**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) OF****THE
                SECURITIES EXCHANGE ACT
                1934**





For
      the
      quarterly period ended September 30, 2005





o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF****THE
                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. [X] Yes [ ] No





Indicate
      by check mark whether the Registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act). [ ] Yes [X] No





Indicate
      by check mark whether the Registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). [ ] Yes [X] No




As
      of
      October 31, 2005, there were  16,360,629 shares
      of the Registrant's Common Stock, par value $.0001, outstanding.








**EMERITUS
                  CORPORATION****Table
                  of Contents****Part
                  I. Financial
                  Information**Page
                  No.**Item
                  1. Financial Statements (unaudited):**
              1Condensed
                  Consolidated Balance Sheets as of September 30, 2005,
                  and December 31, 2004
              2Condensed
                  Consolidated Statements of Operations for the Three
                  Months and Nine months ended September 30, 2005 and
                  2004
              3Condensed
                  Consolidated Statements of Cash Flows for the Nine
                  months ended September 30, 2005 and 2004
              4Notes
                  to Condensed Consolidated Financial
                  Statements
              5**Item
                  2.**
              **Management's
                  Discussion and Analysis of Financial Condition
                  and Results of Operations**
              15**Item
                  3.**
              **Quantitative
                  and Qualitative Disclosures About Market
                  Risk**
              36**Item
                  4.**
              **Controls
                  and Procedures**
              36**Part
                  II. Other Information**Note:
              Items
                  2, 3, 4, and 5 of Part II are omitted because they are not
                  applicable.**Item
                  1.**
              **Legal
                  Proceedings**
              38**Item
                  6.**
              **Exhibits**
              39**Signature**
              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
                CORPORATION****CONDENSED
                CONSOLIDATED BALANCE SHEETS****(unaudited)****(In
                thousands, except share data)****ASSETS****September
                30,**
            
            **December
                31,****2005**
            
            **2004**Current
                Assets:Cash
                and cash equivalents
            
            $
            25,531
            
            $
            10,748Short-term
                investments
            
            
            1,860
            
            
            1,336Trade
                accounts receivable, net of allowance of $755 and $841
            
            
            4,086
            
            
            3,982Other
                receivables
            
            
            1,039
            
            
            2,270Prepaid
                expenses and other current assets
            
            
            20,894
            
            
            18,317Property
                held for sale
            
            
            -
            
            
            7,891Total
                current assets
            
            
            53,410
            
            
            44,544Long-term
                investments
            
            
            3,442
            
            
            6,884Property
                and equipment, net
            
            
            613,333
            
            
            627,047Property
                held for development
            
            
            807
            
            
            807Notes
                receivable from and investments in affiliates
            
            
            4,489
            
            
            3,518Restricted
                deposits
            
            
            9,622
            
            
            7,642Lease
                acquisition costs, net
            
            
            26,431
            
            
            26,625Other
                assets, net
            
            
            1,654
            
            
            2,571Total
                assets
            
            $
            713,188
            
            $
            719,638**LIABILITIES
                AND SHAREHOLDERS' DEFICIT**Current
                Liabilities:Current
                portion of long-term debt
            
            $
            2,647
            
            $
            4,133Current
                portion of capital lease and financing obligations
            
            
            18,252
            
            
            15,479Convertible
                debentures
            
            
            11,210
            
            
            -Trade
                accounts payable
            
            
            4,696
            
            
            9,057Accrued
                employee compensation and benefits
            
            
            14,467
            
            
            13,259Accrued
                interest
            
            
            1,540
            
            
            1,547Accrued
                real estate taxes
            
            
            6,747
            
            
            4,596Accrued
                dividends on preferred stock
            
            
            -
            
            
            10,539Accrued
                insurance liability
            
            
            29,290
            
            
            25,903Other
                accrued expenses
            
            
            11,009
            
            
            7,952Deferred
                revenue
            
            
            7,804
            
            
            6,516Unearned
                rental income
            
            
            7,518
            
            
            8,227Deposit
                on sales contract
            
            
            -
            
            
            9,212Total
                current liabilities
            
            
            115,180
            
            
            116,420Long-term
                debt, less current portion
            
            
            62,452
            
            
            50,528Capital
                lease and financing obligations, less current portion
            
            
            614,775
            
            
            614,046Convertible
                debentures
            
            
            20,790
            
            
            32,000Deferred
                gain on sale of communities
            
            
            26,563
            
            
            28,517Deferred
                rent
            
            
            5,221
            
            
            4,571Other
                long-term liabilities
            
            
            2,427
            
            
            1,875Total
                liabilities
            
            
            847,408
            
            
            847,957Commitments
                and contingenciesShareholders'
                Deficit:Preferred
                stock, $.0001 par value. Authorized 5,000,000 shares.Series
                B, Authorized 70,000 shares, issued and outstanding zero and 36,242
                shares
                atSeptember
                30, 2005, and December 31, 2004, respectively
            
            
            -
            
            
            -Common
                stock, $.0001 par value. Authorized 40,000,000 shares; issued and
                outstanding16,356,312
                and 10,811,531 shares at September 30, 2005, and December 31, 2004,
                respectively
            
            
            2
            
            
            1Additional
                paid-in capital
            
            
            76,727
            
            
            75,779Accumulated
                deficit
            
            
            (210,949
            )
            
            (204,099
            )Total
                shareholders' deficit
            
            
            (134,220
            )
            
            (128,319
            )Total
                liabilities and shareholders' deficit
            
            $
            713,188
            
            $
            719,638


See
      accompanying Notes to Condensed Consolidated Financial Statements and
      Management's


Discussion
      and Analysis of Financial Condition and Results of Operations.








**2**


Table of Contents








**EMERITUS
                CORPORATION****CONDENSED
                CONSOLIDATED STATEMENTS OF OPERATIONS****(unaudited)****(In
                thousands, except per share data)****Three
                Months ended September 30,**
            
            **Nine
                Months ended September 30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Revenues:Community
                revenue
            
            $
            95,698
            
            $
            77,787
            
            $
            282,909
            
            $
            215,277Other
                service fees
            
            
            1,700
            
            
            1,572
            
            
            5,191
            
            
            4,545Management
                fees
            
            
            457
            
            
            1,202
            
            
            1,517
            
            
            4,031Total
                operating revenues
            
            
            97,855
            
            
            80,561
            
            
            289,617
            
            
            223,853Expenses:Community
                operations (exclusive of depreciation and amortizationand
                facility lease expense shown separately below)
            
            
            68,897
            
            
            51,190
            
            
            191,934
            
            
            141,076General
                and administrative
            
            
            8,250
            
            
            6,550
            
            
            23,440
            
            
            19,328Depreciation
                and amortization
            
            
            11,650
            
            
            8,170
            
            
            34,562
            
            
            21,661Facility
                lease expense
            
            
            10,534
            
            
            9,711
            
            
            30,659
            
            
            28,775Asset
                impairment
            
            
            234
            
            
            -
            
            
            4,262
            
            
            -Total
                operating expenses
            
            
            99,565
            
            
            75,621
            
            
            284,857
            
            
            210,840Operating
                income (loss) from continuing operations
            
            
            (1,710
            )
            
            4,940
            
            
            4,760
            
            
            13,013Other
                income (expense):Interest
                income
            
            
            447
            
            
            155
            
            
            883
            
            
            442Interest
                expense
            
            
            (13,108
            )
            
            (11,586
            )
            
            (37,593
            )
            
            (29,124
            )Gain
                on sale of investment in Alterra Healthcare Corporation
            
            
            -
            
            
            -
            
            
            21,323
            
            
            -Equity
                earnings in Senior Healthcare Partners, LLC
            
            
            2,304
            
            
            -
            
            
            2,360
            
            
            -Other,
                net
            
            
            620
            
            
            969
            
            
            1,905
            
            
            1,332Net
                other expense
            
            
            (9,737
            )
            
            (10,462
            )
            
            (11,122
            )
            
            (27,350
            )Loss
                from continuing operations before income taxes
            
            
            (11,447
            )
            
            (5,522
            )
            
            (6,362
            )
            
            (14,337
            )Provision
                for income taxes
            
            
            (122
            )
            
            (915
            )
            
            (1,211
            )
            
            (915
            )Loss
                from continuing operations
            
            
            (11,569
            )
            
            (6,437
            )
            
            (7,573
            )
            
            (15,252
            )Income
                from discontinued operations
            
            
            -
            
            
            851
            
            
            1,322
            
            
            1,026Net
                loss
            
            
            (11,569
            )
            
            (5,586
            )
            
            (6,251
            )
            
            (14,226
            )Preferred
                stock dividends
            
            
            -
            
            
            (938
            )
            
            (599
            )
            
            (2,788
            )Net
                loss to common shareholders
            
            $
            (11,569
            )
            $
            (6,524
            )
            $
            (6,850
            )
            $
            (17,014
            )Basic
                and diluted income (loss) per common share:Continuing
                operations
            
            $
            (0.71
            )
            $
            (0.69
            )
            $
            (0.64
            )
            $
            (1.71
            )Discontinued
                operations
            
            
            -
            
            
            0.08
            
            
            0.10
            
            
            0.10$
            (0.71
            )
            $
            (0.61
            )
            $
            (0.54
            )
            $
            (1.61
            )Weighted
                average common shares outstanding - basic and diluted
            
            
            16,271
            
            
            10,769
            
            
            12,690
            
            
            10,564


See
      accompanying Notes to Condensed Consolidated Financial Statements and
      Management's


Discussion
      and Analysis of Financial Condition and Results of Operations.








**3**


Table of Contents





**EMERITUS
                CORPORATION****CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS****(unaudited)****(In
                thousands)****Nine
                Months****Ended
                September 30,****2005**
            
            **2004**Cash
                flows from operating activities:Net
                loss
            
            $
            (6,251
            )
            $
            (14,226
            )Adjustments
                to reconcile net loss to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            34,562
            
            
            21,661Amortization
                of deferred gain
            
            
            (1,661
            )
            
            (1,622
            )Gain
                on sale of properties, net
            
            
            (1,321
            )
            
            (952
            )Gain
                on sale of investment
            
            
            (21,323
            )
            
            -Impairment
                of long-lived asset
            
            
            4,262
            
            
            -Write
                down of loan fees and amortization
            
            
            316
            
            
            2,358Preferred
                stock conversion costs
            
            
            265
            
            
            -Equity
                investment losses (earnings)
            
            
            (2,277
            )
            
            794Other
            
            
            583
            
            
            216Changes
                in operating assets and liabilities, net of acquisitions:
            
            
            5,602
            
            
            3,809Net
                cash provided by operating activities
            
            
            12,757
            
            
            12,038Cash
                flows from investing activities:Acquisition
                of property and equipment
            
            
            (5,595
            )
            
            (2,676
            )Acquisition
                of assets in lease transactions
            
            
            (406
            )
            
            (1,106
            )Sale
                of property and equipment
            
            
            -
            
            
            3,552Construction
                expenditures - leased properties
            
            
            (1,263
            )
            
            (525
            )Management
                and lease acquisition costs
            
            
            (1,830
            )
            
            (7,818
            )Advances
                to affiliates and other managed communities
            
            
            (106
            )
            
            (669
            )Sale
                of investment in Alterra, net
            
            
            24,979
            
            
            -Investment
                in affiliates
            
            
            1,293
            
            
            (501
            )Collection
                of notes receivable
            
            
            -
            
            
            2,657Net
                cash provided by (used in) investing activities
            
            
            17,072
            
            
            (7,086
            )Cash
                flows from financing activities:Proceeds
                from sale of stock under employee stock purchaseand
                incentive plans, net
            
            
            583
            
            
            1,303Increase
                in restricted deposits
            
            
            (1,982
            )
            
            (1,389
            )Debt
                issue and other financing costs
            
            
            (795
            )
            
            (1,280
            )Proceeds
                from short-term borrowing on bank line of credit
            
            
            -
            
            
            3,000Proceeds
                from long-term borrowings and financings
            
            
            32,226
            
            
            26,407Repayment
                of long-term borrowings
            
            
            (22,574
            )
            
            (25,440
            )Repayment
                of capital lease and financing obligations
            
            
            (11,732
            )
            
            (6,247
            )Payment
                of preferred dividend
            
            
            (10,772
            )
            
            -Net
                cash used in financing activities
            
            
            (15,046
            )
            
            (3,646
            )Net
                increase in cash and cash equivalents
            
            
            14,783
            
            
            1,306Cash
                and cash equivalents at the beginning of the period
            
            
            10,748
            
            
            6,368Cash
                and cash equivalents at the end of the period
            
            $
            25,531
            
            $
            7,674Supplemental
                disclosure of cash flow information -Cash
                paid during the period for interest
            
            $
            37,600
            
            $
            29,916Non-cash
                financing and investing activities:Accrued
                and in-kind preferred stock dividends
            
            $
            (599
            )
            $
            2,788Debt
                issued for acquisition of property and equipment
            
            $
            1,417
            
            $
            -Capital
                lease and financing obligations
            
            $
            15,234
            
            $
            387,463Reduction
                in assets held for sale and related deposit
            
            $
            7,891
            
            $
            -Note
                retirement
            
            $
            (631
            )
            $
            -Assumption
                of debt on sale-leaseback
            
            $
            -
            
            $
            (56,566
            )





See
      accompanying Notes to Condensed Consolidated Financial Statements and
      Management's


Discussion
      and Analysis of Financial Condition and Results of Operations





**4**


Table of Contents











**EMERITUS
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(unaudited)**





**Definitions**





Throughout
      Notes to Condensed Consolidated Financial Statements certain terms are used
      repeatedly. In the interest of brevity, the full reference has been abbreviated
      to a single name or acronym. The following defines these abbreviated
      terms:





1.
            "FASB"
                refers to the Financial Accounting Standards
                Board.


2.
            "SFAS"
                refers to Statement of Financial Accounting
                Standards.


3.
            "SEC"
                refers to the Securities and Exchange
                Commission.


4.
            "REIT"
                refers to real estate investment
                trust.


5.
            "LIBOR"
                is the London Interbank Offering
                Rate.


6.
            "Mr.
                Baty" refers to Daniel R. Baty, the Company's chairman of the board
                of
                directors and chief executive officer.


7.
            "Triple-net
                lease" means a lease under which the lessee pays all operating expenses
                of
                the property, including taxes, licenses, utilities, maintenance,
                and
                insurance. The lessor receives a net rent.


8.
            "Alterra"
                refers to Alterra Healthcare Corporation, a national assisted living
                company headquartered in Milwaukee,
                Wisconsin.


9.
            "Fortress"
                refers to Fortress Investment Group LLC, a New York based private
                equity
                fund.


10.
            "LLC"
                refers to a limited liability
                company.


11.
            "NW"
                refers to NW Select LLC, an entity controlled by Mr.
                Baty.


12.
            "CPM"
                refers to Columbia Pacific Management, a group of entities controlled
                by
                Mr. Baty.


13.
            "JEA"
                refers to JEA Senior Living, a
                non-affiliate.


14.
            "Saratoga"
                refers to a group of related companies, namely: Saratoga Partners
                IV, LP;
                Saratoga Management Company LLC, as Agent; and Saratoga Coinvestment
                IV,
                LLC.


15.
            "Series
                B Stock" refers to Series B Convertible Preferred
                Stock.


16.
            “SHP”
                refers to Senior Healthcare Partners, LLC, a pharmaceutical supply
                limited
                liability company.


17.
            "N/A"
                in a table means not applicable.


18.
            "N/M"
                in a table means not meaningful.





**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, and litigation.
      Emeritus bases its estimates on historical experience and on various other
      assumptions that are believed 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 2004 Form 10-K filed March 31, 2005. The following
      critical accounting policy and estimates have not changed but have been updated
      for new events and information.





·
            The
                Company's accounting policy regarding contingent liabilities is to
                recognize those obligations if they are probable and estimable in
                accordance with SFAS 5*Accounting
                for Contingencies*based on management’s best estimate of the ultimate outcome. If a legal
                judgment is rendered against the Company, then Emeritus believes
                that it
                has a probable liability and it accrues the full amount





**5**
 **EMERITUS
            CORPORATION**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 Continued
 (unaudited)


Table of Contents


of
      the
      judgment as the most likely estimate of the probable loss unless it is able
      to
      obtain a legal opinion that the ultimate settlement will be
      different.





**Recent
      Accounting Pronouncements and Proposed Statements**





In
      December 2004, the FASB issued Statement of Financial Accounting Standards
      No.
      123 (revised 2004), *Share-Based
      Payment* (“SFAS
      No. 123R”) . This
      statement requires the Company to recognize expense for compensation cost
      related to share-based payments, including stock options and employee stock
      purchase plans, in its consolidated statement of operations. SFAS No. 123R
      would
      eliminate the Company’s ability to account for share-based awards to employees
      using Accounting Principles Board ("APB") Opinion 25, “ *Accounting
      for Stock Issued to Employees”* and
      would
      require that the transactions use a fair value method as of the grant
      date *.* SFAS
      No.
      123R addresses the accounting for transactions in which the Company receives
      employee services in exchange for equity instruments or liabilities that are
      based on the fair value of the Company’s equity instruments or that may be
      settled through the issuance of such equity instruments. On April 14, 2005,
      the
      SEC adopted a new rule that amends the compliance dates for SFAS No. 123R.
      Under
      the new rule, the Company is required to adopt SFAS No. 123R in the first
      quarter of fiscal 2006, beginning January 1, 2006. The Company has determined
      that it will adopt the “modified prospective” method in implementing SFAS No.
      123R. Using this method and the current assumptions used in the pro forma
      disclosure, the Company expects the amounts to be similar to the current pro
      forma disclosures under SFAS No. 123.





