UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT 1934

For the quarterly period ended June 30, 2003.

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission file number 1-14012

EMERITUS CORPORATION
(Exact name of registrant as specified in its charter)

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

3131 Elliott Avenue, Suite 500
Seattle, WA 98121
(Address of principal executive offices)

(206) 298-2909
(Registrant's telephone number, including area code)
____________________________

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No

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

As of July 31, 2003, there were 10,251,307 shares of the Registrant's Common
Stock, par value $.0001, outstanding.

EMERITUS CORPORATION

INDEX

Part I. Financial Information

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

Condensed Consolidated Balance Sheets as of June 30, 2003, and
December 31, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Condensed Consolidated Statements of Operations for the Three
Months and Six Months ended June 30, 2003 and 2002 . . . .. .. . . . . . . . 3

Condensed Consolidated Statements of Cash Flows for the Six
Months ended June 30, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . . 4

Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . 5

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations . . . .. . . . . . . . . . . . .. . . . .. . . . . . . . . . . 14

Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . 27

Item 4. Controls and Procedures . . . . . . . . . . . .. . . . .. . . . . . . . . . 27

Part II. Other Information

Note: Items 1 through 3 and Item 5 of Part II are omitted because they are not
applicable.

Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . 28

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 29

Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

[The rest of this page is intentionally left blank]

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

June 30, December 31,
2003 2002
-------------- --------------

Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,626 $ 6,960
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2,759
Trade accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,631 1,662
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,819 3,645
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . 5,744 5,217
-------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,820 20,243
-------------- --------------
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,203 119,583
Property held for development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,254 1,254
Notes receivable from and investments in affiliates. . . . . . . . . . . . . . . . . . . . 6,553 6,358
Restricted deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,577 5,555
Lease acquisition costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,467 6,081
Other assets, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,957 3,759
-------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 162,831 $ 162,833
============== ==============

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current Liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,498 $ 3,604
Trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,926 3,108
Accrued employee compensation and benefits. . . . . . . . . . . . . . . . . . . . . . . . 6,163 5,355
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,843 1,737
Accrued real estate taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,309 2,463
Accrued dividends on preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . 16,554 13,457
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,172 9,080
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,856 2,884
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,941 5,040
-------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,262 46,728
-------------- --------------
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,033 119,887
Convertible debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000 32,000
Deferred gain on sale of communities . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,143 20,324
Deferred rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,519 2,508
Other long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 894
-------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226,207 222,341
-------------- --------------
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411 558
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 25,000
Commitments and contingencies
Shareholders' Deficit:
Preferred stock, $.0001 par value. Authorized 70,000 shares; issued and outstanding
34,145 and 33,473 at June 30, 2003, and December 31, 2002, respectively. . . . . . . . - -
Common stock, $.0001 par value. Authorized 40,000,000 shares; issued and outstanding
10,251,307 and 10,247,226 shares at June 30, 2003, and December 31, 2002, respectively 1 1
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,666 68,944
Accumulated other comprehensive gain . . . . . . . . . . . .. . . . . . . . . . . . . . . - 1,247
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (158,454) (155,258)
-------------- --------------
Total shareholders' deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (88,787) (85,066)
-------------- --------------
Total liabilities and shareholders' deficit . . . . . . . . . . . . . . . . . . . . . . . $ 162,831 $ 162,833
============== ==============

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

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

Three Months ended June 30, Six Months ended June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------

Revenues:
Community revenue. . . . . . . . . . . . $ 45,160 $ 30,294 $ 88,246 $ 62,414
Other service fees . . . . . . . . . . . 1,041 1,095 2,035 2,095
Management fees. . . . . . . . . . . . . 3,197 2,626 6,294 5,651
------------- ------------- ------------- -------------
Total operating revenues . . . . 49,398 34,015 96,575 70,160
------------- ------------- ------------- -------------

Expenses:
Community operations . . . . . . . . . . 29,785 21,084 58,430 41,646
General and administrative . . . . . . . 5,811 4,867 11,215 9,790
Depreciation and amortization. . . . . . 1,840 1,675 3,687 3,526
Facility lease expense . . . . . . . . . 9,325 7,410 17,929 14,138
------------- ------------- ------------- -------------
Total operating expenses . . . . 46,761 35,036 91,261 69,100
------------- ------------- ------------- -------------
Income (loss) from operations. . 2,637 (1,021) 5,314 1,060

Other income (expense):
Interest income. . . . . . . . . . . . . 173 113 328 222
Interest expense . . . . . . . . . . . . (3,229) (2,852) (6,502) (5,778)
Other, net . . . . . . . . . . . . . . . 1,392 (174) 1,440 (741)
------------- ------------- ------------- -------------
Net other expense. . . . . . . . (1,664) (2,913) (4,734) (6,297)
------------- ------------- ------------- -------------

Net income (loss). . . . . . . . 973 (3,934) 580 (5,237)

Preferred stock dividends. . . . . . . . . 1,905 1,732 3,776 3,729
------------- ------------- ------------- -------------
Net loss to common shareholders. $ (932) $ (5,666) $ (3,196) $ (8,966)
============= ============= ============= =============

Loss per common share - basic and diluted. $ (0.09) $ (0.56) $ (0.31) $ (0.88)
============= ============= ============= =============

Weighted average number of common shares
outstanding - basic and diluted. . . . 10,249 10,200 10,248 10,198
============= ============= ============= =============

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

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

Six Months Ended June 30,
------------------------------------
2003 2002
----------------- -----------------

Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 580 $ (5,237)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Minority interests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 115
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,687 3,526
Amortization of deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . (185) (149)
Loss on sale of properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 515
Gain on sale of investment securities . . . . . . . . . . . . . . . . . . . . . . . . (1,437) -
Write off of deferred gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (12)
Changes in operating assets and liabilities . . . . . . . . . . . . . . . . . . . . . (874) (477)
----------------- -----------------
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . 1,872 (1,719)
----------------- -----------------

Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . (1,174) (808)
Purchase of minority partner interest . . . . . . . . . . . . . . . . . . . . . . . . . - (3,070)
Proceeds from sale of property and equipment. . . . . . . . . . . . . . . . . . . . . . - 25,010
Proceeds from sale of investment securities . . . . . . . . . . . . . . . . . . . . . . 2,949 -
Management and lease acquisition costs. . . . . . . . . . . . . . . . . . . . . . . . . (625) (1,242)
Advances to affiliates and other managed communities. . . . . . . . . . . . . . . . . . (5) (501)
Proceeds from sales of interest in affiliates . . . . . . . . . . . . . . . . . . . . . - 750
Investment in affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (127) (107)
Distributions to minority partners. . . . . . . . . . . . . . . . . . . . . . . . . . . (250) (250)
----------------- -----------------
Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . 768 19,782
----------------- -----------------

Cash flows from financing activities:
Proceeds from sale of stock under employee stock purchase plan. . . . . . . . . . . . . 43 57
(Increase) decrease in restricted deposits. . . . . . . . . . . . . . . . . . . . . . . (22) 668
Repayment of short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . (1,367) (1,733)
Debt issue and other financing costs. . . . . . . . . . . . . . . . . . . . . . . . . . (169) (1,516)
Proceeds from long-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . 600 37,341
Repayment of long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . (59) (51,732)
----------------- -----------------
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . (974) (16,915)
----------------- -----------------

Net increase in cash and cash equivalents. . . . . . . .. . . . . . . . . . . 1,666 1,148

Cash and cash equivalents at the beginning of the period. . . . . . . . . . . . . . . . . 6,960 9,811
----------------- -----------------

Cash and cash equivalents at the end of the period. . . . . . . . . . . . . . . . . . . . $ 8,626 $ 10,959
================= =================

Supplemental disclosure of cash flow information - cash paid during the period
for interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,397 $ 6,926

Noncash investing and financing activities:
Unrealized holding gains in investment securities . . . . . . . . . . . . . . . . . . . $ (1,247) $ 249
Accrued and in-kind preferred stock dividends . . . . . . . . . . . . . . . . . . . . . $ 3,776 $ 3,729

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

EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Emeritus believes the following critical accounting policies are most
significant to the judgments and estimates used in the preparation of its
condensed consolidated financial statements. Revisions in such estimates are
charged to income in the period in which the facts that give rise to the
revision become known.

* Emeritus uses a captive insurance structure essentially to self-fund its
primary layer of insurance. This policy is claims-made based and covers
losses and liabilities associated with general and professional liability.
The primary layer has per occurrence and aggregate limits. Within that
primary layer is a self-insured retention, which also has a per occurrence
and aggregate limit. The Company also has an excess policy, which applies
to claims in excess of the primary layer on a per claim basis. Losses
within the primary layer, which include the self-insured retention, are
accrued based upon actuarial 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.

