UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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)

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

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)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $.0001 par value American Stock Exchange, Inc.

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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), (2) and has been subject to such
filing requirements for the past 90 days. Yes[X] No[ ]

Indicate by check mark that there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained in this form, and no disclosure
will be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.[ ]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes[ ] No[X]
Aggregate market value of voting stock held by non-affiliates of the
registrant as of June 28, 2002 was $24,100,140.

Aggregate market value of voting stock held by non-affiliates of the
registrant as of February 28, 2003 was $22,389,919.

As of February 28, 2003 10,247,226 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III of Form 10-K (items 10-13) is
incorporated herein by reference to the Registrant's definitive Proxy Statement
to be filed on or before April 30, 2003.

EMERITUS CORPORATION

INDEX

PART I
PAGE NO.
--------

ITEM 1. DESCRIPTION OF BUSINESS 1
ITEM 2. .DESCRIPTION OF PROPERTY 11
ITEM 3. .LEGAL PROCEEDINGS 19
ITEM 4. .SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
EXECUTIVE OFFICERS OF EMERITUS. . . 20
PART II
ITEM 5. .MARKET FOR REGISTRANTCOMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . 23

ITEM 6. .SELECTED CONSOLIDATED FINANCIAL DATA 24

ITEM 7. .MANAGEMENTDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . 25

ITEM 7A..QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 53

ITEM 8. .FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 54

ITEM 9. .CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 54

PART III

ITEM 10..DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 55
ITEM 11..EXECUTIVE COMPENSATION 55

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND EQUITY COMPENSATION PLAN INFORMATION 55

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 55
ITEM 14..CONTROLS AND PROCEDURES 55
PART IV

ITEM 15..EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K. 56

PART I

ITEM 1. DESCRIPTION OF BUSINESS

Overview

Emeritus is one of the largest and most experienced national operators of
assisted living residential communities. Assisted living communities provide a
residential housing alternative for senior citizens who need help with the
activities of daily living, with an emphasis on assisted living and personal
care services.

At December 31, 2002, we operated 180 assisted living communities, consisting of
approximately 15,800 units with a capacity for 18,900 residents, located in 33
states. These include 17 communities that we own, 67 communities that we lease,
and 96 communities that we manage, including two in which we hold joint venture
interests. Under three management agreements covering 46 of our 96 managed
communities, we have options to purchase 38 communities and rights of first
refusal on three communities that expire June 30, 2003, and options to purchase
five communities that expire December 31, 2003.

We strive to provide a wide variety of assisted living services in a
professionally managed environment that allows our residents to maintain dignity
and independence. Our residents are typically unable to live independently, but
do not require the intensive care provided in skilled nursing facilities. Under
our approach, seniors reside in a private or semi-private residential unit for a
monthly fee based on each resident's individual service needs. We believe our
residential assisted living communities allow seniors to maintain a more
independent lifestyle than is possible in the institutional environment of
skilled nursing facilities. In addition, we believe that our services,
including assisting residents with activities of daily living, such as
medication management, bathing, dressing, personal hygiene, and grooming are
attractive to seniors who are inadequately served by independent living
facilities.

Emeritus's annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments thereto, filed with the Securities and
Exchange Commission (SEC) pursuant to Section 13(a) of the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder are made
available free of charge, on Emeritus's web site, (www.emeritus.com), as soon as
reasonably practicable after Emeritus electronically files such material with,
or furnishes it to, the SEC. The information contained on Emeritus's web site
is not being incorporated herein.

The Assisted Living Industry

We believe that the assisted living industry is the preferred residential
alternative for seniors who cannot live independently due to physical or
cognitive frailties but who do not require the more intensive medical attention
provided by a skilled nursing facility.

Generally, assisted living provides housing and 24-hour personal support
services designed to assist seniors with the activities of daily living, which
include bathing, eating, personal hygiene, grooming, medication reminders,
ambulating, and dressing. Certain assisted living facilities may offer higher
levels of personal assistance for residents with Alzheimer's disease or other
forms of dementia.

We believe that a number of factors will allow assisted living companies to
continue as one of the fastest growing choices for senior care:

* Consumer Preference. We believe that assisted living is preferred by
prospective residents as well as their families, who are often the decision
makers for seniors. Assisted living is a cost-effective alternative to other
types of care, offering seniors greater independence while enabling them to
reside longer in a more residential environment.

* Cost-Effectiveness. The average annual cost to care for a Medicare or
Medicaid patient in a skilled nursing home can exceed $40,000. The average cost
to care for a private pay patient in a skilled nursing home can exceed $60,000
per year in certain markets. In contrast, assisting living services generally
cost 30% to 50% less than skilled nursing facilities located in the same region.
We also believe that the cost of assisted living services compares favorably
with home healthcare, particularly when costs associated with housing, meals,
and personal care assistance are taken into account.

* Demographics. The target market for our services is generally persons 75
years and older who represent the fastest growing segments of the U.S.
population. According to the U.S. Census Bureau, the portion of the U.S.
population age 75 and older is expected to increase by 9.8% from approximately
16.9 million in 2001 to approximately 18.6 million by the year 2010. The number
of persons age 85 and older, as a segment of the U.S. population, is expected to
increase by 30.4% from approximately 4.4 million in 2001 to over 5.7 million by
the year 2010. Furthermore, the number of persons afflicted with Alzheimer's
disease is also expected to grow in the coming years. According to data
published by the Alzheimer's Association, this population will increase 127%
from the current 4.4 million to 10.0 million people by the year 2010. Because
Alzheimer's disease and other forms of dementia are more likely to occur as a
person ages, we expect the increasing life expectancy of seniors to result in a
greater number of persons afflicted with Alzheimer's disease and other forms of
dementia in future years, absent breakthroughs in medical research.

* Changing Family Dynamics. According to the U.S. Census Bureau, the median
income of the elderly population is increasing. Currently, more than 54% of the
population over the age of 75 have incomes over $20,000 per year and slightly
more than 44% have annual incomes of at least $25,000. Accordingly, we believe
that the number of seniors and their families who are able to afford
high-quality senior residential services, such as those we offer, has also
increased. In addition, the number of two-income households has increased over
the last decade and the geographical separation of senior family members from
their adult children correlates with the geographic mobility of the U.S.
population. As a result, many families that traditionally would have provided
the type of care and services we offer to senior family members are less able to
do so.

* Supply/Demand Imbalance. While the senior population is growing significantly,
the supply of skilled nursing beds per thousand is declining. We attribute this
imbalance to a number of factors in addition to the aging of the population.
Many states, in an effort to maintain control of Medicaid expenditures on
long-term care, have implemented more restrictive Certificate of Need
regulations or similar legislation that restricts the supply of licensed skilled
nursing facility beds. Additionally, acuity-based reimbursement systems have
encouraged skilled nursing facilities to focus on higher

acuity patients. We also believe that high construction costs and limits on
government reimbursement for construction and start-up expenses have constrained
the growth and supply of traditional skilled nursing beds. We believe that these
factors, taken in combination, result in relatively fewer skilled nursing beds
available for the increasing number of seniors who require assistance with the
activities of daily living but do not require 24-hour medical attention.

Competitive Strengths

We compete with other assisted living communities located in the areas where we
operate. These communities are operated by individuals, local and regional
businesses, and larger operators of regional and national groups of communities,
including public companies similar to us. We believe that we have the following
competitive strengths:

* State-of-the-Art Communities. Of our 180 operating communities, 89
communities have been built and opened since January 1, 1996. In addition, we
have significantly upgraded 48 of our older communities to improve their
appearance and operating efficiency. These upgrades include the finished
appearance of the communities, as well as various improvements to kitchens,
nurse call systems, and electronic systems, including those for data
transmission, data sharing, and e-mail.

* Large Operating Scale. We believe that our size gives us significant
advantages over smaller operators. Given the scale of our operations, we have
the opportunity to select the best operating systems and service alternatives
and to develop a set of best practices for implementation on a national scale.
We also believe that, because of our size, we are able to purchase such items as
food, equipment, insurance, and employee benefits at lower costs, and to
negotiate more favorable financing arrangements.

* Lower Cost of Communities. As of December 31, 2002, the average cost per
unit of our communities was approximately $65,300. We believe that these costs
are less than the current replacement costs of these communities and below the
average costs incurred by many other public companies operating in the industry.
We also believe that these lower capital costs give us opportunities to enhance
margins and greater flexibility in designing our rate structure and responding
to varying regional economic and regulatory changes.

* Geographic Diversification and Regional Focus. We operate our communities
in 33 states in all regions of the United States. We believe that because of
this geographic diversification we are less vulnerable to adverse economic
developments and industry factors, such as overbuilding and regulatory changes,
that are limited to a particular region. We believe that this also moderates
the effects of regional employment and competitive conditions. Within each
region, we have focused on establishing a critical mass of communities in
secondary markets, which enables us to maximize operating efficiencies.

* Experienced Management with Industry Relationships. Daniel R. Baty, our Chief
Executive Officer, has more than 30 years of experience in the long-term care
industry, ranging from independent living to skilled nursing care. We believe
that his experience and the relationships that he has developed with owners,
operators, and sources of capital have helped us and will continue to help us
develop operating efficiencies, investment and joint venture relationships, as
well as obtain

sources of debt and equity capital. Mr. Baty also has a significant financial
and management interest in Holiday Retirement Corporation, an operator of
independent living facilities, and Columbia-Pacific Group, Inc., an operator of
independent living facilities and assisted living communitiesIn addition, our
operating vice presidents have an average of 20 years of experience with major
companies in the long-term care industry. We believe that this strong senior
leadership, with proven management skills, will allow us to take advantage of
the opportunities present in the assisted living industry.

Business Strategy

We believe that there is a significant demand for alternative long-term care
services that are well-positioned between the limited services offered by
independent living facilities and the higher-level medical and institutional
care offered by skilled nursing facilities. Our goal is to become the national
leader in the assisted living segment of the long-term care industry through the
following strategy:

* Focus on Operations and Occupancy. 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. Having achieved our
growth objective, in 1999 and continuing through 2001, we substantially reduced
our pace of acquisition and development activities to concentrate on improving
community performance through both increased occupancy and revenue per occupied
unit. Initially, we focused most of our efforts on increasing occupancy across
our portfolio. Having achieved a portion of our total goal by late 1999, we
then shifted our efforts toward enhancing our rates, particularly in facilities
that were substantially below industry averages. This rate strategy has led to
increased rates across most of our portfolio. We believe that continued focus
on both rates and occupancy will continue to generate the incremental growth in
margins we are striving to achieve.

Expand Business through Management Agreements. With the current
changes in the capital markets, we may be presented with, or look for,
opportunities for revenue growth through the use of management agreements under
which we earn a fee. We will take advantage of these opportunities if the
managed communities fit into our existing areas of operational strength and
appropriate geographical proximity to the communities that we currently own or
manage, and, therefore require minimal incremental cost. We intend to manage
these new communities for a fee based on a percentage of their gross revenue.

Acquire Communities Selectively. In 1998, we reduced our acquisition
activity in part to concentrate on the need to improve operations through
occupancy and rate enhancement. As we achieve these objectives, we expect to be
more receptive to acquisition opportunities that meet designated criteria. We
particularly expect to favor the acquisition of communities that provide more
complete coverage of our existing markets and intend to focus on acquisitions of
communities that have been originally designed as assisted living facilities
with a favorable current operating structure, and communities that provide
immediate positive cash flow opportunities with minimal impact to existing
operations. In 2002, as the opportunities arose, we acquired additional leased
communities and managed communities that satisfy our criteria. We intend to
continue to be more selective and measured in our acquisition strategy in the
future.

* Appeal to the Middle Market. The market segment most attractive to us is
middle to upper-middle income seniors in smaller cities and suburbs with
populations of 50,000 to 150,000 persons. We believe that this
"value-sensitive" segment of the senior community is the largest, broadest, and
most stable. We think that these markets are receptive to the development of
new assisted living communities and the expansion of existing communities.

Resident Services

Our assisted living communities offer residents a full range of services based
on individual resident needs in a supportive "home-like" environment. By
offering a full range of services, we can accommodate residents with a broad
range of service needs. The services that we provide to our residents are
designed to respond to their individual needs and to improve their quality of
life.

SERVICE LEVEL TYPE OF RESIDENT DESCRIPTION OF CARE PROVIDED
- ------------- ------------------------------- --------------------------------------------------------------

Basic Services. . All residents--independent, We offer these basic services to our residents:
. . . . assisted living and those with * three meals per day,
. . . . Alzheimer's and related * social and recreational activities,
. . . . dementia * weekly housekeeping and linen service,
. . . . * building maintenance and grounds keeping,
. . . . * 24-hour emergency response and security,
. . . . * licensed nurses on staff to monitor and coordinate care
. . . . needs, and
. . . . * transportation to appointments, etc.
- ----------------------------------------------------------------------------------------------------------------------
Assisted living . Assisted living residents We cater our assisted living services to each resident based on
services. . . . . his/her individual requirements for more frequent or intensive
. . . . assistance or increased care or supervision. We achieve this
. . . . individualized care, through consultation with the resident, the
. . . . resident's physician and the resident's family.
. . . .
. . . . We determine an individual resident's level of care by the
. . . . degree of assistance he/she requires in each of several categories.
. . . . Our categories of care include, but are not limited to:
. . . . * medication management and supervision,
. . . . * reminders for dining and recreational activities,
. . . . * assistance with bathing, dressing and grooming,
. . . . * incontinence care and assistance,
. . . . * behavior management,
. . . . * dietary assistance, and
. . . . * miscellaneous services (including diabetic management,
. . . . prescription medication reviews, transfers, simple treatments, and
. . . . oxygen set up/maintenance).
- ----------------------------------------------------------------------------------------------------------------------
Special Care. . . Residents with Alzheimer's We have designed our Special Care program to meet the
Program . . . . . and related dementia specialized medical, psychological and social needs of our
(Alzheimer's &. . resident afflicted by this condition. In a manner consistent with
related dementia) our assisted living services, we help structure a service plan for
. . . . each resident based on his/her individual needs. Some of the key
. . . . service areas that we focus on to provide the best care for our
. . . . residents with Alzheimer's or related dementias center around:
. . . . * separate dining program,
. . . . * enhanced behavior interpretation and management,
. . . . * structured activity planning, and
. . . . * partnering with and supporting families through support groups,
. . . . one on one meetings, and educational forums.

- ----------------------------------------------------------------------------------------------------------------------

Service Revenue Sources

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.

As third party reimbursement programs and other forms of payment continue to
grow, we intend to pursue these alternative forms of payment, depending on the
level of reimbursement provided in relation to the level of care provided. We
also believe that private long-term care insurance will increasingly become a
revenue source in the future, although it is currently small. All sources of
revenue other than residents' private resources constitute less than 10% of our
total revenues.

Management Activities

At December 31, 2002, we managed and provided administrative services to 94
assisted living communities under management agreements that typically provide
for management fees ranging from 3% to 7% of gross revenues. Management fees
were approximately $10.9 million in 2002. These management agreements have
terms ranging from two to five years, and may be renewed or renegotiated at the
expiration of the term. We have various categories of management agreements,
including:

* management agreements covering 46 communities in connection with the
Emeritrust transactions, which we will refer to extensively throughout this
document and which are detailed as follows:

* EMERITRUST I: 25 communities that we began managing in December 1998.
Until December 31, 2001, we received a base management fee of 5% of
gross revenues, but were entitled to receive up to 7% depending on the
cash flow performance of the communities managed. As of January 1,
2002, however, we started receiving a base management fee of 3% of
gross revenues, but may receive up to 7% depending on the cash flow
performance of the communities managed. Additionally, we are required
by our management contracts to fund cash operating deficits. In May
2002, we entered into an agreement for a third party to operate one of
these communities. The new operator has responsibility for all
economic benefits and detriments and has an option to purchase this
community from the owner of the community.

* EMERITRUST II: 21 communities that we began managing in March 1999,
consisting of:

* EMERITRUST II OPERATING: 16 communities for which we have no
obligation to fund cash operating deficits. We receive a base
management fee of 5% of gross revenues, but may receive up to 7%
depending on the cash flow performance of the communities
managed.

* EMERITRUST II DEVELOPMENT: 5 communities for which we are
required to fund cash operating deficits. We receive a base
management fee of 5% of gross revenues, but may receive up to 7%
depending on the cash flow performance of the communities
managed.

Mr. Baty holds an indirect non-controlling interest in
the entities that own these communities.

* management agreements covering 30 communities owned by entities controlled
by Daniel R. Baty ("Baty"), our Chairman and Chief Executive Officer and
one of its principal shareholders. We generally receive fees ranging from
4% to 6% of the gross revenues generated by the communities.

* management agreements covering two communities owned by joint ventures in
which we have a financial interest. We receive management fees ranging from
4% to 7% of gross revenues.

* management agreements covering four communities owned by independent third
parties. We receive management fees ranging from 4% to 7% of gross
revenues, or similar arrangements based on occupied capacity.

* management agreements covering 14 communities owned by Regent Assisted
Living, Inc. We receive a flat management fee of $8,000 per community with
opportunities to earn additional fees based on operating cash flow.

Prior to 1999, we did not have material revenue from management agreements. If
we exercise our options to purchase the Emeritrust communities prior to June 10,
2003 (December 10, 2003, for the five Emeritrust II Development communities), or
if the management agreements expire on those dates and are not renewed, our
revenue from management fees will diminish substantially. Management believes
it will renegotiate and extend the above agreements.

Marketing and Referral Relationships

Our operating strategy is designed to integrate our assisted living communities
into the continuum of healthcare providers in the geographic markets in which we
operate. One objective of this strategy is to enable residents who require
additional healthcare services to benefit from our relationships with local
hospitals, physicians, home healthcare agencies, and skilled nursing facilities
in order to obtain the most appropriate level of care. Thus, we seek to
establish relationships with local hospitals, through joint marketing efforts
where appropriate, and home healthcare agencies, alliances with visiting nurses
associations and, on a more limited basis, priority transfer agreements with
local, high-quality skilled nursing facilities. In addition to benefiting
residents, the implementation of this operating strategy has strengthened and
expanded our network of referral sources.

Administration

We employ an integrated structure of management, financial systems and controls
to maximize operating efficiency and contain costs. In addition, we have
developed the internal procedures, policies, and standards we believe are
necessary for effective operation and management of our assisted living
communities. We have recruited experienced key employees from several
established operators in the long-term care services field and believe we have
assembled the administrative, operational, and financial personnel who will
enable us to continue to manage our operating strategies effectively.

We have established Central, Eastern, and Western Operations. A divisional vice
president heads each division. Each division consists of several operating
regions headed by a regional director of operations who provides management
support services for each of the communities in his/her respective region. An
on-site community director who, in certain jurisdictions, must satisfy certain
licensing requirements supervises day-to-day community operations. We provide
management support services to each of our residential communities, including
establishing operating standards, recruiting, training, and financial and
accounting services.

We have centralized finance and other operational functions at our headquarters
in Seattle, Washington, in order to allow community-based personnel to focus on
resident care. The Seattle office establishes certain policies and procedures
applicable to the entire company, oversees our financial and marketing
functions, manages our acquisition and development activities, and provides our
overall strategic direction.

We use a blend of centralized and decentralized accounting and computer systems
that link each community with our headquarters. Through these systems, we are
able to monitor operating costs and distribute financial and operating
information to appropriate levels of management in a cost efficient manner. We
believe that our current data systems are adequate for current operating needs
and provide the flexibility to meet the requirements of our operations without
disruption or significant modification to existing systems beyond 2003. We use
high quality hardware and operating systems from current and proven technologies
to support our current technology infrastructure.

Competition

The number of assisted living communities continues to grow in the United
States. We believe that market saturation has had, and could continue to have,
an adverse effect on our communities and their ability to reach and maintain
stabilized occupancy levels. Moreover, the senior housing services industry has
been subject to pressures that have resulted in the consolidation of many small,
local operations into larger regional and national multi-facility operations.
We anticipate that our source of competition will come from local, regional, and
national assisted living companies that operate, manage, and develop residences
within the geographic area in which we operate, as well as retirement facilities
and communities, home healthcare agencies, not-for-profit or charitable
operators and, to a lesser extent, skilled nursing facilities and convalescent
centers. We believe that quality of service, reputation, community location,
physical appearance, and price will be significant competitive factors. Some of
our competitors may have significantly greater resources, experience, and
recognition within the healthcare community than we do.

Employees

At December 31, 2002, we had 7,950 employees, including 5,883 full-time
employees, of which approximately 112 were employed at our headquarters and
approximately 4,658 were employed in our managed communities. None of our
employees are currently represented by a labor union, and we are not aware of
any union-organizing activities among our employees. We believe that our
relationship with our employees is satisfactory.

Although we believe that we are able to employ sufficiently skilled personnel to
staff the communities we operate or manage, a shortage of skilled personnel in
any of the geographic areas in which we operate could adversely affect our
ability to recruit and retain qualified employees and to control our operating
expenses.

ITEM 2. DESCRIPTION OF PROPERTY

Communities

Our assisted living communities generally consist of one-story to three-story
buildings and include common dining and social areas. Nineteen of our operating
communities offer some independent living services and three are operated as
skilled nursing facilities. The table below summarizes information regarding our
current operating communities as of December 31, 2002.

EMERITUS
OPERATIONS UNITS BEDS
COMMUNITY LOCATION COMMENCED (A) (B) INTEREST
- ------------------------------------- ------------------- ----------- ------- ------- ------------

ALABAMA
Galleria Oaks . . . . . . . . . . . . Birmingham Oct-02 71 107 Lease

ARIZONA
Arbor at Olive Grove. . . . . . . . . Phoenix Jun-94 98 111 Lease
Desert Flower . . . . . . . . . . . . Scottsdale Jan-02 102 108 Manage
La Villita (2). . . . . . . . . . . . Phoenix Jun-94 92 92 Option/Manage
Loyalton Court of Scottsdale. . . . . Scottsdale Jan-02 24 44 Manage
Loyalton of Flagstaff (3) . . . . . . Flagstaff Jun-99 61 67 Option/Manage
Loyalton of Phoenix (3) . . . . . . . Phoenix Jan-99 101 111 Option/Manage
Scottsdale Royale ~ . . . . . . . . . Scottsdale Aug-94 63 63 Own
Village Oaks at Chandler. . . . . . . Chandler Oct-02 66 105 Lease
Village Oaks at Glendale. . . . . . . Glendale Oct-02 66 105 Lease
Village Oaks at Mesa. . . . . . . . . Mesa Oct-02 66 105 Lease

CALIFORNIA
Creston Village . . . . . . . . . . . Paso Robles Feb-98 100 110 Lease
Emerald Hills . . . . . . . . . . . . Auburn Jun-98 89 98 Lease
Fulton Villa. . . . . . . . . . . . . Stockton Mar-95 80 80 Own
Laurel Place ~(2). . . . . . . . . . San Bernardino Apr-96 71 72 Option/Manage
Loyalton of Folsom. . . . . . . . . . Folsom Jan-02 98 113 Manage
Northbay Retirement . . . . . . . . . Fairfield Mar-98 172 189 Lease
Orchard Park. . . . . . . . . . . . . Clovis Jan-02 112 124 Manage
Regent House at Merced. . . . . . . . Merced Jan-02 72 83 Manage
Regent Senior Living. . . . . . . . . West Covina Jan-02 130 144 Manage

EMERITUS
OPERATIONS UNITS BEDS
COMMUNITY LOCATION COMMENCED (A) (B) INTEREST
- ------------------------------------- ------------------- ----------- ------- ------- ------------
Sunshine Villa. . . . . . . . . . . . Santa Cruz Jan-02 106 116 Manage
The Terrace (2) . . . . . . . . . . . Grand Terrace Mar-96 87 87 Option/Manage
Villa Del Rey . . . . . . . . . . . . Escondido Mar-97 84 84 Own
Villa Serra . . . . . . . . . . . . . Salinas Jan-02 150 150 Manage

CONNECTICUT
Cold Spring Commons . . . . . . . . . Rocky Hill Apr-97 80 88 Lease

DELAWARE
Gardens at Whitechapel (2). . . . . . Newark Oct-95 100 110 Option/Manage
Green Meadows at Dover. . . . . . . . Dover Jul-98 52 63 Lease

FLORIDA
Barrington Place (2). . . . . . . . . Lecanto May-96 79 120 Option/Manage
Beneva Park Club (2). . . . . . . . . Sarasota Jul-95 96 102 Option/Manage
College Park Club (2) . . . . . . . . Bradenton Jul-95 85 93 Option/Manage
La Casa Grande. . . . . . . . . . . . New Port Richey May-97 200 235 Own
Madison Glen (2) . . . . . . . . . . Clearwater May-96 135 154 Option/Manage
Park Club of Brandon (3). . . . . . . Brandon Jul-95 88 88 Option/Manage
Park Club of Fort Myers (3) . . . . . Ft. Myers Jul-95 77 82 Option/Manage
Park Club of Oakbridge (3). . . . . . Lakeland Jul-95 88 88 Option/Manage
River Oaks. . . . . . . . . . . . . . Englewood May-97 155 200 Own
Springtree (2). . . . . . . . . . . . Sunrise May-96 179 246 Option/Manage
Stanford Centre . . . . . . . . . . . Altamonte Springs May-97 118 180 Own
The Colonial Park Club (3) . . . . . Sarasota Aug-96 88 90 Option/Manage
The Lakes . . . . . . . . . . . . . . Ft. Myers Jun-00 154 190 Manage
The Lodge at Mainlands (2) . . . . . Pinellas Park Aug-96 154 162 Option/Manage
The Pavillion at Crossing Pointe ~(2) Orlando Jul-95 174 190 Option/Manage
Village Oaks at Conway. . . . . . . . Orlando Oct-02 66 103 Lease
Village Oaks at Melbourne . . . . . . Melbourne Oct-02 66 103 Lease
Village Oaks at Orange Park . . . . . Orange Park Oct-02 66 103 Lease
Village Oaks at Southpoint. . . . . . Jacksonville Oct-02 66 103 Lease
Village Oaks at Tuskawilla. . . . . . Winter Springs Oct-02 66 105 Lease

IDAHO
Bestland Retirement . . . . . . . . . Coeur d' Alene Nov-96 83 86 Manage

EMERITUS
OPERATIONS UNITS BEDS
COMMUNITY LOCATION COMMENCED (A) (B) INTEREST
- ------------------------------------- ------------------- ----------- ------- ------- ------------
Highland Hills (3). . . . . . . . . . Pocatello Oct-96 49 55 Option/Manage
Juniper Meadows . . . . . . . . . . . Lewiston Nov-97 82 90 Own
Loyalton of Coeur d'Alene ~(3) . . . Coeur d' Alene Mar-96 108 114 Option/Manage
Ridge Wind (3). . . . . . . . . . . . Chubbuck Aug-96 80 106 Option/Manage
Summer Wind . . . . . . . . . . . . . Boise Sep-95 49 53 Lease
Willow Park . . . . . . . . . . . . . Boise Jan-02 106 120 Manage

ILLINOIS
Canterbury Ridge. . . . . . . . . . . Urbana Nov-98 101 111 Lease
Loyalton of Rockford. . . . . . . . . Rockford Jun-00 100 110 Manage

INDIANA
Meridian Oaks . . . . . . . . . . . . Indianapolis Oct-02 77 111 Lease
Village Oaks at Fort Wayne. . . . . . Fort Wayne Oct-02 66 105 Lease
Village Oaks at Greenwood . . . . . . Indianapolis Oct-02 66 105 Lease

IOWA
Silver Pines. . . . . . . . . . . . . Cedar Rapids Jan-95 80 80 Own

KANSAS
Elm Grove Estates (2) . . . . . . . . Hutchinson Apr-97 121 133 Option/Manage

KENTUCKY
Stonecreek Lodge. . . . . . . . . . . Louisville Apr-97 80 88 Lease

LOUISIANA
Kingsley Place at Alexandria. . . . . Alexandria May-02 80 96 Manage
Kingsley Place at Lafayette . . . . . Lafayette May-02 80 96 Manage
Kingsley Place at Lake Charles. . . . Lake Charles May-02 80 96 Manage
Kingsley Place at Shreveport. . . . . Shreveport May-02 80 80 Manage

MARYLAND
Emerald Estates . . . . . . . . . . . Baltimore Oct-99 120 134 Manage
Loyalton of Hagerstown (3). . . . . . Hagerstown Jul-99 100 110 Option/Manage

EMERITUS
OPERATIONS UNITS BEDS
COMMUNITY LOCATION COMMENCED (A) (B) INTEREST
- ------------------------------------- ------------------- ----------- ------- ------- ------------
MASSACHUSETTS
Canterbury Woods. . . . . . . . . . . Attleboro Jun-00 130 130 Manage
Meadow Lodge at Drum Hill . . . . . . Chelmsford Aug-97 80 88 Own
The Lodge at Eddy Pond. . . . . . . . Auburn Jan-00 108 110 Own
The Pines at Tewksbury (3). . . . . . Tewksbury Jan-96 49 65 Option/Manage
Woods at Eddy Pond. . . . . . . . . . Auburn Mar-97 80 88 Lease

