based on occupancy that approximate 5% of gross revenues.





Effective
September 1, 2007, Emeritus completed a merger transaction with Summerville
Senior Living, Inc. (Summerville), pursuant to which the Company acquired all of
the outstanding stock of Summerville (see Note 4).  Summerville
operated 81 communities comprising 7,935 units in 13 states, which provided
independent living, assisted living, and Alzheimer’s and dementia-related
services to senior citizens.  Financial results for periods subsequent
to the merger include the combined operations of Emeritus and
Summerville.





Emeritus
has one reportable segment, which is assisted living and related
services.





2.
            Summary
      of Significant Accounting Policies and Use of
  Estimates





The
preparation of condensed consolidated financial statements requires Emeritus to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities.  On an ongoing basis, Emeritus evaluates its
estimates, including those related to resident programs and incentives such as
move-in fees, bad debts, investments, intangible assets, impairment of
long-lived assets, income taxes, restructuring, long-term service contracts,
contingencies, self-insured retention, insurance deductibles, health insurance,
inputs to the Black-Scholes option pricing model, and
litigation.  Emeritus bases its estimates on historical experience and
on various other assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources.  Actual results may differ from these estimates under
different assumptions or conditions.





Emeritus
believes that certain critical accounting policies are most significant to the
judgments and estimates used in the preparation of its condensed consolidated
financial statements.  Revisions in such estimates are charged to
income in the period in which the facts that give rise to the revision become
known.  A detailed discussion of the Company’s significant accounting
policies and use of estimates is contained in the Company’s 2007 Form 10-K filed
with the Securities and Exchange Commission on March 17, 2008.





Effective
September 1, 2007, the Company changed its estimate of the maximum useful life
of buildings from 40 years to 50 years and applied this new policy beginning in
2007 for all acquired properties.  This change in estimate did not
have a material impact on the periods presented herein.





5
 EMERITUS
CORPORATION
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Continued
 June 30,
2008


Table of Contents





Basis
of Presentation





The
unaudited interim financial information furnished herein, in the opinion of the
Company’s management, reflects all adjustments, consisting of only normally
recurring adjustments, which are necessary to state fairly the financial
position, results of operations, and cash flows of Emeritus as of June 30, 2008
and for all periods presented.  The results of operations for the
period ended June 30, 2008, are not necessarily indicative of the operating
results that may be achieved for the full year ended December 31,
2008.  The Company presumes that those reading this interim financial
information have read or have access to its 2007 audited consolidated financial
statements and Management’s Discussion and Analysis of Financial Condition and
Results of Operations that are contained in the Company’s 2007 Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March 17,
2008.  Therefore, the Company has omitted certain footnotes and other
disclosures that are disclosed in the Form 10-K.





Recent
Accounting Pronouncements Not Yet Adopted





In March
2008, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133.  SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, establishes, among other things, the
disclosure requirements for derivative instruments and for hedging
activities.  SFAS No. 161 amends and expands the disclosure
requirements of SFAS No. 133 with the intent to provide users of financial
statements with an enhanced understanding of:  (a) how and why an
entity uses derivative instruments; (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows.  To meet those objectives, SFAS No. 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative agreements.  SFAS No. 161 will have no impact on the Company’s
consolidated financial statements when it is adopted effective January 1,
2009.





In
December 2007, the FASB issued SFAS No. 141(revised 2007), Business Combinations(SFAS
No. 141R).  SFAS No. 141R replaces the existing SFAS No. 141 but
retains the fundamental requirements in SFAS No. 141 that the acquisition method
of accounting be used for all business combinations and for an acquirer to be
identified for each business combination.  SFAS No. 141R defines the
acquirer as the entity that obtains control of one or more businesses in the
business combination and establishes the acquisition date as the date that the
acquirer achieves control.  It also requires an acquirer to recognize
the assets acquired, the liabilities assumed, and any noncontrolling interest in
the acquiree at their fair values at the acquisition date.  The
additional fair value measurements of SFAS No. 141R replace the cost-allocation
process of SFAS No. 141, which required the cost of an acquisition to be
allocated to the individual assets acquired and liabilities assumed based on
their estimated fair values.  In addition, all acquisition-related
costs are to be expensed and liabilities related to contingent consideration are
to be remeasured to fair value each subsequent reporting
period.  Costs incurred by the acquirer to effect the acquisition are
not allocated to the assets acquired or liabilities assumed, but are recognized
separately.  SFAS No. 141R is effective prospectively for Emeritus for
business combinations consummated on or after January 1, 2009.





Reclassifications





Certain
reclassifications have been made to the condensed consolidated financial
statements to conform to the current period presentation.





3.
            Stock-Based
      Compensation





The
Company records compensation expense based on fair value for all awards, which
is estimated using the Black-Scholes option pricing model.  The
Company recorded stock-based compensation expense based on the fair value of
stock options and shares issued under the Company's various equity
incentive plans and the Employee Stock Purchase (ESP) Plan of approximately $1.4
million and $786,000 for the three months ended June 30, 2008 and





6
 EMERITUS
CORPORATION
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Continued
 June 30,
2008


Table of Contents


2007,
respectively, and approximately $2.8 million and $1.3 million for the six months
ended June 30, 2008 and 2007, respectively.





During
the six months ended June 30, 2008, the Company granted options to purchase
10,000 shares of common stock from the 2006 equity incentive plan (the 2006
Plan) and options to purchase 52,500 shares of common stock from the
non-employee director plan.





The
following table summarizes the Company’s stock option activity for the six
months ended June 30, 2008 and 2007:


2008
            
            
            2007Weighted-
            
            
            Aggregate
            
            
            
            
            
            Weighted-
            
            
            AggregateAverage
            
            
            Intrinsic
            
            
            
            
            
            Average
            
            
            IntrinsicExercise
            
            
            Value
            
            
            
            
            
            Exercise
            
            
            ValueShares
            
            
            Price
            
            
            $
      (000)
            
            
            Shares
            
            
            Price
            
            
            $(000)Outstanding
      at beginning of year
            
            
            2,166,575
            
            
            $
            18.76
            
            
            
            
            
            
            
            1,510,189
            
            
            $
            9.09Granted
            
            
            62,500
            
            
            $
            20.03
            
            
            
            
            
            
            
            -
            
            
            
            N/AExercised
            
            
            (21,115
            )
            
            $
            10.43
            
            
            $
            (247
            )
            
            
            (106,988
            )
            
            $
            5.82
            
            
            $
            (2,996
            )Canceled
            
            
            (33,498
            )
            
            $
            19.61
            
            
            
            
            
            
            
            (9,416
            )
            
            $
            -Outstanding
      at June 30, 2008 and 2007
            
            
            2,174,462
            
            
            $
            18.87
            
            
            $
            6,795
            
            
            
            1,393,785
            
            
            $
            9.31
            
            
            $
            30,209Options
      exercisable at June 30, 2008 and 2007
            
            
            1,000,144
            
            
            $
            10.12
            
            
            $
            6,795
            
            
            
            1,037,808
            
            
            $
            6.01
            
            
            $
            25,910N/AWeighted-average
      fair value of options granted
            
            
            
            
            
            $
            11.25
            
            
            
            
            
            
            
            
            
            
            
            N/A





The
amount of cash received from the exercise of stock options under
the Company's various equity incentive plans and stock purchased through
the ESP Plan was $517,000 and $873,000 in the six months ended June 30, 2008 and
2007, respectively.  As of June 30, 2008, there were 134,384 shares
available for purchase under the ESP Plan, 1,516,658 shares available for grant
under the 2006 Plan, and 69,000 shares available for grant under the 1995 Stock
Incentive Plan, which includes options available under the non-employee director
plan.





The
Company estimates the fair value of its options using the Black-Scholes option
pricing model.  Option valuation models require the input of various
assumptions, including the expected stock price volatility, risk-free interest
rate, dividend yield, and forfeiture rate.  The Company groups its
options into two main categories based on estimated life.  They are
the employees and the Board of Directors.  The fair value of the stock
options granted was estimated using a risk-free rate that is the five-year or
seven-year U.S. Treasury yield in effect at the time of grant.  The
expected life of the stock options granted (five or seven years) was estimated
using the historical exercise behavior of option holders.  Expected
volatility was based on historical volatility for a period equal to the stock
option’s expected life, ending on the date of grant.  Forfeitures are
estimated at the time of valuation and reduce expense ratably over the vesting
period.  The forfeiture rate, which was estimated at 10.2% of the
options awarded, is adjusted periodically based on the extent to which actual
forfeitures differ, or are expected to differ, from the previous
estimate.  The Company's options have characteristics significantly
different from those of traded options and changes in the various input
assumptions can materially affect the fair value estimates.  The fair
value of options granted for the six months ended June 30, 2008 and 2007, were
estimated at the date of grant using the following weighted average
assumptions:





7
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CORPORATION
 NOTES
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 June 30,
2008


Table of Contents





For
      Employees and Key ExecutivesSix
      Months Ended June 30,2008
            
            2007Expected
      life from vest date (in years)
            
            
            5
            
            No
      options grantedRisk-free
      interest rate
            
            
            2.69
            %Volatility
            
            
            42.7
            %Dividend
      yield
            
            
            -Weighted
      average fair value (per share)
            
            $
            8.75





For
      DirectorsSix
      Months Ended June 30,2008
            
            2007Expected
      life from vest date (in years)
            
            
            7
            
            No
      options grantedRisk-free
      interest rate
            
            
            3.90
            %Volatility
            
            
            54.7
            %Dividend
      yield
            
            
            -Weighted
      average fair value (per share)
            
            $
            11.73





The
Company offers eligible employees the option to purchase common stock of the
Company under the ESP Plan at a 15% discount from the lower of the market price
on (a) the first trading date of each calendar quarter or (b) the last trading
date of each quarter.  The following table shows the number of shares
of common stock issued under the ESP Plan and purchase price of these shares for
the first two quarters of 2008:





2008Shares
            
            
            PriceQuarter
      1
            
            
            9,360
            
            
            $
            17.73Quarter
      2
            
            
            13,621
            
            
            $
            12.43








4.
            Acquisitions
      and Other Significant Transactions





2008
HCN Purchase





On June
6, 2008, the Company entered into an asset purchase agreement (the “Agreement”)
with Health Care REIT, Inc. (HCN) and its affiliated entities to purchase 29
communities consisting of 2,257 units located throughout the United States for a
purchase price of $299.8 million, excluding transaction costs.  The
Company leased these communities from HCN (19 under a master lease dated
September 30, 2003, two under individual leases, both dated February 26, 1996,
and eight under a master lease dated September 30, 2004) and operated these
communities as assisted living and memory care service
facilities.  The Company made an earnest money deposit of
approximately $3.0 million related to the Agreement.  As provided in
the Agreement, the transaction will be closed in two phases.





On June
30, 2008, the Company completed the first phase of the HCN transaction discussed
above.  The first phase consisted of 19 communities with a capacity of
1,564 units for a purchase price of $223.8 million, including
closing





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 NOTES
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 June 30,
2008


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costs and
financed it through mortgage debt of approximately $163.2 million and
seller-provided debt of $50.0 million (Note 5).





The
Company accounted for 18 of the 19 acquired properties as capital
leases.  Upon termination of the leases, the difference between the
carrying amount of the capital lease assets and the capital lease obligations
was recorded as an adjustment to the carrying amount of the purchased
communities in the amount of approximately $19.0 million.  In
addition, the Company had unamortized deferred gains on sale of approximately
$15.0 million related to an earlier sale/leaseback transaction involving these
communities, which was also recorded as an adjustment to the carrying amount of
the purchased communities.  One of the purchased properties was
treated as an operating lease with straight-line rent liability accruals of
$562,000 as of the acquisition date, which we also recorded as an adjustment to
the carrying value of the purchased communities.  Finally, unamortized
lease acquisition costs in the amount of $7.6 million related to these
communities was also recorded as an adjustment to the carrying amount of the
purchased communities.  The net reduction in the cost basis of the 19
purchased assets was approximately $27.0 million as of the closing
date.





The
purchase of the remaining 10 communities is expected to close no later than
December 31, 2008, including available extension options.  Eight of
the communities in phase two of this transaction are currently subject to a cash
flow sharing agreement with an entity controlled by Daniel R. Baty, the
Company’s Co-CEO and a significant shareholder (Baty).  As part of
this transaction, this existing cash flow sharing arrangement will be terminated
for the eight communities and, thereafter, the eight communities will be held in
a joint venture owned by the Company and a Baty-related entity, which will
provide economic terms and conditions similar to the existing cash flow sharing
agreement.





2008
NHP Purchase





On
February 6, 2008, the Company entered into a purchase and sale agreement with
Nationwide Health Properties, Inc. (NHP) to purchase 24 communities consisting
of 1,672 units located in 13 states for a purchase price of $314.8 million,
including transaction costs.  The Company leased these communities
from NHP and operated the communities as assisted living and dementia care
facilities.  On April 2, 2008, the Company closed on this transaction
and financed it through mortgage debt of approximately $249.9 million and
seller-provided debt of $30.0 million (Note 5).





We
accounted for these leases as capital leases.  Upon termination of the
capital leases, the difference between the carrying amount of the capital lease
assets and the capital lease obligations of $25.6 million was recorded as an
adjustment to the carrying amount of the purchased communities.  In
addition, unamortized lease acquisition costs in the amount of $6.0 million
related to these communities was also recorded as an adjustment to the carrying
amount of the purchased communities.  The net reduction in the cost
basis of the purchased assets was approximately $19.6 million as of the closing
date.





Summerville
Acquisition





On
September 1, 2007, the Company acquired all of the outstanding stock of
Summerville through a merger of its wholly-owned subsidiary with
Summerville.  Under the terms of the merger agreement, a total of
8,392,656 shares of the Company’s common stock were issued: (i) to Apollo Real
Estate Investment Funds III and IV (the Apollo Funds), two real estate funds
managed by Apollo Real Estate Advisors, in satisfaction of certain loans from
such entities to Summerville, (ii) to certain employees of Summerville, in
satisfaction of certain incentive compensation arrangements they had with
Summerville, and (iii) to the shareholders of Summerville, including the Apollo
Funds.  The total purchase price for Summerville was $278.2
million.