In
      March
      2005, the FASB issued FASB Interpretation 47, *“Accounting
      for Conditional Asset Retirement Obligations”* (“FIN
      47”). This Interpretation clarifies that an entity is required to recognize a
      liability for a legal obligation to perform asset retirement activities when
      the
      retirement is conditional on a future event and if the liability’s fair value
      can be reasonably estimated. The fair value of the liability should be
      recognized when incurred - generally upon acquisition, construction, or
      development and/or through the normal operation of the asset. In the event
      the
      liability’s fair value cannot be reasonably estimated, then the entity must
      disclose (a) a description of the obligation, (b) the fact that a liability
      has
      not been recognized because the fair value cannot be reasonably estimated,
      and
      (c) the reasons why it cannot be reasonably estimated. FIN 47 also clarifies
      when an entity would have sufficient information to reasonably estimate the
      fair
      value of an asset retirement obligation. The Company is required to implement
      this Interpretation in the fourth quarter of 2005 and the Company is evaluating
      the effect on its consolidated financial statements, which is not expected
      to be
      material.





**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 condensed
      consolidated financial position, results of operations, and cash flows of
      Emeritus as of September 30, 2005, and for the three and nine months ended
      September 30, 2005 and 2004. The results of operations for the period ended
      September 30, 2005, are not necessarily indicative of the operating results
      for
      the full year. The Company presumes that those reading this interim financial
      information have read or have access to its 2004 audited consolidated financial
      statements and Management's Discussion and Analysis of Financial Condition
      and
      Results of Operations that are contained in the 2004 Form 10-K filed March
      31,
      2005. Therefore, the Company has omitted footnotes and other disclosures herein,
      which are disclosed in the Form 10-K.





**Reclassifications**





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





**6**
 **EMERITUS
            CORPORATION**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 Continued
 (unaudited)


Table of Contents





**Stock-Based
      Compensation**





The
      Company applies APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* and
      related interpretations in measuring compensation costs for its stock option
      plans. The Company discloses pro forma net loss and net loss per share as if
      compensation cost had been determined consistent with SFAS No. 123, *Accounting
      for Stock-Based Compensation* .





Had
      compensation costs for the Company’s stock option plan been determined pursuant
      to SFAS 123, the Company’s pro forma net loss and pro forma net loss per share
      would have been as follows:





**Three
                Months ended**
            
            **Nine
                Months ended****September
                30,**
            
            **September
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004****(In
                thousands, except per share data )**Net
                loss to common shareholdersAs
                reported
            
            $
            (11,569
            )
            $
            (6,524
            )
            $
            (6,850
            )
            $
            (17,014
            )Add:
                Stock-based employee compensation expenseincluded
                in reported net loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -Deduct:
                Stock-based employee compensationdetermined
                under fair value based method for all awards
            
            
            (367
            )
            
            (350
            )
            
            (799
            )
            
            (969
            )Pro
                forma
            
            $
            (11,936
            )
            $
            (6,874
            )
            $
            (7,649
            )
            $
            (17,983
            )Net
                loss per common share:As
                reported - basic and diluted
            
            $
            (0.71
            )
            $
            (0.61
            )
            $
            (0.54
            )
            $
            (1.61
            )Pro
                forma - basic and diluted
            
            $
            (0.73
            )
            $
            (0.64
            )
            $
            (0.60
            )
            $
            (1.70
            )





The
      Company estimates the fair value of its options using the Black-Scholes option
      value model, which is one of several methods that can be used to estimate option
      values. The Black-Scholes option valuation model was developed for use in
      estimating the fair value of traded options that have no vesting restrictions
      and are fully transferable. Option valuation models require the input of highly
      subjective assumptions, including the expected stock price volatility. The
      Company's options have characteristics significantly different from those of
      traded options and changes in the subjective input assumptions can materially
      affect the fair value estimates. The fair value of options granted and employee
      purchase plan shares in the three months and nine months ended September 30,
      2005 and 2004, were estimated at the date of grant using the following weighted
      average assumptions:








**Three
                Months**
            
            **Nine
                Months****Ended**
            
            **Ended****September
                30,**
            
            **September
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Expected
                life from grant date (in years)
            
            
            4
            
            
            4
            
            
            4
            
            
            4Weighted
                average risk-free interest rate
            
            
            3.96
            %
            
            3.37
            %
            
            3.74%-3.96
            %
            
            3.37%-3.52
            %Weighted
                average volatility
            
            
            64.0
            %
            
            88.4
            %
            
            64.0%-74.6
            %
            
            88.4%-90.7
            %Dividend
                yield
            
            
            -
            
            
            -
            
            
            -
            
            
            -Weighted
                average fair value (per share)
            
            $
            7.54
            
            $
            5.15
            
            $
            7.38
            
            $
            4.24








**7**
 **EMERITUS
            CORPORATION**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 Continued
 (unaudited)


Table of Contents





**Emeritrust
      Transactions**





Beginning
      in 1999, the Company managed 25 communities under arrangements with a
      related investor group (“Emeritrust”) that involved (i) payment of management
      fees to the Company (ii) options for the Company to purchase the communities
      at
      a price determined by a formula, and (iii) obligations to fund operating losses
      of certain communities.




*Emeritrust I
      Communities Management.* During the period from 2000 to 2004, the arrangements were modified several
      times, the options to purchase and funding obligation were terminated, and
      the
      number of communities covered declined from 25 to 21. Effective January 2,
      2004,
      the management fee arrangement provided for a flat fee of 5% of gross revenues.
      The term currently expires March 31, 2006, subject to termination by
      either
      party on 90 days notice. On September 30, 2004, 16 communities were leased
      pursuant to leases discussed below and five communities, which are now owned
      by
      Mr. Baty, continue to be managed by the Company. The Company received management
      fees of approximately $129,000 and $633,000 for the three months ended September
      30, 2005 and 2004, respectively, and $385,000 and $1.9 million for the nine
      months ended September 30, 2005 and 2004, respectively.





*Emeritrust
      I Communities Lease.* On
      September 30, 2004, the Company completed the first phase of a transaction
      to
      lease (“Baty/REIT Lease”) up to 20 assisted living communities in 12 states,
      with 1,824 units. These communities, which were owned by entities in which
      Mr.
      Baty had financial interests, were acquired by an independent REIT for an
      investment of approximately $170.8 million and are being leased to the Company.
      The Company completed the lease on the first 18 communities on September 30,
      2004, which included 17 new communities and one existing lease. One additional
      community was leased on March 31, 2005, and another one on September 1, 2005.
      Of
      the communities included in this lease, 16 were part of the communities referred
      to above and in past filings with the SEC as the “Emeritrust I communities.” The
      initial 18 leased communities are accounted for as capital leases. The two
      additional communities are accounted for as operating leases with escalating
      rent payments, which are accounted for on a straight-line basis.





The
      lease
      of these 20 communities has a term of 15 years, with one 15-year renewal option.
      The annualized cash lease payment for the communities is approximately $15.3
      million per year, with inflators to the extent the change in the consumer price
      index exceeds 0%, not to exceed 40 basis points during years two through four
      and 30 basis points thereafter, as calculated with respect to the REIT's
      investment basis in the properties. All of the leases are triple-net leases.
      The
      18 initial leases have cross-default provisions and are cross-collateralized
      with all of the Company's other leases and loans relating to other communities
      owned by the REIT. All of the leases contain certain financial and other
      covenants. The Company has the right of first refusal to purchase these leased
      communities and Mr. Baty is personally guaranteeing its obligations under the
      lease. Mr. Baty will receive, based on a prescribed formula, 50% of the positive
      cash flow of the 20 communities and will be responsible for 50% of any negative
      cash flow, as defined in the cash flow sharing agreement. In the fourth quarter
      of 2004, the first quarter under this arrangement, Mr. Baty earned $200,000
      as
      consideration. Mr. Baty earned $78,000 and $514,000 in the three months and
      nine
      months ended September 30, 2005, respectively.





**Debt
      Consolidation**





In
      March
      2005, the Company completed a debt restructuring transaction that reduced the
      effective interest rate by approximately 2.75% on $21.4 million of debt and
      extended the maturity to March 2008.





The
      REIT
      that financed the Emeritrust II transaction discussed in the Company’s 2004
      Form 10-K already held $6.8 million of the Company's leasehold mortgage debt
      that matured in March 2005 and bore interest at 12% per annum, commencing March
      2002 with periodic increases up to 13% per annum. This REIT also provided $7.5
      million in leasehold mortgage financing incurred to support the Series A
      Preferred Stock repurchase in August 2003. On September 30, 2003, these
      two
      debt obligations, together with the $11.5 million leasehold mortgage loan
      related to the Emeritrust II communities, were consolidated into a single $25.8
      million leasehold mortgage loan, covering the 32 communities and maturing on
      June 30, 2007 (the “REIT Loan”). The REIT Loan bore interest at an initial rate
      of 12.13% per annum with periodic increases





**8**
 **EMERITUS
            CORPORATION**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 Continued
 (unaudited)


Table of Contents


up
      to
      13%. The consolidated REIT Loan required monthly payments of interest the first
      year and monthly payments of principal and interest, based on a 10-year
      amortization, thereafter. The Company elected to make a principal reduction
      of
      $6.0 million on August 2, 2004. The balance on the REIT Loan as of March 2,
      2005, was approximately $19.5 million. On March 2, 2005, the REIT Loan
      was
      sold to Healthcare Realty Trust, Incorporated ("HRT") and modified. The loan,
      as
      modified, provides for monthly interest-only payments at 10% per annum and
      matures March 3, 2008 (the “HRT Loan”). The HRT Loan may not be prepaid
      without the lender's consent.





In
      connection with the HRT Loan modification, HRT also loaned an additional $1.8
      million to the Company on the same terms as the HRT Loan to pay off certain
      transaction cost advances related to communities acquired in April 2004. The
      transaction cost advances were scheduled to mature in March 2006 and had an
      interest rate of 12.0%, which would have increased to 12.5% in April 2005.
      In
      addition, in connection with the HRT Loan modification, the Company incurred
      approximately $126,000 in closing costs, which were included in the loan and
      resulted in a $21.4 million HRT Loan.





**Alterra
      Transactions**





In
      October 2003, the Company paid $7.7 million in cash to acquire an interest
      in an
      LLC that acquired Alterra. The members of the LLC consisted of an affiliate
      of
      Fortress, NW, and the Company, with original ownership interests of 50%, 25%,
      and 25%, respectively. Through January 31, 2004, the investment in Alterra
      was
      structured as an ownership interest in an LLC, which is a pass-through entity
      for tax purposes, similar to a limited partnership. Under generally accepted
      accounting principles, the Company used the equity method of accounting for
      its
      LLC membership interest and recorded a portion of Alterra's results of
      operations in its financial statements. As a consequence, equity losses of
      approximately $794,000 are included in the condensed consolidated statement
      of
      operations for the first three quarters of 2004, under the caption “Other, net,”
      which represents the Company's portion of Alterra's net loss for December 2003
      and January 2004.





The
      LLC
      made an election to be treated as a corporation for tax purposes effective
      January 31, 2004, and is no longer a pass-through entity. As a result of this
      election, on February 1, 2004, the Company began accounting for Alterra
      on
      a cost basis under APB 18 “The Equity Method of Accounting for Investments in
      Common Stock.”





In
      June
      2005, Fortress purchased 50% of both NW and the Company’s interest in Alterra
      for $50 million in cash, $25 million each to NW and Emeritus. The Company,
      NW,
      and Fortress entered into a Membership Interest Purchase Agreement whereby,
      concurrent with the sale and purchase of the membership interests, the parties
      entered into an Amended and Restated LLC Agreement (the “Amended LLC”). The
      resulting membership interests of Fortress, NW, and the Company is 75%, 12.5%,
      and 12.5%, respectively. The Company recorded a gain of $21.3 million in the
      condensed consolidated statement of operations for the nine months ended
      September 30, 2005, as a result of this transaction. The estimated income tax
      effect of this gain is approximately $835,000.





Under
      the
      Amended LLC, the Company agreed to provide an indirect guarantee of an
      obligation of Alterra. The primary guarantor is an affiliate of Fortress (the
      “Affiliate”). The Affiliate has agreed to guarantee the proposed purchase by
      Alterra of six properties that are currently operated by Alterra under a lease
      agreement with Omega Healthcare Investors. The Company agreed to pay its
      proportional membership interest (12.5%) of any amount that the Affiliate is
      required to pay under the guarantee, not to exceed $2,550,000. The gain on
      sale
      of the investment in Alterra was reduced by the fair value of the guarantee,
      which was determined to be $200,000.





**CPM/JEA
      Transactions**





In
      March
      2005, the Company entered into agreements covering the final two communities
      of
      the CPM/JEA lease transactions for which the first stage was completed in April
      2004. One community had been previously managed by the Company and is located
      in
      Richland, Washington. This community offers assisted living services and was
      part of the CPM group. The second community located in Lubbock,





**9**
 **EMERITUS
            CORPORATION**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 Continued
 (unaudited)


Table of Contents


Texas,
      offers memory loss services and is a part of the JEA group of communities.
      It is
      new to the Company's portfolio. Both facilities are under separate leases with
      the independent REIT, each with an expiration date of March 31, 2019, with
      three
      5-year renewal options. The lease rate is 9% with fixed inflators of the lesser
      of four times the change in the consumer price index or 3%. The base rent as
      of
      September 30, 2005, for these two leases is approximately $107,000 per month.
      These leases are accounted for as capital leases, which resulted in additions
      to
      property and equipment and capital lease and financing obligations totaling
      approximately $14.6 million.





**Senior
      Med Transaction**





In
      January 2000, Emeritus acquired a 30% equity interest in SHP for an investment
      of approximately $2.2 million ($1.8 million initial investment plus $356,000
      in
      subsequent contributions). The Company currently carries the investment at
      approximately $1.8 million after recording its equity share of income (losses)
      in SHP since the acquisition. SHP provides pharmacy services to senior housing
      residents under the trade name “Senior Med.” The remaining 70% of SHP is owned
      by MD Network, LLC, which is not affiliated with the Company.





In
      September 2005, SHP entered into an agreement with Walgreen Company (“Walgreen”)
      to sell substantially all of the business assets of SHP for cash, assumption
      of
      certain liabilities and an ownership interest in Senior Med, LLC, an entity
      created specifically for this transaction (“Walgreen Transaction”). SHP
      continues to maintain a 33.3% interest in Senior Med, LLC. The operating
      agreement for this transaction contains an option to purchase by Walgreen,
      and a
      put and call provision for Walgreen and SHP, by which Walgreen could obtain
      the
      remaining SHP interest in Senior Med. Should this provision be exercised, the
      Company’s remaining interest in SHP would be acquired by Walgreen at a price
      based upon a multiple of revenues as defined in the operating agreement. The
      agreement also contains a non-compete agreement, which prevents Emeritus from
      providing pharmacy services to the assisted living industry in the U.S., in
      any
      manner, for a period of 18 months after Emeritus ceases to hold any ownership
      interest in SHP. The Walgreen Transaction resulted in an indirect ownership
      interest by Emeritus of approximately 9.5% in Senior Med, LLC. Emeritus
      recognized equity earnings of $2.3 million and $2.4 million in its condensed
      consolidated statements of operations for the three and nine months ended
      September 30, 2005, respectively, and received an initial cash distribution
      of
      $1.5 million related to the Walgreen Transaction.





**Sale
      of Community**





On
      November 1, 2004, the Company sold a single community located in Issaquah,
      Washington, for cash and assumption of liabilities for a total of $9.6 million.
      Since the Company had a continuing involvement in the community until such
      time
      as the buyer was granted a license to operate the community, which occurred
      on
      January 7, 2005, the Company deferred recognition of the sale and associated
      gain until that point. The Company recorded a gain of $1.3 million related
      to
      this sale in "Income from discontinued operations" in its condensed consolidated
      statements of operations for the nine months ended September 30,
      2005.





**Series
      B Stock**





On
      June 30, 2005, the Company entered into an agreement with Saratoga that
      provided for the conversion of the Series B Stock held by Saratoga upon
      the
      payment by the Company of accrued and unpaid cash dividends on the Series B
      Stock, in the amount of approximately $10.8 million. Also on June 30,
      2005, the Company borrowed $10.8 million from a REIT to finance the
      payment
      of dividends to Saratoga. Upon such payment, which occurred on June 30, 2005,
      Saratoga converted all of the outstanding Series B Stock to common stock
      in
      accordance with the agreement.





The
      Series B Stock owned by Saratoga consisted of 36,970 shares with a stated
      value of $1,000 per share, of which 30,000 shares were issued in December 1999
      for a price of $30.0 million and 6,970 shares were issued as dividends
      of
      additional Series B Stock since December 1999.