MISSISSIPPI
Loyalton of Biloxi. . . . . . . . . . Biloxi Jan-99 83 91 Lease
Loyalton of Hattiesburg . . . . . . . Hattiesburg Jul-99 79 83 Lease
Ridgeland Pointe. . . . . . . . . . . Ridgeland Aug-97 79 87 Joint Venture
Silverleaf Manor. . . . . . . . . . . Meridian Jul-98 101 111 Manage
Trace Point . . . . . . . . . . . . . Clinton Oct-99 100 110 Manage

MISSOURI
Autumn Ridge ~. . . . . . . . . . . . Herculaneum Jun-97 94 94 Manage

MONTANA
Springmeadows Residence . . . . . . . Bozeman Apr-97 74 81 Own

NEVADA
Concorde. . . . . . . . . . . . . . . Las Vegas Nov-96 116 128 Own
Village Oaks at Las Vegas . . . . . . Las Vegas Oct-02 66 105 Lease
Woodmark at Summit Ridge. . . . . . . Reno Feb-02 94 109 Manage

NEW JERSEY
Laurel Lake Estates . . . . . . . . . Voorhees Jul-95 117 119 Lease
Loyalton of Cape May. . . . . . . . . Cape May May-01 100 110 Manage

NEW YORK
Bassett Manor (1) . . . . . . . . . . Williamsville Nov-96 103 105 Lease
Bassett Park Manor (1). . . . . . . . Williamsville Nov-96 78 80 Lease
Bellevue Manor (1). . . . . . . . . . Syracuse Nov-96 90 90 Lease
Colonie Manor (1) . . . . . . . . . . Latham Nov-96 94 94 Lease
East Side Manor (1) . . . . . . . . . Fayetteville Nov-96 80 88 Lease
Green Meadows at Painted Post (1) . . Painted Post Oct-95 73 92 Lease
Loyalton of Lakewood (3). . . . . . . Lakewood Jul-99 83 91 Option/Manage

EMERITUS
OPERATIONS UNITS BEDS
COMMUNITY LOCATION COMMENCED (A) (B) INTEREST
- ------------------------------------- ------------------- ----------- ------- ------- ------------
Perinton Park Manor (1) . . . . . . . Fairport Nov-96 78 86 Lease
The Landing at Brockport. . . . . . . Brockport Jul-99 84 92 Manage
The Landing at Queensbury . . . . . . Queensbury Nov-99 84 92 Manage
West Side Manor - Liverpool (1) . . . Liverpool Nov-96 78 80 Lease
West Side Manor - Rochester (1) . . . Rochester Nov-96 72 72 Lease
Woodland Manor (1). . . . . . . . . . Vestal Nov-96 60 116 Lease

NORTH CAROLINA
Heritage Hills Retirement . . . . . . Hendersonville Feb-96 99 99 Own
Heritage Lodge Assisted Living. . . . Hendersonville Feb-96 20 24 Lease
Pine Park Retirement ~. . . . . . . . Hendersonville Feb-96 110 110 Lease
The Pines of Goldsboro. . . . . . . . Goldsboro Sep-98 101 111 Manage

OHIO
Brookside Estates (2) . . . . . . . . Middleberg Heights Sep-98 99 101 Option/Manage
Park Lane ~ . . . . . . . . . . . . . Toledo Jan-98 92 101 Manage
The Landing at Canton . . . . . . . . Canton Aug-00 84 92 Manage

OREGON
Meadowbrook (3) . . . . . . . . . . . Ontario Jun-95 53 55 Option/Manage
Regency Park. . . . . . . . . . . . . Portland Jan-02 122 136 Manage
Regent Court Corvallis. . . . . . . . Corvallis Jan-02 24 48 Manage
Sheldon Park. . . . . . . . . . . . . Eugene Jan-02 103 115 Manage

PENNSYLVANIA
Green Meadows at Allentown. . . . . . Allentown Oct-95 76 97 Lease
Green Meadows at Latrobe. . . . . . . Latrobe Oct-95 84 125 Lease

SOUTH CAROLINA
Anderson Place - Cottages (3) . . . . Anderson Oct-96 75 75 Option/Manage
Anderson Place - Nursing Home (3) . . Anderson Oct-96 22 44 Option/Manage
Anderson Place - Summer House #(3). . Anderson Oct-96 30 40 Option/Manage
Bellaire Place (2). . . . . . . . . . Greenville May-97 81 89 Option/Manage
Countryside Park. . . . . . . . . . . Easley Feb-96 48 66 Lease
Countryside Village Assisted Living . Easley Feb-96 48 78 Lease
Countryside Village Health Center # . Easley Feb-96 24 44 Lease

EMERITUS
OPERATIONS UNITS BEDS
COMMUNITY LOCATION COMMENCED (A) (B) INTEREST
- ------------------------------------- ------------------- ----------- ------- ------- ------------
Countryside Village Retirement. . . . Easley Feb-96 72 75 Lease
Skylyn Health Center #. . . . . . . . Spartanburg Feb-96 26 48 Lease
Skylyn Personal Care. . . . . . . . . Spartanburg Feb-96 115 131 Lease
Skylyn Retirement . . . . . . . . . . Spartanburg Feb-96 120 120 Lease
The Willows at York . . . . . . . . . York Sep-99 82 164 Manage

TENNESSEE
Walking Horse Meadows (2) . . . . . . Clarkesville Jun-97 50 55 Option/Manage

TEXAS
Amber Oaks. . . . . . . . . . . . . . San Antonio Apr-97 163 275 Lease
Beckett Meadows . . . . . . . . . . . Austin Oct-02 72 72 Manage
Cambria Lodge . . . . . . . . . . . . El Paso Sep-96 79 87 Lease
Champion Oaks . . . . . . . . . . . . Houston Oct-02 48 84 Lease
Collin Oaks . . . . . . . . . . . . . Plano Oct-02 78 112 Lease
Dowlen Oaks (2). . . . . . . . . . . Beaumont Dec-96 79 87 Option/Manage
Eastman Estates (2) . . . . . . . . . Longview Jun-97 70 77 Option/Manage
Elmbrook Estates (3). . . . . . . . . Lubbock Dec-96 79 87 Option/Manage
Hamilton House. . . . . . . . . . . . San Antonio Sep-02 111 123 Lease
Kingsley Place at Henderson . . . . . Henderson May-02 57 101 Manage
Kingsley Place at Oakwell Farms . . . San Antonio May-02 80 160 Manage
Kingsley Place at Stonebridge Ranch . McKinney May-02 80 166 Manage
Kingsley Place at the Medical Center. San Antonio May-02 80 160 Manage
Lakeridge Place (2). . . . . . . . . Wichita Falls Jun-97 79 87 Option/Manage
Loyalton of Austin. . . . . . . . . . Austin Oct-02 76 111 Lease
Loyalton of Lake Highlands. . . . . . Dallas Oct-02 78 112 Lease
Meadowlands Terrace (2) . . . . . . . Waco Jun-97 71 78 Option/Manage
Memorial Oaks . . . . . . . . . . . . Houston Oct-02 68 105 Lease
Myrtlewood Estates (2) . . . . . . . San Angelo May-97 79 87 Option/Manage
Redwood Springs . . . . . . . . . . . San Marcos Apr-97 90 90 Lease
Saddleridge Lodge (2). . . . . . . . Midland Dec-96 79 87 Option/Manage
Seville Estates (2) . . . . . . . . . Amarillo Mar-97 50 55 Option/Manage
Sherwood Place. . . . . . . . . . . . Odessa Sep-96 79 87 Lease
Sugar Land Oaks . . . . . . . . . . . Sugar Land Oct-02 75 110 Lease
Tanglewood Oaks . . . . . . . . . . . Fort Worth Oct-02 78 112 Lease
The Palisades . . . . . . . . . . . . El Paso Apr-97 158 215 Lease

EMERITUS
OPERATIONS UNITS BEDS
COMMUNITY LOCATION COMMENCED (A) (B) INTEREST
- ------------------------------------- ------------------- ----------- ------- ------- ------------
Vickery Towers at Belmont ~ . . . . . Dallas Apr-95 301 331 Manage
Village Oaks at Cielo Vista . . . . . El Paso Oct-02 66 105 Lease
Village Oaks at Farmers Branch. . . . Farmers Branch Oct-02 66 105 Lease
Village Oaks at Hollywood Park. . . . San Antonio Oct-02 66 105 Lease
Woodbridge Estates. . . . . . . . . . San Antonio Oct-02 78 112 Lease

UTAH
Emeritus Estates (2). . . . . . . . . Ogden Feb-98 83 91 Option/Manage
Regent at Salt Lake . . . . . . . . . Salt Lake City Mar-02 116 116 Manage

VIRGINIA
Carriage Hill . . . . . . . . . . . . Bedford Sep-94 91 137 Manage
Cobblestones at Fairmont. . . . . . . Manassas Sep-96 75 82 Own
Loyalton of Staunton (3). . . . . . . Staunton Jul-99 101 111 Option/Manage
Wilburn Gardens . . . . . . . . . . . Fredericksburg Jan-99 101 111 Manage

WASHINGTON
Arbor Place at Silverlake . . . . . . Everett Jun-99 101 111 Manage
Charlton Place. . . . . . . . . . . . Tacoma Jul-98 96 105 Manage
Cooper George ~ . . . . . . . . . . . Spokane Jun-96 140 158 Partnership
Evergreen Lodge (3). . . . . . . . . Federal Way Apr-96 98 124 Option/Manage
Fairhaven Estates (3) . . . . . . . . Bellingham Oct-96 50 55 Option/Manage
Garrison Creek Lodge. . . . . . . . . Walla Walla Jun-96 80 88 Lease
Harbour Pointe Shores (2). . . . . . Ocean Shores Feb-97 50 55 Option/Manage
Hearthside of Issaquah. . . . . . . . Issaquah Feb-00 98 98 Own
Kirkland Lodge at Lakeside. . . . . . Kirkland Mar-96 74 84 Own
Northshore House. . . . . . . . . . . Kenmore Jan-02 85 92 Manage
Regent Court at Kent. . . . . . . . . Kent Jan-02 24 48 Manage
Renton Villa. . . . . . . . . . . . . Renton Sep-93 79 97 Lease
Richland Gardens. . . . . . . . . . . Richland May-98 100 110 Manage
Seabrook. . . . . . . . . . . . . . . Everett Jun-94 60 62 Lease
Sterling Park . . . . . . . . . . . . Redmond Jan-02 154 175 Manage
The Courtyard at the Willows. . . . . Puyallup Sep-97 101 111 Own
The Hearthstone (3) . . . . . . . . . Moses Lake Nov-96 84 92 Option/Manage

WYOMING
Park Place (2). . . . . . . . . . . . Casper Feb-96 60 60 Option/Manage

WEST VIRGINIA
Charleston Gardens. . . . . . . . . . Charleston Aug-01 100 132 Manage

----------- -------
Total Operating Communities 15,762 18,865
=========== =======

- --------
~ Currently offers independent living services.
# Currently operates as a skilled nursing facility.
(a) A unit is a single- or double-occupancy residential living space,
typically an apartment or studio.
(b) "Beds" reflects the actual number of beds, which in no event is greater
than the maximum number of licensed beds allowed under the community's license.
(1) We provide administrative services to the community that is operated by
Painted Post Partners through a lease agreement with an independent party.
(2) On December 31, 1998, an investor group acquired these communities
("Emeritrust I") from Meditrust. We hold an option or a right of first refusal
to purchase the communities, expiring on June 10, 2003, at a formula price based
on a specified return to the investor group. We manage the communities during
the option term.
(3) On March 31, 1999, an investor group acquired these communities
("Emeritrust II") from Meditrust. We hold an option to purchase the communities,
expiring on June 10, 2003, or December 10, 2003, for the five development
communities, at a formula price based on a specified return to the investor
group. We manage the communities during the option term.

Executive Offices

Our executive offices are located in Seattle, Washington, where we lease
approximately 26,500 square feet of space. Our lease agreement includes a term
of 10 years, expiring July 2006, with two five-year renewal options.

ITEM 3. LEGAL PROCEEDINGS

In August 2000, Emeritus began arbitration proceedings with Corio Inc. ("Corio")
in connection with a contract dispute. In 1999, we entered into an agreement
with Corio, pursuant to which Corio would plan, implement, and finalize our new
accounting software program. In March 2000, Emeritus canceled the
implementation of the program prior to its completion. Corio asserted a claim
for breach of contract for $1.4 million, requesting payment of the full contract
value. Both parties contacted AAA Arbitration as specified in the leasing and
service contract, and the dispute was settled in February 2001 for $500,000,
representing reimbursement for actual expenditures incurred by Corio. Payments
of $150,000 and $300,000 were made in 2002 and 2001, respectively. The
remaining payment is to be remitted in 2003. This balance has been accrued and
is included in the consolidated financial statements for the year ended December
31, 2002.

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,
we do not believe that any liability from any such lawsuits or other matters
will have a material effect on our financial position, results of operations, or
liquidity.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Emeritus did not submit any matter to a vote of its security holders during the
fourth quarter of its fiscal year ended December 31, 2002.

EXECUTIVE OFFICERS OF EMERITUS

The following table presents certain information about our executive officers.
There are no family relationships between any of the directors or executive
officers.

Name Age Position
- --------------------- --- -------------------------------------------------

Daniel R. Baty. . . . 59 Chairman of the Board and Chief Executive Officer
Raymond R. Brandstrom 50 Vice President of Finance, Secretary, and Chief
Financial Officer
Gary S. Becker. . . . 55 Senior Vice President of Operations
Martin D. Roffe . . . 55 Vice President, Financial Planning
Suzette McCanless . . 54 Vice President, Operations - Eastern Division
Russell G. Kubik. . . 49 Vice President, Operations - Central Division
P. Kacy Kang. . . . . 35 Vice President, Operations - Western Division
Kellie S. Murray. . . 49 Vice President of Human Resources
Susan A. Scherr . . . 54 Vice President of Signature Services

Daniel R. Baty, one of Emeritus's founders, has served as its Chief Executive
Officer and as a director since its inception in 1993 and became Chairman of the
Board in April 1995. Mr. Baty also has served as the Chairman of the Board of
Holiday Retirement Corporation since 1987 and served as its Chief Executive
Officer from 1991 through September 1997. Since 1984, Mr. Baty has also served
as Chairman of the Board of Columbia Pacific Group, Inc. and, since 1986, as
Chairman of the Board of Columbia Management, Inc. Both of these companies are
wholly owned by Mr. Baty and are engaged in developing independent living
facilities and providing consulting services for that market.

Raymond R. Brandstrom, one of Emeritus's founders, has served as a director
since its inception in 1993 and as Vice Chairman of the Board from March 1999
until March 2000. From 1993 to March 1999, Mr. Brandstrom also served as
Emeritus's President and Chief Operating Officer. In March 2000, Mr. Brandstrom
was elected Vice President of Finance, Chief Financial Officer and Secretary of
Emeritus. From May 1992 to May 1997, Mr. Brandstrom served as Vice President
and Treasurer of Columbia Winery, a company affiliated with Mr. Baty that is
engaged in the production and sale of table wines.

Gary S. Becker joined Emeritus as Western Division Director in January 1997, was
promoted to Vice President, Operations-Western Division in September 1999, and
then promoted to Senior Vice President of Operations in March 2000. Mr. Becker
has 29 years of health care management experience. From October 1993 to
December 1996 he was Vice President of Operations for the Western Division of
SunBridge Healthcare Corporation, the nursing home division of Sun Healthcare
Group, Inc. Sun Healthcare Group, Inc. is one of the largest providers of
long-term, subacute and related specialty health care services in the United
States.

Martin D. Roffe joined Emeritus as Director of Financial Planning in March 1998,
and was promoted to Vice President of Financial Planning in October 1999. Mr.
Roffe has 30 years experience in the acute care, long-term care, and senior
housing industries. Prior to joining Emeritus, from May 1987 until February
1996, Mr. Roffe served as Vice President of Financial Planning for the Hillhaven
Corporation, where he also held the previous positions of Sr. Application
Analyst and Director of Financial Planning. Hillhaven Corporation operated
nursing centers, pharmacies and retirement housing communities.

Suzette McCanless joined Emeritus as Eastern Division Director of Operations in
March 1997 and was promoted to Vice President of Operations - Eastern Division,
in September 1999. Mrs. McCanless has 22 years of health care management
experience. Prior to joining Emeritus, from July 1996 to February 1997, she was
Group Vice President for Beverly Enterprises, Inc., where she also held the
previous positions of Administrator and Regional Director of Operations. The
business of Beverly Enterprises, Inc. consists principally of providing
healthcare services, including the operation of nursing facilities, assisted
living centers, hospice and home care centers, outpatient therapy clinics and
rehabilitation therapy services.

Russell G. Kubik joined Emeritus as Central Division Director of Operations in
April 1997 and was promoted to Vice President, Operations - Central Division, in
September 1999. Mr. Kubik has 18 years of health care management experience.
Prior to joining Emeritus, from 1994 to 1997, Mr. Kubik served as Regional
Director of Operations for Sun Healthcare Group, Inc. in the Seattle/Puget Sound
area. Mr. Kubik also worked as Regional Director of Operations for Beverly
Enterprises, Inc. in Washington and Idaho.

P. Kacy Kang joined Emeritus as Regional Director of Operations in June 1997 and
was promoted to Senior Director of Operations - Western Division, in February
2001. Mr. Kang was then promoted to Vice

President of Operations - Western Division in August 2001. Prior to joining
Emeritus, Mr. Kang operated nursing and rehabilitation facilities for Beverly
Enterprises, Inc. from 1991 to 1994 and for Sun Healthcare Group, Inc. from 1994
through 1997.

Kellie S. Murray joined Emeritus as Director of Human Resources in September
1999. She was promoted to Vice President of Human Resources in April 2001. Ms.
Murray has 18 years of health care and human resources management experience.
From January 1995 to September 1999 she was Vice President of Human Resources
for the Western Group of SunBridge Healthcare Corporation, the nursing home
division of Sun Healthcare Group, Inc. Prior to that she was Human Resources
Manager for Virginia Mason Medical Center.

Susan A. Scherr joined Emeritus as a Regional Support Specialist in October 1997
and was promoted to Director of Signature Services and a member of the Emeritus
Senior Management team in December 1999. In April 2001 she became Vice
President of Signature Services, providing leadership and direction to Emeritus
through Sales and Marketing, Education and Training, Dining Services, and
Wellness and Activities Programming. Ms. Scherr brings to Emeritus more than 18
years' experience in the assisted living, acute and skilled care, and
hospice/home health care industries. Prior to her association with Emeritus,
she worked with SunBridge Healthcare Corporation, the nursing home division of
Sun Healthcare Group, Inc. and Jerry Erwin & Associates, an assisted living
company.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Our common stock has been traded on the American Stock Exchange under the symbol
"ESC" since November 21, 1995, the date of our initial public offering. The
following table sets forth for the periods indicated the high and low closing
prices for our common stock as reported on AMEX.

High Low
-------- -------

2002
First Quarter . . . . $5.2200 $2.0500
Second Quarter. . . . $5.0000 $3.8000
Third Quarter . . . . $4.5000 $1.7000
Fourth Quarter. . . . $5.6800 $1.7000

2001
First Quarter . . . . $1.7500 $0.9000
Second Quarter. . . . $2.6000 $0.8000
Third Quarter . . . . $2.5000 $1.4500
Fourth Quarter. . . . $2.3200 $1.6000

2000
First Quarter . . . . $7.0000 $4.2500
Second Quarter. . . . $4.1875 $2.5000
Third Quarter . . . . $3.5000 $2.1250
Fourth Quarter. . . . $2.0000 $1.1250

As of February 28, 2003, the number of record holders of our Common Stock was
139.

We have never declared or paid any dividends on our Common Stock, and expect to
retain any future earnings to finance the operation and expansion of our
business. Future dividend payments will depend on our results of operations,
financial condition, capital expenditure plans and other obligations and will be
at the sole discretion of our Board of Directors. Certain of our existing leases
and lending arrangements contain provisions that restrict our ability to pay
dividends, and it is anticipated that the terms of future leases and debt
financing arrangements may contain similar restrictions. Therefore, we do not
anticipate paying any cash dividends on our Common Stock in the foreseeable
future.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected data presented below under the captions "Consolidated Statements of
Operations Data" and "Consolidated Balance Sheet Data" for, and as of the end
of, each of the years in the five-year period ended December 31, 2002, are
derived from the consolidated financial statements of Emeritus Corporation,
which financial statements have been audited by KPMG LLP, independent auditors.
The consolidated financial statements as of December 31, 2002 and 2001, and for
each of the years in the three-year period ended December 31, 2002, are included
elsewhere in this document.

Year Ended December 31,
-----------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------

Consolidated Statements of Operations Data: (In thousands, except per share data)
Total operating revenues. . . . . . . . . . . . $153,129 $140,577 $125,192 $122,642 $151,820
Total operating expenses. . . . . . . . . . . . 152,132 133,076 125,905 125,330 173,823
--------- --------- --------- --------- ---------
Income (loss) from operations . . . . . . . . . 997 7,501 (713) (2,688) (22,003)
Net other expense . . . . . . . . . . . . . . . (7,220) (11,735) (21,223) (18,349) (9,033)
--------- --------- --------- --------- ---------
Net loss. . . . . . . . . . . . . . . . . . . . (6,223) (4,234) (21,936) (21,037) (31,036)

Preferred stock dividends . . . . . . . . . . . 7,343 6,368 5,327 2,250 2,250
--------- --------- --------- --------- ---------
Net loss to common shareholders. . . . . . . . $(13,566) $(10,602) $(27,263) $(23,287) $(33,286)
========= ========= ========= ========= =========

Net loss per common share -- basic and diluted. $ (1.33) $ (1.04) $ (2.69) $ (2.22) $ (3.17)
========= ========= ========= ========= =========
Weighted average number of
common shares outstanding--
basic and diluted. . . . . . . . . . . . . . . 10,207 10,162 10,117 10,469 10,484
========= ========= ========= ========= =========

Consolidated Operating Data:
Communities in which we have an interest. . . . 180 133 135 129 113
Number of units . . . . . . . . . . . . . . . . 15,762 12,248 12,412 11,726 9,972

December 31,
-----------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Consolidated Balance Sheet Data: (In thousands)
Cash and cash equivalents . . . . . . . . . . . $ 6,960 $ 9,811 $ 7,496 $ 12,860 $ 11,442
Working capital (deficit) . . . . . . . . . . . (26,485) (12,100) (81,167) 6,828 (977)
Total assets. . . . . . . . . . . . . . . . . . 162,833 168,428 178,079 198,370 192,870
Long-term debt, less current portion. . . . . . 119,887 131,070 60,499 128,319 119,674
Convertible debentures. . . . . . . . . . . . . 32,000 32,000 32,000 32,000 32,000
Redeemable preferred stock. . . . . . . . . . . 25,000 25,000 25,000 25,000 25,000
Shareholders' deficit . . . . . . . . . . . . . (85,066) (74,141) (65,803) (37,290) (45,964)

ITEM 7. 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 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 2002,
along with a focus on operations, we selectively acquired, leased, and managed
additional communities.

In our consolidated portfolio, our rate enhancement program brought about an
increase in average monthly revenue per occupied unit to $2,577 for 2002 from
$2,405 for 2001. This represents an average revenue increase of $172 per month
per occupied unit, or 7.2%. The average occupancy rate decreased to 80.9% in
2002 from 84.1% in 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 $2,557 for 2002 from $2,294 for 2001. This represents an
average revenue increase of $263 per month per occupied unit, or 11.5%. The
average occupancy rate decreased slightly to 80.8% in 2002 from 81.6% during
2001.

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

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

As of December 31,
----------------------------------------------------------------------
2002 2001 2000
---------------------- ---------------------- ----------------------
Buildings Units Buildings Units Buildings Units
---------- ---------- ---------- ---------- ---------- ----------

Owned (1) . . . . . . . . . . . . . . . 17 1,687 16 1,579 16 1,579
Leased (1)(4) . . . . . . . . . . . . . 67 5,279 42 3,444 45 3,700
Managed/Admin Services. . . . . . . . . 94 8,577 70 6,620 69 6,528
Joint Venture/Partnership . . . . . . . 2 219 5 605 5 605
---------- ---------- ---------- ---------- ---------- ----------
Operated Portfolio . . . . . . . . 180 15,762 133 12,248 135 12,412

Percentage increase (decrease) (2) 35.3% 28.7% (1.5%) (1.3%) 4.7% 5.9%

New Developments (3). . . . . . . . . . - - - - 2 200
---------- ---------- ---------- ---------- ---------- ----------
Total. . . . . . . . . . . . . . . 180 15,762 133 12,248 137 12,612
---------- ---------- ---------- ---------- ---------- ----------

Percentage increase (decrease) (2) 35.3% 28.7% (2.9%) (2.9%) 0.1% 0.6%

- --------
(1) Included in our consolidated portfolio of communities.
(2) The percentage increase (decrease) indicates the change from the prior
period.
(3) The communities under development at December 31, 2000, were developed by
third parties, but are currently
managed by Emeritus.
(4) The leased communities are all operating leases, in which the revenues and
expenses from these communities are included in the Consolidated Statement of
Operations but the assets and liabilities are not included in the Consolidated
Balance Sheets.

We have incurred net operating losses since our inception, and as of December
31, 2002, we had an accumulated deficit of approximately $155.3 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;

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

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

During 1998, we decided to reduce acquisition and development activities and
dispose of selected 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. In 2002, along with a focus on operations, we selectively acquired
additional communities and new management contracts.

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 call the Emeritrust I communities, was
completed in December 1998 and the second purchase, consisting of 21
communities, 16 of which we call the Emeritrust II Operating communities and
five of which we call the Emeritrust II Development communities, was completed
in March 1999.

$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
2001. During 2000, the Emeritrust I communities failed to comply with covenants
under the $138 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, 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 operating cash flow to pay management fees is subject
to first meeting mandatory owner distribution requirements, which include
repayment of fees and expenses related to restructuring the mortgage loan and
subsequent extension in September 2002. 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, 2002, the management fees for
the Emeritrust I communities were 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 $2.5 million in the case of the
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. Our funding obligations for
the Emeritrust I communities have been $184,000, $1.3 million, and $4.9 million
for 2002, 2001 and 2000, respectively. Our funding obligations for the
Emeritrust II Development communities have been $137,000, $310,000 and $1.6
million in 2002, 2001, and 2000, respectively.

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 consolidated financial statements. Management
fees earned for the Emeritrust I communities have been $2.0 million, $4.0
million, and $2.1 million in 2002, 2001, and 2000, respectively, of which $1.8
million, $2.8 million, and zero, have been recognized in 2002, 2001, and 2000,
respectively. Management fees earned for the Emeritrust II Development
communities have been $764,000, $766,000, and $360,000, of which $699,000,
$673,000, and $174,000 have been recognized in 2002, 2001, and 2000,
respectively. Management fees earned for the Emeritrust II Operating
communities have been $1.9 million earned and recognized in each of the years,
2002, 2001, and 2000.

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 for the Emeritrust Operating communities and December 31,
2003, for the Emeritrust 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. Based upon
current market conditions and valuations, we believe the option purchase price
for these facilities exceeds their current fair market value.

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 purchase the
communities, subject to our prior right to do so within a specified time period.

The management agreements and related options to purchase these communities
expire June 30, 2003, (except that management agreements with respect to five
communities would continue until December 31, 2003). Because we are not in a
position to exercise the options to acquire the communities prior to expiration,
we are currently in discussions with the owners of the communities and their
lenders to extend the management agreements and related options. While we
believe that these arrangements will be extended, we cannot guarantee that these
discussions will be successful or, if the arrangements are extended, what the
terms will be. If we are unsuccessful, we could lose the management fee revenue
from these communities and future rights with respect to them.

OTHER TRANSACTIONS

In January 2002, we entered into management and accounting services agreements
with Regent Assisted Living, Inc. of Portland, Oregon, to manage or provide
administrative services to 18 of their communities. The agreements provide for
us to receive a fixed base management/service fee with some agreements having
provisions for incentive fees based upon improved community performance. In
February 2002, two of the communities were sold to an entity controlled by Dan
Baty; we have continued to manage these communities under agreements providing
for 5% of gross revenues. In March 2002, we began managing one additional
Regent community. In April 2002, one community that we had been managing for
Regent was sold to another entity and our management agreement terminated. In
September 2002, we purchased Regent's leasehold interest in one community that
we had been managing which is discussed below. In October 2002, one community
that we had been managing was sold to another entity and our management
agreement terminated. Management fees recognized from managing the Regent
communities were approximately $1.5 million for the year ended December 31,
2002.

In February 2002, we reached an agreement with GE Healthcare Financial Services
("GE") 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 was to mature February 2004 and provided for monthly
principal payments of approximately $40,000 in addition to interest at LIBOR
plus 4%. These terms have since been modified as it was included in the
December 6, 2002, refinancing transaction, which is discussed below. 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 we pay to the lender a fee equal to 1% of the outstanding
portfolio balance at May 31, 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. An entity
controlled by Baty held a 50% economic interest in one of the communities.
Prior to the lease transaction, we purchased the Baty entity's economic interest
for his investment basis of $2.1 million plus a 9% return, a $2.95 million total
payment. The other community in which we had an interest was 50% owned by an
outside investor. Also prior to the lease transaction, we purchased the
remaining 50% interest in this community for $2.65 million. The remaining two
communities 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 net loss of approximately
$530,000, which is recorded in "Other, net" in the 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 had 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.