* For workers' compensation insurance for insured states (excluding Texas and
compulsory State Funds), the Company is on an incurred loss, retrospective
insurance policy, retroactively adjusted, upward or downward, based upon
total incurred loss experience. The premium charged by the insurance
underwriter is based upon a standard rate determined by the underwriter to
cover, amongst other things, estimated losses and other fixed costs. The
difference between the premium charged and the actuarial based estimate of
costs, which is expensed on a monthly basis, is carried as an asset on the
balance sheet. After the end of the policy year, the insurance company
conducts an audit and adjusts the total premium based upon the actual
payroll and actual incurred loss for the policy year. Any premium
adjustment for the differences between estimated and actual payroll and
estimated and actual losses will first be applied to the accrued asset and
then as an adjustment to workers' compensation expense at the time such
adjustment is determined. There is a reasonable expectation that the
incurred loss adjustment will be downward, resulting in a premium refund.
The incurred loss adjustment is limited to 50% of the standard premium with
the initial adjustment six months after policy expiration on December 31,
2003, and annually thereafter. For work-related injuries in Texas, the
Company is a non-subscriber, meaning that work-related losses are covered
under a defined benefit program outside of the Texas Workers' Compensation
system. Losses are paid as incurred and estimated losses are accrued on a
monthly basis.

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

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

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 adopted SFAS No. 143 on
January 1, 2003. Adoption did not have an impact on the Company's financial
condition and results of operations.

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 are applied in fiscal
years beginning after May 15, 2002. 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. Adoption did not have a material impact on the Company's
financial condition and results of operations in the quarter ended June 30,
2003.

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. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. Adoption did not have an impact
on the Company's financial condition and results of operations.

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

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

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
condensed consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46 (FIN No. 46),
"Consolidation of Variable Interest Entities." This Interpretation addresses
consolidation by business enterprises of variable interest entities (VIE's). A
VIE is subject to the consolidation provisions of FIN No. 46 if it cannot
support its financial activities without additional subordinated financial
support from third parties or its equity investors lack any one of the following
characteristics: the ability to make decisions about its activities through
voting rights, the obligation to absorb losses of the entity if they occur, or
the right to receive residual returns of the entity if they occur. FIN No. 46
requires a VIE to be consolidated by its primary beneficiary. The primary
beneficiary is the party that holds the variable interests that expose it to a
majority of the entity's expected losses and/or residual returns. For purposes
of determining a primary beneficiary, all related party interests must be
combined with the actual interests of the Company in the VIE. The application
of this Interpretation is immediate for VIE's created or altered after January
31, 2003, and is effective July 1, 2003, for variable interest entities that
existed prior to February 1, 2003.

The Company is currently evaluating the impact of FIN No. 46 on all its current
related party management agreements including those more fully discussed in the
Company's December 31, 2002, Annual Report on Form 10-K, under Item 13 "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS," under sections denoted as "Emeritrust
Transactions" and "Baty Transactions" as well as other management agreements and
other arrangements with potential VIE's. Implementation of FIN No. 46 will more
likely than not result in consolidation of both the Emeritrust I and Emeritrust
II Development communities and possibly some of the other entities discussed in
the referenced sections. Variable interest entities required to be
consolidated, will be measured at fair value in accordance with the
Interpretation and any difference between the net amount added to the balance
sheet and any previously recognized interest shall be recognized as the
cumulative effect of an accounting change in the Company's Condensed
Consolidated Statements of Operations as of September 30, 2003.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. For public
enterprises, such as the Company, this statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. Management has determined that no financial instruments of the Company
are covered by this pronouncement.

BASIS OF PRESENTATION

The unaudited interim financial information furnished herein, in the opinion of
the Company's management, reflects all adjustments, consisting of only normally
recurring adjustments, which are necessary to state fairly the condensed
consolidated financial position, results of operations, and cash flows of
Emeritus as of June 30, 2003, and for the three and six months ended June 30,
2003 and 2002. The results of operations for the period ended June 30, 2003,
are not necessarily indicative of the operating results for the full year. The
Company presumes that those reading this interim financial information have read
or have access to its 2002 audited consolidated financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations that are contained in the 2002 Form 10-K filed March 28, 2003.
Therefore, the Company has omitted footnotes and other disclosures herein, which
are disclosed in the Form 10-K.

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.

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

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

Three Months ended Six Months ended
June 30, June 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
(In thousands, except per share data)

Net loss to common shareholders:
As reported . . . . . . . . . . . . . . . . . . . . . . . $ (932) $ (5,666) $ (3,196) $ (8,966)
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 (179) (261) (465) (460)
--------------- --------------- --------------- ---------------
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . $ (1,111) $ (5,927) $ (3,661) $ (9,426)
=============== =============== =============== ===============
Net loss per common share -- basic and diluted:
As reported . . . . . . . . . . . . . . . . . . . . . . . $ (0.09) $ (0.56) $ (0.31) $ (0.88)
=============== =============== =============== ===============

Pro forma . . . . . . . . . . . . . . . . . . . . . . . . $ (0.11) $ (0.58) $ (0.36) $ (0.92)
=============== =============== =============== ===============

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

Three Months Six Months
Ended Ended
June 30, June 30,
-------------------- ------------------------
2003 2002 2003 2002
--------- --------- ------------- ---------

Expected life from vest date (in years) 4 4 4 4
Risk-free interest rate . . . . . . . . 1.96% 4.3% 1.96% - 2.57% 4.3%
Volatility. . . . . . . . . . . . . . . 90.0% 92.8% 90.0% - 90.4% 93.3%
Dividend yield. . . . . . . . . . . . . - - - -
Weighted average fair value . . . . . . 2.58 2.00 2.57 2.00

EMERITRUST TRANSACTIONS

The Company holds interest in 45 communities referred to as the Emeritrust
communities, including 24 Emeritrust I communities, 16 Emeritrust II Operating
communities, and five Emeritrust II Development communities, under management
agreements described in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002. In May 2002, the Company entered into an agreement with
a third party operator where it would assume full control of a single Emeritrust
I facility located in San

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

Bernardino, California for a set lease payment. As of April 1, 2003, this new
operator exercised its option to purchase the community, thus reducing the
number of Emeritrust I communities under management to 24. The Company does not
recognize management fees on the Emeritrust communities as revenue in its
condensed consolidated financial statements to the extent that it is funding the
cash operating losses that include them, although the amounts of the funding
obligation each year include management fees earned by Emeritus under the
management agreements. Correspondingly, the Company recognizes the funding
obligation under the agreement, less the applicable management fees, as an
expense in its condensed consolidated financial statements under the category
"Other, net". Conversely, if the applicable management fees exceed the funding
obligation, the Company recognizes the management fees less the funding
obligation as management fee revenue in its condensed consolidated financial
statements.

For the three months and six months ended June 30, 2003 and 2002, the total
gross management fees earned, management fees recognized, and funding
obligations accrued for all Emeritrust communities are shown in the tables below
(In thousands):

Management Fees Earned:

Three Months Ended June 30, Six Months Ended June 30,
---------------------------- Increase ---------------------------- Increase
Communities 2003 2002 (Decrease) 2003 2002 (Decrease)
- ------------------------- ------------- ------------- -------------- ------------- ------------- --------------

Emeritrust I. . . . . . . $ 989 $ 402 $ 587 $ 1,836 $ 1,100 $ 736
Emeritrust II Operating . 493 479 14 987 965 22
Emeritrust II Development 179 229 (50) 364 397 (33)
------------- ------------- -------------- ------------- ------------- --------------
Total . . . . . . . . . . $ 1,661 $ 1,110 $ 551 $ 3,187 $ 2,462 $ 725
============= ============= ============== ============= ============= ==============

Management Fees Recognized:

Emeritrust I. . . . . . . $ 989 $ 402 $ 587 $ 1,826 $ 1,100 $ 726
Emeritrust II Operating . 493 479 14 987 965 22
Emeritrust II Development 172 203 (31) 354 358 (4)
------------- ------------- -------------- ------------- ------------- --------------
Total . . . . . . . . . . $ 1,654 $ 1,084 $ 570 $ 3,167 $ 2,423 $ 744
============= ============= ============== ============= ============= ==============

Funding Obligation Accrued:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- Increase ---------------------------- Increase
Communities 2003 2002 (Decrease) 2003 2002 (Decrease)
- ------------------------- ------------- ------------- -------------- -------------- ------------- --------------

Emeritrust I. . . . . . . $ - $ - $ - $ 11 $ - $ 11
Emeritrust II Development 8 85 (77) (20) 121 (141)
------------- ------------- -------------- -------------- ------------- --------------
Total . . . . . . . . . . $ 8 $ 85 $ (77) $ (9) $ 121 $ (130)
============= ============= ============== ============== ============= ==============

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

purchase option agreement related to the Emeritrust II communities was amended
to expire October 1, 2003, which will allow the owners of the communities, their
lenders, and the Company to consider a longer-term agreement. The Company
continues to operate under the existing operating structure of the Emeritrust I
communities on a day-to-day basis pending resolution of the terms of financing,
management, and purchase option agreements. While the Company believes that
these arrangements will be extended, it cannot guarantee that these discussions
will be successful or, if the arrangements are extended, what the terms will be.
If the Company is unsuccessful, it could lose the management fee revenue from
these communities and future rights with respect to them.

