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

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FORM 10-K

(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT 1934

For the fiscal year ended December 31, 2000.

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

Commission file number 1-14012

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

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

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

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

Securities registered pursuant to Section 12(b) of the Act:

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Title of each class Name of each exchange on which registered
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Common Stock, $.0001 par value American Stock Exchange, Inc.

Securities registered pursuant to Section 12(g) of the Act: None

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

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

Aggregate market value of voting stock held by non-affiliates of the
registrant as of February 28, 2001 was $8,421,962.

As of February 28, 2001 10,120,045 shares of the Registrant's Common Stock
were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

The information required by Part III of Form 10-K (items 10-13) is
incorporated herein by reference to the Registrant's definitive Proxy
Statement to be filed on or before April 30, 2001.

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EMERITUS CORPORATION

INDEX

Page No.
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PART I

ITEM 1. DESCRIPTION OF BUSINESS................................... 1

ITEM 2. DESCRIPTION OF PROPERTY................................... 17

ITEM 3. LEGAL PROCEEDINGS......................................... 22

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 22

EXECUTIVE OFFICERS OF EMERITUS............................ 22

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...................................... 24

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA...................... 25

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 26

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK..................................................... 33

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............... 33

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................... 33

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........ 34

ITEM 11. EXECUTIVE COMPENSATION.................................... 34

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................... 34

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 34

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K................................................. 34

PART I

ITEM 1. DESCRIPTION OF BUSINESS

Overview

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

We currently operate 135 assisted living communities, consisting of
approximately 12,400 units with a capacity for 14,100 residents, located in 29
states and Japan. Of these operating communities, we own 16 communities, lease
45 communities, manage 69 communities, and hold joint venture interests in
five communities, of which we manage four. Under three management agreements
covering 46 of our 73 managed communities, we have options to purchase 43 of
the communities and a right of first refusal to purchase the remaining three
communities at any time up to December 12, 2001.

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

The Assisted Living Industry

We believe that the assisted living industry is the preferred residential
alternative for seniors who cannot live independently due to physical or
cognitive frailties but who do not require the more intensive medical
attention provided by a skilled nursing facility. Industry estimates show that
assisted and independent living industries generated approximately $11 billion
in revenues in 1996 and will generate $15 billion in revenues in 2001.

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

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

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

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

. Demographics. The target market for our services is generally persons 75
years and older who represent the fastest growing segments of the U.S.
population. According to the U.S. Census Bureau, the portion of the U.S.
population age 75 and older is expected to increase by 11.5% from
approximately 16.6 million in 2000 to approximately 18.6 million by the
year 2010. The number of persons age 85 and older, as a segment of the
U.S. population, is expected to increase by 33.2% from approximately 4.3
million in 2000 to over 5.7 million by the year 2010. Furthermore, the
number of persons afflicted with Alzheimer's disease is also expected to
grow in the coming years. According to data published by the Alzheimer's
Association, this population will increase 127% from the current 4.4
million to 10.0 million people by the year 2010. Because Alzheimer's
disease and other forms of dementia are more likely to occur as a person
ages, we expect the increasing life expectancy of seniors to result in a
greater number of persons afflicted with Alzheimer's disease and other
forms of dementia in future years, absent breakthroughs in medical
research.

. Changing Family Dynamics. According to the U.S. Census Bureau, the
median income of the elderly population is increasing. Currently, over
50% of persons 80 and older have annual incomes exceeding $15,000, and
over 38% have incomes of at least $25,000. Accordingly, we believe that
the number of seniors and their families who are able to afford high-
quality senior residential services, such as those we offer, has also
increased. In addition, the number of two-income households has
increased over the last decade and the geographical separation of senior
family members from their adult children has risen with the geographic
mobility of the U.S. population. As a result, many families that
traditionally would have provided the type of care and services we offer
to senior family members are less able to do so.

. Supply/Demand Imbalance. While the senior population is growing
significantly, the supply of skilled nursing beds per thousand is
declining. We attribute this imbalance to a number of factors in
addition to the aging of the population. Many states, in an effort to
maintain control of Medicaid expenditures on long-term care, have
implemented more restrictive Certificate of Need regulations or similar
legislation that restricts the supply of licensed skilled nursing
facility beds. Additionally, acuity-based reimbursement systems have
encouraged skilled nursing facilities to focus on higher acuity
patients. We also believe that high construction costs and limits on
government reimbursement for construction and start-up expenses also has
constrained the growth and supply of traditional skilled nursing beds.
We believe that these factors, taken in combination, result in
relatively fewer skilled nursing beds available for the increasing
number of seniors who require assistance with the activities of daily
living but do not require 24-hour medical attention.

Competitive Strengths

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

. State-of-the-Art Communities. Of our 135 operating communities, 65
communities have been built and opened since January 1, 1996 and reflect
state-of-the-art design and equipment. In addition, we have
significantly upgraded 48 of our older communities to improve their
appearance and operating efficiency. These upgrades include the finished
appearance of the communities, as well as various improvements to
kitchens, nurse call systems and electronic systems, including those for
data transmission, data sharing and e-mail.

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

insurance and employee benefits at lower costs, and to negotiate more
favorable financing arrangements.

. Lower Cost of Communities. As of December 31, 2000, the average cost per
unit of our communities was approximately $65,100. We believe that these
costs are less than the current replacement costs of these communities
and below the average costs incurred by many other public companies
operating in the industry. We also believe that these lower capital
costs give us opportunities to enhance margins and greater flexibility
in designing our rate structure and responding to varying regional
economic and regulatory changes.

. Geographic Diversification and Regional Focus. We operate our
communities in 29 states in all regions of the United States. We believe
that because of this geographic diversification we are less vulnerable
to adverse economic developments and industry factors, such as
overbuilding and regulatory changes, that are limited to a particular
region. We believe that this also moderates the effects of regional
employment and competitive conditions. Within each region, we have
focused on establishing a critical mass of communities in secondary
markets, which enables us to maximize operating efficiencies.

. Experienced Management with Industry Relationships. Daniel R. Baty, our
Chief Executive Officer, has more than 30 years of experience in the
long-term care industry, ranging from independent living to skilled
nursing care. We believe that his experience and the relationships that
he has developed with owners, operators and sources of capital have
helped us and will continue to help us develop operating efficiencies,
investment and joint venture relationships, as well as obtain sources of
debt and equity capital. Mr. Baty also has a significant financial and
management interest in Holiday Retirement Corporation, an operator of
independent living facilities, which we believe provides us with an
informal but important relationship with a complementary business. In
addition, our senior operating vice presidents have an average of 22
years of experience with major companies in the long-term care industry.
We believe that this strong senior leadership, with proven management
skills, will allow us to take advantage of the opportunities present in
the assisted living industry.

Business Strategy

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

. Focus on Operations and Occupancy. Through 1998, we focused on rapidly
expanding our operations in order to assemble a portfolio of assisted
living communities with a critical mass of capacity. We pursued an
aggressive acquisition and development strategy during that time. Having
achieved our growth objective, in 1999 and continuing in 2000, we have
substantially reduced our pace of acquisition and development activities
to concentrate on improving community performance through both increased
occupancy and revenue per occupied unit. Since our shift in emphasis in
1999, we have seen improvement in both occupancy and rates. Initially,
we focused most of our efforts on increasing occupancy across our
portfolio. Having achieved a portion of our total goal by late 1999, we
then shifted our efforts toward enhancing our rates, particularly in
facilities that were substantially below industry averages. This rate
strategy has led to increased rates across most of our portfolio. We
believe that continued focus on both rates and occupancy will continue
to generate the incremental growth in margins we are striving to
achieve.

. Expand Business through Third Party Management Agreements. With the
current changes in the capital markets, we may be presented with, or
look for, opportunities for revenue growth through the use of third
party management agreements. We will take advantage of these
opportunities if the managed communities fit into our existing areas of
operational strength and appropriate geological proximity to the
communities that we currently own or manage, and, therefore require
minimal

incremental cost. We intend to manage these new communities for a fee
based on a percentage of their gross revenue.

. Acquire Communities Selectively. In 1998, we reduced our acquisition
activity in part to concentrate on the need to improve operations
through occupancy and rate enhancement. As we achieve these objectives,
we expect to be more receptive to acquisition opportunities that meet
designated criteria. We particularly expect to favor the acquisition of
communities that provide more complete coverage of our existing markets
and intend to focus on acquisitions of communities that have been
originally designed as assisted living facilities and that will have
positive cash flow opportunities. We intend to be more selective and
measured in our acquisition strategy in the future.

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

Resident Services

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

Service Level Type of Description of Care Provided
Resident
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Basic All residents-- We offer these basic services to our
services independent, residents:
assisted living
and memory . three meals per day,
disorder
residents . social and recreational activities,

. weekly housekeeping and linen
service,

. building maintenance and grounds
keeping,

. 24-hour emergency response and
security,

. licensed nurses on staff to monitor
and coordinate care needs, and

. transportation to appointments, etc.
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Assisted Assisted living We cater our assisted living services to
living residents each resident based on his/her individual
services requirements for more frequent or intensive
assistance or increased care or supervision.
We achieve this individualized care, through
consultation with the resident, the
resident's physician and the resident's
family.

We determine an individual resident's
level of care by the degree of assistance
he/she requires in each of several
categories. Our categories of care include,
but are not limited to:

. medication management and
supervision,

. reminders for dining and recreational
activities,

. assistance with bathing, dressing and
grooming,

. incontinence,

. behavior management,

. dietary assistance, and

. miscellaneous (which consists of
diabetic management, prescription
medication, transfer, simple
treatment, oxygen set up/maintenance
and prosthesis).
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Memory Memory disorder We have designed our memory disorder
disorder residents program to meet the specialized medical,
(Alzheimer's) psychological and social needs of our
services residents afflicted by this condition. In a
manner consistent with our assisted living
services, we help structure a service plan
for each resident based on his/her
individual needs. Some of the key service
areas that we focus on to provide the best
care for our memory disorder residents
center around:

. separate dining program,

. enhanced behavior management,

. structured activity planning, and

. counseling for residents and their
families.

Service Revenue Sources

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

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

Management Activities

At December 31, 2000, we managed and provided administrative services to 73
assisted living communities under management agreements that typically provide
for management fees ranging from 4% to 7% of gross revenues. Management fees
were approximately $4.6 million in 2000. These management agreements have
terms ranging from two to five years, and may be renewed or renegotiated at
the expiration of the term. We have various categories of management
agreements, including:

. management agreements covering 46 communities in connection with the
Meditrust transactions that are described under "Meditrust
Transactions." We receive a management fee of 5% of gross revenues, but
may receive up to 7% depending on cash flow performance of the
communities managed. Additionally, we are required by our management
contracts to fund cumulative cash operating deficits in excess of $4.5
million, for the December communities (more fully discussed under
Meditrust Transactions) and $500,000 individually, for the March
development communities (more fully discussed under the Meditrust
Transactions).

. management agreements covering 8 communities owned by Columbia House, a
limited partnership, and 10 additional communities owned by entities all
controlled by Mr. Baty. We provide management services and
administrative services in connection with acquisition, development and
financing activities and generally receive fees ranging from 4% to 6% of
the gross revenues generated by the communities.

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

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

Prior to 1999, we did not have material revenue from management
arrangements. If we exercise our options to purchase the Meditrust communities
prior to December 12, 2001 or if the management agreements expire on that date
and are not renewed, our revenue from management fees will diminish
substantially.

Marketing and Referral Relationships

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

Administration

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

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

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

We use a blend of centralized and decentralized accounting and computer
systems that link each community with our headquarters. Through these systems,
we are able to monitor operating costs and distribute financial and operating
information to appropriate levels of management in a cost efficient manner. We
believe that our current data systems are adequate for current operating needs
and provide the flexibility to meet the requirements of our operations without
disruption or significant modification to existing systems beyond 2001. We use
high quality hardware and operating systems from current and proven
technologies to support our current technology infrastructure.

Competition

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

Employees

At December 31, 2000, we had 6,500 employees, including 4,300 full-time
employees, of which approximately 80 were employed at our headquarters. None
of our employees are currently represented by a labor union, and we are not
aware of any union-organizing activities among our employees. We believe that
our relationship with our employees is satisfactory.

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

Meditrust Transactions

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

The investor groups who purchased the communities included parties
affiliated with us. Of the $168.0 million purchase price for the December
investment, $138.0 million was financed through a three-year first mortgage
loan with an independent third party and $30.0 million was financed through
subordinated debt and equity investments from the investor group, which
includes our Chief Executive Officer, who is also a director and a principal
shareholder.

Of the $124.2 million purchase price for the March investment, approximately
$99.6 million was financed through three-year first mortgage loans with
independent third parties and $24.6 million was financed through subordinated
debt and equity investments from the investor group, which includes our Chief
Executive Officer.

The investor groups retained us to manage all of the communities through
December 31, 2001. If we do not exercise the option or right of first refusal
to purchase the communities, as described below, the investor group may
require us to manage the communities for up to twelve additional months. Under
the arrangement, we receive management fees equal to 5% of the gross revenues
generated by the facilities on the properties. We also are entitled to
additional management fees of 2% of the gross revenues, which will be accrued
and paid out of cash flow, provided that the communities have positive cash
flow for three consecutive months. Thereafter, if the cash flow is not
positive for two consecutive months, the 2% management fee will again be
deferred until the three-month standard is again met. The cash flow
requirements are determined as a group for the December communities, as a
group for March operating communities and individually for the March
communities under development. We have agreed to reimburse the December
investment group for cumulative cash operating losses greater than
$4.5 million sustained on the December communities prior to December 31, 2001.
We have a similar reimbursement arrangement relating to the five development
communities acquired in the March investment; under this arrangement, we are
generally required to reimburse the investor group for any cash operating
losses greater than $500,000 at any of the five development communities. We do
not have any such arrangement for the 16 operating communities acquired in the
March investment. In 1999, the December communities incurred $6.4 million of
operating cash losses, which included $1.9 million of management fees that we
earned. Our funding obligation was $1.9 million, net of the $4.5 million of
operating cash losses funded by the December investor group. In 2000, the
December communities incurred $4.9 million in cash operating losses, which
represented our funding obligation and included $2.1 million in management
fees that we earned. In 1999, since the March communities did not generate
cash operating losses in excess of the amounts funded by the March investor
group, no funding was required by us and we earned $1.5 million in management
fees. In 2000, the March development communities incurred aggregate cash
operating losses of $1.6 million, including $360,000 in management fees that
we earned. The other March communities are not subject to a deficit funding
obligation and we earned $1.9 million in management fees.

Although the funding obligations described above include management fees
earned by us under the management agreements, we do not recognize these
management fees as revenue in our financial statements to the extent that we
are funding the cash operating losses that include them. Correspondingly, we
recognize the funding obligation under the agreement, less the applicable
management fees, as an expense in our financial statements under the category
"Other, net."

We have certain rights to acquire the communities purchased in the December
and March transactions. We have an option to purchase 22 of the December
communities as a group and we have an option to purchase all 21 of the March
communities as a group, for which we must give notice of our intent to
exercise by

December 12, 2001. In addition, if either of the investor groups requires Mr.
Baty to purchase certain of the communities, upon the conditions described
below, we have the right to exercise our option within 60 days of receiving
notice of this action. We also have to give notice of our intent to exercise
the right of first refusal through December 12, 2001 to re-purchase the three
December communities that we previously owned.

The option purchase prices for the December communities and the March
communities are determined under similar formulas, which provide for the
repayment or payment of:

. the mortgage loans of $138.0 million and $99.6 million on such
communities;

. the investor groups' original debt and equity investments;

. an amount intended to provide the investor groups with an 18% rate of
return, compounded annually, on their original debt and equity
investments, less any cash distributions received;

. a fee generally equal to 2% of the investor groups' original debt and
equity investments, which for the March communities may be adjusted for
appreciation in our common stock; and

. the reasonable costs of the investor groups' dissolution and
liquidation.

As a condition to making the December and March investments, the investor
groups entered into agreements with Mr. Baty under which the investor groups
may require Mr. Baty to purchase certain of the December and March
communities. Under these agreements, the investor groups may require Mr. Baty
to purchase between six and twelve of the December communities and between
four and ten of the March communities, upon the occurrence of any one of the
following events:

. we do not provide notice of our intent to exercise our options to
purchase the December or March communities by December 12, 2001;

. we exercise an option to purchase the communities, but do not close the
transaction;

. we or one of our managers causes a default under the agreements which
govern the management of the December and March communities;

. Mr. Baty's net worth falls below a certain threshold or Mr. Baty fails
to provide certain reports relating to his net worth to the investor
groups;

. there is a change of control in our Board or our ownership; or

. Mr. Baty ceases to be our chief executive officer.

If either of the investor groups requires Mr. Baty to purchase some of the
communities, Mr. Baty will also have the option to purchase all of the
communities owned by that investor group on the same terms under which we may
purchase the communities.

During 2000, the December communities failed to comply with certain debt
service coverage tests required under the related mortgage loan for $138
million. This noncompliance resulted in a restructuring of the mortgage debt
effective March 22, 2001. As a part of the restructuring, the existing
variable interest rate (LIBOR plus 3.25%) was increased by 1.25% on $40
million of the debt, which will increase the deficit funding obligation for
which we may be responsible under our management agreement with the December
investor group. The restructuring also provided for the pledge of five of the
March communities as additional collateral to secure the mortgage debt, which
could adversely affect our ability to purchase such communities under our
management agreement with the March investor group. Other features of the
restructuring include two nine-month extensions of the mortgage loan,
exercisable by the December investor group under certain circumstances;
modification of the debt service coverage tests; modification of certain
liquidity requirements that we are required to meet; and payment of certain
restructuring and extension fees and expenses. As a part of the restructuring,
Mr. Baty agreed to fund a partial repayment of the mortgage debt of $1.25
million during the first quarter of 2000, with additional $250,000 reductions
each quarter thereafter, and agreed to pledge additional collateral to secure
his obligation to purchase communities under certain circumstances as
described above.

In connection with the restructuring, our management agreement with the
December investor group was also amended. Under the amendment, we have the
option to extend the management agreement (including the option to purchase
the December communities) for two nine-month terms, provided that the mortgage
debt is extended as contemplated in the restructuring and subject to certain
performance-based rights of the December investor group to terminate the
agreement early. Notice of our intent to exercise the option to purchase the
December communities, which originally had to be given prior to June 30, 2001,
may now be given at any time prior to December 12, 2001 (or during the first
and second extension terms, September 12, 2002 and June 1, 2003,
respectively). During the extension terms, we are entitled to a base
management fee of 3% of revenues, payable out of cash flow, and an additional
management fee of 4% of revenues, payable out of 50% of cash flow, and we
continue to be obligated to fund cash operating deficits if any, during the
extension terms. Under the amended management agreement, transaction fees and
expenses, including the restructuring fee and extension fees payable to the
mortgage lender, are funded by Mr. Baty, subject to reimbursement by us as to
25% of such fees and expenses out of 50% of management fees received with
respect to the December communities. In addition, if we exercise our options
to purchase either the December communities or the March communities, 25% of
such fees and expenses are added to the option price and used to reimburse Mr.
Baty.