On April 1, 2002, in conjunction with the HC REIT master lease transaction, we
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 April 2002, we entered into agreements to acquire the ownership interest of
one community and the leasehold interest of seven communities for the assumption
of the mortgage debt relating to the owned community and the lease obligations
relating to the leased communities. The eight communities, comprising 617 units
in Louisiana and Texas, had been previously operated by Horizon Bay Management
L.L.C. In May 2002, we assigned our rights under these agreements to entities
wholly owned by Mr. Baty and entered into five-year management agreements
expiring April 30, 2007, with the Baty entities providing for a management fee
of 5% of gross revenue. As a part of these agreements, we have the right to
reacquire the one community and seven leased communities at any time prior to
April 30, 2007, by assuming the mortgage debt and lease obligations and paying
the Baty entities the amount of any cash investment in the communities, plus 9%
per annum. In the original agreements of acquisition with the Baty entities,
Horizon Bay agreed to fund operating losses of the communities to the extent of
$2.3 million in the first twelve months and $1.1 million in the second twelve
months following the closing. Under the management agreements with the Baty
entities, we have agreed to fund any operating losses in excess of these limits
over the five-year management term. In late 2002, the Baty entities and Horizon
Bay altered their agreement relating to operating losses whereby (i) Horizon Bay
paid the Baty entities $2 million and (ii) the Baty entities waived any further
funding by Horizon of operating losses of the communities. This alteration did
not change our funding commitment.

In August of 2002, we terminated the management agreement with an entity owned
by Mr. Baty, for a 214-unit facility in Cincinnati, Ohio. In the same month, we
exercised our purchase option to acquire a 108-unit facility in Auburn,
Massachusetts, from Hanseatic Corporation. The cost to exercise the option was
approximately $10.4 million, which consists of the option price of $10.2 million
and approximately $200,000 in transaction costs. We financed the transaction
using $8.3 million in debt financing provided by GE Healthcare Financial
Services and approximately $2.1 million in cash. The debt financing bears
interest at LIBOR plus 3.85%, with a floor of 6.5%, and is secured by the
mortgage and the assignment of leases.

In September of 2002, we purchased the leasehold interest in a 111-unit facility
located in San Antonio, Texas, from Regent Assisted Living. Regent had a cash
security deposit on this property of approximately $742,000, which was replaced
with a letter of credit from us. We also paid $408,000 in additional
consideration to purchase RAL's leasehold interest. Total cash paid was
approximately $1.2 million after transaction costs. Healthcare Property
Investors provided 5-year debt financing of $800,000 with interest-only payments
at an effective rate of 15% per annum.

In October of 2002, we purchased $2.9 million of mezzanine debt secured by
interests in three communities leased by us; interest receivable on the debt
will partially offset lease payments as our lease payments are used to pay
interest on the debt. Also in October of 2002, an entity controlled by Daniel
R. Baty acquired a 72-unit assisted living and dementia care community in
Austin, Texas, which Emeritus is managing. The management agreement is
effective until terminated by either party with written notice according to a
specified notice period. The management agreement consists of a fee of 5% of
revenue or $5,000 per month, whichever is greater.

On October 1, 2002, we entered into a lease agreement with Fretus Investors LLC
("Fretus"), for 24 assisted living communities (the "Properties") in six states
containing an aggregate of approximately 1,650 units. Fretus acquired the
Properties from Marriott Senior Living Services, a subsidiary of Marriott
International. Fretus is a private investment joint venture between Fremont
Realty Capital ("Fremont"), which holds a 65% stake, and an Entity controlled by
Mr. Baty and in which he holds a 36% interest, which holds a 35% minority stake.
Mr. Baty is guarantor of a portion of the debt and controls the entity that is
the administrative member of Fretus. Fretus, in turn, leased the Properties to
us. We have no obligation with respect to the properties other than our
responsibilities under the lease, which includes an option to purchase solely at
our discretion.

The Fretus lease is for an initial 10-year period with two 5-year extensions and
includes an opportunity for us to acquire the Properties during the third,
fourth, or fifth year and the right under certain circumstances for the lease to
be cancelled as to one or more properties upon the payment of a termination fee.
The lease is a net lease, with base rental equal to (i) the debt service on the
outstanding senior mortgage granted by Fretus, and (ii) an amount necessary to
provide a 12% annual return on equity to Fretus. The initial senior mortgage
debt is for $45.0 million and interest is accrued at LIBOR plus 3.5%, subject to
a floor of 6.25%. The Fretus equity is approximately $24.8 million but may
increase as a result of additional capital contributions for specified purposes
and will decrease as a result of cash distributions to investors. Based on the
initial senior mortgage terms and Fretus equity, current rental is approximately
$500,000 per month. In addition to the base rental, the lease also provides for
percentage rental equal to a percentage (ranging from 7% to 8.5%) of gross
revenues in excess of a specified threshold, commencing with the thirteenth
month of the lease. Total rent expense as of December 31, 2002, was
approximately $1.5 million. The Properties in this acquisition are all
purpose-built assisted living communities in which we plan to offer both
assisted and memory loss services in selected communities.

On December 6, 2002, we completed the refinancing of $77.8 million of existing
mortgage debt related to 11 assisted living communities. The refinance included
seven communities representing $39.3 million of mortgage debt maturing in May
2003 (the remaining balance owed to Deutsch Bank AG described above), three
communities that were previously refinanced in March 2002 for $30.2 million
maturing in March 2004, and a single community repurchased in August 2002 with
existing debt of $8.3 million.

The refinance was facilitated by a four-year $58.0 million first mortgage which
matures on December 5, 2006, provided by GE Healthcare Financial Services and
$16.0 million of five-year subordinated financing which matures on December 5,
2007, provided by Health Care Property Investors, Inc. ("HCPI"), a real estate
investment trust. The GE debt is a LIBOR-based loan which has an initial
interest rate of 6.5% with a 25-year amortization period and includes the
opportunity for a nine-month extension option. The GE debt includes an earnout
provision of an additional $7.0 million available to us under certain operating
performance levels of the communities which GE will disburse to us in order to
pay down the subordinated HCPI debt. The HCPI debt provides for a current
interest payment of 12.0% and an accrual of additional interest at 1.75% to be
paid upon repayment of the principal.

As part of the refinancing agreement, we transferred all long-term assets and
liabilities related to the above properties to Emeritus Realty Corporation, a
wholly-owned subsidiary of Emeritus included in the consolidated financial
statements. Notwithstanding consolidation for financial statement purposes, it
is
32

management's intention that Emeritus Realty Corporation be a separate legal
entity wherein the assets and liabilities are not available to pay other debts
or obligations of the consolidated Company and the consolidated Company is not
liable for the liabilities of Emeritus Realty Corporation.

We also recorded a gain of approximately $5.1 million related to discounts
received upon the payoff of existing financing, offset by certain costs related
to the transaction. This refinancing extends the maturity for the entire $77.8
million for four years.

In January 2003, we reached an agreement with General Motors Acceptance
Corporation ("GMAC") to extend a $6.8 million note set to mature February 1,
2003. The original $6.8 million note has been bifurcated into a $6.2 million
Note A and a $560,000 Note B. The new notes of $6.8 million mature March 1,
2006, and provide for monthly principal payments of approximately $22,000 in
addition to interest at LIBOR plus 4.5% and LIBOR plus 7.75%, respectively. As
a result of this refinancing, we have reclassified the long-term portion of $6.6
million principal balance to long-term debt from current portion of long-term
debt in our December 31, 2002, consolidated financial statements.

Additionally, related to the GMAC extension, the original Seller note for $1
million was also extended. The original Seller note principal balance for the
year ended December 31, 2002, was $921,000 with a maturity of March 1, 2003.
This amendment extends the principal maturity to March 1, 2006, and requires
$12,500 monthly principal and interest payments, with interest accruing at 12%.
Additionally, we have also made a $200,000 principal paydown in February 2003.
As a result, we have reclassified the long-term portion of $656,000 principal
balance to long-term debt from current portion of long-term debt in our,
December 31, 2002, consolidated financial statements.

RESULTS OF OPERATIONS

Summary of Significant Accounting Policies and Use of Estimates

Emeritus's discussion and analysis of its financial condition and results of
operations are based upon Emeritus's 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
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, bad debts,
investments, intangible assets, income taxes, financing operations,
restructuring, long-term service contracts, contingencies, self insured
retention, 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 the following accounting policies are most significant to the
judgments and estimates used in the preparation of its 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.

* Emeritus utilizes third-party insurance for losses and liabilities
associated with general and professional liability insurance claims subject to
established self-insured retention levels on a per occurrence basis. Losses up
to these self-insured retention levels are accrued based upon actuarially
determined estimates of the aggregate liability for claims incurred.

* For health insurance, Emeritus self-insures up to a certain level for each
occurrence above which a catastrophic insurance policy covers any additional
costs. Health insurance expense is accrued based upon historical experience of
the aggregate liability for claims incurred. If these estimates are
insufficient, additional charges may be required.

* 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.

The following table sets forth, for the periods indicated, certain items from
our Consolidated Statements of Operations as a percentage of total revenues and
the percentage change of the dollar amounts from period to period.

Percentage of Revenues Year-to-Year
Years Ended December 31, Percentage Increase(Decrease)
---------------------------------------- ----------------------------------
2002 2001 2000 2001-2002 2000-2001
------------ ------------ ------------ ---------------- ----------------

Revenues. . . . . . . . . . . . . . 100.0% 100.0% 100.0% 8.9% 12.3%
Expenses:
Community operations . . . . . 61.3 57.5 61.4 16.1 5.2
General and administrative . . 13.8 12.7 13.9 18.2 2.5
Depreciation and amortization. 4.7 5.2 5.9 (0.5) (1.7)
Facility lease expense . . . . 19.6 19.3 19.4 10.5 11.8
------------ ------------ ------------ ---------------- ----------------
Total operating expenses . 99.4 94.7 100.6 14.3 5.7
------------ ------------ ------------ ---------------- ----------------
Income from operations. . . . . . . 0.6 5.3 (0.6) (86.7) N/A
Other income (expense)
Interest income. . . . . . . . 0.3 0.7 0.8 (58.9) (1.0)
Interest expense . . . . . . . (7.7) (9.4) (12.0) (11.8) (11.7)
Other, net . . . . . . . . . . 2.7 0.4 (5.7) 606.5 N/A
------------ ------------ ------------ ---------------- ----------------
Net other expense. . . . . (4.7) (8.3) (16.9) (38.5) (44.7)
------------ ------------ ------------ ---------------- ----------------

Net loss . . . . . . . . . (4.1%) (3.0%) (17.5%) 47.0% (80.7%)
============ ============ ============ ================ ================

Comparison of the Years Ended December 31, 2002 and 2001
- -----------------------------------------------------------------

Total Operating Revenues: Total operating revenues for the year ended December
31, 2002, increased by $12.5 million to $153.1 million from $140.6 million in
2001, or 8.9%. Approximately $9.7 million of the increase reflects revenue from
24 communities that we began leasing in late 2002. The balance of the change in
revenue is primarily the result of increases in the average monthly revenue per
unit due to our rate enhancement program and additional managed communities
throughout 2002 compared to 2001. Average monthly revenue per unit was $2,577
for 2002 compared to $2,405 for 2001, an increase of approximately 7.2%.
Management fees increased by $2.2 million in the year ended December 31, 2002,
compared to 2001. This is primarily due to the addition of 24 managed
communities in 2002 compared to 2001, as well as, increases in contingent
management fees from certain existing managed communities. These increases were
partially offset by a decrease in the occupancy rate of 3.2 percentage points to
80.9% for 2002 from 84.1% for 2001.

Community Operations: Community operating expenses for the year ended December
31, 2002, increased $13.0 million to $93.8 million from $80.8 million for 2001,
or 16.1%. Approximately $9.7 million of the increase reflects operating expense
from 24 communities that we began leasing in October 2002. The balance of this
change was due to increases in personnel costs and above average increases in
liability, health, and workers' compensation insurance premiums. Community
operating expenses as a percentage of total operating revenue increased to 61.3%
in 2002 from 57.5% in 2001, primarily as a result of these increased expenses.

General and Administrative: General and administrative (G&A) expenses for the
year ended December 31, 2002, increased $3.2 million to $21.1 million from $17.9
million for 2001, or 18.2%. We experienced increases of approximately $2.7
million in personnel costs related to acquisitions, health and workers'
compensation insurance, and other acquisition related expenses. As a
percentage of total operating revenues, G&A expenses increased to 13.8% for
2002, compared to 12.7% for 2001, primarily as a result of higher expenses due
to additional communities in our consolidated portfolio. 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
6.6% for 2002 and 2001, respectively.

Depreciation and Amortization: Depreciation and amortization for the year ended
December 31, 2002, and 2001, were approximately $7.2 million and $7.3 million,
respectively. In 2002, this represents 4.7% of total operating revenues
compared to 5.2% for 2001. The decrease as a percentage of revenues is due to
increased revenues from leased communities.

Facility Lease Expense: Facility lease expense for the year ended December 31,
2002, was $30.0 million compared to $27.1 million for the year ended December
31, 2001, representing an increase of $2.9 million, or 10.5%. Approximately $1.5
million of the increase reflects rental expense from 24 communities that we
began leasing in October 2002. Approximately $848,000 of the increase was the
result of a sale/leaseback transaction related to four communities, offset by
the disposition of one leased community and the repurchase of a leased
community. The balance of the increase is primarily attributable to rental
increases

based on community performance under certain of our leases in 2002. We leased 67
communities as of December 31, 2002, compared to 42 communities as of December
31, 2001. Facility lease expense as a percentage of revenues increased to 19.6%
from 19.3% for the years ended December 31, 2002, and 2001, respectively.

Interest Income: Interest income for the year ended December 31, 2002, was
$403,000 versus $980,000 for the year ended December 31, 2001. This is
primarily attributable to declining interest rates.

Interest Expense: Interest expense for the year ended December 31, 2002, was
$11.7 million compared to $13.3 million for the year ended December 31, 2001.
This decrease of $1.6 million, or 11.8%, is primarily attributable to reduced
amount of outstanding debt in 2002 compared to 2001, as a result of
sales/leaseback and refinancing transactions and lower interest rates on our
variable rate debt. As a percentage of total operating revenues, interest
expense decreased to 7.7% from 9.4% for the year ended December 31, 2002 and
2001, respectively, reflecting increased revenues in conjunction with lower
interest rates.

Other, net: Other, net increased by $3.5 million to $4.1 million in income for
the year ended December 31, 2002, from $581,000 income for the year ended
December 31, 2001. The amount for the year 2002 includes a $5.1 million gain
related to discounts we received upon the payoff of existing financing, offset
by certain costs related to the transaction. This gain is offset by
approximately $1.2 million in write-offs of existing loan fees related to a
sales/leaseback transaction and a refinancing transaction and write-offs of
approximately $600,000 related to capitalized development transaction costs that
do not have future realizable value. The amount for the year 2001 included a
deficit-funding obligation of $335,000 arising from our management of the
Emeritrust communities, losses of $313,000 associated with our investment in
Senior Healthcare Partners, LLC, and a net gain of $1.1 million on sale of two
communities.

Preferred dividends: For the year ended December 31, 2002 and 2001, the
preferred dividends were approximately $7.3 million and $6.4 million,
respectively. For the last ten quarters we have not declared cash dividends on
our preferred stock but have been accruing such accumulated and unpaid
dividends. The terms of our preferred stock provide that accumulated and unpaid
dividends accrue at a higher rate than dividends that are paid currently. The
amount of dividends attributable to such higher rates is $2.1 million for both
2002 and 2001, respectively. In addition, because the board of directors did
not declare dividends on our Series A Stock for more than six quarters,
effective January 1, 2002, such dividends were calculated on a compounded
cumulative basis, retroactive to our last payment, until they are paid current.
Had we been required to pay the higher rate for the Series A Stock, both our
preferred dividends and net loss to common shareholders would have increased
$275,000 and $19,000 for 2001 and 2000, respectively. This combined amount of
$294,000 was recognized in 2002 as well as an additional cumulative compounded
dividend of $622,000 for 2002.

Comparison of the Years Ended December 31, 2001 and 2000
- -----------------------------------------------------------------

Total Operating Revenues: Total operating revenues for the year ended December
31, 2001, increased by $15.4 million to $140.6 million from $125.2 million in
2000, or 12.3%. Approximately $4.1 million of the increase reflects revenue
from four communities that we first leased in late 2000, reduced by revenues
from leased communities we disposed of in late 2001. The balance of the change
in revenue is primarily the result of increases in the average monthly revenue
per unit due to our rate enhancement program. Average monthly revenue per unit
was $2,405 for 2001 compared to $2,213 for 2000, an increase of approximately
8.7%. These increases were partially offset by a small decrease in the
occupancy rate of 1.7 percentage points to 84.1% for 2001 from 85.8% for 2000.
An increase in management fee revenue of $4.2 million contributed significantly
to increased revenue. Improved performance of managed communities allowed us to
recognize base management fees and performance-driven contingent management
fees. Concurrently, our net funding obligation for the Emeritrust communities
was greatly reduced (see Other, net below).

Community Operations: Community operating expenses for the year ended December
31, 2001, increased $4.0 million to $80.8 million from $76.8 million for 2000,
or 5.2%. Approximately $1.8 million of the increase reflects operating expense
from four communities that we first leased in late 2000, reduced by operating
expense from leased communities we disposed of in late 2001. The balance of
this change was due to increases in personnel costs and above average increases
in utility costs and liability insurance premiums. Community operating expenses
as a percentage of total operating revenue decreased to 57.5% in 2001 from 61.4%
in 2000, primarily as a result of increased revenues.

General and Administrative: General and administrative (G&A) expenses for the
year ended December 31, 2001, increased $435,000 to $17.9 million from $17.4
million for 2000, or 2.5%. This comparison reflects the effect of abnormally
high expenses in 2000 for professional consulting fees and for certain employee
benefits. Excluding these items, we experienced increases of approximately $1.5
million in personnel costs, liability insurance and utilities. As a percentage
of total operating revenues, G&A expenses decreased to 12.7% for 2001, compared
to 13.9% for 2000, primarily as a result of increased revenues. 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 6.6% and
7.2% for 2001 and 2000, respectively.

Depreciation and Amortization: Depreciation and amortization for the year ended
December 31, 2001 and 2000, were approximately $7.3 million and $7.4 million,
respectively. In 2001, this represents 5.2% of total operating revenues,
compared to 5.9% for 2000. The decrease as a percentage of revenues is due to
increased revenues.

Facility Lease Expense: Facility lease expense for the year ended December 31,
2001, was $27.1 million compared to $24.3 million for the year ended December
31, 2000, representing an increase of $2.8 million, or 11.5%. Approximately $1.8
million of the increase reflects rental from four communities that we first
leased in late 2000, reduced by rental from leased communities we disposed of in
late 2001. The balance of the increase is primarily attributable to rental
increases based on community performance under certain of our leases and to
higher rental on two leased communities that were refinanced through
sale/leaseback transactions. We leased 42 communities as of December 31, 2001,
compared to 45 communities as of

December 31, 2000. Facility lease expense as a percentage of revenues decreased
to 19.3% from 19.4% for the years ended December 31, 2001 and 2000,
respectively.

Interest Income: Interest income for the year ended December 31, 2001, was
$980,000 versus $990,000 for the year ended December 31, 2000. This is
primarily attributable to declining interest rates.

Interest Expense: Interest expense for the year ended December 31, 2001, was
$13.3 million compared to $15.1 million for the year ended December 31, 2000.
This decrease of $1.8 million, or 11.9%, is primarily attributable to lower
interest rates on our variable rate debt. As a percentage of total operating
revenues, interest expense decreased to 9.4% from 12.0% for the year ended
December 31, 2001 and 2000, respectively, reflecting increased revenues in
conjunction with lower interest rates.

Other, net: Other, net increased by $7.7 million to $581,000 income for the
year ended December 31, 2001, from $7.1 million expense for the year ended
December 31, 2000. The amount for the year 2001 included a deficit-funding
obligation of $335,000 arising from our management of the Emeritrust
communities, losses of $313,000 associated with our investment in Senior
Healthcare Partners, LLC, and a net gain of $1.1 million on sale of two
communities. The amount for the year 2000 includes a deficit funding obligation
of $3.7 million arising from our management of the Emeritrust communities,
write-offs of $1.5 million relating to receivables and capitalized development
transaction costs that do not have future realizable value, losses of $557,000
associated with our investment in Senior Healthcare Partners, LLC, and other
items aggregating $1.3 million.

Preferred dividends: For the year ended December 31, 2001 and 2000, the
preferred dividends were approximately $6.4 million and $5.3 million,
respectively. For the last ten quarters we have not paid dividends on our
preferred stock but have been accruing such accumulated and unpaid dividends.
The terms of our preferred stock provide that accumulated and unpaid dividends
accrue at a higher rate than dividends that are paid currently. The amount of
dividends attributable to such higher rates is $2.1 million and $600,000 for
2001 and 2000, respectively. In addition, because we have failed to pay the
dividends on our Series A Stock for more than six quarters, effective January 1,
2002, such dividends were calculated on a compounded cumulative basis,
retroactive to our last payment, until they are paid current. Had we been
required to pay the higher rate for the Series A Stock, both our preferred
dividend expense and net loss to common shareholders would have increased
$275,000 and $19,000 for 2001 and 2000, respectively.

Same Community Comparison

Three months ended December 31, 2002, and 2001:
- ------------------------------------------------------

We operated 59 owned or leased communities on a comparable basis during both the
three months ended December 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 December 31, 2002 and 2001.

Three Months ended December 31,
(In thousands)
-------------------------------------------------
Dollar % Change
2002 2001 Change Fav / (Unfav)
------------ ------------ -------- -------------

Revenue. . . . . . . . . . . $ 33,516 $ 31,806 $ 1,710 5.4%
Community operating expenses (21,674) (19,289) (2,385) (12.4)
------------ ------------ -------- -------------
Community operating income 11,842 12,517 (675) (5.4)
Depreciation & amortization. (1,572) (1,617) 45 2.8
Facility lease expense . . . (6,806) (6,479) (327) (5.0)
------------ ------------ -------- -------------
Operating income . . . . 3,464 4,421 (957) (21.6)
Interest expense, net. . . . (2,363) (2,244) (119) (5.3)
------------ ------------ -------- -------------
Net income . . . . . . . $ 1,101 $ 2,177 $(1,076) (49.4%)
============ ============ ======== =============

The same communities represented $33.5 million or 71.4% of our total revenue of
$46.9 million for the fourth quarter of 2002. Same community revenues increased
by $1.7 million or 5.4% for the quarter ended December 31, 2002, from the
comparable period in 2001. This was primarily due to rate increases, which
increased revenue per unit by 5.6%, partially offset by a decrease in average
occupancy to 82.3% in the fourth quarter of 2002 from 83.2% in the fourth
quarter of 2001. For the quarter ended December 31, 2002, our net income
decreased to $1.1 million from $2.2 million for the comparable period of 2001,
primarily as a result of increased community operating expenses mainly due to
higher health and workers' compensation insurance costs in 2002 compared to
2001.

Year ended December 31, 2002, and 2001:
- ---------------------------------------------

We operated 59 owned or leased communities on a comparable basis during both the
twelve months ended December 31, 2002 and 2001. The following table sets forth
a comparison of same community results of operations, excluding general and
administrative expenses, for 2002 and 2001.

Year Ended December 31,
(In thousands)
-------------------------------------------------
Dollar % Change
2002 2001 Change Fav / (Unfav)
------------ ------------ -------- -------------

Revenue. . . . . . . . . . . $ 130,956 $ 126,103 $ 4,853 3.8%
Community operating expenses (83,394) (76,199) (7,195) (9.4)
------------ ------------ -------- -------------
Community operating income 47,562 49,904 (2,342) (4.7)
Depreciation & amortization. (6,098) (6,391) 293 4.6
Facility lease expense . . . (27,405) (25,040) (2,365) (9.4)
------------ ------------ -------- -------------
Operating income . . . . 14,059 18,473 (4,414) (23.9)
Interest expense, net. . . . (9,108) (10,606) 1,498 14.1
------------ ------------ -------- -------------
Net income . . . . . . . $ 4,951 $ 7,867 $(2,916) (37.1%)
============ ============ ======== =============

The same communities represented $131.0 million or 85.5% of our total revenue of
$153.1 million for the year ended December 31, 2002. Same community revenues
increased by $4.9 million or 3.8% for the year ended December 31, 2002, from the
year ended December 31, 2001. The increase in revenue is attributable to our
rate enhancement program, which resulted in same community average monthly
revenue per unit increasing to $2,568 for 2002, from $2,425 for 2001. This is
an increase of $143 or 5.9%. These results were partially offset by a decrease
in occupancy to 81.9% in 2002 from 84.2% in 2001. For the year ended December
31, 2002, our net income decreased to $5.0 million from $7.9 million for 2001,
primarily as a result of increased community operating expenses mainly due to
higher health and workers' compensation insurance costs in 2002 compared to
2001. Net income was also reduced by an increase in additional rent expense
from existing leases due to contingent rent expense and increased by lower
interest expense related to the December 2002, refinancing (see "Other
Transactions").

LIQUIDITY AND CAPITAL RESOURCES

For the year ended December 31, 2002, net cash provided by operating activities
was $3.9 million compared to $3.6 million of cash provided in operating
activities for the prior year. The primary component of the operating cash
provided in the year ended December 31, 2002, was an increase in deferred
revenue of $2.9 million and an increase in other liabilities of $3.5 million
offset by an increase in prepaid expenses of $2.5 million and a decrease in
accrued interest of $1.3 million.

Net cash provided by investing activities amounted to $3.2 million for the year
ended December 31, 2002, and was comprised primarily of proceeds from sale of
property and equipment related to refinancing of four communities through
sale/leaseback transactions, which was partially offset by the acquisition of
property, equipment, new leases, and lease improvements.

For the year ended December 31, 2002, net cash used in financing activities was
$9.9 million primarily from short-term and long-term debt repayments and other
financing costs, offset by proceeds from long-term borrowings. For the year
ended December 31, 2001, net cash used in financing activities was $3.8 million
primarily from short-term and long-term debt repayments.

We have incurred significant operating losses since our inception and have a
working capital deficit of $26.5 million, although $2.9 million represents
deferred revenue and $13.5 million of preferred dividends is due only if
declared by the Company's board of directors. In 2001 and 2002 we reported
positive net cash from operating activities in our consolidated statements of
cash flows. At times in the past, however, we have been dependent upon third
party financing or disposition of assets to fund operations and we cannot
guarantee that, if necessary in the future, such transactions will be available
timely or at all, or on terms attractive to us.

In 2002, we refinanced substantially all of our debt obligations, extending the
maturities of such financings to dates in 2005 or 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 lender or lessor. Such cross-default provisions affect
16 owned assisted living properties and 64 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.

Management believes that the Company will be able to sustain positive operating
cash flow at least through 2003 and will have adequate cash for all necessary
investing and financing activities including required debt service and capital
expenditures.

The following table summarizes our contractual obligations at December 31, 2002
(In thousands):

Payments Due by Period
--------------------------------------------------------------
Less than 1 After 5
Total year 1 - 3 years 4 - 5 years years
- ----------------------- ----------- ------------ ------------ ----------- ---------

Contractual Obligations
Long-Term Debt. . . . . $ 123,491 $ 3,604 $ 14,657 $ 74,000 $ 31,230
Operating Leases. . . . $ 289,738 $ 27,568 $ 55,772 $ 53,603 $152,795

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development, and/or normal use
of the assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement
of the asset retirement obligation, the obligation will be adjusted at the end
of each period to reflect the passage of time and changes in the estimated
future cash flows underlying the obligation. The Company is required to adopt
SFAS No. 143 on January 1, 2003. Management is currently assessing the impact
of SFAS No. 143, to determine the effect on the Company's financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 amends existing guidance on reporting gains and losses on the
extinguishment of debt to prohibit the classification of the gain or loss as
extraordinary, as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to
require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of the
Statement related to the rescission of Statement No. 4 is applied in fiscal
years beginning after May 15, 2002. Earlier application of these provisions is
encouraged. The provisions of the Statement related to Statement No. 13 were
effective for transactions occurring after May 15, 2002, with early application
encouraged. We adopted SFAS No. 145 in the fourth quarter of 2002 and have
included the extraordinary gain on refinancing long-term debt in other income.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged.
Management cannot determine the impact of SFAS No. 146 on the Company's
financial statements as it will be applied prospectively.

In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002, and are not
expected to have a material effect on the Company's financial statements. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002, and are included in the notes to
these consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For nonpublic enterprises, such as the
Company, with a variable interest in a variable interest entity created before
February 1, 2003, the Interpretation is applied to the enterprise no later than
the end of the first annual reporting period beginning after June 15, 2003.
Management is currently evaluating the impact of this Interpretation on the
Company's financial statements.

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.