**10**
 **EMERITUS
            CORPORATION**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 Continued
 (unaudited)


Table of Contents





The
      Series B Stock was entitled to receive quarterly dividends in a combination
      of
      cash and additional shares of Series B Stock. The initial rate for the dividend
      was 6% of the stated value of $1,000 per share, of which 2% was payable in
      cash
      and 4% was payable in additional Series B Stock. Starting in January 2004,
      the
      dividend rate moved to 7%, of which 3% was payable in cash and 4% in Series
      B
      Stock. The Series B Stock provided for an “arrearage rate” if the cash portion
      of the dividend was not paid, increasing the cash portion of the dividend to
      7%.
      The arrearage rate became effective in October 2000, thus accruing dividends
      at
      an 11% rate, 7% in cash and 4% in additional shares of Series B Stock. The
      Company had issued the additional Series B Stock dividends on a quarterly basis
      on the first day of the month after the end of each quarter. However, the cash
      portion of the dividend had not been paid since 2000, which resulted in an
      accumulated liability of approximately $10.8 million as of March 31, 2005.
      For
      accounting purposes, the Company had accrued a liability of $11.1 million,
      which included approximately $358,000 representing a straight-line dividend
      accrual that was reversed upon closing of this stock transaction. No interest
      was required to be accrued on the unpaid cash dividends. On June 30, 2005,
      the
      Series B Stock was converted into 5,365,747 shares of common stock. In addition,
      in connection with the conversion, the Company paid $265,000 in legal and
      professional fees.





The
      Company borrowed $10.8 million from a REIT at 10% per annum for a term of three
      years in order to pay the unpaid cash dividends of the Series B Stock. Monthly
      note payments of interest-only are due in arrears on the first day of each
      month. The note is due in full on June 30, 2008, with no prepayments allowed
      prior to January 1, 2007, and only upon at least 9 months prior written notice.
      The $10.8 million note contains provisions that modify one multi-community
      and
      four individual community leases with the REIT covering 12 properties. The
      loan
      requires collateral in the form of a letter of credit issued by a bank or a
      cash
      deposit of $1.0 million with the REIT. The Company deposited $1.0 million in
      cash with the REIT at closing, which is recorded as a restricted deposit in
      the
      accompanying condensed consolidated balance sheet.





**Convertible
      Debentures**





The
      Company has $32.0 million of 6.25% convertible subordinated debentures (the
      “Debentures”) that are due January 1, 2006 .
      The
      Debentures are convertible
      into common stock at the rate of $22 per share, which equates to an aggregate
      of
      approximately 1,454,545 shares of the Company’s common stock .
      Interest on the Debentures is payable semiannually on January 1 and July 1
      of
      each year. The Debentures are unsecured, subordinated to all other indebtedness
      of the Company, and are subject to redemption by the Company at any time, as
      a
      whole or in part, at a redemption price of 100% of the principal
      amount.





Of
      the
      $32.0 million of Debentures, $21.5 million are owned by directors and officers
      or their affiliates. Saratoga, two of whose representatives are directors,
      owns
      $5.0 million of the Debentures. Affiliates of Mr. Baty and Stanley L. Baty,
      a
      director, own $15.8 million of the Debentures and another executive officer
      owns
      $660,000.





On
      July
      6, 2005, the Company announced that it intended to commence an offer to exchange
      (the "Exchange Offer") its 6.25% Convertible Subordinated Debentures due 2006
      (the "Outstanding Debentures") for new convertible subordinated debentures
      (the
      "New Debentures"). On October 18, 2005, the Company announced that it
      had
      commenced the Exchange Offer.  The
      New
      Debentures will have the same terms as the Outstanding Debentures, except that
      (i) the principal amount and any accrued and unpaid interest of New Debentures
      will mature and be paid on July 1, 2008, and all other dates that are determined
      by or relate to the maturity date of the Outstanding Debentures will be adjusted
      accordingly; and (ii) the Company will have no right of redemption prior to
      maturity, as provided in the Outstanding Debentures. The interest rate will
      remain at 6.25%.





On
      October 14, 2005, the Company entered into an Amended and Restated Agreement
      Regarding 6.25% Convertible Subordinated Debentures Due 2006 (an "Agreement")
      with Saratoga and certain entities in which Mr. Baty has a financial interest
      (collectively, the "Baty Entities"), whereby each of the Baty Entities and
      Saratoga have agreed that, if any such entity does not exchange all of its
      Outstanding Debentures for New Debentures in the Exchange Offer, it will lend
      to
      the Company on December 30, 2005, an amount





**11**
 **EMERITUS
            CORPORATION**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 Continued
 (unaudited)


Table of Contents


equal
      to
      the principal amount of Outstanding Debentures that it has retained. The
      indebtedness will be nonconvertible, will mature July 1, 2008, will bear
      interest at 6.25% per annum payable semiannually on January 1 and July 1, will
      be on a parity as to payment with the New Debentures and will be subject to
      the
      same events of default as set forth in the indenture governing the New
      Debentures. The Agreement amends and restates in its entirety a similar
      agreement among the Company, Saratoga, and the Baty Entities entered into on
      June 30, 2005. As a part of the amendment, the agreement of the Baty Entities
      and Saratoga to purchase New Debentures to the extent that other holders of
      Outstanding Debentures do not exchange their Debentures has been
      terminated.





Mr.
      Baty
      beneficially owns approximately 28.5% of the Company's common stock. Saratoga
      beneficially owns approximately 33.0% of the Company's common stock and is
      represented on the Company's board by two directors. Together the Baty Entities
      and Saratoga beneficially own approximately 65% of the Outstanding
      Debentures.





**Recent
      Event-Hurricane Damage**





Certain
      communities in Texas, Louisiana, and Mississippi were affected by Hurricanes
      Katrina and Rita. The Company’s Biloxi community suffered significant damage
      from Katrina and will be out of operation for approximately one year. Four
      other
      communities operated by the Company and one managed community in Mississippi
      suffered limited damage from Katrina. Residents of the Biloxi community and
      one
      other community were evacuated without incident; residents have returned except
      to the Biloxi community. Four communities in Texas and two communities in
      Louisiana were evacuated without incident in advance of Rita. There was no
      damage to three Texas communities and only limited damage to the
      others.





Although
      the Company is still evaluating the full extent of damage and other financial
      impacts caused by the hurricanes, the Company has incurred losses in the third
      quarter of approximately $1.0 million related to physical property damages,
      costs of evacuation, and other expenses incurred in connection with the
      hurricanes, net of insurance recoveries. Physical damage to buildings is covered
      by insurance, subject to deductibles, and the Company also has business
      interruption insurance subject to various limits. The Company believes it will
      exceed its insurance limit on business interruption insurance specifically
      related to its Biloxi community and may exceed other insurance limits as
      well.





**Loss
      Per Share**





The
      capital structure of Emeritus includes convertible debentures, common stock
      warrants, and stock options and up until June 30, 2005, included redeemable
      convertible preferred stock. Basic net loss per share is computed based on
      weighted average shares outstanding and excludes any potential dilution. Diluted
      net loss per share is computed based on the weighted average number of shares
      outstanding plus dilutive potential common shares. Options and warrants are
      included under the “treasury stock method” to the extent they are dilutive.
      Shares issuable upon the exercise of stock options and warrants and conversion
      of convertible debentures and preferred stock have been excluded from the
      computation because the effect of their inclusion would be anti-dilutive. The
      following table summarizes those that are excluded in each period because they
      are anti-dilutive (in thousands):


**Three
                Months ended**
            
            **Nine
                Months ended****September
                30,**
            
            **September
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Convertible
                Debentures
            
            
            1,455
            
            
            1,455
            
            
            1,455
            
            
            1,455Options
            
            
            1,477
            
            
            1,617
            
            
            1,477
            
            
            1,617Warrants
                - Senior Housing Partners I, L.P.
            
            
            500
            
            
            500
            
            
            500
            
            
            500Warrants
                - Saratoga Partners
            
            
            1,000
            
            
            1,000
            
            
            1,000
            
            
            1,000Series
                B Stock(1)
            
            
            -
            
            
            5,208
            
            
            -
            
            
            5,2084,431
            
            
            9,780
            
            
            4,431
            
            
            9,780(1)Converted
                to common June 30, 2005.





**12**
 **EMERITUS
            CORPORATION**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 Continued
 (unaudited)


Table of Contents





**Comprehensive
      Loss**





Comprehensive
      loss is the same as net loss to common shareholders for the three-month and
      nine-month periods ended September 30, 2005 and 2004, respectively.




**Asset
      Impairment**





In
      June
      2005, the Company determined that the carrying amount of a financing lease
      facility in Las Vegas, Nevada, was not recoverable from expected undiscounted
      cash flows generated from the use and ultimate disposal of the asset and thus
      recorded an impairment loss of approximately $4.0 million and accordingly,
      the
      carrying value was reduced to estimated fair value based on appraised value
      and
      a letter of intent from a pending sale. Since June 2005, the estimated net
      sales
      proceeds were further reduced and thus, an additional impairment was recorded
      in
      the third quarter. The total asset impairment for the nine months ended
      September 30, 2005, amounted to $4.3 million.





**Liquidity** ****





The
      Company has incurred significant operating losses since its inception and has
      a
      working capital deficit of $61.8 million . Due
      to
      the nature of the Company’s business, it is not unusual to operate in the
      position of a working capital deficit because revenues are collected much more
      quickly, often in advance, than obligations are required to be paid. This
      results in 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 includes $15.3
      million of deferred revenue and unearned rental income and the
      level of current liabilities is not expected to change year to year in such
      a
      way as to require the use of significant cash, except for scheduled debt
      maturities. The Company has generated cash flow from operations for the
      nine-months ended September 30, 2005, of $12.8 million. Additionally, while
      our
      occupancy and revenue per unit grew in the current period, they grew more slowly
      than our targeted growth. While there is some indication that this is
      characteristic of the assisted living industry, we are responding through
      increased marketing initiatives, programs that address resident mix and
      increasing maintenance and other community-level expenses to attract additional
      long-term residents. We believe that these initiatives will have a positive
      impact on operating performance over time. In addition, due to the adverse
      judgment against the Company as described under Part II Item 1 “Legal
      Proceedings,” an additional reserve was recorded in the fourth quarter of 2004
      for $18.7 million in accordance with the Company's self-insured pool agreement.
      The Company is obligated to pay interest on the judgment at 5% and recorded
      an
      accrual of $563,000 in 2005 for interest owed on the judgment. The Company
      believes there are substantial grounds for an appeal and that the damage award
      was not justified by the facts or the law in the case presented. The Company
      has
      appealed the verdict and on March 16, 2005, posted funds in the amount of $1.7
      million in order to stay the proceedings while the appellate process runs its
      course, which could be anywhere from 18 months to three years from the date
      of
      the verdict. The Company will not be required to pay additional amounts until
      the appeal and further litigation is completed or the case is settled. At times
      in the past, the Company has been dependent upon third-party financing or
      disposition of assets to fund operations. If such transactions are necessary
      in
      the future, Emeritus cannot guarantee that they will be available on a timely
      basis, on terms attractive to the Company, or at all.





Throughout
      2004 and continuing through the second quarter of 2005, the Company refinanced
      substantially all of its debt obligations, extending the maturities of such
      financings to dates beyond September 30, 2006, 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 to the same or other lenders or lessors. Such
      cross-default provisions affect 6 owned assisted living properties and 158
      properties operated under leases. Accordingly, any event of default could cause
      a material adverse effect on the Company's financial condition if such debt
      or
      leases are cross-defaulted. At September 30, 2005, the Company was in violation
      of one or more covenants in certain of its leases, but has been able to obtain
      waivers from the owners such that it was still deemed to be in compliance and
      thus, was not in default.





**13**
 **EMERITUS
            CORPORATION**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 Continued
 (unaudited)


Table of Contents





Management
      believes that the Company will be able to sustain positive operating cash flow
      on an annual basis, or will have adequate cash reserves to cover any potential
      operating shortfalls, and will have the ability to obtain adequate financing
      for
      all necessary investing and financing activities including required debt service
      and capital expenditures through at least September 30, 2006.





**Discontinued
      Operations**





On
      August
      9, 2004, the Company sold an owned facility (“Scottsdale Royale”) to an
      unrelated third party. Due to certain legal requirements of resident
      notification, the Company leased the property back from the third party through
      August 31, 2004. In addition, on September 30, 2004, the Company committed
      to
      sell another owned facility (“Hearthside of Issaquah”), which under SFAS No. 144 *“Accounting
      for the Impairment or Disposal of Long-Lived Assets,* ”
      qualified as an asset held for sale. A current asset of $7.9 million was
      recorded on the Company's financial statements and the Company discontinued
      depreciating the asset as of September 30, 2004. Hearthside of Issaquah was
      sold
      on November 1, 2004, but was not recognized as a sale until the first quarter
      of
      2005 due to continuing involvement in the community through that period. Both
      transactions qualify for discontinued operations treatment under SFAS No. 144
      and the results of discontinued operations is reported as a separate line item
      in the condensed consolidated statements of operations.





The
      following table shows the revenues and net income for the discontinued
      operations (in thousands):





**Three
                months ended**
            
            **Nine
                months ended****September
                30,**
            
            **September
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004****Total
                revenue:**Hearthside
                of Issaquah
            
            $
            -
            
            $
            913
            
            $
            -
            
            $
            2,639Scottsdale
                Royale
            
            
            -
            
            
            70
            
            
            -
            
            
            305Total
            
            $
            -
            
            $
            983
            
            $
            -
            
            $
            2,944**Net
                income:**Hearthside
                of Issaquah
            
            $
            -
            
            $
            131
            
            $
            1,319
            
            $
            344Scottsdale
                Royale
            
            
            -
            
            
            720
            
            
            3
            
            
            682Total
            
            $
            -
            
            $
            851
            
            $
            1,322
            
            $
            1,026











**14**


Table of Contents







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





**Definitions**





Throughout
      this filing certain terms are used repeatedly. In the interest of brevity,
      the
      full reference has been abbreviated to a single name or acronym. The following
      defines these abbreviated terms:





1.
            "FASB"
                refers to the Financial Accounting Standards
                Board.


2.
            "SFAS"
                refers to Statement of Financial Accounting
                Standards.


3.
            "SEC"
                refers to the Securities and Exchange
                Commission.


4.
            "REIT"
                refers to real estate investment
                trust.


5.
            "LIBOR"
                is the London Interbank Offering
                Rate.


6.
            "Mr.
                Baty" refers to Daniel R. Baty, the Company's chairman of the board
                of
                directors and chief executive officer.


7.
            "Triple-net
                lease" means a lease under which the lessee pays all operating expenses
                of
                the property, including taxes, licenses, utilities, maintenance,
                and
                insurance. The lessor receives a net rent.


8.
            "Alterra"
                refers to Alterra Healthcare Corporation, a national assisted living
                company headquartered in Milwaukee,
                Wisconsin.


9.
            "Fortress"
                refers to Fortress Investment Group LLC, a New York based private
                equity
                fund.


10.
            "LLC"
                refers to a limited liability
                company.


11.
            "NW"
                refers to NW Select LLC, an entity controlled by Mr.
                Baty.


12.
            "CPM"
                refers to Columbia Pacific Management, a group of entities controlled
                by
                Mr. Baty.


13.
            "JEA"
                refers to JEA Senior Living, a non-affiliate.


14.
            "Saratoga"
                refers to a group of related companies, namely: Saratoga Partners
                IV, LP;
                Saratoga Management Company LLC, as Agent; and Saratoga Coinvestment
                IV,
                LLC.


15.
            "Series
                B Stock" refers to Series B Convertible Preferred
                Stock.


16.
            “SHP”
                refers to Senior Health Partners, LLC, a pharmaceutical supply limited
                liability company.


17.
            "N/A"
                in a table means not applicable.


18.
            "N/M"
                in a table means not meaningful.





**Overview**





Emeritus
      is a Washington corporation organized by Mr. Baty and two other founders in
      1993. In November 1995, we completed our initial public offering.





From
      1995
      through 1998, we expanded rapidly through acquisition and internal development
      and by December 31, 1999, operated 129 assisted living communities with
      11,726 units. We believe, however, that during this expansion, the assisted
      living industry became overbuilt in certain regions, creating an environment
      characterized by slower than planned occupancy and rate growth. As a result
      of
      these difficult operating circumstances, we limited further growth and in 1999
      began an increasing focus, first, on raising our occupancy and later, on
      operating efficiencies and cost controls as well as implementing a systematic
      rate enhancement program.





We
      believe that the health of the assisted living industry is currently improving
      and that opportunities are developing to improve occupancy and adjust rates.
      The
      assisted living industry is experiencing increased regulation (varying by
      state), increased insurance costs, and limited availability of capital for
      smaller local and regional operators. In this type of environment, we believe
      that we will continue to witness consolidation of smaller local and regional
      operators into the larger national operators. Because of these circumstances,
      we
      have been able to complete several acquisitions or leases in the last two years.
      In addition, our size and ability to respond to negative environmental
      conditions such as insurance availability and costs has attracted capital
      resources to allow us to convert communities we managed to communities we now
      lease.





**15**


Table of Contents


Going
      forward, we will attempt to identify additional acquisition or lease
      opportunities. In 2000 and 2001, we operated approximately 130 communities,
      but
      in 2002 and 2003, we increased that to 180 and 175 communities, respectively.
      From the end of 2000 to the end of 2003, the communities we managed decreased
      from 69 to 47 and the owned and leased communities increased from 61 to 128,
      reflecting our increasing confidence in the assisted living industry,
      stabilization of managed properties, and the availability of capital. In 2004,
      managed communities further declined to 17 and owned and leased communities
      increased to 164. In the first three quarters of 2005, managed communities
      declined to 14 and owned and leased communities increased to 168. Throughout
      2004 and continuing in 2005, we continue to review acquisition or lease
      opportunities.





In
      March
      2005, we completed the lease of three additional communities, two of which
      we
      had previously managed. In September 2005, we completed the lease of one new
      community.