In connection with the restructuring, our management agreement with the
March investor group was also amended to provide that our notice to exercise
the option to purchase the March communities, which originally had to be given
prior to June 30, 2001, may now be given at any time prior to December 12,
2001. In addition, if we exercise our option to purchase the March communities
and the five March communities that serve as additional collateral for the
December communities' mortgage debt are not released, then the option price on
the remaining March communities is reduced by the amount that the value of the
five communities, determined in accordance with a formula, exceeds the option
price on such communities, if any.

Factors Affecting Future Results and Regarding Forward-Looking Statements

Our business, results of operations and financial condition are subject to
many risks, including, but not limited to, those set forth below. The
following important factors, among others, could cause actual operating
results to differ materially from those expressed in forward-looking
statements included in this report and presented elsewhere by our management
from time to time. Do not place undue reliance on these forward-looking
statements, which speak only as of the date of this report. A number of the
matters and subject areas discussed in this report refer to potential future
circumstances, operations and prospects, and therefore, are not historical or
current facts. The discussion of such matters and subject areas is qualified
by the inherent risks and uncertainties surrounding future expectations, and
also may materially differ from our actual future experience involving any one
or more of such matters and subject areas relating to possible excess assisted
living capacity in our market areas affecting our occupancy and pricing
levels; uncertainties in increasing occupancy and pricing, generally;
effective management of costs and the effects of cost increases beyond our
control, such as utilities and insurance; the difficulty in reducing and
eliminating continuing operating losses; vulnerability to defaults in our debt
and lease financing as a result of noncompliance with various covenants; a
need to extend maturities of debt due in 2001 and the effects of cross-default
terms; competition; and uncertainties relating to construction, licensing,
environmental and other matters that affect acquisition, disposition and
development of assisted living communities. We have attempted to identify, in
context, certain of the factors that may cause actual future experience and
results to differ from our current expectations regarding the relevant matter
or subject area. We are not obligated to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events.

We have incurred losses since we began doing business and expect to continue
to incur losses for the foreseeable future. We organized and began operations
in July 1993 and have operated at a loss since we began doing business. For
1999 and 2000, we recorded net losses before preferred dividends of $21.0
million and $22.0 million, respectively. We believe that the historically
aggressive growth of our portfolio through acquisitions and developments and
related financing activities were among the causes of these losses. Operating
communities that we acquire or develop typically incur operating losses for
periods ranging from 12 to 18 months

following acquisition or opening. In addition, to date, we have been generally
unable to stabilize occupancy and rate structures at our communities that
result in positive cash flow and earnings. We expect to continue to incur
losses at least through the end of 2001. Our operations may not become
profitable in line with our current expectations or may not become profitable
at all. As a result of continuing losses, we are dependant on third party
financing or disposition of assets to fund operations. We cannot guarantee
that third party financing or disposition of assets will be available timely
or at all or on terms satisfactory to us.

If we cannot generate sufficient cash flow to cover required interest,
principal and lease payments, we risk defaults on our debt agreements and
operating leases. At December 31, 2000, we had mortgage debt of
$141.5 million, with minimum principal payments of about $81.0 million due in
2001. At December 31, 2000, we were obligated under long-term operating leases
requiring minimum annual lease payments of about $26.3 million in 2001. In
addition, we will have approximately $2.9 million and $15.4 million in
principal amount of debt repayment obligations that become due in 2002 and
2003, respectively. We intend to continue to finance our communities through a
combination of mortgage financing and operating leases, including leases
arising through sale/leaseback transactions.

We have $73.2 million of mortgage debt that matures on April 29, 2001. While
we have been in discussions with the lender regarding an extension of the
debt's maturity, we have reached no agreement at this time and have no
alternative commitment for refinancing. If we are unable to extend the
maturity of this debt, the lender could declare the entire amount immediately
due and payable at maturity and could begin foreclosure proceedings with
respect to the ten assisted living properties that secure this debt. In
addition, many of our debt instruments and leases contain "cross-default"
provisions pursuant to which a default under one obligation can cause a
default under one or more other obligations. Such cross-default provisions
affect 35 assisted living properties owned or leased by us. Accordingly, the
inability to extend the debt due in April could have a further material
adverse effect on our financial condition if any other lender or lessor
notifies us that we are in default under any debt instrument or lease. If we
are able to resolve this matter successfully, we will nevertheless continue to
be subject to the risks described below.

The foregoing factors raise doubt about our ability to continue as a going
concern. We are pursuing several initiatives to mitigate this doubt, including
continued discussions regarding extension of the debt due in April.
Additionally, we will conduct advance discussions with other lenders and
lessors that may be affected by cross-default provisions. We are taking
further steps to stabilize operations at positive cash flow levels including
implementing rate increases and pursuing additional programs to increase
occupancy, and if necessary, the sale of selected assets.

Because we are highly leveraged, we may not be able to respond to changing
business and economic conditions or continue our development and acquisition
program. Further, a substantial portion of our cash flow will be devoted to
debt service and lease payments. In the past we have been unable to generate
sufficient cash flow from operations to cover required interest, principal and
lease payments and we may be unable to do so in the future. If we cannot meet
these payments when due, we may need to renegotiate payments or obtain
additional equity or debt financing. We may not be successful or timely in
doing so, and the terms of any financing or refinancing may not be favorable.

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

We may be unable to increase or stabilize our occupancy rates. In previous
years we had difficulty increasing our occupancy levels. Our historical losses
have resulted, in part, from lower than expected occupancy

levels at our newly developed and acquired communities. Although we have
reduced our acquisition and development activity substantially, we have been
unable to increase occupancy levels as we had anticipated and, during the last
year, occupancy levels declined slightly. We cannot guarantee that our
occupancy levels will increase.

We may be unable to obtain the additional capital we will need to finance our
operations. We have experienced negative cash flow from operating activities
since we began doing business. Operating communities that we acquire or develop
typically incur operating losses for periods ranging from 12 to 18 months
following acquisition or opening. In addition, to date we have been unable to
establish occupancy and rate structures at our communities that result in
positive cash flow and earnings.

Our future success depends in part on finding sources to finance our
development and acquisition of assisted living communities. We expect to meet
this need largely through arranging sale/leaseback arrangements or mortgage
refinancing. However, our communities, individually or as a group, may not
achieve a stabilized occupancy rate and resident mix that meets our
expectations, or generate positive cash flow or operating results sufficient to
allow us to refinance outstanding indebtedness secured by the community through
sale/leaseback transactions.

We will occasionally seek additional funding through public or private
financing, including equity financing. We may not find adequate equity, debt or
sale/leaseback financing when we need it or on terms acceptable to us. This
could require us to delay, scale back or eliminate all or some of our
development and acquisition projects. In addition, if we raise additional funds
by issuing equity securities, our shareholders may experience dilution of their
investment.

We may be unable to obtain the additional capital we will need to retain
important segments of our operating communities. We manage 46 of our operating
communities under short-term management agreements expiring December 31, 2001,
with the right to extend management of 25 communities for two nine-month terms
under certain circumstances. In addition, we expect to manage communities that
are currently under development. We also have options to purchase 43
communities, and a right of first refusal to purchase three of these
communities prior to December 12, 2001. Based on formulas in the options, the
purchase prices of the communities could be substantially greater than the
original purchase prices paid by the investor groups that currently own them,
depending on when the purchase occurs and the performance of the communities.
If we are unable to obtain the capital and related mortgage financing necessary
to complete these purchases, we could lose control of these communities and the
right to operate them, which represents about 34 % of our total operating
capacity. The loss of these operating communities would have a material adverse
effect on our revenues and results of operations.

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

We face risks associated with selective acquisitions. We intend to continue
to seek selective acquisition opportunities. However, we may not succeed in
identifying any future acquisition opportunities or completing any identified
acquisitions. The acquisition of communities presents a number of risks.
Existing residences available for acquisition may frequently serve or target
different market segments than those we presently serve. It may be necessary in
these cases to re-position and renovate acquired residences or turn over the
existing resident population to achieve a resident care level and income
profile that is consistent with our objectives. In the past, these obstacles
have delayed the achievement of acceptable occupancy levels and increased
operating and capital expenditures. As a consequence, we currently plan to
target assisted living communities with established operations, which could
reduce the number of acquisitions we can complete and increase the expected

cost. Even in these acquisitions, however, we may need to make staff and
operating management personnel changes to successfully integrate acquired
communities into our existing operations. We may not succeed in repositioning
acquired communities or in effecting any necessary operational or structural
changes and improvements on a timely basis. We also may face unforeseen
liabilities attributable to the prior operator of the acquired communities,
against whom we may have little or no recourse.

We expect competition in our industry to increase, which could cause our
occupancy rates and resident fees to decline. The long-term care industry is
highly competitive, and given the relatively low barriers to entry and
continuing health care cost containment pressures, we expect that our industry
will become increasingly competitive in the future. We believe that the
industry is experiencing over-capacity in several of our markets, thereby
intensifying competition and adversely affecting occupancy levels and pricing.
We compete with other companies providing assisted living services as well as
numerous other companies providing similar service and care alternatives, such
as home healthcare agencies, independent living facilities, retirement
communities and skilled nursing facilities. We expect that competition will
increase from new market entrants, as assisted living residences receive
increased market awareness and more states decide to include assisted living
services in their Medicaid programs. Many of these competitors may have
substantially greater financial resources than we do. Increased competition
may limit our ability to attract or retain residents or maintain our existing
rate structures. This could lead to lower occupancy rates or lower rate
structures in our newly constructed and developed communities.

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

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

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

Interest rate increases could adversely affect our earnings due to our
floating rate debt. As of December 31, 2000, about $87.0 million of our debt
bore interest at fluctuating rates. We may incur additional debt in the future
that bears interest at floating rates. Accordingly, increases in prevailing
interest rates would increase our interest payment obligations and negatively
affect our earnings. For example, a two percent increase in interest rates
would increase our annual interest expense by about $1.7 million based on our
floating rate debt as of December 31, 2000. Furthermore, we are required to
fund aggregate cash operating deficits for both the December and March
development communities (more fully discussed under Meditrust Transactions) in
excess of amounts previously funded by their respective investor groups,
including community debt service. Therefore, any increase in prevailing
interest rates on the Meditrust outstanding debt would also increase cash
operating deficits required to be funded by us.

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

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

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

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

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

We have entered into agreements with several companies that are owned or
controlled by our affiliates, whose interests with respect to these companies
occasionally may conflict with ours. We have entered into agreements with
several entities that are owned or controlled by certain of our officers and
directors. These include most of our management agreements, including
management agreements (with options to purchase) relating to the 43
communities covered by the Meditrust transactions. Under these agreements, we
provide management and other services to senior housing communities owned by
those companies and we have material agreements relating to the purchase, sale
and financing of a number of our operating communities. There is a risk that
our dealings with these companies under these and any future arrangements will
not be negotiated at arm's length and may be regarded as less advantageous to
us than terms that would be negotiated with unrelated third parties. Because
of our affiliates' interests and responsibilities with respect to these other
companies, these affiliates may occasionally have interests that are not
compatible with ours.

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

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

. fire safety,

. sanitation,

. staff training,

. staffing levels,

. living accommodations such as room size, number of bathrooms and
ventilation, and

. health-related services.

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

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

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

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

. the liquidity of the market for our common stock;

. variations in our operating results;

. variations from analysts' expectations; and

. new statutes or regulations, or changes in the interpretation of
existing statutes or regulations, affecting the healthcare industry
generally or the assisted living residence business in particular.

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

Our share ownership and certain other factors may impede a proposed takeover
of our business. As of February 28, 2001, Mr. Baty, our Chief Executive
Officer, controls about 36% of our outstanding common stock. Together, our
directors and executive officers own, directly and indirectly, over 79% of the
voting power of our outstanding common and preferred stock. Accordingly, Mr.
Baty and the other members of our board and management would have significant
influence over the outcome of matters submitted to our shareholders for a
vote, including matters that would involve a change of control of Emeritus.
Further, our Articles of Incorporation require a two-thirds supermajority vote
to approve a business combination of Emeritus with another company that is not
approved by the board of directors. Accordingly, the current management group
and board of directors could prevent approval of such a business combination.
We currently have a staggered board in which only one-third of the board
stands for election each year. Thus, absent removals and resignations, a
complete change in board membership could not be accomplished in fewer than
approximately two calendar years.

ITEM 2. DESCRIPTION OF PROPERTY

Communities

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

Emeritus
Operations Units Beds
Community Location Commenced (a) (b) Interest
- ------------------------ --------------- ---------- ----- ---- --------------------

Arizona
Arbor at Olive Grove * Phoenix Jun. 1994 98 111 Lease
La Villita * (2) Phoenix Jun. 1994 92 92 First Refusal/Manage
Loyalton of Flagstaff
(3) Flagstaff Jun. 1999 61 67 Option/Manage
Loyalton of Phoenix
(3) Phoenix Jan. 1999 101 111 Option/Manage
Scottsdale Royale ++ Scottsdale Aug. 1994 63 63 Own
Villa Ocotillo Scottsdale Sep. 1994 102 106 Lease

California
Creston Village ++ Paso Robles Feb. 1998 100 110 Joint Venture
Emerald Hills Auburn Jun. 1998 89 98 Lease
Fulton Villa Stockton Mar. 1995 80 80 Own
Laurel Place * ++ (2) San Bernardino Apr. 1996 71 72 Option/Manage
Northbay Retirement ++ Fairfield Mar. 1998 172 189 Joint Venture
Rosewood Court Fullerton Mar. 1996 71 78 Lease
The Terrace ++ (2) Grand Terrace Mar. 1996 87 87 Option/Manage
Villa Del Rey * Escondido Mar. 1997 84 84 Own

Connecticut
Cold Spring Commons * Rocky Hill Apr. 1997 80 88 Lease

Delaware
Gardens at White
Chapel (2) Newark Jul. 1998 100 110 Option/Manage
Green Meadows at Dover Dover Oct. 1995 52 63 Lease

Florida
The Allegro St. Augustine Aug. 1999 111 122 Manage
The Allegro at Fleming
Island Fleming Island Oct. 2000 90 99 Manage
Barrington Place (2) LeCanto May 1996 79 120 Option/Manage
Beneva Park Club (2) Sarasota Jul. 1995 96 102 Option/Manage
The Pavillion at
Crossing
Pointe * ++ (2) Orlando Jul. 1995 174 190 Option/Manage
College Park Club *
(2) Bradenton Jul. 1995 85 93 Option/Manage
Colonial Park Club (3) Sarasota Aug. 1996 88 90 Option/Manage
Heritage Oaks Tallahassee Dec. 1999 120 132 Manage
La Casa Grande New Port Richey May 1997 200 235 Own
The Lakes Ft. Myers June 2000 154 190 Manage
The Lodge at Mainlands
(2) Pinellas Park Aug. 1996 154 162 Option/Manage
Madison Glen (2) Clearwater May 1996 135 154 First Refusal/Manage
Park Club of Brandon
(3) Brandon Jul. 1995 88 88 Option/Manage
Park Club of Ft. Myers
(3) Ft. Myers Jul. 1995 77 82 Option/Manage
Park Club of Oakbridge
(3) Lakeland Jul. 1995 88 88 Option/Manage

Emeritus
Operations Units Beds
Community Location Commenced (a) (b) Interest
- ------------------------- ----------------- ---------- ----- ---- -------------

River Oaks Englewood May 1997 155 200 Own
Springtree (2) Sunrise May 1996 179 246 Option/Manage
Stanford Centre Altamonte Springs May 1997 118 180 Own

Idaho
Bestland Retirement Coeur d'Alene Nov. 1996 83 86 Manage
Highland Hills ++ (3) Pocatello Oct. 1996 49 55 Option/Manage
Juniper Meadows Lewiston Nov. 1997 82 90 Own
Loyalton of Coeur
d'Alene ++ (3) Coeur d'Alene Mar. 1996 108 114 Option/Manage
Ridge Wind (3) Chubbuck Aug. 1996 80 106 Option/Manage
Summer Wind Boise Sep. 1995 49 53 Lease

Illinois
Canterbury Ridge (4) Urbana Nov. 1998 101 111 Lease
Rockford Rockford Jun. 2000 100 110 Manage

Iowa
Silver Pines Cedar Rapids Jan. 1995 80 80 Own

Kansas
Elm Grove Estates (2) Hutchinson Apr. 1997 121 133 Option/Manage

Kentucky
Stonecreek Lodge * Louisville Apr. 1997 80 88 Lease

Maryland
Emerald Estates Baltimore Oct. 1999 120 134 Manage
Loyalton of Hagerstown
(3) Hagerstown Jul. 1999 100 110 Option/Manage

Massachusetts
Canterbury Woods Attleboro Jun. 2000 130 130 Manage
The Lodge at Eddy Pond Auburn Jan. 2000 108 110 Lease
Meadow Lodge at Drum
Hill * Chelmsford Aug. 1997 80 88 Own
The Pines at Tewksbury
* (3) Tewksbury Jan. 1996 49 65 Option/Manage
Woods at Eddy Pond * Auburn Mar. 1997 80 88 Lease

Mississippi
Loyalton of Biloxi (4) Biloxi Jan. 1999 83 91 Manage
Loyalton of Hattiesburg Hattiesburg Jul. 1999 79 83 Lease
Ridgeland Pointe * Ridgeland Aug. 1997 79 87 Joint Venture
Silverleaf Manor Meridian Jul. 1998 101 111 Manage
Trace Point Clinton Oct. 1999 100 110 Manage

Missouri
Autumn Ridge ++ Herculaneum Jun. 1997 94 94 Manage

Montana
Springmeadows Residence Bozeman Apr. 1997 74 81 Own

Nevada
Concorde * Las Vegas Nov. 1996 116 128 Own

New Jersey
Laurel Lake Estates Voorhees Jul. 1995 117 119 Lease

Emeritus
Operations Units Beds
Community Location Commenced (a) (b) Interest
- ------------------------ ------------------ ---------- ----- ---- -------------

New York
Bassett Manor (1) Williamsville Nov. 1996 103 105 Lease
Bassett Park Manor (1) Williamsville Nov. 1996 78 80 Lease
Bellevue Manor (1) Syracuse Nov. 1996 90 90 Lease
Colonie Manor (1) Latham Nov. 1996 94 94 Lease
East Side Manor (1) Fayetteville Nov. 1996 80 88 Lease
Green Meadows at
Painted Post (1) Painted Post Oct. 1995 73 96 Lease
The Landing at
Brockport Brockport Jul. 1999 84 92 Manage
The Landing at
Queensbury Queenbury Nov. 1999 84 92 Manage
Loyalton of Lakewood
(3) Lakewood Jul. 1999 83 91 Option/Manage
Perinton Park Manor
(1) Fairport Nov. 1996 78 86 Lease
West Side Manor--
Rochester (1) Rochester Nov. 1996 72 72 Lease
West Side Manor--
Syracuse (1) Syracuse Nov. 1996 78 80 Lease
Woodland Manor (1) Vestal Nov. 1996 60 116 Lease

North Carolina
Heritage Hills
Retirement Community
++ Hendersonville Feb. 1996 99 99 Own
Heritage Lodge
Assisted Living Hendersonville Feb. 1996 20 24 Lease
Pine Park Retirement
Community ++ Hendersonville Feb. 1996 110 110 Lease
Pines of Goldsboro Goldsboro Sep. 1998 101 111 Manage