EIGHT BUILDING LEASE ACQUISITION

On May 1, 2003, the Company entered into a lease agreement with certain
affiliates of Healthcare Realty Trust ("HRT"), a real estate investment trust,
for eight assisted living communities (the "Properties") in four states
containing an aggregate of 489 units.

The lease is for an initial 10-year period with three 5-year extensions and
includes an opportunity for the Company to acquire the Properties anytime during
the second year for $42.2 million and a purchase option in the third year at a
3% premium over the original purchase option price. In addition, the lease
gives the Company the right of first refusal to purchase any of the properties
if the owner decides to sell. The lease is a net lease, with base rent
approximating $3.45 million annually with certain lease escalators. At the end
of the first and second lease years, the lease escalator is based on a
percentage of increased operating revenues, with an aggregate annual cap of
$275,000. The lease escalators each year thereafter are based on increases in
the consumer price index not to exceed 3.5% of the prior year's amount. HRT has
agreed to fund up to $500,000 for capital expenditure requirements. The capital
expenditures funded by HRT will increase the basis and purchase option and carry
a 10% lease rate.

HRT also agreed to extend a $600,000 loan to the Company for working capital
purposes and for capital and other improvements to the facilities. This loan
has a 10-year term with no extensions, bearing interest at 10% annually with
monthly interest-only payments. In addition, if the Company exercises its
purchase option at any time on any facility, the pro rata principal portion of
the loan will become due at the closing of such purchase.

The Properties in this acquisition are purpose-built assisted living communities
in which the Company plans to offer both assisted and memory loss services.

ACCRUED DIVIDENDS ON PREFERRED STOCK

Since the third quarter of 2000, the Company has accrued its obligation to pay
cash dividends to both the Series A and Series B preferred shareholders, which
amounted to approximately $16.6 million at June 30, 2003, including all
penalties for non-payment. Since dividends on the Series A shares were not paid
for six consecutive quarters, the Series A dividends were calculated on a
compounded basis retroactively, and the cumulative effect of approximately
$294,000 was reflected in the first quarter of 2002. In addition, since the
Company had not paid these dividends for more than six consecutive quarters,
under the Designation of Rights and Preferences of the Series A and Series B
stock in the Company's Articles of Incorporation, the Series A and B
shareholders, as the case may be, may designate one director in addition to the
other directors that they are entitled to designate under the shareholders'
agreement. Under the Series A shareholders' agreement, however, the Series A
shareholder's right to designate this additional director under the Articles is
limited to circumstances in which they would not otherwise be entitled to name a
director. Currently, the Series A shareholder does not have the right to
designate an additional director. As of January 1, 2002, the Series B
shareholders became entitled to designate an additional director under the
Articles, but thus far have chosen not to do so.

On June 10, 2003, Emeritus announced in a press release that it had entered into
an agreement to repurchase its Series A preferred stock from the sole
shareholder for a total price of $20.0 million.

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

The Series A Stock has a face value of $25.0 million with a $18.20 per share
conversion price and a mandatory redemption date of October 2004. At June 30,
2003, the Series A Stock had accrued and unpaid dividends of approximately $9.6
million, which are included in the repurchase price and will therefore be
extinguished as a part of the transaction.

On July 31, 2003, the Company repurchased Series A stock with a face value of
$12.5 million for $10 million. As part of the purchase agreement, the holder of
the Series A Preferred Stock has agreed to forego accrued and unpaid dividends
of approximately $5.0 million. The Company anticipates recording a one-time
gain of approximately $7.5 million, exclusive of transaction costs, in the third
quarter. The purchase was financed through the previously announced lease
transaction involving three communities in which the Company raised $10.2
million, further discussed below in "Other Transactions". The outside date of
the original agreement has been extended to August 31, 2003, and continues to
apply to the remainder of the Series A stock.

Series B dividends are to be paid in cash and in additional shares of Series B
preferred shares. As of June 30, 2003, an additional 4,145 Series B preferred
shares had been issued as paid-in-kind dividends for all periods prior to the
second quarter of 2003. As of July 1, 2003, an additional 341 Series B
preferred shares were issued as paid-in-kind dividends for the second quarter of
2003.

OTHER TRANSACTIONS

In July 2003, the Company entered into a transaction involving three leased
communities wherein the three leases were transferred to a new lessor. The
Company received approximately $10.2 million in cash proceeds and anticipates
recognizing a gain of approximately $6.3 million, which will be amortized over
the remaining life of the leases. As part of the transaction, approximately $4.4
million in notes and interest receivable related to the three facilities were
retired. The three facilities are purpose-built assisted living communities
located in Auburn, Massachusetts; Louisville, Kentucky; and Rocky Hill,
Connecticut.

Effective July 1, 2003, the Company ceased managing 12 Regent Assisted Living
communities. On August 1, 2003, the Company ceased managing an additional
Regent Assisted Living community.

LOSS PER SHARE

Basic net loss per share is computed based on weighted average shares
outstanding and excludes any potential dilution. Diluted net loss per share is
computed based on the weighted average number of shares outstanding plus
dilutive potential common shares using the treasury stock method. The capital
structure of Emeritus includes convertible debentures, redeemable and
non-redeemable convertible preferred stock, common stock warrants, and stock
options. The assumed conversion and exercise of these securities have been
excluded from the calculation of diluted net loss per share since their effect
is anti-dilutive. The loss per common share was calculated on a dilutive basis
without consideration of 10,588,066 and 10,193,900 potential common shares at
June 30, 2003 and 2002, respectively, related to outstanding options, warrants,
convertible debentures, and convertible preferred stock.

GAINS ON INVESTMENT SECURITIES

On April 23, 2003, ARV announced that, at a special meeting held on that date,
its shareholders voted to approve the Agreement and Plan of Merger, dated as of
January 3, 2003, between ARV and Prometheus Assisted Living LLC ("Prometheus").
ARV further announced that the merger transaction closed and trading of the ARV
stock on the American Stock Exchange ceased on April 23, 2003. Under the terms
of the merger, shares of ARV's stock held by shareholders other than Prometheus
and its affiliates were converted into the right to receive merger consideration
of $3.90 per share, without interest. On April 25, 2003, the Company received
approximately $2.9 million in exchange for its 755,884 shares of ARV common
stock in which it had a cost basis of approximately $1.5 million, thus
recognizing a gain of approximately $1.4 million, which is included in "Other,
net" in the Company's Condensed Consolidated Statements of Operations and a
reduction in "Accumulated other comprehensive gain" in the Company's Condensed
Consolidated Balance Sheets.

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

OTHER COMPREHENSIVE LOSS

Other comprehensive loss includes the following transactions for the three-month
and six-month periods ended June 30, 2003 and 2002, respectively:

Three Months ended June 30, Six Months ended June 30,
------------------------------- --------------------------------
(In thousands)
2003 2002 2003 2002
--------------- --------------- --------------- ---------------

Net loss to common shareholders. . $ (932) $ (5,666) $ (3,196) $ (8,966)
Other comprehensive income:
Unrealized holding gains
on investment securities - 121 - 249
--------------- --------------- --------------- ---------------
Comprehensive loss . . . . . . . . $ (932) $ (5,545) $ (3,196) $ (8,717)
=============== =============== =============== ===============

LIQUIDITY

The Company has incurred significant operating losses since its inception and
has a working capital deficit of $31.4 million, although $4.9 million represents
deferred revenue and $16.6 million of preferred dividends is due only if
declared by the Company's board of directors. At times in the past, the Company
has been dependent upon third party financing or disposition of assets to fund
operations. If such transactions are necessary in the future, Emeritus cannot
guarantee that they will be available on a timely basis, on terms attractive to
the Company, or at all.

Throughout 2002 and continuing in the first quarter of 2003, 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 72 properties operated
under leases. Accordingly, any event of default could cause a material adverse
effect on the Company's financial condition if such debt or leases are
cross-defaulted. At June 30, 2003, the Company complied with all such
covenants, except in respect to one leased building. The Company has obtained a
waiver from the lessor and is considered to be in full compliance as of June 30,
2003.

