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 March 31, 2002.

[ ] 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 Employer
of 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

As of April 30, 2002, there were 10,199,764 shares of the Registrant's Common
Stock, par value $.0001, outstanding.

EMERITUS CORPORATION

INDEX

Part I. Financial Information

Item 1. Financial Statements: . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page No.
--------

Condensed Consolidated Balance Sheets as of March 31, 2002, and
December 31, 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Condensed Consolidated Statements of Operations for the
Three Months ended March 31, 2002 and 2001 . . . . . . . . . . . . . . . . . . 2

Condensed Consolidated Statements of Cash Flows for the Three
Months ended March 31, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . 3

Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . 4

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . 17

Part II. Other Information

Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Note: Items 1, 2, 3, 4, and 6 of Part II are omitted because they are not applicable.

EMERITUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS

March 31, December 31,
2002 2001
----------- --------------

Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,661 $ 9,811
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,504 1,376
Trade accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . 1,652 1,172
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,244 2,859
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . . . 4,310 2,463
Property held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,242 2,242
----------- --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,613 19,923
----------- --------------
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,248 131,200
Property held for development . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,040 1,040
Notes receivable from and investments in affiliates . . . . . . . . . . . . . . . . 3,798 3,675
Restricted deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,852 5,520
Lease acquisition costs, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,693 4,864
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,389 2,206
----------- --------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 148,633 $ 168,428
=========== ==============

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current Liabilities:
Current portion of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . $ 14,492 $ 4,523
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,154 2,105
Accrued employee compensation and benefits . . . . . . . . . . . . . . . . . . . . 4,450 3,301
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,007 2,861
Accrued real estate taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,102 1,415
Accrued dividends on preferred stock. . . . . . . . . . . . . . . . . . . . . . . 9,102 7,429
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,666 8,690
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,715 1,699
----------- --------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,688 32,023
----------- --------------
Long-term debt, less current portion. . . . . . . . . . . . . . . . . . . . . . . . 100,921 131,070
Convertible debentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000 32,000
Deferred gain on sale of communities. . . . . . . . . . . . . . . . . . . . . . . . 20,359 18,671
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,468 2,404
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 256
----------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199,665 216,424
----------- --------------
Minority interests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 949 1,145
Redeemable preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 25,000
Commitments and contingencies
Shareholders' Deficit:
Preferred stock, $.0001 par value. Authorized 70,000 shares; issued and outstanding
30,609 and 30,609 at March 31,2002, and December 31, 2001, respectively
Common stock, $.0001 par value. Authorized 40,000,000 shares; issued and
outstanding 10,199,764 and 10,196,030 shares at March 31, 2002, and
December 31, 2001, respectively . . . . . . . . . . . . . . . . . . . . . . . . 1 1
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,016 67,686
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . (7) (136)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (144,991) (141,692)
----------- --------------
Total shareholders' deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . (76,981) (74,141)
----------- --------------
Total liabilities and shareholders' deficit. . . . . . . . . . . . . . . . . . . . $ 148,633 $ 168,428
=========== ==============

See accompanying Notes to Condensed Consolidated Financial Statements
and Management's Discussion and Analysis
of Financial Condition and Results of Operations

EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)

Three Months
ended March 31, 2002
2002 2001
------------- -------------

Revenues:
Community revenue . . . . . . . . . . . $ 32,121 $ 32,701
Other service fees. . . . . . . . . . . 1,000 542
Management fees . . . . . . . . . . . . 3,025 1,538
------------- -------------
Total operating revenues. . . . 36,146 34,781

Expenses:
Community operations. . . . . . . . . . 20,562 20,645
General and administrative. . . . . . . 4,923 4,167
Depreciation and amortization . . . . . 1,851 1,816
Facility lease expense. . . . . . . . . 6,728 6,833
------------- -------------
Total operating expenses. . . . 34,064 33,461
------------- -------------
Income from operations. . . . . 2,082 1,320

Other income (expense):
Interest income . . . . . . . . . . . . 109 239
Interest expense. . . . . . . . . . . . (2,926) (3,533)
Other, net. . . . . . . . . . . . . . . (567) (143)
------------- -------------
Net other expense . . . . . . . (3,384) (3,437)
------------- -------------

Net loss. . . . . . . . . . . . (1,302) (2,117)

Preferred stock dividends . . . . . . . . 1,997 1,611
------------- -------------
Net loss to common shareholders $ (3,299) $ (3,728)
============= =============

Loss per common share - basic and diluted $ (0.32) $ (0.37)
============= =============

Weighted average number of common shares. 10,196 10,120
============= =============

See accompanying Notes to Condensed Consolidated Financial Statements
and Management's Discussion and Analysis
of Financial Condition and Results of Operations

EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)

Three Months ended March 31,
------------------------------------
2002 2001
----------------- -----------------

Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,302) $ (2,117)
Adjustments to reconcile net loss to net cash:
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 63
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . 1,851 1,624
Amortization of deferred gain. . . . . . . . . . . . . . . . . . . . . . (61) (245)
Loss on sale of properties . . . . . . . . . . . . . . . . . . . . . . . 530 -
Write off of deferred gain . . . . . . . . . . . . . . . . . . . . . . . 14 -
Changes in operating assets and liabilities. . . . . . . . . . . . . . . (1,864) (111)
----------------- -----------------
Net cash used in operating activities. . . . . . . . . . . . . . . (754) (786)
----------------- -----------------