Ohio
Brookside Estates (2) Middleburg Heights Sep. 1998 99 101 Option/Manage
The Landing at Canton Canton Aug. 2000 84 92 Manage
Lodge at Montgomery Cincinnati Jun. 2000 214 274 Manage
Park Lane ++ Toledo Jan. 1998 92 101 Manage

Oregon
Meadowbrook (3) Ontario Jun. 1995 53 55 Option/Manage

Pennsylvania
Green Meadows at
Allentown Allentown Oct. 1995 76 97 Lease
Green Meadows at
Latrobe Latrobe Oct. 1995 84 125 Lease

South Carolina
Anderson Place--The
Summer House ++ (3) Anderson Oct. 1996 30 40 Option/Manage
Anderson Place--
Cottages (3) Anderson Oct. 1996 75 75 Option/Manage
Anderson Place--The
Health
Center # (3) Anderson Oct. 1996 22 44 Option/Manage
Bellaire Place * (2) Greenville May 1997 81 89 Option/Manage
Countryside Park Easley Feb. 1996 48 66 Lease
Countryside Village
Assisted Living Easley Feb. 1996 48 78 Lease
Countryside Village
Health Care Center # Easley Feb. 1996 24 44 Lease
Countryside Village
Retirement Center Easley Feb. 1996 72 75 Lease
Skylyn Health Center # Spartanburg Feb. 1996 26 48 Lease
Skylyn Personal Care
Center Spartanburg Feb. 1996 115 131 Lease
Skylyn Retirement
Community Spartanburg Feb. 1996 120 120 Lease

Emeritus
Operations Units Beds
Community Location Commenced (a) (b) Interest
- ------------------------ -------------- ---------- ------ ------ --------------------

Tennessee
Walking Horse Meadows
++ * (2) Clarksville Jun. 1997 50 55 Option/Manage

Texas
Amber Oaks * San Antonio Apr. 1997 163 275 Lease
Cambria * El Paso Sep. 1996 79 87 Lease
Dowlen Oaks (2) Beaumont Dec. 1996 79 87 Option/Manage
Eastman Estates (2) Longview Jun. 1997 70 77 Option/Manage
Elmbrook Estates (3) Lubbock Dec. 1996 79 87 Option/Manage
Lakeridge Place (2) Wichita Falls Jun. 1997 79 87 Option/Manage
Meadowlands Terrace *
(2) Waco Jun. 1997 71 78 First Refusal/Manage
Myrtlewood Estates (2) San Angelo May 1997 79 87 Option/Manage
The Palisades * ++ El Paso Apr. 1997 158 215 Lease
Redwood Springs San Marcos Apr. 1997 90 90 Lease
Saddleridge Lodge (2) Midland Dec. 1996 79 87 Option/Manage
Seville Estates * (2) Amarillo Mar. 1997 50 55 Option/Manage
Sherwood Place * Odessa Sep. 1996 79 87 Lease
Vickery Towers at
Belmont ++ Dallas Apr. 1995 301 331 Manage

Utah
Emeritus Estates (2) Ogden Feb. 1998 83 91 Option/Manage
Virginia
Carriage Hill
Retirement Bedford Sep. 1994 91 137 Lease
Cobblestones at
Fairmont * Manassas Sep. 1996 75 82 Own
Loyalton of Staunton
(3) Staunton Jul. 1999 101 111 Option/Manage
Wilburn Gardens Fredericksburg Jan. 1999 101 111 Manage

Washington
Arbor Place at Silver
Lake Everett Jun. 1999 101 111 Manage
Charlton Place Tacoma Jul. 1998 96 105 Manage
Cooper George ++ * Spokane Jun. 1996 140 158 Partnership
Courtyard at the
Willows * Puyallup Sep. 1997 101 111 Own
Evergreen Lodge (3) Federal Way Apr. 1996 98 124 Option/Manage
Fairhaven Estates *
(3) Bellingham Oct. 1996 50 55 Option/Manage
Garrison Creek Lodge * Walla Walla Jun. 1996 80 88 Lease
Harbour Pointe Shores
(2) Ocean Shores Feb. 1997 50 55 Option/Manage
The Hearthstone (3) Moses Lake Nov. 1996 84 92 Option/Manage
The Hearthside Issaquah Feb. 2000 98 98 Own
Kirkland Lodge Kirkland Mar. 1996 74 84 Own
Renton Villa * Renton Sep. 1993 79 97 Lease
Richland Gardens Richland May 1998 100 110 Manage
Seabrook * Everett Jun. 1994 60 62 Lease
Van Vista/Columbia
House Vancouver Oct. 1997 100 100 Admin Services

Wyoming
Park Place ++ (2) Casper Feb. 1996 60 60 Option/Manage
Sierra Hills (4) Cheyenne May 1998 83 91 Lease

Japan
San Oaks Kurashiki Dec. 1999 114 158 Joint Venture
------ ------
Total Operating
Communities 12,412 14,094
====== ======

- --------
* Near an existing or proposed Holiday facility.

++ Currently offers independent living services.

# Currently operates as a skilled nursing facility.

(a) A unit is a single- or double-occupancy residential living space,
typically an apartment or studio.

(b) "Beds" reflects the actual number of beds, which in no event is greater
than the maximum number of licensed beds allowed under the community's
license.

(1) We provide administrative services to the community that is operated by
Painted Post Partners through a lease agreement with an independent third
party.

(2) On December 31, 1998, an investor group acquired these communities from
Meditrust. We hold an option or a right of first refusal to purchase the
communities, expiring on December 12, 2001, at a formula price based on a
specified return to the investor group. We manage the communities during
the option term.

(3) On March 31, 1999, an investor group acquired these communities from
Meditrust. We hold an option to purchase the communities, expiring on
December 12, 2001, at a formula price based on a specified return to the
investor group. We manage the communities during the option term.

(4) These communities are managed for two years or until they meet specified
cash flow targets, whichever occurs first, at which time we lease them
pursuant to pre-established terms.

Development Communities

The following table summarizes certain current information regarding
communities under construction, which are communities where construction
activities, such as groundbreaking activities, exterior construction or
interior build-out, have commenced.

Scheduled Units Beds
Community Location Opening (a) (b) Site Interest
- ---------------------- ---------- ------------ ----- ---- -------------

Anticipated 2001 Openings:
New Jersey
Loyalton of Cape May Cape May 2nd Qtr 2001 100 110 Manage
West Virginia
Charleston Charleston 3rd Qtr 2001 100 132 Manage
--- ---
Total Development
Communities 200 242
=== ===

- --------
(a) A unit is a single- or double-occupancy residential living space,
typically an apartment or studio.

(b) "Beds" reflects the actual number of beds, which in no event is greater
than the maximum number of licensed beds allowed under the community's
license.

Executive Offices

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

ITEM 3. LEGAL PROCEEDINGS

In August 2000, Emeritus began arbitration proceedings with Corio Inc.
("Corio") in connection with a contract dispute. In 1999, we entered into an
agreement with Corio, pursuant to which Corio would plan, implement, and
finalize our new accounting software program. In March 2000, Emeritus canceled
the implementation of the program prior to its completion. Corio asserted a
claim for breach of contract for $1.4 million, requesting payment of the full
contract value. Both parties contacted AAA Arbitration as specified in the
leasing and service contract, and the dispute was settled in February 2001 for
$500,000, representing reimbursement for actual expenditures incurred by
Corio. Payment is to be remitted over a three-year term as follows: $300,000
in 2001; $150,000 in 2002 and $50,000 in 2003. This balance has been accrued
and is included in the consolidated financial statements for the year ended
December 31, 2000.

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

Emeritus did not submit any matter to a vote of its security holders during
the fourth quarter of its fiscal year ended December 31, 2000.

Executive Officers of Emeritus

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

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

Daniel R. Baty.......... 58 Chairman of the Board and Chief Executive Officer
Raymond R. Brandstrom... 48 Vice President of Finance, Secretary, Chief Financial Officer
and Vice Chairman of the Board
Gary S. Becker.......... 54 Senior Vice President of Operations
Martin D. Roffe......... 53 Vice President, Financial Planning
Suzette McCanless....... 53 Vice President, Operations--Eastern Division
Russell G. Kubik........ 48 Vice President, Operations--Central Division

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

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

Gary S. Becker joined Emeritus as Western Division Director in January 1997,
was promoted to Vice President, Operations--Western Division in September
1999, and then promoted to Senior Vice President of Operations in March 2000.
Mr. Becker has 28 years of health care management experience. From October
1993 to December 1996 he was Vice President of Operations for the Western
Division of Sunrise Healthcare Corp. From 1982 to October 1993 he was Vice
President of Operations for the Mid-West division of the Hillhaven
Corporation.

Martin D. Roffe joined Emeritus as Director of Financial Planning in March
1998, and was promoted to Vice President of Financial Planning in October
1999. Mr. Roffe has 29 years experience in the acute care, long-term care, and
senior housing industries. Prior to joining Emeritus, from May of 1987 until
February 1996, Mr. Roffe served as Vice President of Financial Planning for
the Hillhaven Corporation, at which he also held the previous positions of Sr.
Application Analyst and Director of Financial Planning, from January 1983 to
April 1987. Prior to 1983, Mr. Roffe served in a Budget Director capacity for
Acute Care Facilities.

Suzette McCanless joined Emeritus as Eastern Division Director of Operations
in March 1997 and was promoted to Vice President of Operations--Eastern
Division, in September 1999. Ms. McCanless has 21 years of health care
management experience. Prior to joining Emeritus, from July 1996 to February
1997, she was Group Vice President for Beverly Enterprises, Inc., at which she
also held the previous positions of Administrator and Regional Director of
Operations from June 1983 to March 1994. In the interim, Ms. McCanless worked
for Delta Health Group, from April 1994 to August 1995, as Regional Director
of Operations, and at Hillhaven/Vencor Corporation as the Director of
Operations from September 1995 to June 1996.

Russell G. Kubik joined Emeritus as Central Division Director of Operations
in April 1997 and was promoted to Vice President, Operations--Central
Division, in September 1999. Mr. Kubik has 17 years of health care management
experience. Prior to joining Emeritus, from 1994 to 1997, Mr. Kubik served as
Regional Director of Operations for Sun Healthcare Group in the Seattle/Puget
Sound area. From May 1992 to March 1994, Mr. Kubik worked as Regional Director
of Operations for Beverly Enterprises, Inc. in Washington and Idaho.

PART II

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

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

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

1998
First Quarter......................... $13.5000 $10.6875
Second Quarter........................ $13.3750 $10.7500
Third Quarter......................... $12.4375 $ 9.1250
Fourth Quarter........................ $11.3750 $ 8.6250

1999
First Quarter......................... $15.1250 $11.3750
Second Quarter........................ $12.1250 $ 9.7500
Third Quarter......................... $10.0000 $ 7.5000
Fourth Quarter........................ $ 7.8125 $ 5.1250

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

As of February 28, 2001, the number of record holders of our Common Stock
was 139.

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

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and
related notes included elsewhere in this Form 10-K. The consolidated statements
of operations and consolidated balance sheet data set forth below, have been
derived from our consolidated financial statements, which have been audited by
KPMG LLP, independent auditors. The historical results are not necessarily
indicative of results to be expected for any future period.

Year Ended December 31,
------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------

Consolidated Statements of
Operations Data:
Total operating revenues.... $ 68,926 $117,772 $151,820 $122,642 $125,192
Total operating expenses.... 74,053 139,323 171,405 124,821 125,711
-------- -------- -------- -------- --------
Loss from operations........ (5,127) (21,551) (19,585) (2,179) (519)
Net interest and other
expense.................... (3,075) (6,660) (9,194) (18,525) (21,417)
Extraordinary loss on
extinguishment of debt..... -- -- (937) (333) --
Cumulative effect of change
in accounting principle.... -- -- (1,320) -- --
-------- -------- -------- -------- --------
Net loss.................... (8,202) (28,211) (31,036) (21,037) (21,936)
Preferred stock dividends... -- 425 2,250 2,250 5,327
-------- -------- -------- -------- --------
Net loss to common
shareholders............. $ (8,202) $(28,636) $(33,286) $(23,287) $(27,263)
======== ======== ======== ======== ========
Loss per common share before
extraordinary item and
cumulative effect of change
in accounting principle--
basic and diluted.......... $ (0.75) $ (2.60) $ (2.96) $ (2.19) $ (2.69)
Extraordinary loss per
common share--basic and
diluted.................... $ -- $ -- $ (.09) $ (.03) $ --
Cumulative effect of change
in accounting principle
loss per common share--
basic and diluted.......... $ -- $ -- $ (.12) $ -- $ --
Net loss per common share--
basic and diluted.......... $ (0.75) $ (2.60) $ (3.17) $ (2.22) $ (2.69)
Weighted average number of
common shares outstanding--
basic and diluted.......... 11,000 11,000 10,484 10,469 10,117

Consolidated Operating Data:
Communities operated........ 69 99 113 129 135
Number of units............. 5,807 8,624 9,972 11,726 12,412

December 31,
------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------

Consolidated Balance Sheet
Data:
Cash and cash equivalents... $ 23,039 $ 17,537 $ 11,442 $ 12,860 $ 7,496
Working capital (deficit)... 9,757 12,074 (977) 6,828 (81,167)
Total assets................ 158,038 228,573 192,870 198,370 178,079
Long-term debt, less current
portion.................... 60,260 108,117 119,674 128,319 60,499
Convertible debentures...... 32,000 32,000 32,000 32,000 32,000
Redeemable preferred stock.. -- 25,000 25,000 25,000 25,000
Shareholders' equity
(deficit).................. 26,188 1,207 (45,964) (37,290) (65,803)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Overview

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

Through 1998, we focused on rapidly expanding our operations in order to
assemble a portfolio of assisted living communities with a critical mass of
capacity. We pursued an aggressive acquisition and development strategy during
that time, acquiring 35 and developing 10 communities in 1996, acquiring 7 and
developing 20 communities in 1997, and developing 5 communities in 1998.
Having achieved our initial growth objective, in 1999 and continuing in 2000,
we have substantially reduced our pace of acquisition and development
activities to concentrate on improving community performance through both
occupancy and revenue per occupied unit. In 1999, we focused our operational
efforts on increasing occupancy. During 1999, average occupancy increased 10
percentage points between 1998 and 1999 to an average occupancy of 87% in our
consolidated portfolio of buildings. Revenue per unit increased 7% or $134 per
unit to $2,134 as of December 31, 1999. Due to the success of our occupancy
focus in 1999, we shifted our operational concentration on improvement in
revenue per unit in 2000. We implemented a rate enhancement program that
yielded a 4% increase or $79 per unit to $2,213 in our consolidated portfolio
over 1999 results. Additionally, we sacrificed less than 1 percentage point in
average occupancy to 86% from 87% in 1999. Our total operated portfolio,
comprised of all managed communities, experienced a similar improvement in
revenue per unit. Our rate enhancement program yielded an increase of 6% or
$125 per unit to $2,109 in our total operated portfolio over 1999 results.
Additionally, our consolidated portfolio community operating margin (defined
as community revenues less community operations) improved 2 percentage points
to 36% in 2000, compared to 34% in 1999. Additionally, we experienced an
increase in average occupancy of 3% to 82% in 2000 from 79% in 1999 and
community operating margin for our total operated portfolio improved 4
percentage points to 33% in 2000 from 29% in 1999.

The following table presents a summary of our community interests.

As of December 31,
-----------------------------------------------------
1998 1999 2000
---------------- ---------------- ----------------
Buildings Units Buildings Units Buildings Units
--------- ------ --------- ------ --------- ------

Owned (4)................ 15 1,492 16 1,572 16 1,579
Leased (4)............... 52 3,937 40 3,302 45 3,700
Managed/Admin. Services.. 38 3,734 68 6,247 69 6,528
Joint Venture/Partnership
(5)..................... 8 809 5 605 5 605
--- ------ --- ------ --- ------
Operated Portfolio..... 113 9,972 129 11,726 135 12,412
Percentage Increase
(1)................... 13% 15% 14% 18% 5% 6%
Pending Acquisitions..... -- -- 2 206 -- --
New Developments (2)..... 21 2,029 6 604 2 200
Minority Interest (Alert)
(3)..................... 21 1,203 -- -- -- --
--- ------ --- ------ --- ------
Total.................. 155 13,204 137 12,536 137 12,612
Percentage Increase
(decrease) (1)........ 5% 6% (12%) (5%) 0% 1%

- --------
(1) The percentage increase (decrease) indicates the change from the preceding
December 31.

(2) The communities under development at December 31, 2000 are being developed
by third parties, but will be managed by us upon completion.

(3) In November 1999, we sold all our minority interest in Alert Care.

(4) Included in our consolidated portfolio of communities.

(5) Includes one community that we do not manage.

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 generally that
only seniors with income or assets meeting or exceeding the regional median can
afford to reside in our communities. Inflation or other circumstances that
adversely affect seniors' ability to pay for assisted living services could
therefore have an adverse effect on our business. All sources of revenue other
than residents' private resources constitute less than 10% of our total
revenues.

We have incurred net operating losses and negative cash flows from operating
activities since our inception. As of December 31, 2000, we had an accumulated
deficit of approximately $131 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.

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

Results of Operations

The following table sets forth, for the years indicated, certain items of the
Company's Consolidated Statements of Operations as a percentage of total
revenues and the percentage change of the dollar amounts from year to year.

Percentage of
Revenues Year-to-Year
Years Ended Percentage
December 31, Increase (Decrease)
------------------ -------------------
1998 1999 2000 1998-1999 1999-2000
---- ---- ---- --------- ---------

Total operating revenues.......... 100% 100% 100% (19)% 2%
Expenses:
Community operations............ 73 64 61 (29) (2)
General and administrative...... 9 13 14 14 13
Depreciation and amortization... 4 5 5 5 13
Rent............................ 27 20 20 (39) (2)
--- --- --- ---- ---
Total operating expenses.......... 113 102 100 (27) 1
--- --- --- ---- ---
Loss from operations............ (13) (2) (0) (89) (76)
--- --- --- ---- ---
Other expense:
Interest expense, net........... 9 11 11 -- 8
Impairment of securities........ -- 6 -- N/A N/A
Other, net...................... (3) (2) 6 (48) 270
Extraordinary loss on early
extinguishment of debt........... 1 -- -- (64) N/A
Cumulative effect of change in
accounting principle............. 1 -- -- (100) N/A
--- --- --- ---- ---
Net loss........................ (20)% (17)% (18)% 32% 4%
=== === === ==== ===

Comparison of the Years Ended December 31, 2000 and 1999

Total Operating Revenues. Total operating revenues increased $2.6 million to
$125.2 million for 2000 from $122.6 million in 1999, representing a 2%
increase.