Management believes that the Company will be able to sustain positive operating
cash flow at least through June 30, 2004, and will have adequate cash for all
necessary investing and financing activities including required debt service and
capital expenditures.

OTHER EVENTS

Alterra Healthcare Corporation ("Alterra"), a national assisted living company
headquartered in Milwaukee, filed a voluntary Chapter 11 bankruptcy petition on
January 22, 2003. On April 10, 2003, the Bankruptcy Court approved bidding
procedures establishing a process for Alterra to seek and select a transaction
to address its capital and liquidity needs upon completion of its bankruptcy
reorganization by selling its capital stock or assets.

On July 23, 2003, the United States Bankruptcy Court for the District of
Delaware approved a Merger Agreement which provides that an entity controlled by
Emeritus Corporation, with capital from an affiliate of Fortress Investment
Group LLC, will acquire Alterra upon the closing of the merger. The total

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

consideration provided under the Merger Agreement, subject to certain
adjustments, is $76 million. Emeritus has guaranteed $6.9 million of such
closing consideration. The transaction is conditioned on, among other things,
confirmation of Alterra's Chapter 11 Plan of Reorganization, the consent of
certain lenders and lessors, and the receipt of regulatory approvals. The
transaction is expected to close in the fourth quarter of this year.

Upon emerging from its Chapter 11 reorganization, Alterra is expected to be
comprised of approximately 310 communities with bed capacity of 13,000. Upon
completing the acquisition, Emeritus will operate approximately 475 communities
comprising 27,500 units in 38 states.

[The rest of this page is intentionally left blank]

ITEM 2. 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 seven
and developing 20 communities in 1997, and developing five communities in 1998.
During 1999 and continuing through 2001, we substantially reduced our pace of
acquisition and development activities to concentrate our efforts on improving
the performance of our existing facilities. During 2002 and the first half of
2003, we have resumed pursuing, on a selective basis, management contracts and
acquisition opportunities, which we believe will be beneficial to us.

In our consolidated portfolio, we had an increase in average monthly revenue per
occupied unit to $2,757 for the first two quarters of 2003 from $2,525 for the
first two quarters of 2002, primarily brought about by our rate enhancement
program. This represents an average revenue increase of $232 per month per
occupied unit, or 9.2%. The average occupancy rate decreased to 77.0% for the
first two quarters of 2003 from 81.5% for the first two quarters of 2002.
However, the year-to-year comparison of these results is skewed by the impact of
the 24 building lease acquisition in the fourth quarter of 2002. The table
below shows the results exclusive of this acquisition:

Six months ended June 30,
-------------------------------------------------------------
2003 2002
--------------------------------------------- --------------
A B C D E
------------- --------------- -------------- -------------- --------------
24 Building (A w/o B) (C-D)
Consolidated Lease Consolidated Increase
Portfolio Acquisition Portfolio (Decrease)
------------- --------------- -------------- -------------- --------------

Average monthly revenue
per occupied unit . . $ 2,757 $ 3,009 $ 2,698 $ 2,525 $ 173
============== ============== ============== ============== ==============

Average occupancy rate. 77.0% 64.3% 80.9% 81.5% (0.6%)
============== ============== ============== ============== ==============

In our total operated portfolio, which includes managed communities, we had an
increase in average monthly revenue per occupied unit to $2,693 for the first
two quarters of 2003 from $2,513 for the first two quarters of 2002, primarily
brought about by our rate enhancement program. This represents an average
revenue increase of $180 per month per occupied unit, or 7.2%. The average
occupancy rate decreased to 78.6% for the first quarter of 2003 from 80.8% for
the first quarter of 2002. However, the year-to-year comparison of these
results is skewed by the impact of the 24 building lease acquisition in the
fourth quarter of 2002. The table below shows the results exclusive of this
acquisition:

Six months ended June 30,
-------------------------------------------------------------
2003 2002
--------------------------------------------- --------------
A B C D E
------------- --------------- -------------- -------------- --------------
Total 24 Building (A w/o B) Total (C-D)
Operated Lease Operated Increase
Portfolio Acquisition Portfolio (Decrease)
------------- --------------- -------------- -------------- --------------

Average monthly revenue
per occupied unit . . $ 2,693 $ 3,009 $ 2,663 $ 2,513 $ 150
============== ============== ============== ============== ==============

Average occupancy rate. 78.6% 64.3% 80.3% 80.8% (0.5%)
============== ============== ============== ============== ==============

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

While our focus during the upcoming year will be shifted toward integration of
existing and pending acquisitions, we intend to continue evaluation of other
acquisition opportunities. We are interested in opportunities that have neutral
capitalization requirements, enhance or expand existing offerings, and offer
upside potential, such as the eight community acquisition in May 2003. We do
not believe our efforts to integrate Alterra Healthcare into our structure will
preclude us from participating in these types of transactions.

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

As of June 30, As of December 31, As of June 30,
2003 2002 2002
---------------------- ---------------------- --------------------
Buildings Units Buildings Units Buildings Units
---------- ---------- ---------- ---------- ---------- ----------

Owned (1). . . . . . . . . . 17 1,687 17 1,687 16 1,579
Leased (1) . . . . . . . . . 75 5,768 67 5,279 44 3,716
Managed/Admin Services . . . 91 8,267 94 8,577 95 8,763
Joint Venture/Partnership. . 2 219 2 219 3 333
---------- ---------- ---------- ---------- ---------- ----------
Operated Portfolio. . . 185 15,941 180 15,762 158 14,391
========== ========== ========== ========== ========== ==========

Percentage increase (2) 2.8% 1.1% 35.3% 28.7% 18.8% 17.5%

- --------
(1) Included in our consolidated portfolio of communities.
(2) The percentage increase indicates the change from the prior year, or, in
the case of June 30, 2003 and 2002, from the end of the prior year.

We rely primarily on our residents' ability to pay our charges for services from
their own or familial resources and expect that we will do so for the
foreseeable future. Although care in an assisted living community is typically
less expensive than in a skilled nursing facility, we believe that generally
only seniors with income or assets meeting or exceeding the regional median can
afford to reside in our communities. Inflation or other circumstances that
adversely affect seniors' ability to pay for assisted living services could
therefore have an adverse effect on our business. All sources of
resident-related revenue other than residents' private resources constitute less
than 10% of our total revenues.

We have incurred net losses since our inception, and as of June 30, 2003, we had
an accumulated deficit of approximately $158.5 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;

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

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

During 1998, we decided to reduce acquisition and development activities and
dispose of select communities that had been operating at a loss. We believe
that slowing our acquisition and development activities enabled us to use our
resources more efficiently and increase our focus on enhancing community
operations. In 2002 and through the second quarter of 2003, along with a focus
on operations, we selectively acquired additional communities and new management
contracts.

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

EMERITRUST TRANSACTIONS

We hold interests in 45 communities referred to as the Emeritrust communities,
including 24 Emeritrust I communities, 16 Emeritrust II Operating communities
and five Emeritrust II Development communities, under management agreements
described in our Annual Report on Form 10-K for the year ended December 31,
2002. In May 2002, we entered into an agreement with a third party operator
where they would assume full control of a single Emeritrust I facility located
in San Bernardino, California for a set lease payment. As of April 1, 2003,
this new operator exercised its option to purchase the community, thus reducing
the number of Emeritrust I communities under management to 24. We do not
recognize management fees on the Emeritrust communities as revenue in our
condensed consolidated financial statements to the extent that we are funding
the cash operating losses that include them, although the amounts of the funding
obligation each year include management fees earned by us under the management
agreements. Correspondingly, we recognize the funding obligation under the
agreement, less the applicable management fees, as an expense in our condensed
consolidated financial statements under the category "Other, net". Conversely,
if the applicable management fees exceed the funding obligation, we recognize
the management fees less the funding obligation as management fee revenue in our
condensed consolidated financial statements.

Management Fees Earned:

Management Fees Recognized:

Funding Obligation Accrued:

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

The management agreements and related options to purchase these communities
expired June 30, 2003 (except that management agreements with respect to five
communities continue until December 31, 2003). Because we were 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 purchase options. On July 2, 2003,
we executed an initial extension of management agreement with respect to the
Emeritrust II communities. The management and the purchase option agreement
related to the Emeritrust II communities was amended to expire October 1, 2003,
which will allow us, the owners of the communities, and their lenders to
consider a longer-term agreement. We continue to operate under the existing
operating structure of the Emeritrust I communities on a day-to-day basis
pending resolution of the terms of financing, management, and purchase option
agreements. 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.