Cash flows from investing activities:
Acquisition of property and equipment. . . . . . . . . . . . . . . . . . . (81) (271)
Purchase of minority partner interest. . . . . . . . . . . . . . . . . . . (3,070) -
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . 25,010 1,109
Investment in lease acquisition costs. . . . . . . . . . . . . . . . . . . (1,044) (71)
Payments to affiliates and other managed communities . . . . . . . . . . . (650) -
Investment in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . (110) -
----------------- -----------------
Net cash provided by investing activities. . . . . . . . . . . . . 20,055 767
----------------- -----------------

Cash flows from financing activities:
Proceeds from sale of stock under employee stock purchase plan . . . . . . 7 -
Decrease in restricted deposits. . . . . . . . . . . . . . . . . . . . . . 668 -
Repayment of short-term borrowings . . . . . . . . . . . . . . . . . . . . - (1,650)
Debt issue and other financing costs . . . . . . . . . . . . . . . . . . . (946) (5)
Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . 30,609 144
Repayment of long-term borrowings. . . . . . . . . . . . . . . . . . . . . (50,789) (385)
----------------- -----------------
Net cash used in financing activities. . . . . . . . . . . . . . . (20,451) (1,896)
----------------- -----------------

Net decrease in cash and cash equivalents. . . . . . . . . . . . . (1,150) (1,915)

Cash and cash equivalents at the beginning of the period . . . . . . . . . . 9,811 7,496
----------------- -----------------

Cash and cash equivalents at the end of the period . . . . . . . . . . . . . $ 8,661 $ 5,581
================= =================

Supplemental disclosure of cash flow information cash paid during the period
for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,780 $ 3,639
================= =================

Noncash investing and financing activities:
Unrealized holding gains (losses) on investment securities . . . . . . . . $ 129 $ 104
================= =================
Accrued preferred stock dividends. . . . . . . . . . . . . . . . . . . . . $ 1,997 $ 1,611
================= =================

See accompanying Notes to Condensed Consolidated Financial Statements
and Management's Discussion and Analysis
of Financial Condition and Results of Operations

EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

CRITICAL ACCOUNTING POLICIES AND 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 on-going basis, Emeritus evaluates its estimates,
including those related to resident programs and incentives, bad debts,
investments, intangible assets, income taxes, financing operations,
restructuring, long-term service contracts, contingencies, 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 the following critical accounting policies are most
significant to the judgments and estimates used in the preparation of its
condensed consolidated financial statements. Emeritus maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
residents to make required payments. If the financial condition of Emeritus's
residents were to deteriorate, resulting in an impairment of their ability to
make payments, additional charges may be required. Emeritus holds shares in ARV
Assisted Living, Inc. amounting to less than 5% of its shares. ARV is publicly
traded and has a volatile share price. Emeritus records an investment
impairment charge when it believes this investment has experienced a decline in
value that is other than temporary. Future adverse changes in market conditions
or poor operating results underlying this investment could result in losses or
an inability to recover the carrying value of the investment that may not be
reflected in this investment's current carrying value, thereby possibly
requiring an impairment charge in the future. Emeritus records a valuation
allowance to reduce its deferred tax assets to the amount that is more likely
than not to be realized, which at this time shows a net asset valuation of zero.
While Emeritus has considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the valuation
allowance, in the event Emeritus were to determine that it would be able to
realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made.

NEW ACCOUNTING PRONOUNCEMENTS

In October 2001, the FASB issued SFAS No.144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No.144 addresses significant issues
relating to the implementation of SFAS No.121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and develops a
single accounting method under which long-lived assets that are to be disposed
of by sale are measured at the lower of book value or fair value less cost to
sell. Additionally, SFAS No.144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. The Company adopted
SFAS No.144 effective January 1, 2002. As the adoption of SFAS No.144 is
prospective, the Company cannot predict the impact on its financial statements.

BASIS OF PRESENTATION

The unaudited interim financial information furnished below, 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 March 31, 2002, and for the three months ended March 31, 2002 and
2001. The
4

EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(unaudited)

Company presumes that those reading this interim financial information have
read or have access to its 2001 audited consolidated financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations that are contained in the 2001 Form 10-K filed March 29, 2002, and
amended on April 30, 2002. Therefore, the Company has omitted footnotes and
other disclosures herein, which are disclosed in the Form 10-K.

REVENUE RECOGNITION

Due to dramatic increases in liability insurance premiums for the year 2002, the
Company decided to institute a one-time insurance surcharge and billed
approximately $1.4 million to the residents of its communities in the first
quarter of 2002. The associated revenue is being recognized on a straight-line
basis over the life of the insurance policy. In the three months ended March
31, 2002, the Company recognized $342,000 in other service fees and recorded
deferred revenues of approximately $1.0 million, included in other current
liabilities.

PROPERTY HELD FOR SALE

Emeritus currently has two properties being held for sale. Assets to be
disposed of are reported at the lower of their carrying amount or fair market
value less costs to sell.

PROPERTY AND EQUIPMENT

In March 2002, the Company entered into a 15-year master lease arrangement with
HC REIT, Inc. for four communities, two of which Emeritus previously held an
ownership interest in and two of which it previously leased from another lessor.
A related party investor held a 50% economic interest in one community, located
in Fairfield, California. Preceding the HC REIT transaction, Emeritus purchased
the related party investor's economic interest for his investment basis of $2.1
million plus a 9% return, a $2.95 million total payment. The Company recognized
a loss on the repurchase of approximately $158,000, which is included in "Other,
Net" in the condensed consolidated statements of operations. Another community,
located in Paso Robles, California, was 50% owned by an outside investor. Also
preceding the HC REIT transaction, the Company purchased the remaining 50%
interest in this community for $2.65 million. The remaining two communities,
located in Hattiesburg, Mississippi, and Urbana, Illinois, were both under
operating leases with a different lessor. Subsequent to the two purchase
transactions, Emeritus entered into a master lease arrangement for all four
communities and recognized a loss of approximately $372,000, which is recorded
in "Other, net" in the condensed consolidated statements of operations. The
loss is primarily comprised of write-offs of existing loan fees and lease
acquisition costs for the four buildings. Additionally, the Company has a
deferred gain on sale associated with the transaction that approximates $1.8
million and new lease acquisition costs of $1.0 million, that will both be
amortized over the lease period of 15 years.