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








**As
                of September 30,**
            
            **As
                of December 31,**
            
            **As
                of September 30,****2005**
            
            **2004**
            
            **2004****Buildings**
            
            **Units**
            
            **Buildings**
            
            **Units**
            
            **Buildings**
            
            **Units**Owned
            
            
            6
            
            
            454
            
            
            6
            
            
            454
            
            
            7
            
            
            552Leased
                (1 )
            
            
            162
            
            
            12,921
            
            
            158
            
            
            12,589
            
            
            155
            
            
            12,344Consolidated
                Portfolio
            
            
            168
            
            
            13,375
            
            
            164
            
            
            13,043
            
            
            162
            
            
            12,896Managed/Admin
                Services (2)
            
            
            13
            
            
            1,443
            
            
            16
            
            
            1,668
            
            
            18
            
            
            1,850Joint
                Venture/Partnership
            
            
            1
            
            
            140
            
            
            1
            
            
            140
            
            
            1
            
            
            140Operated
                Portfolio
            
            
            182
            
            
            14,958
            
            
            181
            
            
            14,851
            
            
            181
            
            
            14,886Percentage
                increase (3)
            
            
            0.6
            %
            
            0.7
            %
            
            3.4
            %
            
            0.0
            %
            
            3.4
            %
            
            0.3
            %








--------


(1)
      Of
      the leased communities at September 30, 2005, 77 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 70 are accounted for as capital
      leases, in which a long-term asset and corresponding liability is established
      on
      our balance sheet. The remaining 15 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.


(2)
      One
      managed building was shut down and sold March 12, 2004; we discontinued
      management of one facility on September 30, 2004, and one on July 1,
      2005.


(3)  The
      percentage increase indicates the change from the prior year, or, in the case
      of
      September 30, 2005 and 2004, from the end of the prior year.





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. We rely
      primarily on our residents' ability to pay our charges for services from their
      own or familial resources and expect that we will do so for the foreseeable
      future. Although care in an assisted living community is typically less
      expensive than in a skilled nursing facility, we believe that generally only
      seniors with income or assets meeting or exceeding the regional median can
      afford to reside in our communities. In this context, we must be sensitive
      to
      our residents' financial circumstances and remain aware that rates and occupancy
      are often interrelated.





In
      evaluating the rate component, we generally rely on the average monthly revenue
      per unit, computed by dividing the total 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





**16**
 **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
            RESULTS OF OPERATIONS - CONTINUED**


Table of Contents


includes
      the communities we own and lease, and our operating portfolio, which also
      includes the communities we manage.





In
      our
      consolidated portfolio, our average monthly revenue per unit for the nine months
      ended September 30, 2005, increased to $2,931 from $2,856 for the same period
      in
      2004. This change represents an increase of $75 or 2.6%. In our consolidated
      portfolio, our average monthly revenue per unit for the three months ended
      September 30, 2005, increased to $2,963 from $2,883 for the three months ended
      September 30, 2004. This change represents an increase of $80 or 2.8%. For
      the
      second quarter of 2005, our average monthly revenue per unit was $2,928. This
      level of increase is partially due to repositioning several of our acquired
      communities over the past year to be more rate-competitive and to establish
      a
      new presence in their respective markets. In addition, increased competition
      in
      certain locations has prevented us from raising rates to the extent we otherwise
      would have desired.





In
      our
      consolidated portfolio, our average occupancy rate increased to 84.6% for the
      nine months ended September 30, 2005, from 81.0% for the nine months ended
      September 30, 2004. In our consolidated portfolio, our average occupancy rate
      increased to 84.5% for the three months ended September 30, 2005, from 83.4%
      for
      the three months ended September 30, 2004 For the second quarter of 2005, our
      average occupancy rate was 84.4%. We believe that this increase in occupancy
      rates reflects industry-wide factors, such as the declining supply of vacant
      units as well as our own actions and policies. We continue to evaluate the
      factors of rate and occupancy to find the optimum balance.





We
      have
      incurred operating losses since our inception in 1993, and as of September
      30,
      2005, we had an accumulated deficit of approximately $210.9 million. We believe
      that these losses have resulted from our early emphasis on expansion, financing
      costs arising from multiple financing and refinancing transactions related
      to
      this expansion, and occupancy rates remaining lower for longer periods than
      we
      anticipated.





**Significant
      Transactions**





In
      2004
      and continuing in 2005, we substantially increased the number of communities
      we
      lease, reduced the number of communities we manage, and, in connection with
      these changes, increased and restructured portions of our long-term financing
      obligations. The transactions associated with these developments are summarized
      below.





*Emeritrust
      Transactions*





Beginning
      in 1999, we managed 25 communities under arrangements with a related investor
      group (“Emeritrust”) that involved (i) payment of management fees to us (ii)
      options for us to purchase the communities at a price determined by a formula,
      and (iii) obligations to fund operating losses of certain
      communities.




*Emeritrust I
      Communities Management.* During the period from 2000 to 2004, the arrangements were modified several
      times, the options to purchase and funding obligation were terminated, and
      the
      number of communities covered declined from 25 to 21. Effective January 2,
      2004,
      the management fee arrangement provided for a flat fee of 5% of gross revenues.
      The term currently expires March 31, 2006, subject to termination by
      either
      party on 90 days notice. On September 30, 2004, 16 communities were
      leased
      pursuant to leases discussed below and five communities, which are now owned
      by
      Mr. Baty, continue to be managed by us. We received management fees of
      approximately $129,000 and $633,000 for the three months ended September 30,
      2005 and 2004, respectively, and $385,000 and $1.9 million for the nine months
      ended September 30, 2005 and 2004, respectively.





*Emeritrust
      I Communities Lease.* On
      September 30, 2004, we completed the first phase of a transaction to lease
      (“Baty/REIT Lease”) up to 20 assisted living communities in 12 states, with
      1,824 units. These communities, which were owned by entities in which Mr. Baty
      had financial interests, were acquired by an





**17**
 **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
            RESULTS OF OPERATIONS - CONTINUED**


Table of Contents


independent
      REIT for an investment of approximately $170.8 million and are being leased
      to
      us. We completed the lease on the first 18 communities on September 30, 2004,
      consisting of 17 new communities and one existing lease. One additional
      community was leased on March 31, 2005, and another one on September 1, 2005.
      Of
      the communities included in this lease, 16 were part of the communities referred
      to above and in past filings with the SEC as the “Emeritrust I communities.” The
      initial 18 leased communities are accounted for as capital leases. The two
      additional communities are accounted for as operating leases with escalating
      rent payments, which are accounted for on a straight-line basis





The
      lease
      of these 20 communities has a term of 15 years, with one 15-year renewal option.
      The annualized cash lease payment for the communities is approximately $15.3
      million per year, with inflators to the extent the change in the consumer price
      index exceeds 0%, not to exceed 40 basis points during years two through four
      and 30 basis points thereafter, as calculated with respect to the REIT's
      investment basis in the properties. All of the leases are triple-net leases.
      The
      18 initial leases have cross-default provisions and are cross-collateralized
      with all of our other leases and loans relating to other communities owned
      by
      the REIT. All of the leases contain certain financial and other covenants.
      We
      have the right of first refusal to purchase these leased communities and Mr.
      Baty is personally guaranteeing our obligations under the lease. Mr. Baty will
      receive, based on a prescribed formula, 50% of the positive cash flow of the
      20
      communities and will be responsible for 50% of any negative cash flow, as
      defined in the cash flow sharing agreement. In the fourth quarter of 2004,
      the
      first quarter under this arrangement, Mr. Baty earned $200,000 as consideration.
      Mr. Baty earned $78,000 and $514,000 in the three months and nine months ended
      September 30, 2005, respectively.





*Debt
      Consolidation*





In
      March
      2005, we completed a debt restructuring transaction that reduced the effective
      interest rate by approximately 2.75% on $21.4 million of debt, extended the
      maturity to March 2008, and improved annual cash flows and earnings by
      approximately $1.6 million and $550,000, respectively, exclusive of transaction
      charges, as further described below.





The
      REIT
      that financed the Emeritrust II transaction discussed in our 2004 Form
      10-K
      already held $6.8 million of our leasehold mortgage debt that matured in March
      2005 and bore interest at 12% per annum, commencing March 2002 with periodic
      increases up to 13% per annum. This REIT also provided $7.5 million in leasehold
      mortgage financing incurred to support the Series A Preferred Stock
      repurchase in August 2003. On September 30, 2003, these two debt
      obligations, together with the $11.5 million leasehold mortgage loan related
      to
      the Emeritrust II communities, were consolidated into a single $25.8 million
      leasehold mortgage loan covering the 32 communities and maturing on June 30,
      2007 (the ”REIT Loan”). The REIT Loan bore interest at an initial rate of 12.13%
      per annum with periodic increases up to 13%. The consolidated REIT Loan required
      monthly payments of interest the first year and monthly payments of principal
      and interest, based on a 10-year amortization, thereafter. We elected to make
      a
      principal reduction of $6.0 million on August 2, 2004. The balance on the REIT
      Loan as of March 2, 2005, was approximately $19.5 million. On March 2,
      2005, the REIT Loan was sold to Healthcare Realty Trust, Incorporated ("HRT")
      and modified. The loan, as modified, provides for monthly interest-only payments
      at 10% per annum and matures March 3, 2008 (the “HRT Loan”). The HRT Loan
      may not be prepaid without the lender's consent.





In
      connection with the HRT Loan modification, HRT also loaned an additional $1.8
      million to us on the same terms as the HRT Loan to pay off certain transaction
      cost advances related to communities acquired in April 2004. The transaction
      cost advances were scheduled to mature in March 2006 and had an interest rate
      of
      12.0%, which would have increased to 12.5% in April 2005. In addition, in
      connection with the HRT Loan modification, we incurred approximately $126,000
      in
      closing costs, which were included in the loan and resulted in a $21.4 million
      HRT Loan.





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            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
            RESULTS OF OPERATIONS - CONTINUED**


Table of Contents





*Alterra
      Transactions*





In
      October 2003, we paid $7.7 million in cash to acquire an interest in an LLC
      that
      acquired Alterra. The members of the LLC consisted of an affiliate of Fortress,
      NW and us, with original ownership interests of 50%, 25%, and 25%,
      respectively.  Through
      January 31, 2004, the investment in Alterra was structured as an ownership
      interest in an LLC, which is a pass-through entity for tax purposes, similar
      to
      a limited partnership. Under generally accepted accounting principles, we used
      the equity method of accounting for our LLC membership interest and recorded
      a
      portion of Alterra's results of operations in our financial statements. As
      a
      consequence, equity losses of approximately $794,000 are included in the
      condensed consolidated statement of operations for the first three quarters
      of
      2004, under the caption “Other, net,” which represents our portion of Alterra's
      net loss for December 2003 and January 2004.





The
      LLC
      made an election to be treated as a corporation for tax purposes effective
      January 31, 2004, and is no longer a pass-through entity. As a result of this
      election, on February 1, 2004, we began accounting for Alterra on a
      cost
      basis under APB 18 “The Equity Method of Accounting for Investments in Common
      Stock.”





In
      June
      2005, Fortress purchased 50% of both NW and our interest in Alterra for $50
      million in cash, $25 million each to NW and us. NW, Fortress, and we entered
      into a Membership Interest Purchase Agreement whereby, concurrent with the
      sale
      and purchase of the membership interests, the parties entered into an Amended
      and Restated LLC Agreement (the “Amended LLC”). The resulting membership
      interests of Fortress, NW, and us are 75%, 12.5%, and 12.5%, respectively.
      We
      recorded a gain of $21.3 million in the condensed consolidated statement of
      operations for the nine months ended September 30, 2005, as a result of this
      transaction. The estimated income tax effect of this gain is approximately
      $835,000.





Under
      the
      Amended LLC, we agreed to provide an indirect guarantee of an obligation of
      Alterra. The primary guarantor is an affiliate of Fortress (the “Affiliate”).
      The Affiliate has agreed to guarantee the proposed purchase by Alterra of six
      properties that are currently operated by Alterra under a lease agreement with
      Omega Healthcare Investors. We agreed to pay our proportional membership
      interest (12.5%) of any amount that the Affiliate is required to pay under
      the
      guarantee, not to exceed $2,550,000. The gain on sale of the investment in
      Alterra was reduced by the fair value of the guarantee, which was determined
      to
      be $200,000.





*CPM/JEA
      Transactions*





In
      March
      2005, we entered into agreements covering the final two communities of the
      CPM/JEA lease transactions for which the first stage was completed in April
      2004. One community had been previously managed by us and is located in
      Richland, Washington. This community offers assisted living services and was
      part of the CPM group. The second community located in Lubbock, Texas, offers
      memory loss services and is a part of the JEA group of communities. It is new
      to
      our portfolio. Both facilities are under separate leases with the independent
      REIT, each with an expiration date of March 31, 2019, with three 5-year renewal
      options. The lease rate is 9% with fixed inflators of the lesser of four times
      the change in the consumer price index or 3%. The base rent as of September
      30,
      2005, for these two leases is approximately $107,000 per month. These leases
      are
      accounted for as capital leases, which resulted in additions to property and
      equipment and capital lease and financing obligations totaling approximately
      $14.6 million.





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            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
            RESULTS OF OPERATIONS - CONTINUED**


Table of Contents





*Senior
      Med Transaction*





In
      January 2000, we acquired a 30% equity interest in SHP for an investment of
      approximately $2.2 million ($1.8 million initial investment plus $356,000 in
      subsequent contributions). We currently carry the investment at approximately
      $1.8 million after recording our equity share of income (losses) in SHP since
      the acquisition. SHP provides pharmacy services to senior housing residents
      under the trade name “Senior Med.” The remaining 70% of SHP is owned by MD
      Network, LLC, which is not affiliated with us.





In
      September 2005, SHP entered into an agreement with Walgreen Company (“Walgreen”)
      to sell substantially all of the business assets of SHP for cash, assumption
      of
      certain liabilities and an ownership interest in Senior Med, LLC, an entity
      created specifically for this transaction (“Walgreen Transaction”). SHP
      continues to maintain a 33.3% interest in Senior Med, LLC. The operating
      agreement for this transaction contains an option to purchase by Walgreen,
      and a
      put and call provision for Walgreen and SHP, by which Walgreen could obtain
      the
      remaining SHP interest in Senior Med, LLC. Should this provision be exercised,
      our remaining interest in SHP would be acquired by Walgreen at a price based
      upon a multiple of revenues as defined in the operating agreement. The agreement
      also contains a non-compete agreement, which prevents us from providing pharmacy
      services to the assisted living industry in the U.S., in any manner, for a
      period of 18 months after we cease to hold any ownership interest in SHP. The
      Walgreen Transaction resulted in an indirect ownership interest by us of
      approximately 9.5% in Senior Med, LLC. We recognized equity earnings of $2.3
      million and $2.4 million in our condensed consolidated statements of operations
      for the three and nine months ended September 30, 2005, respectively, and
      received an initial cash distribution of $1.5 million related to the Walgreen
      Transaction.





*Sale
      of Community*





On
      November 1, 2004, we sold a single community located in Issaquah, Washington,
      for cash and assumption of liabilities for a total of $9.6 million. Since we
      had
      a continuing involvement in the community until such time as the buyer was
      granted a license to operate the community, which occurred on January 7, 2005,
      we deferred recognition of the sale and associated gain until that point. We
      recorded a gain of $1.3 million related to this sale in "Income from
      discontinued operations" in our condensed consolidated statements of operations
      for the nine months ended September 30, 2005.





*Series
      B Stock*





On
      June 30, 2005, we entered into an agreement with Saratoga that provided
      for
      the conversion of the Series B Stock held by Saratoga upon the payment
      by
      us of accrued and unpaid cash dividends on the Series B Stock, in the
      amount of approximately $10.8 million. Also on June 30, 2005,
      we
      borrowed $10.8 million from a REIT to finance the payment of dividends
      to
      Saratoga. Upon such payment, which occurred on June 30, 2005, Saratoga converted
      all of the outstanding Series B Stock to common stock in accordance
      with
      the agreement.





The
      Series B Stock owned by Saratoga consisted of 36,970 shares with a stated
      value of $1,000 per share, of which 30,000 shares were issued in December 1999
      for a price of $30.0 million and 6,970 shares were issued as dividends
      of
      additional Series B Stock since December 1999.





The
      Series B Stock was entitled to receive quarterly dividends in a combination
      of
      cash and additional shares of Series B Stock. The initial rate for the dividend
      was 6% of the stated value of $1,000 per share, of which 2% was payable in
      cash
      and 4% was payable in additional Series B Stock. Starting in January 2004,
      the
      dividend rate moved to 7%, of which 3% was payable in cash and 4% in Series
      B
      Stock. The Series B Stock provided for an “arrearage rate” if the cash portion
      of the dividend was not paid, increasing the cash portion of the dividend to
      7%.
      The arrearage rate became effective in October 2000, thus accruing dividends
      at
      an 11% rate, 7% in cash and 4% in additional shares of Series B Stock. We had
      issued the additional Series B





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 **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
            RESULTS OF OPERATIONS - CONTINUED**


Table of Contents


Stock
      dividends on a quarterly basis on the first day of the month after the end
      of
      each quarter. However, the cash portion of the dividend had not been paid since
      2000, which resulted in an accumulated liability of approximately $10.8 million
      as of March 31, 2005. For accounting purposes, we had accrued a liability of
      $11.1 million, which included approximately $358,000 representing a
      straight-line dividend accrual that was reversed upon closing of this stock
      transaction. No interest was required to be accrued on the unpaid cash
      dividends. On June 30, 2005, the Series B Stock was converted into 5,365,747
      shares of common stock. In addition, in connection with the conversion, we
      paid
      $265,000 in legal and professional fees.