SERIES A PREFERRED STOCK

On June 10, 2003, we announced in a press release that we had entered into an
agreement to repurchase our Series A preferred stock from the sole shareholder
for a total price of $20.0 million. The Series A Stock has a face value of $25.0
million with a $18.20 per share conversion price and a mandatory redemption date
of October 2004. At June 30, 2003, the Series A Stock had accrued and unpaid
dividends of approximately $9.6 million, which are included in the repurchase
price and will therefore be extinguished as a part of the transaction.

On July 31, 2003, we repurchased Series A stock with a face value of $12.5
million for $10 million. As part of the purchase agreement, the holder of the
Series A Preferred Stock has agreed to forego accrued and unpaid dividends of
approximately $5.0 million. We anticipate recording a one-time gain of
approximately $7.5 million, exclusive of transaction costs, in the third
quarter. The purchase was financed through the previously announced lease
transaction involving three communities in which we raised $10.2 million,
further discussed below in "Other Transactions". The outside date of the
original agreement has been extended to August 31, 2003, and continues to apply
to the remainder of the Series A stock.

OTHER TRANSACTIONS

In July 2003, we entered into a transaction involving three leased communities
wherein the three leases were transferred to a new lessor. We received
approximately $10.2 million in cash proceeds and anticipate recognizing a gain
of approximately $6.3 million, which will be amortized over the remaining life
of the leases. As part of the transaction approximately $4.4 million in notes
and interest receivable related to the three facilities were retired. The three
facilities are purpose-built assisted living communities located in Auburn,
Massachusetts; Louisville, Kentucky; and Rocky Hill, Connecticut.

Effective July 1, 2003, we ceased managing 12 Regent Assisted Living
communities. On August 1, 2003, we ceased managing an additional Regent
Assisted Living community.

EIGHT BUILDING LEASE ACQUISITION

On May 1, 2003, we entered into a lease agreement with certain affiliates of
Healthcare Realty Trust ("HRT"), a real estate investment trust, for eight
assisted living communities (the "Properties") in four states containing an
aggregate of 489 units.

The lease is for an initial 10-year period with three 5-year extensions and
includes an opportunity for us to acquire the Properties anytime during the
second year for $42.2 million and a purchase option in the third year at a 3%
premium over the original purchase option price. In addition, the lease gives
us the right of first refusal to purchase any of the properties if the owner
decides to sell. The lease is a net lease, with base rent approximating $3.45
million annually with certain lease escalators. At the end of the first and
second lease years, the lease escalator is based on a percentage of increased
operating revenues, with an aggregate annual cap of $275,000. The lease
escalators each year thereafter are based on increases in the consumer

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

price index not to exceed 3.5% of the prior year's amount. HRT has agreed to
fund up to $500,000 for capital expenditure requirements. The capital
expenditures funded by HRT will increase the basis and purchase option and carry
a 10% lease rate.

HRT also agreed to extend a $600,000 loan to us for working capital purposes and
for capital and other improvements to the facilities. This loan has a 10-year
term with no extensions, bearing interest at 10% annually with monthly
interest-only payments. In addition, if we exercise our purchase option at any
time on any facility, the pro rata principal portion of the loan will become due
at the closing of such purchase.

The Properties in this acquisition are purpose-built assisted living communities
in which we plan to offer both assisted and memory loss services to select
communities.

GAINS ON INVESTMENT SECURITIES

On April 23, 2003, ARV Assisted Living, Inc. ("ARV") announced that, at a
special meeting held on that date, its shareholders voted to approve the
Agreement and Plan of Merger, dated as of January 3, 2003, between ARV and
Prometheus Assisted Living LLC ("Prometheus"). ARV further announced that the
merger transaction closed and trading of the ARV stock on the American Stock
Exchange ceased on April 23, 2003. Under the terms of the merger, shares of
ARV's stock held by shareholders other than Prometheus and its affiliates were
converted into the right to receive merger consideration of $3.90 per share,
without interest. On April 25, 2003, we received approximately $2.9 million in
exchange for our 755,884 shares of ARV common stock in which we had a cost basis
of approximately $1.5 million, thus recognizing a gain of approximately $1.4
million, which is included in "Other, net" in our Condensed Consolidated
Statements of Operations and a reduction in "Accumulated other comprehensive
gain" in our Condensed Consolidated Balance Sheets.

OTHER EVENTS

On July 23, 2003, the United States Bankruptcy Court for the District of
Delaware approved a Merger Agreement which provides that an entity controlled by
us, with capital from an affiliate of Fortress Investment Group LLC, will
acquire Alterra upon the closing of the merger. The total consideration
provided under the Merger Agreement, subject to certain adjustments, is $76
million. We have guaranteed $6.9 million of such closing consideration. The
transaction is conditioned on, among other things, confirmation of Alterra's
Chapter 11 Plan of Reorganization, the consent of certain lenders and lessors,
and the receipt of regulatory approvals. The transaction is expected to close
in the fourth quarter of this year.

Upon emerging from its Chapter 11 reorganization, Alterra is expected to be
comprised of approximately 310 communities with bed capacity of 13,000. Upon
completing the acquisition, we will operate approximately 475 communities
comprising 27,500 units in 38 states.

RESULTS OF OPERATIONS

Critical Accounting Policies and Estimates.

Management's discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including
those related to resident programs and incentives, bad debts, investments,
intangible

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

assets, income taxes, restructuring, long-term service contracts, contingencies,
self-insured retention, insurance deductibles, health insurance, and litigation.
We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies are most significant to
the judgments and estimates used in the preparation of our condensed
consolidated financial statements. Revisions in such estimates are charged to
income in the period in which the facts that give rise to the revision become
known.

* We use a captive insurance structure essentially to self-fund our primary
layer of insurance. This policy is claims-made based and covers losses and
liabilities associated with general and professional liability. The primary
layer has per occurrence and aggregate limits. Within that primary layer is
a self-insured retention, which also has a per occurrence and aggregate
limit. We also have an excess policy, which applies to claims in excess of
the primary layer on a per claim basis. Losses within the primary layer,
which include the self-insured retention, are accrued based upon actuarial
estimates of the aggregate liability for claims incurred.

* For health insurance, we self-insure 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.

* For workers' compensation insurance for insured states (excluding Texas and
compulsory State Funds), we are on an incurred loss, retrospective
insurance policy, retroactively adjusted, upward or downward, based upon
total incurred loss experience. The premium charged by the insurance
underwriter is based upon a standard rate determined by the underwriter to
cover, amongst other things, estimated losses and other fixed costs. The
difference between the premium charged and the actuarial based estimate of
costs, which is expensed on a monthly basis, is carried as an asset on the
balance sheet. After the end of the policy year, the insurance company
conducts an audit and adjusts the total premium based upon the actual
payroll and actual incurred loss for the policy year. Any premium
adjustment for the differences between estimated and actual payroll and
estimated and actual losses will first be applied to the accrued asset and
then as an adjustment to workers' compensation expense at the time such
adjustment is determined. There is a reasonable expectation that the
incurred loss adjustment will be downward, resulting in a premium refund.
The incurred loss adjustment is limited to 50% of the standard premium with
the initial adjustment six months after policy expiration on December 31,
2003, and annually thereafter. For work-related injuries in Texas, we are a
non-subscriber, meaning that work-related losses are covered under a
defined benefit program outside of the Texas Workers' Compensation system.
Losses are paid as incurred and estimated losses are accrued on a monthly
basis.

* We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our residents to make required payments. If the
financial condition of our residents were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.

* We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized, which at this time
shows a net asset valuation of zero. We have considered future taxable
income and ongoing prudent and feasible tax planning strategies in
assessing the need for a valuation allowance. However, in the event we were
to determine that we would be able to realize our deferred tax assets in
the future in excess of our net recorded amount, an adjustment to the
deferred tax asset would increase income in the period we made such
determination.