Within total operating revenues, community revenue (including other service
fees) increased $2.8 million to $120.6 million in 2000 from $117.8 million in
1999. The first quarter of 1999, however, includes approximately $6.3 million
of community revenue from 21 communities (known as the March communities, more
fully discussed under Meditrust Transactions) that were transferred at the end
of the quarter to a related party investor group under agreements pursuant to
which we continue to manage them. Accordingly, the first quarter of 2000
includes only management fees from these communities and no community revenue.
Excluding the March communities, revenues increased $9.1 million or 8% from
1999 to 2000, primarily as a result of a 4% increase in revenue per unit (an
increase of $79 per unit to $2,213 per unit at December 31, 2000) and the
addition of six communities during 2000, partially offset by the disposition
of a skilled nursing facility.

Management fee revenue decreased $336,000 to $4.6 million in 2000 from $4.9
million in 1999. In 2000, we were not able to recognize fees earned from our
management of 25 communities (known as the December communities, more fully
discussed under Meditrust Transactions) where the management agreements
require us to fund cash operating deficits, while in 1999 we recognized $1.4
million in management fee revenue from these communities. This was partially
offset by an increase of $500,000 in management fees from the
March communities from $1.4 million to $1.9 million, the addition of several
new management agreements and the generally improving performance of our
portfolio of managed communities.

Community Operations. Community operating expenses decreased $1.4 million to
$76.8 million for 2000 from $78.2 for 1999, representing a 2% decrease. As a
percentage of total operating revenues, community operations decreased to 61%
for 2000 compared to 64% for 1999. The first quarter of 1999, however,
includes approximately $3.9 million of community operating expenses from the
March communities, with no comparable offset in 2000. Excluding the March
communities, community operating expenses increased $2.5 million or 3% from
1999 to 2000, primarily as a result of the addition of six new buildings to
our consolidated portfolio, slightly offset by the disposition of one skilled
nursing facility. Excluding the March communities, our operating margin, which
we compute as community operating revenues less community operating expenses,
increased to 36% in 2000 from 33% in 1999, as our community operating revenues
increased faster than our community operating expenses.

General and Administrative. General and administrative expenses increased
$2.0 million to $17.4 million for 2000 from $15.5 million for 1999,
representing a 13% increase. As a percentage of revenues, general and
administrative expenses increased to 14% for 2000 compared to 13% for 1999.
The increase of general and administrative costs as a percentage of revenues
is due, in part, to transferring our interest in the March communities. The
overall increase of $2.0 million is primarily attributable to settlement and
legal costs of the "Corio" mediation (See Item 3. Legal Proceedings) and
additional costs associated with increased professional liability insurance
deductibles.

Depreciation and Amortization. Depreciation and amortization expense
increased $0.8 million to $6.8 million for 2000 from $6.0 million for 1999,
representing a 13% increase. As a percentage of total revenue, depreciation
and amortization expenses remained constant at 5% for both 2000 and 1999. This
marginal increase is principally the result of six community acquisitions in
2000, partially offset by the disposition of one skilled nursing facility.

Rent. Rent expense decreased $0.5 million to $24.7 million for 2000 from
$25.1 million for 1999, representing a decrease of 2%. The decrease is
primarily attributable to the transfer of the March communities that converted
to management agreements as discussed in "Total Operating Revenues" above.
These communities accounted for $1.9 million in rent expense for 1999,
partially offset by additional rent generation from six community acquisitions
and normal increases in rent obligations from our existing portfolio. Rent as
a percentage of revenues was 20% for both 2000 and 1999.

Interest Expense, Net of Interest Income. Interest expense, net of interest
income increased to $14.1 million for 2000 from $13.1 million for 1999,
representing an 8% increase. As a percentage of revenue, interest expense
remained at 11% for both 2000 and 1999. The increase is primarily attributable
to generally increasing mortgage

interest expense associated with our variable rate debt, as well as the
addition of six consolidated communities in early 2000. In addition, total
debt increased approximately $5 million to $175 million as of December 31,
2000 compared to $170 million as of December 31, 1999.

Impairment of Investment Securities. During 2000, we did not have an
impairment of investment securities. In 1999, we wrote down $7.4 million on
our investment in ARV Assisted Living, Inc., as we concluded the decline in
the fair market value of this investment was other than temporary.

Other, Net. Other, net was $7.3 million (expense) in 2000 and $2.0 million
income in 1999, representing a net change of $9.3 million. The amount for the
year 2000 includes a deficit funding obligation of $3.7 million arising from
our management of both the December and March communities in which we are
responsible for cash operating deficits for such communities, write-offs of
$1.5 million relating to receivables and capitalized development transaction
costs that do not have future realizable value, losses of $557,000 associated
with our investment in Senior Healthcare Partners, LLC, and other items
aggregating $1.3 million. The amount for the year 1999 includes gain of $3.2
million arising from a litigation settlement, gain of $762,000 from the sale
of a Canadian subsidiary, deficit funding obligation of $1.4 million arising
from our management of the December communities described above, and other
items aggregating $600,000.

Extraordinary Item. We recognized extraordinary losses of approximately
$333,000 in 1999 and none in 2000. Our 1999 extraordinary loss resulted from
the write-off of loan fees and other related costs in conjunction with the
refinancing of several of our mortgage-financed communities.

Comparison of Years Ended December 31, 1999 and 1998

Total Operating Revenues. Total operating revenues decreased $29.2 million
to $122.6 million for 1999, from $151.8 million for 1998, representing a 19%
decrease. At December 31, 1998 and at March 31, 1999, we transferred our
interests in a total of 41 owned and leased communities to others but
continued to manage them under three-year management agreements with rights of
first refusal or options to acquire them in the future. As a result, we now
receive management fees from these communities rather than the revenues
arising from their operations. For 1998, these communities were responsible
for $51.3 million in operating revenue while generating $2.7 million in
management fees for the same period in 1999. This decrease in revenue was
partially offset, however, by generally increasing levels of occupancy
throughout our consolidated communities. Average occupancy of the 59
consolidated communities we owned and leased for 1999 rose to 87% compared to
77% for the 99 owned and leased communities in the equivalent 1998 period, an
increase of 10 percentage points.

Community Operating Expenses. Community operating expenses decreased $32.4
million to $78.2 million for 1999 from $110.6 million for 1998, representing a
29% decrease. As a percentage of total operating revenues, community
operations decreased to 64% for 1999 compared to 73% for 1998. This reduction
is primarily the result of the transfer of 41 of our previously leased and
owned communities to management agreements, as discussed in "Total Operating
Revenues" above. These communities were responsible for $39.8 million of
community operating expenses as owned and leased communities in 1998; because
25 and 16 were managed communities during 1999 and the nine months ended
December 31, 1999, respectively, we were no longer responsible for their
operating expenses. This decrease was partially offset, however, by increased
variable costs resulting from the significant occupancy gains in our
communities and by increased sales and marketing costs. Our community
operating margin, which we compute as community revenues less community
operating expenses, has increased to 32.6% for 1999 compared to 25.4% for
1998. This improvement is, in part, because the 41 communities that we
transferred to management agreements generally experienced lower margins than
our communities as a whole and, in part, because of cost control measures that
we instituted in 1998 that affected our remaining owned and leased
communities.

General and Administrative. General and administrative costs increased $1.9
million to $15.5 million for 1999 from $13.6 million for 1998, representing a
14% increase. As a percentage of revenues, general and administrative expenses
increased to 13% for 1999 compared to 9% for 1998. The increase of general and

administrative costs as a percentage of revenues is due, in part, to the shift
from community revenues to management fees in the transfer of the 41
communities referred to above. The overall increase of $1.9 million is
attributable to greater personnel costs to support our increasing number of
communities as well as increased marketing costs to enhance occupancy.

Depreciation and Amortization. Depreciation and amortization expense
increased $0.3 million to $6.0 million for 1999 from $5.7 million for 1998,
representing a 5% increase. As a percentage of total revenue, depreciation and
amortization expenses increased to 5% for 1999 as compared to 4% for 1998.

Rent. Rent expense decreased $16.4 million to $25.1 million for 1999 from
$41.5 million for 1998, representing a decrease of 39%. The decrease is
primarily attributable to the transfer of 38 of our previously leased operating
communities to management agreements as discussed above. These communities
accounted for $18 million in rent expense for 1998. We leased an average of 43
communities in 1999, compared to an average of 76 in 1998. Rent as a percentage
of revenues was 27% and 20% for 1998 and 1999, respectively.

Interest Expense, Net of Interest Income. Interest expense, net of interest
income nominally changed to $13.1 million for 1999 from $13.0 million for 1998,
representing an increase of less than one percent. As a percentage of revenue,
interest expense increased to 11% for 1999 as compared to 9% for 1998. This
increase is primarily the result of an increase in mortgage interest expense
due to the refinancing of several properties during 1999. The change in
percentage of revenue is primarily the result of our decrease in revenues from
the transfer of 41 of our communities as discussed above. In addition, total
debt increased approximately $3 million to $170 million as of December 31, 1999
compared to $167 million as of December 31, 1998.

Impairment of Investment Securities. Impairment of investment securities was
$7.4 million for 1999. In 1999, we wrote down our investment in ARV Assisted
Living, Inc., as we concluded the decline in the fair market value of this
investment was other than temporary.

Other, Net. Other, net decreased $1.8 million to $2.0 million for 1999 from
$3.8 million for 1998, representing a decrease of 48%. As a percentage of
revenue, other, net, decreased to 2% in 1999 from 3% in 1998. The $1.8 million
decrease results from the recognition of our portion of 1999 operating losses
from two of our communities, gains realized on the sale of investment
securities, and the disposition of communities in 1998 which did not occur in
1999.

Extraordinary Item. We recognized an extraordinary loss of $333,000 for 1999,
resulting from the write-off of loan fees and other related costs in
conjunction with the refinancing of several of our mortgage-financed
communities.

Cumulative Effect of Change in Accounting Principle. In 1998, we recognized
the cumulative effect of a change in accounting principle of $1.3 million
related to the early adoption of Statement of Position (SOP) 98-5, "Reporting
on Costs of Start-up Activities", which requires that costs of start-up
activities and organization be expensed as incurred.

Same Community Comparison

We operated 56 communities on a comparable basis during both the three
months ended December 31, 1999 and 2000. The following table sets forth a
comparison of same community results of operations, excluding general and
administrative expenses, for the three months ended December 31, 1999 and
2000.

Three Months Ended December 31,
------------------------------------
Dollar Percentage
1999 2000 Change Change
------- ------- ------ ----------
(In thousands)

Revenue............................... $26,765 $28,213 $1,448 5%
Community operating expense........... 17,628 17,076 (552) (3)
------- ------- ------ ---
Community operating income.......... 9,137 11,137 2,000 22
------- ------- ------ ---
Depreciation and amortization......... 1,271 1,370 99 8
Rent.................................. 5,581 5,551 (30) (1)
------- ------- ------ ---
Operating income.................... 2,285 4,216 1,931 85
------- ------- ------ ---
Interest expense, net................. (2,549) (2,667) (118) (5)
Other expense, net.................... (56) (34) 22 39
------- ------- ------ ---
Net income (loss)................... $ (320) $ 1,515 $1,835 573%
======= ======= ====== ===

The same communities represented $28.2 million or 84% of our total operating
revenue for the quarter ended December 31, 2000. Same community revenues
increased $1.4 million or 5% to $28.2 million for the three months ended
December 31, 2000 compared to $26.8 million for the comparable period in 1999.
This increase in revenue is attributable to our shift from acquisitions to
improving community operating performance through revenue per occupied unit.
For the quarter ended December 31, 2000 occupancy decreased 4% to 87% from 91%
for the quarter ended December 31, 1999. However, average monthly revenue per
occupied unit increased to $2,273 for the quarter ended December 31, 2000
compared to $2,070 for the quarter ended December 31, 1999. For the quarter
ended December 31, 2000, we generated operating income of $4.2 million
compared to an operating income of $2.3 million for the comparable period in
1999, an improvement of $1.9 million or 85%.

For the full years 1999 and 2000, we operated 56 communities on a comparable
basis. The following table sets forth a comparison of these same community
results of operations, excluding general and administrative expenses for these
two years.

Year Ended December 31,
--------------------------------------
Dollar Percentage
1999 2000 Change Change
-------- -------- ------ ----------
(In thousands)

Revenue............................. $104,341 $110,194 $5,853 6%
Community operating expense......... 66,832 68,549 1,717 3
-------- -------- ------ ----
Community operating income........ 37,509 41,645 4,136 11
-------- -------- ------ ----
Depreciation and amortization....... 4,830 5,262 432 9
Rent................................ 22,124 22,145 21 --
-------- -------- ------ ----
Operating income.................. 10,555 14,238 3,683 35
-------- -------- ------ ----
Interest expense, net............... (9,750) (10,496) (746) (8)
Other expense, net.................. (71) (306) (235) (331)
-------- -------- ------ ----
Net income ....................... $ 734 $ 3,436 $2,702 368%
======== ======== ====== ====

These same communities represented $110 million or 88% of our total
operating revenue for 2000. Same community revenues increased $5.9 million or
6% to $110 million for 2000 compared to $104.3 million for 1999.

This increase in revenue is attributable to our shift from acquisitions to
improving community operating performance through revenue per occupied unit.
For both 1999 and 2000, occupancy remained constant at 88%. However, average
monthly revenue per occupied unit increased to $2,197 for 2000 compared to
$2,081 for 1999. For 2000, we generated operating income of $14.2 million and
a net income of $3.7 million, compared to operating income of $10.6 million
and net income of $0.7 million for 1999, an improvement of $3.7 million or 35%
in operating income and an improvement of $2.7 million or 368% in net income.

Liquidity and Capital Resources

Cash Flows for the Year Ended December 31, 2000. Cash decreased $5.4 million
to $7.5 million as of December 31, 2000.

Net cash used by operating activities was $5.4 million, which resulted from
our net loss of $22.0 million, adjusted for depreciation and amortization, the
decrease in other receivables and our accrued deficit funding obligation to
fund the December and March communities (more fully discussed under Meditrust
transactions).

Net cash from investing was $19,000. This was derived from the release of
$13.5 million of restricted cash proceeds from the issuance of our Series B
preferred stock, offset by acquisitions of property and equipment, including
one newly acquired community, and cash contributions to Senior Healthcare
Partners, LLC for our 30% equity investment.

Net cash used by financing activities was $31,000. This was primarily
attributable to repurchasing 260,200 shares of our common stock through public
market transactions at an aggregate cost of $1.4 million, payment of preferred
dividends of $4.0 million, and repayments of long term debt of $2.9 million;
offset by proceeds from long term debt in the community acquisitions denoted
above of $7.9 million and net proceeds from short-term borrowings of $650,000.

We have incurred significant operating losses since our inception, including
net losses in excess of $20 million in each of 1999 and 2000. To date, we have
been unable to stabilize operations and occupancy at levels that would
generate positive cash flow and, therefore, are dependent on third party
financing or disposition of assets to fund operations. In addition, as of
December 31, 2000, our working capital deficit was approximately $81 million,
due in part to $73.2 million of mortgage debt that matures on April 29, 2001.
We have been in discussions with the lender regarding an extension of the
debt's maturity, or restructure and although we believe the issue will be
resolved with the lender, there has been no agreement reached at this time and
has no alternative commitment for refinancing. If we are unable to extend the
maturity of this debt, the lender could declare the entire amount immediately
due and payable at maturity and could begin foreclosure proceedings with
respect to the ten assisted living properties that secure this debt. In
addition, many of our remaining debt instruments and leases contain "cross-
default" provisions pursuant to which a default under one obligation can cause
a default under one or more other obligations. Such cross-default provisions
affect 35 assisted living properties owned or leased by us. Accordingly, the
inability to extend the debt due in April could have a further material
adverse effect on our financial condition if any other lender or lessor
notifies us that we are in default under any debt instrument or lease.

The foregoing factors raise doubt about our ability to continue as a going
concern. We are pursuing several initiatives to mitigate this doubt, including
on-going discussions regarding extension of the debt due in April.
Additionally, we will conduct advance discussions with other lenders and
lessors that may be affected by cross-default provisions, and take further
steps to stabilize operations at positive cash flow levels including
implementing rate increases and pursuing additional programs to increase
occupancy, and if necessary, the sale of selected assets.

Impact of Inflation

To date, we have not been significantly affected by inflation. It could,
however, affect our future revenues and operating income due to our dependence
on our senior resident population, most of whom rely on relatively fixed
incomes to pay for our services. As a result, 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.

ITEM 7A. 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 December 31, 2000, our variable rate
borrowings totaled $87.0 million. If market interest rates average 2% more in
2001 than they did in 2000, our interest expense and net loss would increase by
$1.7 million. These amounts are determined by considering the impact of
hypothetical interest rates on our outstanding variable rate borrowings as of
December 31, 2000 and do not consider changes in the actual level of borrowings
that may occur subsequent to December 31, 2000. This analysis also does not
consider the effects of the reduced level of overall economic activity that
could exist in such an environment nor does it consider possible actions that
management could take with respect to our financial structure to mitigate the
exposure to such a change.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information under the caption "Executive Officers of the Registrant" in
Part I of this Form 10-K and under the captions "Election of Directors--
Nominees for Election" and "Compliance with Section 16(a) of the Exchange Act
of 1934" in the Company's Proxy Statement relating to its 2001 annual meeting
of shareholders (the "Proxy Statement") is hereby incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

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

Page
----

Independent Auditors' Report........................................ F-2
Consolidated Balance Sheets......................................... F-3
Consolidated Statements of Operations............................... F-4
Consolidated Statements of Comprehensive Operations................. F-5
Consolidated Statements of Cash Flows............................... F-6
Consolidated Statements of Shareholders' Equity (Deficit)........... F-7
Notes to Consolidated Financial Statements.......................... F-8

(2) FINANCIAL STATEMENT SCHEDULES. Schedule II Valuation and Qualifying
Accounts (contained on page F-23) Other financial statement
schedules have been omitted because the information required to be
set forth therein is not applicable, is immaterial or is shown in
the consolidated financial statements or notes thereto.

(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the
Registrant during the quarter ended December 31, 2000.