We
      borrowed $10.8 million from a REIT at 10% per annum for a term of three years
      in
      order to pay the unpaid cash dividends of the Series B Stock. Monthly note
      payments of interest-only are due in arrears on the first day of each month.
      The
      note is due in full on June 30, 2008, with no prepayments allowed prior to
      January 1, 2007, and only upon at least 9 months prior written notice. The
      $10.8
      million note contains provisions that modify one multi-community and four
      individual community leases with the REIT covering 12 properties. The loan
      requires collateral in the form of a letter of credit issued by a bank or a
      cash
      deposit of $1.0 million with the REIT. We deposited $1.0 million in cash with
      the REIT at closing, which was recorded as a restricted deposit in the
      accompanying condensed consolidated balance sheet.





*Convertible
      Debentures*





We
      have
      $32.0 million of 6.25% convertible subordinated debentures (the “Debentures”)
      that are due January 1, 2006. The Debentures are convertible into common stock
      at the rate of $22 per share, which equates to an aggregate of approximately
      1,454,545 shares of our common stock. Interest on the Debentures is payable
      semiannually on January 1 and July 1 of each year. The Debentures are unsecured,
      subordinated to all our other indebtedness, and are subject to redemption by
      us
      at any time, as a whole or in part, at a redemption price of 100% of the
      principal amount.





Of
      the
      $32.0 million of Debentures, $21.5 million are owned by directors and officers
      or their affiliates. Saratoga, two of whose representatives are directors,
      owns
      $5.0 million of the Debentures. Affiliates of Mr. Baty and Stanley L. Baty,
      a
      director, own $15.8 million of the Debentures and another executive officer
      owns
      $660,000.





On
      July
      6, 2005, we announced our intention to commence an offer to exchange (the
      "Exchange Offer") our 6.25% Convertible Subordinated Debentures due 2006 (the
      "Outstanding Debentures") for new convertible subordinated debentures (the
      "New
      Debentures"). On October 18, 2005, we announced that we had commenced
      the
      Exchange Offer.  The
      New
      Debentures will have the same terms as the Outstanding Debentures, except that
      (i) the principal amount and any accrued but unpaid interest of New Debentures
      will mature and be paid on July 1, 2008, and all other dates that are determined
      by or relate to the maturity date of the Outstanding Debentures will be adjusted
      accordingly; and (ii) we will have no right of redemption prior to maturity,
      as
      provided in the Outstanding Debentures. The interest rate will remain at 6.25%.





On
      October 14, 2005, we entered into an Amended and Restated Agreement Regarding
      6.25% Convertible Subordinated Debentures Due 2006 (an "Agreement") with
      Saratoga and certain entities in which Mr. Baty has a financial interest
      (collectively, the "Baty Entities"), whereby each of the Baty Entities and
      Saratoga have agreed that, if any such entity does not exchange all of its
      Outstanding Debentures for New Debentures in the Exchange Offer, it will lend
      to
      us on December 30, 2005, an amount equal to the principal amount of
      Outstanding Debentures that it has retained. The indebtedness will be
      nonconvertible, will mature July 1, 2008, will bear interest at 6.25% per annum
      payable semiannually on January 1 and July 1, will be on a parity as to payment
      with the New Debentures and will be subject to the same events of default as
      set
      forth in the indenture governing the New Debentures. The Agreement amends and
      restates in its entirety a similar agreement among us, Saratoga, and the Baty
      Entities entered into on June 30, 2005. As a part of the amendment, the
      agreement of the Baty Entities and Saratoga to purchase New Debentures to the
      extent that other holders of the Outstanding Debentures do not exchange their
      Debentures has been terminated.





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            RESULTS OF OPERATIONS - CONTINUED**


Table of Contents


Mr.
      Baty
      beneficially owns approximately 28.5% of our common stock. Saratoga beneficially
      owns approximately 33.0% of our common stock and is represented on our board
      by
      two directors. Together the Baty Entities and Saratoga beneficially own
      approximately 65% of Outstanding Debentures.








The
      following table shows the changes in buildings from December 31, 2003, through
      September 30, 2005, including those transactions described above:





**Month**
            
            **Owned**
            
            **Leased**
            
            
            
            **Consolidated**
            
            **Managed**
            
            **Total****December
                31, 2003**
            
            
            
            
            
            **19**
            
            
            **109**
            
            
            
            
            **128**
            
            
            **47**
            
            
            **175**Madison
                Glen - disposition
            
            
            Mar-04
            
            
            -
            
            
            -
            
            
            
            
            -
            
            
            (1
            )
            
            (1
            )**March
                31, 2004**
            
            
            
            
            
            **19**
            
            
            **109**
            
            
            
            
            **128**
            
            
            **46**
            
            
            **174**CPM/JEA
                transactions
            
            
            Apr-04
            
            
            -
            
            
            16
            
            **1**
            
            
            16
            
            
            (8
            )
            
            8Autumn
                Ridge
            
            
            Jun-04
            
            
            -
            
            
            1
            
            **1**
            
            
            1
            
            
            (1
            )
            
            -The
                Terrace
            
            
            Jun-04
            
            
            -
            
            
            1
            
            **1**
            
            
            1
            
            
            (1
            )
            
            -**June
                30, 2004**
            
            
            
            
            
            **19**
            
            
            **127**
            
            
            
            
            **146**
            
            
            **36**
            
            
            **182**HCP
                Transaction - sale-leaseback
            
            
            Jul-04
            
            
            (11
            )
            
            11
            
            **2**
            
            
            -
            
            
            -
            
            
            -Scottsdale
                Royale - sold
            
            
            Aug-04
            
            
            (1
            )
            
            -
            
            
            
            
            (1
            )
            
            -
            
            
            (1
            )Baty/REIT
                Lease
            
            
            Sep-04
            
            
            -
            
            
            17
            
            **1**
            
            
            17
            
            
            (17
            )
            
            -**September
                30, 2004**
            
            
            
            
            
            **7**
            
            
            **155**
            
            
            
            
            **162**
            
            
            **19**
            
            
            **181**Manor
                at Essington
            
            
            Oct-04
            
            
            -
            
            
            1
            
            **1**
            
            
            1
            
            
            -
            
            
            1Arbor
                Gardens at Corona
            
            
            Oct-04
            
            
            -
            
            
            1
            
            **1**
            
            
            1
            
            
            -
            
            
            1Willows
                at York - disposition
            
            
            Oct-04
            
            
            -
            
            
            -
            
            
            
            
            -
            
            
            (1
            )
            
            (1
            )Loyalton
                of Cape May
            
            
            Oct-04
            
            
            -
            
            
            1
            
            **1**
            
            
            1
            
            
            (1
            )
            
            -Hearthside
                of Issaquah - disposition
            
            
            Nov-04
            
            
            (1
            )
            
            -
            
            
            
            
            (1
            )
            
            -
            
            
            (1
            )**December
                31, 2004**
            
            
            
            
            
            **6**
            
            
            **158**
            
            
            
            
            **164**
            
            
            **17**
            
            
            **181**Richland
                Gardens
            
            
            Mar-05
            
            
            **-**
            
            
            1
            
            **1**
            
            
            1
            
            
            (1
            )
            
            -Quail
                Ridge
            
            
            Mar-05
            
            
            **-**
            
            
            1
            
            **1**
            
            
            1
            
            
            **-**
            
            
            1Wilburn
                Gardens
            
            
            Mar-05
            
            
            **-**
            
            
            1
            
            
            
            
            1
            
            
            (1
            )
            
            -**March
                31, 2005**
            
            
            
            
            
            **6**
            
            
            **161**
            
            
            
            
            **167**
            
            
            **15**
            
            
            **182****-**
            
            
            
            
            
            
            
            
            **-**
            
            
            
            
            **-**
            
            
            **-**
            
            
            **-****June
                30, 2005**
            
            
            
            
            
            **6**
            
            
            **161**
            
            
            
            
            **167**
            
            
            **15**
            
            
            **182**Regent
                Court of Kent - disposition
            
            
            Jul-05
            
            
            **-**
            
            
            **-**
            
            
            
            
            **-**
            
            
            (1
            )
            
            (1
            )Hunter's
                Glen - Missoula
            
            
            Sep-05
            
            
            **-**
            
            
            1
            
            
            
            
            1
            
            
            -
            
            
            1**September
                30, 2005**
            
            
            
            
            
            **6**
            
            
            **162**
            
            
            
            
            **168**
            
            
            **14**
            
            
            **182**








1These
                leases are accounted for as capital leases in our condensed consolidated
                statements.2These
                11 leased communities are reflected in our condensed consolidated
                financial statements as owned communities because ofaccounting requirements related to sale-leaseback accounting,
                notwithstanding the legal sale of the communities and
                theirsubsequent leasing by us.








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 **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
            RESULTS OF OPERATIONS - CONTINUED**










**Results
      of Operations**





**Summary
      of Significant Accounting Policies and Use of Estimates**





Our
      discussion and analysis of our financial condition and results of operations
      are
      based upon our condensed consolidated financial statements, which have been
      prepared in accordance with accounting principles generally accepted in the
      United States. The preparation of these financial statements requires us 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, we evaluate our 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, health insurance, and litigation. We base our estimates on historical
      experience and on various other assumptions that are believed 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.





Our
      significant accounting policies and use of estimates are delineated in the
      Notes
      to the Condensed Consolidated Financial Statements under the heading "Summary
      of
      Significant Accounting Policies and Use of Estimates."





**Common-size
      Statements of Operations 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 Period****Percentage****Change****Percentage
                of Revenues**
            
            **Fav
                / (Unfav)****Three
                Months**
            
            **Nine
                Months****Three
                Months ended**
            
            **Nine
                Months ended**
            
            **ended**
            
            **ended****September
                30,**
            
            **September
                30,**
            
            **September
                30,**
            
            **September
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**
            
            **2005-2004**
            
            **2005-2004**Revenues:
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            21.5
            %
            
            29.4
            %Expenses:Community
                operations*
            
            
            70.4
            
            
            63.6
            
            
            66.3
            
            
            63.0
            
            
            (34.6
            )
            
            (36.1
            )General
                and administrative
            
            
            8.4
            
            
            8.1
            
            
            8.1
            
            
            8.6
            
            
            (26.0
            )
            
            (21.3
            )Depreciation
                and amortization
            
            
            11.9
            
            
            10.1
            
            
            11.9
            
            
            9.7
            
            
            (42.6
            )
            
            (59.6
            )Facility
                lease expense
            
            
            10.8
            
            
            12.1
            
            
            10.6
            
            
            12.9
            
            
            (8.5
            )
            
            (6.5
            )Asset
                impairment
            
            
            0.2
            
            
            -
            
            
            1.5
            
            
            -
            
            
            N/A
            
            
            N/ATotal
                operating expenses
            
            
            101.7
            
            
            93.9
            
            
            98.4
            
            
            94.2
            
            
            (31.7
            )
            
            (35.1
            )Operating
                income (loss) from continuing operations
            
            
            (1.7
            )
            
            6.1
            
            
            1.6
            
            
            5.8
            
            
            (134.6
            )
            
            (63.4
            )Other
                income (expense)Interest
                income
            
            
            0.5
            
            
            0.2
            
            
            0.3
            
            
            0.2
            
            
            188.4
            
            
            99.8Interest
                expense
            
            
            (13.4
            )
            
            (14.4
            )
            
            (13.0
            )
            
            (13.0
            )
            
            (13.1
            )
            
            (29.1
            )Gain
                on sale of investment in Alterra Healthcare Corporation
            
            
            -
            
            
            -
            
            
            7.4
            
            
            -
            
            
            N/A
            
            
            N/AEquity
                earnings in Senior Healthcare Partners, LLC
            
            
            2.3
            
            
            -
            
            
            0.8
            
            
            -
            
            
            N/A
            
            
            N/AOther,
                net
            
            
            0.6
            
            
            1.2
            
            
            0.7
            
            
            0.6
            
            
            36.0
            
            
            (43.0
            )Net
                other expense
            
            
            (10.0
            )
            
            (13.0
            )
            
            (3.9
            )
            
            (12.2
            )
            
            6.9
            
            
            59.3Loss
                from continuing operationsbefore
                income taxes
            
            
            (11.7
            )
            
            (6.9
            )
            
            (2.3
            )
            
            (6.4
            )
            
            (107.3
            )
            
            55.6Provision
                for income taxes
            
            
            (0.1
            )
            
            (1.1
            )
            
            (0.4
            )
            
            (0.4
            )
            
            86.7
            
            
            (32.3
            )Loss
                from continuing operations
            
            
            (11.8
            )
            
            (8.0
            )
            
            (2.7
            )
            
            (6.8
            )
            
            (79.7
            )
            
            50.3Income
                from discontinued operations
            
            
            -
            
            
            1.1
            
            
            0.5
            
            
            0.4
            
            
            (100.0
            )
            
            28.8Net
                loss
            
            
            (11.8
            %)
            
            (6.9
            %)
            
            (2.2
            %)
            
            (6.4
            %)
            
            (107.1
            %)
            
            56.1
            %*
                exclusive of depreciation and amortization and facility lease expense
                shown separately below








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            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
            RESULTS OF OPERATIONS - CONTINUED**


Table of Contents


Comparison
      of the three months ended September 30, 2005 and 2004





*Total
      Operating Revenues:* Total
      operating revenues for the three months ended September 30, 2005, increased
      by
      $17.3 million to $97.9 million from $80.6 million for the comparable period
      in
      2004, or 21.5%.





Community
      revenue and other service fees increased by approximately $18.0 million in
      the
      three months ended September 30, 2005, compared to the three months ended
      September 30, 2004, or 22.7%. This increase was primarily due to additional
      revenue related to the acquisition or lease of 24 communities from July 1,
      2004,
      to September 30, 2005. Of the 24 communities, we had formerly managed 20. These
      communities represent a revenue increase of approximately $15.1 million in
      the
      third quarter of 2005. Revenue also increased $3.1 million, or 3.9%, primarily
      due to an increase in occupancy and average revenue per unit of previously
      operated communities, offset by hurricane-related revenue losses of
      approximately $250,000 primarily from the temporary closure of our Biloxi
      community.





The
      average occupancy rate for all communities for the three months ended September
      30, 2005, increased 1.1 percentage points to 84.5% from 83.4%. The occupancy
      rate grew from marketing initiatives in existing communities and from the
      acquisition or leasing of additional communities with higher occupancy levels
      than existing communities. Average community monthly revenue per unit for all
      communities was $2,963 for the third quarter of 2005 compared to $2,883 for
      the
      comparable quarter of 2004, an increase of approximately $80 per occupied unit,
      or 2.8%.





Our
      occupancy and revenue per unit grew more slowly in the current quarter than
      our
      targeted growth. While there is some indication that this is characteristic
      of
      the assisted living industry, we are responding through increased marketing
      initiatives, programs that address resident mix and increasing maintenance
      and
      other community-level expenses to attract additional long-term residents. We
      believe that these initiatives will have a positive impact on operating
      performance over time.





Management
      fee income decreased by approximately $745,000 to $457,000 for the three months
      ended September 30, 2005, from $1.2 million for the three months ended September
      30, 2004. This decrease was primarily due to 20 communities now leased in the
      third quarter of 2005 that were managed in the same quarter of the prior year.





*Community
      Operations:* Community operating expenses for the three months ended September 30, 2005,
      increased by $17.7 million to $68.9 million from $51.2 million in the third
      quarter of 2004, or 34.6%. The change was primarily due to the acquisition
      or
      lease of 24 communities referred to above, which accounted for approximately
      $9.3 million of the increased expense. Approximately $8.4 million of the
      increase, or 16.4%, was attributable to a number of factors affecting the other
      144 communities we operate. The most significant factor was a $5.0 million
      adjustment to our professional and general liability insurance accrual as
      further explained below. In addition, approximately $650,000 of the increase
      is
      attributable to hurricane related costs, as discussed below. The remaining
      increase of approximately $2.7 million, or 5.3%, relate to general operating
      expenses of the communities, including staffing, raw food costs, utilities,
      real
      estate taxes, and similar expenses, of which approximately $290,000 related
      to
      increased facility maintenance costs,
      partially offset by an expense reduction of approximately $700,000, reflecting
      the positive trends of our Texas workers’ compensation program. Community
      operating expenses as a percentage of total operating revenue increased to
      70.4%
      in the third quarter of 2005 from 63.6% in the third quarter of
      2004.





We
      recorded an additional $5.0 million professional and general liability insurance
      accrual to reflect the settlement experience of claims closed in the third
      quarter ended September 30, 2005, primarily from claims originating in 2003
      and
      2004, and to reflect an updated estimate of ultimate losses for all years from
      2002 to September 30, 2005, based upon an actuarial valuation
      report.





Hurricanes
      Katrina and Rita caused physical damage to several of our communities located
      in
      Mississippi, Texas, and Louisiana. Most of the losses were within our insurance
      deductibles and we will incur the cost to repair the damage. Our Biloxi,
      Mississippi, community sustained significant damage and will be out of operation
      for approximately one year. In addition, we incurred costs associated with
      evacuations and


**24**
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            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
            RESULTS OF OPERATIONS - CONTINUED**


Table of Contents


relocation
      of residents, as well as other uninsured costs. As a result of the hurricanes,
      we realized losses of approximately $1.0 million in the third quarter of 2005,
      an increase of $900,000 from similar losses of approximately $100,000 in the
      third quarter of 2004. The third quarter 2005 losses of $1.0 million impacted
      our revenues by approximately $250,000, primarily from the closure of our Biloxi
      community, and increased our community operating expenses by approximately
      $650,000, net of business interruption insurance recoveries and the $100,000
      in
      losses recorded in the same period last year.