RISK FACTORS

Our business, results of operations and financial condition are subject to many
risks, including, but not limited to, those set forth below:

The following important factors, among others, could cause actual operating
results to differ materially from those expressed in forward-looking statements
included in this report and presented elsewhere by our management from time to
time. Do not place undue reliance on these forward-looking statements, which
speak only as of the date of this report. A number of the matters and subject
areas discussed in this report refer to potential future circumstances,
operations and prospects, and therefore, are not historical or current facts.
The discussion of such matters and subject areas is qualified by the inherent
risks and uncertainties surrounding future expectations, which may materially
differ from our actual future experience involving any one or more of such
matters and subject areas as a result of various factors, including: possible
excess assisted living capacity in our market areas affecting our occupancy and
pricing levels; uncertainties in increasing occupancy and pricing, generally;
effective management of costs and the effects of cost increases beyond our
control, such as utilities and insurance; the difficulty in reducing and
eliminating continuing operating losses; vulnerability to defaults in our debt
and lease financing as a result of noncompliance with various covenants; the
effects of cross-default terms; competition; and uncertainties relating to
construction, licensing, environmental, and other matters that affect
acquisition, disposition and development of assisted living communities. We
have attempted to identify, in context, certain of the factors that may cause
actual future experience and results to differ from our current expectations
regarding the relevant matter or subject area. We are not obligated to publicly
release the results of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date of this report or
to reflect the occurrence of unanticipated events. These and other factors are
discussed in more detail below.

We have incurred losses since we began doing business and may continue to incur
losses for the foreseeable future. We organized and began operations in July
1993 and have operated at a loss since we began doing business. For 2002, 2001,
and 2000, we recorded net losses before preferred dividends of $6.2 million,
$4.2 million, and $22.0 million, respectively. We believe that the historically
aggressive growth of our portfolio through acquisitions and developments and
related financing activities were among the causes of these losses. To date, at
many of our communities, we have been generally unable to stabilize occupancy
and rate structures to levels that result in positive cash flow and earnings for
the company as a whole. Our operations may not become profitable in line with
our current expectations or may not become profitable at all.

If we cannot generate sufficient cash flow to cover required interest, principal
and lease payments, we risk defaults on our debt agreements and operating
leases. At December 31, 2002, we had total debt of $123.5 million, with minimum
principal payments of about $3.6 million due in 2003. At December 31, 2002, we
were obligated under long-term operating leases requiring minimum annual lease
payments of which $27.6 million is payable in 2003. In addition, we will have
approximately $3.6 million and $11.1 million in principal amount of debt
repayment obligations that become due in 2004 and 2005, respectively. If we are
unable to generate sufficient cash flow to make such payments as required and
are unable to renegotiate payments or obtain additional equity or debt
financing, a lender could foreclose on our communities secured by the respective
indebtedness or, in the case of an operating lease, could terminate our lease,
resulting in

loss of income and asset value. In some cases, our indebtedness is secured by a
particular community and a pledge of our interests in a subsidiary entity that
owns that community. In the event of a default, a lender could avoid judicial
procedures required to foreclose on real property by foreclosing on our pledge
instead, thus accelerating its acquisition of that community. Furthermore,
because of cross-default and cross-collateralization provisions in certain of
our mortgage and sale/leaseback agreements, if we default on one of our payment
obligations, we could adversely affect a significant number of our communities.

Because we are highly leveraged, we may not be able to respond to changing
business and economic conditions or continue with selected acquisitions. A
substantial portion of our future cash flow will be devoted to debt service and
lease payments. In the past, we have frequently been dependent on third party
financing and disposition of assets to fund these obligations in full and we may
be required to do so in the future. In addition, we are periodically required
to refinance these obligations as they mature. These circumstances reduce our
flexibility and ability to respond to our business needs, including changing
business and financial conditions such as increasing interest rates and
opportunities to expand our business through selected acquisitions.

We may be unable to increase or stabilize our occupancy rates that would result
in positive earnings. In previous years we had difficulty increasing our
occupancy levels. Our historical losses have resulted, in part, from lower than
expected occupancy levels at our newly developed and acquired communities.
Although we have reduced our acquisition and development activity, we have been
unable to increase occupancy levels as we had anticipated and, during the last
year, occupancy levels declined. We cannot guarantee that our occupancy levels
will increase.

We will occasionally seek additional funding through public or private
financing, including equity financing. We may not find adequate equity, debt, or
sale/leaseback financing when we need it or on terms acceptable to us. This
could affect our ability to finance our operations or refinance our properties
to avoid the consequences of default and foreclosure under our existing
financing as described above. In addition, if we raise additional funds by
issuing equity securities, our shareholders may experience dilution of their
investment.

We may be unable to obtain the additional capital we will need to retain
important segments of our operating communities. We manage 46 of our operating
communities under short-term management agreements expiring June 30, 2003, for
the 41 communities, which we have referred to throughout this document as the
Emeritrust I and Emeritrust II Operating communities, and December 31, 2003, for
the remaining five Emeritrust II Development communities. We also have options
to purchase 43 communities, and a right of first refusal to purchase three of
these communities prior to December 10, 2003, for the five Emeritrust II
Development communities, and June 10, 2003, for the remaining 41 communities.
Based on formulas in the options, the purchase prices of the communities would
be substantially greater than the original purchase prices paid by the investor
groups that currently own them, depending on when the purchase occurs and the
performance of the communities. If we are unable to obtain the capital and
related mortgage financing necessary to complete these purchases, we could lose
control of these communities and the right to operate them, which represents
about 24.0% of our total operating capacity. The loss of these operating
communities would have a material adverse effect on our revenues and results of
operations.

If we fail to comply with financial covenants contained in our debt instruments,
our lenders may accelerate the related debt. From time to time, we failed to
comply with certain covenants in our financing agreements. In the future we may
not be able to comply with these covenants, which generally relate to matters
such as cash flow, and debt coverage ratios. If we fail to comply with any of
these requirements, our lenders could accelerate the related indebtedness so
that it becomes due and payable prior to its stated due date. We may be unable
to pay or refinance this debt if it becomes due.

Our liability insurance may be insufficient to cover the liabilities we face. In
recent years, participants in the long-term-care industry have faced an
increasing number of lawsuits alleging negligence, malpractice or related legal
theories. Many of these suits involve large claims and significant legal costs.
We expect that we occasionally will face such suits because of the nature of our
business. We currently maintain insurance policies with coverage and
self-insured retention (with respect to general and professional liability) and
deductibles (with respect to auto liability and property damage claims) we deem
appropriate based on the nature and risks of our business, historical
experience, industry standards, and the availability of insurance. We could
incur liability in excess of our insurance coverage or experience claims not
covered by our insurance, including punitive damages. Claims against us,
regardless of their merit or eventual outcome, may also undermine our ability to
attract residents or expand our business and would require management to devote
time to matters unrelated to the operation of our business. Our liability
insurance policies must be renewed annually, and we may not be able to obtain
liability insurance coverage in the future or, if available, on acceptable
terms. During the past several years, retained losses relating to high
self-insured retention and annual premiums have increased significantly, which
have substantially compounded our costs associated with insurance and claims
defense.

We face risks associated with selective acquisitions. We intend to continue to
seek selective acquisition opportunities. However, we may not succeed in
identifying any future acquisition opportunities or completing any identified
acquisitions. The acquisition of communities presents a number of risks.
Existing residences available for acquisition may frequently serve or target
different market segments than those we presently serve. It may be necessary in
these cases to re-position and renovate acquired residences or turn over the
existing resident population to achieve a resident care level and income profile
that is consistent with our objectives. In the past, these obstacles have
delayed the achievement of acceptable occupancy levels and increased operating
and capital expenditures. As a consequence, we currently plan to target
assisted living communities with established operations, which could reduce the
number of acquisitions we can complete and increase the expected cost. Even in
these acquisitions, however, we may need to make staff and operating management
personnel changes to successfully integrate acquired communities into our
existing operations. We may not succeed in repositioning acquired communities
or in effecting any necessary operational or structural changes and improvements
on a timely basis. We also may face unforeseen liabilities attributable to the
prior operator of the acquired communities, against whom we may have little or
no recourse.

We expect competition in our industry to increase, which could cause our
occupancy rates and resident fees to decline. The long-term care industry is
highly competitive, and given the relatively low barriers to entry and
continuing health care cost containment pressures, we expect that our industry
will become increasingly competitive in the future. We believe that the industry
is experiencing over-capacity in several of our markets, thereby intensifying
competition and adversely affecting occupancy levels and pricing. We

compete with other companies providing assisted living services as well as
numerous other companies providing similar service and care alternatives, such
as home healthcare agencies, independent living facilities, retirement
communities, and skilled nursing facilities. We expect that competition will
increase from new market entrants, as assisted living residences receive
increased market awareness and more states decide to include assisted living
services in their Medicaid programs. Many of these competitors may have
substantially greater financial resources than we do. Increased competition may
limit our ability to attract or retain residents or maintain our existing rate
structures. This could lead to lower occupancy rates or lower rate structures in
our communities.

We also cannot predict the effect of the healthcare industry trend toward
managed care on the assisted living marketplace. Managed care, an arrangement
whereby service and care providers agree to sell specifically defined services
to public or private payers in an effort to achieve more efficiency with respect
to utilization and cost, is not currently a significant factor in the assisted
living marketplace. However, managed care plans sponsored by insurance
companies or HMOs may in the future affect pricing and the range of services
provided in the assisted living marketplace.

If development of new assisted living facilities outpaces demand, we may
experience decreased occupancy, depressed margins, and diminished operating
results. We believe that some assisted living markets have become or are on the
verge of becoming overbuilt. The barriers to entry in the assisted living
industry are not substantial. Consequently, the development of new assisted
living facilities could outpace demand. Overbuilding in the markets in which we
operate could thus cause us to experience decreased occupancy and depressed
margins and could otherwise adversely affect our operating results.

Market forces could undermine our efforts to attract seniors with sufficient
resources. We rely on our residents' abilities to pay our fees from their own or
familial financial resources. Generally, only seniors with income or assets
meeting or exceeding the comparable median in the region where our assisted
living communities are located can afford our fees. Inflation or other
circumstances may undermine the ability of seniors to pay for our services. If
we encounter difficulty in attracting seniors with adequate resources to pay for
our services, our occupancy rates may decline and we may suffer losses that
could cause the value of your investment in our stock to decline.

Our labor costs may increase and may not be matched by corresponding increases
in rates we charge to our residents. We compete with other providers of assisted
living services and long-term care in attracting and retaining qualified and
skilled personnel. We depend on our ability to attract and retain management
personnel responsible for the day-to-day operations of each of our residences.
If we are unable to attract or retain qualified residence management personnel,
our results of operations may suffer. In addition, possible shortages of nurses
or trained personnel may require us to enhance our wage and benefits packages to
compete in the hiring and retention of personnel. We also depend on the
available labor pool of semi-skilled and unskilled employees in each of the
markets in which we operate. As a result of these and other factors, our labor
costs may increase and may not be matched by corresponding increases in rates we
charge to our residents.

We face possible environmental liabilities at each of our properties. Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real property may be held liable for
the costs of removal or remediation of certain hazardous or toxic substances,
including asbestos-containing materials, that could be located on, in or under
its property. These laws and regulations often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of the
hazardous or toxic substances. We could face substantial costs of any required
remediation or removal of these substances, and our liability typically is not
limited under applicable laws and regulations. Our liability could exceed our
properties' value or the value of our assets. We may be unable to sell or rent
our properties, or borrow using our properties as collateral, if any of these
substances is present or if we fail to remediate them properly. Under these
laws and regulations, if we arrange for the disposal of hazardous or toxic
substances such as asbestos-containing materials at a disposal site, we also may
be liable for the costs of the removal or of the hazardous or toxic substances
at the disposal site. In addition to liability for these costs, we could be
liable for governmental fines and injuries to persons or properties.

Some of our facilities generate infectious medical waste due to the illness or
physical condition of the residents, including, for example, blood-soaked
bandages, swabs and other medical waste products, and incontinence products of
those residents diagnosed with an infectious disease. The management of
infectious medical waste, including handling, storage, transportation,
treatment, and disposal, is subject to regulation under various laws, including
federal and state environmental laws. These environmental laws set forth the
management requirements, as well as permit, record-keeping, notice, and
reporting obligations. Each of our facilities has an agreement with a waste
management company for the proper disposal of all infectious medical waste. Any
finding that we are not in compliance with these environmental laws could
adversely affect our business and financial condition. Because these
environmental laws are amended from time to time, we cannot predict when and to
what extent liability may arise. In addition, because these environmental laws
vary from state to state, expansion of our operations to states where we do not
currently operate may subject us to additional restrictions on the manner in
which we operate our facilities.

Our chief executive officer has personal interest that may conflict with ours
due to his interest in Holiday Retirement Corporation and Columbia-Pacific
Group, Inc. Mr. Baty, our Chief Executive Officer, is a principal shareholder,
director and Chairman of the Board of Holiday Retirement Corporation, and is the
principal owner of Columbia-Pacific Group, Inc. Substantially all of the
independent living facilities operated by Holiday are owned by partnerships that
are controlled by Mr. Baty and Holiday. Mr. Baty's varying financial interests
and responsibilities include the acquisition, financing, and refinancing of
independent living facilities and the development and construction of, and
capital raising activities to finance, new facilities. Columbia-Pacific and
affiliated partnerships operate assisted living communities and independent
living facilities, many of which we manage under various management agreements.
The financial interests and management and financing responsibilities of Mr.
Baty with respect to Holiday and Columbia-Pacific and their affiliated
partnerships could present conflicts of interest with us, including potential
competition for residents in markets where both companies operate and competing
demands for the time and efforts of Mr. Baty.

Because Mr. Baty is both our Chief Executive Officer as well as Holiday's
Chairman of the Board and is the principal owner of Columbia-Pacific,
circumstances could arise that would distract him from our operations. Our
interests and those of Holiday and Columbia-Pacific interests may on some
occasions be incompatible. We have entered into a noncompetition agreement with
Mr. Baty, but this noncompetition agreement does not limit Mr. Baty's current
role with Holiday or its related partnerships, so long as assisted living is
only an incidental component of Holiday's operation or management of independent
living facilities.

We have entered into agreements with a number of entities that are owned or
controlled by Mr. Baty, whose interests with respect to these companies
occasionally may conflict with ours. We have entered into agreements, including
most of our management agreements, with a number of entities that are owned or
controlled by Mr. Baty. Under these agreements, we provide management and other
services to senior housing and assisted living communities owned by these
entities and we have material agreements with these entities relating to the
purchase, sale, and financing of a number of our operating communities. There is
a risk that the administration of these and any future arrangements could be
adversely affected by these continuing relationships because our interest and
those of Mr. Baty may not be consistent at all times.

Some of our recent transactions and the operations of certain communities that
we manage are supported financially by Mr. Baty with limited guarantees and
through his direct and indirect ownership of such communities; we would be
unable to benefit from these transactions and manged communities without this
support. Our recent transactions to lease an additional 24 communities and our
agreements to manage 24 communities involve limited guarantees by Mr. Baty and
rely on his direct and indirect ownership of the communities involved. We
believe that we would be unable to take advantage of these transactions and
management opportunities without Mr. Baty's individual support. The ongoing
administration of these transactions, however, could be adversely affected by
these continuing relationships because our interests and those of Mr. Baty may
not be consistent at all times. In addition, we cannot guarantee that such
support will be available in the future.

We may be unable to attract and retain key management personnel. We depend upon,
and will continue to depend upon, the services of Mr. Baty, our Chief Executive
Officer. The loss of Mr. Baty's services, in part or in whole, could adversely
affect our business and our results of operations. Mr. Baty has financial
interests and management responsibilities with respect to Holiday and its
related partnerships. As a result, he does not devote his full time and efforts
to Emeritus. We may be unable to attract and retain other qualified executive
personnel critical to the success of our business.

Our costs of compliance with government regulations may significantly increase
in the future. Federal, state and local authorities heavily regulate the
healthcare industry. Regulations change frequently, and sometimes require us to
make expensive changes in our operations. A number of legislative and regulatory
initiatives relating to long-term care are proposed or under study at both the
federal and state levels that, if enacted or adopted, could adversely affect our
business and operating results. We cannot predict to what extent legislative or
regulatory initiatives will be enacted or adopted or what effect any initiative
would have on our business and operating results. Changes in applicable laws and
new interpretations of existing laws can significantly affect our operations, as
well as our revenues, particularly those from governmental sources, and our
expenses. Our residential communities are subject to varying degrees of
regulation and

licensing by local and state health and social service agencies and other
regulatory authorities. While these regulations and licensing requirements often
vary significantly from state to state, they typically address:

* fire safety,
* sanitation,
* staff training,
* staffing patterns,
* living accommodations such as room size, number of bathrooms, and
ventilation, and
* health-related services.

We may be unable to satisfy all regulations and requirements or to acquire and
maintain any required licenses on a cost-effective basis.

In addition, with respect to our residents who receive financial assistance from
governmental sources for their assisted living services, we are subject to
federal and state regulations that prohibit certain business practices and
relationships. Failure to comply with these regulations could prevent
reimbursement for our healthcare services under Medicaid or similar state
reimbursement programs. Our failure to comply with such regulations also could
result in fines and the suspension or inability to renew our operating licenses.
Federal, state and local governments occasionally conduct unannounced
investigations, audits and reviews to determine whether violations of applicable
rules and regulations exist. Devoting management and staff time and legal
resources to such investigations, as well as any material violation by us that
is discovered in any such investigation, audit or review, could strain our
resources and affect our profitability. In addition, regulatory oversight of
construction efforts associated with refurbishment could cause us to lose
residents and disrupt community operations.

Our stock price has been highly volatile, and a number of factors may cause our
common stock price to decline. The market price of our common stock has
fluctuated and could fluctuate significantly in the future in response to
various factors and events, including, but not limited to:

* the liquidity of the market for our common stock;
* variations in our operating results;
* variations from analysts' expectations; and
* new statutes or regulations, or changes in the interpretation of existing
statutes or regulations, affecting the healthcare industry generally or
the assisted living residence business in particular.

In addition, the stock market in recent years has experienced broad price and
volume fluctuations that often have been unrelated to the operating performance
of particular companies. These market fluctuations also may cause the market
price of our common stock to decline.

Our share ownership and certain other factors may impede a proposed takeover of
our business. As of February 28, 2003, Mr. Baty, our Chief Executive Officer,
controls about 39% of our outstanding common stock. Together, our directors and
executive officers own, directly and indirectly, over 62% of the voting power of
our outstanding common and preferred stock. Accordingly, Mr. Baty and the other
members of our board and management would have significant influence over the
outcome of matters submitted to our shareholders for a vote, including matters
that would involve a change of control of Emeritus. Further, our Articles of
Incorporation require a two-thirds supermajority vote to approve a business
combination of Emeritus with another company that is not approved by the board
of directors. Accordingly, the current management group and board of directors
could prevent approval of such a business combination. We currently have a
staggered board in which only one-third of the board stands for election each
year. Thus, absent removals and resignations, a complete change in board
membership could not be accomplished in fewer than approximately two calendar
years.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The table below provides information about our financial instruments entered
into for purposes other than trading that are sensitive to changes in interest
rates. For our debt obligations, the table presents principal repayments in
thousands of dollars and current weighted averages of interest rates on these
obligations as of December 31, 2002. For our debt obligations with variable
interest rates, the rates presented reflect the current rates in effect at the
end of 2002. These rates are based on LIBOR plus a margin of 4% .

Expected maturity date (In thousands)
--------------------------------------------------------
Average
Fair interest
2003 2004 2005 2006 2007 Thereafter Total value rate
------- ------- ------- ------- ------- ----------- ------- ------- ---------

Long-term debt:
Fixed rate. . $ 2,535 $ 2,431 $ 9,831 $ 5,830 $ 6,834 $ 31,230 $58,691 $54,582 9.18%
Variable rate $ 1,069 $ 1,154 $ 1,241 $ 7,289 $54,047 $ - $64,800 $64,800 6.67%

If market interest rates average 2% more in 2003 than they did in 2002, our
interest expense and net loss would increase by $1.3 million. These amounts are
determined by considering the impact of hypothetical interest rates on our
outstanding variable rate borrowings as of December 31, 2002, and do not
consider changes in the actual level of borrowings that may occur subsequent to
December 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 nor does it consider possible actions that management could take
with respect to our financial structure to mitigate the exposure to such a
change.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and the Independent Auditors' report are listed at Item
14 and are included beginning on Page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information under the caption "Executive Officers of the Registrant" in Part
I of this Form 10-K and under the captions "Election of Directors -- Nominees
for Election" and "Compliance with Section 16(a) of the Exchange Act of 1934" in
the Company's Proxy Statement relating to its 2003 annual meeting of
shareholders (the "Proxy Statement") is hereby incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information under the captions "Executive Compensation" and "Election of
Directors -- Director Compensation" in the Company's Proxy Statement is hereby
incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
EQUITY COMPENSATION PLAN INFORMATION

The information under the caption "Security Ownership of Certain Beneficial
Owners and Management" and "Equity Compensation Plan Information" in the
Company's Proxy Statement is hereby incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information under the caption "Certain Transactions" in the Company's Proxy
Statement is hereby incorporated by reference.

ITEM 14. CONTROLS AND PROCEDURES

We maintain a set of disclosure controls and procedures and internal controls
designed to ensure that information required to be disclosed in our filings
under the Securities Exchange Act of 1934 is recorded, processed, summarized,
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Our principal executive and financial officers
have evaluated our disclosure controls and procedures within 90 days prior to
the filing of this Annual Report on Form 10-K and have determined that such
disclosure controls and procedures are effective.

Subsequent to our evaluation, there were no significant changes in internal
controls or other factors that could significantly affect internal controls.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of the report:

(1) FINANCIAL STATEMENTS. The following financial statements of the
Registrant and the Report of Independent Public Accountants therein are filed as
part of this Report on Form 10-K:

Page
----

Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . F-3
Consolidated Statements of Operations . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Shareholders' Deficit and Comprehensive Operations . . . . . . . . . . F-7
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8

(2) FINANCIAL STATEMENT SCHEDULES.

Independent Auditors' Report on Financial Statement Schedule S-1
Schedule II Valuation and Qualifying Accounts S-2

Other financial statement schedules have been omitted because the information
required to be set forth therein is not applicable, is immaterial or is
shown in the consolidated financial statements or notes thereto.

(b) REPORTS ON FORM 8-K. A reports on Form 8-K was filed by the Registrant
during the quarter ended December 31, 2002, dated October 15, 2002, and was
amended on December 16, 2002.

(c) EXHIBITS: The following exhibits are filed as a part of, or incorporated
by reference into, this Report on Form 10-K:

Footnote
Number Description Number
--------- ------------------------------------------------------------------------------------------- ------------

3.1 Restated Articles of Incorporation of registrant (Exhibit 3.1). . . . . . . . . . . . . . . (2)
3.2 Amended and Restated Bylaws of the registrant (Exhibit 3.2) . . . . . . . . . . . . . . . . (1)
4.1 Forms of 6.25% Convertible Subordinated Debenture due 2006 (Exhibit 4.1). . . . . . . . . . (2)
4.2 Indenture dated February 15, 1996, between the registrant and Fleet National Bank
("Trustee") (Exhibit 4.2).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2)
4.3 Preferred Stock Purchase Agreement (including Designation of Rights and Preferences of
Series A Convertible Exchangeable Redeemable Preferred Stock of Emeritus
Corporation Agreement, Registration of Rights Agreement and
Shareholders Agreement) dated October 24, 1997, between the
registrant ("Seller") and Merit Partners, L.L.C. ("Purchaser")
(Exhibit 4.1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12)
10.1 Amended and Restated 1995 Stock Incentive Plan (Exhibit
99.1). (14)
10.2 Stock Option Plan for Nonemployee Directors (Exhibit 10.2). . . . . . . . . . . . . . . . . (2)
10.3 Form of Indemnification Agreement for officers and
directors of the registrant (Exhibit 10.3). . . . . . . . . . . . . . . . . . . . . . . . . (1)
10.4 Noncompetition Agreements entered into between the
registrant and each of the following individuals:
10.4.1 Daniel R. Baty (Exhibit 10.4.1), Raymond R.
Brandstrom (Exhibit 10.4.2) and Frank A. Ruffo
(Exhibit 10.4.3).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2)
10.9 Rosewood Court in Fullerton, California, the Arbor at Olive
Grove in Phoenix, Arizona, Renton Villa in Renton,
Washington, Seabrook in Everett, Washington, Laurel Lake
Estates in Vorhees, New Jersey, Green Meadows--

Footnote
Number Description Number
--------- ------------------------------------------------------------------------------------------- ------------

Allentown in Allentown, Pennsylvania, Green Meadows--Dover in Dover,
Delaware, Green Meadows--Latrobe in Latrobe, Pennsylvania,
Green Meadows--Painted Post in Painted Post, New York,
Heritage Health Center in Hendersonville, North Carolina.
The following agreements are representative of those
executed in connection with these properties:
10.9.1 Lease Agreement dated March 29, 1996, between the
registrant ("Lessee") and Health Care Property
Investors, Inc. ("Lessor") (Exhibit 10.10.1).. . . . . . . . . . . . . . . . . . . (3)
10.9.2 First Amendment Lease Agreement dated April 25,
1996, by and between the registrant ("Lessee")
and Health Care Property Investors, Inc.
("Lessor") (Exhibit 10.10.2).. . . . . . . . . . . . . . . . . . . . . . . . . . . (3)
10.9.3 Amended and Restated Master Lease Agreement dated September 18,
2002, between Health Care Property Investors, Inc., HCPI Trust,
Texas HCP Holding, L.P. ("Lessor") and Emeritus Corporation,
ESC III, L.P. ("Lessee").. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27)
10.9.4 Promissory Note between Emeritus Corporation ("Maker")
Health Care Property Investors, Inc. ("Lender"),
dated September 18, 2002.. . . . . . . . . . . . . . . . . . . . . . . . . . . . (27)
10.11 Summer Wind in Boise, Idaho
10.11.1 Lease Agreement dated as of August 31, 1995,
between AHP of Washington, Inc. and the
registrant (Exhibit 10.18.1).. . . . . . . . . . . . . . . . . . . . . . . . . . . (1)
10.11.2 First Amended Lease Agreement dated as of
December 31, 1996, by and between the registrant
and AHP of Washington, Inc. (Exhibit 10.16.2). . . . . . . . . . . . . . . . . . . (5)
10.13 The Palisades in El Paso, Texas, Amber Oaks in San Antonio,
Texas and Redwood Springs in San Marcos, Texas. The
following agreements are representative of those executed
in connection with these properties.
10.13.1 Lease Agreement dated April 1, 1997, between ESC
III, L.P. D/B/A Texas-ESC III, L.P. ("Lessee")
and Texas HCP Holding , L.P. ("Lessor") (Exhibit
10.4.1). (6)
10.13.2 First Amendment to Lease Agreement dated April 1,
1997, between Lessee and Texas HCP Holding , L.P.
Lessor (Exhibit 10.4.2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6)
10.13.3 Guaranty dated April 1, 1997, by the registrant
("Guarantor") in favor of Texas HCP Holding ,
L.P. (Exhibit 10.4.3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6)
10.13.4 Assignment Agreement dated April 1, 1997, between
the registrant ("Assignor") and Texas HCP Holding
, L.P. ("Assignee") (Exhibit 10.4.4).. . . . . . . . . . . . . . . . . . . . . . . (6)
10.15 Green Meadows Communities
10.15.1 Consent to Assignment of and First Amendment to
Asset Purchase Agreement dated September 1, 1995,
among the registrant, The Standish Care Company
and Painted Post Partnership, Allentown Personal
Car General Partnership, Unity Partnership,
Saulsbury General Partnership and P. Jules Patt
(collectively, the "Partnerships"), together with
Asset Purchase Agreement dated July 27, 1995,
among The Standish Care Company and the
Partnerships (Exhibit 10.24.1).. . . . . . . . . . . . . . . . . . . . . . . . . . (1)
10.15.2 Agreement to Provide Administrative Services to
an Adult Home dated October 23, 1995, between the
registrant and P. Jules Patt and Pamela J. Patt
(Exhibit 10.24.6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1)
10.15.3 Assignment Agreement dated October 19, 1995,
between the registrant, HCPI Trust and Health
Care Property Investors, Inc. (Exhibit 10.24.8). . . . . . . . . . . . . . . . . . (1)
10.15.4 Assignment and Assumption Agreement dated August
31, 1995, between the registrant and The Standish
Care Company (Exhibit 10.24.9).. . . . . . . . . . . . . . . . . . . . . . . . . . (1)
10.15.5 Guaranty dated October 19, 1995, by Daniel R.
Baty in favor of Health Care Property Investors,
Inc., and HCPI Trust (Exhibit 10.24.10). . . . . . . . . . . . . . . . . . . . . . (1)
10.15.6 Guaranty dated October 19, 1995, by the
registrant in favor of Health Care Property
Investors, Inc. (Exhibit 10.24.11).. . . . . . . . . . . . . . . . . . . . . . . . (1)
10.15.7 Second Amendment to Agreement to provide
Administrative Services to an Adult Home dated
January 1, 1997, between Painted Post Partners
and the registrant (Exhibit 10.2). . . . . . . . . . . . . . . . . . . . . . . . . (10)
10.16 Carolina Communities
10.16.1 Lease Agreement dated January 26, 1996, between
the registrant and HCPI Trust with respect to
Countryside Facility (Exhibit 10.23.1).. . . . . . . . . . . . . . . . . . . . . . (2)