Summerville
was a San Ramon, California-based operator of 81 communities comprising 7,935
units in 13 states, which provided independent living, assisted living, and
Alzheimer’s and dementia-related services to seniors.  Upon completion
of the Summerville acquisition, Summerville became a wholly owned subsidiary of
Emeritus.  Of the 81 communities operated by Summerville, 73 are
leased from third parties and eight are owned by the Company.





9
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 NOTES
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 June 30,
2008


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2007 HCPI
Communities Purchased





In March
2007, the Company completed the purchase of seven communities consisting of 453
units located in South Carolina for approximately $28.9 million, including
transaction costs.  The Company had operated these facilities pursuant
to a master lease dated September 18, 2002, between Health Care Property
Investors, Inc. (HCPI), and Emeritus.  The Company accounted for this
master lease as an operating lease.





In
August 2007, Emeritus acquired 41 additional communities from HCPI,
consisting of 3,732 units located in 17 states.  The aggregate
purchase price was $504.9 million, including transaction costs.  Of
the 41 communities, the Company leased 33 and Summerville leased eight of the
communities pursuant to leases that were assigned to the Company when it
purchased these communities.  Summerville continued to operate the
eight communities under existing leases until Emeritus completed its acquisition
of Summerville in September 2007, at which time the leases
terminated.





2007
HRT Communities Purchased





In March
2007, the Company purchased 12 communities consisting of 786 units located in
five states for $100.2 million, including transaction costs.  The
Company had leased four of these communities from Healthcare Realty Trust (HRT)
since May 2002 and eight since May 2003.  Four of the leased
communities had been accounted for as capital leases and eight as operating
leases by the Company.





2007
Fretus Communities Purchased





In
February 2007, the Company purchased 24 communities consisting of 1,651
units located in six states for $143.5 million, including transaction
costs.  The Company had leased these communities from Fretus since
October 2002 and had accounted for them as operating leases.





Fretus
was a private investment joint venture between Fremont Realty Capital, which
held a 65% interest, and a Baty-related entity, which held a 35% minority
interest.  Mr. Baty held a 16% indirect interest in the minority
entity, personally guaranteed $3.0 million of the Fretus mortgage debt
covering the communities and controlled the administrative member of
Fretus.  In conjunction with this transaction, the Baty-related entity
provided $18.0 million in short-term financing to the Company, of which
approximately $5.1 million was used to fund the balance of the purchase
price and the balance was used for general business purposes.  The
short-term debt was repaid in July 2007.





2007
HCN Purchase





In August
2007, the Company completed the acquisition of three Florida communities
consisting of 431 units.  The purchase price was $25.0 million,
including transaction costs.  The Company had leased these communities
from HCN and affiliates and accounted for them as capital leases.





2007
Wegman Purchase





In August
2007, the Company completed the acquisition of nine communities that the Company
previously leased, consisting of 711 units located in the State of New
York, for an aggregate purchase price of $89.0 million including
transaction costs.





Other
2007-2008 Community Acquisitions





On June
12, 2008, the Company purchased a 54-unit community in Granger, Indiana, for
$6.9 million, including closing costs, of which $6.0 million was financed
through mortgage financing with Capmark Bank (Note 5).





In
January 2008, the Company entered into a long-term lease for a newly constructed
38-unit Alzheimer’s community located in Joliet, Illinois.  The lease
term was 11 years, expiring in March 2019.  This community
is





10
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 NOTES
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 Continued
 June 30,
2008


Table of Contents


included
in the NHP portfolio that the Company purchased in April 2008 as detailed above
and this lease was terminated in connection with such purchase.





In
January 2008, the Company entered into a long-term lease for a 104-unit
community located in Orangevale, California.  The lease term is 15
years, expiring in January 2023, with two 10-year renewal options
available.  The initial annual lease payment is approximately
$901,000, with annual increases of 3.0%.





In
December 2007, the Company purchased a 106-unit assisted living community
located in Ohio for a price of $12.9 million.





In July
2007, the Company entered into a long-term lease for an 89-unit assisted living
community in Ohio.  The lease term is 12 years, expiring in July 2019,
with one ten-year renewal option available.  The initial annual lease
payment is approximately $1.1 million, with annual increases based on the
greater of 3% or the change in the Consumer Price Index (CPI).





Joint
Ventures





The
Company holds a 50.0% interest in a joint venture (Stow JV) with an affiliate of
The Wegman Companies, Inc., which operates a newly constructed property in Stow,
Ohio.  The community owned by the Stow JV began operations in May 2008
and is managed by the Company.  The Company recorded equity losses of
approximately $130,000 and $152,000 for the three and six months ended June 30,
2008, respectively.  The Company recorded management fee income of
approximately $32,000 for the three and six months ended June 30,
2008.





The
Company holds a 19.0% interest in a joint venture (Blackstone JV) with
Blackstone Real Estate Advisors that began operations in December 2006 and
operates a portfolio of 24 properties as of June 30, 2008, 23 of which are
managed by the Company.  The Company recorded equity losses of
approximately $794,000 and $450,000 for the three months ended June 30, 2008 and
2007, respectively, and $705,000 and $845,000 for the six months ended June 30,
2008 and 2007, respectively.  The Company recorded management fee
income of approximately $822,000 and $696,000 for the three months ended June
30, 2008 and 2007, respectively, and $1.6 million and $1.3 million for the six
months ended June 30, 2008 and 2007, respectively.





5.
            Long-Term
      Debt





On June
30, 2008, in conjunction with the 2008 HCN Purchase discussed in Note 4, the
Company entered into financing agreements for this first phase of the HCN
transaction that consists of $163.2 million of mortgage debt at a fixed rate of
6.65% originated by KeyBank through a Freddie Mac credit facility and a $50.0
million note from HCN with a fixed rate of 8.0%, increasing on each anniversary
date by 25 basis points.  The Freddie Mac credit facility has a term
of 10 years, with interest-only payments for the first year and, thereafter,
interest and principal payments based on a 30-year amortization
schedule.  The HCN note has a term of three years, with interest-only
payments over the three-year term.





On June
12, 2008, the Company purchased a 54-unit community in Granger, Indiana, for
$6.9 million, including closing costs, of which $6.0 million was financed
through mortgage financing with Capmark Bank (Capmark) at an annual rate based
on the monthly LIBOR rate plus 250 basis points for a term of 36 months, with a
floor of 5.25%, and payments beginning on August 1, 2008.





On April
30, 2008, the Company repaid the $20.0 million outstanding balance of a mortgage
loan (the GMAC Mortgage) secured by five of its existing
communities.  The interest rate on the GMAC Mortgage was 6.98% and the
note was to mature in August 2008.





The
Company refinanced the GMAC Mortgage with new credit
facilities.  Three of the five communities secure notes totaling $25.4
million at a fixed rate of 6.29%, (the Fixed Rate Notes), with a term of 10
years.  The Fixed Rate Notes require payments in the first three years
of interest only, and payments of principal and interest thereafter based on a
30-year amortization.  The Fixed Rate Notes were originated by KeyCorp
Real Estate Capital Markets, Inc. and were purchased by Fannie
Mae.  The Fixed Rate Notes may be prepaid subject to a prepayment
penalty





11
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 June 30,
2008


Table of Contents


based on
a formula defined in the loan agreements.  The Fixed Rate Notes
contain cross-default provisions and customary events of default, including
those related to non-payment and the sale or transfer of
collateral.





The
remaining two communities secure variable rate notes (the Variable Rate Notes)
totaling $13.3 million, of which $7.2 million was withheld at closing and is
available for funding of construction projects on these two
communities.  The Variable Rate Notes have terms of three years and an
initial weighted average annual interest rate of 5.06% based on the LIBOR rate
at closing.  KeyBank N.A. is the lender.  The maturity dates
may be extended for one additional year at the Company’s option (the Extension
Period) depending upon the attainment of certain debt service coverage ratios as
defined in the loan agreements.  Monthly payments are interest only
for three years and, if extended, include scheduled principal reductions during
the Extension Period.  The Variable Rate Notes may be prepaid at any
time without penalty.  The Variable Rate Notes contain various events
of default, including non-payment and the maintenance of specified levels of
occupancy and debt service coverage ratios.





The
Company received approximately $11.2 million in cash from these refinancing
transactions, which will be used for general corporate purposes.





On April
29, 2008, the Company refinanced the mortgage debt on 18 of its existing
properties, which were purchased from Fretus Investors, LLC (Fretus) in February
2007 (Note 4).The original
loan of $132.0 million bore interest at a fixed annual rate of 6.5475% and was
secured by 24 properties. Of the $132.0 million principal balance outstanding,
$112.0 million was paid down as part of this refinancing.  The
original loan agreement was amended to provide that: (i) the remaining balance
of $20.0 million is secured by five properties, with one property released from
the security pool and (ii) the interest rate changed from a fixed rate of
6.5475% to a variable rate equal to LIBOR plus 280 basis points (5.80% at
closing), adjusted monthly, with a floor of 5.80%.  Subsequent to the
close of this transaction, the Company further reduced the $20.0 million loan to
$16.8 million with the proceeds from the sale of a property.





The new
debt of $129.0 million has a term of 10 years at a fixed rate of 6.21%, with
payments in the first three years of interest only and payments of principal and
interest thereafter based on a 30-year amortization period.  Both the
existing and the new mortgages were provided by Capmark and purchased by
Freddie Mac.  The notes on the 18 properties contain cross-default
provisions.  The new debt may be prepaid subject to a prepayment
penalty based on a formula defined in the loan agreement.  The loan
agreement contains customary events of default, including payment
defaults.





The
Company received approximately $14.4 million in net cash proceeds as a result of
this transaction, which will be used for general corporate
purposes.





On April
2, 2008, the Company closed on the NHP Purchase as discussed in Note 4 and
financed the transaction through mortgage debt of approximately $241.9 million
originated by Capmark through a Fannie Mae credit facility with an interest rate
of 5.9%, and seller-provided debt of $30.0 million with an interest rate of
7.25%.  In addition, the seller agreed to a 12-month extension on an
existing $21.4 million note originally maturing in March 2008, including a
reduction in the interest rate from 10.0% to 8.5%.  The Company also
secured the ability to borrow up to an additional $8.1 million under this Fannie
Mae credit facility based on portfolio performance.  This portfolio
includes a memory loss community, which was financed separately with variable
interest rate mortgage debt financing of $8.0 million provided by
Capmark.  Interest is based on monthly LIBOR plus 265 basis points
with a floor of 5.65%.  The interest rate as of the closing date was
5.65%.





On
February 8, 2008, Emeritus entered into a credit agreement with Wells Fargo
Bank, National Association, which provides a $25.0 million unsecured revolving
line of credit.  The credit agreement permits the Company to borrow
from time to time up to $25.0 million on an unsecured basis.  The
credit agreement also allows the Company to obtain letters of credit from the
lender, provided that outstanding letters of credit and any borrowings
outstanding do not exceed $25.0 million.  The line of credit matures
on February 15, 2009.  Outstanding borrowings will bear interest at a
variable rate of 0.5% below Wells Fargo’s prime rate, payable
monthly.  The Company may partially or wholly repay borrowings and
reborrow provided that the total outstanding borrowings may not at any time
exceed $25.0 million.  Emeritus is required to pay a commitment fee of
0.25% on the average daily unused amount of the line of credit, which is payable
quarterly.  In addition, the Company is required to pay fees equal to
1.0% of every





12
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 NOTES
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 June 30,
2008


Table of Contents


letter of
credit issued as well as the negotiation fees on each letter.  The
Company must maintain a zero balance on advances for 30 consecutive days during
each fiscal year, a $20.0 million minimum balance in cash, cash equivalents
and/or publicly traded marketable securities, meet a fixed charge coverage
ratio, and comply with customary affirmative and negative
covenants.





The
Company intends to use the line of credit for general corporate
purposes.  There were no outstanding borrowings under this credit
facility as of June 30, 2008.





Effective
February 1, 2008, Emeritus entered into an interest rate swap contract that has
a notional amount of $12.4 million and matures on January 1,
2010.  The swap effectively converts the interest rate on the related
mortgage debt from a floating rate equal to the London Interbank Offered Rate
(LIBOR) plus 225 basis points to a fixed rate of 4.965%, thus mitigating the
impact of interest rate changes on future interest expense.  The
Company did not designate the swap as a hedging instrument (Note
11).





6.
            Shareholders’
      Equity





Debenture
Conversion





In
February 2007, the Company offered to pay a cash incentive to debenture holders
if they elected to convert their debentures into common stock by March 8,
2007.  The incentive payment was equal to the amount of interest that
the holders would have received if the debentures were held to the maturity date
of July 1, 2008.





Of the
$26.6 million principal amount of debentures outstanding when the Company made
the offer, holders of $16.1 million principal amount converted their debentures
into 732,725 shares of common stock at the debentures’ stated conversion rate of
$22.00 per share.  Of the debentures converted into common stock,
$15.8 million principal amount was owned by entities controlled by Mr.
Baty.  On April 16, 2007, the Company paid the incentive fee of $1.3
million in connection with this conversion, which amount would have otherwise
been paid in three installments on July 1, 2007, January 1, 2008, and
July 1, 2008, if the debentures were held to maturity.  The
incentive payment was expensed to “Other, net” in the condensed consolidated
statement of operations in the first quarter of 2007.





At June
30, 2008, the Company had $10.5 million principal amount of debentures
outstanding, which were paid off at maturity on July 1, 2008, and of which
Saratoga Partners IV and related entities owned $5.0 million principal
amount.





7.
            Loss
      Per Share





The
capital structure of Emeritus includes convertible debentures and stock
options.  Basic loss per share is computed based on the weighted
average shares outstanding and excludes any potential
dilution.  Diluted loss per share is computed based on the weighted
average number of shares outstanding plus dilutive potential common
shares.  Options are included using the “treasury stock method” to the
extent they are dilutive.  Certain shares issuable upon the exercise
of stock options and conversion of convertible debentures have been excluded
from the computation because the effect of their inclusion would be
anti-dilutive.