*General
      and Administrative:* General
      and administrative (G&A) expenses for the three months ended September 30,
      2005, increased $1.7 million to $8.3 million from $6.6 million for the
      comparable period in 2004, or 26.0%. As a percentage of total operating
      revenues, G&A expenses increased to 8.4% for the three months ended
      September 30, 2005, compared to 8.1% for the three months ended September 30,
      2004. Approximately $840,000 of the increase related to increased accounting
      and
      consulting fees, including direct project costs to comply with internal control
      requirements under the Sarbanes-Oxley Act of 2002, and increases in our 2005
      audit fees. The balance of the increase of approximately $860,000 was primarily
      related to staffing costs for regional and corporate overhead
      positions.





*Depreciation
      and Amortization:* Depreciation
      and amortization for the three months ended September 30, 2005, was $11.7
      million compared to $8.2 million for the comparable period in 2004. The increase
      is primarily the result of depreciation resulting from capital lease treatment
      associated with 22 additional communities operated since July 1, 2004 (primarily
      the Baty/REIT transactions announced September 30, 2004). In 2005, depreciation
      and amortization represented 11.9% of total operating revenues, compared to
      10.1% for the same period in 2004.





*Facility
      Lease Expense* :
      Facility lease expense for the three months ended September 30, 2005, was $10.5
      million compared to $9.7 million for the comparable period of 2004, representing
      an increase of $823,000, or 8.5%. The change was primarily due to the operating
      lease of two new communities discussed under Emeritrust I communities lease,
      which accounted for approximately $650,000 of the increase, offset in the amount
      of $104,000 by one lease that was changed from an operating lease to a capital
      lease in September 2004. The remaining increase of $277,000 was primarily
      attributable to performance-based lease inflators of existing operating leases.
      We leased 77 and 76 communities under operating leases as of September 30,
      2005
      and 2004, respectively. Facility lease expense as a percentage of revenues
      was
      10.8% for the three months ended September 30, 2005, and 12.1% for the three
      months ended September 30, 2004. The decrease is primarily a result of increased
      revenues.





*Asset
      Impairment:* In
      June
      2005, the Company determined that the carrying amount of a facility in Las
      Vegas, Nevada, was not recoverable from expected undiscounted cash flows
      generated from the use of the asset and thus recorded an impairment loss of
      approximately $4.0 million and accordingly, the carrying value was reduced
      to
      estimated fair value based on appraised value and a letter of intent from a
      pending sale. Since June 2005, the estimated net sales proceeds were further
      reduced and thus, an additional impairment of $234,000 was recorded for the
      three months ended September 30, 2005.





*Interest
      Income:* Interest
      income for the three months ended September 30, 2005, was $447,000 versus
      $155,000 for the same period of 2004, an increase of $292,000. This increase
      was
      primarily attributable to interest earned on collateral funds placed with our
      workers' compensation insurance carrier and interest earned on investment of
      cash that was received in the partial sale of our ownership interest in
      Alterra.





*Interest
      Expense:* Interest
      expense for the three months ended September 30, 2005, was $13.1 million
      compared to $11.6 million for the comparable period of 2004, an increase of
      $1.5
      million, or 13.1%. An increase of approximately $2.0 million resulted
      from capital lease treatment on the Emeritrust I communities’ lease involving 18
      facilities completed on September 30, 2004. In addition, interest expense
      includes $563,000
      in interest related to the Texas judgment as discussed below in Part II Item
      1
“Legal Proceedings ”
      and an
      increase of $270,000 from the new 10.8 million loan used to pay cash dividends
      on the Series B Stock. Also,
      the comparable period of 2004 included the write-off of approximately $1.7
      million in loan fees related to a financing transaction completed in July 2004
      that offsets the increase from capital leases noted


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above. As a percentage of total operating revenues,
      interest expense decreased to 13.4% in the third quarter of 2005 from 14.4%
      for
      the third quarter of 2004.




*Other,
      net:* Other,
      net income for the three months ended September 30, 2005, was approximately
      $620,000 compared to $899,000 for the comparable period in 2004. The $620,000
      income for the current year quarter is primarily due to the amortization
      of deferred gains on sales-leaseback transactions of approximately $553,000.
      The
      $899,000 income in the third quarter of 2004 is primarily the result of the
      gain
      on sale of undeveloped land in the amount of $265,000 and the amortization
      of
      deferred gains on sales-leaseback transactions of approximately
      $508,000.





*Income
      taxes:* The
      provision for income taxes of $122,000 for the three months ended September
      30,
      2005, was principally due to Federal alternative minimum tax and state income
      and franchise tax liabilities on sale transactions and operating income after
      adding back financial accounting for leases and other timing and permanent
      differences between financial accounting and tax. At September 30, 2005 and
      2004, we have a 100% valuation allowance on our deferred tax assets.





*Net
      Loss and Property-Related Expense:* In
      comparing the net loss for the three months ended September 30, 2005 and 2004,
      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 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.





The
      net
      loss reflected in our consolidated statements of operations for the three months
      ended September 30, 2005, was $11.6 million. Our property-related expense for
      this period was $35.3 million, of which $30.9 million was associated with our
      leases due to the effects of lease accounting referred to above. Our actual
      capital, finance and operating lease payments during this period were $24.9
      million. Correspondingly, the net loss of $5.6 million for the three months
      ended September 30, 2004, reflected property-related expense of $29.5 million,
      of which $23.1 million was associated with our leases. Our actual capital,
      finance, and operating lease payments for the three months ended September
      30,
      2004, were $19.4 million. The increase in total property-related expense is
      due
      primarily to the acquisition and lease of 24 additional communities since July 1, 2004. The amount by which the
      property-related expense associated with our leases exceeded our actual lease
      payments was $6.0 million for the three months ended September 30, 2005,
      compared to $3.7 million for the three months ended September 30, 2004, an
      increase of $2.3 million. This increase is primarily attributable to capital
      lease accounting treatment for 22 of the 24 communities referred to above and
      the finance lease treatment of 11 communities which were in a sales-leaseback
      transaction in July 2004. It should be noted that, 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
      increase our revenues and our results from community operations to cover these
      increases.





*Income
      from Discontinued Operations:* Income
      from discontinued operations for the three months ended September 30, 2005,
      was
      zero compared to $851,000 for the comparable period in 2004, most of which
      related to the gain on the sale of a facility in Arizona.





*Preferred
      dividends:* For the
      three months ended September 30, 2005 and 2004, preferred dividends totaled
      zero
      and $938,000, respectively. The preferred dividends for the three months ended
      September 30, 2005, were zero because the Series B Stock was converted to common
      stock on June 30, 2005.








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Comparison
      of the nine months ended September 30, 2005 and 2004





*Total
      Operating Revenues:* Total
      operating revenues for the nine months ended September 30, 2005, increased
      by
      $65.7 million to $289.6 million from $223.9 million for the comparable period
      in
      2004, or 29.4%.





Community
      revenue and other service fees increased by approximately $68.3 million in
      the
      nine months ended September 30, 2005, compared to the nine months ended
      September 30, 2004, or 31.1%. This increase was primarily due to additional
      revenue related to the acquisition or lease of 42 communities from January
      1,
      2004, to September 30, 2005. Of the 42 communities, we had formerly managed
      30.
      These communities represent a revenue increase of approximately $56.2 million
      in
      the first three quarters of 2005. Revenue also increased approximately $12.3
      million, or 5.6%, primarily due to an increase in occupancy and average revenue
      per unit of previously operated communities, offset by hurricane-related revenue
      losses of approximately $250,000, primarily from the temporary closure of our
      Biloxi community.





The
      average occupancy rate for all communities for the nine months ended September
      30, 2005, increased 3.6 percentage points to 84.6% from 81.0%. The occupancy
      rate grew from marketing initiatives in existing communities and from the
      acquisition or leasing of additional communities with higher occupancy levels
      than existing communities. Average community monthly revenue per unit for all
      communities was $2,931 for the first three quarters of 2005 compared to $2,856
      for the comparable quarters of 2004, an increase of approximately $75 per
      occupied unit, or 2.6%.





While
      our
      occupancy and revenue per unit grew from the comparable prior year period,
      it
      grew more slowly than our targeted growth. While there is some indication that
      this is characteristic of the assisted living industry, we are responding
      through increased marketing initiatives, programs that address resident mix
      and
      increasing maintenance and other community-level expenses to attract additional
      long-term residents. We believe that these initiatives will have a positive
      impact on operating performance over time.





Management
      fee income decreased by approximately $2.5 million to $1.5 million for the
      nine
      months ended September 30, 2005, from $4.0 million for the nine months ended
      September 30, 2004. This decrease was primarily due to 30 communities now leased
      in the first three quarters of 2005 that were managed for a portion of same
      quarters of the prior year.





*Community
      Operations:* Community operating expenses for the nine months ended September 30, 2005,
      increased by $50.8 million to $191.9 million from $141.1 million for the first
      three quarters of 2004, or 36.1%. The change was primarily due to the
      acquisition or lease of 42 communities referred to above, which accounted for
      approximately $33.4 million of the increased expense. Approximately $17.4
      million of the increase, or 12.3%, was attributable to a number of factors
      affecting the other 126 communities we operate. The most significant factor
      was
      a $5.0 million adjustment to our professional and general liability insurance
      accrual, as further explained below. In addition, approximately $650,000 of
      the
      increase is attributable to hurricane-related costs, as discussed below. The
      remaining increase of approximately $11.7 million, or 8.3%, relate to general
      operating expenses of the communities, including staffing, raw food costs,
      utilities, real estate taxes and similar expenses, of which approximately $1.1
      million related to increased facility maintenance costs,
      partially offset by an expense reduction of approximately $700,000, reflecting
      the positive trends of our Texas workers’ compensation program. Community
      operating expenses as a percentage of total operating revenue increased to
      66.3%
      for the first three quarters of 2005 from 63.0% for the first three quarters
      of
      2004.





We
      recorded an additional $5.0 million professional and general liability insurance
      accrual to reflect the settlement experience of claims closed in the third
      quarter ended September 30, 2005, primarily from claims originating in 2003
      and
      2004, and to reflect an updated estimate of ultimate losses for all years from
      2002 to September 30, 2005, based upon an actuarial valuation
      report.




Hurricanes
      Katrina and Rita caused physical damage to several of our communities located
      in
      Mississippi, Texas, and Louisiana. Most of the losses were within our insurance
      deductibles and we will incur the cost





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to
      repair
      the damage. Our Biloxi, Mississippi, community sustained significant damage
      and
      will be out of operation for approximately one year. In addition, we incurred
      costs associated with evacuations and relocation of residents, as well as other
      uninsured costs. As a result of the hurricane, we realized losses of
      approximately $1.0 million in the firsts three quarters of 2005, an increase
      of
      $900,000 from similar losses of approximately $100,000 in the first three
      quarters of 2004. The 2005 losses of $1.0 million impacted our revenues
      by
      approximately $250,000, primarily from the closure of our Biloxi community,
      and
      increased our community operating expenses by approximately $650,000, net of
      business interruption insurance recoveries and the $100,000 in losses recorded
      in the same period last year.





*General
      and Administrative:* General
      and administrative (G&A) expenses for the nine months ended September 30,
      2005, increased $4.1 million to $23.4 million from $19.3 million for the
      comparable period in 2004, or 21.3%. As a percentage of total operating
      revenues, G&A expenses decreased to 8.1% for the nine months ended September
      30, 2005, compared to 8.6% for the nine months ended September 30, 2004,
      primarily as a result of increased revenue arising from the acquisition or
      lease
      of communities referred to above. Approximately $265,000 of the increase related
      to costs associated with the conversion of our Series B Stock and an
      increase in accounting and consulting fees of $1.2 million, including direct
      project costs to comply with internal control requirements under the
      Sarbanes-Oxley Act of 2002 and increases in our 2005 audit fees. The balance
      of
      the increase of approximately $2.6 million was primarily related to incentive
      compensation increases due to the increase in our operated communities,
      increases in general insurance costs, general professional and legal fees,
      and
      staffing additions and related travel costs primarily associated with regional
      and corporate overhead positions.





*Depreciation
      and Amortization:* Depreciation
      and amortization for the nine months ended September 30, 2005, was $34.6 million
      compared to $21.7 million for the comparable period in 2004. The increase is
      primarily the result of depreciation resulting from capital lease treatment
      associated with 40 additional communities operated since December 31,
      2003
      (primarily the CPM/JEA transactions announced April 1, 2004, and the
      Baty/REIT transactions announced September 30, 2004). In 2005, depreciation
      and
      amortization represented 11.9% of total operating revenues, compared to 9.7%
      for
      the same period in 2004.





*Facility
      Lease Expense* :
      Facility lease expense for the nine months ended September 30, 2005, was $30.7
      million compared to $28.8 million for the comparable period of 2004,
      representing an increase of $1.9 million, or 6.5%. The change was primarily
      due
      to the operating lease of two communities discussed under Emeritrust I
      communities lease, which accounted for approximately $1.2 million of the
      increase, offset in the amount of $286,000 by two leases that were changed
      from
      operating leases to capital leases. The remaining increase of $499,000 was
      primarily attributable to performance-based lease inflators of existing
      operating leases. We leased 77 and 76 communities under operating leases as
      of
      September 30, 2005 and 2004, respectively. Facility lease expense as a
      percentage of revenues was 10.6% for the nine months ended September 30, 2005,
      and 12.9% for the nine months ended September 30, 2004. The decrease is
      primarily a result of increased revenues.





*Asset
      Impairment:* In
      June
      2005, the Company determined that the carrying amount of a facility in Las
      Vegas, Nevada, was not recoverable from expected undiscounted cash flows
      generated from the use of the asset and thus recorded an impairment loss of
      approximately $4.0 million and accordingly, the carrying value was reduced
      to
      estimated fair value based on appraised value and a letter of intent from a
      pending sale. Since June 2005, the estimated net sales proceeds were further
      reduced and thus, an additional impairment of $234,000 was recorded for the
      three months ended September 30, 2005. The total asset impairment for the nine
      months ended September 30, 2005, amounted to $4.3 million.




*Interest
      Income:* Interest
      income for the nine months ended September 30, 2005, was $883,000 versus
      $442,000 for the same period of 2004, an increase of $441,000. This increase
      was
      primarily attributable to interest earned on collateral funds placed with our
      workers' compensation insurance carrier and interest earned on investment of
      cash that was received in the partial sale of our ownership interest in
      Alterra.





*Interest
      Expense:* Interest
      expense for the nine months ended September 30, 2005, was $37.6 million compared
      to $29.1 million for the comparable period of 2004, an increase of $8.5 million,
      or 29.1%. Of this





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amount,
      $6.1 million resulted from capital lease treatment on the Emeritrust I
      communities’ lease involving 18 facilities completed on September 30, 2004, and
      $3.6 million resulted from the capital lease treatment of the CPM/JEA
      communities’ lease involving 23 communities, completed from April 1, 2004,
      through March 2005. In addition, the comparable period of 2004 included the
      write-off of $1.7 million in loan fees related to a financing transaction
      completed in July 2004 that offsets the increase from capital leases noted
      above. The current year period also includes $563,000 in interest related to
      the
      Texas judgment as discussed below in Part II Item 1 “Legal Proceedings.” As a
      percentage of total operating revenues, interest expense remained flat at 13.0%
      for the first three quarters of 2005 as compared to the first three quarters
      of
      2004.





*Other,
      net:* Other,
      net income for the nine months ended September 30, 2005, was approximately
      $1.9
      million compared to $1.2 million for the comparable period in 2004. The $1.9
      million income for the first three quarters of 2005 is primarily the result
      of
      amortization of deferred gains from sales-leaseback transactions of
      approximately $1.7 million. The $1.2 million income for the first three quarters
      of 2004 is primarily the result of the amortization of deferred gains from
      sales-leaseback transactions of approximately $1.6 million and the gain on
      sale
      of undeveloped land in the amount of $265,000, partially offset by our portion
      of Alterra’s net loss (discussed above under “Alterra Transactions”) totaling
      $794,000.





*Income
      taxes:* The
      provision for income taxes of $1.2 million for the nine months ended September
      30, 2005, was principally due to the estimated income tax effect of sale
      transactions and Federal alternative minimum tax and state income and franchise
      tax liabilities on operating income after adding back financial accounting
      for
      leases and other timing and permanent differences between financial accounting
      and tax. At September 30, 2005 and 2004, we have a 100% valuation allowance
      on
      our deferred tax assets.





*Net
      Loss and Property-Related Expense:* In
      comparing the net loss for the nine months ended September 30, 2005 and 2004,
      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 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.





The
      net
      loss reflected in our consolidated statements of operations for the nine months
      ended September 30, 2005, was $6.3 million. Our property-related expense for
      this period was $102.8 million, of which $91.5 million was associated with
      our
      leases due to the effects of lease accounting referred to above. Our actual
      capital, finance and operating lease payments during this period were $73.4
      million. Correspondingly, the net loss of $14.2 million for the nine months
      ended September 30, 2004, reflected property-related expense of $79.6 million,
      of which $61.5 million was associated with our leases. Our actual capital,
      finance, and operating lease payments for the nine months ended September 30,
      2004, were $51.7 million. The increase in total property-related expense is
      due
      primarily to the acquisition and lease of 42 additional communities since
      December 31, 2003. The amount by which the property-related expense
      associated with our leases exceeded our actual lease payments was $18.1 million
      for the nine months ended September 30, 2005, compared to $9.8 million for
      the
      nine months ended September 30, 2004, an increase of $8.3 million. This increase
      is primarily attributable to capital lease accounting treatment for 40 of the
      42
      communities referred to above and the finance lease treatment of 11 communities
      which were part of a sales-leaseback transaction in July 2004. It should be
      remembered that, 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 increase our revenues and
      our results from community operations to cover these increases.