ACCRUED DIVIDENDS ON PREFERRED STOCK

Since the third quarter of 2000, the Company has accrued its obligation to pay
cash dividends to both the Series A and Series B preferred shareholders, which
amounted to $9.1 million at March 31, 2002, including all penalties for
non-payment. Since dividends on the Series A shares were not paid for six
consecutive quarters, the Series A dividends were calculated on a compounded
cumulative basis, retroactively. This caused the preferred dividends to be
approximately $386,000 higher in the first quarter of 2002 as compared to the
first quarter of 2001. In addition, since the Company has not paid these
dividends for six consecutive quarters, both the Series A and Series B
shareholders became entitled to elect one additional director each to the
Company's board of directors at each annual shareholders' meeting until such
time as the accrued dividends have been paid.

LONG-TERM DEBT

In February 2002, the Company reached an agreement with Heller Healthcare
Finance to refinance three of the properties in the $71.8 million portfolio that
previously was financed by Deutsche Bank AG and matured December 14, 2001. The
new loan of $30.6 million matures February 2004 and provides for monthly
principal payments of approximately $40,000 in addition to interest at LIBOR
plus four percent. This refinancing in turn satisfied the extension agreement
dated May 31, 2001, with Deutsche Bank AG to extend the maturity date of the
remaining debt of $46.3 million secured by seven properties in the original
portfolio to May 31, 2003, provided that the Company pays to the lender a fee
equal to 1% of the outstanding portfolio balance at May 31, 2002. As a result
of this refinancing, the Company reclassified the entire $71.8 million principal
balance on this portfolio to long-term debt from current debt in its December
31, 2001, financial statements.

LOSS PER SHARE

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 on the basis of the weighted average number of shares outstanding plus
dilutive potential common shares using the treasury stock method. The capital
structure of Emeritus includes convertible debentures, redeemable and
non-redeemable convertible preferred stock, common stock warrants, and stock
options. The assumed conversion and exercise of these securities have been
excluded from the calculation of diluted net loss per share since their effect
is anti-dilutive. The loss per common share was calculated on a dilutive basis
without consideration of 9,507,196 and 9,285,337 common shares at March 31, 2002
and 2001, respectively, related to outstanding options, warrants, convertible
debentures, and convertible preferred stock.

UNREALIZED HOLDING GAINS ON INVESTMENT SECURITIES

The change in unrealized holding gains on investment securities for the
three-month period ended March 31, 2002, represents the change in value of the
Company's investment in ARV Assisted Living, Inc.

OTHER COMPREHENSIVE INCOME

Other comprehensive income includes the following transactions for the
three-month period ended March 31, 2002 and 2001, respectively:

Three Months ended March 31,
------------------------------------
2002 2001
----------------- -----------------
(In thousands)

Net loss to common shareholders. . . . . . . . . . . . $ (3,299) $ (3,728)
Other comprehensive income:
Unrealized holding gains on investment securities 129 104
----------------- -----------------
Comprehensive loss . . . . . . . . . . . . . . . . . . $ (3,170) $ (3,624)
================= =================

SUBSEQUENT EVENTS

On April 1, 2002, in conjunction with the HC REIT master lease transaction more
fully discussed under "Property and Equipment" above, the Company received $6.7
million in proceeds from a $6.8 million debt issuance under a separate loan
agreement with HC REIT. The loan agreement requires interest only

payments and bears interest at 12% per annum with fixed annual increases of 50
basis points for a term of 36 months.

In May 2002, Emeritus commenced management of eight communities previously
operated by Horizon Bay Management L.L.C., a national seniors housing management
company that manages the WHSLH Realty, L.L.C., ("WHSLH") portfolio of senior
housing properties.

The management agreement structure replaces the originally announced agreement
where Emeritus was to have directly assumed the current leases on seven
communities and the mortgage on an eighth, comprising 617 units in Louisiana and
Texas. Entities controlled by Daniel R. Baty, Chairman and CEO of Emeritus,
have agreed to assume the current leases and mortgage and will engage the
Company as manager. Under the terms of the management arrangement, the Company
will receive a management fee equal to 5% of
revenue and has the right to assume the leases and mortgage at any time during
the five-year term of the management agreement. Horizon Bay has agreed to fund
operating losses of the Baty entities to the extent of $2.3 million in the first
twelve months and $1.1 million in the second twelve months following the close.
The Company has agreed to fund any operating losses in excess of these limits
over the five-year lease term.

RECLASSIFICATIONS

Certain reclassifications of 2001 amounts have been made to conform to the 2002
presentation.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

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

Through 1998, we focused on rapidly expanding our operations in order to
assemble a portfolio of assisted living communities with a critical mass of
capacity. We pursued an aggressive acquisition and development strategy during
that time, acquiring 35 and developing 10 communities in 1996, acquiring 7 and
developing 20 communities in 1997, and developing 5 communities in 1998. During
1999 and continuing through 2001, we have substantially reduced our pace of
acquisition and development activities to concentrate on improving our
operations and increasing occupancy and our average revenue per unit.