The
following table summarizes those potential common shares that are excluded in
each period because they are anti-dilutive (in thousands):





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June,
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Convertible
      Debentures
            
            
            475
            
            
            
            475
            
            
            
            475
            
            
            
            475Options
            
            
            2,174
            
            
            
            1,394
            
            
            
            2,174
            
            
            
            1,3942,649
            
            
            
            1,869
            
            
            
            2,649
            
            
            
            1,869








13
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CORPORATION
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 June 30,
2008


Table of Contents


8.           Comprehensive
Loss





The
following table summarizes the comprehensive loss for the periods indicated (in
thousands):





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      loss
            
            $
            (25,234
            )
            
            $
            (1,589
            )
            
            $
            (51,202
            )
            
            $
            (11,324
            )Other
      comprehensive income (loss):Unrealized
      holding gains (losses)on
      available-for-sale investment securities
            
            
            (202
            )
            
            
            –
            
            
            
            62
            
            
            
            –Comprehensive
      loss
            
            $
            (25,436
            )
            
            $
            (1,589
            )
            
            $
            (51,140
            )
            
            $
            (11,324
            )





9.
            Discontinued
      Operations





During
the first quarter of 2008, the Company determined to discontinue operations at
four of its communities and put the assets and businesses up for
sale.  During the second quarter of 2008, the Company decided to
discontinue operations at one more community and put the assets and business up
for sale.  The Company decided to sell these communities primarily
because they have consistently incurred operating losses over a sustained period
of time due to geographic location and local market conditions.  Two
of the communities were sold in the second quarter of 2008 and the remaining
three are expected to be sold in the second half of 2008.  Financial
statements for the three and six months ended June 30, 2007 have been
reclassified to present the operations of these communities as discontinued
operations.  In 2007, the Company determined that the carrying amounts
of three communities were not recoverable from expected undiscounted cash flows
generated from the use of the assets and recognized an aggregate loss of $4.8
million to write down the related carrying amounts of these properties to their
estimated fair values.  In the second quarter of 2008, the Company
recognized an impairment loss of $4.3 million on the additional community
classified in discontinued operations.  The assets of the three
properties remaining to be sold, which consist of property and equipment, are
presented separately under the caption “Property held for sale” in the
accompanying condensed consolidated balance sheet at June 30,
2008.  The Company will continue to operate these communities until
sold.








The
following table shows the revenues, net loss, and net loss per common share for
the discontinued operations (in thousands, except per share data):





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Total
      revenue
            
            $
            2,239
            
            
            $
            2,707
            
            
            $
            5,041
            
            
            $
            5,387Net
      loss
            
            $
            4,768
            
            
            $
            291
            
            
            $
            5,366
            
            
            $
            760Basic
      and diluted net loss per common share
            
            $
            (0.12
            )
            
            $
            (0.02
            )
            
            $
            (0.14
            )
            
            $
            (0.04
            )Weighted
      average common shares outstanding: - basic and diluted
            
            
            39,059
            
            
            
            18,971
            
            
            
            39,048
            
            
            
            18,674








14
 EMERITUS
CORPORATION
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Continued
 June 30,
2008


Table of Contents





10.
            Liquidity





As of
June 30, 2008, the Company has a working capital deficit of $37.4
million.  The Company is able to operate in the position of a working
capital deficit because revenues are collected more quickly, often in advance,
than obligations are required to be paid.  This can result in a low
level of current assets to the extent cash has been deployed in business
development opportunities or to pay down long-term liabilities.  Along
those lines, the working capital deficit includes, as part of current
liabilities, $27.2 million of deferred revenue and unearned rental income, which
will not require a future outlay of cash.  The level of current
liabilities is not expected to change from period to period in such a way as to
require the use of significant cash, except for (i) convertible debentures of
$10.5 million, which were paid off at maturity on July 1, 2008, (ii) the current
portion of debt of $24.3 million maturing by June 30, 2009, and (iii) long-term
debt maturities of $122.6 million due after June 2009 but prior to June 30,
2010, which the Company plans to refinance prior to their due dates or pay off
at maturity.





The
Company reported net cash from operating activities in its condensed
consolidated statements of cash flows of $39.3million and $23.6 million for
the six months ended June 30, 2008 and 2007, respectively.  While the
Company has reported positive cash flows from operating activities over the past
three years, the cash flows have not always been sufficient to pay all of its
long-term obligations and the Company has been dependent upon third-party
financing or disposition of assets to fund operations.  The Company
cannot guarantee that, if necessary in the future, such transactions will be
readily available, or on terms attractive to the Company.





Since
2002, the Company has refinanced substantially all of its debt obligations,
extending the maturities of such financings to dates in 2008 or thereafter, at
which time the Company will need to refinance or otherwise repay the
obligations.  Many of the Company's debt instruments and leases
contain “cross-default” provisions pursuant to which a default under one
obligation can cause a default under one or more other
obligations.  Such cross-default provisions affect the majority of the
Company’s properties, and as a result, any event of default could cause a
material adverse effect on the Company's financial condition.  At June
30, 2008, the Company was in violation of one or more covenants related to rent
coverage ratios or occupancy requirements in certain leases and a mortgage, but
has obtained waivers from the owners/lenders related to these covenant
defaults.  The waivers expire on July 1, 2009.





Management
believes that the Company will be able to generate sufficient operating cash
flows and will have adequate cash for all necessary operating, investing, and
financing activities including required debt service and capital expenditures
for at least the next twelve months.





11.
            Fair
      Value Disclosures




Investment securities
available-for-sale. The carrying values of investment securities
classified as available-for-sale are recorded at their fair values based on
quoted market prices utilizing public information for the issuers (Note
8).




Derivative financial
instruments.  The Company enters into derivative financial
instruments, specifically interest rate swaps, for non-trading
purposes.  The Company uses interest rate swaps to manage interest
rate risk associated with floating rate debt.  As of June 30, 2008,
the Company was party to two interest rate swaps with a total notional amount of
$32.0 million.  The Company elected not to apply hedge accounting for
these interest rate swaps even though they are economic hedges of the Company’s
floating rate debt and the Company does not enter into derivatives for
speculative purposes.  These derivative contracts currently have
negative net fair values based on current market conditions affecting interest
rates and are recorded in other long-term liabilities.





The table
that follows summarizes the interest rate swap contracts outstanding at June 30,
2008 (in thousands):





Notional
            
            Effective
            Expiration
            
            EstimatedAmount
            
            Date
            Date
            
            Fair
      ValueInterest
      rate swap
            
            $
            19,640
            
            10/1/2007
            8/6/2012
            
            $
            (679
            )Interest
      rate swap
            
            
            12,405
            
            2/1/2008
            1/1/2010
            
            
            89







15
 EMERITUS
CORPORATION
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Continued
 June 30,
2008


Table of Contents




As of
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements.The
standard defines fair value, establishes a framework for measuring fair value,
and also expands disclosures about fair value measurements.  Under
this standard, fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly
transaction between market participants at the measurement date.  SFAS
No. 157 also requires the Company to consider its own credit spreads when
measuring the fair value of liabilities, including derivatives.





The
following table presents information about the Company’s assets and liabilities
measured at fair value on a recurring basis as of June 30, 2008, and indicates
the fair value hierarchy of the valuation techniques utilized by the Company to
determine such fair value (in thousands):





Quoted Prices in
            
            
            SignificantActive
      Markets
            
            
            Other
            
            
            Significant
            
            
            Balance
      atfor
      Identical
            
            
            Observable
            
            
            Unobservable
            
            
            June
      30,Assets
      (Level 1)
            
            
            Inputs (Level 2)
            
            
            Inputs (Level 3)
            
            
            2008AssetsInvestment
      securities – available-for-sale
            
            $
            3,036
            
            
            $
            -
            
            
            $
            -
            
            
            $
            3,036LiabilitiesDerivative
      financial instruments
            
            
            -
            
            
            
            590
            
            
            
            -
            
            
            
            590





In
general, fair values determined by Level 1 inputs utilize quoted prices in
active markets for identical assets or liabilities that the Company has the
ability to access.  For example, the Company’s investment in
available-for-sale equity securities is valued based on the quoted market price
for that security.





Fair
values determined by Level 2 inputs utilize inputs other than quoted prices
included in Level 1 that are observable for the asset or liability, either
directly or indirectly.  Level 2 inputs include quoted prices for
similar assets and liabilities in active markets, and inputs other than quoted
prices that are observable for the asset or liability.  For example,
the Company uses market interest rates and yield curves that are observable at
commonly quoted intervals in the valuation of its interest rate swap
contracts.





Level 3
inputs are unobservable inputs for the asset or liability, and include
situations where there is little, if any, market activity for the asset or
liability.  The Company’s assessment of the significance of a
particular input to the fair value measurement in its entirety requires
judgment, and considers factors specific to the asset or liability.





At June
30, 2008, the Company believes that any unobservable inputs used to determine
the fair value of its derivative financial instruments are not significant to
the fair value measurement in its entirety, and therefore the Company does not
consider its derivative financial instruments to be Level 3
liabilities.





For the
three months and six months ended June 30, 2008, the Company recognized
unrealized gains of $972,000 and $135,000, respectively, which represent the
change in the fair value of the interest rate swaps.





The
Company also has assets that under certain conditions are subject to measurement
at fair value on a non-recurring basis.  These assets include property
held for sale and those associated with acquired businesses, including goodwill
and other intangible assets.  For these assets, measurement at fair
value in periods subsequent to their initial recognition is applicable if one or
more is determined to be impaired.  During the three months ended June
30, 2008, the Company recorded an impairment loss of $4.3 million related to
property held for sale (Note 9), which is included in loss from discontinued
operations.  The fair value of this property was determined based on a
recent offer from a prospective purchaser (Level 2 input).





The
Company also adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement
No. 115, as of January 1, 2008, but has not made any fair value
elections with respect to any of its eligible assets or liabilities as of June
30, 2008.





16
 EMERITUS
CORPORATION
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Continued
 June 30,
2008


Table of Contents





12.           Subsequent
Event





On July
25, 2008, the Company entered into five Agreements for Sale of Real Estate (the
“Agreements”) with Ventas Realty, LP (“Ventas”) to purchase five communities
consisting of 432 units located in Ohio, Florida (2), California and
Michigan.  These communities, which are operated as assisted living
and memory care service facilities, are currently leased from Ventas under three
master leases dated August 1, 2005, March 24, 2006, and April 20, 2006, that
were originally entered into by Summerville.  Under the terms of the
Agreements, the Company will pay an aggregate purchase price of $62.5 million,
plus estimated closing costs of approximately $2.8 million, for the acquired
communities.  The completion of this transaction is subject to
customary closing conditions.  The Company has made an earnest money
deposit of $250,000 related to the Agreements.





The
Company is in the process of obtaining commitments for mortgage financing
related to this transaction in an amount equal to approximately 75% of the
purchase price.  The balance of the purchase price will be funded by
seller-provided financing of $10.0 million, a refund of approximately $6.0
million of security deposits held by Ventas, and the balance from cash on
hand.  The seller-provided financing is for a term of three years at
an annual interest rate of 8.0%, increasing annually by 25 basis points, with
monthly payments equal to accrued interest plus a $40,000 monthly principal
payment.














17


Table of Contents





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


RESULTS
OF OPERATIONS





Forward-Looking
Statements





This report contains “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995, as amended.  This Act provides a “safe harbor” for
forward-looking statements to encourage companies to provide prospective
information about themselves so long as they identify these statements as
forward-looking and provide meaningful cautionary statements identifying
important factors that could cause actual results to differ from the projected
results.  In some cases, you can identify forward-looking statements
by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,”
“expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should” or
“will,” or the negative of those terms, or comparable
terminology.  Some of the forward-looking statements included in this
report and documents incorporated by reference and in some of our other public
statements relate to, among other things:





·
            the
      effects of competition and economic conditions on the occupancy levels in
      our communities, including possible excess assisted living
      capacity;




·
            our
      ability under current market conditions to maintain and increase our
      resident charges without adversely affecting occupancy
    levels;




·
            our
      ability to control community operating expenses, including the management
      of costs largely beyond our control (such as insurance and utility costs)
      without adversely affecting the level of occupancy and resident
      charges;




·
            our
      ability to generate cash flow sufficient to service our debt and other
      fixed payment requirements;




·
            our
      vulnerability to defaults as a result of noncompliance with various debt
      and lease covenants, including the effects of cross-default
      provisions;




·
            uncertainties
      relating to competition, construction, licensing, environmental
      regulation, and other matters that affect acquisition, disposition, and
      development of assisted living
communities;




·
            our
      ability to find sources of financing and capital on satisfactory terms to
      meet our cash requirements to the extent that they are not met by
      operations; and




·
            uncertainties
      related to professional liability
claims.







Any or
all of our forward-looking statements in this report and in any other public
statements we make may turn out to be inaccurate.  Please review
carefully Item 1A—Risk
Factors of our 2007 Annual Report on Form 10-K for important factors that
could cause our actual results to differ materially from the forward-looking
statements included in this report and presented elsewhere by our management
from time to time.  Incorrect assumptions we might make and known or
unknown risks and uncertainties may affect the accuracy of our forward-looking
statements.  Forward-looking statements reflect our current
expectations or forecasts of future events or results and are inherently
uncertain, and accordingly, you should not place undue reliance on
forward-looking statements.





Although
we believe that the expectations and forecasts reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, performance, or
achievements.  Consequently, no forward-looking statement can be
guaranteed and future events and actual or suggested results may differ
materially.  We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events, or otherwise.  You are advised, however, to consult any
further disclosures we make in our quarterly reports on Form 10-Q and
current reports on Form 8-K.





Overview





During
the first six months of 2008, we continued to concentrate on implementing our
previously disclosed growth strategy, which focuses on increasing our revenues
and cash flows through a combination of: (i) organic growth in








18
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents





our
existing operations; (ii) selected acquisitions of additional communities; and
(iii) expansion of our existing communities.





In 2007,
we acquired 88 communities that we previously had leased and eight communities
previously leased by Summerville, leased one, and purchased one additional
community, and, as a result of our acquisition of Summerville, began operating
another 73 communities leased by Summerville.  So far in 2008, we
acquired 43 communities we previously had leased, entered into leases for two
additional communities, and purchased one other new community.  In
2007 and continuing into 2008, we have also focused more on internal growth
through expansion of existing properties and construction of new communities.