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

COMMON-SIZE INCOME STATEMENTS AND PERIOD-TO-PERIOD PERCENTAGE CHANGE

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

Period-to-Period
Percentage
Increase
(Decrease)
Percentage of Revenues ----------------------------
---------------------------------------------------------- Three Months Six Months
Three Months ended Six Months Ended ended ended
June 30, June 30, June 30, June 30,
---------------------------- ---------------------------- ------------- -------------
2003 2002 2003 2002 2003-2002 2003-2002
------------- ------------- ------------- ------------- ------------- -------------

Revenues. . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 45.2% 37.6%
Expenses:
Community operations . . . . . 60.3 62.0 60.5 59.3 41.3 40.3
General and administrative . . 11.8 14.3 11.6 14.0 19.4 14.6
Depreciation and amortization. 3.7 4.9 3.8 5.0 9.9 4.6
Facility lease expense . . . . 18.9 21.8 18.6 20.2 25.8 26.8
------------- ------------- ------------- ------------- ------------- -------------
Total operating expenses . 94.7 103.0 94.5 98.5 33.5 32.1
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) from operations. . . 5.3 (3.0) 5.5 1.5 N/A 401.3
Other income (expense)
Interest income. . . . . . . . 0.4 0.3 0.3 0.3 53.1 47.7
Interest expense . . . . . . . (6.5) (8.4) (6.7) (8.2) 13.2 12.5
Other, net . . . . . . . . . . 2.8 (0.5) 1.5 (1.1) N/A N/A
------------- ------------- ------------- ------------- ------------- -------------
Net other expense. . . . . (3.3) (8.6) (4.9) (9.0) (42.9) (24.8)
------------- ------------- ------------- ------------- ------------- -------------

Net income (loss) . . . . . 2.0% (11.6%) 0.6% (7.5%) N/A N/A
============= ============= ============= ============= ============= =============

Comparison of the three months ended June 30, 2003 and 2002
- ---------------------------------------------------------------------

Total Operating Revenues: Total operating revenues for the three months ended
June 30, 2003, increased by $15.4 million to $49.4 million from $34.0 million
for the comparable period in 2002, or 45.2%.

Community revenue increased by approximately $14.9 million in the three months
ended June 30, 2003, compared to the three months ended June 30, 2002. This
increase is primarily due to additional revenue related to a 24 building lease
acquisition in the fourth quarter of 2002 and an 8 building lease acquisition in
the second quarter of 2003. These acquired communities, which represent revenue
of approximately $11.4 million, were included in our consolidated portfolio in
the second quarter of 2003, but were not included in the comparable quarter of
2002. The remaining increase in revenue is attributed to the net effect of an
increase in average monthly revenue per unit and a decrease in the occupancy
rate. Average monthly revenue per unit (excluding the 24 community acquisition
impact which was favorable by $64) was $2,694 for the second quarter of 2003
compared to $2,533 for the comparable quarter of 2002, an increase of
approximately 6.4%. The occupancy rate for the second quarter of 2003
(excluding the 24 community acquisition impact which was unfavorable by 3.9
percentage points) decreased 0.2 percentage points from the prior year quarter.

Community Operations: Community operating expenses for the three months ended
June 30, 2003, increased by $8.7 million to $29.8 million from $21.1 million in
the second quarter of 2003, or 41.3%. The

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

change was primarily due to a 24 building lease acquisition in the fourth
quarter of 2002 and an 8 building lease acquisition in the second quarter of
2003. These acquired communities, which approximates $9.7 million, were included
in our consolidated portfolio in the second quarter of 2003, but were not
included in the comparable quarter of 2002. The increases attributable to the
two lease acquisitions are partially offset by improvements in insurance bad
debt, and other operating expenses. Our insurance expense improved mainly due to
a change in our professional and general liability insurance structure, which is
essentially a self-insured policy that reduces our insurance premiums in 2003
compared to 2002. Community operating expenses as a percentage of total
operating revenue decreased to 60.3% in the second quarter of 2003 from 62.0% in
the second quarter of 2002.

General and Administrative: General and administrative (G&A) expenses for the
three months ended June 30, 2003, increased $944,000 to $5.8 million from $4.9
million for the comparable period in 2002, or 19.4%. As a percentage of total
operating revenues, G&A expenses decreased to 11.8% for the three months ended
June 30, 2003, compared to 14.3% for the three months ended June 30, 2002. G&A
expenses increased primarily due to increases in the number of employees and
normal increases in employee salaries. Recent growth in total communities
managed through additional contracts has led to some added operational and
administrative employees. Since approximately half of the communities we
operate are managed rather than owned or leased, G&A expense as a percentage of
operating revenues for all communities, including managed communities, may be
more meaningful for industry-wide comparisons. G&A as a percentage of operating
revenues for all communities increased to 5.9% from 5.7% for the three months
ended June 30, 2003 and 2002, respectively.

Depreciation and Amortization: Depreciation and amortization for the three
months ended June 30, 2003, was $1.8 million compared to $1.7 million for the
comparable period in 2002. In 2003, depreciation and amortization represents
3.7% of total operating revenues, compared to 4.9% for the comparable period in
2002. This decrease as a percentage of revenue is primarily due to increased
revenue.

Facility Lease Expense: Facility lease expense for the three months ended June
30, 2003, was $9.3 million compared to $7.4 million for the comparable period of
2002, representing an increase of $1.9 million, or 25.8%. This increase is
primarily due to the 24 building lease acquisition in the fourth quarter of 2002
and an 8 building lease acquisition in the second quarter of 2003. We leased 75
communities as of June 30, 2003, compared to 44 leased communities as of June
30, 2002. The additional facility lease expense related to the acquired
communities approximates $2.0 million. Facility lease expense as a percentage
of revenues was 18.9% for the three months ended June 30, 2003, and 21.8% for
the three months ended June 30, 2002.

Interest Income: Interest income for the three months ended June 30, 2003, was
$173,000 versus $113,000 for the comparable period of 2002. This increase is
primarily attributable to a higher return on certain restricted deposits related
to a sale-leaseback transaction in the fourth quarter of 2002.

Interest Expense: Interest expense for the three months ended June 30, 2003,
was $3.2 million compared to $2.9 million for the comparable period of 2002.
This increase of $377,000, or 13.2%, is primarily attributable to the repurchase
of a previously leased community in the third quarter of 2002 and a refinance
transaction related to 11 communities in December of 2002. As a percentage of
total operating revenues, interest expense decreased to 6.5% from 8.4% for the
three months ended June 30, 2003 and 2002, respectively.

Other, net: Other, net (expense) for the three months ended June 30, 2003, was
income of $1.4 million compared to expense of $174,000 for the comparable period
in 2002. The net change of $1.6 million is primarily comprised of recognizing a
gain on the sale of our investment in ARV Assisted Living common stock of
approximately $1.4 million, which is further discussed above in "Gains on
Investment Securities".

Preferred dividends: For the three months ended June 30, 2003 and 2002, the
preferred dividends were approximately $1.9 million and $1.7 million,
respectively. Since dividends on the Series A shares were not paid for six
consecutive quarters, the Series A dividends were calculated on a compounded
cumulative basis, retroactively, and the cumulative effect of approximately
$294,000 was reflected in the first quarter

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

of 2002. In addition, since we have not paid these dividends for six consecutive
quarters, under the Designation of Rights and Preferences of the Series A and
Series B stock in the our Articles of Incorporation, the Series A and B
shareholders, as the case may be, may designate one director in addition to the
other directors that they are entitled to designate under the shareholders'
agreement. Under the Series A shareholders' agreement, however, the Series A
shareholder's right to designate this additional director under the Articles is
limited to circumstances in which they would not otherwise be entitled to name a
director. Currently, the Series A shareholder does not have the right to
designate an additional director. As of January 1, 2002, the Series B
shareholders became entitled to designate an additional director under the
Articles, but thus far have chosen not to do so.

Comparison of the six months ended June 30, 2003 and 2002
- -------------------------------------------------------------------

Total Operating Revenues: Total operating revenues for the six months ended
June 30, 2003, increased by $26.4 million to $96.6 million from $70.2 million
for the comparable period in 2002, or 37.6%.

Community revenue increased by approximately $25.8 million in the six months
ended June 30, 2003, compared to the six months ended June 30, 2002. This
increase is primarily due to additional revenue related to a 24 building lease
acquisition in the fourth quarter of 2002 and an 8 building lease acquisition in
the second quarter of 2003. These acquired communities, which represent revenue
of approximately $20.9 million, were included in our consolidated portfolio in
the first two quarters of 2003, but were not included in the comparable quarters
of 2002. The remaining increase in revenue is attributed to the net effect of
an increase in average monthly revenue per unit and a decrease in the occupancy
rate. Average monthly revenue per unit (excluding the 24 community acquisition
impact which was favorable by $60) was $2,698 for the first two quarters of 2003
compared to $2,525 for the comparable quarters of 2002, an increase of
approximately 6.9%. The occupancy rate for the first two quarters of 2003
(excluding the 24 community acquisition impact which was unfavorable by 3.9
percentage points) decreased 0.6 percentage points from the first two quarters
of the prior year.

Community Operations: Community operating expenses for the six months ended June
30, 2003, increased by $16.8 million to $58.4 million from $41.6 million in the
first two quarters of 2003, or 40.3%. The change was primarily due to a 24
building lease acquisition in the fourth quarter of 2002 and an 8 building lease
acquisition in the second quarter of 2003. These acquired communities, which
approximates $17.9 million, were included in our consolidated portfolio in the
first two quarter of 2003, but were not included in the comparable quarters of
2002. The increases attributable to the two lease acquisitions are partially
offset by improvements in insurance, bad debt, and other operating expenses.
Our insurance expense improved mainly due to a change in our professional and
general liability insurance structure, which is essentially a self-insured
policy that reduces our insurance premiums in 2003 compared to 2002. Community
operating expenses as a percentage of total operating revenue increased to 60.5%
in the first two quarters of 2003 from 59.3% in the first two quarters of 2002.