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

Number Description
--------- -------------------------------------------------------------------

3.1 Restated Articles of Incorporation of registrant (Exhibit
3.1). (2)
3.2 Amended and Restated Bylaws of the registrant (Exhibit
3.2). (1)
4.1 Forms of 6.25% Convertible Subordinated Debenture due 2006
(Exhibit 4.1). (2)
4.2 Indenture dated February 15, 1996, between the registrant
and Fleet National Bank ("Trustee") (Exhibit 4.2). (2)
4.3 Preferred Stock Purchase Agreement (including Designation
of Rights and Preferences of Series A Convertible
Exchangeable Redeemable Preferred Stock of Emeritus
Corporation Agreement, Registration of Rights Agreement and
Shareholders Agreement) dated October 24, 1997, between the
registrant ("Seller") and Merit Partners, LLC ("Purchaser")
(Exhibit 4.1). (12)
10.1 Amended and Restated 1995 Stock Incentive Plan (Exhibit
99.1). (14)
10.2 Stock Option Plan for Nonemployee Directors (Exhibit 10.2). (2)
10.3 Form of Indemnification Agreement for officers and
directors of the registrant (Exhibit 10.3). (1)
10.4 Noncompetition Agreements entered into between the
registrant and each of the following individuals:
10.4.1 Daniel R. Baty (Exhibit 10.4.1), Raymond R.
Brandstrom (Exhibit 10.4.2) and Frank A. Ruffo
(Exhibit 10.4.3). (2)
10.6 Form of Stock Purchase Agreement dated July 31, 1995,
entered into between Daniel R. Baty and each of Michelle A.
Bickford, Jean T. Fukuda, James S. Keller, George T. Lenes
and Kelly J. Price (Exhibit 10.6). (1)
10.8 Scottsdale Royale in Scottsdale, Arizona, and Villa
Ocotillo in Scottsdale, Arizona. The following agreements
are representative of those executed in connection with
these properties:
10.8.1 Loan Agreement dated December 31, 1996, in the
amount of $12,275,000 by the registrant
("Borrower") and Lender (Exhibit 10.9.1). (5)
10.8.2 Promissory Note dated December 31, 1996, in the
amount of $5,500,000 between the registrant to
Bank United (the "Lender") with respect to
Scottsdale Royale and Villa Ocotillo (Exhibit
10.9.3). (5)
10.8.3 Deed of Trust, Security Agreement, Assignment of
Leases and Rents, and Fixture Filing (Financial
Statement) dated as of December 31, 1996, by the
registrant, as Trustor and debtor, to Chicago
Title Insurance Company, as Trustee, for the
benefit of the Lender, Beneficiary and secured
party with respect to Scottsdale Royale and Villa
Ocotillo (Exhibit 10.9.4). (5)
10.9 Rosewood Court in Fullerton, California, the Arbor at Olive
Grove in Phoenix, Arizona, Renton Villa in Renton,
Washington, Seabrook in Everett, Washington, Laurel Lake
Estates in Vorhees, New Jersey, Green Meadows--Allentown in
Allentown, Pennsylvania, Green Meadows--Dover in Dover,
Delaware, Green Meadows--Latrobe in Latrobe, Pennsylvania,
Green Meadows--Painted Post in Painted Post, New York,
Heritage Health Center in Hendersonville, North Carolina.
The following agreements are representative of those
executed in connection with these properties:
10.9.1 Lease Agreement dated March 29, 1996, between the
registrant ("Lessee") and Health Care Property
Investors, Inc. ("Lessor") (Exhibit 10.10.1). (3)
10.9.2 First Amendment Lease Agreement dated April 25,
1996, by and between the registrant ("Lessee")
and Health Care Property Investors, Inc.
("Lessor") (Exhibit 10.10.2). (3)
10.11 Summer Wind in Boise, Idaho
10.11.1 Lease Agreement dated as of August 31, 1995,
between AHP of Washington, Inc. and the
registrant (Exhibit 10.18.1). (1)
10.11.2 First Amended Lease Agreement dated as of
December 31, 1996, by and between the registrant
and AHP of Washington, Inc. (Exhibit 10.16.2). (5)
10.12 Silver Pines (formerly Willowbrook) in Cedar Rapids, Iowa
10.12.1 Purchase and Sale Agreement (including Real
Estate Contract) dated January 4, 1995, between
Jabo, Ltd. ("Jabo") and the registrant (Exhibit
10.19.1). (1)
10.12.2 Assignment and Assumption Agreement with respect
to facility leases dated as of January 17, 1995,
by and between Jabo, as Assignor, and the
registrant, as Assignee (Exhibit 10.19.2). (1)
10.13 The Palisades in El Paso, Texas, Amber Oaks in San Antonio,
Texas and Redwood Springs in San Marcos, Texas. The
following agreements are representative of those executed
in connection with these properties.
10.13.1 Lease Agreement dated April 1, 1997, between ESC
III, L.P. D/B/A Texas-ESC III, L.P. ("Lessee")
and Texas HCP Holding , L.P. ("Lessor") (Exhibit
10.4.1). (6)
10.13.2 First Amendment to Lease Agreement dated April 1,
1997, between Lessee and Texas HCP Holding , L.P.
Lessor (Exhibit 10.4.2). (6)

Number Description
--------- -----------------------------------------------------------------

10.13.3 Guaranty dated April 1, 1997, by the registrant
("Guarantor") in favor of Texas HCP Holding ,
L.P. (Exhibit 10.4.3) (6)
10.13.4 Assignment Agreement dated April 1, 1997, between
the registrant ("Assignor") and Texas HCP Holding
, L.P. ("Assignee") (Exhibit 10.4.4). (6)
10.14 Carriage Hill Retirement in Bedford, Virginia
10.14.1 Lease Agreement dated August 31, 1994, between
the registrant, as Tenant, and Carriage Hill
Retirement of Virginia, Ltd. as Landlord (Exhibit
10.23.1). (1)
10.14.2 Supplemental Lease Agreement dated September 2,
1994 (Exhibit 10.23.2). (1)
10.15 Green Meadows Communities
10.15.1 Consent to Assignment of and First Amendment to
Asset Purchase Agreement dated September 1, 1995,
among the registrant, The Standish Care Company
and Painted Post Partnership, Allentown Personal
Car General Partnership, Unity Partnership,
Saulsbury General Partnership and P. Jules Patt
(collectively, the "Partnerships"), together with
Asset Purchase Agreement dated July 27, 1995,
among The Standish Care Company and the
Partnerships (Exhibit 10.24.1). (1)
10.15.2 Agreement to Provide Administrative Services to
an Adult Home dated October 23, 1995, between the
registrant and P. Jules Patt and Pamela J. Patt
(Exhibit 10.24.6). (1)
10.15.3 Assignment Agreement dated October 19, 1995,
between the registrant, HCPI Trust and Health
Care Property Investors, Inc. (Exhibit 10.24.8). (1)
10.15.4 Assignment and Assumption Agreement dated August
31, 1995, between the registrant and The Standish
Care Company (Exhibit 10.24.9). (1)
10.15.5 Guaranty dated October 19, 1995, by Daniel R.
Baty in favor of Health Care Property Investors,
Inc., and HCPI Trust (Exhibit 10.24.10). (1)
10.15.6 Guaranty dated October 19, 1995, by the
registrant in favor of Health Care Property
Investors, Inc. (Exhibit 10.24.11). (1)
10.15.7 Second Amendment to Agreement to provide
Administrative Services to an Adult Home dated
January 1, 1997, between Painted Post Partners
and the registrant (Exhibit 10.2). (10)
10.16 Carolina Communities
10.16.1 Lease Agreement dated January 26, 1996, between
the registrant and HCPI Trust with respect to
Countryside Facility (Exhibit 10.23.1). (2)
10.16.3 Promissory Note dated as of January 26, 1996, in
the amount of $3,991,190 from Heritage Hills
Retirement, Inc. ("Borrower") to Health Care
Property Investors, Inc. ("Lender")
(Exhibit 10.23.4). (2)
10.16.4 Loan Agreement dated January 26, 1996, between
the Borrower and the Lender (Exhibit 10.23.5). (2)
10.16.5 Guaranty dated January 26, 1996, by the
registrant in favor of the Borrower (Exhibit
10.23.6). (2)
10.16.6 Deed of Trust with Assignment of Rents, Security
Agreement and Fixture Filing dated as of January
26, 1996, by and among Heritage Hills Retirement,
Inc. ("Grantor"), Chicago Title Insurance Company
("Trustee") and Health Care Property Investor,
Inc. ("Beneficiary") (Exhibit 10.23.7). (2)
10.16.7 Lease Agreement dated as of January 26, 1996,
between the registrant and Health Care Property
Investor, Inc. with respect to Heritage Lodge
Facility (Exhibit 10.23.8). (2)
10.16.8 Lease Agreement dated as of January 26, 1996,
between the registrant and Health Care Property
Investor, Inc. with respect to Pine Park Facility
(Exhibit 10.23.9). (2)
10.16.9 Lease Agreement dated January 26, 1996, between
the registrant and HCPI Trust with respect to
Skylyn Facility (Exhibit 10.23.10). (2)
10.16.10 Lease Agreement dated January 26, 1996, between
the registrant and HCPI Trust with respect to
Summit Place Facility (Exhibit 10.23.11). (2)
10.16.11 Amendment to Deed of Trust dated April 25, 1996,
between Heritage Hills Retirement, Inc.
("Grantor"), and Health Care Property Investors,
Inc. ("Beneficiary") (Exhibit 10.21.12). (5)
10.17 Development Property in Fairfield, California
10.17.1 Loan Agreement in the amount of $12,800,000 dated
January 10, 1997, between Fairfield Retirement
Center, LLC ("Borrower") and the Finova Capital
Corporation ("Lender") (Exhibit 10.31.1). (5)
10.17.2 Promissory Note dated January 10, 1997, in the
amount of $12,800,000 between Fairfield
Retirement Center, LLC ("Borrower") and Finova
Capital Corporation ("Lender") (Exhibit 10.31.2). (5)

Number Description
--------- ---------------------------------------------------------------

10.17.3 Deed of Trust, Security Agreement, Assignment
of Leases and Rents and Fixture Filing dated
January 10, 1997, between Fairfield Retirement
Center, LLC ("Trustor"), Chicago Title Company
("Trustee") and Finova Capital Corporation
("Beneficiary") (Exhibit 10.31.3). (5)
10.17.4 Guaranty Agreement dated January 10, 1997,
between the registrant ("Guarantor") and Finova
Capital Corporation ("Lender") (Exhibit
10.31.4). (5)
10.18 Garrison Creek Lodge in Walla Walla, Washington, Cambria
in El Paso Texas, and Sherwood Place in Odessa, Texas.
The following agreements are representative of those
executed in connection with these properties:
10.18.1 Lease Agreement dated July, August and
September 1996, between the registrant
("Lessee") and American Health Properties, Inc.
("Lessor") (Exhibit 10.3.1). (4)
10.18.2 First Amendment to Lease Agreement dated
December 31, 1996, between the registrant
("Lessee") and AHP of Washington, Inc.,
("Lessor") (Exhibit 10.35.2). (5)
10.19 Cobblestone at Fairmont in Manassas, Virginia
10.19.1 Loan Agreement effective as of October 26,
1995, between the registrant and Health Care
REIT, Inc. (Exhibit 10.42.1). (1)
10.19.2 Deed of Trust, Security Agreement, Assignment
of Leases and Rents and Fixture Filing dated as
of October 26, 1995, by the registrant to
Health Care REIT, Inc. (Exhibit 10.42.2). (1)
10.19.3 Note dated October 26, 1995, from the
registrant to Health Care REIT, Inc. (Exhibit
10.42.3). (1)
10.19.4 Unconditional and Continuing Guaranty dated as
of October 26, 1995, by Daniel R. Baty in favor
of Health Care REIT, Inc. (Exhibit 10.42.4). (1)
10.20 Rosewood Court in Fullerton, California, The Arbor at
Olive Grove in Phoenix, Arizona, Renton Villa in Renton,
Washington, Seabrook in Everett, Washington and Laurel
Lake Estates in Voorhees, New Jersey, Green Meadows--
Allentown in Allentown, Pennsylvania, Green Meadows--
Dover in Dover, Delaware, Green Meadows--Latrobe in
Latrobe, Pennsylvania, Green Meadows--Painted Post in
Painted Post, New York. The following agreements are
representative of those executed in connection with these
properties:
10.20.1 Second Amended Lease Agreement dated as of
December 30, 1996, by and between the
registrant and Health Care Property Investors,
Inc. (Exhibit 10.37.1). (5)
10.21 Cooper George Partners Limited Partnership
10.21.1 Deed of Trust, Trust Indenture, Assignment,
Assignment of Rents, Security Agreement,
Including Fixture Filing and Financing
Statement dated June 30, 1998, between Cooper
George Partners Limited Partnership
("Grantor"), Chicago Title Insurance Company
("Trustee") and Deutsche Bank AG, New York
Branch ("Beneficiary") (Exhibit 10.3.1) (15)
10.21.2 Partnership Interest Purchase Agreement dated
June 4, 1998, between Emeritus Real Estate LLC
IV ("Seller") and Columbia Pacific Master Fund
98 General Partnership ("Buyer") (Exhibit
10.3.2). (15)
10.21.3 Credit Agreement dated June 30, 1998, between
Cooper George Partners Limited Partnership
("Borrower") and Deutsche Bank AG, New York
Branch ("Lender") (Exhibit 10.3.3). (15)
10.21.4 Amended and Restated Agreement of Limited
Partnership of Cooper George Partners Limited
Partnership dated June 29, 1998, between
Columbia Pacific Master Fund '98 General
Partnership, Emeritus Real Estate IV, L.L.C.
and Bella Torre De Pisa Limited Partnership
(Exhibit 10.3.4). (15)
10.21.5 Guaranty and Limited Indemnity Agreement dated
June 30, 1998, between Daniel R. Baty
("Guarantor") and Deutsche Bank AG, New York
Branch ("Lender") (Exhibit 10.3.6). (15)
10.21.6 Promissory Note dated June 30, 1998, between
Cooper George Limited Partnership ("Borrower")
and Deutsche Bank, AG, New York Branch
("Lender") (Exhibit 10.3.7) (15)
10.22 Registration Rights Agreement dated February 8, 1996,
with respect to the registrant's 6.25%
Convertible Subordinated Debentures due 2006 (Exhibit
10.44). (2)
10.23 Registration Rights Agreement dated February 8, 1996,
with respect to the registrant's 6.25%
Convertible Subordinated Debentures due 2006 (Exhibit
10.45). (2)
10.24 Office Lease Agreement dated April 29, 1996, between
Martin Selig ("Lessor") and the registrant ("Lessee")
(Exhibit 10.8). (3)

Number Description
--------- -------------------------------------------------------------------

10.25 Colonie Manor in Latham, New York, Bassett Manor in
Williamsville, New York, West Side Manor in Liverpool, New
York, Bellevue Manor in Syracuse, New York, Perinton Park
Manor in Fairport, New York, Bassett Park Manor in
Williamsville, New York, Woodland Manor in Vestal, New York,
East Side Manor in Fayetteville, New York and West Side Manor
in Rochester, New York. The following agreement is
representative of those executed in connection with these
properties:
10.25.1 Lease Agreement dated September 1, 1996, between
Philip Wegman ("Landlord") and Painted Post
Partners ("Tenant") (Exhibit 10.4.1). (4)
10.25.2 Agreement to Provide Administrative Services to an
Adult Home dated September 2, 1996, between the
registrant and Painted Post Partners ("Operator")
(Exhibit 10.4.2). (4)
10.25.3 First Amendment to Agreement to Provide
Administrative Services to an Adult Home dated
January 1, 1997, between Painted Post Partners and
the registrant (Exhibit 10.1). (10)
10.26 Columbia House Communities.
10.26.1 Management Services Agreement between the
Registrant ("Manager") and Columbia House, LLC
("Lessee") dated November 1, 1996, with respect to
Camlu Retirement (Exhibit 10.6.1). (4)
10.26.2 Management Services Agreement dated January 1,
1998, between the registrant ("Manager") and
Columbia House LLC ("Lessee") with respect to York
Care. (13)
10.26.3 Commercial Lease Agreement dated January 13, 1997,
between Albert M. Lynch ("Landlord") and Columbia
House, LLC ("Tenant") with respect to York Care
(Exhibit 10.3.2). (6)
10.26.4 Management Services Agreement dated June 1, 1997,
between the registrant ("Manager") and Columbia
House LLC ("Owner") with respect to Autumn Ridge
(Exhibit 10.3.1). (9)
10.26.5 Agreement to Provide Accounting and Administrative
Services dated October 1, 1997, between Acorn
Service Corporation ("Administrator") and Vancouver
Housing, L.L.C., ("Manager") with respect to Van
Vista and Columbia House (Exhibit 10.6.1). (12)
10.26.6 Assignment and First Amendment to Agreement to
Provide Management Services dated September 1,
1997, between the registrant, Columbia House,
L.L.C., Acorn Service Corporation and Camlu Coeur
d'Alene, L.L.C. with respect to Camlu. (13)
10.26.7 Assignment and First Amendment to Agreement to
Provide Management Services dated September 1,
1997, between the registrant, Columbia House,
L.L.C., Acorn Service Corporation and Autumn Ridge
Herculaneum, L.L.C. with respect to Autumn Ridge. (13)
10.26.8 Management Services Agreement dated January 1,
1998, between the registrant ("Manager") and
Columbia House LLC ("Owner") with respect to Park
Lane. (13)
10.27 Vickery Towers in Dallas, Texas
10.27.1 Partnership Interest Purchase and Sale Agreement
dated June 4, 1998, between ESC GP II, Inc. and
Emeritus Properties IV, Inc. (together "Seller")
and Columbia Pacific Master Fund 98 General
Partnership and Daniel R. Baty (together
"Purchaser") (Exhibit 10.4.1). (15)
10.27.2 Amended and Restated Agreement of Limited
Partnership of ESC II, LP dated June 30, 1998,
between Columbia Pacific Master Fund '98 General
Partnership and Daniel R. Baty (Exhibit 10.4.2). (15)
10.27.3 Agreement to Provide Management Services To An
Independent and Assisted Living Facility dated June
30, 1998, between ESC II, LP ("Owner") and ESC III,
LP ("Manager") (Exhibit 10.4.3). (15)
10.28 Concorde in Las Vegas, Nevada
10.28.1 Purchase and Sale Agreement dated July 9, 1996,
between the registrant ("Purchaser") and Sunday
Estates, Inc. ("Seller") (Exhibit 10.56.1). (5)
10.28.2 First Amendment to Purchase and Sale Agreement
dated July 11, 1996, between the registrant the
Seller (Exhibit 10.56.2). (5)
10.29 Development Properties in Auburn, Massachusetts, Louisville,
Kentucky and Rocky Hill, Connecticut. The following
agreements are representative of those executed in connection
with these properties:
10.29.1 Lease Agreement dated February 1996, between the
registrant ("Lessee") and LM Auburn Assisted Living
LLC, and LM Louisville Assisted Living LLC,
("Landlords") with respect to the development
properties in Auburn and Louisville (Exhibit
10.58.1). (5)
10.29.2 Amended and Restated Lease Agreement dated February
26, 1996, between the registrant ("Lessee") and LM
Rocky Hill Assisted Living Limited Partnership,
("Landlord") with respect to the development
property in Rocky Hill (Exhibit 10.58.2). (5)
10.29.3 Lease Agreement dated October 10, 1996, between the
registrant ("Lessee") and LM Chelmsford Assisted
Living LLC, ("Landlord") with respect to the
development property in Chelmsford (Exhibit
10.58.3). (5)

Number Description
--------- -----------------------------------------------------------------