In our consolidated portfolio, our rate enhancement program brought about an
increase in average monthly revenue per occupied unit to $2,546 for the first
quarter of 2002 from $2,345 for the first quarter of 2001. This represents an
average revenue increase of $201 per month per occupied unit, or 8.6%. The
average occupancy rate decreased to 82.0% for the first quarter of 2002 from
85.4% for the first quarter of 2001.

In our total operated portfolio, which includes managed communities, our rate
enhancement program brought about an increase in average monthly revenue per
occupied unit to $2,539 for the first quarter of 2002 from $2,231 for the first
quarter of 2001. This represents an average revenue increase of $308 per month
per occupied unit, or 13.8%. The larger increase in average monthly revenue per
occupied unit in our total portfolio as compared to that in our consolidated
portfolio is partially due to the addition of 17 communities previously managed
by Regent Assisted Living, Inc., discussed more fully below in "Other
Transactions". A majority of the Regent communities have Special Care
(Alzheimer's) units, which have a significantly higher rental rate than
non-Special Care units. The average occupancy rate decreased to 80.5% for the
first quarter of 2002 from 82.5% for the first quarter of 2001.

We intend to continue a selective growth strategy through acquiring and managing
new communities with operating characteristics consistent with our current
emphasis on stabilizing occupancy and enhancing our operating model and service
offerings.

[The rest of this page is intentionally left blank]

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

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

As of March 31, As of December 31, As of March 31,
2002 2001 2001
---------------------- ---------------------- ----------------------
Buildings Units Buildings Units Buildings Units
---------- ---------- ---------- ---------- ---------- ----------

Owned (1) . . . . . . . . . . . . . . . 16 1,579 16 1,579 16 1,579
Leased (1). . . . . . . . . . . . . . . 44 3,716 42 3,444 45 3,700
Managed/Admin Services. . . . . . . . . 88 8,194 70 6,620 69 6,528
Joint Venture/Partnership . . . . . . . 3 333 5 605 5 605
---------- ---------- ---------- ---------- ---------- ----------
Operated Portfolio . . . . . . . . 151 13,822 133 12,248 135 12,412

Percentage increase (decrease) (2) 14% 13% (1%) (1%) 0% 0%

Pending Acquisitions. . . . . . . . . . - - - - - -
New Developments (3). . . . . . . . . . - - - - 3 320
---------- ---------- ---------- ---------- ---------- ----------
Total. . . . . . . . . . . . . . . 151 13,822 133 12,248 138 12,732
---------- ---------- ---------- ---------- ---------- ----------

Percentage increase (decrease) (2) 14% 13% (4%) (4%) (1%) (1%)

- --------
(1) Included in our consolidated portfolio of communities.
(2) The percentage increase (decrease) indicates the change from the prior
quarter.
(3) The communities under development at March 31, 2001, were developed by
third parties, but are currently managed by Emeritus.

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. Inflation or other circumstances that
adversely affect seniors' ability to pay for assisted living services could
therefore have an adverse effect on our business. All sources of revenue other
than residents' private resources constitute less than 10% of our total
revenues.

We have incurred net operating losses since our inception and as of March 31,
2002, we had an accumulated deficit of approximately $145.0 million. These
losses resulted from a number of factors, including:

* occupancy levels at our communities that were lower for longer periods than we
originally anticipated and have declined in the last two years consistent with
industry patterns;

* financing costs that we incurred as a result of multiple financing and
refinancing transactions; and

* administrative and corporate expenses that we increased to facilitate our
growth and maintain operations.

During 1998, we decided to reduce acquisition and development activities and
dispose of select communities that had been operating at a loss. We believe
that slowing our acquisition and development activities has enabled us to use
our resources more efficiently and increase our focus on enhancing community
operations.

EMERITRUST TRANSACTIONS

In two separate transactions during the fall of 1998 and the spring of 1999, we
arranged for two investor groups to purchase an aggregate of 41 of our operating
communities and five communities under development for a total purchase price of
approximately $292.2 million. Of the 46 communities involved, 43 had been, or
were proposed to be, leased to us by Meditrust Company LLC under sale/leaseback
financing arrangements, and three had been owned by us. The first purchase,
consisting of 25 communities, which we will call the Emeritrust I communities,
was completed in December 1998 and the second purchase, consisting of 21
communities, 16 of which we will call the Emeritrust II Operating communities
and five of which we call the Emeritrust II Development communities, was
completed in March 1999.

Of the $168.0 million purchase price for the Emeritrust I communities, $138.0
million was financed through a three-year first mortgage loan with an
independent third party and $30.0 million was financed through subordinated debt
and equity investments from the investor group, which includes Daniel R. Baty,
our Chief Executive Officer, who is also a director and a principal shareholder.
Of the $124.2 million purchase price for the Emeritrust II Operating communities
and Emeritrust II Development communities, approximately $99.6 million was
financed through three-year first mortgage loans with independent third parties
and $24.6 million was financed through subordinated debt and equity investments
from the investor group, which includes Mr. Baty.