General and Administrative: General and administrative (G&A) expenses for the
six months ended June 30, 2003, increased $1.4 million to $11.2 million from
$9.8 million for the comparable period in 2002, or 14.6%. As a percentage of
total operating revenues, G&A expenses decreased to 11.6% for the six months
ended June 30, 2003, compared to 14.0% for the six months ended June 30, 2002.
G&A expenses increased primarily due to increases in the number of employees and
normal increases in employee salaries, as well as, insurance costs. Recent
growth in total communities managed through additional contracts has led to some
added operational and administrative employees. Since approximately half of the
communities we operate are managed rather than owned or leased, G&A expense as a
percentage of operating revenues for all communities, including managed
communities, may be more meaningful for industry-wide comparisons. G&A as a
percentage of operating revenues for all communities decreased to 5.7% from 5.8%
for the six months ended June 30, 2003 and 2002, respectively.

Depreciation and Amortization: Depreciation and amortization for the six months
ended June 30, 2003, was $3.7 million compared to $3.5 million for the
comparable period in 2002. In 2003, depreciation and amortization represents
3.8% of total operating revenues, compared to 5.0% for the comparable period in
2002. This decrease as a percentage of revenue is primarily due to increased
revenue.

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

Facility Lease Expense: Facility lease expense for the six months ended June
30, 2003, was $17.9 million compared to $14.1 million for the comparable period
of 2002, representing an increase of $3.8 million, or 26.8%. This increase is
primarily due to the 24 building lease acquisition in the fourth quarter of 2002
and the 8 building lease acquisition in the second quarter of 2003. We leased
75 communities as of June 30, 2003, compared to 44 leased communities as of June
30, 2002. The additional facility lease expense related to the acquired
communities approximates $3.5 million for the first two quarters of 2003. The
balance of the increase was attributable to variable rent escalation provisions
in existing leases. Facility lease expense as a percentage of revenues was
18.6% for the six months ended June 30, 2003, and 20.2% for the six months ended
June 30, 2002.

Interest Income: Interest income for the six months ended June 30, 2003, was
$328,000 versus $222,000 for the comparable period of 2002. This increase is
primarily attributable to a higher return on certain restricted deposits related
to a sale-leaseback transaction in the fourth quarter of 2002.

Interest Expense: Interest expense for the six months ended June 30, 2003, was
$6.5 million compared to $5.8 million for the comparable period of 2002. This
increase of $724,000, or 12.5%, is primarily attributable to the repurchase of a
previously leased community in the third quarter of 2002, a refinance
transaction related to 11 communities in December 2002, and a refinance
transaction in January of 2003 which has a slightly higher interest rate, all of
which constitute an increase of approximately $987,000. This increase is
partially offset by a sale-leaseback transaction in the second quarter of 2002,
which replaced interest expense with lease expense of approximately $206,000. As
a percentage of total operating revenues, interest expense decreased to 6.7%
from 8.2% for the six months ended June 30, 2003 and 2002, respectively.

Other, net: Other, net (expense) for the six months ended June 30, 2003, was
income of $1.4 million compared to expense of $741,000 for the comparable period
in 2002. The net change of $2.2 million is primarily comprised of the following
items: In April 2003, we recognized a gain on the sale of our investment in ARV
Assisted Living common stock of approximately $1.4 million. During the first
two quarters of 2002, we repurchased a related party's economic interest in a
172-unit community resulting in an expense of $158,000 and the sale-leaseback of
two communities and re-lease of two additional communities resulting in an
expense of $372,000, for a combined impact of $530,000. The remaining
difference is primarily attributable to amortization of deferred gains related
to three communities of approximately $148,000.

Preferred dividends: For the six months ended June 30, 2003 and 2002, the
preferred dividends were approximately $3.8 million and $3.7 million,
respectively. Since dividends on the Series A shares were not paid for six
consecutive quarters, the Series A dividends were calculated on a compounded
cumulative basis, retroactively, and the cumulative effect of approximately
$294,000 was reflected in the first quarter of 2002. In addition, since we have
not paid these dividends for six consecutive quarters, under the Designation of
Rights and Preferences of the Series A and Series B stock in our Articles of
Incorporation, the Series A and B shareholders, as the case may be, may
designate one director in addition to the other directors that they are entitled
to designate under the shareholders' agreement. Under the Series A
shareholders' agreement, however, the Series A shareholder's right to designate
this additional director under the Articles is limited to circumstances in which
they would not otherwise be entitled to name a director. Currently, the Series
A shareholder does not have the right to designate an additional director. As
of January 1, 2002, the Series B shareholders became entitled to designate an
additional director under the Articles, but thus far have chosen not to do so.

[The rest of this page is intentionally left blank]

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

Same Community Comparison

We operated 59 communities on a comparable basis during both the three months
ended June 30, 2003 and 2002. The following table sets forth a comparison of
same community results of operations, excluding general and administrative
expenses, for the three months ended June 30, 2003 and 2002.

Three Months ended March 31,
(In thousands)
----------------------------------------------------
Dollar % Change
2003 2002 Change Fav / (Unfav)
------------ ------------ -------- -------------

Revenue . . . . . . . . . . . . . . . . . . $ 33,734 $ 32,204 $ 1,530 4.8%
Community operating expenses. . . . . . . . (20,416) (20,518) 102 0.5
------------ ------------ -------- -------------
Community operating income. . . . . . . 13,318 11,686 1,632 14.0
Depreciation & amortization . . . . . . . . (1,521) (1,465) (56) (3.8)
Facility lease expense. . . . . . . . . . . (6,979) (7,125) 146 2.0
------------ ------------ -------- -------------
Operating income. . . . . . . . . . . . 4,818 3,096 1,722 55.6
Interest expense, net . . . . . . . . . . . (2,476) (2,172) (304) (14.0)
------------ ------------ -------- -------------
Operating income after interest expense $ 2,342 $ 924 $ 1,418 153.5%
============ ============ ======== =============

The same communities represented $33.7 million or 68.3% of our total revenue of
$49.4 million for the second quarter of 2003. Same community revenues increased
by $1.5 million or 4.8% for the quarter ended June 30, 2003, from the comparable
period in 2002. This increase is due to higher average revenue per unit and an
increase in occupancy. Average revenue per occupied unit increased by $138 per
month or 5.4%. Average occupancy increased to 81.7% in the second quarter of
2003 from 81.0% in the second quarter of 2002.

Community operating expenses increased approximately $102,000 due to a
combination of factors: the increase in operating expenses was primarily due to
added personnel expenses associated with our increasing emphasis on dementia
care (Alzheimer's), normal salary increases, and other employee costs of
$302,000, as well as decreases in other operating expense categories of
$381,000. Occupancy expenses, consisting of facility lease expense, depreciation
and amortization, and interest expense combined, increased approximately
$214,000 as a result of the net effect of a refinancing transaction related to
11 buildings in December of 2002, and variable rent escalation related to other
communities, partially offset by lower interest rates. For the quarter ended
June 30, 2003, operating income after interest expense increased to $2.3 million
from $924,000 for the comparable period of 2002.

LIQUIDITY AND CAPITAL RESOURCES

For the six months ended June 30, 2003, net cash provided by operating
activities was $1.9 million compared to $1.7 million used in operating
activities for the comparable period in the prior year. The primary components
of operating cash provided were the depreciation and amortization of $3.7
million and net income of $580,000 partially offset by the net increase in other
operating assets and liabilities of $874,000. The primary components of
operating cash used for the six months ended June 30, 2002, were the net loss of
$5.2 million, partially offset by depreciation and amortization of $3.5 million.

Net cash provided by investing activities amounted to $768,000 for the six
months ended June 30, 2003, and was comprised primarily of funds from the sale
of investment securities of approximately $2.9 million, offset by purchases of
approximately $1.2 million of various property and equipment, approximately
$625,000 in management and lease acquisition cost, and $250,000 of partner
distributions. Net cash provided by investing activities amounted to $19.8
million for the six months ended June 30, 2002, and was comprised primarily of
funds of approximately $25.0 million related to the sale of two buildings offset
by the purchase of minority interest in two buildings for approximately $3.1
million, repayment of advances by third parties and affiliates of $501,000 and
additional lease acquisition costs of $1.2 million.