10.29.4 Promissory Note in the amount of $1,255,000 dated
December 1996, between the registrant ("Lender")
and LM Auburn Assisted Living LLC, ("Borrower")
with respect to the development property in
Auburn (Exhibit 10.58.4). (5)
10.29.5 Promissory Note in the amount of $1,450,000 dated
January 1997, between the registrant ("Lender")
and LM Louisville Assisted Living LLC,
("Borrower") with respect to the development
property in Louisville (Exhibit 10.58.5). (5)
10.29.6 Promissory Note in the amount of $1,275,000 dated
January 1997, between the registrant ("Lender")
and LM Rocky Hill Assisted Living Limited
Liability Partnership, ("Borrower") with respect
to the development property in Rocky Hill
(Exhibit 10.58.6). (5)
10.29.7 Promissory Note in the amount of $300,000 dated
January 1997, between the registrant ("Lender")
and LM Chelmsford Assisted Living LLC,
("Borrower") with respect to the development
property in Chelmsford (Exhibit 10.58.7). (5)
10.30 Development Properties in Cheyenne, Wyoming and Auburn,
California. The following agreements are representative of
those executed in connection with these properties.
10.30.1 Management Agreement dated May 30, 1997, between
Willard Holdings, Inc., ("Owner") and the
registrant ("Manager") (Exhibit 10.5.1). (9)
10.30.2 Lease Agreement dated May 30, 1997, between
Willard Holdings, Inc., ("Lessor") and the
registrant ("Lessee") (Exhibit 10.5.2). (9)
10.31 Senior Management Employment Agreements and Amendments
entered into between the registrant and each of the
following individuals:
10.31.1 Frank A. Ruffo (Exhibit 10.6.2), Kelly J. Price
(Exhibit 10.6.3), Gary D. Witte (Exhibit 10.6.4),
Sarah J. Curtis (Exhibit 10.6.4), and Raymond R.
Brandstrom (Exhibit 10.6.5). (9)
10.31.2 Raymond R. Brandstrom (Exhibit 10.11.1), Gary D.
Witte ( Exhibit 10.11.2), Frank A. Ruffo (Exhibit
10.11.3), Sarah J. Curtis (Exhibit 10.11.4), and
Kelly J. Price (Exhibit 10.11.5) (9)
10.32 La Casa Grande in New Port Richey, Florida, River Oaks in
Englewood, Florida, and Stanford Centre in Altamonte
Springs, Florida. The following agreements are
representative of those executed in connection with these
properties.
10.32.1 Stock Purchase Agreement dated September 30,
1996, between Wayne Voegele, Jerome Lang, Ronald
Carlson, Thomas Stanford, Frank McMillan, Lonnie
Carlson, and Carla Holweger ("Seller") and the
registrant ("Purchaser") with respect to La Casa
Grande (Exhibit 10.1). (7)
10.32.2 First Amendment to Stock Purchase Agreement dated
January 31, 1997, between the Seller and the
registrant with respect to La Case Grande
(Exhibit 10.2). (7)
10.32.3 Stock Purchase Agreement dated September 30,
1996, between the Seller and the registrant with
respect to River Oaks (Exhibit 10.3). (7)
10.32.4 First Amendment to Stock Purchase Agreement dated
January 31, 1997, between the Seller and the
registrant with respect to River Oaks (Exhibit
10.4). (7)
10.32.5 Stock Purchase Agreement dated September 30,
1996, between the Seller and the registrant with
respect to Stanford Centre (Exhibit 10.5). (7)
10.32.6 First Amendment to Stock Purchase Agreement dated
January 31, 1997, between the Seller and the
registrant with respect to Stanford Centre
(Exhibit 10.6). (7)
10.33 Painted Post Partnership
10.33.1 Painted Post Partners Partnership Agreement dated
October 1, 1995 (Exhibit 10.24.7). (1)
10.33.2 First Amendment to Painted Post Partners
Partnership Agreement dated October 22, 1996,
between Daniel R. Baty and Raymond R. Brandstrom
(Exhibit 10.20.20). (5)
10.33.3 Indemnity Agreement dated November 3, 1996,
between the registrant and Painted Post Partners
(Exhibit 10.3). (10)
10.33.4 First Amendment to Indemnity Agreement dated
January 1, 1997, between the registrant and
Painted Post Partners (Exhibit 10.4). (10)
10.33.5 Undertaking and Indemnity Agreement dated October
23, 1995, between the registrant, P. Jules Patt
and Pamela J. Patt and Painted Post Partnership
(Exhibit 10.5). (10)
10.33.6 First Amendment to Undertaking and Indemnity
Agreement dated January 1, 1997, between Painted
post Partners and the registrant (Exhibit 10.6). (10)
10.33.7 First Amendment to Non-Competition Agreement
between the registrant and Daniel R. Baty
(Exhibit 10.1.1) and Raymond R. Brandstrom
(Exhibit 10.1.2). (11)

Number Description
--------- -----------------------------------------------------------------

10.34 Ridgeland Court in Ridgeland, Mississippi
10.34.1 Master Agreement and Subordination Agreement
dated September 5, 1997, between the
registrant, Emeritus Properties I, Inc., and
Mississippi Baptist Health Systems, Inc.
(Exhibit 10.1.1). (12)
10.34.2 License Agreement dated September 5, 1997,
between the registrant and its subsidiary and
affiliated corporations and Mississippi Baptist
Health Systems, Inc. (Exhibit 10.1.2). (12)
10.34.3 Economic Interest Assignment Agreement and
Subordination Agreement dated September 5,
1997, between the registrant, Emeritus
Properties I, Inc., and Mississippi Baptist
Health Systems, Inc. (Exhibit 10.1.3). (12)
10.34.4 Operating Agreement for Ridgeland Assisted
Living, L.L.C. dated December 23, 1998, between
the registrant, Emeritust Properties XI, L.L.C.
and Mississippi Baptist Medical Enterprises,
Inc. (Exhibit 10.46.4) (16)
10.34.5 Purchase and Sale Agreement dated December 23,
1998, between the registrant and Meditrust
Company LLC. (Exhibit 10.46.5). (16)
10.35 Development Property in Urbana, Illinois.
10.35.1 Lease Agreement dated September 10, 1997,
between ALCO IV, L.L.C. ("Lessor") and the
registrant ("Lessee") (Exhibit 10.2.1). (12)
10.35.2 Management Agreement dated September 10, 1997,
between the registrant ("Manager" and ALCO IV,
L.L.C. ("Owner") (Exhibit 10.2.2). (12)
10.36 Amendment to Office Lease Agreement dated September 6,
1996, between Martin Selig ("Lessor") and the registrant. (13)
10.37 Villa Del Rey in Escondido, California
10.37.1 Purchase and Sale Agreement dated December 19,
1996, between the registrant ("Purchaser") and
Northwest Retirement ("Seller") (Exhibit
10.1.1). (6)
10.38 Development Property in Paso Robles, California
10.38.1 Agreement of TDC/Emeritus Paso Robles
Associates dated June 1, 1995, between the
registrant and TDC Convalescent, Inc. (Exhibit
10.2.1). (6)
10.38.2 Loan Agreement in the amount of $6,000,000
dated February 15, 1997, between Finova Capital
Corporation ("Lender") and TDC/Emeritus Paso
Robles Associates ("Borrower") (Exhibit
10.2.2). (6)
10.38.3 Promissory Note dated February 28, 1997, in the
amount of $6,000,000 between Finova Capital
Corporation ("Lender") and TDC/Emeritus Paso
Robles Associates ("Borrower") (Exhibit
10.2.3). (6)
10.38.4 Deed of Trust, Security Agreement, Assignment
of Leases and Rents and Fixture Filing dated
February 18, 1997, between TDC/Emeritus Paso
Robles Associates ("Trustor"), Chicago Title
Company ("Trustee") and Finova Capital
Corporation ("Beneficiary") (Exhibit 10.2.4). (6)
10.38.5 Guaranty between TDC Convalescent, Inc.
("Guarantor") and Finova Capital Corporation
(Exhibit 10.2.5). (6)
10.38.6 Guaranty between the registrant ("Guarantor")
and Finova Capital Corporation (Exhibit
10.2.6). (6)
10.39 Development Property in Staunton, Virginia
10.39.1 Purchase and Sale Agreement dated February 5,
1997, between Greencastle Retirement Partners,
L.L.C. ("Purchaser") and Gail G. Brown
("Seller") (Exhibit 10.72.1). (13)
10.39.2 Assignment and Assumption of Purchase and Sale
Agreement dated February 12, 1997, between
Greencastle Retirement Partners, L.L.C. and the
registrant. (13)
10.40 Development Property in Jamestown New York
10.40.1 Purchase Agreement dated December 12, 1996,
between June Fagerstrom ("Seller") and Wegman
Family LLC ("Buyer") (Exhibit 10.73.1). (13)
10.40.2 Assignment and Assumption Agreement dated
December 30, 1997, between Wegman Family LLC
("Assignor") and Painted Post Partners
("Assignee") (Exhibit 10.73.2). (13)
10.41 Development Property in Danville, Illinois
10.41.1 Purchase and Sale Agreement dated October 14,
1997, between South Bay Partners, Inc.
("Purchaser") and Elks Lodge No. 332, BPOE
("Seller") (Exhibit 10.74.1). (13)
10.41.2 Assignment and Assumption of Purchase and Sale
Agreement dated October 21, 1997, between South
Bay Partners, Inc. and the registrant (Exhibit
10.74.2). (13)

Number Description
--------- -----------------------------------------------------------------

10.42 Development Property in Biloxi, Mississippi
10.42.1 Management Agreement dated December 18, 1997,
between the registrant ("Manager") and ALCO
VII, L.L.C. ("Owner") (Exhibit 10.75.1). (13)
10.42.2 Lease Agreement dated September 29, 2000,
between the registrant ("Lessee") and HR
Acquisition Corporation ("Lessor") (Exhibit
10.75.2).
10.43 Sanyo Electric Co., Ltd.
10.43.1 Agreement entered into on May 30, 1996, between
the registrant and Sanyo Electric Co., Ltd. for
the interest in jointly entering the
development, construction and /or operation of
the Senior Housing Business in Japan (Exhibit
10.76.1). (13)
10.43.2 Joint Venture Agreement entered into on July 9,
1997, between the registrant and Sanyo Electric
Co., Ltd. (Exhibit 10.76.2). (13)
10.44 Lakeridge Place in Wichita Falls, Texas, Meadowlands
Terrace in Waco, Texas, Saddleridge Lodge in Midland,
Texas and Sherwood Place in Odessa, Texas. The following
agreements are representative of those executed in
connection with these properties.
10.44.1 Management and Consulting Agreement dated
February 1, 1998, between ESC I, L.P., and XL
Management Company L.L.C. (Exhibit 10.78.1). (13)
10.45 1998 Employee Stock Purchase Plan (Exhibit 99.2). (14)
10.46 River Oaks in Englewood, California, Stanford Center in
Alamonte Springs, La Casa Grande in New Port Richey,
Florida, Silver Pines in Cedar Rapids, Iowa, Villa Del
Rey in Escondido, California, Spring Meadows in Bozeman,
Montana, Juniper Meadows in Lewiston, Idaho and Fulton
Villa in Stockton, California.
10.46.1 Credit Agreement dated April 29, 1998, between
Emeritus Properties II, Inc., Emeritus
Properties V, Inc., and Emeritus Properties
VII, Inc. ("Borrowers") and Deutsche Bank AG,
New York Branch ("Lender") (Exhibit 10.2.1). (15)
10.46.2 Amended and Restated Guaranty and Limited
Indemnity Agreement dated June 30, 1998,
between Emeritus Corporation ("Guarantor") and
Deutsche Bank AG ("Lender") (Exhibit 10.2.2). (15)
10.46.3 Amendment to Credit Agreement and Restatement
of Article IX dated June 30, 1998, between
Emeritus Properties II, Inc., Emeritus
Properties III, Inc., Emeritus Properties V and
Emeritus Properties VII, Inc. (together
"Borrowers") and Deutsche Bank AG ("Lender")
(Exhibit 10.2.3). (15)
10.46.4 Guaranty and Limited Indemnity Agreement dated
April 29, 1998, between Emeritus Corporation
("Grantor") and Deutsche Bank AG, New York
Branch ("Lender") (Exhibit 10.2.4). (15)
10.46.5 Promissory Note dated June 30, 1998, between
Emeritus Properties III, Inc. ("Borrower") and
Deutsche Bank AG, New York Branch ("Lender")
(Exhibit 10.2.5). (15)
10.46.6 Future Advance Promissory Note dated April 29,
1998, between Emeritus Properties V, Inc.
("Borrower") and Deutsche Bank AG, New York
Branch ("Lender") (Exhibit 10.2.6). (15)
10.47 Courtyard at the Willows In Puyallup, Washington
10.47.1 Deed of Trust, Trust Indenture, Assignment,
Assignment of Rents, Security Agreement,
Including Fixture Filing and Financing
Statement dated June 30, 1998, between Emeritus
Properties III, Inc. ("Grantor") and Chicago
Title Insurance Company ("Trustee") and
Deutsche Bank AG, New York Branch
("Beneficiary") (Exhibit 10.7.1). (15)
10.47.2 Mortgage, Open-End Mortgage, Advance Money
Mortgage, Trust Deed, Deed Of Trust, Trust
Indenture, Assignment, Assignment of Rents,
Security Agreement, Including Fixture Filing
and Financing Statement dated June 30, 1998,
between Emeritus Properties III, Inc.
("Grantor, Mortgagor") and Deutsche Bank, AG,
New York Branch (Exhibit 10.7.2). (15)
10.48 Silver Pines in Cedar Rapids, Iowa, Spring Meadows in
Bozeman, Montana and Juniper Meadows in Lewiston, Idaho.
10.48.1 Promissory Note dated April 29, 1998, between
Emeritus Properties II ("Borrower") and
Deutsche Bank AG, New York Branch (Exhibit
10.8.1). (15)
10.49 Richland Gardens in Richland, Washington, Charlton Place
in Tacoma Washington, The Pines of Goldsboro in
Goldsboro, North Carolina, Silverleaf Manor in Meridian,
Mississippi and Wilburn Gardens in Fredericksburg,
Virginia. The following agreement is representative of
those executed in connection with these properties.
10.49.1 Agreement To Provide Management Services To An
Assisted Living Facility dated February 2,
1998, between Richland Assisted, L.L.C.
("Owner") and Acorn Service Corporation
("Manager") (Exhibit 10.9.1). (15)

Number Description
--------- -----------------------------------------------------------------

10.50 Richland Gardens in Richland, Washington, The Pines of
Goldsboro in Goldsboro, North Carolina, Silverleaf Manor
in Meridian, Mississippi, Wilburn Gardens in
Fredericksburg, Virginia and Park Lane in Toledo, Ohio.
The following agreement is representative of those
executed in connection with these properties.
10.50.1 Marketing Agreement dated February 2, 1998,
between Acorn Service Corporation ("Acorn") and
Richland Assisted, L.L.C. ("RALLC") (Exhibit
10.10.1). (15)
10.51 Kirkland Lodge in Kirkland, Washington
10.51.1 Purchase and Sale Agreement dated December 23,
1998, between the registrant and Meditrust
Company LLC. (Exhibit 10.46.5). (16)
10.51.2 Loan Agreement dated December 28, 1998, between
Emeritus Properties X, L.L.C and Guaranty
Federal Bank (Exhibit 10.65.2). (16)
10.51.3 Promissory Note Agreement dated December 28,
1998, between Emeritus Properties X, L.L.C and
Guaranty Federal Bank (Exhibit 10.65.3). (16)
10.51.4 Guaranty Agreement dated December 28, 1998,
between the registrant and Guaranty Federal
Bank (Exhibit 10.65.3). (16)
10.52 Emeritrust Communities
10.52.1 Purchase and Sale Agreement dated December 30,
1998, between the registrant, Emeritus
Properties VI, Inc., ESC I, L.P. and AL
Investors LLC. (Exhibit 10.66.1). (16)
10.52.2 Supplemental Purchase Agreement in Connection
with Purchase of Facilities dated December 30,
1998, between the registrant, Emeritus
Properties I, Inc. Emeritus Properties VI,
Inc., ESC I, L.P. and AL Investors LLC.
(Exhibit 10.66.2). (16)
10.52.3 Management Agreement with Option to Purchase
dated December 30, 1998, between the
registrant, Emeritus Management I LP, Emeritus
Properties I, Inc, ESC I, L.P., Emeritus
Management LLC and AL Investors LLC. (Exhibit
10.66.3). (16)
10.52.4 Guaranty of Management Agreement and Shortfall
Funding Agreement dated December 30, 1998,
between the registrant and AL Investors LLC.
(Exhibit 10.66.4). (16)
10.52.5 Put and Purchase Agreement dated December 30,
1998, between Daniel R. Baty and AL Investors
LLC. (Exhibit 10.66.5) Second Emeritrust. (16)
10.53 Emeritrust II Communities
10.53.1 Supplemental Purchase Agreement in Connection
with Purchase of Facilities (AL II--14
Operating Facilities) dated March 26,1999,
between the registrant, Emeritus Properties I,
Inc. ESC G.G. I, Inc., ESC I, L.P. and AL
Investors II LLC (Exhibit 10.1.1). (17)
10.53.2 Management Agreement with Option to Purchase
(AL II--14 Operating Facilities) dated March
26, 1999, between the registrant, Emeritus
Management I LP, Emeritus Properties I, Inc.,
ESC G.P. I, Inc., ESC I, L.P., Emeritus
Management LLC and AL Investors II LLC (Exhibit
10.1.2). (17)
10.53.3 Guaranty of Management Agreement (AL II--14
Operating Facilities) dated March 26, 1999,
between the registrant and AL Investors II LLC
(Exhibit 10.1.3). (17)
10.53.4 Supplemental Purchase Agreement in Connection
with Purchase of Facilities (AL II--5
Development Facilities) dated March 26, 1999,
between the registrant, Emeritus Properties I,
Inc. and AL Investors Development LLC (Exhibit
10.1.4). (17)
10.53.5 Management Agreement with Option to Purchase
(AL II--5 Development Facilities) dated
March 26, 1999, between the registrant,
Emeritus Properties I, Inc., Emeritus
Management LLC and AL Investors Development LLC
(Exhibit 10.1.5). (17)
10.53.6 Guaranty of Management Agreement and Shortfall
Funding Agreement (AL II--5 Development
Facilities) dated March 26, 1999, between the
registrant and AL Investors Development LLC
(Exhibit 10.1.6). (17)
10.53.7 Put and Purchase Agreement (AL II Holdings--14
Operating Facilities and 5 Development
Facilities) dated March 26, 1999, between
Daniel R. Baty and AL II Holdings LLC, AL
Investors II LLC and AL Investors Development
LLC (Exhibit 10.1.7). (17)
10.54 Meadow Lodge at Drum Lodge Hill in Chelmsford,
Massachusetts
10.54.1 Purchase and Sales Agreement dated April 23,
1999, between LM Chelmsford Assisted Living,
LLC ("Seller") and the registrant ("purchaser")
(Exhibit 10.1.1). (18)

Number Description
--------- -----------------------------------------------------------------