The investor groups retained us to manage all of the communities through
December 31, 2001, and granted us options to purchase the communities during
this period. During 2000, the Emeritrust I communities failed to comply with
covenants under the $138.0 million mortgage loan, and in 2001 it became clear
that we would not be able to purchase the communities under the options. As a
result, in January 2002, the mortgage loans were restructured and the management
agreements and options to purchase were extended to June 30, 2003 (to December
31, 2003, in the case of the five Emeritrust II Development communities). The
discussion below reflects the terms of these arrangements as modified.
From January 1, 2002, through June 30, 2003, we will receive for the Emeritrust
I communities a base management fee of 3% of gross revenues generated by the
communities and an additional management fee of 4%, payable out of 50% of cash
flow. The availability of cash flow to pay management fees is subject to prior
payment of expenses and fees related to the restructuring of the mortgage loan
in 2001. For the Emeritrust II Operating communities and the Emeritrust II
Development communities, we have received and continue to receive a base
management fee of 5% of gross revenues and an additional management fee of 2%,
payable to the extent that the communities meet certain cash flow standards.
Prior to January 1, 2001, the management fees for the Emeritrust I communities
were also computed in this fashion.
Under the management agreements, we are obligated to reimburse the investor
groups for cumulative cash operating losses greater than $4.5 million in the
case of the Emeritrust I communities and $500,000 in the case of each of the
five Emeritrust II Development communities. Since these thresholds have been
exceeded, we are currently responsible for most cash operating losses generated
by these communities if they occur. There is no such funding arrangement with
respect to the Emeritrust II Operating communities. For the Emeritrust I
communities there was no funding obligation for the three months ended March 31,
2002, compared to $387,000 for the three months ended March 31, 2001. Our
funding obligations for the Emeritrust II Development communities were $35,000
and $148,000 for the three months ended March 31, 2002 and 2001, respectively.
Thus, our gross funding obligations decreased $500,000 for the first quarter of
2002 compared to the comparable period in 2001.

Although the amounts of our funding obligation each year include management fees
earned by us under the management agreements, we do not recognize these
management fees as revenue in our financial statements to the extent that we are
funding the cash operating losses that include them. Correspondingly,

we recognize the funding obligation under the agreement, less the applicable
management fees, as an expense in our financial statements under the category
"Other, net." Conversely, if the applicable management fees exceed our funding
obligation, we recognize the management fees less the funding obligation as
management fee revenue in our condensed consolidated financial statements. For
the three months ended March 31, 2002 and 2001, total management fees earned for
the Emeritrust I communities were $698,000 and $566,000, respectively, of which
$698,000 and $296,000, respectively, were recognized as revenue for that period.
For the three months ended March 31, 2002 and 2001, total management fees earned
for the Emeritrust II Development communities were $168,000, and $114,000,
respectively, of which $155,000 and $77,000, respectively, were recognized as
revenue for that period. For the three months ended March 31, 2002 and 2001,
management fees earned and recognized for the Emeritrust II Operating
communities were $486,000 and $464,000, respectively. Thus, our management fees
recognized for all of the Emeritrust communities increased $502,000 for the
first quarter of 2002 compared to the comparable period in 2001.

We have an option to purchase 43 of the 46 Emeritrust communities and a right of
first refusal with respect to the remaining three communities, both of which
expire June 30, 2003 (December 31, 2003, in the case of the five Emeritrust II
Development communities). The option must be exercised with respect to all
communities or may not be exercised at all. If investor groups require Mr. Baty
to purchase certain of the communities, upon the conditions described below, we
have the right to exercise our option within 60 days of receiving notice of this
action. The option price for the 43 Emeritrust communities is equal to the
original cost of the communities of approximately $292 million, plus an amount
that would provide the investor groups with an 18% rate of return, compounded
annually, on their original investment of $54.6 million (less any cash
distributions received). In connection with the exercise of the option, we are
also obligated to pay certain costs and fees.

The management agreements, including the options to purchase the related
communities, are subject to various termination provisions, including
cross-default provisions among all three groups of communities. The management
agreement for the Emeritrust I communities may be terminated if cash
distributions to the investor group do not meet certain levels or if the
communities fail to meet certain coverage requirements under the mortgage loan.
In addition, certain of the communities have been refinanced and, accordingly,
our ability to exercise the option will depend on whether we can assume or
refinance the debt secured by these communities. Termination of the management
agreements or failure to exercise the options could result in the loss of
management fees and the substantial decrease in the number of communities we
operate.

Under related agreements, the investor groups may require Mr. Baty to purchase
between ten and twelve of the Emeritrust communities, depending on the
occurrence of any one of the following events: (a) we do not exercise our
option to purchase the communities before the option expires, (b) we default
under the management agreements, (c) Mr. Baty's net worth falls below a certain
threshold, (d) we experience a change of control or (e) Mr. Baty ceases to be
our chief executive officer. If Mr. Baty is required to purchase some of the
communities, he will also have the option to purchase all of the Emeritrust
communities on the same terms under which we are entitled to purchase the
communities, subject to our prior right to do so within a specified time period.

OTHER TRANSACTIONS

In January 2002, we entered into management and accounting services agreements
with Regent Assisted Living, Inc. of Portland, Oregon, to manage 18 of their
communities. The agreements will result in the Company receiving a fixed base
management fee with provisions for incentive fees based upon improved community
performance. In February 2002, two of the communities were sold to a third
party with whom we have other management agreements. Concurrently, we entered
into a management agreement with them to continue managing these communities for
5% of gross revenues. In March 2002, we began managing another Regent
community. In April 2002, one community that we had been managing for

Regent was sold to another entity and our management terminated. Management
fees recognized from managing the Regent communities were approximately $380,000
in the first quarter of 2002.