Footnote
Number Description Number
--------- ------------------------------------------------------------------------------------------- ------------
10.16.3 Promissory Note dated as of January 26, 1996, in
the amount of $3,991,190 from Heritage Hills
Retirement, Inc. ("Borrower") to Health Care
Property Investors, Inc. ("Lender")
(Exhibit 10.23.4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2)
10.16.4 Loan Agreement dated January 26, 1996, between
the Borrower and the Lender (Exhibit 10.23.5). . . . . . . . . . . . . . . . . . . (2)
10.16.5 Guaranty dated January 26, 1996, by the
registrant in favor of the Borrower (Exhibit
10.23.6). (2)
10.16.6 Deed of Trust with Assignment of Rents, Security
Agreement and Fixture Filing dated as of January
26, 1996, by and among Heritage Hills Retirement,
Inc. ("Grantor"), Chicago Title Insurance Company
("Trustee") and Health Care Property Investor,
Inc. ("Beneficiary") (Exhibit 10.23.7).. . . . . . . . . . . . . . . . . . . . . . (2)
10.16.7 Lease Agreement dated as of January 26, 1996,
between the registrant and Health Care Property
Investor, Inc. with respect to Heritage Lodge
Facility (Exhibit 10.23.8).. . . . . . . . . . . . . . . . . . . . . . . . . . . . (2)
10.16.8 Lease Agreement dated as of January 26, 1996,
between the registrant and Health Care Property
Investor, Inc. with respect to Pine Park Facility
(Exhibit 10.23.9). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2)
10.16.9 Lease Agreement dated January 26, 1996, between
the registrant and HCPI Trust with respect to
Skylyn Facility (Exhibit 10.23.10).. . . . . . . . . . . . . . . . . . . . . . . . (2)
10.16.10 Lease Agreement dated January 26, 1996, between
the registrant and HCPI Trust with respect to
Summit Place Facility (Exhibit 10.23.11).. . . . . . . . . . . . . . . . . . . . . (2)
10.16.11 Amendment to Deed of Trust dated April 25, 1996,
between Heritage Hills Retirement, Inc.
("Grantor"), and Health Care Property Investors,
Inc. ("Beneficiary") (Exhibit 10.21.12). . . . . . . . . . . . . . . . . . . . . . (5)
10.18 Garrison Creek Lodge in Walla Walla, Washington, Cambria
in El Paso Texas, and Sherwood Place in Odessa, Texas.
The following agreements are representative of those
executed in connection with these properties:
10.18.1 Lease Agreement dated July, August and
September 1996, between the registrant
("Lessee") and American Health Properties, Inc.
("Lessor") (Exhibit 10.3.1). . . . . . . . . . . . . . . . . . . . . . . . . . . . (4)
10.18.2 First Amendment to Lease Agreement dated
December 31, 1996, between the registrant
("Lessee") and AHP of Washington, Inc.,
("Lessor") (Exhibit 10.35.2).. . . . . . . . . . . . . . . . . . . . . . . . . . . (5)
10.20 Rosewood Court in Fullerton, California, The Arbor at
Olive Grove in Phoenix, Arizona, Renton Villa in Renton,
Washington, Seabrook in Everett, Washington and Laurel
Lake Estates in Voorhees, New Jersey, Green Meadows--
Allentown in Allentown, Pennsylvania, Green Meadows--
Dover in Dover, Delaware, Green Meadows--Latrobe in
Latrobe, Pennsylvania, Green Meadows--Painted Post in
Painted Post, New York. The following agreements are
representative of those executed in connection with these
properties:
10.20.1 Second Amended Lease Agreement dated as of
December 30, 1996, by and between the
registrant and Health Care Property Investors,
Inc. (Exhibit 10.37.1).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5)
10.21 Cooper George Partners Limited Partnership
10.21.2 Partnership Interest Purchase Agreement dated
June 4, 1998, between Emeritus Real Estate L.L.C.
IV ("Seller") and Columbia Pacific Master Fund
98 General Partnership ("Buyer") (Exhibit
10.3.2). (15)
10.21.4 Amended and Restated Agreement of Limited
Partnership of Cooper George Partners Limited
Partnership dated June 29, 1998, between
Columbia Pacific Master Fund '98 General
Partnership, Emeritus Real Estate IV, L.L.C.
and Bella Torre De Pisa Limited Partnership
(Exhibit 10.3.4).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15)
10.22 Registration Rights Agreement dated February 8, 1996,
with respect to the registrant's 6.25%
Convertible Subordinated Debentures due 2006 (Exhibit
10.44). (2)
10.23 Registration Rights Agreement dated February 8, 1996,
with respect to the registrant's 6.25%
Convertible Subordinated Debentures due 2006 (Exhibit
10.45). (2)
10.24 Office Lease Agreement dated April 29, 1996, between
Martin Selig ("Lessor") and the registrant ("Lessee")
(Exhibit 10.8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3)
10.25 Colonie Manor in Latham, New York, Bassett Manor in
Williamsville, New York, West Side Manor in Liverpool, New
York, Bellevue Manor in Syracuse, New York, Perinton Park
Manor in Fairport, New York, Bassett Park Manor in
Williamsville, New York, Woodland Manor in Vestal, New York,
East Side Manor in Fayetteville, New York and West Side Manor
in Rochester, New York. The following agreement is
representative of those executed in connection with these
properties:

Footnote
Number Description Number
--------- ------------------------------------------------------------------------------------------- ------------
10.25.1 Lease Agreement dated September 1, 1996, between
Philip Wegman ("Landlord") and Painted Post
Partners ("Tenant") (Exhibit 10.4.1).. . . . . . . . . . . . . . . . . . . . . . . (4)
10.25.2 Agreement to Provide Administrative Services to an
Adult Home dated September 2, 1996, between the
registrant and Painted Post Partners ("Operator")
(Exhibit 10.4.2).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4)
10.25.3 First Amendment to Agreement to Provide
Administrative Services to an Adult Home dated
January 1, 1997, between Painted Post Partners and
the registrant (Exhibit 10.1). . . . . . . . . . . . . . . . . . . . . . . . . . . (10)
10.26 Columbia House Communities.
10.26.1 Management Services Agreement between the
Registrant ("Manager") and Columbia House, L.L.C.
("Lessee") dated November 1, 1996, with respect to
Camlu Retirement (Exhibit 10.6.1). . . . . . . . . . . . . . . . . . . . . . . . . (4)
10.26.2 Management Services Agreement dated January 1,
1998, between the registrant ("Manager") and
Columbia House L.L.C. ("Lessee") with respect to York
Care.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13)
10.26.4 Management Services Agreement dated June 1, 1997,
between the registrant ("Manager") and Columbia
House L.L.C. ("Owner") with respect to Autumn Ridge
(Exhibit 10.3.1).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9)
10.26.6 Assignment and First Amendment to Agreement to
Provide Management Services dated September 1,
1997, between the registrant, Columbia House,
L.L.C., Acorn Service Corporation and Camlu Coeur
d'Alene, L.L.C. with respect to Camlu. . . . . . . . . . . . . . . . . . . . . . . (13)
10.26.7 Assignment and First Amendment to Agreement to
Provide Management Services dated September 1,
1997, between the registrant, Columbia House,
L.L.C., Acorn Service Corporation and Autumn Ridge
Herculaneum, L.L.C. with respect to Autumn Ridge.. . . . . . . . . . . . . . . . . (13)
10.26.8 Management Services Agreement dated January 1,
1998, between the registrant ("Manager") and
Columbia House L.L.C. ("Owner") with respect to Park
Lane.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13)
10.27 Vickery Towers in Dallas, Texas
10.27.1 Partnership Interest Purchase and Sale Agreement
dated June 4, 1998, between ESC GP II, Inc. and
Emeritus Properties IV, Inc. (together "Seller")
and Columbia Pacific Master Fund 98 General
Partnership and Daniel R. Baty (together
"Purchaser") (Exhibit 10.4.1). . . . . . . . . . . . . . . . . . . . . . . . . . . (15)
10.27.2 Amended and Restated Agreement of Limited
Partnership of ESC II, LP dated June 30, 1998,
between Columbia Pacific Master Fund '98 General
Partnership and Daniel R. Baty (Exhibit 10.4.2). . . . . . . . . . . . . . . . . . (15)
10.27.3 Agreement to Provide Management Services To An
Independent and Assisted Living Facility dated June
30, 1998, between ESC II, LP ("Owner") and ESC III,
LP ("Manager") (Exhibit 10.4.3). . . . . . . . . . . . . . . . . . . . . . . . . . (15)
10.29 Development Properties in Auburn, Massachusetts, Louisville,
Kentucky and Rocky Hill, Connecticut. The following
agreements are representative of those executed in connection
with these properties:
10.29.1 Lease Agreement dated February 1996, between the
registrant ("Lessee") and LM Auburn Assisted Living
L.L.C., and LM Louisville Assisted Living L.L.C.,
("Landlords") with respect to the development
properties in Auburn and Louisville (Exhibit
10.58.1). (5)
10.29.2 Amended and Restated Lease Agreement dated February
26, 1996, between the registrant ("Lessee") and LM
Rocky Hill Assisted Living Limited Partnership,
("Landlord") with respect to the development
property in Rocky Hill (Exhibit 10.58.2).. . . . . . . . . . . . . . . . . . . . . (5)
10.29.3 Lease Agreement dated October 10, 1996, between the
registrant ("Lessee") and LM Chelmsford Assisted
Living L.L.C., ("Landlord") with respect to the
development property in Chelmsford (Exhibit
10.58.3). (5)
10.29.4 Promissory Note in the amount of $1,255,000 dated
December 1996, between the registrant ("Lender")
and LM Auburn Assisted Living L.L.C., ("Borrower")
with respect to the development property in
Auburn (Exhibit 10.58.4).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5)
10.29.5 Promissory Note in the amount of $1,450,000 dated
January 1997, between the registrant ("Lender")
and LM Louisville Assisted Living L.L.C.,
("Borrower") with respect to the development
property in Louisville (Exhibit 10.58.5).. . . . . . . . . . . . . . . . . . . . . (5)
10.29.6 Promissory Note in the amount of $1,275,000 dated
January 1997, between the registrant ("Lender")
and LM Rocky Hill Assisted Living Limited
Liability Partnership, ("Borrower") with respect
to the development property in Rocky Hill
(Exhibit 10.58.6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5)

Footnote
Number Description Number
--------- ------------------------------------------------------------------------------------------- ------------
10.29.7 Promissory Note in the amount of $300,000 dated
January 1997, between the registrant ("Lender")
and LM Chelmsford Assisted Living L.L.C.,
("Borrower") with respect to the development
property in Chelmsford (Exhibit 10.58.7).. . . . . . . . . . . . . . . . . . . . . (5)
10.29.8 Real Estate Purchase and Sale Agreement under the purchase
option on the lease dated January 1, 2000, between Auburn
Land L.L.C. ("Seller") and Emeritus Properties XIV, L.L.C. ("Buyer")
dated August 26, 2002.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27)
10.29.9 Sublease Termination and Release Agreement between
Sage Assisted Living L.L.C. ("Landlord") and Emeritus
Properties XIV, L.L.C. ("Tenant") dated August 26, 2002.. . . . . . . . . . . . . (27)
10.31 Senior Management Employment Agreements and Amendments
entered into between the registrant and each of the
following individuals:
10.31.1 Frank A. Ruffo (Exhibit 10.6.2) and Raymond R. Brandstrom (Exhibit 10.6.5).. . . . (9)
10.31.2 Raymond R. Brandstrom (Exhibit 10.11.1) and Frank A. Ruffo (Exhibit10.11.3). . . . (9)
10.32 La Casa Grande in New Port Richey, Florida, River Oaks in
Englewood, Florida, and Stanford Centre in Altamonte
Springs, Florida. The following agreements are
representative of those executed in connection with these
properties.
10.32.1 Stock Purchase Agreement dated September 30,
1996, between Wayne Voegele, Jerome Lang, Ronald
Carlson, Thomas Stanford, Frank McMillan, Lonnie
Carlson, and Carla Holweger ("Seller") and the
registrant ("Purchaser") with respect to La Casa
Grande (Exhibit 10.1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7)
10.32.2 First Amendment to Stock Purchase Agreement dated
January 31, 1997, between the Seller and the
registrant with respect to La Case Grande
(Exhibit 10.2).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7)
10.32.3 Stock Purchase Agreement dated September 30,
1996, between the Seller and the registrant with
respect to River Oaks (Exhibit 10.3).. . . . . . . . . . . . . . . . . . . . . . . (7)
10.32.4 First Amendment to Stock Purchase Agreement dated
January 31, 1997, between the Seller and the
registrant with respect to River Oaks (Exhibit
10.4). (7)
10.32.5 Stock Purchase Agreement dated September 30,
1996, between the Seller and the registrant with
respect to Stanford Centre (Exhibit 10.5). . . . . . . . . . . . . . . . . . . . . (7)
10.32.6 First Amendment to Stock Purchase Agreement dated
January 31, 1997, between the Seller and the
registrant with respect to Stanford Centre
(Exhibit 10.6).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7)
10.33 Painted Post Partnership
10.33.1 Painted Post Partners Partnership Agreement dated
October 1, 1995 (Exhibit 10.24.7). . . . . . . . . . . . . . . . . . . . . . . . . (1)
10.33.2 First Amendment to Painted Post Partners
Partnership Agreement dated October 22, 1996,
between Daniel R. Baty and Raymond R. Brandstrom
(Exhibit 10.20.20).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5)
10.33.3 Indemnity Agreement dated November 3, 1996,
between the registrant and Painted Post Partners
(Exhibit 10.3).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10)
10.33.4 First Amendment to Indemnity Agreement dated
January 1, 1997, between the registrant and
Painted Post Partners (Exhibit 10.4).. . . . . . . . . . . . . . . . . . . . . . . (10)
10.33.5 Undertaking and Indemnity Agreement dated October
23, 1995, between the registrant, P. Jules Patt
and Pamela J. Patt and Painted Post Partnership
(Exhibit 10.5).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10)
10.33.6 First Amendment to Undertaking and Indemnity
Agreement dated January 1, 1997, between Painted
post Partners and the registrant (Exhibit 10.6). . . . . . . . . . . . . . . . . . (10)
10.33.7 First Amendment to Non-Competition Agreement
between the registrant and Daniel R. Baty
(Exhibit 10.1.1) and Raymond R. Brandstrom
(Exhibit 10.1.2).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11)
10.34 Ridgeland Court in Ridgeland, Mississippi
10.34.1 Master Agreement and Subordination Agreement
dated September 5, 1997, between the
registrant, Emeritus Properties I, Inc., and
Mississippi Baptist Health Systems, Inc.
(Exhibit 10.1.1).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12)
10.34.2 License Agreement dated September 5, 1997,
between the registrant and its subsidiary and
affiliated corporations and Mississippi Baptist
Health Systems, Inc. (Exhibit 10.1.2). . . . . . . . . . . . . . . . . . . . . . . (12)
10.34.3 Economic Interest Assignment Agreement and
Subordination Agreement dated September 5,
1997, between the registrant, Emeritus
Properties I, Inc., and Mississippi Baptist
Health Systems, Inc. (Exhibit 10.1.3). . . . . . . . . . . . . . . . . . . . . . . (12)
10.34.4 Operating Agreement for Ridgeland Assisted
Living, L.L.C. dated December 23, 1998, between
the registrant,

Footnote
Number Description Number
--------- ------------------------------------------------------------------------------------------- ------------
Emeritust Properties XI, L.L.C.
and Mississippi Baptist Medical Enterprises,
Inc. (Exhibit 10.46.4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16)
10.34.5 Purchase and Sale Agreement dated December 23,
1998, between the registrant and Meditrust
Company L.L.C(Exhibit 10.46.5).. . . . . . . . . . . . . . . . . . . . . . . . . . (16)
10.36 Amendment to Office Lease Agreement dated September 6,
1996, between Martin Selig ("Lessor") and the registrant. . . . . . . . . . . . . . . . . . (13)
10.37 Villa Del Rey in Escondido, California
10.37.1 Purchase and Sale Agreement dated December 19,
1996, between the registrant ("Purchaser") and
Northwest Retirement ("Seller") (Exhibit
10.1.1). (6)
10.38 Development Property in Paso Robles, California
10.38.1 Agreement of TDC/Emeritus Paso Robles
Associates dated June 1, 1995, between the
registrant and TDC Convalescent, Inc. (Exhibit
10.2.1). (6)
10.38.7 Purchase and Sale Agreement between TDC Convalescent, Inc.
("Seller") and the registrant ("Purchaser") dated March 26, 2002.. . . . . . . . . (25)
10.41 Development Property in Danville, Illinois
10.41.1 Purchase and Sale Agreement dated October 14,
1997, between South Bay Partners, Inc.
("Purchaser") and Elks Lodge No. 332, BPOE
("Seller") (Exhibit 10.74.1).. . . . . . . . . . . . . . . . . . . . . . . . . . . (13)
10.41.2 Assignment and Assumption of Purchase and Sale
Agreement dated October 21, 1997, between South
Bay Partners, Inc. and the registrant (Exhibit
10.74.2). (13)
10.43 Sanyo Electric Co., Ltd.
10.43.1 Agreement entered into on May 30, 1996, between
the registrant and Sanyo Electric Co., Ltd. for
the interest in jointly entering the
development, construction and /or operation of
the Senior Housing Business in Japan (Exhibit
10.76.1). (13)
10.43.2 Joint Venture Agreement entered into on July 9,
1997, between the registrant and Sanyo Electric
Co., Ltd. (Exhibit 10.76.2). . . . . . . . . . . . . . . . . . . . . . . . . . . . (13)
10.45 1998 Employee Stock Purchase Plan (Exhibit 99.2). . . . . . . . . . . . . . . . . . . . . . (14)
10.49 Richland Gardens in Richland, Washington, Charlton Place
in Tacoma Washington, The Pines of Goldsboro in
Goldsboro, North Carolina, Silverleaf Manor in Meridian,
Mississippi and Wilburn Gardens in Fredericksburg,
Virginia. The following agreement is representative of
those executed in connection with these properties.
10.49.1 Agreement To Provide Management Services To An
Assisted Living Facility dated February 2,
1998, between Richland Assisted, L.L.C.
("Owner") and Acorn Service Corporation
("Manager") (Exhibit 10.9.1).. . . . . . . . . . . . . . . . . . . . . . . . . . . (15)
10.50 Richland Gardens in Richland, Washington, The Pines of
Goldsboro in Goldsboro, North Carolina, Silverleaf Manor
in Meridian, Mississippi, Wilburn Gardens in
Fredericksburg, Virginia and Park Lane in Toledo, Ohio.
The following agreement is representative of those
executed in connection with these properties.
10.50.1 Marketing Agreement dated February 2, 1998,
between Acorn Service Corporation ("Acorn") and
Richland Assisted, L.L.C. ("RAL.L.C.") (Exhibit
10.10.1). (15)
10.51 Kirkland Lodge in Kirkland, Washington
10.51.1 Purchase and Sale Agreement dated December 23,
1998, between the registrant and Meditrust
Company L.L.C(Exhibit 10.46.5).. . . . . . . . . . . . . . . . . . . . . . . . . . (16)
10.51.2 Loan Agreement dated December 28, 1998, between
Emeritus Properties X, L.L.C and Guaranty
Federal Bank (Exhibit 10.65.2).. . . . . . . . . . . . . . . . . . . . . . . . . . (16)
10.51.3 Promissory Note Agreement dated December 28,
1998, between Emeritus Properties X, L.L.C and
Guaranty Federal Bank (Exhibit 10.65.3). . . . . . . . . . . . . . . . . . . . . . (16)
10.51.4 Guaranty Agreement dated December 28, 1998,
between the registrant and Guaranty Federal
Bank (Exhibit 10.65.3).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16)
10.52 Emeritrust Communities
10.52.1 Purchase and Sale Agreement dated December 30,
1998, between the registrant, Emeritus
Properties VI, Inc., ESC I, L.P. and AL
Investors L.L.C(Exhibit 10.66.1).. . . . . . . . . . . . . . . . . . . . . . . . . (16)
10.52.2 Supplemental Purchase Agreement in Connection
with Purchase of Facilities dated December 30,
1998, between the registrant, Emeritus
Properties I, Inc. Emeritus Properties VI,
Inc., ESC I, L.P. and AL Investors L.L.C

Footnote
Number Description Number
--------- ------------------------------------------------------------------------------------------- ------------
(Exhibit 10.66.2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16)
10.52.3 Management Agreement with Option to Purchase
dated December 30, 1998, between the
registrant, Emeritus Management I LP, Emeritus
Properties I, Inc, ESC I, L.P., Emeritus
Management L.L.C. and AL Investors L.L.C(Exhibit
10.66.3). (16)
10.52.4 Guaranty of Management Agreement and Shortfall
Funding Agreement dated December 30, 1998,
between the registrant and AL Investors L.L.C
(Exhibit 10.66.4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16)
10.52.5 Put and Purchase Agreement dated December 30,
1998, between Daniel R. Baty and AL Investors
L.L.C(Exhibit 10.66.5) Second Emeritrust.. . . . . . . . . . . . . . . . . . . . . (16)
10.52.6 First Amendment to Management Agreement with Option
to Purchase (AL I - Emeritrust 25 Facilities) dated March 22, 2001,
between the registrant, Emeritus Management I LP, and AL
Investors L.L.C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24)
10.52.7 Amendment to Guaranty of Management Agreement and
Shortfall Funding Agreement (Emeritrust 25) dated March 22, 2001,
between the registrant and AL Investors L.L.C. . . . . . . . . . . . . . . . . . . . (24)
10.52.8 Second Amendment to Put and Purchase Agreement (AL I -
Emeritrust 25 Facilities) dated March 22, 2001, between Daniel R.
Baty and AL Investors L.L.C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24)
10.52.9 Second Amendment to Management Agreement with Option to
Purchase (AL I - Emeritrust 25 Facilities) dated January 1, 2002,
between the registrant, Emeritus Management I LP, and AL
Investors L.L.C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24)
10.52.10 Third Amendment to Put and Purchase Agreement (AL I -
Emeritrust 25 Facilities) dated January 1, 2002, between Daniel R. Baty
and AL Investors L.L.C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24)
10.52.11 Waiver, Consent, and Amendment to Management Agreement dated
May 1, 2002, (AL I-Laurel Place) between Emeritus Management, L.L.C.,
the registrant, and AL I Investors, L.L.C.. . . . . . . . . . . . . . . . . . . . . . . (25)
10.53 Emeritrust II Communities
10.53.1 Supplemental Purchase Agreement in Connection
with Purchase of Facilities (AL II--14
Operating Facilities) dated March 26,1999,
between the registrant, Emeritus Properties I,
Inc., ESC G.G. I, Inc., ESC I, L.P. and AL
Investors II LLC. (Exhibit 10.1.1).. . . . . . . . . . . . . . . . . . . . . . . (17)
10.53.2 Management Agreement with Option to Purchase
(AL II--14 Operating Facilities) dated March
26, 1999, between the registrant, Emeritus
Management I LP, Emeritus Properties I, Inc.,
ESC G.P. I, Inc., ESC I, L.P., Emeritus
Management L.L.C. and AL Investors II L.L.C. (Exhibit
10.1.2). (17)
10.53.3 Guaranty of Management Agreement (AL II--14
Operating Facilities) dated March 26, 1999,
between the registrant and AL Investors II L.L.C.
(Exhibit 10.1.3).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17)
10.53.4 Supplemental Purchase Agreement in Connection
with Purchase of Facilities (AL II--5
Development Facilities) dated March 26, 1999,
between the registrant, Emeritus Properties I,
Inc. and AL Investors Development L.L.C. (Exhibit
10.1.4). (17)
10.53.5 Management Agreement with Option to Purchase
(AL II--5 Development Facilities) dated
March 26, 1999, between the registrant,
Emeritus Properties I, Inc., Emeritus
Management LLC and AL Investors Development LLC
(Exhibit 10.1.5).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17)
10.53.6 Guaranty of Management Agreement and Shortfall
Funding Agreement (AL II--5 Development
Facilities) dated March 26, 1999, between the
registrant and AL Investors Development LLC
(Exhibit 10.1.6).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17)
10.53.7 Put and Purchase Agreement (AL II Holdings--14
Operating Facilities and 5 Development
Facilities) dated March 26, 1999, between
Daniel R. Baty and AL II Holdings L.L.C., AL
Investors II L.L.C. and AL Investors Development
L.L.C. (Exhibit 10.1.7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17)
10.53.8 Second Amendment to Management Agreement (AL II -
14 Operating Facilities) (GMAC) dated March 22, 2001, between the
registrant, Emeritus Management L.L.C., Emeritus Management I,
and AL Investors II L.L.C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24)
10.53.9 Second Amendment to Put and Purchase Agreement (AL
II Holdings - 14 Operating Facilities and 5 Development Facilities)
dated March 22, 2001, between Daniel R. Baty and AL II Holdings
L.L.C., AL Investors II L.L.C. and AL Investors Development L.L.C. . . . . . . . . (24)
10.53.10 First Amendment to Management Agreement (AL II -
5 Development Facilities) dated January 1, 2002, between the
registrant, Emeritus Management L.L.C., and AL Investors
Development L.L.C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24)
10.53.11 Third Amendment to Put and Purchase Agreement (AL II
Holdings - 14 Operating Facilities and 5 Development Facilities)
dated January 1, 2002, between Daniel R. Baty and AL II Holdings
L.L.C., AL Investors II L.L.C., and AL

Footnote
Number Description Number
--------- ------------------------------------------------------------------------------------------- ------------
Investors Development L.L.C. . . . . . . . . (24)
10.53.12 Third Amendment to Management Agreement (AL II -
14 Operating Facilities) (GMAC) dated January 1, 2002, between
the registrant, Emeritus Management L.L.C., Emeritus Management I LP,
and AL Investors II L.L.C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24)
10.54 Meadow Lodge at Drum Lodge Hill in Chelmsford,
Massachusetts
10.54.1 Purchase and Sales Agreement dated April 23,
1999, between LM Chelmsford Assisted Living,
L.L.C. ("Seller") and the registrant ("purchaser")
(Exhibit 10.1.1).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18)
10.55 Meadow Lodge at Drum Hill in Chelmsford, Massachusetts,
Cobblestones at Fairmont in Manassas, Virginia, Kirkland
Lodge in Kirkland, Washington and Ridgeland Pointe in
Ridgeland, Mississippi. The following agreements are
representative of those executed in conjunction with these
properties.
10.55.1 Fixed Rate Note dated September 29, 1999,
between Amresco Capital, L.P. ("Payee") and the
registrant ("Maker") (Exhibit 10.2.1).. . . . . . . . . . . . . . . . . . . . . . (18)
10.55.2 Mortgage and Security Agreement dated September
29, 1999, between Amresco Capital, L.P.
(Mortgagee") and the registrant ("mortgagor")
(Exhibit 10.2.2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18)
10.56 Series B Preferred Stock Purchase Agreement dated as of
December 10, 1999, between Emeritus Corporation and Saratoga
Partners IV, L.P. (Exhibit 4.1).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19)
10.57 Designation of Rights and Preferences of Series B
Convertible Preferred Stock as filed with the Secretary of
State of Washington on December 29, 1999 (Exhibit 4.2). . . . . . . . . . . . . . . . . . . (19)
10.58 Shareholders Agreement dated as of December 30, 1999, among
Emeritus Corporation, Daniel R. Baty, B.F., Limited
Partnership and Saratoga Partners IV, L.P. (Exhibit 4.3). . . . . . . . . . . . . . . . . . (19)
10.59 Registration Rights Agreement dated as of December 30, 1999,
between Emeritus Corporation and Saratoga Partners IV, L.P.
(Exhibit 4.4).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19)
10.60 Investment Agreement dated as of December 30, 1999, among
Emeritus Corporation, Daniel R. Baty, B.F., Limited
Partnership and Saratoga Partners IV, L.P., Saratoga
Partners IV, L.P. and Saratoga Management Company L.L.C
(Exhibit 4.5).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19)
10.62 Emerald Hills in Auburn
10.62.2 Lease agreement dated September 5, 2001, between Health
Care Property Investors, Inc. ("Lessor"), and Emeritus
Corporation ("Lessee").. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24)
10.63 Sierra Hills in Cheyenne, Wyoming
10.63.1 Lease agreement dated September 29, 2000, and
effective October 1, 2000, between HR
Acquisitions I Corporation ("Lessor") and
Emeritus Corporation ("Lessee").. . . . . . . . . . . . . . . . . . . . . . . . . (20)
10.63.2 Lease Assignment and Operations Transfer Agreement dated
September 30, 2001, between Emeritus Corporation ("Tenant")
and Sierra Hills Assisted Living Community, L.L.C., ("Assignee")
and Jon M. and Kristin P. Harder, husband and wife, Darryl E.
and Carol L. Fisher, husband and wife, Eric W. and Marti M.
Jacobson, husband and wife and Sunwest Management, Inc.
("Guarantor").. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24)
10.65 Loyalton of Hattiesburg in Hattiesburg, Mississippi
10.65.2 Purchase agreement for Hattiesburg between ALCO XII L.L.C.
("Seller") and the registrant ("Purchaser") dated March 27, 2002.. . . . . . . . (25)
10.66 Loyalton of Biloxi in Biloxi, Mississippi
10.66.2 Lease agreement dated September 5, 2001, between Health
Care Property Investors, Inc. ("Lessor"), and Emeritus
Corporation ("Lessee"). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24)
10.67 Amended 1998 Employee Stock Purchase Plan (as amended and
restated on May 19, 1999, and August 17, 2001). (Appendix B). . . . . . . . . . . . . . (23)
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 Placeat 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:
10.68.1 Horizon Bay Lease Facilities Purchase Agreement between Integrated
Living Communities of Alexandria, L.L.C, Integrated Living Communities
of Lake Charles, L.L.C., Integrated Living Communities of Lafayette, L.L.C.,