The
following table sets forth a summary of our property interests:





As
      of June 30,
            
            As
      of December 31,
            
            As
      of June 30,2008
            
            2007
            
            2007Buildings
            
            Units
            
            Buildings
            
            Units
            
            Buildings
            
            UnitsOwned
      (1)
            149
            
            11,952
            
            107
            
            8,781
            
            53
            
            3,698Leased
      (2 )
            106
            
            9,855
            
            147
            
            12,978
            
            118
            
            9,931Consolidated
      Portfolio
            255
            
            21,807
            
            254
            
            21,759
            
            171
            
            13,629Managed/Admin
      Services
            11
            
            1,265
            
            10
            
            1,184
            
            9
            
            1,084Joint
      Venture/Partnership
            23
            
            1,737
            
            23
            
            1,737
            
            25
            
            1,975Operated
      Portfolio
            289
            
            24,809
            
            287
            
            24,680
            
            205
            
            16,688Percentage
      increase (decrease) (3)
            0.7%
            
            0.5%
            
            41.4%
            
            49.5%
            
            1.0%
            
            1.1%





(1)   Owned
      communities increased from June 30, 2007, due to the acquisition of three
      communities on August 6, 2007, 41 communities on August 15, 2007, nine
      communities on August 31, 2007, one community in December 2007, 24
      communities on April 2, 2008, one community on June 12, 2008, and 19
      communities on June 30, 2008, less two communities sold on May 15,
      2008.  Of the owned communities, three are held for sale and are
      in discontinued operations, representing 310
  units.


(2)   Of
      the 106 leased communities at June 30, 2008, 71 are accounted for as
      operating leases, in which the assets and liabilities of the communities
      are not included in our condensed consolidated balance sheet and 31 are
      accounted for as capital leases, in which a long-term asset and
      corresponding liability is established on our balance
      sheet.  The remaining four leased communities are reflected in
      our condensed consolidated financial statements as owned communities
      because of accounting requirements related to sale-leaseback accounting,
      notwithstanding the legal sale of the communities and their subsequent
      leasing by us.


(3)   The
      percentage increase (decrease) indicates the change from the prior year,
      or, in the case of June 30, 2008 and 2007, from the end of the prior
      fiscal year.





The
      total consolidated portfolio of 21,807 units at June 30, 2008, consist of
      the following unit types:





Total
      UnitsIndependent
      Living
            
            
            1,444Assisted
      Living
            
            
            16,844Alzheimer's
      Care
            
            
            2,916Skilled
      Nursing Care
            
            
            72Operating
      Units
            
            
            21,276Held
      for sale (3 properties)
            
            
            310Units
      taken out of service
            
            
            221Designed
      Capacity Units
            
            
            21,807





The units
taken out of service represent rooms that have been converted for alternative
uses, such as additional office space, and are not available for immediate
occupancy, and therefore excluded from the calculation of occupancy
percentage.  These units are put back into service as demand
dictates.





19
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents





Two of
the important factors affecting our financial results are the rates we charge
our residents and the occupancy levels we achieve in our
communities.  In evaluating the rate component, we generally rely on
the average monthly revenue per occupied unit, computed by dividing the total
community revenue for a particular period by the average number of occupied
units for the same period.  In evaluating the occupancy component, we
generally rely on an average occupancy rate, computed by dividing the average
units occupied during a particular period by the average number of units
available during the period.  We evaluate these and other operating
components for our consolidated portfolio, which includes the communities we own
and lease, and our operating portfolio, which also includes the communities we
manage.





The table
below shows for our consolidated portfolio the average monthly revenue per
occupied unit and occupancy rate for the three and six months ended June 30,
2008 and 2007:







Three
      Months ended June 30,
              
              Six
      Months Ended June 30,2008
              
              2007
              
              $D
              
              %
      D
              
              2008
              
              2007
              
              $
      D
              
              %
      DAverage
      monthly revenueper
      occupied unit
              $
      3,372
              
              $
      3,212
              
              $
      160
              
              5.0%
              
              $
      3,349
              
              $
      3,198
              
              $
      151
              
              4.7%Average
      occupancy rate
              86.4%
              
              86.4%
              
              
              
              .0
              ppt*
              86.8%
              
              86.6%
              
              
              
              .2
              ppt*
 
 *
percentage points


We
believe that occupancy rates reflect industry-wide factors and other economic
conditions, as well as our own actions and policies, including the various
acquisitions and development projects we completed in 2007 and
2008.  Although occupancy rates have recently leveled off or declined
slightly, we continue to evaluate the factors of rate and occupancy to find the
optimum balance in each community.





Since our
inception in 1993, we have incurred operating losses totaling approximately
$307.0 million as of June 30, 2008.  We believe that these losses have
resulted from our emphasis on expansion, financing costs arising from multiple
financing and refinancing transactions related to this expansion, administrative
and corporate expenses that we incurred in anticipation of further expansion and
increased emphasis on risk management and financial reporting controls, the
impact in the early years on many of our leases from capital and financing lease
treatments, and occupancy rates remaining lower for longer periods than we
anticipated.  Our current emphasis is on maximization of cash flows as
we work toward improvements in occupancy and average rates, selective growth,
and changes in our capital structure, such as acquisition of leased properties
and refinancing of existing high-rate debt.





20
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents





Significant
Transactions





In recent
periods, and continuing into 2008, we entered into a number of transactions that
affected the number of communities we own, lease, and manage; our financing
arrangements; and our capital structure.  These transactions are
summarized in Notes 4 and 5 to the Unaudited Condensed Consolidated Financial
Statements above.





The
following table shows the changes in buildings from December 31, 2006, through
June 30, 2008, including those transactions previously described:





Month
            
            Owned
            
            
            Leased
            
            
            Consolidated
            
            
            Managed
            
            
            TotalDecember
      31, 2006
            
            
            
            10
            
            
            
            161
            
            
            
            171
            
            
            
            32
            
            
            
            203Walking
      Horse Meadows – disposition
            Jan-07
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (1
            )
            
            
            (1
            )Fretus
      Purchase
            Feb-07
            
            
            24
            
            
            
            (24
            )
            
            
            –
            
            
            
            –
            
            
            
            –HRT
      Purchase
            Mar-07
            
            
            12
            
            
            
            (12
            )
            
            
            –
            
            
            
            –
            
            
            
            –HCPI
      Purchase
            Mar-07
            
            
            7
            
            
            
            (7
            )
            
            
            –
            
            
            
            –
            
            
            
            –March
      31, 2007
            
            
            
            53
            
            
            
            118
            
            
            
            171
            
            
            
            31
            
            
            
            202Additional
      JV– management agreements
            May-07
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            3
            
            
            
            3June
      30, 2007
            
            
            
            53
            
            
            
            118
            
            
            
            171
            
            
            
            34
            
            
            
            205Inn
      at Marietta
            Jul-07
            
            
            –
            
            
            
            1
            
            
            
            1
            
            
            
            –
            
            
            
            1HC
      REIT Purchase
            Aug-07
            
            
            3
            
            
            
            (3
            )
            
            
            –
            
            
            
            –
            
            
            
            –HCPI
      Purchase (including 8 Summerville communities)
            Aug-07
            
            
            41
            
            
            
            (33
            )
            
            
            8
            
            
            
            –
            
            
            
            8Wegman
      Purchase
            Aug-07
            
            
            9
            
            
            
            (9
            )
            
            
            –
            
            
            
            –
            
            
            
            –Isle
      of Ledgewood
            Sep-07
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            1
            
            
            
            1Summerville
      Merger
            Sep-07
            
            
            –
            
            
            
            73
            
            
            
            73
            
            
            
            –
            
            
            
            73September
      30, 2007
            
            
            
            106
            
            
            
            147
            
            
            
            253
            
            
            
            35
            
            
            
            288Cooper
      George - disposition
            Oct-07
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (1
            )
            
            
            (1
            )Gardens
      at Westlake - disposition
            Oct-07
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (1
            )
            
            
            (1
            )Pinnacle
      - purchase
            Dec-07
            
            
            1
            
            
            
            –
            
            
            
            1
            
            
            
            –
            
            
            
            1December
      31, 2007
            
            
            
            107
            
            
            
            147
            
            
            
            254
            
            
            
            33
            
            
            
            287Courtyard
      of Loyalton - acquisition
            Jan-08
            
            
            –
            
            
            
            1
            
            
            
            1
            
            
            
            –
            
            
            
            1Summerville
      at Hazel Creek - acquisition
            Jan-08
            
            
            –
            
            
            
            1
            
            
            
            1
            
            
            
            –
            
            
            
            1March
      31, 2008
            
            
            
            107
            
            
            
            149
            
            
            
            256
            
            
            
            33
            
            
            
            289NHP
      Purchase
            Apr-08
            
            
            24
            
            
            
            (24
            )
            
            
            –
            
            
            
            –
            
            
            
            –Galleria
      Oaks - disposition
            May-08
            
            
            (1
            )
            
            
            –
            
            
            
            (1
            )
            
            
            –
            
            
            
            (1
            )Meridian
      Oaks - disposition
            May-08
            
            
            (1
            )
            
            
            –
            
            
            
            (1
            )
            
            
            –
            
            
            
            (1
            )Arborwood
      - purchase
            Jun-08
            
            
            1
            
            
            
            –
            
            
            
            1
            
            
            
            –
            
            
            
            1Emeritus
      at Stow - development
            Jun-08
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            1
            
            
            
            1HCN
      Purchase
            Jun-08
            
            
            19
            
            
            
            (19
            )
            
            
            –
            
            
            
            –
            
            
            
            –June
      30, 2008
            
            
            
            149
            
            
            
            106
            
            
            
            255
            
            
            
            34
            
            
            
            289








21
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents





Results
of Operations





Significant
Accounting Policies and Use of Estimates





For a
description of our significant accounting policies and estimates, see our Annual
Report on Form 10-K for the year ended December 31, 2007.





Statements
of Operations as Percentage of Revenues and Period-to-Period Percentage
Change





The
following table sets forth, for the periods indicated, certain items from our
condensed consolidated statements of operations as a percentage of total
revenues and the percentage change of the dollar amounts from period to
period.





Period-to-PeriodPercentageChangePercentage
      of Revenues
            
            
            Fav
      / (Unfav)Three
      Months
            
            
            Six
      MonthsThree
      Months Ended
            
            
            Six
      Months Ended
            
            
            Ended
            
            
            EndedJune
      30,
            
            
            June
      30,
            
            
            June
      30,
            
            
            June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            
            2008-2007
            
            
            
            2008-2007Revenues:
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            73.0
            %
            
            
            72.8
            %Expenses:Community
      operations*
            
            
            63.9
            
            
            
            62.1
            
            
            
            64.6
            
            
            
            62.5
            
            
            
            (78.1
            )
            
            
            (78.3
            )General
      and administrative
            
            
            7.9
            
            
            
            10.4
            
            
            
            7.9
            
            
            
            9.9
            
            
            
            (31.3
            )
            
            
            (37.5
            )Depreciation
      and amortization
            
            
            15.8
            
            
            
            13.2
            
            
            
            16.1
            
            
            
            13.3
            
            
            
            (106.0
            )
            
            
            (110.9
            )Facility
      lease expense
            
            
            11.9
            
            
            
            6.8
            
            
            
            12.0
            
            
            
            8.1
            
            
            
            (204.9
            )
            
            
            (155.8
            )Total
      operating expenses
            
            
            99.5
            
            
            
            92.5
            
            
            
            100.6
            
            
            
            93.8
            
            
            
            (86.2
            )
            
            
            (85.3
            )Operating
      income (loss) from continuing operations
            
            
            0.5
            
            
            
            7.5
            
            
            
            (0.6
            )
            
            
            6.2
            
            
            
            (88.9
            )
            
            
            (115.8
            )Other
      income (expense)Interest
      income
            
            
            0.3
            
            
            
            0.6
            
            
            
            0.4
            
            
            
            0.5
            
            
            
            (3.0
            )
            
            
            21.4Interest
      expense
            
            
            (12.2
            )
            
            
            (15.5
            )
            
            
            (11.7
            )
            
            
            (14.0
            )
            
            
            (35.4
            )
            
            
            (44.3
            )Change
      in fair value of interest rate swaps
            
            
            0.5
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            N/A
            
            
            
            N/AEquity
      gains (losses) in unconsolidated joint ventures
            
            
            0.4
            
            
            
            6.5
            
            
            
            (0.2
            )
            
            
            3.0
            
            
            
            90.6
            
            
            
            113.2Other,
      net
            
            
            (0.3
            )
            
            
            0.6
            
            
            
            -
            
            
            
            -
            
            
            
            (178.2
            )
            
            
            (714.3
            )Net
      other expense
            
            
            (11.3
            )
            
            
            (7.8
            )
            
            
            (11.6
            )
            
            
            (10.5
            )
            
            
            (151.4
            )
            
            
            (91.1
            )Loss
      from continuing operations before income taxes
            
            
            (10.8
            )
            
            
            (0.3
            )
            
            
            (12.2
            )
            
            
            (4.3
            )
            
            
            N/A
            
            
            
            N/AProvision
      for income taxes
            
            
            (0.2
            )
            
            
            (0.9
            )
            
            
            (0.1
            )
            
            
            (0.6
            )
            
            
            74.1
            
            
            
            63.6Loss
      from continuing operations
            
            
            (10.9
            )
            
            
            (1.2
            )
            
            
            (12.3
            )
            
            
            (4.9
            )
            
            
            N/A
            
            
            
            N/ALoss
      from discontinued operations
            
            
            (2.6
            )
            
            
            (0.3
            )
            
            
            (1.4
            )
            
            
            (0.3
            )
            
            
            N/A
            
            
            
            N/ANet
      loss
            
            
            (13.5
            %)
            
            
            (1.5
            %)
            
            
            (13.7
            %)
            
            
            (5.2
            %)
            
            
            N/A
            
            
            
            N/A





*  exclusive
of depreciation and amortization and facility lease expense shown
separately.