In March 2002, we entered into a 15-year master lease arrangement with HC REIT,
Inc. for four communities, two of which we previously held an ownership interest
in and two of which we previously leased from another lessor. A related party
investor held a 50% economic interest in one community, located in Fairfield,
California. Preceding the HC REIT transaction, we purchased the related party
investor's economic interest for his investment basis of $2.1 million plus a 9%
return, a $2.95 million total payment. We recognized a loss on the repurchase
of approximately $158,000, which is included in "Other, Net" in the condensed
consolidated statements of operations. Another community, located in Paso
Robles, California, was 50% owned by an outside investor. Also preceding the HC
REIT transaction, we purchased the remaining 50% interest in this community for
$2.65 million. The remaining two communities, located in Hattiesburg,
Mississippi, and Urbana, Illinois, were both under operating leases with a
different lessor. Subsequent to the two purchase transactions, we entered into
a master lease arrangement for all four communities and recognized a loss of
approximately $372,000, which is recorded in "Other, net" in the condensed
consolidated statements of operations. The loss is primarily comprised of
write-offs of existing loan fees and lease acquisition costs for the four
buildings. Additionally, we have a deferred gain on sale associated with the
transaction that approximates $1.8 million and new lease acquisition costs of
$1.0 million, both of which we will amortize over the lease period of 15 years.

RESULTS OF OPERATIONS

Critical Accounting Policies and Estimates.

Management's 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 on-going basis, we evaluate our estimates, including
those related to resident programs and incentives, bad debts, investments,
intangible assets, income taxes, financing operations, restructuring, long-term
service contracts, contingencies, and litigation. We base our estimates on
historical experience and on various other assumptions that we believe 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.

We believe the following critical accounting policies are more 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. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our residents to make required payments. If the
financial condition of our residents were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. We hold shares in ARV Assisted Living, Inc. amounting to less than 5%
of its shares. ARV is publicly traded and has a volatile share price. We
record an investment impairment charge when we believe this investment has
experienced a decline in value that is other than temporary. Future adverse
changes in market conditions or poor operating results underlying this
investment could result in losses or an inability to recover the carrying value
of the investment that may not be reflected in this investment's current
carrying value, thereby possibly requiring an impairment charge in the future.
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized, which at this time shows a net
asset valuation of zero. While we have considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for a
valuation allowance, in the event we were to determine that we would be able to
realize our deferred tax assets in the future in excess of our net recorded

amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made.

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
Increase
Percentage of Revenues (Decrease)
Three Months Three Months Three Months
ended ended ended
March 31, March 31, March 31,
2002 2001 2001-2002
--------------- --------------- ---------------

Revenues . . . . . . . . . . . . . 100.0% 100.0% 3.7%
Expenses:
Community operations. . . . . 56.9 59.4 (0.4)
General and administrative. . 13.6 12.0 18.1
Depreciation and amortization 5.1 5.2 1.9
Facility lease expense. . . . 18.6 19.6 (1.5)
Total operating expenses. 94.2 96.2 1.8
--------------- --------------- ---------------
Income from operations . . . . . . 5.8 3.8 57.7
Other income (expense):
Interest income . . . . . . . 0.3 0.7 (54.4)
Interest expense. . . . . . . (8.1) (10.2) (17.2)
Other, net. . . . . . . . . . (1.6) (0.4) 296.5
Net other expense . . . . (9.4) (9.9) (1.5)
--------------- --------------- ---------------
Net loss . . . . . . . . (3.6%) (6.1%) (38.5%)
=============== =============== ===============

Comparison of the three months ended March 31, 2002 and 2001
- ----------------------------------------------------------------------

Total Operating Revenues: Total operating revenues for the three months ended
March 31, 2002, increased by $1.3 million to $36.1 million from $34.8 million
for the comparable period in 2001, or 3.7%. The change in revenue is primarily
the result of an increase in management fee revenue of $1.5 million and a
one-time insurance surcharge of approximately $1.4 million, of which
approximately $342,000 was recognized in the first quarter of 2002, offset by a
decrease in community revenue of approximately $580,000. The decrease in
community revenue is due to the disposal of three communities, which were not
included in our consolidated portfolio in the first quarter of 2002 but were
included in the comparable quarter of 2001 and the decrease in the occupancy
rate offset by the increase in average monthly revenue per unit. The occupancy
rate decreased 3.4 percentage points to 82.0% for the first quarter of 2002 from
85.4% for the first quarter of 2001. Average monthly revenue per unit was $2,546
for the first quarter of 2002 compared to $2,345 for the comparable quarter of
2001, an increase of approximately 8.6%. Improved performance of managed
communities allowed us to recognize additional base management fees and
performance-driven contingent management fees.

Community Operations: Community operating expenses for the three months ended
March 31, 2002 and 2001, were approximately $20.6 million in both periods. This
was due to increases in some expenses being offset by decreases in others. The
significant decreases occurred in food service expenses, business licenses and
taxes, and utilities. The decrease in expenses was primarily due to the
disposal of three communities, which were not included in our consolidated
portfolio in the first quarter of 2002 but were included in the comparable
quarter of 2001. The significant increases were in liability and workers'
compensation insurance premiums. Community operating expenses as a percentage
of total operating

revenue decreased to 56.9% in the first quarter of 2002 from 59.4% in the first
quarter of 2001, primarily as a result of increased revenues and cost
containment measures.

General and Administrative: General and administrative (G&A) expenses for the
three months ended March 31, 2002, increased $756,000 to $4.9 million from $4.2
million for the comparable period in 2001, or 18.1%. As a percentage of total
operating revenues, G&A expenses increased to 13.6% for the three months ended
March 31, 2002, compared to 12.0% for the three months ended March 31, 2001.
G&A expenses rose primarily due to increases in the number of employees from an
abnormally low level in 2001, normal increases in employee salaries, and costs
related to various employee benefit programs. In addition, a limited number of
employees have been added to support the growth in number of facilities
operated. Since more than half of the communities we operate are managed, G&A
expense as a percentage of operating revenues for all communities, including
managed communities, may be more meaningful for industry-wide comparisons.
These percentages were 6.0% and 6.2% for the three months ended March 31, 2002
and 2001, respectively.