Footnote
Number Description Number
--------- ------------------------------------------------------------------------------------------- ------------
Integrated Living Communities of Henderson, L.P., Integrated Living
Communities of Oakwell, L.P., Integrated Living Communities of
San Antonio, L.P., and Integrated Living Communities of McKinney, L.P.,
(collectively, the "Seller") and the registrant ("Purchaser") dated
April 4, 2002.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
10.68.2 Horizon Bay Purchase Agreement between the registrant ("Purchaser")
and Senior Lifestyle Shreveport, L.L.C. ("Seller"), dated April 17, 2002. . . . . (25)
10.68.3 First Amendment to the Horizon Bay Lease Facilities Purchase
Agreement between the registrant ("Purchaser") and Integrated Living
Communities of Alexandria, L.L.C, Integrated Living Communities
of Lake Charles, L.L.C., Integrated Living Communities of Lafayette, L.L.C.,
Integrated Living Communities of Henderson, L.P., Integrated Living
Communities of Oakwell, L.P., Integrated Living Communities of
San Antonio, L.P., and Integrated Living Communities of McKinney, L.P.,
(collectively, the "Seller") dated May 1, 2002.. . . . . . . . . . . . . . . . . (25)
10.68.4 First Amendment to the Horizon Bay Purchase Agreement
between the registrant ("Purchaser") and Senior Lifestyle
Shreveport, L.L.C. ("Seller"), dated May 1, 2002. . . . . . . . . . . . . . . . . (25)
10.68.5 Amended and restated funding agreement between the registrant
and HB-ESC I, L.L.C., HB-ESC II, L.L.C., and HB-ESC V, L.P.,
dated May 1, 2002.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
10.68.6 Agreement to provide management services to assisted living
facilities (Lafayette) between HB-ESC II, L.P., and the registrant
dated May 1, 2002.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
10.68.7 Agreement to provide management services to assisted living
facilities (Lake Charles) between HB-ESC II, L.P., and the registrant
dated May 1, 2002.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
10.68.8 Agreement to provide management services to assisted living
facilities (Alexandria) between HB-ESC II, L.P., and the registrant
dated May 1, 2002.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
10.68.9 Agreement to provide management services to assisted living
facilities (Shreveport) between HB-ESC I, L.P., and the registrant
dated May 1, 2002.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
10.68.10 Agreement to provide management services to assisted living
facilities (Henderson) between HB-ESC V, L.P., and the registrant
dated May 9, 2002.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
10.68.11 Agreement to provide management services to assisted living
facilities (Medical Center) between HB-ESC V, L.P., and the registrant
dated May 9, 2002.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
10.68.12 Agreement to provide management services to assisted living
facilities (Oakwell Farms) between HB-ESC V, L.P., and the registrant
dated May 9, 2002.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
10.68.13 Agreement to provide management services to assisted living
facilities (Stonebridge) between HB-ESC V, L.P., and the registrant
dated May 9, 2002.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
10.68.14 Second Amendment to the Horizon Bay Purchase Agreement
between the registrant ("Purchaser") and Senior Lifestyle
Shreveport, L.L.C. ("Seller"), dated May 31, 2002.. . . . . . . . . . . . . . . . (25)
10.68.15 Third Amendment to the Horizon Bay Purchase Agreement
between the registrant ("Purchaser") and Senior Lifestyle
Shreveport, L.L.C. ("Seller"), dated June 14, 2002. . . . . . . . . . . . . . . . (25)
10.68.16 Fourth Amendment to the Horizon Bay Purchase Agreement
between the registrant ("Purchaser") and Senior Lifestyle
Shreveport, L.L.C. ("Seller"), dated June 28, 2002. . . . . . . . . . . . . . . . (25)
10.69 Willow Park and West Wind in Boise, Idaho, Sunshine Villa in Santa Cruz,
California, Orchard Park in Clovis, California, Willow Creek in Folsom,
California, Regent Court in Medesto, California, Villa Sera in Salinas,
California, Regent House in Merced, California, Regent Senior Living in
West Covina, California, Sheldon Park in Eugene, Oregon, Regency Park in
Portland, Oregon, Regent Court in Corvalis, Oregon, Hamilton House in
San Antonio, Texas, Regent Court at Scottsdale and Desert Flower
in Scottsdale, Arizona, Sterling Park in Redmond, Washington, Regent Court
in Kent, Washington, and Northshore House in Kenmore, Washington
The following agreements are representative of those executed in connection
with these properties:
10.69.1 Amended and Restated Agreement to provide management services
to Assisted Living Facilities between Regent Assisted Living, Inc.
("Owner"), and the registrant ("Manager") dated December 31, 2001. . . . . . . . (25)
10.69.2 Amended and Restated Agreement to provide accounting and
consulting services to California Assisted Living Facilities between
Regent Assisted Living, Inc. ("Owner"), and the registrant ("Manager")
dated December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)

Footnote
Number Description Number
--------- ------------------------------------------------------------------------------------------- ------------
10.69.3 Agreement to provide management services to Washington
Assisted Living Facilities between Regent Assisted Living, Inc.
("Owner"), and the registrant ("Manager") dated December 31, 2001. . . . . . . . (25)
10.69.4 Agreement to provide accounting and consulting services to
California Assisted Living Facilities (Willow Creek-Folsom) between
Regent Assisted Living, Inc. ("Owner"), and the registrant ("Manager")
dated February 15, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
10.69.5 Lease and Working Capital Agreement between Sacramento County
Assisted, L.L.C.("Landlord") and Regent Assisted Living, Inc.("Tenant")
dated February 15, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
10.69.6 Assignment and Release Agreement between Regent Assisted Living,
Inc.("Assignor"), the registrant ("Assignee"), and Sacramento County
Assisted, L.L.C. ("Landlord") dated July 2, 2002.. . . . . . . . . . . . . . . . (25)
10.69.7 First Amendment to Lease and Working Capital Agreement between
Sacramento County Assisted, L.L.C. ("Landlord") and the registrant
("Tenant") dated July 2, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . (25)
10.69.8 Agreement and Consent of Assignment of Lease between . . . . . . . . . . . . . . . (27)
Texas HCP Holding, Inc. ("Lessor"), Regent Assisted Living ("Assignor"),
ESC III, L.P. ("Assignee") dated September 18, 2002. . . . . . . . . . . . . . . (27)
10.69.9 Lease Assignment and Operations Transfer Agreement between . . . . . . . . . . . . (27)
Regent Assisted Living ("Tenant") and ESC III, L.P. ("Assignee")
dated September 18, 2002.. . . . . . . . . . . . . . . . . . . . . . . . . . . . (27)
10.70 Loyalton Court at Scottsdale, Arizona. The following agreements are
representative of those executed in connection with the property:
10.70.1 Agreement to provide management services to Assisted Living
Facilities (Scottsdale) between Scottsdale Assisted, L.L.C, ("Owner")
and the registrant ("Manager") dated February 8, 2002. . . . . . . . . . . . . . (25)
10.70.2 First Amendment to Management Agreement (Scottsdale) between
Scottsdale Assisted, L.L.C, ("Owner") and the registrant ("Manager")
dated February 15, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25)
10.71 Lodge at Eddy Pond, Massachusetts. The following agreements are
representative of those executed in connection with the property:
10.71.1 Loan Agreement between Heller Healthcare Finance, Inc. ("Lender")
and Emeritus Properties XIV, L.L.C. ("Borrower") dated August 26, 2002.. . . . . (27)
10.71.2 Promissory Note A between Heller Healthcare Finance, Inc. ("Holder")
and Emeritus Properties XIV, L.L.C. ("Maker") dated August 26, 2002. . . . . . . (27)
10.71.3 Subordinate Promissory Note B between Heller Healthcare
Finance, Inc. ("Holder") and Emeritus Properties XIV, L.L.C.
("Maker") dated August 26, 2002. . . . . . . . . . . . . . . . . . . . . . . . . (27)
10.71.4 Real Property Mortgage with Power of Sale and Security
Agreement (Massachusetts) dated August 21, 2002. . . . . . . . . . . . . . . . . (27)
10.71.5 Collateral Assignment of Management Agreement and
Waiver of Property Management and Broker Liens
dated August 26, 2002.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27)
10.71.6 Guaranty by registrant ("Guarantor") to Heller Healthcare Finance,
Inc. ("Lender") dated August 26, 2002.. . . . . . . . . . . . . . . . . . . . . . (27)
10.71.7 Lease and Rent Assignment Agreement between Emeritus
Properties XIV, L.L.C. ("Assignor") to Heller Healthcare Finance,
Inc. ("Assignee") dated August 21, 2002.. . . . . . . . . . . . . . . . . . . . . (27)
10.71.8 Side Letter regarding Deutsche Bank Refinancing and the registrants
intent on refinancing with Heller Healthcare Finance, Inc. ("Lender")
dated August 26, 2002.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27)
10.71.9 Senior Housing Rider between Emeritus Properties XIV, L.L.C. ("Borrower"),
Emeritus Corporation ("Manager") and Heller Healthcare Finance,
Inc. ("Lender") dated August 26, 2002. . . . . . . . . . . . . . . . . . . . . . (27)
10.71.10 Hazardous Materials Indemnity Agreement between Emeritus
Properties XIV, L.L.C. ("Borrower"), Emeritus Corporation ("Guarantor")
and Heller Healthcare Finance, Inc. ("Lender") dated August 26, 2002.. . . . . . (27)
10.72 Champion Oaks, Texas, Collin Oaks, Texas, Galleria Oaks, Alabama,
Loyalton of Austin, Texas, Loyalton of Lake Highlands, Texas,
Memorial Oaks, Texas, Meridian Oaks, Indiana, Sugar Land Oaks, Texas,
Tanglewood Oaks, Texas, Woodbridge Estates, Texas, Village Oaks at
Chandler, Arizona, Cielo Vista, Texas, Conway, Florida, Farmers Branch, Texas,
Fort Wayne, Indiana, Glendale, Arizona, Greenwood, Indiana,
Hollywood Park, Texas, Las Vegas, Nevada, Melbourne, Florida, Mesa, Arizona,
Orange Park, Florida, Southpoint, Florida, Tuskawilla, Florida. The following
agreements are representative of those executed in connection with the properties:
10.72.1 Master Lease Agreement between various subsidiaries and
affiliates of Fretus Investors L.L.C. ("Landlord") and

Footnote
Number Description Number
--------- ------------------------------------------------------------------------------------------- ------------
Emeritus Properties-NGH, L.L.C. and ESC-NGH, L.P. ("Tenant")
dated October 1, 2002.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26)
10.73 Concorde, Nevada, Courtyard at the Willows, Washington, Fulton Villa, California,
Juniper Meadows, Idaho , La Casa Grande, Florida , Lodge at Eddy Pond, Massachusetts,
River Oaks, Florida, Silver Pines, Iowa , Springmeadows, Montana,
Stanford Centre, Florida, Villa del Rey, California. The following agreements
are representative of those executed in connection with these properties:
10.73.1 Master Lease by Emeritus Realty II, LLC, Emeritus Realty III, LLC,
Emeritus Realty V, LLC, Emeritus Realty VII, LLC, Emeritus Realty XIV, LLC,
Emeritus Realty Puyallup, LLC, Emeritus Realty Bozeman, LLC,
ESC-Port St. Richie, LLC, (collectively and Emeritus Corporation,
Emeritus Properties II, Inc., Emeritus Properties III, Inc.,
Emeritus Properties V, Inc., Emeritus Properties XIV, LLC,
ESC-New Port Richey, LLC, ESC-Bozeman, LLC, dated December 6, 2002. . . . . . . (28)
10.73.2 Loan Agreement by and between General Electric Capital Corporation,
a Delaware corporation, and Emeritus Realty II, LLC, Emeritus Realty III, LLC,
Emeritus Realty V, LLC, Emeritus Realty VII, LLC, Emeritus Realty XIV, LLC,
Emeritus Realty Bozeman, LLC, Emeritus Realty Puyallup, LLC,
ESC-Port St. Richie. LLC, dated December 6, 2002. . . . . . . . . . . . . . . . (28)
10.73.3 Promissory Note A by Emeritus Realty II, LLC, Emeritus Realty III, LLC,
Emeritus Realty V, LLC, Emeritus Realty VII, LLC, Emeritus Realty XIV, LLC,
Emeritus Realty Bozeman, LLC, Emeritus Realty Puyallup, LLC,
ESC-Port St. Richie. LLC, to General Electric Capital Corporation,
a Delaware corporation, dated December 6, 2002. . . . . . . . . . . . . . . . . (28)
10.73.4 Subordinated Promissory Note B by ESC-Port St. Richie, LLC,
a Washington limited liability company, to General Electric
Capital Corporation, dated December 6, 2002.. . . . . . . . . . . . . . . . . . (28)
10.73.5 Loan Agreement by and between Emeritus Realty Corporation,
a Nevada corporation and Health Care Property Investors, Inc.,
a Maryland corporation, dated December 6, 2002. . . . . . . . . . . . . . . . . (28)
10.73.6 Promissory Note by Emeritus Realty Corporation, a Nevada corporation,
to Health Care Property investors, Inc., a Maryland corporation,
dated December 6, 2002.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28)
10.74 Hearthside Issaquah, Washington. The following agreements are representative
of those executed in connection with these properties:
10.74.1 Second Amendment to Loan Agreement by and between Emeritus
Properties XIII, LLC ("Borrower") and GMAC Commercial Mortgage
Corporation, ("Lender") dated January 29, 2003. . . . . . . . . . . . . . . . . . (28)
10.74.2 Restatement, Amendment, and Bifurcation of Promissory Note A
between Emeritus Properties XIII, LLC ("Borrower"), and GMAC Commercial
Mortgage Corporation ("Lender") dated January 29, 2003.. . . . . . . . . . . . . (28)
10.74.3 Restatement, Amendment, and Bifurcation of Promissory Note B
between Emeritus Properties XIII, LLC ("Borrower"), and GMAC Commercial
Mortgage Corporation ("Lender") dated January 29, 2003.. . . . . . . . . . . . . (28)
10.74.4 Amendment to Promissory Note between M&M Properties ("Holder")
and Emeritus Corporation and Emeritus Properties XIII, LLC ("Maker")
dated January 29, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28)
21.1 Subsidiaries of the registrant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28)
23.1 Consent of KPMG LLP.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28)
99.1 Certification of Periodic Reports
99.1.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 for Daniel R. Baty dated
March 27, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28)(29)
99.1.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 for Raymond R. Brandstrom
dated March 27, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28)(29)
99.2 Press Releases
99.2.1 Press Release dated October 1, 2002, announcing the 24
Marriott community acquisition. . . . . . . . . . . . . . . . . . . . . . (26)
99.2.2 Press Release dated March 25, 2003, reports on fourth quarter and year
2002 results.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28)

(1) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-1 (File No. 33-97508) declared
effective on November 21, 1995.
(2) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on March 29, 1996.

(3) Incorporated by reference to the indicated exhibit filed with the
Company's Second Quarter Report on Form 10-Q (File No. 1-14012) on August 14,
1996.
(4) Incorporated by reference to the indicated exhibit filed with the
Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on November 14,
1996.
(5) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on March 31, 1997.
(6) Incorporated by reference to the indicated exhibit filed with the
Company's First Quarter Report on Form 10-Q (File No. 1-14012) on May 15, 1997.
(7) Incorporated by reference to the indicated exhibit filed with the
Company's Current Report on Form 8-K (File No. 1-14012) on May 16, 1997.
(8) Incorporated by reference to the indicated exhibit filed with the
Company's Current Report on Form 8-K Amendment No. 1 (File No. 1-14012) on July
14, 1997.
(9) Incorporated by reference to the indicated exhibit filed with the
Company's Second Quarter Report on Form 10-Q (File No. 1-14012) on August 14,
1997.
(10) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-3 Amendment No. 2 (File No.
333-20805) on August 14, 1997.
(11) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-3 Amendment No. 3 (File No.
333-20805) on October 29, 1997.
(12) Incorporated by reference to the indicated exhibit filed with the
Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on November 14,
1997.
(13) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on March 30, 1998.
(14) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-8 (File No. 333-60323) on July 31,
1998.
(15) Incorporated by reference to the indicated exhibit filed with the
Company's Second Quarter Report on Form 10-Q (File No. 1-14012) on August 14,
1998
(16) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on March 31, 1999.
(17) Incorporated by reference to the indicated exhibit filed with the
Company's First Quarter Report on Form 10-Q (File No. 1-14012) on May 10, 1999.
(18) Incorporated by reference to the indicated exhibit filed with the
Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on November 15,
1999.
(19) Incorporated by reference to the indicated exhibit filed with the
Company's Form 8-K (File No. 1-14012) on January 14, 2000.
(20) Incorporated by reference to the indicated exhibit filed with the
Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on November 14,
2000.
(21) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on April 2, 2001.
(22) Incorporated by reference to the indicated exhibit filed with the
Company's Current Report on Form 8-K (File No. 1-14012) on July 18, 2001.
(23) Incorporated by reference to the indicated exhibit filed with the
Company's Definitive Proxy Statement on Form DEF 14A on August 17, 2001.
(24) Incorporated by reference to the indicated exhibit filed
with the Company's Annual Report on Form 10-K (File No. 1-14012) on March 29,
2002.
(25) Incorporated by reference to the indicated exhibit filed with the
Company's Second Quarter Report on Form 10-Q (File No. 1-14012) on August 14,
2002.
(26) Incorporated by reference to the indicated exhibit filed with the
Company's Form 8-K (File No. 1-14012) on October 15, 2002.
(27) Incorporated by reference to the indicated exhibit filed with the
Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on November 8,
2002.
(28) Filed herewith.
(29) A signed original of this written statement required by Section 906 has
been provided to Emeritus Corporation and will be retained by Emeritus
Corporation and furnished to the Securities and Exchange Commission or its staff
upon request

SIGNATURES

Pursuant to the requirements of 13 Of 15(d) 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.

EMERITUS CORPORATION
(Registrant)

Dated: March 28, 2003

SIGNATURES

Pursuant to the requirements of 13 of 15(d) 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.

Emeritus Corporation
(Registrant)

Dated: March 28, 2003

Signature. . . . . . . . . . Title
---------------------------- ---------------------------

/s/ Daniel R. Baty . . . . Chief Executive Officer and
----------------------------
Daniel R. Baty . . . . . . . Chairman of the Board

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

/s/ Patrick Carter . . . . Director
----------------------------
Patrick Carter

/s/ Charles P. Durkin. . . Director
----------------------------
Charles P. Durkin

/s/ David Hamamoto . . . . Director
----------------------------
David Hamamoto

/s/ David W. Niemiec . . . Director
----------------------------
David W. Niemiec

CERTIFICATIONS

I, Daniel R. Baty, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Emeritus Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which the annual report is being prepared;
b) evaluated the effectiveness of the issuer's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this Annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
(a pre-existing term relating to internal controls regarding financial
reporting) which could adversely affect the issuer's ability to record, process,
summarize and report financial data and have identified for the issuer's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the issuer's internal controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

/S/ Daniel R. Baty
Daniel R. Baty
Chief Executive Officer
March 27, 2003

CERTIFICATIONS

I, Raymond R. Brandstrom, certify that:
1. I have reviewed this annual report on Form 10-K of Emeritus Corporation;

/S/ Raymond R. Brandstrom
Raymond R. Brandstrom
Chief Financial Officer
March 27, 2003

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
----

Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001. . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended December 31, 2002, 2001, and 2000 . . . F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000 . . . F-5
Consolidated Statements of Shareholders' Deficit and Comprehensive Operations for the years ended
December 31, 2002, 2001, and 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Independent Auditors' Report on Financial Statement Schedule . . . . . . . . . . . . . . . . . . S-1
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . S-2

F-1

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Emeritus Corporation

We have audited the consolidated balance sheets of Emeritus Corporation and
subsidiaries ("the Company") as of December 31, 2002 and 2001, and the related
consolidated statements of operations, shareholders' deficit and comprehensive
operations, and cash flows for each of the years in the three-year period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Emeritus Corporation
and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.

/s/KPMG LLP
Seattle, Washington
March 14, 2003
F-2

EMERITUS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS

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

Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,960 $ 9,811
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,759 1,376
Trade accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,662 1,172
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,645 2,859
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . 5,217 2,463
Property held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2,242
-------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,243 19,923
-------------- --------------
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,583 131,200
Property held for development. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,254 1,040
Notes receivable from and investments in affiliates. . . . . . . . . . . . . . . . . 6,358 3,675
Restricted deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,555 5,520
Lease acquisition costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,081 4,864
Other assets, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,759 2,206
-------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 162,833 $ 168,428
============== ==============

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current Liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,604 $ 4,523
Trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,108 2,105
Accrued employee compensation and benefits. . . . . . . . . . . . . . . . . . . . . 5,355 3,301
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,737 2,861
Accrued real estate taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,463 1,415
Accrued dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . . .. 13,457 7,429
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,080 8,690
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,884 -
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,040 1,699
-------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,728 32,023
-------------- --------------
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . 119,887 131,070
Convertible debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000 32,000
Deferred gain on sale of communities . . . . . . . . . . . . . . . . . . . . . . . . 20,324 18,671
Deferred rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,508 2,404
Other long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 894 256
-------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222,341 216,424
-------------- --------------
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 558 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
33,473 and 30,609 at December 31, 2002, and December 31, 2001, respectively. . . - -
Common stock, $.0001 par value. Authorized 40,000,000 shares; issued and
outstanding 10,247,226 and 10,196,030 shares at December 31, 2002, and
December 31, 2001, respectively. . . . . . . . . . . . . . . . . . . . . . . . . 1 1
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,944 67,686
Accumulated other comprehensive gain (loss). . . . . . . . . . . . . . . . . . . . . 1,247 (136)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (155,258) (141,692)
-------------- --------------
Total shareholders' deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (85,066) (74,141)
-------------- --------------
Total liabilities and shareholders' deficit . . . . . . . . . . . . . . . . . . $ 162,833 $ 168,428
============== ==============

See accompanying notes to consolidated financial statements.
F-3

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

Year Ended December 31,
-------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------

Revenues:
Community revenue . . . . . . . . . . . $ 137,662 $ 129,561 $ 118,655
Other service fees. . . . . . . . . . . 4,575 2,291 1,977
Management fees . . . . . . . . . . . . 10,892 8,725 4,560
--------------- --------------- ---------------
Total operating revenues. . . . 153,129 140,577 125,192
--------------- --------------- ---------------
Expenses:
Community operations. . . . . . . . . . 93,822 80,829 76,838
General and administrative. . . . . . . 21,112 17,864 17,429
Depreciation and amortization . . . . . 7,223 7,260 7,383
Facility lease expense. . . . . . . . . 29,975 27,123 24,255
--------------- --------------- ---------------
Total operating expenses. . . . 152,132 133,076 125,905
--------------- --------------- ---------------
Income (loss) from operations . 997 7,501 (713)

Other income (expense):
Interest income . . . . . . . . . . . . 403 980 990
Interest expense. . . . . . . . . . . . (11,728) (13,296) (15,066)
Other, net. . . . . . . . . . . . . . . 4,105 581 (7,147)
--------------- --------------- ---------------
Net other expense . . . . . . . (7,220) (11,735) (21,223)
--------------- --------------- ---------------

Net loss. . . . . . . . . . . . (6,223) (4,234) (21,936)

Preferred stock dividends . . . . . . . . 7,343 6,368 5,327
--------------- --------------- ---------------
Net loss to common shareholders $ (13,566) $ (10,602) $ (27,263)
=============== =============== ===============

Loss per common share - basic and diluted $ (1.33) $ (1.04) $ (2.69)
=============== =============== ===============

Weighted average number of common shares
outstanding - basic and diluted . . 10,207 10,162 10,117
=============== =============== ===============

See accompanying notes to consolidated financial statements.
F-4

EMERITUS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
----------------------------------------------
2002 2001 2000
-------------- -------------- --------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,223) $ (4,234) $ (21,936)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . 7,223 7,260 7,213
Amortization of deferred gains . . . . . . . . . . . . . . . . . . . . . (320) (221) (190)
Gain on refinancings and sale of properties, net . . . . . . . . . . . . (4,544) (1,392) -
Write down of lease acquisition costs. . . . . . . . . . . . . . . . . . 262 835 -
Write down of loan fees and amortization . . . . . . . . . . . . . . . . 381 - -
Write off of deferred gain . . . . . . . . . . . . . . . . . . . . . . . 265 - -
Provision for doubtful accounts. . . . . . . . . . . . . . . . . . . . . (71) 466 359
Write off of property held for development . . . . . . . . . . . . . . . - - 1,267
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364 894 377
Changes in operating assets and liabilities:. . . . . . . . . . . . . . . . - - -
Trade accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . (419) 179 (281)
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . (404) - -
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . (2,545) 265 (55)
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 1,003 (1,038) (491)
Accrued employee compensation and benefits . . . . . . . . . . . . . . . 2,054 852 (909)
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,259) (130) 194
Accrued real estate taxes. . . . . . . . . . . . . . . . . . . . . . . . 1,048 (391) (228)
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . (33) (531) 4,593
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,884 - -
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . 3,485 484 691
Security deposits and other long-term liabilities. . . . . . . . . . . . 627 14 (14)
Deferred rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 272 245
-------------- -------------- --------------
Net cash provided by (used in) operating activities. . . . . . . . 3,882 3,584 (9,165)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment. . . . . . . . . . . . . . . . . . (11,698) (1,429) (11,441)
Purchase of minority partner interest. . . . . . . . . . . . . . . . . . (3,070) - -
Proceeds from sale of facilities, property, and equipment. . . . . . . . 25,010 2,350 565
Construction expenditures - leased communities . . . . . . . . . . . . . (1,154) (694) (197)
Change in restricted cash. . . . . . . . . . . . . . . . . . . . . . . . - - 13,500
Repayments from and (advances to) investments in affiliates, net . . . . (941) 2,699 2,199
Distribution to minority partners. . . . . . . . . . . . . . . . . . . . (500) - -
Additions to lease acquisition costs . . . . . . . . . . . . . . . . . . (2,229) (416) (943)
Investment in affiliates . . . . . . . . . . . . . . . . . . . . . . . . (2,971) - -
Sale of investments in affiliates. . . . . . . . . . . . . . . . . . . . 750 - -
-------------- -------------- --------------
Net cash provided by investing activities. . . . . . . . . . . . . 3,197 2,510 3,683
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease (increase) in restricted deposits . . . . . . . . . . . . . . . (35) 748 261
Proceeds from (repayment of) short-term borrowings, net. . . . . . . . . (2,210) (1,650) 650
Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . 120,838 145 7,879
Repayment of long-term borrowings. . . . . . . . . . . . . . . . . . . . (125,092) (3,067) (2,883)
Repurchase/retirement of common stock. . . . . . . . . . . . . . . . . . - - (1,400)
Payment of preferred stock dividends . . . . . . . . . . . . . . . . . . - - (4,024)
Debt issue and other financing costs . . . . . . . . . . . . . . . . . . (3,374) - -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (57) 45 (365)
-------------- -------------- --------------
Net cash provided by (used in) financing activities. . . . . . . . (9,930) (3,779) 118
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . (2,851) 2,315 (5,364)
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . 9,811 7,496 12,860
-------------- -------------- --------------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . $ 6,960 $ 9,811 $ 7,496
============== ============== ==============

F-5

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest . . . . . . . . . . . . . . . . . $ 12,852 $ 13,426 $ 13,659
============== ============== ==============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer of property held for sale to property and equipment . . . . . . 2,028 - -
Transfer of property and equipment to property held for sale . . . . . . - - 270
Transfer of property and equipment from property held for development. . 214 730 -
Notes receivable from buyer in sales . . . . . . . . . . . . . . . . . . - 1,000 -
Assumption of debt by buyer in sale. . . . . . . . . . . . . . . . . . . - 3,162 -
Unrealized holding gains (losses) in investment securities . . . . . . . 1,383 951 (709)
Series B preferred stock in-kind dividends . . . . . . . . . . . . . . . 1,315 1,268 1,224
Accrued preferred stock cash dividends . . . . . . . . . . . . . . . . . 6,028 5,100 2,329
Transfer of other assets to property and equipment . . . . . . . . . . . - - 1,002

See accompanying notes to consolidated financial statements.
F-6

EMERITUS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND COMPREHENSIVE OPERATIONS
(In thousands, except share data)

Accum.
Preferred stock Common stock other
----------------- ------------------ Additional Comp. Total
Number Number paid-in income Accum. shareholders'
of shares Amount of shares Amount capital (loss) deficit deficit
--------- ------ ----------- ------- ------------ --------- ---------- ---------------

Balances at December 31, 1999 . . 30,000 - 10,323,950 $ 1 $ 66,916 $ (380) $(103,827) $ (37,290)
Unrealized loss on investment
securities . . . . . . . . . . - - - - - (708) - (708)
Additional costs from issuance of
preferred stock .. . . . . . . - - - - (516) - - (516)
Foreign currency translation
adjustment . . . . . . . . . . - - - - - 1 - 1
Repurchase of common stock. . . . - - (260,200) - (1,400) - - (1,400)
Issuances of shares under
Employee Stock Purchase Plan . - - 56,295 - 149 - - 149
Preferred stock dividends . . . . 609 - - - 1,224 - (5,327) (4,103)
Net loss for the year ended
December 31, 2000 . . . . . . - - - - - - (21,936) (21,936)
--------- ------ ----------- ------- ------------ --------- ---------- ---------------
Balances at December 31, 2000 . . 30,609 - 10,120,045 $ 1 $ 66,373 $ (1,087) $(131,090) $ (65,803)
Unrealized gain on investment
securities . . . . . . . . . . - - - - - 951 - 951
Issuances of shares under
Employee Stock Purchase Plan . - - 75,985 - 45 - - 45
Preferred stock dividends . . . . - - - - 1,268 - (6,368) (5,100)
Net loss for the year ended
December 31, 2001 . . . . . . - - - - - (4,234) (4,234)
--------- ------ ----------- ------- ------------ --------- ---------- ---------------
Balances at December 31, 2001 . . 30,609 - 10,196,031 $ 1 $ 67,686 $ (136) $(141,692) $ (74,141)
Unrealized gain on investment
securities . . . . . . . . . . - - - - - 1,383 - 1,383
Issuances of shares under
Employee Stock Purchase Plan,
net of repurchases. . . . . - - 43,695 - (73) - - (73)
Options Exercised . . . . . . . . - - 7,501 - 16 - - 16
Preferred stock dividends . . . . 2,864 - - - 1,315 - (7,343) (6,028)
Net loss for the year ended
December 31, 2002 . . . . . . . - - - - - - (6,223) (6,223)
--------- ------ ----------- ------- ------------ --------- ---------- ---------------
Balances at December 31, 2002 . . 33,473 - 10,247,226 $ 1 $ 68,944 $ 1,247 $(155,258) $ (85,066)
========= ====== =========== ======= ============ ========= ========== ===============

See accompanying notes to consolidated financial statements.
F-7

EMERITUS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Emeritus Corporation ("Emeritus" or the "Company") is a nationally integrated
assisted living company focused on operating residential style communities.
These communities provide a residential housing alternative for senior citizens
who need help with the activities of daily living, with an emphasis on assisted
living and personal care services. The Company owns 17 communities and leases
67 communities. These 84 communities comprise the communities included in the
consolidated financial statements.