22
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents





Comparison of the Three
Months Ended June 30, 2008 and 2007





Total
Operating Revenues:





Three
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            % D(in
      thousands, except percentages)Community
      revenue
            
            $
            185,705
            
            
            $
            107,137
            
            
            $
            78,568
            
            
            
            73.3
            %Management
      fees
            
            
            1,223
            
            
            
            930
            
            
            
            293
            
            
            
            31.5
            %Total
      operating revenues
            
            $
            186,928
            
            
            $
            108,067
            
            
            $
            78,861
            
            
            
            73.0
            %





Three
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            % DAverage
      monthly revenue per occupied unit
            
            $
            3,372
            
            
            $
            3,212
            
            
            $
            160
            
            
            
            5.0
            %Average
      occupancy rate
            
            
            86.4
            %
            
            
            86.4
            %
            
            
            
            
            
            
            .0
            ppt*





*
percentage points





Of the
$78.6 million increase in community revenues for the three months ended June 30,
2008, compared to the three months ended June 30, 2007, approximately $74.3
million was due to the addition of 86 new communities, including the Summerville
communities.  The remaining increase of $4.3 million was primarily due
to the increase in the average monthly revenue per occupied unit.





We
continue our efforts to build our occupancy through increased marketing
initiatives, programs that address resident mix and a focus on property
improvements and other community-level enhancements to attract additional
long-term residents and increase occupancy while maintaining growth in average
monthly revenue per unit.  We believe that these initiatives will
continue to have a positive impact on operating performance over
time.





The
increase in management fee revenue was primarily due to the Blackstone joint
venture (Blackstone JV) (see Note 4 to the Unaudited Condensed Consolidated
Financial Statements above), from which we recorded $822,000 and $696,000 in the
three-month periods ended June 30, 2008 and 2007, respectively.





Community
Operations:





Three
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Community
      operations
            
            $
            119,526
            
            
            $
            67,094
            
            
            $
            52,432
            
            
            
            78.1
            %As
      a percent of revenue
            
            
            63.9
            %
            
            
            62.1
            %
            
            
            
            
            
            
            2.1
            ppt





Of the
$52.4 million increase in community operations expenses, $48.1 million was due
to the addition of 86 new communities, including the Summerville
communities.  The remaining increase of $4.3 million was primarily
related to increases in employee salaries and benefits of $2.7 million and $1.6
million in various other community operating expenses.





23
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents





General
and Administrative:





Three
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)General
      and administrative
            
            $
            14,731
            
            
            $
            11,221
            
            
            $
            3,510
            
            
            
            31.3
            %As
      a percent of revenue
            
            
            7.9
            %
            
            
            10.4
            %
            
            
            
            
            
            
            (2.5
            )
      ppt





The
growth in general and administrative expenses of $3.5 million was primarily
related to staffing costs for regional and corporate overhead positions,
comprised of increases in the number of personnel and in average salaries, and
consisted of approximately $2.2 million in salaries and benefits, including an
increase of $650,000 in non-cash stock compensation expense.  Much of
the increase in staffing costs relates to the addition of the 86 new
communities, including the Summerville communities.  The remaining
increase consisted primarily of increases in consulting and legal fees, travel,
and payroll processing costs.  Included in general and administrative
expenses was non-cash stock compensation expense of $1.4 million and $786,000
for the three months ended June 30, 2008 and 2007,
respectively.  Ongoing stock option expense is approximately $1.4
million per quarter based on the current stock options outstanding.





General
and administrative expense as a percentage of operating revenues for all
communities, including managed communities, may be more meaningful for
industry-wide comparisons.  General and administrative expense as a
percentage of community operating revenues for all managed and consolidated
communities decreased to 6.9% for the three months ended June 30, 2008 from 8.5%
for the three months ended June 30, 2007.





Depreciation
and Amortization:





Three
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Depreciation
      and amortization
            
            $
            29,451
            
            
            $
            14,294
            
            
            $
            15,157
            
            
            
            106.0
            %As
      a percent of revenue
            
            
            15.8
            %
            
            
            13.2
            %
            
            
            
            
            
            
            2.6
            ppt





The
increase in depreciation and amortization expense of $15.2 million was primarily
the result of $14.1 million in depreciation and amortization expense related to
new communities we acquired and a $1.9 million increase from the acquisition of
properties formerly leased, partially offset by a decrease of $862,000 in
depreciation expense for the remaining communities.





Facility
Lease Expense:





Three
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Facility
      lease expense
            
            $
            17,435
            
            
            $
            7,164
            
            
            $
            10,271
            
            
            
            143.4
            %Above/below
      market rent
            
            
            2,524
            
            
            
            –
            
            
            
            2,524
            
            
            
            N/AStraight-line
      rent
            
            
            2,354
            
            
            
            153
            
            
            
            2,201
            
            
            
            N/ATotal
      facility lease expense
            
            $
            22,313
            
            
            $
            7,317
            
            
            $
            14,996
            
            
            
            204.9
            %As
      a percent of revenue
            
            
            11.9
            %
            
            
            6.8
            %
            
            
            
            
            
            
            5.1
            ppt








24
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents


The
increase in facility lease expense of $15.0 million was primarily due to the
operating lease expense increase of $20.4 million due to the addition of new
leased communities, partially offset by a decrease of $6.2 million due to the
acquisitions of communities we previously leased.  The remaining
increase of $806,000 was primarily due to annual lease escalators on other
leased communities.  We leased 71 and 38 communities under operating
leases as of June 30, 2008 and 2007, respectively.  The increase in
the number of leased communities was due primarily to the acquisition of
Summerville, offset in part by acquisitions of communities we previously
leased.





Interest
Income:





Three
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Interest
      income
            
            $
            581
            
            
            $
            599
            
            
            $
            (18
            )
            
            
            (3.0
            %)As
      a percent of revenue
            
            
            0.3
            %
            
            
            0.6
            %
            
            
            
            
            
            
            (.3
            )
      ppt





Interest
income is primarily attributable to interest earned on invested cash balances,
interest earned on collateral paid in advance for workers’ compensation, and
interest earned on restricted deposits.





Interest
Expense:





Three
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Interest
      expense
            
            $
            (22,741
            )
            
            $
            (16,801
            )
            
            $
            (5,940
            )
            
            
            35.4
            %As
      a percent of revenue
            
            
            (12.2
            %)
            
            
            (15.5
            %)
            
            
            
            
            
            
            3.3
            ppt





The
increase in interest expense of $5.9 million for the second quarter of 2008 as
compared to the 2007 period was primarily due to an increase of $7.1 million in
interest expense from financings on the acquisition of communities and debt
assumed in the Summerville acquisition, partially offset by reductions in other
interest expense of $1.0 million due to the refinancings and normal reductions
on other loans and mortgages.





Change
      in fair value of interest rate
swaps:





Three
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Change
      in fair value of interest rate swaps
            
            $
            972
            
            
            $
            –
            
            
            $
            972
            
            
            
            N/AAs
      a percent of revenue
            
            
            0.5
            %
            
            
            –
            
            
            
            
            
            
            
            .5
            ppt





For the
three months ended June 30, 2008, we had unrealized gains of $972,000, which
represent the change in the fair value of the interest rate swaps.





25
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents





Equity
Gains in Unconsolidated Joint Ventures:





Three
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Equity
      gains inunconsolidated
      joint ventures
            
            $
            665
            
            
            $
            7,065
            
            
            $
            (6,400
            )
            
            
            (90.6
            %)As
      a percent of revenue
            
            
            0.4
            %
            
            
            6.5
            %
            
            
            
            
            
            
            (6.1
            )ppt





The
equity gains of $794,000 from the Blackstone JV for the three months ended June
30, 2008, includes $876,000 in unrealized gains from the change in the fair
value of interest rate swaps and were partially offset by equity losses of
$130,000 from the Stow JV.  The equity gains in unconsolidated joint
ventures of $7.1 million in the three months ended June 30, 2007, primarily
reflects net equity gains of $7.7 million recognized in connection with the
Company’s divestiture of its investment in Senior Med, partially offset by
equity operating losses in Senior Med of $113,000 and in the Blackstone JV of
$450,000.  We sold our interest in Senior Med in May
2007.





Other,
net:





Three
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Other,
      net
            
            $
            (580
            )
            
            $
            742
            
            
            $
            (1,322
            )
            
            
            (178.2
            %)As
      a percent of revenue
            
            
            (0.3
            %)
            
            
            0.6
            %
            
            
            
            
            
            
            (.9
            )
      ppt




Other,
net in 2008 primarily reflects $1.1 million of expenses related to refinancing
transactions, partially offset by the amortization of deferred gains of
$502,000.  Other, net in the three months ended June 30, 2007, primarily
reflects $549,000 of
amortization of deferred gains in 2007 and an increase of $189,000 on our
investment for our non-qualified compensation plan.




Income
Taxes:





Three
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Provision
      for income taxes
            
            $
            (270
            )
            
            $
            (1,044
            )
            
            $
            774
            
            
            
            N/AAs
      a percent of revenue
            
            
            (0.2
            %)
            
            
            (0.9
            %)
            
            
            
            
            
            
            (0.7
            )
      ppt





The
income tax provision in 2008 represents estimated state income and franchise tax
liabilities.  In the 2007 period, the tax provision represents estimated
taxes on the gain from the Senior Med transaction. The estimated tax benefit of
excess stock compensation deductions in 2007 in the amount of $286,000 was
credited to additional paid-in capital.


Net Loss and Property-Related
Expense:





In
comparing the net loss for the three months ended June 30, 2008 and 2007, it is
important to consider our property-related expenses, which include depreciation
and amortization, facility lease expense, and interest expense that are directly
related to our communities, and which include capital lease accounting
treatment, finance accounting treatment, or straight-line accounting treatment
of rent escalators for many of our leases.  These





26
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents


accounting
treatments all result in greater property-related expense than actual lease
payments made in the early years of the affected leases and less
property-related expense than actual lease payments made in later years, as
detailed in the tables below.





Detail
      of property-related expenses from lease accounting
    treatment:Three
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Total
      property-related expense:Depreciation
      and amortization
            
            $
            29,451
            
            
            $
            14,294
            
            
            $
            15,157
            
            
            
            106.0
            %Total
      facility lease expense
            
            
            22,313
            
            
            
            7,317
            
            
            
            14,996
            
            
            
            204.9
            %Interest
      expense
            
            
            22,741
            
            
            
            16,801
            
            
            
            5,940
            
            
            
            35.4
            %Total
      property-related expense
            
            $
            74,505
            
            
            $
            38,412
            
            
            $
            36,093
            
            
            
            94.0
            %Property-related
      expenses from lease accounting treatment:Depreciation
      and amortization
            
            $
            6,248
            
            
            $
            9,210
            
            
            $
            (2,962
            )
            
            
            (32.2
            %)Interest
      expense
            
            
            6,118
            
            
            
            9,557
            
            
            
            (3,439
            )
            
            
            (36.0
            %)Straight-line
      lease expense
            
            
            2,354
            
            
            
            153
            
            
            
            2,201
            
            
            
            N/AOperating
      lease expense
            
            
            17,435
            
            
            
            7,164
            
            
            
            10,271
            
            
            
            143.4
            %Total
      property-related lease expense
            
            
            32,155
            
            
            
            26,084
            
            
            
            6,071
            
            
            
            23.3
            %Actual
      lease payments
            
            
            (27,149
            )
            
            
            (22,025
            )
            
            
            (5,124
            )
            
            
            23.3
            %Expense
      in excess of lease payments
            
            $
            5,006
            
            
            $
            4,059
            
            
            $
            947
            
            
            
            23.3
            %





Our
property-related expense associated with our leases exceeded our actual lease
payments by $5.0 million and $4.1 million for the three months ended June 30,
2008 and 2007, respectively.  The impact of lease accounting increased
by $947,000 in the current year quarter from the comparable quarter last year
due primarily to the Summerville acquisition, partially offset by a reduction in
interest expense on the capital leases in connection with the normal paydown of
the lease obligation and the termination of leases from the acquisition of the
formerly leased communities.  Notwithstanding the effects of lease
accounting treatment, the actual lease payments required under most of our
leases will continue to increase annually and, as a result, we will need to
improve our results from community operations to cover these
increases.  However, in the quarter ended June 30, 2008, the actual
lease payments increased from the comparable period in the prior year due to the
acquisition transactions discussed in Note 4 to the Unaudited Condensed
Consolidated Financial Statements.








27
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents





Comparison of the Six Months
Ended June 30, 2008 and 2007





Total
Operating Revenues:





Six
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Total
      community revenues
            
            $
            370,442
            
            
            $
            213,958
            
            
            $
            156,484
            
            
            
            73.1
            %Management
      fees
            
            
            2,382
            
            
            
            1,807
            
            
            
            575
            
            
            
            31.8
            %Total
      operating revenues
            
            $
            372,824
            
            
            $
            215,765
            
            
            $
            157,059
            
            
            
            72.8
            %





Six
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      DAverage
      monthly revenue per occupied unit
            
            $
            3,349
            
            
            $
            3,198
            
            
            $
            151
            
            
            
            4.7
            %Average
      occupancy rate
            
            
            86.8
            %
            
            
            86.6
            %
            
            
            
            
            
            
            .2
            ppt





Of the
$156.5 million increase in community revenues for the six months ended June 30,
2008, compared to the six months ended June 30, 2007, approximately $148.3
million was due to the addition of 86 new communities, including the Summerville
communities.  The remaining increase of $8.2 million was primarily due
to increases in the average monthly revenue per occupied unit.





We
continue our efforts to build our occupancy through increased marketing
initiatives, programs that address resident mix and a focus on property
improvements and other community-level enhancements to attract additional
long-term residents and increase occupancy while maintaining growth in average
monthly revenue per unit.  We believe that these initiatives will
continue to have a positive impact on operating performance over
time.





The
increase in management fee revenue was primarily due to the Blackstone JV, from
which we recognized $1.6 million and $1.3 million in the six-month periods ended
June 30, 2008 and 2007, respectively.





Community
Operations:





Six
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Community
      operations
            
            $
            240,612
            
            
            $
            134,972
            
            
            $
            105,640
            
            
            
            78.3
            %As
      a percent of revenue
            
            
            64.6
            %
            
            
            62.5
            %
            
            
            
            
            
            
            2.1
            ppt








Of the
$105.6 million increase in community operating expense, $97.7 million was due to
the addition of 86 new communities, including the Summerville
communities.  Of the remaining increase of $7.9 million, $6.1 million
was primarily due to increases in labor-related costs.  The remaining
increase of $1.8 million was primarily related to increases in various other
community operating expenses.  Included in this net increase was a
$1.9 million decrease in professional and general liability insurance expense in
2008 based upon an actuarial valuation report compared to a similar decrease of
$2.5 million in the comparable period of 2007.