Depreciation and Amortization: Depreciation and amortization for the three
months ended March 31, 2002 and 2001, were approximately $1.8 million in both
periods. In 2002, this represents 5.1% of total operating revenues, compared to
5.2% for the comparable period in 2001. The decrease as a percentage of
revenues is due to increased revenues.
Facility Lease Expense: Facility lease expense for the three months ended March
31, 2002, was $6.7 million compared to $6.8 million for the comparable period of
2001, representing a decrease of $105,000, or 1.5%. The decrease is primarily
attributable to the number of communities under leasing arrangements. We leased
44 communities as of March 31, 2002, compared to 45 communities as of March 31,
2001. Facility lease expense as a percentage of revenues was 18.6% for the
three months ended March 31, 2002, and 19.6% for the three months ended March
31, 2001.
Interest Income: Interest income for the three months ended March 31, 2002, was
$109,000 versus $239,000 for the comparable period of 2001. This decrease is
primarily attributable to declining interest rates.

Interest Expense: Interest expense for the three months ended March 31, 2002,
was $2.9 million compared to $3.5 million for the comparable period of 2001.
This decrease of $607,000, or 17.2%, is primarily attributable to lower interest
rates on our variable rate debt. As a percentage of total operating revenues,
interest expense decreased to 8.1% from 10.2% for the three months ended March
31, 2002 and 2001, respectively, reflecting increased revenues in conjunction
with lower interest rates in the first quarter of 2002.

Other, net: Other, net (expense) increased by $424,000 to $567,000 for the
quarter ended March 31, 2002, from $143,000 for the quarter ended March 31,
2001. The net change of $424,000 is comprised of the following items: During
the first quarter of 2002, we repurchased a related party's economic interest in
a 172-unit community resulting in an expense of $158,000. Additionally, the
sale-leaseback of two communities and re-lease of two additional communities
resulted in transaction related expense of $372,000, for a combined impact of
$530,000 for the quarter ended March 31, 2002. These expenses compare to
sale-leaseback related gains in the quarter ended March 31, 2001 of $189,000.
This increase of $719,000 is offset by both a decrease of $205,000 in our net
funding obligation expense associated with our obligation to fund operating
deficits of the Emeritrust I and Emeritrust II Development communities and a
property tax refund of approximately $64,000.

Preferred dividends: For the three months ended March 31, 2002 and 2001, the
preferred dividends were approximately $2.0 million and $1.6 million,
respectively. Since dividends on the Series A shares were not paid for six
consecutive quarters, the Series A dividends were calculated on a compounded
cumulative basis, retroactively. This caused the preferred dividends to be
approximately $416,000 higher in the first

quarter of 2002 as compared to the first quarter of 2001. In addition, since
we have not paid these dividends for six consecutive quarters, both our Series A
and Series B shareholders became entitled to elect one additional director each
to our board of directors at each annual shareholders' meeting until such time
we have paid the accrued dividends.

Same Community Comparison

We operated 57 communities on a comparable basis during both the three months
ended March 31, 2002 and 2001. The following table sets forth a comparison of
same community results of operations, excluding general and administrative
expenses, for the three months ended March 31, 2002 and 2001.

Three Months ended March 31,
(In thousands)
-------------------------------------------------
Dollar Percentage
2002 2001 Change Change
------------ ------------ -------- -----------

Revenue . . . . . . . . . . . $ 30,755 $ 29,812 $ 943 3.2%
Community operating expenses. (18,875) (18,173) (702) 3.9
------------ ------------ -------- -----------
Community operating income. 11,880 11,639 241 2.1
Depreciation & amortization . (1,413) (1,367) (46) 3.4
Facility lease expense. . . . (6,114) (5,849) (265) 4.5
------------ ------------ -------- -----------
Operating income. . . . . 4,353 4,423 (70) (1.6)
Interest expense, net . . . . (1,908) (2,711) 803 (29.6)
Other income (expense). . . . (26) (196) 170 (86.7)
------------ ------------ --------
Net income. . . . . . . . $ 2,419 $ 1,516 $ 903 59.6%
============ ============ ======== ===========

The same communities represented $30.8 million or 85.1% of our total revenue of
$36.1 million for the first quarter of 2002. Same community revenues increased
by $943,000 or 3.2% for the quarter ended March 31, 2002, from the comparable
period in 2001. There was a one-time insurance surcharge of approximately $1.2
million charged to residents in the first quarter of 2002 of which approximately
$311,000 was recognized in the period. The increases in same community revenues
were primarily due to rate increases and the recognized insurance surcharge,
which increased revenue per unit by 7.7%, partially offset by a decrease in
average occupancy to 81.7% in the first quarter of 2002 from 85.0% in the first
quarter of 2001. For the quarter ended March 31, 2002, we increased our net
income to $2.4 million from $1.5 million for the comparable period of 2001,
primarily as a result of the revenue increases and decreased interest expense
resulting from lower interest rates.

LIQUIDITY AND CAPITAL RESOURCES

For the three months ended March 31, 2002, net cash used in operating activities
was $754,000 compared to $786,000 for the comparable period in the prior year.
The primary components of this operating use of cash were the net loss of $1.3
million and an increase in prepaid insurance of $1.4 million in the three months
ended March 31, 2002, which is typical in the first quarter of each year,
partially offset by depreciation and amortization of $1.8 million. The primary
components of the operating use of cash in the three months ended March 31,
2001, were the net loss of $2.1 million and amortization of deferred gain of
$245,000, partially offset by depreciation and amortization of $1.6 million.