In addition, the Company also provides management services to independent and
related-party owners of assisted living communities for an additional 96
communities, for which only management fees are recognized in the consolidated
financial statements.

The management agreements include management agreements covering 46 communities
in connection with the Emeritrust transactions, which are referred to
extensively throughout these financial statements, detailed as follows:

* EMERITRUST I: 25 communities that the Company began managing in December
1998. Until December 31, 2001, the Company received a base management fee
of 5% of gross revenues, but was entitled to receive up to 7% depending on
the cash flow performance of the communities managed. As of January 1,
2002, however, the Company received a base management fee of 3% of gross
revenues, but may receive up to 7% depending on the cash flow performance
of the communities managed. Additionally, the Company is required by its
management contracts to fund cash operating deficits. In May 2002, the
Company entered into an agreement for a third party to operate one of these
communities. The new operator has responsibility for all economic benefits
and detriments and an option to purchase this community from the owner of
the community.

* EMERITRUST II: 21 communities that the Company began managing in March
1999, consisting of:

* EMERITRUST II OPERATING: 16 communities for which the Company has no
obligation to fund cash operating deficits. The Company receives a
base management fee of 5% of gross revenues, but may receive up to 7%
depending on the cash flow performance of the communities managed.

* EMERITRUST II DEVELOPMENT: 5 communities for which the Company is
required to fund cash operating deficits. The Company receives a base
management fee of 5% of gross revenues, but may receive up to 7%
depending on the cash flow performance of the communities managed.

F-8

Other management agreements are as follows:

* management agreements covering 30 communities owned by entities controlled
by Mr. Baty, the Company's Chairman and Chief Executive Officer and one of
its principal shareholders. The Company generally receives fees ranging
from 4% to 6% of the gross revenues generated by the communities.

* management agreements covering two communities owned by joint ventures in
which the Company has a financial interest. The Company receives management
fees ranging from 4% to 7% of gross revenues.

* management agreements covering four communities owned by independent
parties. The Company receives management fees ranging from 4% to 7% of gross
revenues, or similar arrangement based on occupied capacity.

* management agreements covering 14 communities owned by Regent Assisted
Living, Inc. The Company receives a flat management fee of $8,000 per community
with opportunities to earn additional fees based on operating cash flow.

Summary of Significant Accounting Policies and Use of Estimates

The preparation of these financial statements requires the Company 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, the Company 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, insurance deductibles, health insurance, and
litigation. The Company 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.

The Company believes the following accounting policies are most significant to
the judgments and estimates used in the preparation of its 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.

* The Company utilizes third-party insurance providers for losses and
liabilities associated with general and professional liability insurance claims
subject to established self-insured retention levels on a per occurrence basis.
Losses up to these self-insured retention levels are accrued based upon
actuarially determined estimates of the aggregate liability for claims incurred.

* For health insurance, the Company self-insures up to a certain level for
each occurrence above which a catastrophic insurance policy covers any
additional costs. Health insurance expense is accrued based upon historical
experience of the aggregate liability for claims incurred. If these estimates
are insufficient, additional charges may be required.

* The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its residents to make required payments. If the
financial condition of the Company's

F-9

residents were to deteriorate, resulting in an impairment of their ability to
make payments, additional charges may be required.

* The Company 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.
The Company 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.

* The Company 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 the Company has considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event the Company 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.

Basis of Presentation and Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. In addition, the accounts of limited liability
companies and partnerships are consolidated where the Company maintains
effective control over such entities' assets and operations, notwithstanding a
lack of technical majority ownership. The Company's management contracts do not
result in control and those entities are not consolidated. All significant
inter-company balances and transactions are eliminated in consolidation.

Revenue Recognition

Operating revenue consists of resident fee revenue and management services
revenue. Resident units are rented on a month-to-month basis and rent is
recognized in the month the unit is occupied. Service fees paid by residents
for assisted living and other related services and management fees are
recognized in the period services are rendered. Management services revenue is
comprised of revenue from management contracts and is recognized in the month in
which services are performed in accordance with the terms of the management
contract.

In 2001 and prior years, the Company recognized nonrefundable move-in fees at
the time the resident occupied the unit and the related services were performed.
This treatment was not materially different than recognition of such fees over
the average period of occupancy. However, in 2002, the Company began charging
significantly higher fees for move-ins than were previously charged. Therefore,
the Company has instituted a policy consistent with SEC Staff Accounting
Bulletin 101 "Revenue Recognition", to defer such fees and recognize them over
the average period of occupancy, approximately 16 months. The Company has not
deferred any of the costs related to move-ins.

F-10

Cash and Cash Equivalents

Cash and cash equivalents consist primarily of money market investments,
commercial paper and certificates of deposit with a maturity date at purchase of
three months or less. Cash equivalents at December 31, 2002, and 2001 were not
material.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets as follows: buildings and improvements, 25 to 40 years; furniture,
equipment and vehicles, five to seven years; leasehold improvements, over the
lease term.

The Company accounts for impairment of long-lived assets, which include property
and equipment, investments, amortizable intangible assets, and goodwill, in
accordance with the provisions of SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets or SFAS No. 142 Goodwill and Other Intangible
Assets, as applicable. An impairment review is performed annually or whenever a
change in condition occurs which indicates that the carrying amounts of assets
may not be recoverable. Such changes include changes in our business strategies
and plans, changes in the quality or structure of our relationships with our
partners, and deteriorating operating performance of individual communities.
The Company uses a variety of factors to assess the realizable value of assets
depending on their nature and use. Such assessments are primarily based upon
the sum of expected future undiscounted net cash flows over the expected period
the asset will be utilized, as well as market values and conditions. The
computation of expected future undiscounted net cash flows can be complex and
involves a number of subjective assumptions. Any changes in these factors or
assumptions could impact the assessed value of an asset and result in an
impairment charge equal to the amount by which its carrying value exceeds its
actual or estimated fair value.

Investments

Investment securities are classified as available-for-sale and are recorded at
fair value. Unrealized holding gains and losses, net of any related tax effect,
are excluded from results of operations and are reported as a component of other
comprehensive income (loss).

Investments in 20% to 50% owned affiliates are accounted for under the equity
method except where a lack of voting power exists. Investments in less than 20%
owned entities are accounted for under the cost method unless the Company
exercises significant influence by means other than ownership.

F-11

Intangible Assets

Intangible assets, which are comprised of deferred financing costs (included in
other assets) and lease acquisition costs, are amortized on the straight-line
method over the term of the related debt or lease agreement.

Income Taxes

Deferred income taxes are provided based on the estimated future tax effects of
loss carryforwards and temporary differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
that are expected to apply to taxable income in the years in which those
carryforwards and temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A
valuation allowance is recorded for deferred tax assets when it is more likely
than not that such deferred tax assets will not be realized.

Deferred Revenue

Due to dramatic increases in liability insurance premiums for the year 2002, the
Company decided to institute an insurance surcharge 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 2002 policy period.

Deferred Rent

Deferred rent primarily represents lease incentives that are deferred and
amortized using the straight-line method over the terms of the associated
leases.

Deferred Gain on Sales of Communities

Deferred gains on sales of communities consist of deferred gains on
sale/leaseback transactions and deferred gains on sale transactions. Deferred
gains on sale/leaseback transactions are amortized using the straight-line
method over the terms of the associated leases where the Company has no
continued financial involvement in communities that it has sold and leased back.
Deferred gains on sale/leaseback and sale transactions where the Company has
continuing financial involvement, other than the leasebacks, are deferred until
such involvement terminates.

F12

Community Operations

Community operations expenses represent direct costs incurred to operate the
communities and include costs such as resident activities, marketing,
housekeeping, food service, payroll and benefits, facility maintenance,
utilities, taxes, and licenses.

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 Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.

Had compensation cost 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, including the effect of the repricing, would have been as follows:

Year ended December 31,
(In thousands, except per share data)
----------------------------------------
2002 2001 2000
------------ ------------ ------------

Net loss to common shareholders:
As reported . . . . . . . . . . . . . . . . . . . . . . . $ (13,566) $ (10,602) $ (27,263)
Add: Stock-based employee compensation expense
included in reported net loss - - -
Deduct: Stock-based employee compensation
determined under fair value based method for all awards (773) (1,074) (1,780)
------------ ------------ ------------
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . $ (14,339) $ (11,676) $ (29,043)
============ ============ ============
Net loss per common share -- basic and diluted:
As reported . . . . . . . . . . . . . . . . . . . . . . . $ (1.33) $ (1.04) $ (2.69)
============ ============ ============

Pro forma . . . . . . . . . . . . . . . . . . . . . . . . $ (1.40) $ (1.15) $ (2.87)
============ ============ ============

SFAS No. 148 Accounting for Stock-based Compensation-Transition and Disclosure,
which was issued in December 2002, provides alternative methods of transition
for a voluntary change to the fair value-based method of accounting for
stock-based employee compensation and also requires disclosures in interim as
well as annual financial statements regarding our method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The amount shown above for 2001 has been adjusted to correct for a
computational error.

F-13

Net Loss Per Share

Basic net loss per share is computed based on weighted average shares
outstanding. Diluted per share amounts are computed on the basis of the
weighted average number of shares outstanding plus dilutive potential common
shares (if any) using the treasury stock method. The capital structure of the
Company includes convertible debentures, redeemable and non-redeemable
convertible preferred stock, as well as stock options and common stock warrants.
The assumed conversion and exercise of stock options totaling 1,714,333;
1,192,552; and 1,321,707 in 2002, 2001, and 2000, respectively, have been
excluded from the calculation of diluted net loss per share, as their effect is
anti-dilutive.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other gains and
losses affecting shareholders' equity, which under accounting principles
generally accepted in the United States, are excluded from results of
operations. For the Company, these consist of unrealized gains and losses on
investment securities and foreign currency translation adjustments, net of any
related tax effect.

Foreign Currency Translation

Foreign currency amounts attributable to foreign operations have been translated
into U.S. dollars using year-end exchange rates for assets and liabilities,
historical rates for equity, and average annual rates for revenues and expenses.
Unrealized gains and losses arising from fluctuations in the year-end exchange
rates are recorded as a component of other comprehensive income (loss).

Recent Accounting Pronouncements

In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development, and/or normal use
of the assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement
of the asset retirement obligation, the obligation will be adjusted at the end
of each period to reflect the passage of time and changes in the estimated
future cash flows underlying the obligation. The Company is required to adopt
SFAS No. 143 on January 1, 2003. Management is currently assessing the impact
of SFAS No. 143 to determine the effect on the Company's financial statements.

F-14

provisions of the Statement related to the rescission of Statement No. 4 is
applied in fiscal years beginning after May 15, 2002. Earlier application of
these provisions is encouraged. The provisions of the Statement related to
Statement No. 13 were effective for transactions occurring after May 15, 2002,
with early application encouraged. The Company adopted SFAS No. 145 in the
fourth quarter of 2002 and have included the extraordinary gain on refinancing
long-term debt in other income.

F-15

Reclassifications

Certain reclassifications of 2000 and 2001 amounts have been made to conform to
the 2002 presentation.

(2) SHORT-TERM INVESTMENTS

In 1999, the Company wrote down its investment in the common stock of ARV
Assisted Living, Inc. ("ARV") by $7.4 million as management concluded the
decline in the fair market value of this investment was other than temporary.
Details regarding the ARV investment, which is designated as available for sale,
as of December 31, as follows (In thousands):

Gross
Unrealized Fair
Amortized Gains Market
Cost (losses) Value
---------- ------------ -------

2002 . . . $ 1,512 $ 1,247 $ 2,759
========== ============ =======
2001 . . . $ 1,512 $ (136) $ 1,376
========== ============ =======
2000 . . . $ 1,512 $ (1,087) $ 425
========== ============ =======

(3) OTHER RECEIVABLES

Other receivables consisted of the following at December 31 (In thousands):

2002 2001
----------- -----------

Working capital advances to third parties and affiliates $ 3,645 $ 1,859
Notes receivable from buyer in sale of communities . . . - 1,000
----------- -----------
$ 3,645 $ 2,859
=========== ===========

F-16

(4) PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31 (In thousands):

2002 2001
--------- ---------

Land and improvements . . . . $ 12,378 $ 13,779
Buildings and improvements. . 112,085 120,827
Furniture and equipment . . . 14,298 14,764
Vehicles. . . . . . . . . . . 4,247 3,461
Leasehold improvements. . . . 6,529 5,402
-------- --------
149,537 158,233
Less accumulated depreciation 30,335 27,167
-------- --------
119,202 131,066
Construction in progress. . . 381 134
-------- --------
$119,583 $131,200
======== ========

(5) NOTES RECEIVABLE FROM AND INVESTMENTS IN AFFILIATED COMPANIES

During 1998, the Company sold its interest in a community located in Texas to a
Baty-related entity. Pursuant to the purchase and sale agreement, the Company
advanced funds to the Baty-related entity of $1.0 million, which was
subsequently repaid in 1999, and $800,000, subject to promissory notes bearing
interest at 9% and payable in 10 years and on demand, respectively. The $1.0
million note contained additional funding provisions whereby the Company funds
20% of the losses generated by the community up to $500,000, of which $500,000
was outstanding at December 31, 2002 and 2001 which also bears interest at 9%
and payable in 10 years. In addition, the Company has advanced the Baty-related
entity $450,000 under a repair note, bearing interest at 9% and due June 2008.
At December 31, 2002, the Baty-related entity's obligations to the Company were
$2.1 million.

In January 2000, the Company purchased a 30% equity interest in Senior
Healthcare Partners, LLC, a pharmaceutical supply limited liability company.
The Company has cash funding obligations of up to $1.8 million. As of December
31, 2002, the Company had no funding obligation and recognized its share of
partnership gain of $98,000. At December 31, 2001, the Company had funded the
entire $1.8 million and during 2001 recognized its share of partnership losses
of $313,000, which is included in "Other, net".

(6) RESTRICTED DEPOSITS

Restricted deposits consist of funds required by various Real Estate Investment
Trusts ("REITs") to be placed on deposit until the Company's communities meet
certain debt coverage and/or cash flow coverage ratios, at which time the funds
will be released to the Company.

F-17

(7) LONG-TERM DEBT

Long-term debt consists of the following at December 31 (In thousands):

2002 2001
---------------- ---------------

Notes payable, principal and interest at LIBOR* plus 4.15%
with a floor of 6.5% (6.5% at December 31, 2002), payable
monthly, unpaid principal and interest due December 2006,
with an option to extend to September 2007) . . . . . . . . . $ 58,000 $ -

Notes payable, interest-only at 12% payable monthly plus
1.75% accrued interest, unpaid principal and 1.75 % accrued
interest due December 2007. . . . . . . . . . . . . . . . . . 16,020 -

Note payable, interest-only at 12% with a 50 basis point
increase each anniversary, unpaid principal and interest due
March 2005. . . . . . . . . . . . . . . . . . . . . . . . . . 6,800 -

Notes payable, interest-only at LIBOR* plus 3.25%, payable
monthly, unpaid principal and interest due December 2001,
refinanced with long-term debt. . . . . . . . . . . . . . . . - 46,287

Notes payable, interest-only at LIBOR* plus 3.25%, payable
monthly, unpaid principal and interest due December 2001,
refinanced with long-term debt. . . . . . . . . . . . . . . . - 25,548

Notes payable, interest-only at LIBOR* plus 3.25% (5.4% at
December 31, 2001), payable monthly, unpaid principal and
interest due on demand. . . . . . . . . . . . . . . . . . . . - 1,747

Note payable, interest at 7.82%, payable monthly, unpaid
principal and interest due July 2004. . . . . . . . . . . . . - 12,130

Note payable, interest at 8.38%, payable monthly, unpaid
principal and interest due February 2003. . . . . . . . . . . - 5,719

Notes payable, principal & interest at LIBOR* plus 4.5% and
LIBOR plus 7.75%, payable monthly, unpaid principal and
interest due March 2006, see note 20 . . . . . . . . . . . . . 6,800 6,800

Notes payable, interest at 7.43%, payable monthly, unpaid
principal and interest due October 2009 . . . . . . . . . . . 24,640 25,075

Notes payable, interest at rates from 8.0% to 12%, payable
monthly, due through July 2009. . . . . . . . . . . . . . . . 11,231 12,286
---------------- ----------------
Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 123,491 $135,593
Less current portion. . . . . . . . . . . . . . . . . . . . . 3,604 4,523
---------------- ----------------
Long-term debt, less current portion. . . . . . . . . . . . . $ 119,887 $131,070
================ ================

* LIBOR is the London Interbank Offering Rate.

F-18

Substantially all long-term debt is secured by the Company's property and
equipment.

During 2002, the Company refinanced approximately $71.8 million of outstanding
debt as described below and wrote off $333,000 of related deferred financing
costs. No additional refinancing or write-offs of deferred costs occurred
during 2001 or 2000.

In February 2002, the Company reached an agreement with GE Healthcare Financial
Services ("GE") to refinance three of the properties in the $71.8 million
portfolio that previously were financed by Deutsche Bank AG and matured December
14, 2001. The new loan of $30.6 million was to mature February 2004 and
provided for monthly principal payments of approximately $40,000 in addition to
interest at LIBOR plus 4%. These terms have since been modified as it was
included in the December 6, 2002, refinancing transaction, which is discussed
below. 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 paid to the lender a fee equal to 1% of the
outstanding portfolio balance at May 31, 2002.

On December 6, 2002, the Company completed the refinancing of $77.8 million of
existing mortgage debt related to 11 assisted living communities. The refinance
included seven communities representing $39.3 million of mortgage debt maturing
in May 2003 (the remaining balance owed to Deutsche Bank AG described above),
three communities that were previously refinanced in March 2002 for $30.2
million maturing in March 2004, and a single community repurchased in August
2002 with existing debt of $8.3 million.

The refinance was facilitated by a four-year $58.0 million first mortgage which
matures on December 5, 2006, provided by GE Healthcare Financial Services and
$16.0 million of five-year subordinated financing which matures on December 5,
2007, provided by Health Care Property Investors, Inc. ("HCPI"), a real estate
investment trust. The GE debt is a LIBOR-based loan which has an initial
interest rate of 6.5% with a 25-year amortization period and includes the
opportunity for a nine-month extension option. The GE debt includes an earnout
provision that allows the Company to draw an additional $7.0 million, based on
operating performance of the communities, for use in paying down the
subordinated HCPI debt. The HCPI debt provides for a current interest payment
of 12.0% and an accrual of additional interest at 1.75% to be paid upon
repayment of the principal.

As part of the refinancing agreement, the Company transferred all long-term
assets and liabilities related to the above properties from four wholly-owned
subsidiaries to Emeritus Realty Corporation. Emeritus Realty Corporation is a
wholly-owned subsidiary of the Company and is included in the consolidated
financial statements. Not withstanding consolidation for financial statement
purposes, it is management's intention that Emeritus Realty Corporation be a
separate legal entity wherein the assets and liabilities are not available to
pay other debts or obligations of the consolidated Company and the consolidated
Company is not liable for the liabilities of Emeritus Realty Corporation.

The Company recorded a gain of approximately $5.1 million in the quarter ended
December 31, 2002, related to discounts it received upon the payoff of existing
financing offset by certain costs related to the transaction. This refinancing
extends the maturity for the entire $77.8 million for four years.

F-19

In January 2003, the Company reached an agreement with General Motors Acceptance
Corporation ("GMAC") to extend a $6.8 million note set to mature February 1,
2003. The original $6.8 million note has been bifurcated into a $6.2 million
Note A and a $560,000 Note B. The new notes of $6.8 million matures March, 1,
2006, and provides for monthly principal payments of approximately $22,000 in
addition to interest at LIBOR plus 4.5% and LIBOR plus 7.75%, respectively. As
a result of this refinancing, the Company has reclassified the long-term portion
of $6.6 million principal balance to long-term debt from current portion of
long-term debt in its December 31, 2002, financial statements.

Additionally, related to the GMAC extension, the original Seller note for $1
million was also extended. The original seller note principal balance for the
year ended December 31, 2002, was $921,000 with a maturity of March 1, 2003.
This amendment extends the principal maturity to March 1, 2006, and requires
$12,500 monthly principal and interest payments, with interest accruing at 12%.
The Company made a $200,000 principal paydown in February 2003. As a result,
the Company has reclassified the long-term portion of $656,000 principal balance
to long-term debt from current portion of long-term debt in its, December 31,
2002, financial statements.

Certain of the Company's indebtedness include restrictive provisions related to
cash dividends, investments, and borrowings and require maintenance of specific
operating ratios, and levels of working capital. As of December 31, 2002, the
Company was in compliance with all such covenants except for one, in which the
Company has obtained a waiver and as of year ended December 31, 2002

Principal maturities of long-term debt at December 31, 2002, are as follows (In
thousands):

2003 . . . $ 3,604
2004 . . . 3,585
2005 . . . 11,072
2006 . . . 13,119
2007 . . . 60,881
Thereafter 31,230
--------
Total. . . $123,491
========

(8) CONVERTIBLE DEBENTURES

The Company has $32.0 million of 6.25% convertible subordinated debentures (the
"Debentures") that are due in 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
debenture is payable semiannually on January 1 and July 1 of each year. The
Debentures are unsecured and subordinated to all other indebtedness of the
Company.

The Debentures are subject to redemption, as a whole or in part, at a redemption
price of 100% of the principal amount.

F-20

(9) REDEEMABLE PREFERRED STOCK

The Company has authorized 5,000,000 shares of preferred stock, $0.0001 par
value. Pursuant to such authority, in October 1997, the Company sold 25,000
shares of Series A cumulative convertible, exchangeable, redeemable preferred
stock for $25,000,000. The Series A redeemable Preferred Stock is entitled to
receive quarterly dividends payable in cash. The dividend rate is 9% of the
stated value of $25,000,000. Dividends accumulate, whether or not declared or
paid. If cash dividends are not paid quarterly, the dividend rate will increase
to 11% ("arrearage rate") until the unpaid cash dividends have been fully paid.
The preferred stock has a mandatory redemption date of October 24, 2004, at a
price equal to $1,000 per share, plus any accrued but unpaid dividends. Each
share of preferred stock may be converted, at the option of the holder, into 55
shares of common stock, at the trading price at the time of conversion. The
preferred stock is also exchangeable in whole only, at the option of the
Company, into 9% subordinated convertible notes due October 24, 2004. The 9%
subordinated notes would contain the same conversion rights, restrictions and
other terms as the preferred stock. For each of the years ended December 31,
2002 and 2001, the Company accumulated dividends aggregating $2.75 million at
the arrearage dividend rate of 11%, for a total of $5.5 million.

At December 31, 2002, the Company has accrued excess dividends of $1.25 million
to its Series A preferred shareholders related to non-payment of the cash
portion of their dividends. Since the Company was unable to pay these dividends
for more than six consecutive quarters, the Series A shareholders became
entitled to elect one additional director to their board of directors at each
annual shareholders' meeting until such time the Company has paid the accrued
dividends. The Series A shareholders have opted not to elect an additional
director. In addition, because the Company has been unable to pay dividends to
their Series A shareholders for more than six consecutive quarters, beginning in
2002, the Series A dividends were calculated on a compounded cumulative basis,
retroactively. The retroactive adjustment of Series A dividends for 2000 and
2001 were $19,000 and $275,000, respectively, which were recognized in 2002.
The cumulative compounding for 2002 was an additional $622,000.

The Company may redeem the preferred stock, in whole or in part, for $1,050 per
share plus accrued dividends, provided that the market price of common stock is
at least 130% of the conversion price for the preferred stock. In the event of
liquidation of the Company, the holders of outstanding preferred stock are
entitled to receive a distribution of $1,000 per share plus accrued dividends.

(10) INCOME TAXES

Income taxes reported by the Company differ from the amount computed by applying
the statutory rate primarily due to limitations on utilizing net operating
losses.

The tax effect of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets and liabilities are comprised of the
following at December 31, (In thousands):

F-21

2002 2001
--------- ---------

Gross deferred tax liabilities-depreciation and amortization. $(1,880) $(1,801)
Gross deferred tax assets:
Net operating loss carryforwards . . . . . . . . . . . . 29,433 29,914
Deferred gains on sale/leaseback . . . . . . . . . . . . 7,621 6,086
Impairment of investment securities. . . . . . . . . . . 2,411 2,411
Unearned rental income . . . . . . . . . . . . . . . . . 1,066 562
Vacation accrual . . . . . . . . . . . . . . . . . . . . 481 452
Health insurance accrual . . . . . . . . . . . . . . . . 723 502
Insurance accrual. . . . . . . . . . . . . . . . . . . . 746 491
Incentive Compensation accrual . . . . . . . . . . . . . 270 312
Deferred Lease Payments. . . . . . . . . . . . . . . . . 665 586
Other .. . . . . . . . . . . . . . . . . . . . . . . . . 55 656
-------- --------
Gross deferred tax assets . . . . . . . . . . . . . 43,471 41,972
Less valuation allowance. . . . . . . . . . . . . . . . . . . 41,591 40,171
-------- --------
Deferred tax assets, net. . . . . . . . . . . . . . . . . . . 1,880 1,801
-------- --------
Net deferred tax assets . . . . . . . . . . . . . . $ - $ -
======== ========

The increase in the valuation allowance was $1.4 million, $1.6 million, and $4.8
million for 2002, 2001, and 2000, respectively. The increases were primarily due
to the amount of net operating loss carryforwards and deferred gains, for which
management does not believe that it is more likely than not that realization is
assured.

For federal income tax purposes, the Company has net operating loss
carryforwards at December 31, 2002, available to offset future federal taxable
income, if any, of approximately $86.6 million expiring beginning in 2005.