10.55 Meadow Lodge at Drum Hill in Chelmsford, Massachusetts,
Cobblestones at Fairmont in Manassas, Virginia, Kirkland
Lodge in Kirkland, Washington and Ridgeland Pointe in
Ridgeland, Mississippi. The following agreements are
representative of those executed in conjunction with these
properties.
10.55.1 Fixed Rate Noted dated September 29, 1999,
between Amresco Capital, L.P. ("Payee") and the
registrant ("Maker") (Exhibit 10.2.1). (18)
10.55.2 Mortgage and Security Agreement dated September
29, 1999, between Amresco Capital, L.P.
(Mortgagee") and the registrant ("mortgagor")
(Exhibit 10.2.2). (18)
10.56 Series B Preferred Stock Purchase Agreement dated as of
December 10, 1999, between Emeritus Corporation and Saratoga
Partners IV, L.P. (Exhibit 4.1). (19)
10.57 Designation of Rights and Preferences of Series B
Convertible Preferred Stock as filed with the Secretary of
State of Washington on December 29, 1999 (Exhibit 4.2). (19)
10.58 Shareholders Agreement dated as of December 30, 1999, among
Emeritus Corporation, Daniel R. Baty, B.F., Limited
Partnership and Saratoga Partners IV, L.P. (Exhibit 4.3). (19)
10.59 Registration Rights Agreement dated as of December 30, 1999,
between Emeritus Corporation and Saratoga Partners IV, L.P.
(Exhibit 4.4). (19)
10.60 Investment Agreement dated as of December 30, 1999, among
Emeritus Corporation, Daniel R. Baty, B.F., Limited
Partnership and Saratoga Partners IV, L.P., Saratoga
Partners IV, L.P. and Saratoga Management Company LLC.
(Exhibit 4.5). (19)
10.61 Canterbury Ridge in Urbana, Illinois
10.61.1 Lease agreement dated September 29, 2000, and
effective October 1, 2000, between HR
Acquisitions I Corporation ("Lessor") and
Emeritus Corporation ("Lessee"). (20)
10.62 Emerald Hills in Auburn
10.62.1 Lease agreement dated September 29, 2000, and
effective October 1, 2000, between HR
Acquisitions I Corporation ("Lessor") and
Emeritus Corporation ("Lessee"). (20)
10.63 Sierra Hills in Cheyenne, Wyoming
10.63.1 Lease agreement dated September 29, 2000, and
effective October 1, 2000, between HR
Acquisitions I Corporation ("Lessor") and
Emeritus Corporation ("Lessee"). (20)
10.64 Villa Ocotillo in Scottsdale, Arizona
10.64.1 Purchase and sale agreement originally dated
October 21, 1997, and effective January 2001,
between Melchor and Isabel Balazs, as Trustees
("Purchaser") and Emeritus Corporation
("Seller"). (21)
10.64.2 Lease agreement dated December 29, 2000 and
effective December 29, 2000, between Melchor
Balazs and Isabel Balazs ("Lessor") and Emeritus
Corporation ("Lessee"). (21)
10.65 Loyalton of Hattiesburg in Hattiesburg, Mississippi
10.65.1 Lease agreement dated June 10, 1998, and
effective October 1, 2000, between ALCO XII, LLC
("Lessor") and Emeritus Corporation ("Lessee"). (21)
10.66 Loyalton of Biloxi in Biloxi, Mississippi
10.66.1 Lease agreement dated September 29, 2000, and
effective October 1, 2000, between HR
Acquisitions I Corporation ("Lessor") and
Emeritus Corporation ("Lessee"). (21)
21.1 Subsidiaries of the registrant. (21)
23.1 Consent of KPMG LLP. (21)

- --------
(1) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-1 (File No. 33-97508) declared
effective on November 21, 1995.
(2) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on March 29,
1996.
(3) Incorporated by reference to the indicated exhibit filed with the
Company's Second Quarter Report on Form 10-Q (File No. 1-14012) on August
14, 1996.
(4) Incorporated by reference to the indicated exhibit filed with the
Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on
November 14, 1996.
(5) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on March 31,
1997.
(6) Incorporated by reference to the indicated exhibit filed with the
Company's First Quarter Report on Form 10-Q (File No. 1-14012) on May 15,
1997.
(7) Incorporated by reference to the indicated exhibit filed with the
Company's Current Report on Form 8-K (File No. 1-14012) on May 16, 1997.
(8) Incorporated by reference to the indicated exhibit filed with the
Company's Current Report on Form 8-K Amendment No. 1 (File No. 1-14012)
on July 14, 1997.
(9) Incorporated by reference to the indicated exhibit filed with the
Company's Second Quarter Report on Form 10-Q (File No. 1-14012) on August
14, 1997.

(10) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-3 Amendment No. 2 (File No.
333-20805) on August 14, 1997.
(11) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-3 Amendment No. 3 (File No.
333-20805) on October 29, 1997.
(12) Incorporated by reference to the indicated exhibit filed with the
Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on
November 14, 1997.
(13) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on March 30,
1998.
(14) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-8 (File No. 333-60323) on July
31, 1998.
(15) Incorporated by reference to the indicated exhibit filed with the
Company's Second Quarter Report on Form 10-Q (File No. 1-14012) on August
14, 1998
(16) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on March 31,
1999.
(17) Incorporated by reference to the indicated exhibit filed with the
Company's First Quarter Report on Form 10-Q (File No. 1-14012) on May 10,
1999.
(18) Incorporated by reference to the indicated exhibit filed with the
Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on
November 15, 1999.
(19) Incorporated by reference to the indicated exhibit filed with the
Company's Form 8-K (File No. 1-14012) on January 14, 2000.
(20) Incorporated by reference to the indicated exhibit filed with the
Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on
November 14, 2000.
(21) Filed herewith.

SIGNATURES

Pursuant to the requirements of 13 of 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

Emeritus Corporation
(Registrant)

Dated: April 2, 2001

Signature Title
--------- -----

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

/s/ Raymond R. Brandstrom Vice President of Finance,
______________________________________ Secretary, Chief
Raymond R. Brandstrom Financial Officer, and
Vice Chairman of the
Board

/s/ Patrick Carter Director
______________________________________
Patrick Carter

/s/ Charles P. Durkin Director
______________________________________
Charles P. Durkin

Director
______________________________________
David Hamamoto

/s/ David W. Niemiec Director
______________________________________
David W. Niemiec

/s/ Motoharu Iue Director
______________________________________
Motoharu Iue

Index to Consolidated Financial Statements

Page No.
--------

Independent Auditors' Report......................................... F-2

Consolidated Balance Sheets as of December 31, 1999 and 2000......... F-3

Consolidated Statements of Operations for the years ended December
31, 1998, 1999 and 2000............................................. F-4

Consolidated Statements of Comprehensive Operations for the years
ended December 31, 1998, 1999 and 2000.............................. F-5

Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1999 and 2000............................................. F-6

Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 1998, 1999 and 2000........................ F-7

Notes to Consolidated Financial Statements........................... F-8

Schedule II--Valuation and Qualifying Accounts....................... F-23

F-1

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Emeritus Corporation:

We have audited the accompanying consolidated balance sheets of Emeritus
Corporation and subsidiaries ("the Company") as of December 31, 1999 and 2000,
and the related consolidated statements of operations, comprehensive
operations, cash flows and shareholders' equity (deficit) for each of the
years in the three-year period ended December 31, 2000. In connection with our
audits of the consolidated financial statements, we have also audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Emeritus
Corporation and subsidiaries as of December 31, 1999 and 2000 and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 20 to the consolidated financial statements, the Company has incurred
recurring net cash flow deficiencies from operations and has a working capital
deficiency at December 31, 2000 that reflects that approximately $81 million
of long-term debt matures in 2001 for which the Company has no alternative
financing commitment. These circumstances raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 20. The consolidated financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.

As discussed in Note 2 to the consolidated financial statements, in 1998 the
Company changed its method of accounting for start-up costs and organization
costs.

/s/ KPMG LLP

Seattle, Washington
March 9, 2001, except as to Notes 10 and 18,
which are as of April 2, 2001

F-2

EMERITUS CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31,
--------------------
1999 2000
--------- ---------
(In thousands,
except share data)

ASSETS

Current assets:
Cash and cash equivalents............................... $ 12,860 $ 7,496
Available for sale securities........................... 1,134 425
Current portion of restricted deposits.................. 381 361
Trade accounts receivable, net.......................... 1,895 1,817
Other receivables....................................... 9,309 4,969
Prepaid expenses and other current assets............... 2,714 3,072
Property held for sale.................................. 7,531 6,475
--------- ---------
Total current assets.................................. 35,824 24,615
--------- ---------
Property and equipment, net............................. 128,828 134,762
Property held for development........................... 2,204 310
Notes receivable from and investments in affiliates..... 2,915 4,380
Restricted cash......................................... 13,500 --
Restricted deposits, less current portion............... 6,148 5,907
Lease acquisition costs, net............................ 5,907 5,983
Other assets, net....................................... 3,044 2,122
--------- ---------
Total assets.......................................... $ 198,370 $ 178,079
========= =========

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:
Short-term borrowings................................... $ 1,000 $ 1,650
Current portion of long-term debt....................... 8,601 80,978
Trade accounts payable.................................. 3,634 3,143
Accrued employee compensation and benefits.............. 3,507 2,449
Accrued interest........................................ 2,797 2,991
Accrued real estate taxes............................... 2,034 1,806
Other accrued expenses.................................. 4,649 9,221
Other current liabilities............................... 2,774 3,544
--------- ---------
Total current liabilities............................. 28,996 105,782
--------- ---------
Deferred rent........................................... 1,887 2,132
Deferred gains on sales of communities.................. 18,590 17,709
Convertible debentures.................................. 32,000 32,000
Long-term debt, less current portion.................... 128,319 60,499
Other long-term liabilities............................. 285 256
--------- ---------
Total liabilities..................................... 210,077 218,378
--------- ---------
Minority interests...................................... 583 504
Redeemable preferred stock.............................. 25,000 25,000
Shareholders' deficit:
Preferred stock, $.0001 par value. Authorized 70,000
shares; issued and outstanding 30,000 and 30,609 at
December 31, 1999 and 2000, respectively............... -- --
Common stock, $.0001 par value. Authorized 40,000,000
shares; issued and outstanding 10,323,950 and
10,120,045 shares at December 31, 1999 and 2000,
respectively........................................... 1 1
Additional paid-in capital.............................. 66,916 66,373
Accumulated other comprehensive loss.................... (380) (1,087)
Accumulated deficit..................................... (103,827) (131,090)
--------- ---------
Total shareholders' deficit........................... (37,290) (65,803)
--------- ---------
Total liabilities and shareholders' deficit........... $ 198,370 $ 178,079
========= =========

See accompanying notes to consolidated financial statements.

F-3

EMERITUS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,
----------------------------
1998 1999 2000
-------- -------- --------
(In thousands, except per
share data)

Revenues:
Community revenue............................. $148,226 $116,063 $118,948
Other service fees............................ 2,796 1,683 1,684
Management fees............................... 798 4,896 4,560
-------- -------- --------
Total operating revenues.................... 151,820 122,642 125,192
-------- -------- --------
Expenses:
Community operations.......................... 110,569 78,193 76,836
General and administrative.................... 13,615 15,468 17,429
Depreciation and amortization................. 5,722 6,025 6,778
Rent.......................................... 41,499 25,135 24,668
-------- -------- --------
Total operating expenses.................... 171,405 124,821 125,711
-------- -------- --------
Loss from operations........................ (19,585) (2,179) (519)
-------- -------- --------
Other income (expense):
Interest income............................... 1,151 670 990
Interest expense.............................. (14,192) (13,751) (15,068)
Impairment of investment securities........... -- (7,429) --
Other, net.................................... 3,847 1,985 (7,339)
-------- -------- --------
Net other expense............................... (9,194) (18,525) (21,417)
-------- -------- --------
Loss before extraordinary item and cumulative
effect of change in accounting principle....... (28,779) (20,704) (21,936)
-------- -------- --------
Extraordinary loss on early extinguishment of
debt........................................... (937) (333) --
Cumulative effect of change in accounting
principle...................................... (1,320) -- --
-------- -------- --------
Net loss...................................... (31,036) (21,037) (21,936)
======== ======== ========
Preferred stock dividends....................... 2,250 2,250 5,327
-------- -------- --------
Net loss to common shareholders............... $(33,286) $(23,287) $(27,263)
======== ======== ========
Loss per common share before extraordinary item
and cumulative effect
of change in accounting principle--basic and
diluted........................................ $ (2.96) $ (2.19) $ (2.69)
Extraordinary loss per common share--basic and
diluted........................................ $ (.09) $ (.03) $ --
Cumulative effect of change in accounting
principle loss per common
share--basic and diluted....................... $ (.12) $ -- $ --
-------- -------- --------
Net loss per common share--basic and diluted.... $ (3.17) $ (2.22) $ (2.69)
======== ======== ========
Weighted average number of common shares
outstanding--basic and diluted................. 10,484 10,469 10,117
======== ======== ========

See accompanying notes to consolidated financial statements.

F-4

EMERITUS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS

Years Ended December 31,
----------------------------
1998 1999 2000
-------- -------- --------
(In thousands)

Net loss.......................................... $(31,036) $(21,037) $(21,936)
Other comprehensive income (loss):
Foreign currency translation adjustments........ (17) 20 1
Unrealized gains (losses) on investment
securities:
Unrealized holding losses arising during the
period....................................... (7,955) (3,409) (708)
Reclassification for (gains) losses included
in net loss.................................. (459) 7,429 --
-------- -------- --------
Total other comprehensive income (loss)..... (8,431) 4,040 (707)
-------- -------- --------
Comprehensive loss................................ $(39,467) $(16,997) $(22,643)
======== ======== ========

See accompanying notes to consolidated financial statements.

F-5

EMERITUS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,
----------------------------
1998 1999 2000
-------- -------- --------
(In thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(31,036) $(21,037) $(21,936)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 6,407 6,845 7,213
Amortization of deferred gains and income..... (2,345) (363) (190)
Provision for doubtful accounts............... 695 693 359
Extraordinary loss on early extinguishment of
debt......................................... 937 333 --
Cumulative effect of change in accounting
principle.................................... 1,320 -- --
Impairment of investment securities........... -- 7,429 --
Write off of property held for development.... -- -- 1,267
Other......................................... 317 (191) 526
Changes in operating assets and liabilities:
Trade accounts receivable..................... (771) (75) (281)
Other receivables............................. (3,026) (3,679) 3,664
Prepaid expenses and other current assets..... (12) 2,176 (55)
Trade accounts payable........................ 4,992 (3,480) (491)
Accrued employee compensation and benefits.... (515) 121 (909)
Accrued interest.............................. 508 477 194
Accrued real estate taxes..................... 975 (881) (228)
Other accrued expenses........................ (1,770) (322) 4,593
Other current liabilities..................... (157) (463) 691
Security deposits and other long-term
liabilities.................................. (768) (435) (14)
Deferred rent................................. 702 308 245
-------- -------- --------
Net cash used in operating activities....... (23,547) (12,544) (5,352)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment........... (28,612) (12,875) (11,441)
Acquisition of property held for development.... (1,780) (560) --
Proceeds from sale of property and equipment.... 33,182 3,705 565
Purchase of investment securities............... (557) (50) --
Proceeds from the sale of investment
securities..................................... 5,421 -- --
Construction advances--leased communities....... 25,613 17,295 --
Construction expenditures--leased communities... (22,586) (17,794) (197)
Change in restricted cash....................... -- (13,500) 13,500
Advances to (repayments from) and investments
in affiliates, net............................. (9,529) (1,000) (1,465)
Additions to lease acquisition costs............ -- -- (943)
Sale of investments in affiliates............... 4,092 8,177 --
-------- -------- --------
Net cash provided by (used in) investing
activities................................. 5,244 (16,602) 19
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease (increase) in restricted deposits...... (647) (39) 261
Proceeds from (repayment of) short-term
borrowings, net................................ (1,841) (6,324) 650
Proceeds from long-term borrowings.............. 105,179 27,355 7,879
jRepayment of long-term borrowings.............. (82,019) (17,700) (2,883)
Increase in lease acquisition and deferred
financing costs................................ (2,235) -- --
Proceeds from sale of preferred stock........... -- 28,981 --
Repurchase/retirement of common stock........... (5,406) (1,100) (1,400)
Payment of preferred stock dividends............ -- -- (4,024)
Other........................................... (806) (629) (514)
-------- -------- --------
Net cash provided by (used in) financing
activities................................. 12,225 30,544 (31)
Effect of exchange rate changes on cash.......... (17) 20 --
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (6,095) 1,418 (5,364)
Cash and cash equivalents at beginning of year... 17,537 11,442 12,860
-------- -------- --------
Cash and cash equivalents at end of year......... $ 11,442 $ 12,860 $ 7,496
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
--cash paid during the year for interest........ $ 12,999 $ 13,273 $ 13,659
======== ======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of business and controlling
interest in a partnership:
Assets acquired............................... $ 6,232 -- --
Liabilities assumed........................... 4,798 -- --
Transfer of property and equipment to property
held for sale................................ 1,450 6,307 270
Assumption of debt by buyer through
disposition of property...................... (14,800) -- --
Declared and issued Series B preferred stock
in-kind dividends............................ -- -- 609
Accrued but not issued Series B preferred
stock in-kind dividends...................... -- -- 615
Accrued preferred stock cash dividends........ 567 2,250 2,329
Transfer of other assets to property and
equipment.................................... -- -- 1,002

See accompanying notes to consolidated financial statements.

F-6

EMERITUS CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

Preferred stock Common stock Accumulated
---------------- ------------------ Additional other Total
Number Number paid-in comprehensive Accumulated shareholders'
of shares Amount of shares Amount capital income (loss) deficit equity (deficit)
--------- ------ ---------- ------ ---------- ------------- ----------- ----------------
(In thousands, except share data)

Balances at December 31,
1997................... -- $ -- 10,974,650 $ 1 $44,449 $ 4,011 $ (47,254) $ 1,207
Unrealized loss on
investment securities.. -- -- -- -- -- (8,414) -- (8,414)
Foreign currency
translation
adjustment............. -- -- -- -- -- (17) -- (17)
Repurchase of common
stock.................. -- -- (491,600) -- (5,466) -- -- (5,466)
Stock options
exercised.............. -- -- 1,000 -- 12 -- -- 12
Preferred stock
dividends.............. -- -- -- -- -- -- (2,250) (2,250)
Net loss for the year
ended December 31,
1998................... -- -- -- -- -- -- (31,036) (31,036)
------ ----- ---------- ---- ------- ------- --------- --------
Balances at December 31,
1998................... -- $ -- 10,484,050 $ 1 $38,995 $(4,420) $ (80,540) $(45,964)
Unrealized loss on
investment securities.. -- -- -- -- -- (3,409) -- (3,409)
Write-down for
impairment of
investment securities.. -- -- -- -- -- 7,429 -- 7,429
Foreign currency
translation
adjustment............. -- -- -- -- -- 20 -- 20
Repurchase of common
stock.................. -- -- (163,700) -- (1,100) -- -- (1,100)
Proceeds from issuance
of preferred stock..... 30,000 -- -- -- 28,981 -- -- 28,981
Stock options
exercised.............. -- -- 3,600 -- 40 -- -- 40
Preferred stock
dividends.............. -- -- -- -- -- -- (2,250) (2,250)
Net loss for the year
ended December 31,
1999................... -- -- -- -- -- -- (21,037) (21,037)
------ ----- ---------- ---- ------- ------- --------- --------
Balances at December 31,
1999................... 30,000 $ -- 10,323,950 $ 1 $66,916 $ (380) $(103,827) $(37,290)
Unrealized loss on
investment securities.. -- -- -- -- -- (708) -- (708)
Additional costs from
issuance of preferred
stock.................. -- -- -- -- (516) -- -- (516)
Foreign currency
translation
adjustment............. -- -- -- -- -- 1 -- 1
Repurchase of common
stock.................. -- -- (260,200) -- (1,400) -- -- (1,400)
Issuances of shares
under Employee Stock
Purchase Plan.......... -- -- 56,295 -- 149 -- -- 149
Preferred stock
dividends.............. 609 -- -- -- 1,224 -- (5,327) (4,103)
Net loss for the year
ended December 31,
2000................... -- -- -- -- -- -- (21,936) (21,936)
------ ----- ---------- ---- ------- ------- --------- --------
Balances at December 31,
2000................... 30,609 $ -- 10,120,045 $ 1 $66,373 $(1,087) $(131,090) $(65,803)
====== ===== ========== ==== ======= ======= ========= ========

See accompanying notes to consolidated financial statements.