*Income
      from Discontinued Operations:* Income
      from discontinued operations for the nine months ended September 30, 2005,
      was
      approximately $1.3 million compared to $1.0 million for the comparable period
      in
      2004. The income for the first three quarters of 2005 was the recognition of
      the
      previously deferred gain on the sale of one community in 2004. We had a
      continuing involvement in the community until such time as the buyer was granted
      a license to operate the community, which occurred on January 7, 2005. Thus,
      we
      deferred recognition of the sale and associated gain of $1.3 million until
      that
      point and recorded the related





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assets at December 31, 2004, as held for sale. The prior
      period income of $1.0 million relates primarily to the gain on the sale of
      a
      facility in Arizona.





*Preferred
      dividends:* For the
      nine months ended September 30, 2005 and 2004, preferred dividends totaled
      approximately $599,000 and $2.8 million, respectively. The preferred dividends
      for the nine months ended September 30, 2005, were lower because the Series
      B
      Stock was converted to common stock on June 30, 2005, no dividends were required
      to be accrued for the second quarter based on the terms of the agreement, and
      the previously accrued dividends due to straight-lining were reversed upon
      conversion and offset against the dividends from the first quarter.





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*Same
      Community Comparison*





We
      operated 124 communities, which we have operated continuously since January
      1,
      2004, and define as "Same Communities." Since our Biloxi community suffered
      significant damage from Katrina and will be out of operation for approximately
      one year, we have excluded it from this comparison. The following table sets
      forth a comparison of same community results of operations, excluding general
      and administrative expenses, for the three months ended September 30, 2005
      and
      2004.





**Three
                Months ended September 30,****(In
                thousands)****$
                Change**
            
            **%
                Change****2005**
            
            **2004**
            
            **Fav
                / (Unfav)**
            
            **Fav
                / (Unfav)**Revenue
            
            $
            69,010
            
            $
            66,115
            
            $
            2,895
            
            
            4.4
            %Community
                operations *
            
            
            (48,871
            )
            
            (42,795
            )
            
            (6,076
            )
            
            (14.2
            )Community
                operating income
            
            
            20,139
            
            
            23,320
            
            
            (3,181
            )
            
            (13.6
            )Depreciation
                & amortization
            
            
            (5,567
            )
            
            (5,441
            )
            
            (126
            )
            
            (2.3
            )Facility
                lease expense
            
            
            (9,508
            )
            
            (9,246
            )
            
            (262
            )
            
            (2.8
            )Operating
                income
            
            
            5,064
            
            
            8,633
            
            
            (3,569
            )
            
            (41.3
            )Interest
                expense, net
            
            
            (6,852
            )
            
            (8,600
            )
            
            1,748
            
            
            20.3Operating
                income (loss) after interest expense
            
            $
            (1,788
            )
            $
            33
            
            $
            (1,821
            )
            
            (5,518.2
            %)*
                exclusive of depreciation and amortization and facility lease expense
                shown separately below





These
      124
      communities represented $69.0 million or 70.5% of our total revenue of $97.9
      million for the third quarter of 2005. Same community revenues increased by
      $2.9
      million or 4.4% for the quarter ended September 30, 2005, from the same period
      in 2004. This was primarily due to improvements in average revenue per occupied
      unit, which contributed approximately $2.3 million, and an increase in
      occupancy, which contributed approximately $600,000. Average revenue per
      occupied unit increased by $96 per month or 3.5% for the three months ended
      September 30, 2005, as compared to the three months ended September 30, 2004.
      Occupancy increased 0.9 percentage points to 83.3% for the three months ended
      September 30, 2005 from 82.4% for the three months ended September 30,
      2004.





Community
      operating expenses increased approximately $6.1 million primarily from increased
      professional an general liability insurance expenses of $3.6 million as
      discussed above. The remaining increase of approximately $2.5 million, or 5.8%,
      reflects increased costs for direct care labor and related employee taxes and
      benefits of $1.0 million, facility maintenance cost increases of $259,000 and
      other general operating expenses of the communities, including utilities, food
      costs, real estate taxes, and similar community operating expenses.
      Property-related expenses (depreciation and amortization, facility lease
      expense, and interest expense, net) decreased by approximately $1.4 million,
      which primarily reflects the effect of a write-off of loan fees of approximately
      $1.7 million in the comparable period of 2004 and a reduction in interest
      expenses resulting from the partial repayment of debt in August 2004. These
      decreases in interest expense are partially offset by rent escalators in some
      operating leases during 2005 and which are in part performance based. Operating
      income (loss) after interest expense decreased $1.8 million from the comparable
      period of 2004.





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**Liquidity
      and Capital Resources**





For
      the
      nine months ended September 30, 2005, net cash provided by operating activities
      was $12.8 million. The components of cash provided by operating activities
      for
      this period included $34.6 million of depreciation and amortization, $4.3
      million of the asset impairment relating to our Las Vegas, Nevada, community,
      and $5.6 million of the net decrease in operating assets and liabilities,
      partially offset by $6.3 million of net loss from operations, $21.3 million
      of
      gain on sale of investment in Alterra, $1.3 million from recognition of deferred
      gain on sale of our Issaquah, Washington, community, $1.7 million of
      amortization of deferred gain, and $2.3 million of equity earnings primarily
      from SHP. For the nine months ended September 30, 2004, net cash provided by
      operating activities was $12.0 million. The primary components of operating
      cash
      provided by operating activities for this period were depreciation and
      amortization of $21.7 million,  the
      amortization of loan fees of $2.4 million,  the
      net
      decrease in operating assets and liabilities of $3.8 million, and an adjustment
      for the Alterra equity investment loss of $794,000, partially offset by the
      amortization of deferred gain of $1.6 million, adjustment for the net gain
      on
      sale of properties of $952,000, and net loss of $14.2 million.





For
      the
      nine months ended September 30, 2005, the investing activities provided $26.5
      million and used $9.4 million in cash, resulting in a net cash increase of
      $17.1
      million. The activities that provided cash include $25.0 million from sale
      of
      our investment in Alterra and $1.5 million cash proceeds from the acquisition
      of
      SHP by Walgreen. The activities that used cash include $5.6 million for the
      acquisition of property and equipment and an aggregate of $3.8 million for
      acquisitions and investments in leased and managed communities, including net
      investments related to affiliates. Net cash used in investing activities
      amounted to $7.1 million for the nine months ended September 30, 2004, and
      was
      comprised primarily of management and lease acquisition costs of approximately
      $7.8 million, purchases of approximately $2.7 million of various property and
      equipment, and an aggregate of $2.8 million for acquisitions and investments
      in
      leased and managed communities, including net investments related to affiliates,
      partially offset by collection of a note receivable of $2.7 million, and
      proceeds from the sale of property and equipment of $3.6 million.





For
      the
      nine months ended September 30, 2005, the financing activities provided $32.8
      million and used $47.8 million in cash, resulting in a net cash decrease of
      $15.0 million. The principal activity that provided cash was $32.2 million
      of
      long-term borrowing from HRT for payment of a long-term debt of $21.4 million
      and preferred dividends on Series B Stock of $10.8 million, resulting in a
      zero
      net change in cash. The other activities resulting in a net cash decrease
      include $1.1 million for repayment of long-term borrowings and $11.7 million
      for
      repayment of capital lease and financing obligations. In addition, debt issue
      and other financing costs, as well as increases in financing deposits, used
      $2.8
      million in cash. Proceeds from the sale of stock provided $583,000 in cash.
      For
      the nine months ended September 30, 2004, net cash used in financing activities
      was $3.6 million. Repayment of capital lease and financing obligations of $6.2
      million and repayment of long-term borrowings of $25.4 million was partially
      offset by long-term borrowing of $26.4 million and short-term borrowings under
      a
      bank line of credit of $3.0 million. The balance of the change resulted from
      the
      offsetting effects of increases in restricted deposits of $1.4 million, $1.3
      million in debt issuance and other financing costs, and proceeds from sale
      of
      stock under employee stock purchase and incentive plans of $1.3
      million.





We
      have
      incurred significant operating losses since our inception and have a working
      capital deficit of $61.8 million. 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 much more quickly, often in advance, than obligations are required
      to be paid. This results in 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 includes
      $15.3 million represents deferred revenue and unearned rental income and the
      level of current liabilities is not expected to change year to year in such
      a
      way as to require the use of significant cash, except for scheduled debt
      maturities. As disussed above, while our occupancy and revenue per unit grew
      from the comparable prior year period, they grew more slowly than our targeted
      growth. While there is some indication that this is characteristic of the
      assisted living industry, we are responding through increased marketing
      initiatives, programs that address resident mix and increasing maintenance
      and
      other community-level expenses to attract additional long-term residents. We
      believe that these initiatives will have a positive





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 **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
            RESULTS OF OPERATIONS - CONTINUED**


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impact
      on
      operating performance over time. Additionally, due to the adverse judgment
      against us as described under Part II Item 1 “Legal Proceedings,” an additional
      reserve was recorded in the fourth quarter of 2004 for $18.7 million in
      accordance with our self-insured pool agreement. We recorded interest of
      $563,000 in 2005 for interest owed on the judgment. We believe there are
      substantial grounds for an appeal and that the damage award was not justified
      by
      the facts or the law in the case presented. We have appealed the verdict and
      on
      March 16, 2005, we posted funds in the amount of $1.7 million in order to stay
      the proceedings while the appellate process runs its course, which could be
      anywhere from 18 months to three years. We will not be required to pay
      additional amounts until the appeal and further litigation is completed or
      the
      case is settled. At times in the past, we have been dependent upon third-party
      financing or disposition of assets to fund operations. If such transactions
      are
      necessary in the future, we cannot guarantee that they will be available on
      a
      timely basis, on terms attractive to us, or at all.





Throughout
      2004 and continuing through the third quarter of 2005, we refinanced
      substantially all of our debt obligations, extending the maturities of such
      financings to dates beyond September 30, 2006, and thereafter, at which time
      we
      will need to refinance or otherwise repay the obligations. 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 to the same or other lenders or lessors. Such cross-default
      provisions affect 6 owned assisted living properties and 158 properties operated
      under leases. Accordingly, any event of default could cause a material adverse
      effect on our financial condition if such debt or leases are cross-defaulted. At
      September 30, 2005, we were in violation of one or more covenants in certain
      of
      our leases, but have been able to obtain waivers from the owners such that
      we
      were still deemed to be in compliance and thus, were not in
      default.





Based
      on
      our current operating initiatives and our current cash position, management
      believes that we will be able to sustain positive operating cash flow on an
      annual basis, or will have adequate cash reserves, and the ability to obtain
      adequate financing to cover any potential operating shortfalls and necessary
      investing and financing activities, including required debt service and capital
      expenditures through at least September 30, 2006.





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            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
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            RESULTS OF OPERATIONS - CONTINUED**


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The
      following table summarizes our contractual obligations at September 30, 2005,
      (in thousands):





**Principal
                Payments Due by Period****Less
                than**
            
            
            
            
            
            **After
                5****Contractual
                Obligations**
            
            **Total**
            
            **1
                year**
            
            **1-3
                years**
            
            **4-5
                years**
            
            **years**Long-term
                debt, including current portion
            
            $
            65,099
            
            $
            2,647
            
            $
            3,766
            
            $
            55,178
            
            $
            3,508Capital
                lease and financing obligations including current portion
            
            
            633,027
            
            
            18,252
            
            
            46,199
            
            
            60,355
            
            
            508,221Operating
                leases
            
            
            343,758
            
            
            39,880
            
            
            82,051
            
            
            84,476
            
            
            137,351Convertible
                debentures*
            
            
            32,000
            
            
            11,210
            
            
            20,790
            
            
            -
            
            
            -$
            1,073,884
            
            $
            71,989
            
            $
            152,806
            
            $
            200,009
            
            $
            649,080





*
      These
      principal payments are predicated on the partial refinancing of the debentures
      to become due July 1, 2008, as described above.





The
      following table summarizes interest on our contractual obligations at September
      30, 2005, (in thousands):








**Interest
                Due by Period****Less
                than**
            
            
            
            
            
            **After
                5****Contractual
                Obligations**
            
            **Total**
            
            **1
                year**
            
            **1-3
                years**
            
            **4-5
                years**
            
            **years**Long-term
                debt
            
            $
            14,933
            
            $
            5,362
            
            $
            8,641
            
            $
            658
            
            $
            272Capital
                lease and financing obligations
            
            
            378,302
            
            
            41,718
            
            
            79,574
            
            
            72,880
            
            
            184,130Convertible
                debentures*
            
            
            4,248
            
            
            1,650
            
            
            2,598
            
            
            -
            
            
            -$
            397,483
            
            $
            48,730
            
            $
            90,813
            
            $
            73,538
            
            $
            184,402





*
      The
      interest payments due in less than one year are based upon the current interest
      rate of 6.25% and the interest payments due in 1-3 years are based upon the
      rate
      of 6.25% for the new debentures to be issued upon refinancing of the current
      debentures, and are included even though they are not yet contractual
      obligations.













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            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**
 **AND
            RESULTS OF OPERATIONS - CONTINUED**


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**Impact
      of Inflation**





To
      date,
      inflation has not had a significant impact on us. However, inflation could
      affect our future revenues and operating income due to our dependence on the
      senior resident population, most of whom rely on relatively fixed incomes to
      pay
      for our services. The monthly charges for a 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. To the extent we rely upon governmental reimbursement programs,
      we have a limited ability to increase rates. 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.





**Forward-Looking
      Statements**





“Safe
      Harbor” Statement under the Private Securities Litigation Reform Act of 1995: A
      number of the matters and subject areas discussed in this report that are not
      historical or current facts deal with potential future circumstances,
      operations, and prospects. The discussion of such matters and subject areas
      is
      qualified by the inherent risks and uncertainties surrounding future
      expectations generally, and also may materially differ from our actual future
      experience as a result of such factors as: the effects of competition and
      economic conditions on the occupancy levels in our communities; our ability
      under current market conditions to maintain and increase our resident charges
      in
      accordance with our rate enhancement programs without adversely affecting
      occupancy levels; our ability to control community operation expenses, including
      insurance and utility costs, without adversely affecting the level of occupancy
      and the level of resident charges; our ability to generate cash flow sufficient
      to service our debt and other fixed payment requirements; 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 final
      resolution of the adverse Texas jury verdict and other uncertainties related
      to
      professional liability claims. We have attempted to identify, in context,
      certain of the factors that we currently believe may cause actual future
      experience and results to differ from our current expectations regarding the
      relevant matter or subject area. These and other risks and uncertainties are
      detailed in our reports filed with the SEC, including our Annual Reports on
      Form
      10-K and Quarterly Reports Form 10-Q.








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      of this page is intentionally left blank]











**35**


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**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 September 30, 2005, we had no variable rate
      borrowings. However, we do have certain operating lease obligations based on
      LIBOR, with a LIBOR cap of approximately 5.3%. As LIBOR rates increase above
      the
      current level, we will be exposed to higher lease expense costs. As of September
      30, 2005, the LIBOR rate was 3.9%. If LIBOR interest rates were to increase
      to
      the cap, our annual facility lease expense and net loss would increase by
      approximately $1.3 million. This amount is determined by considering the impact
      of hypothetical interest rates on these operating lease obligations as of
      September 30, 2005, and does not consider changes in the actual level of
      borrowings or operating lease obligations that may occur subsequent to September
      30, 2005. 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.





**Item
      4. Controls and Procedures******





*Evaluation
      of disclosure controls and procedures*





The
      Company maintains a set of disclosure controls and procedures and internal
      controls designed to ensure that information required to be disclosed in its
      filings under the Securities Exchange Act of 1934 is recorded, processed,
      summarized, and reported within the time periods specified in the SEC’s rules
      and forms. Disclosure controls and procedures include controls and procedures
      designed to ensure that information required to be disclosed by us in reports
      we
      file or submit under the Exchange Act is accumulated and communicated to our
      management, including our chief executive officer and chief financial officer,
      as appropriate, to allow timely decisions regarding disclosure. It should be
      noted that any system of controls, however well designed and operated, can
      provide only reasonable, and not absolute, assurance that the objectives of
      the
      system are met.





Our
      current management, with the participation of our chief executive officer and
      chief financial officer, has evaluated the effectiveness of our disclosure
      controls and procedures as of September 30, 2005, which included an evaluation
      of disclosure controls and procedures applicable to the period covered by the
      filing of this periodic report. Based on this evaluation, our chief executive
      officer and chief financial officer have concluded that our disclosure controls
      and procedures were effective as of September 30, 2005.





The
      certifications of our chief executive officer and chief financial officer
      required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 are
      attached as exhibits to this Form 10-Q.





*Changes
      in internal controls over financial reporting*





In
      our
      Form 10K dated December 31, 2004, the Company’s management identified several
      issues relating to improvement of our internal controls over financial
      reporting. Since that time, we have implemented various changes to our internal
      controls responding to these issues, as follows:




·
            Have
                hired accounting personnel with experience, skills, and knowledge
                relating
                to complex leasing and financing transactions and direct involvement
                in
                the review and accounting evaluation of such
                transactions;




·
            Have
                included internal personnel and outside accounting consultants, if
                necessary, early in a transaction to obtain additional guidance as
                to the
                application of generally accepted accounting principles to a proposed
                transaction;




·
            Have
                established clear responsibilities for our real estate personnel
                and
                accounting personnel and increased the formal interaction, responsibility
                and coordination between such
                personnel;









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Table of Contents









·
            Have
                documented the review, analysis, and related conclusions with respect
                to
                complex leasing transactions;




·
            Senior
                accounting personnel and the chief financial officer review such
                transactions in order to evaluate, document, and approve their accounting
                treatment.