(11) SHAREHOLDERS' DEFICIT

The Company's board of directors authorized a stock repurchase program to
acquire up to aggregate 1,000,000 shares of the Company's common stock. In
March 2000, the stock repurchase plan was discontinued. At December 31, 2000,
the Company had acquired a total of 941,100 shares of its common stock at a
cumulative cost of $8.3 million.
Preferred Stock

In December 1999, the Company entered an agreement to sell 40,000 shares of its
Series B preferred stock to Saratoga Partners IV, L.P. ("Saratoga") and certain
investors related to Saratoga for a purchase price of

F-22

$1,000 per share. On December 30, 1999, the Company completed the sale of 30,000
shares of Series B Stock, and agreed to complete the sale of the remaining
10,000 shares during the first half of 2000. Each share of Series B Stock has
voting authority, and is convertible into the number of shares of common stock
equal to the stated value of $1,000 divided by an initial conversion price of
$7.22, to be adjusted for any anti-dilutive transactions. The net proceeds to be
received by the Company from the sale of all 40,000 shares of the Series B Stock
were to be approximately $38.6 million, after fees and expenses of the
transaction estimated at $1.4 million. The purchase agreement and related
documents provided that the Company's use of the proceeds would be subject to
Saratoga's approval after June 2000 if a substantial portion had not been used
for the acquisition of specified properties. Under a letter agreement dated May
15, 2000, the agreements with Saratoga were modified to (i) cancel the sale of
the remaining 10,000 shares of Series B Stock, (ii) remove all restrictions and
requirements relating to the use of proceeds received from the sale of the
original 30,000 shares, and (iii) provide that the Company would issue to
Saratoga a seven-year warrant ("the Warrant") to purchase one million shares of
Common Stock at an exercise price of $4.30 per share or, in the alternative,
make a specified cash payment to Saratoga. On August 31, 2000, the Warrant was
issued to Saratoga.

The Series B Stock is entitled to receive quarterly dividends payable in a
combination of cash and additional shares of Series B Stock. From issuance to
January 1, 2004, the dividend rate will be 6% of the stated value of $1,000, of
which 2% is payable in cash and 4% is payable in Series B Stock at the rate of
one share of Series B Stock for every $1,000 of dividend. After January 1,
2004, the dividend rate will be 7% of which 3% is payable in cash and 4% is
payable in Series B Stock. Dividends accumulate, whether or not declared or
paid. Prior to January 1, 2007, however, if the cash portion of the dividend is
not paid, the cash dividend rate will increase to 7% ("arrearage rate"), until
the unpaid cash dividends have been fully paid or until January 1, 2007,
whichever first occurs. Beginning January 10, 2003, the Company can redeem all
of the Series B Stock at $1,000 per share plus unpaid dividends, if the closing
price for the common stock on the American Stock Exchange is at least 175% of
the then conversion price for 30 consecutive trading days. In 2000, the Company
accrued $1.3 million in cash dividends, including one quarter at the higher
arrearage rate, and $1.2 million equivalent to 1,224 shares of Series B Stock as
in-kind dividends, of which $302,000 were paid and 609 shares were issued in
2000. In 2001, the Company accrued $2.4 million in cash dividends at the higher
arrearage rate, and $1.3 million equivalent to 1,266 shares of Series B Stock as
in-kind dividends, none of which were paid or issued in 2001. In 2002, the
Company accrued $2.4 million in cash dividends at the higher arrearage rate, and
$1.3 million equivalent to 1,317 shares of Series B Stock as in-kind dividends.
In the third quarter of 2002, the Company issued 2,533 shares of Series B Stock
for the in-kind dividends accrued from 2000, 2001, and the first two quarters of
2002. In the fourth quarter of 2002, another 331 shares of Series B Stock was
issued for the third quarter accrual. Accordingly, the Company had a cumulative
commitment to issue 334 shares, 1,881 shares, and 615 shares of Series B Stock
at December 31, 2002, 2001, and 2000 respectively.

At December 31, 2002, the Company had accrued additional dividends of $3.6
million as a result of the arrearage rate, which is included in the total of
$5.7 million of cash dividends on Series B Stock that the Company has accrued.
Since the Company has failed to pay these dividends for more than six
consecutive quarters, the Series B shareholders are entitled to elect one
additional director to the Board of Directors at each annual shareholders'
meeting until such time the Company has paid the accrued dividends. The Series
B shareholders have opted not to elect an additional director.

F-23

1995 Stock Incentive Plan

The Company has a 1995 stock incentive plan ("1995 Plan") which combines the
features of an incentive and non-qualified stock option plan, stock appreciation
rights, and a stock award plan (including restricted stock). The 1995 Plan is a
long-term incentive compensation plan and is designed to provide a competitive
and balanced incentive and reward program for participants.

The Company has authorized 2,400,000 shares of common stock to be reserved for
grants under the 1995 Plan of which 673,316 were available for future awards at
December 31, 2002. Options generally vest between three-year to five-year
periods, at the discretion of the Compensation Committee of the Board of
Directors, in cumulative increments beginning one year after the date of the
grant and expire not later than ten years from the date of grant. The options
are granted at an exercise price equal to the fair market value of the common
stock on the date of the grant.

In May 2001, the Company announced an offer to exchange options under the 1995
Plan held by current employees, including executive officers, for new options to
be granted under the 1995 Plan and new option letter agreements. Under the
offer, employees were required to tender all or none of their options in
exchange for new options subject to the same number of shares of common stock as
the options tendered for exchange. Approximately 99% of outstanding options
were exchanged. The new options were granted on December 10, 2001, which was
the first business day that was at least six months and one day after the date
tendered options were accepted for exchange. The new options have an exercise
price of $2.11 and will fully vest 2 1/2 years from the date the new options are
granted under the following schedule: 33 1/3 percent will vest six months after
the date of grant; 33 1/3 percent will vest 18 months after the date of grant;
and 33 1/3 percent will vest 30 months after the date of grant. In all other
respects, the terms of the new options were the same as the terms of the options
tendered for exchange.

The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants in 2002, 2001, and 2000: dividend yield of 0.0% for all periods;
expected volatility of 90.4% to 93.3% for 2002, 80.7% to 82.1% for 2001, and
48.0% to 49.6% for 2000, and; risk-free interest rates of 2.9% to 4.3% for 2002,
4.12% to 4.39% for 2001, and 6.06% to 6.69% for 2000; and an expected option
term of 4 years, giving effect to the option repricing.

F-24

A summary of the activity in the Company's stock option plans follows:

2002 2001 2000
---------------------- ------------------------ ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ----------- ------------ ----------- ----------- -----------

Outstanding at beginning of year . . . 1,192,552 $ 2.39 1,321,707 $ 9.13 1,761,601 $ 6.82
Granted. . . . . . . . . . . . . . . . 601,000 $ 2.94 1,144,083 $ 2.11 16,000 $ 3.12
Exercised. . . . . . . . . . . . . . . (7,501) $ 2.11 - $ - - $ -
Canceled . . . . . . . . . . . . . . . (71,718) $ 2.96 (1,273,238) $ 9.13 (455,894) $ 9.28
------------ ----------- ------------ ----------- ----------- -----------
Outstanding at end of year . . . . . . 1,714,333 $ 2.56 1,192,552 $ 2.39 1,321,707 $ 9.13
Options exercisable at year-end. . . . 420,110 $ 2.82 49,869 $ 9.21 817,414 $ 9.50
Weighted-average fair value of options
granted during the year. . . . . . . . $ 1.99 $ 1.31 $ 1.24

The following is a summary of stock options outstanding at December 31, 2002:

Options Outstanding Options Exercisable
--------------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ------------------------ ----------- ------------ ---------- --------- ----------

1.60. . . - $ 2.11 1,113,083 8.95 $ 2.10 376,027 $ 2.10
2.56. . . - $ 4.06 570,500 9.06 $ 2.92 13,333 $ 2.94
6.50. . . - $ 7.25 5,750 6.98 $ 6.60 5,750 $ 6.60
9.63. . . - $ 9.81 1,500 5.89 $ 9.75 1,500 $ 9.75
10.25 . . - $ 15.25 23,500 4.87 $ 13.01 23,500 $ 13.01
----------- ------------ ---------- --------- ----------
1,714,333 8.92 $ 2.56 420,110 $ 2.82
========== =========== ========== ========= ==========

F-25

Employee Stock Purchase Plan

In July 1998, the Company adopted an Employee Stock Purchase Plan (the Plan) to
provide substantially all employees who have completed six months of service an
opportunity to purchase shares of its common stock through payroll deductions,
at a price equal to 85% of the fair market value. A total of 400,000 shares are
available for purchase under the Plan. Periodically, participant account
balances are used to purchase shares of stock on the open market at the lesser
of the fair market value of shares on the first or last day of the participation
period. Employees may not exceed $25,000 in annual purchases or 15% of eligible
compensation. The Employee Stock Purchase Plan expires in May 2008. Through
December 31, 2002, employees have purchased an aggregate of 192,871 common
shares through the Employee Stock Purchase Plan.

(12) COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) consists of the following for the years ended
December 31, 2002, 2001, and 2000, respectively (In thousands):

2002 2001 2000
-------------- -------------- --------------

Net loss to common shareholders. . . . . . . . $ (13,566) $ (10,602) $ (27,263)
Other comprehensive income:
Foreign currency translation adjustments. - - 1
Unrealized holding gains (losses)
on investment securities . . . . . . 1,383 951 (708)
-------------- -------------- --------------
Comprehensive loss . . . . . . . . . . . . . . $ (12,183) $ (9,651) $ (27,970)
============== ============== ==============

(13) FINANCIAL INSTRUMENTS

The Company has financial instruments other than investment securities
consisting of cash and cash equivalents, trade accounts receivable, other
receivables, notes receivable from affiliates, short-term borrowings, accounts
payable, convertible debentures, redeemable preferred stock, and long-term debt.
The fair value of the Company's financial instruments, based on their short-term
nature or current market indicators such as prevailing interest rates,
approximates their carrying value with the exception of the following: long-term
debt had an estimated fair value, based on the Company's incremental borrowing
rate, of $119.4 million versus a carrying value of $123.5 million; and the
convertible debentures that had an estimated fair value, based on the Company's
incremental borrowing rate, of $31.9 million versus a book value of $32.0
million at December 31, 2002.

F-26

(14) RELATED-PARTY MANAGEMENT AGREEMENTS

During 1995, the Company's two most senior executive officers, its Chief
Executive Officer, and its then President, who is now its Chief Financial
Officer, formed a New York general partnership (the "Partnership") to facilitate
the operation of assisted living communities in the state of New York, which
generally requires that natural persons be designated as the licensed operators
of assisted living communities. The Partnership operates ten leased communities
in New York. The Company has agreements with the Partnership and the partners
under which all of the Partnership's profits have been assigned to the Company
and the Company has indemnified the partners against losses. As the Company has
unilateral and perpetual control over the Partnership's assets and operations,
the results of operations of the Partnership are consolidated with those of the
Company.

The Company has management agreements with a number of entities owned or
controlled by Baty relating to 30 communities. The agreements have terms
ranging from two to four years, with options to renew, and provide for
management fees ranging from 4% to 7% of gross operating revenues. Management
fee revenue earned under these agreements was approximately $4.3 million, $2.4
million, and $1.7 million in 2002, 2001, and 2000, respectively.

In 1998, the Company and XL Management Company L.L.C., ("XL Management"), an
affiliate of Holiday Retirement Corp., an owner and operator of independent
living communities, entered into four management agreements whereby XL
Management was to provide management services relating to four of the Company's
newly developed assisted living communities located in Texas. The agreements had
initial terms of two years and six months with management fees based upon 6% of
gross revenues payable monthly. XL Management ceased management of these
buildings during 2000. Total fees in 2000 amounted to $150,000. The Company's
Chairman and Chief Executive Officer and a former member of the Company's board
of directors are principal shareholders and officers of Holiday.

F-27
(15) LEASES

At December 31, 2002, the Company leases office space and 67 assisted living
communities. The office lease expires in 2006 and contains two five-year renewal
options. The community leases expire from 2004 to 2017 and contain various
extension options, ranging from five to ten years.

Minimum lease payments under noncancelable operating leases at December 31,
2002, are as follows (In thousands):

2003 . . . $ 27,568
2004 . . . 27,780
2005 . . . 27,992
2006 . . . 27,635
2007 . . . 25,968
Thereafter 152,795
--------
Total. . . $289,738
========

Facility lease expense under noncancelable operating leases was approximately
$29.9 million, $27.1 million, and $24.3 million for 2002, 2001, and 2000,
respectively. A number of operating leases provide for additional lease
payments after 24 months computed at 5% of additional revenues of the community.
In 2002, additional facility lease expense under these provisions was
approximately $ 3.1 million. Additional lease payment after 13 months computed
at rates ranging from 7% to 8.5% of gross revenues in excess of a specified
threshold are related to the 24 community lease acquisition (discussed in Note
16).

(16) SALES AND ACQUISITIONS, INCLUDING CERTAIN RELATED-PARTY TRANSACTIONS

In two separate transactions during the fall of 1998 and the spring of 1999, the
Company 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 the Company by Meditrust Company
LLC under sale/leaseback financing arrangements, and three had been owned by the
Company. The first purchase, consisting of 25 communities, subsequently
referred to as the Emeritrust I communities, was completed in December 1998 and
the second purchase, consisting of 21 communities, 16 of which are subsequently
referred to as the Emeritrust II Operating communities and five of which are
subsequently referred to as 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 party and $30.0 million was financed through subordinated debt and
equity investments from the investor group, which includes Daniel R. Baty, the
Company's 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.

F-28

The investor groups retained the Company to manage all of the communities
through December 31, 2001, and granted the Company options to purchase the
communities during 2001. During 2000, the Emeritrust I communities failed to
comply with covenants under the $138 million mortgage loan and in 2001 it became
clear that the Company would not be able to purchase the communities under the
options. As a result, 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, the Company 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 operating cash flow to pay management fees is
subject to first meeting mandatory owner distribution requirements, which
include repayment of fees and expenses related to restructuring the mortgage
loan and subsequent extension in September 2002. For the Emeritrust II
Operating communities and the Emeritrust II Development communities, the Company
has 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, 2002, the
management fees for the Emeritrust I communities were computed in this fashion.
Under the management agreements, the Company is 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 $2.5 million in the case of the
Emeritrust II Development communities. Since these thresholds have been
exceeded, the Company is 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. The
Company's funding obligations for the Emeritrust I communities have been
$184,000, $1.3 million, and $4.9 million for 2002, 2001 and 2000, respectively.
The Company's funding obligations for the Emeritrust II Development communities
have been $137,000, $310,000 and $1.6 million in 2002, 2001, and 2000,
respectively.

Although the amounts of the Company's funding obligation each year include
management fees earned by the Company under the management agreements, the
Company does not recognize these management fees as revenue in its financial
statements to the extent that the Company is funding the cash operating losses
that include them. Correspondingly, the Company recognizes the funding
obligation under the agreement, less the applicable management fees, as an
expense in its financial statements under the category "Other, net."
Conversely, if the applicable management fees exceed the Company's funding
obligation, the Company recognizes the management fees less the funding
obligation as management fee revenue in its consolidated financial statements.
Management fees earned for the Emeritrust I communities have been $2.0 million,
$4.0 million, and $2.1 million in 2002, 2001, and 2000, respectively, of which
$1.8 million, $2.8 million, and zero, have been recognized in 2002, 2001, and
2000, respectively. Management fees earned for the Emeritrust II Development
communities have been $764,000, $766,000, and $360,000, of which $699,000,
$673,000, and $174,000 have been recognized in 2002, 2001, and 2000,
respectively. Management fees earned for the Emeritrust II Operating
communities have been $1.9 million earned and recognized in each of the years,
2002, 2001, and 2000.

F29

The Company has 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 for the Emeritrust Operating communities and December
31, 2003, for the Emeritrust 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. Based upon current market conditions and valuations, we believe
the option purchase price for these facilities exceeds their current fair market
value.

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,
the Company's ability to exercise the option will depend on whether the Company
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 the Company operates.

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) the Company does not
exercise its option to purchase the communities before the option expires, (b)
the Company defaults under the management agreements, (c) Mr. Baty's net worth
falls below a certain threshold, (d) the Company experiences a change of control
or (e) Mr. Baty ceases to be the Company's 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 the
Company is entitled purchase the communities, subject to the Company's prior
right to do so within a specified time period.

The management agreements and related options to purchase these communities
expire June 30, 2003, (except that management agreements with respect to five
communities would continue until December 31, 2003). Because the Company is not
in a position to exercise the options to acquire the communities prior to
expiration, the Company is currently in discussions with the owners of the
communities and their lenders to extend the management agreements and related
options. While the Company believes that these arrangements will be extended,
the Company cannot guarantee that these discussions will be successful or, if
the arrangements are extended, what the terms will be. If the Company is
unsuccessful, the Company could lose the management fee revenue from these
communities and future rights with respect to them.

In January 2002, the Company entered into management and accounting services
agreements with Regent Assisted Living, Inc. of Portland, Oregon, to manage or
provide administrative services to 18 of their communities. The agreements
provide for the Company to receive a fixed-base management/service fee

F-30

with some agreements having provisions for incentive fees based upon improved
community performance. In February 2002, two of the communities were sold to a
Baty-related entity; the Company has continued to manage these communities under
agreements providing for 5% of gross revenues. In March 2002, the Company began
managing one additional Regent community. In April 2002, one community that the
Company had been managing for Regent was sold and our management agreement
terminated. In September 2002, the Company purchased one community it had been
managing, as discussed below. In October 2002, one community the Company had
been managing was sold and the management agreement terminated. Management fees
recognized from managing the Regent communities were approximately $1.5 million
for the year ended December 31, 2002.

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 Baty-related entity held a 50% economic interest in one of the communities in
which the Company had an interest. Preceding the HC REIT transaction, Emeritus
purchased the Baty-related entity's economic interest for its investment basis
of $2.1 million plus a 9% return, a $2.95 million total payment. The other
community in which the Company had an interest 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. Subsequent to the
two purchase transactions, Emeritus entered into a master lease arrangement for
all four communities and recognized a net loss of approximately $530,000, which
is recorded in "Other, net" in the 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.

On April 1, 2002, in conjunction with the HC REIT master lease, 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 April 2002, the Company entered into agreements to acquire the ownership
interest of one community and the leasehold interest of seven communities for
the assumption of the mortgage debt relating to the owned community and the
lease obligations relating to the leased communities. The eight communities,
comprising 617 units in Louisiana and Texas, had been previously operated by
Horizon Bay Management L.L.C. In May 2002, the Company assigned its rights under
these agreements to Baty-owned entities and entered into five-year management
agreements expiring April 30, 2007, with the Baty entities providing for a
management fee of 5% of gross revenue. As a part of these agreements, the
Company has the right to reacquire the one community and seven leased
communities at any time prior to April 30, 2007, by assuming the mortgage debt
and lease obligations and paying the Baty entities the amount of any cash
investment in the communities, plus 9% per annum. In the original agreements of
acquisition with the Baty entities, Horizon Bay agreed to fund operating losses
of the communities to the extent of $2.3 million in the first twelve months and
$1.1 million in the second twelve months following the closing. Under the
management agreements with the Baty entities, the Company has agreed to fund any
operating losses in excess of these limits over the five-year management term.
In late 2002, the Baty entities and Horizon Bay

F-31

altered their agreement relating to operating losses whereby (i) Horizon Bay
paid the Baty entities $2 million and (ii) the Baty entities waived any further
funding by Horizon of operating losses of the communities. This alteration did
not change the Company's funding commitment.

In July of 2002, the Company terminated the operating lease on an 88-unit
building in Bedford, Virginia, and entered into a management agreement for that
facility for a period equal to the remainder of the lease term.

In August of 2002, the Company terminated the management agreement with a
Baty-related entity for a 214-unit facility in Cincinnati, Ohio. In the same
month, the Company exercised the purchase option to acquire a 108-unit facility
in Auburn, Massachusetts, from Hanseatic Corporation. The cost to exercise the
option was approximately $10.4 million, which consisted of the option price of
$10.2 million and approximately $200,000 in transaction costs. The Company
financed the transaction using $8.3 million in debt financing provided by GE
Healthcare Financial Services and approximately $2.1 million in cash. The debt
financing bears interest at LIBOR plus 3.85%, with a floor of 6.5%, and is
secured by the mortgage and the assignment of leases.

In September of 2002, the Company purchased the leasehold interest in a 111-unit
facility located in San Antonio, Texas, from Regent Assisted Living. Regent had
a cash security deposit on this property of approximately $742,000, which was
replaced with a letter of credit from the Company. The Company also paid
$408,000 in additional consideration to purchase RAL's leasehold interest.
Total cash paid was approximately $1.2 million after transaction costs.
Healthcare Property Investors provided 5-year debt financing of $800,000, with
interest-only payments at an effective rate of 15% per annum.

In October of 2002, the Company purchased $2.9 million of mezzanine debt secured
by interests in three communities leased by the Company; interest receivable on
the debt will partially offset lease payments as the Company's lease payments
are used to pay interest on the debt. Also in October of 2002, the Company
began managing a 72-unit assisted living and dementia care community in Austin,
Texas owned by a Baty-related entity. The management agreement is effective
until terminated by either party on specified written notice and provides for a
fee of 5% of revenue or $5,000 per month, whichever is greater.

On October 1, 2002, the Company entered into a lease agreement with Fretus
Investors LLC ("Fretus"), for 24 assisted living communities (the "Properties")
in six states containing an aggregate of approximately 1,650 units. Fretus
acquired the Properties from Marriott Senior Living Services, a subsidiary of
Marriott International. Fretus is a private investment joint venture between
Fremont Realty Capital ("Fremont"), which holds a 65% stake, and an entity
controlled by Baty and in which he holds an indirect 36% interest, which holds a
35% minority stake. Mr. Baty is also guarantor of a portion of the debt and
the Baty-related entity is the administrative member of Fretus. Fretus, in
turn, leased the Properties to the Company. The Company has no obligation with
respect to the properties other than its responsibilities under the lease, which
includes the option to purchase solely at the discretion of the Company.

The Fretus lease is for an initial 10-year period with two 5-year extensions and
includes an opportunity for the Company to acquire the Properties during the
third, fourth, or fifth year and the right under certain circumstances for the
lease to be cancelled as to one or more properties upon the payment of a
termination

F-32

fee to Emeritus. The lease is a net lease, with base rental equal to (i) the
debt service on the outstanding senior mortgage granted by Fretus, and (ii) an
amount necessary to provide a 12% annual return on equity to Fretus. The initial
senior mortgage debt is for $45.0 million and interest is accrued at LIBOR plus
3.5%, subject to a floor of 6.25%. The Fretus equity is approximately $24.8
million but may increase as a result of additional capital contributions for
specified purposes and will decrease as a result of cash distributions to
investors. Based on the initial senior mortgage terms and Fretus equity, current
rental is approximately $500,000 per month. In addition to the base rental, the
lease also provides for percentage rental equal to a percentage (ranging from 7%
to 8.5%) of gross revenues in excess of a specified threshold, commencing with
the thirteenth month of the lease. Total rent expense as of December 31, 2002,
was approximately $1.5 million. The Properties in this acquisition are all
purpose-built assisted living communities in which the Company plans to offer
both assisted and memory loss services in selected communities.

The following summary, prepared on a pro forma basis, combines the results of
operations as if the acquisition of the Properties had been consummated as of
the beginning of both of the periods presented, after including the impact of
certain adjustments such as amortization of acquisition costs, elimination of
management fees, lease costs and income tax effects.

(In thousands)
Year ended December 31,
------------------------
2002 2001
--------- ---------
(unaudited)

Net revenues. . . . . . . . . . . . . . . $184,115 $180,873

Net loss. . . . . . . . . . . . . . . . . (9,694) (3,211)
Preferred dividends . . . . . . . . . . . 7,343 6,368
--------- ---------
Net loss to common shareholders . . . . . $(17,037) $ (9,579)
========= =========

Loss per common share - basic and diluted $ (1.67) $ (0.94)
========= =========

Weighted average number of common shares
outstanding - basic and diluted . . 10,207 10,162
========= =========

These unaudited pro forma results are not necessarily indicative of what
actually would have occurred if the acquisitions had been completed as of the
beginning of both of the periods presented. In addition, they are not intended
to be a projection of future results and do not reflect all of the synergies,
additional revenue-generating services or reductions in direct community
operating expenses that might be achieved from combined operations.

F-33

(17) COMMITMENTS AND CONTINGENCIES

The Company is involved in legal proceedings, claims and litigation arising in
the ordinary course of business. In the opinion of management, the outcome of
these matters will not have a material effect on the Company's results of
operations or financial position.

The Company is self-insured for certain employee health benefits. The Company's
policy is to accrue amounts equal to the actuarial liabilities that are based on
historical information along with certain assumptions about future events.
Changes in assumptions for such matters as health care costs and actual
experience could cause these estimates to change.

(18) LIQUIDITY

The Company has incurred significant operating losses since its inception and
has a working capital deficit of $26.7 million, although $2.9 million represents
deferred revenue and $13.5 million of preferred dividends is due only if
declared by the Company's board of directors. In 2001 and 2002 the Company
reported positive net cash from operating activities in its consolidated
statements of cash flows. At times in the past, however, the Company has been
dependent upon third party financing or disposition of assets to fund operations
and the Company cannot guarantee that, if necessary in the future, such
transactions will be available timely or at all, or on terms attractive to the
Company.

In 2002, the Company refinanced substantially all of its debt obligations,
extending the maturities of such financings to dates in 2005 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 lender or
lessor. Such cross-default provisions affect 16 owned assisted living
properties and 64 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.

F-34

(19) QUARTERLY RESULTS (UNAUDITED)

(In thousands, except per share data)
Q1 Q2 Q3 Q4
-------- -------- -------- --------

2002
- --------
Total Operating revenue . . . . . . . . . . $36,146 $34,015 $36,037 $46,931
Income (loss) from operations . . . . . . . 2,082 (1,021) 243 (307)
Other income and expense. . . . . . . . . . (3,384) (2,913) (2,945) 2,022
Net loss. . . . . . . . . . . . . . . . . . (1,302) (3,934) (2,702) 1,715
Preferred dividends . . . . . . . . . . . . 1,997 1,732 1,777 1,837
Net loss to common shareholders . . . . . . $(3,299) $(5,666) $(4,479) $ (122)
Loss per common share -- basic and diluted: $ (0.32) $ (0.56) $ (0.44) $ (0.01)

Q1 Q2 Q3 Q4
-------- -------- -------- --------
2001
- --------
Total Operating revenue . . . . . . . . . . $34,781 $35,177 $34,964 $35,655
Income (loss) from operations . . . . . . . 1,320 1,904 1,027 3,250
Net loss. . . . . . . . . . . . . . . . . . (2,117) (1,422) (846) 151
Preferred dividends . . . . . . . . . . . . 1,611 1,620 1,565 1,572
Net loss to common shareholders . . . . . . $(3,728) $(3,042) $(2,411) $(1,421)
Loss per common share -- basic and diluted. $ (0.37) $ (0.30) $ (0.24) $ (0.14)

The sum of quarterly per share data may not equal the per share total reported
for the year.

(20) SUBSEQUENT EVENTS

In January 2003, the Company reached an agreement with GMAC to extend a $6.8
million note set to mature February 1, 2003. The original $6.8 million note has
been bifurcated into a $6.2 million Note A and a $560,000 Note B. The new notes
of $6.8 million matures March 1, 2006, and provides for monthly principal
payments of approximately $22,000 in addition to interest at LIBOR plus 4.5% and
LIBOR plus 7.75%, respectively. As a result of this refinancing, the Company
has reclassified the long-term portion of $6.6 million principal balance to
long-term debt from current portion of long-term debt in its December 31, 2002,
consolidated financial statements.

Additionally, related to the GMAC extension, the original Seller note for $1
million was also extended. The original Seller note principal balance for the
year ended December 31, 2002, was $921,000 with a maturity of March 1, 2003.
This amendment extends the principal maturity to March 1, 2006, and requires
$12,500 monthly principal and interest payments, with interest accruing at 12%.
Additionally, the Company has also made a $200,000 principal paydown in February
2003. As a result, the Company has reclassified the long-term portion of
$656,000 principal balance to long-term debt from current portion of long-term
debt in its, December 31, 2002, consolidated financial statements.

F-35

INDEPENDENT AUDITORS' REPORT ON
FINANCIAL STATEMENT SCHEDULE

The Board of Directors and Shareholders
Emeritus Corporation:

Under date of March 14, 2003, we reported on the consolidated balance
sheets of Emeritus Corporation and subsidiaries as of December 31, 2002 and
2001, and the related consolidated statements of operations, shareholders'
deficit and comprehensive operations, and cash flows for each of the years in
the three-year period ended December 31, 2002, which are included in the Form
10-K. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule for each of the years in the three-year period ended December 31, 2002
in the Form 10-K. The financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits.

In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP

Seattle, Washington
March 14, 2003

S-1

Schedule II
Emeritus Corporation
Valuation and Qualifying Accounts
Years Ended December 31, 2002, 2001, and 2000
(In thousands)

Column A Column B Column C Column D Column E
- --------------------------------------------- ---------- ------------- --------------- ---------
Balance Charged
at to Balance
Beginning Other Costs at End
of Year and Expenses Deductions (1) of Year
---------- ------------- --------------- ---------

Description
- -----------
Year ended December 31, 2002:
Valuation accounts deducted from assets:
Allowance for doubtful receivables. $ 398 $ 346 $ 417 $ 327
========== ============= =============== =========

Year ended December 31, 2001:
Valuation accounts deducted from assets:
Allowance for doubtful receivables. $ 594 $ 466 $ 662 $ 398
========== ============= =============== =========

Year ended December 31, 2000:
Valuation accounts deducted from assets:
Allowance for doubtful receivables. $ 583 $ 359 $ 348 $ 594
========== ============= =============== =========

_____________
(1) Represents amounts written off

S-2