28
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents


General and Administrative:





Six
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)General
      and administrative
            
            $
            29,342
            
            
            $
            21,336
            
            
            $
            8,006
            
            
            
            37.5
            %As
      a percent of revenue
            
            
            7.9
            %
            
            
            9.9
            %
            
            
            
            
            
            
            (2.0
            )
      ppt





The
growth in general and administrative expenses of $8.0 million was primarily
related to staffing costs for regional and corporate overhead positions,
comprised of increases in the number of personnel and in average salaries, and
consisted of approximately $5.5 million in salaries and benefits, including an
increase of $1.5 million in non-cash stock compensation expense.  Much
of the increase in staffing costs relates to the addition of the 86 new
communities, including the Summerville communities.  The remaining
increase consisted primarily of increases in consulting and legal fees, travel,
payroll processing costs, telephone, and dues and subscriptions.





General
and administrative expense as a percentage of operating revenues for all
communities, including managed communities, may be more meaningful for
industry-wide comparisons.  General and administrative expense as a
percentage of community operating revenues for all managed and consolidated
communities decreased to 6.9% for the six months ended June 30, 2008 from 8.1%
for the six months ended June 30, 2007.





Depreciation
and Amortization:





Six
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Depreciation
      and amortization
            
            $
            60,355
            
            
            $
            28,624
            
            
            $
            31,731
            
            
            
            110.9
            %As
      a percent of revenue
            
            
            16.1
            %
            
            
            13.3
            %
            
            
            
            
            
            
            2.8
            ppt








The
increase in depreciation and amortization expense of $31.7 million was primarily
the result of $28.2 million in depreciation and amortization expense related to
new communities we acquired and a $4.8 million increase from the acquisition of
properties formerly leased, partially offset by a decrease of $1.3 million in
depreciation expense for the remaining communities.





Facility
Lease Expense:





Six
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Facility
      lease expense
            
            $
            34,789
            
            
            $
            17,124
            
            
            $
            17,665
            
            
            
            103.2
            %Above/below
      market rent
            
            
            5,048
            
            
            
            –
            
            
            
            5,048
            
            
            
            N/AStraight-line
      rent
            
            
            4,792
            
            
            
            326
            
            
            
            4,466
            
            
            
            N/ATotal
      facility lease expense
            
            $
            44,629
            
            
            $
            17,450
            
            
            $
            27,179
            
            
            
            155.8
            %As
      a percent of revenue
            
            
            12.0
            %
            
            
            8.1
            %
            
            
            
            
            
            
            3.9
            ppt





The
increase in facility lease expense of $27.2 million was primarily due to the
operating lease expense increase of $40.8 million due to the addition of new
leased communities, partially offset by a decrease of $14.8 million due
to





29
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents


the
acquisitions of communities we previously leased.  The remaining
increase of $1.2 million was primarily due to annual lease escalators on other
leased communities.  We leased 71 and 38 communities under operating
leases as of June 30, 2008 and 2007, respectively.  The increase in
the number of leased communities was due primarily to the acquisition of
Summerville, offset in part by acquisitions of communities we previously
leased.





Interest
Income:





Six
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Interest
      income
            
            $
            1,435
            
            
            $
            1,182
            
            
            $
            253
            
            
            
            21.4
            %As
      a percent of revenue
            
            
            0.4
            %
            
            
            0.5
            %
            
            
            
            
            
            
            (.1
            )
      ppt





Interest
income was primarily attributable to interest earned on invested cash balances,
interest earned on collateral paid in advance for workers’ compensation, and
interest earned on restricted deposits.





Interest
Expense:





Six
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Interest
      expense
            
            $
            43,783
            
            
            $
            30,333
            
            
            $
            13,450
            
            
            
            44.3
            %As
      a percent of revenue
            
            
            11.7
            %
            
            
            14.0
            %
            
            
            
            
            
            
            (2.3
            )
      ppt





The
increase in interest expense of $13.5 million for the first six months of 2008
as compared to the 2007 period was primarily due to an increase of $15.5 million
in interest expense from financings on the acquisition of communities and debt
assumed in the Summerville acquisition, partially offset by reductions of $2.0
million in other interest expense due to the refinancings and normal reductions
on other loans and mortgages.





Change
      in fair value of interest rate
swaps:





Six
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Change
      in fair value of interest rate swaps
            
            $
            135
            
            
            $
            –
            
            
            $
            135
            
            
            
            N/AAs
      a percent of revenue
            
            
            –
            
            
            
            –
            
            
            
            
            
            
            
            0.0
            ppt





For the
six months ended June 30, 2008, we had unrealized gains of $135,000, which
represent the change in the fair value of the interest rate swaps.





30
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents





Equity
Gains (Losses) in Unconsolidated Joint Ventures:





Six
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Equity
      gains (losses) inunconsolidated
      joint ventures
            
            $
            (857
            )
            
            $
            6,496
            
            
            $
            (7,353
            )
            
            
            (113.2
            %)As
      a percent of revenue
            
            
            (0.2
            %)
            
            
            3.0
            %
            
            
            
            
            
            
            (3.2
            )
      ppt





The
equity losses for the six months ended June 30, 2008, were comprised of equity
losses of $705,000 from the Blackstone JV, partially offset by an $85,000 gain
relating to a change in the fair value of an interest rate swap, and equity
losses of $152,000 from the Stow JV.  The equity gains in
unconsolidated joint ventures of $6.5 million in 2007 primarily reflects net
equity gains of $7.7 million recognized in connection with the Company’s
divestiture of its investment in Senior Med, partially offset by equity
operating losses in Senior Med of $113,000 and the Blackstone JV of $845,000 for
the six months ended June 30, 2007.  We sold our interest in Senior
Med in May 2007.





Other,
net:





Six
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Other,
      net
            
            $
            (172
            )
            
            $
            28
            
            
            $
            (200
            )
            
            
            N/AAs
      a percent of revenue
            
            
            –
            
            
            
            –
            
            
            
            
            
            
            
            .0
            ppt





Other,
net in 2008 primarily reflects $1.1 million of expenses related to refinancing
transactions, partially offset by the amortization of deferred gains of $1.0
million.  The balance in 2007 primarily relates to the incentive
payment of $1.3 million related to the early conversion of approximately $16.1
million of our convertible debentures into common stock, offset by $1.1 million
of amortization of deferred gains.




Income
Taxes:





Six
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Provision
      for income taxes
            
            $
            (480
            )
            
            $
            (1,320
            )
            
            $
            840
            
            
            
            N/AAs
      a percent of revenue
            
            
            (0.1
            %)
            
            
            (0.6
            %)
            
            
            
            
            
            
            (0.5
            )
      ppt





The
income tax provision in 2008 represents estimated state income and franchise tax
liabilities.  In the 2007 period, the tax provision represents estimated
taxes on the gain from the Senior Med transaction. The estimated tax benefit of
excess stock compensation deductions in 2007 in the amount of $557,000 was
credited to additional paid-in capital.





Net Loss and Property-Related
Expense:





In
comparing the net loss for the six months ended June 30, 2008 and 2007, it is
important to consider our property-related expenses, which include depreciation
and amortization, facility lease expense, and interest expense that are directly
related to our communities, and which include capital lease accounting
treatment, finance accounting





31
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents


treatment,
or straight-line accounting treatment of rent escalators for many of our
leases.  These accounting treatments all result in greater
property-related expense than actual lease payments made in the early years of
the affected leases and less property-related expense than actual lease payments
made in later years, as detailed in the tables below.





Detail
      of property-related expenses from lease accounting
    treatment:Six
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      D(in
      thousands, except percentages)Total
      property-related expense:Depreciation
      and amortization
            
            $
            60,355
            
            
            $
            28,624
            
            
            $
            31,731
            
            
            
            110.9
            %Total
      facility lease expense
            
            
            44,629
            
            
            
            17,450
            
            
            
            27,179
            
            
            
            155.8
            %Interest
      expense
            
            
            43,783
            
            
            
            30,333
            
            
            
            13,450
            
            
            
            44.3
            %Total
      property-related expense
            
            $
            148,767
            
            
            $
            76,407
            
            
            $
            72,360
            
            
            
            94.7
            %Property-related
      expenses from lease accounting treatment:Depreciation
      and amortization
            
            $
            15,841
            
            
            $
            18,753
            
            
            $
            (2,912
            )
            
            
            (15.5
            %)Interest
      expense
            
            
            14,806
            
            
            
            19,649
            
            
            
            (4,843
            )
            
            
            (24.6
            %)Straight-line
      lease expense
            
            
            4,792
            
            
            
            326
            
            
            
            4,466
            
            
            
            N/AOperating
      lease expense
            
            
            34,789
            
            
            
            17,124
            
            
            
            17,665
            
            
            
            103.2
            %Total
      property-related lease expense
            
            
            70,228
            
            
            
            55,852
            
            
            
            14,376
            
            
            
            25.7
            %Actual
      lease payments
            
            
            (58,729
            )
            
            
            (47,442
            )
            
            
            (11,287
            )
            
            
            23.8
            %Expense
      in excess of lease payments
            
            $
            11,499
            
            
            $
            8,410
            
            
            $
            3,089
            
            
            
            36.7
            %





Our
property-related expense associated with our leases exceeded our actual lease
payments by $11.5 million and $8.4 million for the six months ended June 30,
2008 and 2007, respectively.  The impact of lease accounting increased
by $3.1 million in the first two quarters of the current year from the
comparable period last year due primarily to the Summerville acquisition,
partially offset by a reduction in interest expense on the capital leases in
connection with the normal paydown of the lease obligation and the termination
of leases from the acquisition of the formerly leased
communities.  Notwithstanding the effects of lease accounting
treatment, the actual lease payments required under most of our leases will
continue to increase annually and, as a result, we will need to improve our
results from community operations to cover these increases.  However,
in the six months ended June 30, 2008, the actual lease payments increased over
the comparable period in the prior year due to the acquisition transactions
discussed in Note 4 to the Unaudited Condensed Consolidated Financial
Statements.








32
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents


Same
Community Comparison





Of our
255 communities, we have operated 169 communities continuously since January 1,
2007, which we refer to as our “same communities.”  The following
table sets forth a comparison of same communities results of operations for the
three months ended June 30, 2008 and 2007, respectively, excluding general and
administrative expenses.





Three
      Months Ended June 30,(In
      thousands)$D
            
            
            %
      D2008
            
            
            2007
            
            
            Fav
      / (Unfav)
            
            
            Fav
      / (Unfav)Revenue
            
            $
            111,419
            
            
            $
            107,323
            
            
            $
            4,096
            
            
            
            3.8
            %Community
      operations *
            
            
            (72,838
            )
            
            
            (69,506
            )
            
            
            (3,332
            )
            
            
            (4.8
            )Community
      operating income
            
            
            38,581
            
            
            
            37,817
            
            
            
            764
            
            
            
            2.0Depreciation
      & amortization
            
            
            (15,244
            )
            
            
            (14,217
            )
            
            
            (1,027
            )
            
            
            (7.2
            )Facility
      lease expense
            
            
            (1,623
            )
            
            
            (7,103
            )
            
            
            5,480
            
            
            
            77.2Operating
      income
            
            
            21,714
            
            
            
            16,497
            
            
            
            5,217
            
            
            
            31.6Interest
      expense, net
            
            
            (18,790
            )
            
            
            (15,945
            )
            
            
            (2,845
            )
            
            
            (17.8
            )Operating
      income after interest expense
            
            $
            2,924
            
            
            $
            552
            
            
            $
            2,372
            
            
            
            429.7
            %* exclusive
      of depreciation and amortization and facility lease expense shown
      separately





These
same communities represented $111.4 million or 60.0% of our total community
revenue of $185.7 million for the second quarter of 2008.  The
increase in same community revenues of $4.1 million was primarily due to
improvements in average revenue per occupied unit.





Three
      Months Ended June 30,2008
            
            
            2007
            
            
            $D
            
            
            %
      DAverage
      monthly revenue per occupied unit
            
            $
            3,315
            
            
            $
            3,217
            
            
            $
            98
            
            
            
            3.0
            %Average
      occupancy rate
            
            
            86.2
            %
            
            
            86.4
            %
            
            
            
            
            
            
            (.2
            )
      ppt





The
increase of $3.3 million in community operations expenses for our same
communities was primarily related to normal inflationary increases in
employee-related expenses of $3.0 million including salaries and workers’
compensation expense.  The remainder was primarily related to
increases in various other community operating expenses.





Property-related
expenses (depreciation and amortization, facility lease expense, and interest
expense, net of interest income) for our same communities decreased by
approximately $1.6 million, which primarily reflects the effect of the
termination of leases from the acquisition of communities formerly leased, which
increased depreciation and amortization by $1.0 million and increased interest
expense by $2.8 million, while decreasing facility lease expense by $5.5
million.





Operating
income after interest expense for our same communities increased from $552,000
to $2.9 million for a total increase of $2.4 million from the comparable period
of 2007, primarily as a result of an increase in operating income and of the
property-related expenses discussed above.  We will continue our
efforts to build our occupancy through increased marketing initiatives, programs
that address resident mix and a focus on property improvements and other
community-level enhancements to attract additional long-term residents and
increase occupancy while maintaining growth in average monthly revenue per
unit.  We believe that these initiatives will have a positive impact
on operating performance over time.





33
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents


Liquidity
and Capital Resources





At June
30, 2008, we had cash on hand of $37.2 million compared to $67.7 million at
December 31, 2007.  We had working capital deficits of $37.4 million
and $31.4 million at June 30, 2008 and December 31, 2007,
respectively.





We have
incurred significant operating losses since our inception.  Due to the
nature of our business, it is not unusual to operate in the position of a
working capital deficit because revenues are collected more quickly, often in
advance, than obligations are required to be paid.  The result is a
very low level of current assets to the extent cash has been deployed in
business development opportunities or to pay down long-term
liabilities.  Along those lines, the working capital deficit at June
30, 2008, includes $27.2 million of deferred revenue and unearned rental income,
which will not require a future outlay of cash.  The level of current
liabilities is not expected to change from period to period in such a way as to
require the use of significant cash in excess of normal requirements, except for
(i) convertible debentures of $10.5 million, which were paid off at maturity on
July 1, 2008, (ii) the current portion of long-term debt of $24.3 million due by
June 30, 2009, and (iii) long-term debt maturities of $122.6 million due after
June 2009 but prior to June 30, 2010, which the Company plans to refinance prior
to their due dates or will pay them at maturity.