Net cash provided by investing activities amounted to $20.1 million for the
three months ended March 31, 2002, and was comprised primarily of funds from the
HC REIT transaction previously discussed under "Other Transactions". Net cash
provided by investing activities amounted to $767,000 for the three months ended
March 31, 2001, primarily due to proceeds of $1.1 million received from the
sale/leaseback of one

community partially offset by the acquisition of property and equipment of
$271,000 and investment in lease acquisition costs of $71,000.

For the three months ended March 31, 2002, net cash used in financing activities
was $20.5 million primarily from long-term debt repayments, which include debt
repayments related to the HC REIT transaction previously discussed under "Other
Transactions", partially offset by decreases in restricted deposits and proceeds
of long-term borrowings. For the three months ended March 31, 2001, net cash
used in financing activities was $1.9 million primarily from the repayment of
short-term and long-term borrowings.

In February 2002, we reached an agreement with Heller Healthcare Finance to
refinance three of the properties in our $71.8 million portfolio that previously
were financed by Deutsche Bank AG and matured December 14, 2001. The new loan
of $30.6 million matures February 2004 and provides for monthly principal
payments of approximately $40,000 in addition to interest at LIBOR plus four
percent. This refinancing in turn satisfied our extension agreement dated May
31, 2001, with Deutsche Bank AG to extend the maturity date of the remaining
debt of $46.3 million secured by seven properties in the original portfolio to
May 31, 2003, provided that we pay to the lender a fee equal to 1% of the
outstanding portfolio balance at May 31, 2002.

We have incurred significant operating losses since our inception and have a
working capital deficit of $22.1 million, although $9.1 million of preferred
cash dividends is only due if declared by our board of directors. To date, we
have been dependent upon third party financing or disposition of assets to fund
operations. We intend to continue to refinance or restructure debt as necessary
with our current third party lenders. We cannot, however, guaranty that third
party financing and refinancing or dispositions of assets will be available
timely or on terms acceptable to us. Subsequent to March 31, 2002, we completed
a lease and debt transaction having a beneficial impact on working capital of
$6.7 million in conjunction with the HC REIT master lease transaction more fully
discussed in the Notes to Condensed Consolidated Financial Statements and
elsewhere in Management's Discussion and Analysis of Financial Condition and
Results of Operations. We believe we have sufficient funds to sustain
operations at least through March 31, 2003.

We are currently out of compliance with covenants on debt totaling $1.7 million,
which will be repaid in June 2002 and is not cross-defaulted with any other
debt. Many of our other debt instruments and leases, however, 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 lender or
lessor. Such cross-default provisions affect 14 owned assisted living
properties and 36 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. Except as described above, at March 31, 2002, we
are in compliance with our debt and lease covenants.

IMPACT OF INFLATION

To date, inflation has not had a significant impact on Emeritus. Inflation
could, however, 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 the resident's
unit and assisted living services are influenced by the location of the
community and local competition. Our ability to increase revenues in proportion
to increased operating expenses may be limited. We typically do not rely to a
significant extent on governmental reimbursement programs. 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 contain current facts deal with

potential future circumstances, operations, and prospects. The discussion of
these 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 program
without adversely affecting occupancy levels; our ability to control community
operation expenses without adversely affecting the level of occupancy and the
level of resident charges; the ability of our operations 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. 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 matter or subject area discussed in this
report. These and other risks and uncertainties are detailed in our reports
filed with the Securities and Exchange Commission, including our Annual Reports
on Form 10-K and Quarterly Reports on Form 10-Q.

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. We manage this risk by obtaining fixed
rate borrowings when possible. At March 31, 2002, our variable rate borrowings
totaled $73.5 million. If market interest rates were to average 2% more, our
annual interest expense and net loss would increase $1.5 million. This amount
is determined by considering the impact of hypothetical interest rates on our
outstanding variable rate borrowings as of March 31, 2002, and does not consider
changes in the actual level of borrowings that may occur subsequent to March 31,
2002. This analysis also does not consider the effects of the reduced level of
overall economic activity that could exist in such an environment, or our
current funding requirements for the Emeritrust communities, 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.

PART II. OTHER INFORMATION

ITEM 5. OTHER INFORMATION

On April 1, 2002, in conjunction with the HC REIT master lease transaction more
fully discussed in the Notes to Condensed Consolidated Financial Statements
under "Property and Equipment" and in Management's Discussion and Analysis of
Financial Condition and Results of Operations under "Other Transactions", the
Company received $6.7 million in proceeds from a $6.8 million debt issuance
under a separate loan agreement with HC REIT. The loan agreement requires
interest only payments and bears interest at 12% per annum with fixed annual
increases of 50 basis points for a term of 36 months.

The management agreement structure replaces the originally announced agreement
where Emeritus was to have directly assumed the current leases on seven
communities and the mortgage on an eighth, comprising 617 units in Louisiana and
Texas. Entities controlled by Daniel R. Baty, Chairman and CEO of Emeritus,
have agreed to assume the current leases and mortgage and will engage the
Company as manager. Under the terms of the management arrangement, the Company
will receive a management fee equal to 5% of revenue and has the right to assume
the leases and mortgage at any time during the five-year term of the management
agreement. Horizon Bay has agreed to fund operating losses of the Baty entities
to the extent of $2.3 million in the first twelve months and $1.1 million in the
second twelve months following the close.

The Company has agreed to fund any operating losses in excess of these limits
over the five-year lease term.

Items 1 through 4 and 6 are not applicable.

SIGNATURES

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: May 15, 2002

EMERITUS CORPORATION
(Registrant)

/s/ Raymond R. Brandstrom
--------------------------------------
Raymond R. Brandstrom, Vice President
of Finance, Chief Financial Officer, and
Secretary