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

For the six months ended June 30, 2003, net cash used in financing activities
was $974,000 primarily from short-term debt repayments of $1.4 million, which
include debt repayments related to the January 2003 refinancing transaction
discussed above in "Other Transactions". Also related to that refinancing
transaction, approximately $169,000 relates to debt issuance and other financing
costs. These uses of cash were offset by proceeds from long-term borrowings of
approximately $600,000. For the six months ended June 30, 2002, net cash used
in financing activities was $16.9 million primarily from the repayment of
long-term borrowings related to the sale, minority interest purchase, and lease
transactions.

We have incurred significant operating losses since our inception and have a
working capital deficit of $31.4 million, although $4.9 million represents
deferred revenues and $16.6 million of preferred cash dividends is only due if
declared by our board of directors. At times in the past, we have been
dependent upon third party financing or disposition of assets to fund
operations. If such transactions are necessary in the future, we cannot
guarantee that they will be available on a timely basis, on terms attractive to
us, or at all.

Throughout 2002 and continuing in the first quarter of 2003, 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 72 operated under leases. Accordingly, any event of default
could cause a material adverse effect on our financial condition if such debt or
leases are cross-defaulted. At June 30, 2003, we complied with all such
covenants, except in respect to one leased building. We have obtained a waiver
from the lessor and are considered to be in full compliance as of June 30, 2003.

Management believes that we will be able to sustain positive operating cash flow
at least through June 30, 2004, and will have adequate cash for all necessary
investing and financing activities including required debt service and capital
expenditures.

IMPACT OF INFLATION

To date, inflation has not had a significant impact on Emeritus. However,
inflation could affect our future revenues and operating income due to our
dependence on the senior resident population, most of whom rely on relatively
fixed incomes to pay for our services. The monthly charges for a resident's
unit and assisted living services are influenced by the location of the
community and local competition. Our ability to increase revenues in proportion
to increased operating expenses may be limited. We typically do not rely to a
significant extent on governmental reimbursement programs. In pricing our
services, we attempt to anticipate inflation levels, but there can be no
assurance that we will be able to respond to inflationary pressures in the
future.

FORWARD-LOOKING STATEMENTS

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: A number of the matters and subject areas discussed in this report that
are not historical or current facts deal with potential future circumstances,
operations, and prospects. The discussion of such matters and subject areas is
qualified by the inherent risks and uncertainties surrounding future
expectations generally, and also may materially differ from our actual future
experience as a result of such factors as: the effects of competition and
economic conditions on the occupancy levels in our communities; our ability
under current market conditions to maintain and increase our resident charges in
accordance with rate enhancement programs without adversely affecting occupancy
levels; increases in interest rates that would increase costs as a result of
variable rate debt; our ability to control community operation expenses,
including insurance and utility costs, without adversely affecting the level of
occupancy and the level of resident charges; our ability to generate cash flow
sufficient to service our debt and other fixed payment requirements; our ability
to find sources of financing and capital on satisfactory terms to meet our cash
requirements to the extent that they are not met by operations; and making
satisfactory arrangements for the continued operation of the

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

Emeritrust communities beyond June 30, 2003, when our management agreements for
those communities expire. On July 2, 2003, we executed an initial extension of
management agreement with respect to the Emeritrust II communities. The
management and the purchase option agreement related to the Emeritrust II
communities was amended to expire October 1, 2003, which will allow us, the
owners of the communities, and their lenders to consider a longer-term
agreement. We continue to operate under the existing operating structure of the
Emeritrust I communities on a day-to-day basis pending resolution of the terms
of financing, management, and purchase option agreements. 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. We have attempted to
identify, in context, certain of the factors that we currently believe may cause
actual future experience and results to differ from our current expectations
regarding the relevant matter or subject area. These and other risks and
uncertainties are detailed in our reports filed with the Securities and Exchange
Commission (SEC), including our Annual Reports on Form 10-K and Quarterly
Reports on Form 10-Q.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our earnings are affected by changes in interest rates as a result of our
short-term and long-term borrowings. We manage this risk by obtaining fixed
rate borrowings when possible. At June 30, 2003, our variable rate borrowings
totaled approximately $64.3 million. Currently, all our variable rate
borrowings are based upon LIBOR, subject to a LIBOR floor ranging from 2.0% to
2.5%. As of June 30, 2003, the LIBOR rates were below the floor. If LIBOR
interest rates were to average 2% more, our annual interest expense and net loss
would increase approximately $488,000 with respect to our variable rate
borrowings. This amount is determined by considering the impact of hypothetical
interest rates on our outstanding variable rate borrowings as of June 30, 2003,
and does not consider changes in the actual level of borrowings that may occur
subsequent to June 30, 2003. If LIBOR rates should increase above the floor, we
will be exposed to higher interest expense costs. This analysis also does not
consider the effects of the reduced level of overall economic activity that
could exist in such an environment, or our current funding requirements for the
Emeritrust communities, nor does it consider actions that management might be
able to take with respect to our financial structure to mitigate the exposure to
such a change.

ITEM 4. 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 (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
Quarterly Report on Form 10-Q and have determined that such disclosure controls
and procedures are effective.

No change was made to our internal control over financial reporting during the
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEMS 1 THROUGH 3 AND ITEM 5 ARE NOT APPLICABLE.

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

(a) The Annual Meeting of Shareholders was held on June 11, 2003.

(b) All director nominees listed in the proxy statement were elected at the
meeting.

NOMINEES FOR ELECTION
CLASS I DIRECTORS (TERMS TO EXPIRE IN 2006)

Patrick Carter
David W. Niemiec

CONTINUING DIRECTORS
CLASS II DIRECTORS (TERMS TO EXPIRE 2004)

Raymond R. Brandstrom
David T. Hamamoto

CLASS III DIRECTORS (TERMS TO EXPIRE IN 2005)

Daniel R. Baty
Charles P. Durkin, Jr.

Election of Directors:
- ----------------------

Abstain or
Name For Against Broker Non-vote
- ---------------- ---------- ------- ---------------

Patrick Carter . 14,242,734 - 38,445
David W. Niemiec 14,242,734 - 38,445

Ratification of Independent Public Accountants:
- -----------------------------------------------

For Against Abstain Other Non-vote
- ---------- ------- ------- --------------

14,258,584 20,650 1,945 -

(d) Not applicable.

ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

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

10.53 Emeritrust II Communities
10.53.13 Fourth Amendment to Management Agreement (AL II - 14 Operating
Facilities) (GMAC) dated June 30, 2003, between the registrant, Emeritus
Management L.L.C., Emeritus Management I LP, and AL Investors II L.L.C. . (1)
31.1 Certification of Periodic Reports
31.1.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 for Daniel R. Baty dated
August 8, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1)
31.1.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 for Raymond R. Brandstrom
dated August 8, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . (1)
32.1 Certification of Periodic Reports
32.1.1 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
August 8, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) (3)
32.1.2 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 August 8, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . (2) (3)
99.1 Press Releases
99.1.1 Press Release dated June 10, 2003, Emeritus Announces Intent to Retire
Preferred Stock and Termination of Regent Management Agreement. . . . . . (1)
99.1.2 Press Release dated July 2, 2003, Emeritus Announces Finance Transaction
for Three Communities.. . . . . . . . . . . . . . . . . . . . . . . . . . (1)
99.1.3 Press Release dated July 18, 2003, Emeritus is the Winning Bidder in
the Auction to Acquire Alterra Healthcare.. . . . . . . . . . . . . . . . (1)
99.1.4 Press Release dated July 24, 2003, US Bankruptcy Court Approves
Emeritus Bid to Acquire Alterra.. . . . . . . . . . . . . . . . . . . . . (1)
99.1.5 Press Release dated July 31, 2003, Emeritus Announces Repurchase of Half
its Series A Preferred Stock.. . . . . . . . . . . . . . . . . . . . . . (1)
99.1.6 Press Release dated August 7, 2003, reports on second quarter 2003 results. (1) (4)

- ---------
(1) Filed herewith
(2) Furnished herewith
(3) 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.
(4) Filed as an exhibit to a Form 8-K dated August 7, 2003, filed on August 8,
2003, and incorporated herein by reference.

(B) REPORTS ON FORM 8-K.

1. A report on Form 8-K dated May 8, 2003, was filed on May 12, 2003, related
to a press release dated May 8, 2003, announcing the results of operations
for the first quarter of 2003.

2. A report on Form 8-K dated May 1, 2003, was filed on July 15, 2003, related
to the acquisition of 8 communities. This filing includes items 2 and 7
(Financial Statements of Business Acquired, Unaudited Pro Forma Financial
Information, and Exhibits).

3. A report on Form 8-K dated August 7, 2003, was filed on August 8, 2003,
related to a press release of that date announcing the results of
operations for the second quarter of 2003.

SIGNATURE

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

Dated: August 8, 2003

EMERITUS CORPORATION
(Registrant)

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