While we
have reported positive cash flows from operating activities over the past three
years, our cash flows have not always been sufficient to pay all of our
long-term obligations and we have been dependent upon third-party financing or
disposition of assets to fund operations.  We cannot guarantee that,
if necessary in the future, such transactions will be readily available to us,
or on terms attractive to us, but we believe that we will be able to sustain
positive operating cash flow or have adequate cash reserves and sources of
capital for all necessary investing and financing activities including required
debt service and capital expenditures through at least the next 12
months.  In February 2008, we obtained a $25.0 million unsecured
revolving line of credit as described below.





The
following is a summary of cash flow information for the six months ended June
30, 2008 and 2007 (in thousands):





2008
            
            
            2007Cash
      provided by operating activities
            
            $
            39,262
            
            
            $
            23,550Cash
      used in investing activities
            
            
            (563,816
            )
            
            
            (196,806
            )Cash
      provided by financing activities
            
            
            494,049
            
            
            
            185,731Net
      increase (decrease) in cash and cash equivalents
            
            
            (30,505
            )
            
            
            12,475Cash
      and cash equivalents at the beginning of the period
            
            
            67,710
            
            
            
            14,049Cash
      and cash equivalents at the end of the period
            
            $
            37,205
            
            
            $
            26,524





In the
first six months of 2008 and in each of the previous three years, we reported
positive net cash from operating activities in our consolidated statements of
cash flows.  The increase in cash provided by operating activities in
the first six months of 2008 compared to the prior year period is due primarily
to the additional cash flow as a result of the completion of the Summerville
acquisition in September 2007, the strength of the performance of the
communities we operated during both periods, and fluctuations in the timing of
receivables and payables.  Additionally, by purchasing the real estate
underlying leased facilities, we replaced lease payments with lower levels of
debt service and also avoided future scheduled lease escalators.





The
increase in cash used in investing activities was primarily due to the number of
current year acquisitions as compared to the prior period.  In the
first two quarters of 2008, we purchased 43 communities that we previously
operated under lease agreements and purchased one additional
community.  As a result, cash paid for acquisitions of property and
equipment amounted to $564.1 million in the first two quarters of 2008 compared
to $196.1 million in the prior year period.





34
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents


The
increase in cash provided by financing activities was related to the increase in
acquisition activity described in the previous paragraph.  As a result,
proceeds from long-term borrowings, net of repayments, amounted to $512.1
million in the first six months of 2008 compared to $182.3 million in the prior
year period.  This increase in net cash proceeds was offset in part by an
increase in debt issuance costs ($6.6 million), cash placed in escrow for the
redemption of convertible debentures in 2008 ($10.8 million) and fluctuations in
restricted cash balances ($3.3 million).




At June
30, 2008, we had payment obligations for long-term debt, capital and financing
leases, and convertible debentures due in the next 12 months totaling
approximately $44.8 million.  In addition, for the year ending
December 31, 2008, we anticipate that we will make investments
of approximately $19.9 million to $24.7 million for capital expenditures,
comprised of approximately $13.9 million to $14.7 million of routine capital
expenditures (including corporate capital expenditures) and approximately $6.0
million to $10.0 million of net capital expenditures in connection with our
community expansion and development program.  In the first six months
of 2008, our capital expenditures (excluding acquisition of communities) totaled
$18.9 million, of which $7.5 million was for routine capital requirements, $2.3
million for computer and related equipment to support new sales and marketing
systems, and $9.1 million related to community expansion and development,
including projects begun in 2007.  We had $37.2 million of available
cash at June 30, 2008, to fund any 2008 payment requirements in excess of cash
generated from operations.  The convertible debentures in the amount
of $10.5 million were paid off at maturity on July 1, 2008, using cash
classified as “Restricted cash in escrow” on the balance sheet as of June 30,
2008.


.


In April
2008, we refinanced the mortgage debt on 23 of our existing properties, which
provided net cash proceeds of $25.6 million.  We also extended the
term of a $21.4 million note payable due in March 2008 to March
2009.  We will need to continue our improvements in operating
performance or seek other sources of cash to meet our payment obligations in
future years.  The United States economy experienced a significant
decline in the housing market and a related weakness in the availability and
affordability of credit during 2007 and the first half of 2008.  We
believe that the slowdown in the housing market and the constriction of credit
are likely to continue throughout 2008.  Moreover, leading economic
indicators such as employment levels and income growth predict a downward trend
in the United States economy during 2008, and possibly a
recession.  However, we believe that need-driven demand for our
services continues to grow and remains resilient, in spite of the overall
housing and economic concerns, as evidenced by the relative stability in
occupancy, improvements in cash flows, and our ability to finance the
acquisition of 141 properties during 2007 and 2008, including the acquisition of
24 NHP communities completed in April 2008 and the acquisition of 19 HCN
communities in June 2008.





As a
consequence of our property and lease transactions in 2008, our long-term debt
increased from $113.0 million at December 31, 2006, to $1.3 billion at June 30,
2008, including the convertible debentures repaid on July 1,
2008.  Our obligations under operating leases have increased from
$299.3 million to $841.6 million primarily due to the Summerville acquisition,
and our capital lease and financing obligations decreased from $608.6 million to
$234.3 million primarily as a result of the acquisition of leased
properties.  Many of our debt instruments and leases contain
“cross-default” provisions pursuant to which a default under one obligation can
cause a default under one or more other obligations.  Such
cross-default provisions affect the majority of our properties and as a result,
any event of default could cause a material adverse effect on our financial
condition.  Defaults can include certain financial covenants, which
generally relate to lease coverage and cash flow.  In addition, we are
required to maintain the leased properties in a reasonable and prudent
manner.  For the six months ended June 30, 2008, we were in violation
of one or more covenants related to rent coverage ratios or occupancy in certain
of our leases and a mortgage, but have obtained waivers from the owners/lenders
related to these lease covenant defaults.  The waivers expire on
 July 1, 2009.





On
February 8, 2008, we entered into a credit agreement with Wells Fargo Bank,
National Association, which provides a $25.0 million unsecured revolving line of
credit.  The credit agreement permits us to borrow from time to time
up to $25.0 million on an unsecured basis.  The credit agreement also
allows us to obtain letters of credit from the lender, provided that outstanding
letters of credit and any borrowings outstanding do not exceed $25.0
million.  See Note 5, Long-Term Debt, for further
details.  There were no outstanding borrowings under the line of
credit as of June 30, 2008.











35
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents


The
following table summarizes our contractual obligations at June 30, 2008, (in
thousands):





Principal
      and Lease Payments Due by PeriodAfter
      5Contractual Obligations
            
            Total
            
            
            1 year
            
            
            2-3 years
            
            
            4-5 years
            
            
            yearsLong-term
      debt, including current portion
            
            $
            1,255,790
            
            
            $
            24,270
            
            
            $
            184,309
            
            
            $
            195,033
            
            
            $
            852,178Capital
      lease and financing obligations,including
      current portion
            
            
            234,312
            
            
            
            10,043
            
            
            
            23,212
            
            
            
            29,044
            
            
            
            172,013Operating
      leases
            
            
            841,609
            
            
            
            67,610
            
            
            
            138,195
            
            
            
            141,383
            
            
            
            494,421Convertible
      debentures
            
            
            10,455
            
            
            
            10,455
            
            
            
            -
            
            
            
            -
            
            
            
            -$
            2,342,166
            
            
            $
            112,378
            
            
            $
            345,716
            
            
            $
            365,460
            
            
            $
            1,518,612





The
following table summarizes interest on our contractual obligations at June 30,
2008, (in thousands):








Interest
      Due by PeriodAfter
      5Contractual Obligations
            
            Total
            
            
            1 year
            
            
            2-3 years
            
            
            4-5 years
            
            
            yearsLong-term
      debt
            
            $
            580,901
            
            
            $
            80,919
            
            
            $
            149,106
            
            
            $
            120,774
            
            
            $
            230,102Capital
      lease and financing obligations
            
            
            149,729
            
            
            
            17,402
            
            
            
            32,690
            
            
            
            29,180
            
            
            
            70,457Convertible
      debentures
            
            
            327
            
            
            
            327
            
            
            
            -
            
            
            
            -
            
            
            
            -$
            730,957
            
            
            $
            98,648
            
            
            $
            181,796
            
            
            $
            149,954
            
            
            $
            300,559








Recent
Accounting Pronouncements





For a
discussion of recently issued accounting pronouncements, see Note 2 to the
Unaudited Condensed Consolidated Financial Statements included in this
report.





Impact of Inflation





To date,
inflation has not had a significant impact on us.  Inflation could,
however, affect our cost of doing business, and consequently, our operating
income due to limitations on our ability to increase monthly rates because of
our dependence on the senior resident population, most of whom rely on
relatively fixed incomes to pay for our services.  The monthly charges
for the resident's unit and assisted living services are influenced by the
location of the community and local competition.  Our ability to
increase revenues in proportion to increased operating expenses may be
limited.  We typically do not rely to a significant extent on
governmental reimbursement programs, which accounted for approximately 8.2% of
revenues for the six months ended June 30, 2008.  In pricing our
services, we attempt to anticipate inflation levels, but there can be no
assurance that we will be able to respond to inflationary pressures in the
future.  The near-term negative economic outlook in the United States
may impact our ability to raise our prices.





Non-GAAP
Measures





A
non-GAAP financial measure is generally defined as one that purports to measure
historical or future financial performance, financial position, or cash flows,
but excludes or includes amounts that would not be included in most GAAP
measures.  In this report, we define and use the non-GAAP financial
measure of Adjusted EBITDA/EBITDAR, as set forth below:





Definition of Adjusted
EBITDA/EBITDAR:





We define
Adjusted EBITDA/EBITDAR as net loss adjusted for:





36
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents








·
            gains
      or losses, net of tax, in discontinued
  operations,


·
            provision
      or benefit for income taxes,


·
            equity
      earnings or losses in unconsolidated joint
  ventures,


·
            gains
      or losses on sale of assets , termination of leases, or
      investments,


·
            depreciation
      and amortization,


·
            impairment
      losses,


·
            amortization
      of deferred gains,


·
            non-cash
      stock option compensation expense,


·
            interest
      expense,


·
            interest
      income, and


·
            other
      non-cash unusual adjustments





Definition of Adjusted
EBITDAR:





We define
Adjusted EBITDAR as Adjusted EBITDA adjusted for facility lease
expense.





Management's Use of Adjusted
EBITDA/EBITDAR:





We use
Adjusted EBITDA/EBITDAR to assess our overall financial and operating
performance.  We believe these non-GAAP measures, as we have defined
them, are useful in identifying trends in our day-to-day performance because it
excludes items that have little or no significance to our day-to-day
operations.  These measures provide an assessment of controllable
expenses and afford management the ability to make decisions, which are expected
to facilitate meeting current financial goals, as well as achieve optimal
financial performance.  These measures also provide indicators for
management to determine if adjustments to current spending levels are
needed.





Adjusted
EBITDA/EBITDAR provide us with measures of financial performance, independent of
items that are beyond the control of management in the short-term, such as
depreciation and amortization, taxation, interest expense, and lease expense
associated with our capital structure.  These metrics measure our
financial performance based on operational factors that management can influence
in the short-term, namely the cost structure or expenses of the
organization.  Adjusted EBITDA/EBITDAR are some of the metrics used by
senior management to review the financial performance of the business on a
monthly basis and are used by research analysts and investors to evaluate the
performance and value of the companies in our industry.





Limitations of Adjusted
EBITDA/EBITDAR:





Adjusted
EBITDA/EBITDAR have limitations as analytical tools.  Material
limitations in making the adjustments to our losses to calculate Adjusted
EBITDA/EBITDAR and using this non-GAAP financial measure as compared to GAAP net
loss includes:





·
            The
      items excluded from the calculation of Adjusted EBITDA/EBITDAR generally
      represent income or expense items that may have a significant affect on
      our financial results,


·
            Items
      determined to be non-recurring in nature could, nevertheless, re-occur in
      the future, and


·
            Depreciation
      and amortization, while not directly affecting our current cash position,
      does represent wear and tear and/or reduction in value of our
      properties.  If the cost to maintain our properties exceeds our
      expected routine capital expenditures, then this could affect our ability
      to attract and retain long-term residents at our
    communities.





An
investor or potential investor may find this important in evaluating our
performance and results of operations.  We use these non-GAAP measures
to provide a more complete understanding of the factors and trends affecting our
business.





37
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents


Adjusted
EBITDA/EBITDAR are not alternatives to net loss, loss from continuing
operations, or cash flows provided by or used in operating activities as
calculated and presented in accordance with GAAP.  You should not rely
on Adjusted EBITDA/EBITDAR as substitutes for any such GAAP financial
measure.  We strongly urge you to review the reconciliation of GAAP
net loss to Adjusted EBITDA/EBITDAR presented below, along with our consolidated
balance sheets, statements of operations, and cash flows.  In
addition, because Adjusted EBITDA/EBITDAR are not measures of financial
performance under GAAP and are susceptible to varying calculations, this measure
as presented may differ from and may not be comparable to similarly titled
measures used by other companies.