Management
      believes these changes to be effective, and has evaluated the effectiveness
      of
      the Company's internal controls through September 30, 2005, and will continue
      to
      do so and make additional changes as appropriate. No additional changes have
      been made since filing the Form 10-Q dated March 31, 2005, filed with the SEC
      on
      May 13, 2005.











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      rest
      of this page is intentionally left blank]








**37**


Table of Contents


**PART
      II. OTHER INFORMATION**





**Items
      2, 3, 4, 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.
      Reserves for these claims have been accrued 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, except as
      noted below, 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.





In
      February 2005, a San Antonio, Texas, jury found one of our assisted living
      communities negligent in the care of a resident. The jury awarded a verdict
      against us in the amount of $1.5 million in compensatory damages and $18.0
      million in punitive damages. The verdict was in connection with an action that
      alleged negligence brought by the relatives of a resident at one of our assisted
      living facilities. We believe that this verdict is unjust, that there are
      substantial grounds for an appeal, and that the damage award was not justified
      by the facts or the law in the case presented by the plaintiff. We have appealed
      the verdict based on significant legal errors we believe occurred at the trial.
      We have posted funds in the amount of $1.7 million in order to stay the
      proceedings while the appellate process runs its course, which could be anywhere
      from 18 months to three years from the date of the verdict. We will not be
      required to pay additional amounts until the appeal and further litigation
      is
      completed or the case is settled. We have recorded a liability for the amount
      of
      the verdict on our condensed consolidated balance sheet for the year ended
      December 31, 2004, with a corresponding charge on our condensed consolidated
      statements of operations for the year then ended. The Company recorded an
      accrual of $563,000 in 2005 for interest obligations on the
      judgment.





In
      February 2004, the California Public Interest Research Group brought an action
      against owners and operators of assisted living communities and senior housing
      facilities including us. The action seeks, on behalf of residents of these
      facilities located in California, to recover move-in or preadmission fees that
      have been paid over the past three years as well as certain penalties. We are
      defending this action vigorously and have entered into a joint defense agreement
      with other operators in California. We believe recent court rulings in the
      case
      have significantly eroded the viability of the plaintiff’s action.





There
      have been no further developments in these cases since we filed our 2004 Form
      10-K with the SEC on March 31, 2005. A discussion of our general and
      professional liability is contained in the same 2004 Form 10-K under
      "Significant Accounting Policies and Use of Estimates."





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      rest
      of this page is intentionally left blank]








**38**


Table of Contents





**Item
      6. Exhibits**








**Footnote****Number**
              
              **Description**
              
              **Number**4.6
              
              Agreement
                  Regarding 6.25% Convertible Subordinated Debenture due 2006 entered
                  into
                  as of June 30, 2005 is between EmeritusCorporation
                  (the "Company"), Saratoga Partners IV, LP, Saratoga Management
                  Company
                  LLC, Saratoga Coinvestment IV LLC(collectively,
                  the "Saratoga Entities"), Columbia Select, L.P. and Catalina General,
                  L.P.
                  (collectively, the "Baty Entities").
              
              (10)4.6.1
              AMENDED
                  AND RESTATED AGREEMENT REGARDING 6.25% CONVERTIBLE SUBORDINATED
                  DEBENTURESDUE
                  2006 entered into as of October 14, 2005 is between Emeritus Corporation
                  (the "Company"), Saratoga Partners IV,L.P.,
                  Saratoga Management Company LLC, Saratoga Coinvestment IV LLC
                  (collectively, the "Saratoga Entities"),Columbia
                  Select, L.P. and Catalina General, L.P. (collectively, the "Baty
                  Entities").
              
              (13)**10.53**
              
              **Emeritrust
                  II communities**10.53.19
              Second
                  Amended and Restated Loan Agreement between Healthcare Realty Trust
                  and
                  EmeritusCorporation
                  and dated as of March 3, 2005.
              
              (2)10.53.20
              Second
                  Amended and Restated Note**between
                  Emeritus Corporation and Healthcare Realty TrustIncorporated
                  and dated as of March 3, 2005.
              
              (2)10.53.21
              Loan
                  Purchase Agreement among Healthcare Realty Trust Incorporated,
                  Health Care
                  REIT, Inc., andEmeritus
                  Corporation and dated as of March 3, 2005.
              
              (2)10.53.22
              Intercreditor
                  Agreement between Health Care REIT, Inc. and Healthcare Realty
                  Trust
                  Incorporated anddated
                  as of March 3, 2005.
              
              (2)10.53.23
              First
                  Amendment to Amended and Restated Master Lease Agreement dated
                  as of June
                  22nd, 2005 by and among Health Care REIT,Inc.,
                  HCRI Mississippi Properties, Inc, HCRI Massachusetts Properties
                  Trust II,
                  and HCRI Texas Properties, LTD, as Landlord andEmeritus
                  Corporation as Tenant
              
              (12)**10.68**
              
              **Kingsley
                  Place at Alexandria, Louisiana; Kingsley Place at Lake Charles,
                  Louisiana;
                  Kingsley Place at Lafayette,****Louisiana;
                  Kingsley Place of Shreveport, Louisiana; Kingsley Place of Henderson,
                  Texas; Kingsley Place at Oakwell****Farms,
                  Texas; Kingsley Place at the Medical Center, Texas; Kingsley Place
                  at
                  Stonebridge, Texas. The following****agreements
                  are representative of those executed in connection with these
                  properties:**10.68.25
              Third
                  Amendment to Lease Agreement (Henderson, TX) dated as of June 30,
                  2005 by
                  and between HRAcquisition
                  of San Antonio, LTD ("Lessor"), ESC IV, LP ("Lessee") and Emeritus
                  Corporation and Daniel RBaty
                  (collectively "Guarantor")
              
              (12)10.68.26
              Third
                  Amendment to Lease Agreement (Mckinney, TX) dated as of June 30,
                  2005 by
                  and between HRAcquisition
                  of San Antonio, LTD ("Lessor"), ESC IV, LP ("Lessee") and Emeritus
                  Corporation and Daniel RBaty
                  (collectively "Guarantor")
              
              (12)10.68.27
              Third
                  Amendment to Lease Agreement (Oakwell, TX) dated as of June 30,
                  2005 by
                  and between HRAcquisition
                  of San Antonio, LTD ("Lessor"), ESC IV, LP ("Lessee") and Emeritus
                  Corporation and Daniel RBaty
                  (collectively "Guarantor")
              
              (12)10.68.28
              Third
                  Amendment to Lease Agreement (San Antonio, TX) dated as of June
                  30, 2005
                  by and between HRAcquisition
                  of San Antonio, LTD ("Lessor"), ESC IV, LP ("Lessee") and Emeritus
                  Corporation and Daniel RBaty
                  (collectively "Guarantor")
              
              (12)**10.75**
              
              **Loyalton
                  of Bloomsburg, Pennsylvania; Loyalton of Creekview, Pennsylvania;
                  Loyalton
                  of Harrisburg, Pennsylvania;****Loyalton
                  of Danville, Virginia; Loyalton of Harrisonburg, Virginia; Loyalton
                  of
                  Roanoke, Virginia; Loyalton of****Greensboro,
                  North Carolina; Loyalton of Ravenna, Ohio. The following agreements
                  are
                  representative of those****executed
                  in connection with these properties:**10.75.35
              First
                  Amendment to Lease Agreement dated as of June 30, 2005 by and between
                  HR
                  Acquisition I Corporation, HRAcquisition
                  of Pennsylvania, Inc, and HRT Holdings, Inc ("Lessor") and Emeritus
                  Corporation ("Lessee")
              
              (12)**10.77**
              
              **The
                  Palms at Loma Linda, California, The Springs at Oceanside, California,
                  The
                  Fairways of Augusta, Kansas,****Liberal
                  Springs, Kansas, Loyalton of Broadmoor, Colorado. The following
                  agreements
                  are representative of those****executed
                  in connection with this property:**10.77.6
              Membership
                  Interest Purchase Agreement, dated as of June 29, 2005, by and
                  among NW
                  Select LLC, EmeritusCorporation
                  ("Emeritus" and together with NW Select, the "Sellers", and each
                  individually, a "Seller"), FIT-ALTInvestor
                  LLC, ("Buyer"), and Brookdale Senior Living Inc.,
                  ("Newco")
              
              (8)10.77.7
              Stockholders
                  and Voting Agreement made as of June 29, 2005, by and among Brookdale
                  Senior Living Inc.,FIT-ALT
                  Investor LLC, Emeritus Corporation, and NW Select LLC
              
              (8)
 
 **39**
 
 Table of Contents
 **Footnote****Number**
              
              **Description**
              
              **Number**10.77.8
              Amended
                  and Restated Limited Liability Company Agreement of FEBC-ALT Investors
                  LLC, made as ofJune
                  29, 2005 by and among, FIT-ALT Investors LLC, as a Class A Member,
                  and NW
                  Select LLC, and EmeritusCorporation,
                  as the Class B Members, and the Company
              
              (8)**10.79**
              
              **Loyalton
                  of Folsom, California; The Lakes, Florida; Canterbury Woods,
                  Massachusetts; Beckett Meadows,****Texas;
                  Creekside, Texas; Oak Hollow, Texas; Pinehurst, Texas; Stonebridge,
                  Texas,
                  Desert Springs, Texas;****Austin
                  Gardens, California; Kingsley Place Shreveport, Louisiana; Silverleaf
                  Manor, Mississippi;****Pine
                  Meadow, Mississippi; Pines of Goldsboro, North Carolina; Loyalton
                  of
                  Rockford, Illinois;****Charleston
                  Gardens, West Virginia; Arbor Gardens at Corona, California; and
                  Manor at
                  Essington, Illinois;****Quail
                  Ridge, Lubbock, Texas; Richland Gardens, Richland,
                  Washington.****The
                  following agreements are representative of those executed in connection
                  with these properties:**10.79.10
              Lease
                  dated March 1, 2005 between QR Lubbock Texas Properties, L.P.,
                  a Texas
                  Limited Partnership ("Landlord"),and
                  ESC IV, LP, a Washington Limited Partnership (doing business in
                  the State
                  of Texas as Texas - ESC IV, L.P.(“Tenant”).
              
              (7)10.79.11
              Guaranty
                  of Lease executed as of March 1, 2005, by Emeritus Corporation,
                  a
                  Washington Corporation ("Guarantor")in
                  favor of QR Lubbock Texas Properties, L.P., a Texas Limited Partnership
                  ("Landlord")
              
              (7)10.79.12
              Lease
                  dated February 25, 2005 to be effective as of March 1, 2005 (the
                  "Effective Date") between BIP SUB I,Inc.,
                  a Delaware Corporation ("Landlord"), and Emeritus Corporation,
                  a
                  Washington Corporation ("Tenant").
              
              (7)**10.83**
              
              **Barrington
                  Place, Lecanto, Florida; Bellaire Place, Greenville, South Carolina;
                  Brookside Estates, Middleberg****Heights,
                  Ohio; Dowlen Oaks, Beaumont, Texas; Eastman Estates, Longview,
                  Texas; Elm
                  Grove, Hutchinson,****Kansas;
                  Emeritus Estates, Ogden, Utah; Gardens at White Chapel, Newark,
                  Delaware;
                  Harbor Pointe Shores,****Ocean
                  Shores, Washington; Hunters Glen, Missoula, Montana; Lakeridge
                  Place,
                  Wichita Falls, Texas;****Meadowlands
                  Terrace, Waco, Texas; Myrtlewood Estates, San Angelo, Texas; Pavilion
                  at
                  Crossing Pointe,****Orlando,
                  Florida; Seville Estates, Amarillo, Texas; Saddleridge Lodge, Midland,
                  Texas; Springtree, Sunrise,****Florida;
                  The Terrace, Grand Terrace, California; Wilburn Gardens, Fredericksburg,
                  Virginia; Woodmark****at
                  Summit Ridge, Reno, Nevada.**10.83.6
              Lease
                  Agreement between HCRI Wilburn Gardens Properties, LLC and
                  Emeritus
                  Corporation dated March 31, 2005.
              
              (7)10.83.7
              Lease
                  Agreement between HCRI HUNTERS GLEN PROPERTIES, LLC and
                  Emeritus
                  Corporationdated
                  September 1, 2005.
              
              (15)**10.84**
              
              **Real
                  Property Purchase and Sale Agreement made and entered into as of
                  May 20,
                  2005, by and between Pioneer****Health
                  Management Corporation ("Buyer"), and Emeritus Corporation ("Seller")
                  Green Valley Land Sale**
              
              (12)**10.85**
              
              **Agreement
                  Regarding Series B Convertible Preferred Stock entered into as
                  of June 30,
                  2005 between Emeritus****Corporation,
                  Saratoga Partners IV, LP, Saratoga Management Company LLC and****Saratoga
                  Coinvestment IV LLC. Exhibit 4.7**
              
              (12)10.85.1
              Loan
                  Agreement made and entered into effective as of June 30, 2005 between
                  Emeritus Corporation andHealthcare
                  Realty Trust Incorporated
              
              (12)10.85.2
              $10,800,000
                  Promissory Note between Emeritus Corporation ("Borrower") and Healthcare
                  Realty TrustIncorporated
                  ("Lender")
              
              (12)31.1
              
              
              Certification
                  of Periodic Reports31.1.1
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                  302 of
                  the Sarbanes-Oxley Actof
                  2002 for Daniel R. Baty dated November 4, 2005.
              
              (12)31.1.2
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                  302 of
                  the Sarbanes-Oxley Actof
                  2002 for Raymond R. Brandstrom dated November 14, 2005.
              
              (12)32.1
              
              
              Certification
                  of Periodic Reports32.1.1
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                  906 of
                  the Sarbanes-Oxley Actof
                  2002 for Daniel R. Baty dated November 14, 2005.
              
              (12)32.1.2
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                  906 of
                  the Sarbanes-Oxley Actof
                  2002 for Raymond R. Brandstrom dated November 14, 2005.
              
              (12)99.1
              
              
              Press
                  Releases91.1.1
              Press
                  Release dated February 25, 2005, announcing the results of a jury
                  verdict
                  and plans to appeal.
              
              (1)91.1.2
              Press
                  Release dated March 3, 2005, announcing a $21.4 million
                  refinance.
              
              (2)99.1.3
              Press
                  Release dated March 31, 2005, reports on fourth quarter and year
                  2004
                  results.
              
              (3)99.1.4
              Press
                  Release dated May 13, 2005, reports on first quarter
                  results.
              
              (4)99.1.5
              Press
                  Release dated June 29, 2005, Announcement of sale of Alterra
                  interest
              
              (8)99.1.6
              Press
                  Release dated July 5, 2005, Announcement of the conversion of Series
                  B
                  preferred stock
              
              (9)99.1.7
              Press
                  Release dated July 6, 2005, Announcement Intention to Commence
                  Offer To
                  Exchange Convertible Debentures
              
              (10)99.1.8
              Press
                  Release dated August 15, 2005, reports on second quarter
                  results.
              
              (11)99.1.9
              Press
                  Release dated November 14, 2005, reports on third quarter
                  results.
              
              (14)








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Footnotes:(1)
            Filed
                as an exhibit to a Form 8-K filed on February 25, 2005, and incorporated
                herein by reference.(2)
            Filed
                as an exhibit to a Form 8-K filed on March 9, 2005, and incorporated
                herein by reference.(3)
            Filed
                as an exhibit to a Form 8-K filed on April 1, 2005, and incorporated
                herein by reference.(4)
            Filed
                as an exhibit to a Form 8-K filed on May 13, 2005, and incorporated
                herein
                by reference.(5)
            Filed
                as an exhibit to a Form 10-Q filed on May 13, 2005, and incorporated
                herein by reference.(6)
            Filed
                as an exhibit to a Form 8-K filed on August 9, 2005, and incorporated
                herein by reference.(7)
            Filed
                as an exhibit to a Form 10-Q filed on May 12, 2005, and incorporated
                herein by reference.(8)
            Filed
                as an exhibit to a Form 8-K filed on July 1, 2005, and incorporated
                herein
                by reference.(9)
            Filed
                as an exhibit to a Form 8-K filed on July 7, 2005, and incorporated
                herein
                by reference.(10)
            Filed
                as an exhibit to a Form 8-K filed on July 7, 2005, and incorporated
                herein
                by reference.(11)
            Filed
                as an exhibit to a Form 8-K filed on August 15, 2005, and incorporated
                herein by reference.(12)
            Filed
                as an exhibit to a Form 10-Q filed on August 15, 2005, and incorporated
                herein by reference.(13)
            Filed
                as an exhibit to a Form 8-K filed on October 18, 2005, and incorporated
                herein by reference.(14)
            Filed
                as an exhibit to a Form 8-K filed on November 14, 2005, and incorporated
                herein by reference.(15)
            Filed
                herewith.




















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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:
                November 14, 2005
            EMERITUS
                CORPORATION(Registrant)/s/
                Raymond R. BrandstromRaymond
                R. Brandstrom, Vice President of Finance,Chief
                Financial Officer, and Secretary





**42**