The table
below shows the reconciliation of net loss to Adjusted EBITDA/EBITDAR for the
three and six months ended June 30, 2008 and 2007:




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      loss
              
              $
              (25,234
              )
              
              $
              (1,589
              )
              
              $
              (51,202
              )
              
              $
              (11,324
              )Provision
      for income taxes
              
              
              270
              
              
              
              1,044
              
              
              
              480
              
              
              
              1,320Equity
      losses (gains) in unconsolidated joint ventures
              
              
              (665
              )
              
              
              (7,065
              )
              
              
              857
              
              
              
              (6,496
              )Depreciation
      and amortization
              
              
              29,451
              
              
              
              14,294
              
              
              
              60,355
              
              
              
              28,624Amortization
      of deferred gains
              
              
              (502
              )
              
              
              (549
              )
              
              
              (1,004
              )
              
              
              (1,103
              )Non-cash
      stock option compensation expenses
              
              
              1,436
              
              
              
              786
              
              
              
              2,818
              
              
              
              1,323Convertible
      debentures conversion costs
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,329Interest
      expense
              
              
              22,741
              
              
              
              16,801
              
              
              
              43,783
              
              
              
              30,333Change
      in fair value of interest rate swaps
              
              
              (972
              )
              
              
              -
              
              
              
              (135
              )
              
              
              -Interest
      income
              
              
              (581
              )
              
              
              (599
              )
              
              
              (1,435
              )
              
              
              (1,182
              )Discontinued
      operations
              
              
              4,768
              
              
              
              291
              
              
              
              5,366
              
              
              
              760Other
      non-cash unusual activity:Professional
      and workers' compensation liability adjustments
              
              
              (1,854
              )
              
              
              (1,659
              )
              
              
              (1,854
              )
              
              
              (1,672
              )Adjusted
      EBITDA
              
              
              28,858
              
              
              
              21,755
              
              
              
              58,029
              
              
              
              41,912Facility
      lease expense
              
              
              22,313
              
              
              
              7,317
              
              
              
              44,629
              
              
              
              17,450Adjusted
      EBITDAR
              
              $
              51,171
              
              
              $
              29,072
              
              
              $
              102,658
              
              
              $
              59,362







Subsequent
Event





For a
discussion of subsequent event, see Note 12 to the Unaudited Condensed
Consolidated Financial Statements included in this report.











38
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
 Continued
 June 30,
2008


Table of Contents





Item 3.  Quantitative and Qualitative Disclosures About
Market Risk





Our
earnings are affected by changes in interest rates as a result of our short-term
and long-term borrowings.  At June 30, 2008, we had approximately
$130.0 million of variable rate borrowings based on the LIBOR
rate.  As of June 30, 2008, our weighted average variable rate is
2.13% in excess of the LIBOR rate.  For every 1% change in the LIBOR
rate, our interest expense will change by approximately $1.3 million
annually.  This analysis does not consider changes in the actual level
of borrowings or operating lease obligations that may occur subsequent to June
30, 2008.  This analysis also does not consider the effects of the
reduced level of overall economic activity that could exist in such an
environment, nor does it consider actions that management might be able to take
with respect to our financial structure to mitigate the exposure to such a
change.





We
currently have a $19.6 million interest rate swap contract that matures in
August 2012 and a $12.4 million interest rate swap contract that matures in
January 2010.  A 100 basis point increase in interest rates would
increase the combined fair value of these swaps by approximately $882,000 and a
100 basis point decrease in interest rates would decrease the combined fair
value of these swaps by approximately $919,000.





The
downturn in the United States housing market in 2007 triggered a constriction in
the availability of credit that is expected to continue in 2008.  This
could impact our ability to borrow money or refinance existing obligations at
acceptable rates of interest.  Thus far, we have experienced no
significant barriers to obtaining credit and do not expect to in the near
future.  See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital
Resources.”





Item 4.  Controls and Procedures





(a)  Evaluation of disclosure controls
and procedures.





Our
co-chief executive officers and our chief financial officer, after evaluating
the effectiveness of our “disclosure controls and procedures” (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
period covered by this quarterly report, have concluded that, as of that date,
our disclosure controls and procedures were effective.





(b)
            Changes in internal
      controls





We also
carried out an evaluation of the internal control over financial reporting to
determine whether any changes occurred during the period covered by this
report.  Based on such evaluation, there has been no change in our
internal control over financial reporting that occurred during the most recently
completed fiscal quarter ended June 30, 2008, that materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.











[The rest
of this page is intentionally left blank]





39


Table of Contents


PART II.  OTHER INFORMATION





Items
2, 3, and 5 are not applicable.





Item 1.  Legal Proceedings





From time
to time, we are subject to lawsuits and other matters in the normal course of
business, including claims related to general and professional
liability.  Accruals for these claims are based upon actuarial and/or
estimated exposure, taking into account self-insured retention or deductibles,
as applicable.  While we cannot predict the results with certainty, we
do not believe that any liability from any such lawsuits or other matters will
have a material effect on our financial position, results of operations, or
liquidity.





Item 1A.  Risk Factors





In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2007, which could materially
affect our business, financial condition or future results.  The risks
described in our Annual Report on Form 10-K are not the only risks facing our
Company.  Additional risks and uncertainties not currently known to us
or that we currently deem to be immaterial also may materially adversely affect
our business, financial condition and/or operating results.





Item
4.                      Submission
of Matters to a Vote of Security Holders





(a)
            Our
      Annual Meeting of Shareholders was held on June 12,
  2008.





(b)
            Not
      applicable.





(c)
            The
      following matters voted upon at the meeting received the number of votes
      set forth below:





·
            Election
      of Class I, Class II, and Class III
directors


·
            Ratification
      of appointment of independent registered public accounting
      firm





Election of Directors:Abstain
      orName
            
            For
            
            
            Withhold
            
            
            Broker
      Non-voteDaniel
      R. Baty
            
            
            38,107,291
            
            
            
            78,560
            
            
            
            871,887Bruce
      L. Busby
            
            
            37,476,145
            
            
            
            709,706
            
            
            
            871,887Charles
      P. Durkin, Jr.
            
            
            37,476,645
            
            
            
            709,206
            
            
            
            871,887Stuart
      Koenig
            
            
            37,476,416
            
            
            
            718,435
            
            
            
            862,887Granger
      Cobb
            
            
            38,107,087
            
            
            
            78,764
            
            
            
            871,887Ratification of Independent Public
      Accountants:For
            
            Against
            
            
            Abstain
            
            
            Broker
      Non-vote38,089,695
            
            
            7,076
            
            
            
            89,080
            
            
            
            871,887





(d)
            Not
      applicable.





Item 6.  Exhibits





See
      Index to Exhibits, which is incorporated by
  reference.





40


Table of Contents








SIGNATURE





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.








Dated:  August
      8, 2008
            EMERITUS
      CORPORATION(Registrant)/s/
      Raymond R. BrandstromRaymond
      R. Brandstrom, Executive Vice President - Finance, Chief Financial
      Officer, and Secretary





41


Table of Contents


Index to Exhibits





FootnoteNumber
            
            Description
            
            Number10.2
            
            Amended
      and Restated Stock Option Plan for Nonemployee Directors (as amended
      throughDecember
      7, 2005).
            
            (1)10.3
            
            Amended
      and Restated 1998 Employee Stock Purchase Plan (as amended and
      restatedas
      of March 26, 2008).10.57
            
            Documents
      Relating to Purchase and Financing of Communities from Fretus Investors
      (24 Communities).10.57.07
            First Amendment to Loan Agreement
      (Amended and Restated) dated April 25, 2008, among 23limited
      liability companies and limited partnerships, collectively as borrower,
      and CapmarkBank,
      as lender.
            
            (2)10.57.08
            Amended and Restated Promissory
      Note of borrower dated May 1, 2008, in theprincipal
      amount of $16.8 million payable to Capmark Bank.
            
            (2)10.57.09
            Freddie Mac Security, Assignment
      and Subordination Agreement For Operating Lease datedApril
      25, 2008, among Emeritus Properties-NGH, LLC, Capmark Bank, and Fretus
      InvestorsChandler
      LLC. Representative example of 18 communities, which in total equal $129
      million.
            
            (2)10.57.10
            Multifamily Note dated April 25, 2008,
      between Fretus Investors Chandler LLC andCapmark
      Bank. Representative example of 18 communities which in total equal $129
      million.
            
            (2)10.59
            
            Documents
      Relating to Purchase and Financing of Communities from Alterra Healthcare
      Corporation (5 Communities)10.59.05
            Fannie Mae Multifamily Mortgage,
      Assignment of Rents and Security Agreement dated April30,
      2008, between Emerikeyt Liberal Springs, LLC and and Keycorp Real
      Estate
            
            (2)Capital
      Markets, Inc in the principal amount of $5.3 million.10.59.06
            Fannie Mae Subordination, Assignment
      and Security Agreement dated April30,
      2008, between Emerikeyt Palms at Loma Linda Inc and and Keycorp Real
      EstateCapital
      Markets, Inc in the principal amount of $14.5 million.
            
            (2)10.59.07
            Fannie Mae Subordination,
      Assignment and Security Agreement dated April30,
      2008, between Emerikeyt Springs at Oceanside Inc. and and Keycorp Real
      EstateCapital
      Markets, Inc in the principal amount of $14.5 million.
            
            (2)10.59.08
            Fannie Mae Multifamily Note dated
      April 30, 2008, in the principal amount of $5.3
millionbetween  Emerikeyt
      Liberal Springs, LLC and and Keycorp Real Estate Capital Markets,
      Inc
            
            (2)10.59.09
            Fannie Mae Multifamily Note dated
      April 30, 2008, in the principal amount of $14.5
    millionbetween  Emerikeyt
      Palms at Loma Linda Inc and and Keycorp Real Estate Capital Markets,
      Inc
            
            (2)10.59.10
            Fannie Mae Multifamily Note dated
      April 30, 2008, in the principal amount of $5.6
millionbetween
      Emerikeyt Springs at Ocenaside Inc. and and Keycorp Real Estate Capital
      Markets, Inc.
            
            (2)10.59.11
            Loan Agreement dated April 25, 2008,
      by and between Emerikeyt Fairways of Augusta LLCand
      Keybank National Association for $4.1 million
            
            (2)10.59.12
            Loan Agreement dated April 25,
      2008, by and between Emerikeyt Lo of Broadmoor LLCand
      Keybank National Association for $9,3 million
            
            (2)10.59.13
            Promissory Note dated April 25,
      2008, Emerikeyt Fairways of Augusta LLC payable toand
      Keybank National Association for principal amount of $4.1
      million
            
            (2)10.59.14
            Promissory Note dated April 25,
      2008, Emerikeyt Lo of Broadmoor LLC payable toand
      Keybank National Association for principal amount of $9.3
      million.10.7
            
            Documents
      Relating to the Purchase of communities from Nationwide Health Properties,
      Inc. (NHP)(24
      communities)10.70.02
            First
      Amendment to Purchase and Sale Agreement dated March 25, 2008, by and
      among NationwideHealth
      Properties, Inc. and its affiliated signatories and Emeritus
      Corporation
            
            (1)10.70.03
            Master
      Credit Facility Agreement dated April 1, 2008, by and among Borrowers
      signatoryhereto
      and Capmark Finance, Inc.
            
            (1)10.70.04
            Master
      Promissory Note of Emeritus Corporation dated April 1, 2008, in the
      principal amount of $241.9 millionpayable
      to Capmark Bank.
            
            (1)10.70.05
            Promissory
      Note of Emeritus Corporation dated March 31, 2008, in the
      principalamount
      of $30.0 million payable to Nationwide Health Properties,
    Inc.
            
            (1)10.70.06
            Promissory Note of Emeritus Corporation
      dated April 1, 2008, in the principal




42
 Table of Contents
   FootnoteNumber
              
              Description
              
              Number


amount
      of $8.0 million payable to Nationwide Health Properties,
    Inc.
            
            (2)10.71
            
            Documents
      Relating to the Purchase and Financing of Communities from Health Care
      REIT, Inc.  (HCN)(29
      Communities in two phasses:  Phase 1: 19 communities, Phase 2:
      10 communities )10.71.01
            Asset Purchase Agreement dated
      June 9, 2008, by Emeritus Corporation and Health Care
      REIT,Inc.
      together with the affiliates of HCN
            
            (2)10.71.02
            First Amendment to the Asset
      Purchase Agreement dated June 30, 2008, by and between
      EmeritusCorporation
      and Health Care REIT, Inc. together with the affiliates of
    HCN
            
            (2)10.71.03
            Freddie Mac Multifamely Mortgage,
      Assignment of Rents and Security Agreement effectiveJune
      30, 2008, between Emeritol Woods at Eddy Pond LLC and KeyCorp Real Estate
      CapitalMarkets,
      Inc. Representative example of 19 communities, which in total equal $163.2
      million.
            
            (2)10.71.04
            Freddie Mac Multifamily Note
      effective June 30, 2008, Emeritol Woods at Eddy PondLLC
      jointly and severally promises to pay Keycorp Real Estate Capital Markets,
      Inc.Representative
      example of 19 communities, which in total equal $163.2
      million.
            
            (2)10.71.05
            Promissory Note of Emeritus
      Corporation dated June 30, 2008, in the principal amount of $50.0 million
      payable toHealth
      Care REIT, Inc.
            
            (2)31.1
            
            
            Certification
      of Periodic Reports31.1.1
            Certification Pursuant to 18 U.S.C.
      Section 1350, as Adopted Pursuant to Section 302of
      the Sarbanes-Oxley Act of 2002 for Daniel R. Baty dated August 8,
      2008.
            
            (2)31.1.2
            Certification Pursuant to 18 U.S.C.
      Section 1350, as Adopted Pursuant to Section 302of
      the Sarbanes-Oxley Act of 2002 for L. Granger Cobb dated August 8,
      2008.
            
            (2)31.1.3
            Certification Pursuant to 18
      U.S.C. Section 1350, as Adopted Pursuant to Section
302of
      the Sarbanes-Oxley Act of 2002 for Raymond R. Brandstrom dated August 8,
      2008.
            
            (2)32.1
            
            
            Certification
      of Periodic Reports32.1.1
            Certification Pursuant to 18 U.S.C.
      Section 1350, as Adopted Pursuant to Section 906of
      the Sarbanes-Oxley Act of 2002 for Daniel R. Baty dated August 8,
      2008.
            
            (2)32.1.2
            Certification Pursuant to 18 U.S.C.
      Section 1350, as Adopted Pursuant to Section 906of
      the Sarbanes-Oxley Act of 2002 for L. Granger Cobb dated August 8,
      2008.
            
            (2)32.1.3
            Certification Pursuant to 18
      U.S.C. Section 1350, as Adopted Pursuant to Section
906of
      the Sarbanes-Oxley Act of 2002 for Raymond R. Brandstrom dated August 8,
      2008.
            
            (2)








Footnotes:(1)
            Filed
      as the indicated exhibit to First Quarter Report on Form 10-Q filed
      on May 9, 2008.(2)
            Filed
      herewith.











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