F-7

EMERITUS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Description of Business and Summary of Significant Accounting Policies

Description of Business

Emeritus Corporation ("Emeritus" or the "Company") is a nationally
integrated assisted living company focused on operating residential style
communities. These communities provide a residential housing alternative for
senior citizens that need help with the activities of daily living, with an
emphasis on assisted living and personal care services. The Company also
provides management services to third party and related-party owners of
assisted living communities.

Basis of Presentation and Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. In addition, the accounts of limited
liability companies and partnerships are consolidated where the Company
maintains effective control over such entities' assets and operations,
notwithstanding a lack of technical majority ownership. All significant inter-
company balances and transactions are eliminated in consolidation.

Revenue Recognition

Operating revenue consists of resident fee revenue and management services
revenue. Resident units are rented on a month-to-month basis and rent is
recognized in the month the unit is occupied. Service fees paid by residents
for assisted living and other related services and management fees are
recognized in the period services are rendered. Management services revenue is
comprised of revenue from management contracts and is recognized in the month
in which it is earned in accordance with the terms of the management contract.
The Securities and Exchange Commission recently issued Staff Accounting
Bulletin (SAB) 101, "Revenue Recognition", which became effective in the
fourth quarter of 2000. Adoption of SAB 101 did not have an impact on current
revenue recognition policies.

Cash and Cash Equivalents

Cash and cash equivalents consist primarily of money market investments,
commercial paper and certificates of deposit with a maturity date from
purchase of three months or less. Cash equivalents at December 31, 2000 were
insignificant.

Property and Equipment

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

For long-lived assets, including property and equipment, the Company
evaluates the carrying value of the assets by comparing the estimated future
cash flows to be generated from the use of the assets and their eventual
disposition with the assets' reported net book values. The carrying values of
assets are evaluated for impairment when events or changes in circumstances
occur which may indicate the carrying amount of the assets may not be
recoverable. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceed discounted future cash flows expected to be generated by such
assets. Assets to be disposed of are reported at the lower of their carrying
amount or fair market value less costs to sell.

F-8

EMERITUS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Investments

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

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

Intangible Assets

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

Income Taxes

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

Deferred Rent

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

Deferred Gains on Sales of Communities

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

Community Operations

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

Stock-Based Compensation

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

F-9

EMERITUS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Net Loss Per Share

Basic net loss per share is computed based on weighted average shares
outstanding and excludes any potential dilution. Diluted net loss per share is
computed on the basis of the weighted average number of shares outstanding
plus dilutive potential common shares using the treasury stock method. The
capital structure of the Company includes convertible debentures, redeemable
and non-redeemable convertible preferred stock, as well as stock options and
common stock warrants. The assumed conversion and exercise of these securities
have been excluded from the calculation of diluted net loss per share, as
their effect is anti-dilutive.

Comprehensive Income (Loss)

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

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.

Foreign Currency Translation

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

Reclassifications

Certain reclassifications of 1998 and 1999 amounts have been made to conform
to the 2000 presentation.

(2) Change in Accounting Principle

In April 1997, the Accounting Standards Executive Committee issued Statement
of Position 98-5 ("SOP 98- 5"), Reporting on the Costs of Start-Up Activities.
This statement provides guidance on financial reporting for start-up costs and
organization costs and requires such costs to be expensed as incurred. The
Company elected early adoption of this statement effective January 1, 1998 and
has reported a charge of $1,320,000 for the cumulative effect of this change
in accounting principle.

(3) Restricted Deposits

Restricted deposits consist of funds required by various Real Estate
Investment Trusts ("REITs") to be placed on deposit until the Company's
communities meet certain debt coverage and/or cash flow coverage ratios, at
which time the funds will be released to the Company. As of December 31, 1999
and 2000, the Company had $6.5 million and $6.3 million in restricted
deposits, respectively.

F-10

EMERITUS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(4) Property and Equipment

Property and equipment consist of the following:

December 31,
-----------------
1999 2000
-------- --------
In thousands

Land and improvements................................. $ 11,456 $ 13,492
Buildings and improvements............................ 112,256 118,610
Furniture and equipment............................... 12,007 13,385
Vehicles.............................................. 2,878 3,323
Leasehold improvements................................ 2,832 3,635
-------- --------
141,429 152,445
Less accumulated depreciation and amortization........ 13,789 20,075
-------- --------
127,640 132,370
Construction in progress.............................. 1,188 2,392
-------- --------
$128,828 $134,762
======== ========

(5) Property Held for Development

Property held for development is recorded at cost. Interest costs
capitalized on property held for development and construction in progress was
$0.1 million for 1998. There were no capitalized interest costs in 1999 and
2000.

(6) Investment Securities

In 1997, the Company purchased common stock of ARV Assisted Living, Inc.
("ARV") in market transactions and initiated a tender offer that was
terminated in January 1998, for all of the remaining outstanding common stock
of ARV. During 1998, the Company sold a portion of the ARV common stock in
market transactions realizing gains of approximately $450,000, which are
included in other income, net. In 1999, the Company wrote down its investment
in ARV by $7,429,000 as management concluded the decline in the fair market
value of this investment was other than temporary. Details regarding the ARV
investment as of December 31, as follows:

Gross Fair
Amortized Unrealized Market
Cost Losses Value
--------- ---------- ------
In thousands

1998......................................... $8,890 $(4,399) $4,491
====== ======= ======
1999......................................... $1,512 $ (378) $1,134
====== ======= ======
2000......................................... $1,512 $(1,087) $ 425
====== ======= ======

In September 1999, the Company prevailed in a claim against ARV and settled
for $5.0 million. The settlement terms provided for $1.5 million to be paid
immediately with the remaining balance of $3.5 million to be paid through
2001, with a discount provision for early payment. As of December 31, 1999,
the Company collected $4.3 million as full settlement on this claim. The
settlement, net of all related legal costs, is included in other income.

F-11

EMERITUS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(7) Financial Instruments

The Company has financial instruments other than investment securities
consisting of cash and cash equivalents, trade accounts receivable, other
receivables, notes receivable from affiliates, short-term borrowings, accounts
payable, convertible debentures, redeemable preferred stock and long-term
debt. The fair value of the Company's financial instruments based on their
short-term nature or current market indicators such as prevailing interest
rates approximates their carrying value with the exception of the following:
long term debt had an estimated fair value, based on the Company's incremental
borrowing rate, of $132.1 million versus a carrying value of $141.5 million;
and the convertible debentures that had an estimated fair value, based on the
Company's incremental borrowing rate, of $28.8 million versus a book value of
$32.0 million at December 31, 2000.

(8) Notes Receivable From and Investments in Affiliated Companies

In November 1996, the Company agreed to purchase up to 6,888,466 shares of
convertible preferred stock of Alert Care Corporation ("Alert"), an Ontario,
Canada-based owner and operator of assisted living communities at prices
ranging from $0.67 to $0.74 per share (Cdn). In addition, the Company acquired
an option to purchase an additional 4,000,000 shares of convertible preferred
stock at an exercise price of $1.00 per share (Cdn), as well as an option to
purchase from Eclipse Capital Management ("Eclipse"), the majority shareholder
of Alert, and certain other shareholders of Alert, 9,050,000 currently issued
and outstanding shares of common stock of Alert and 950,000 currently issued
and outstanding shares of Class A non-voting stock of Alert both at an
exercise price of $3.25 per share (Cdn). There was no cost in acquiring the
option to purchase additional shares from Alert and the Company assigned no
value to the option.

In September 1999, the Company sold 38.9% of its holdings in Alert, or
4,235,613 shares, to an entity in which a principal shareholder and a Board
member of the Company are investors at a price per share equal to the
Company's cost basis of $0.85 per share (Cdn) or $0.59 per share (US).
Subsequently, in November 1999, Alert repurchased all of its preferred stock
for $1.10 per share (Cdn). The Company realized a gain of $760,000 on this
transaction, which is included in other income for 1999. Prior to its
disposition, the investment in Alert was accounted for under the cost method,
as the Company's equity ownership consisted of non-voting preferred stock.

During 1998, the Company sold its interest in a community located in Texas
to a partnership in which the principal shareholder of the Company is a
partner. Pursuant to the purchase and sale agreement, the Company advanced
funds to the partnership of $1.0 million, which was subsequently repaid in
1999, and $800,000, subject to promissory notes bearing interest at 9% and
payable in 10 years and on demand, respectively. The $1.0 million note
contains additional funding provisions whereby the Company funds 20% of the
losses generated by the community up to $500,000, of which $500,000 is
outstanding at December 31, 2000. In addition, the Company has advanced the
partnership $450,000 under a repair note, bearing interest at 9% and due June
2008. At December 31, 2000, the Partnership's obligations to the Company were
$1.75 million.

In January 2000, the Company purchased a 30% equity interest in Senior
Healthcare Partners, LLC, a pharmaceutical supply limited liability company.
The Company has cash funding obligations of up to $1.8 million. At December
31, 2000, the Company had funded the entire $1.8 million and during 2000
recognized its share of partnership losses of $557,000 which is included in
other expenses.

(9) Convertible Debentures

The Company has $32.0 million of 6.25% convertible subordinated debentures
(the "Debentures") which are due in 2006. The Debentures are convertible into
common stock at the rate of $22 per share, which equates to an aggregate of
approximately 1,454,545 shares of the Company's common stock and bear interest
payable

F-12

EMERITUS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

semiannually on January 1 and July 1 of each year. The Debentures are
unsecured and subordinated to all other indebtedness of the Company.

The Debentures are subject to redemption, as a whole or in part, at any time
or from time to time commencing after July 1, 1999 at the Company's option on
at least 30 days' and not more than 60 days' prior notice. Through June 30,
2001, the redemption price of the debentures is 101% of the principal amount.
For the period beginning July 1, 2001, and thereafter, the redemption price is
100% of the principal amount.

(10) Long-term Debt

Long-term debt consists of the following:

December 31,
-----------------
1999 2000
-------- --------
In thousands

Notes payable, interest only at LIBOR* plus 2.95% (9.5% at
December 31, 2000) payable monthly, unpaid principal and
interest due April 2001.................................... $ 73,235 $ 73,235
Notes payable, interest only at LIBOR plus 3.25% (9.8% at
December 31, 2000), payable monthly, unpaid principal and
interest due on demand..................................... 5,270 5,270
Note payable, interest at 7.82% payable in monthly
installments, unpaid principal and interest due July 2004.. 12,696 12,428
Note payable, interest at 8.38% payable in monthly
installments, unpaid principal and interest due February
2003....................................................... 5,913 5,818
Note payable, interest only at LIBOR plus 2.9% (9.5% at
December 31, 2000) payable in monthly installments, unpaid
principal and interest due February 2003................... -- 6,800
Notes payable, interest at 7.43%, payable in monthly
installments, unpaid principal and interest due October
2009....................................................... 25,851 25,480
Notes payable, interest at rates from 8.0% to 10.5%, payable
in monthly installments, due through July 2009............. 13,515 12,446
Other....................................................... 440 --
-------- --------
Subtotal.................................................. 136,920 141,477
-------- --------
Less current portion........................................ 8,601 80,978
-------- --------
Long-term debt, less current portion...................... $128,319 $ 60,499
======== ========

- --------
* LIBOR is the London Interbank Offering Rate.

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

During 1998 and 1999, the Company consolidated approximately $60.3 million
and $15.9 million, respectively, of outstanding debt through refinancings and
wrote off $937,000 and $333,000, respectively, of related deferred costs as
extraordinary items. No additional refinancing or write-offs of deferred costs
occurred during 2000.

Certain of the Company's indebtedness includes restrictive provisions
related to cash dividends, investments and borrowings, and require maintenance
of specified operating ratios, levels of working capital and net worth. As of
December 31, 2000, the Company was in compliance with such covenants or
obtained waivers for noncompliance.

F-13

EMERITUS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Principal maturities of long-term debt at December 31, 2000 are as follows:

In thousands

2001........................................................ $ 80,978
2002........................................................ 2,901
2003........................................................ 15,443
2004........................................................ 13,219
2005........................................................ 683
Thereafter.................................................. 28,253
--------
Total..................................................... $141,477
========

(11) Short-term Borrowings

In September 1999, the Company's majority shareholder repaid the Company's
bank line of credit that totaled $5.0 million. Through December 1999, the
Company repaid $4.0 million to the majority shareholder and repaid the
remaining balance of $1.0 million in January 2000. Interest expense on the
shareholder loan totaled $41,000 for 1999.

In December 2000, we entered into a 9% demand note payable with a related
party investor group for $1.65 million. The note was repaid in full on January
3, 2001.

(12) Margin Loan on Equity Securities

In 1997, the Company opened a margin account to facilitate the acquisition
of marketable securities. This account had a balance of $2,324,000 at December
31, 1998, secured by marketable equity securities with a market value of
$4,491,000. This loan was due upon the sale of the securities and bore
interest at 3.75% under broker call. Due to the impairment in value of the
securities, the Company paid the loan in full as of December 31, 1999.

(13) Income Taxes

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

F-14

EMERITUS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The tax effect of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets and liabilities are comprised of
the following:

December 31,
------------------
1999 2000
-------- --------
In thousands

Gross deferred tax liabilities-depreciation and
amortization....................................... $ (1,749) $ (1,919)
-------- --------
Gross deferred tax assets:
Net operating loss carryforwards.................. 24,992 29,612
Deferred gains on sale/leaseback.................. 6,320 6,320
Impairment of investment securities............... 2,411 2,411
Unearned rental income............................ 177 411
Vacation accrual.................................. 362 409
Health insurance accrual.......................... 395 500
Other............................................. 850 794
-------- --------
Gross deferred tax assets....................... 35,507 40,457
Less valuation allowance............................ (33,758) (38,538)
-------- --------
Deferred tax assets, net............................ 1,749 1,919
-------- --------
Net deferred tax assets....................... $ -- $ --
======== ========

The increase in the valuation allowance was $11,856,000, $7,122,000 and
$4,780,000 for 1998, 1999 and 2000, respectively. The increases were primarily
due to the impairment of investment securities and the amount of net operating
loss carryforwards, for which management does not believe that it is more
likely than not that realization is assured.

For federal income tax purposes, the Company has net operating loss
carryforwards at December 31, 2000, available to offset future federal taxable
income, if any, of approximately $87,095,000 expiring beginning in 2012.

(14) Related-Party Management Agreements

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

A number of limited partnerships which are partly owned indirectly by Mr.
Baty, the Company's Chairman and Chief Executive Officer, develop, own and
lease senior housing projects, some of which cater to low income seniors. The
Company has agreements with these partnerships to provide certain
administrative support, due diligence and financial support services with
respect to the acquisition, development and administration of these
communities. The agreements have terms ranging from two to four years, with
options to renew, and provide for management fees ranging from 4% to 7% of
gross operating revenues and fixed administrative fees. Management fee revenue
earned under these agreements was approximately $774,000 and $1,731,000 in
1999 and 2000, respectively.

F-15

EMERITUS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In 1998, the Company and XL Management Company L.L.C., ("XL Management"), an
affiliate of Holiday Retirement Corp., an owner and operator of independent
living communities, entered into four management agreements whereby XL
Management was to provide management services relating to four newly developed
assisted living communities located in Texas. The agreements had initial terms
of two years six months with management fees based upon 6% of gross revenues
payable monthly. XL Management ceased management of these buildings during
2000. Total fees in 2000 amounted to $150,000 as compared to $316,000 in 1999.
The Company's Chairman and Chief Executive Officer and former member of the
Company's board of directors are principal shareholders and officers of
Holiday.

(15) Shareholders' Deficit

In December 1997, the Company purchased 25,600 shares of its common stock at
an aggregate cost of $341,000. In January 1998 and subsequently in August
1999, the Company's board of directors authorized a stock repurchase program
to acquire up to aggregate 1,000,000 shares of the Company's common stock. In
March 2000, the stock repurchase plan was discontinued. At December 31, 2000,
the Company had acquired a total of 941,100 shares of its common stock at a
cumulative cost of $8.3 million.

Preferred Stock

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

The Series B Stock is entitled to receive quarterly dividends payable in a
combination of cash and additional shares of Series B Stock. From issuance to
January 1, 2004, the dividend rate will be 6% of the stated value of $1,000,
of which 2% is payable in cash and 4% is payable in Series B Stock at the rate
of one share of Series B Stock for every $1,000 of dividend. After January 1,
2004, the dividend rate will be 7%, of which 3% is payable in cash and 4% is
payable in Series B Stock. Dividends accumulate, whether or not declared or
paid. Prior to January 1, 2007, however, if the cash portion of the dividend
is not paid, the dividend rate will increase to 7% ("default rate"), payable
entirely in cash, until the unpaid cash dividends have been fully paid or
until January 1, 2007, whichever first occurs. Beginning January 10, 2003, the
Company can redeem all of the Series B Stock at $1,000 per share plus unpaid
dividends, if the closing price for the common stock on the American Stock
Exchange is at least 175% of the then conversion price for 30 consecutive
trading days. For the year ended December 31, 2000, the Company paid two
quarterly dividends consisting of $305,000 of cash dividends and 609,000
shares of Series B Stock. Additionally, there are accumulated dividends for
two quarters of $1.309 million, including one quarter accrued at the default
rate.

F-16

EMERITUS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

1995 Stock Incentive Plan

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

The Company has authorized 2,500,000 shares of common stock to be reserved
for grants under the 1995 Plan of which 1,156,210 remained available for
future awards at December 31, 2000. Options generally vest between three-year
to five-year periods, at the discretion of the Compensation Committee of the
Board of Directors, in cumulative increments beginning one year after the date
of the grant and expire not later than ten years from the date of grant. The
options are granted at an exercise price equal to the fair market value of the
common stock on the date of the grant.

In November 1998, the Company offered, at the election of individual
employees, a repricing of options granted to date at an exercise price of
$9.8125 which was equal to the fair market value of the stock on the grant
date. A total of 1,005,666 shares were forfeited and reissued under the
repricing transaction.

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

Year ended December 31,
----------------------------
1998 1999 2000
-------- -------- --------
In thousands, except per
share data

Net loss to common shareholders:
As reported.............................. $(33,286) $(23,287) $(27,263)
Pro forma................................ (34,676) (25,055) (29,043)
Net loss per common share--basic and
diluted:
As reported.............................. $ (3.17) $ (2.22) $ (2.69)
Pro forma................................ (3.31) (2.39) (2.87)

The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions
used for grants in 1998, 1999 and 2000: dividend yield of 0.0% for all
periods; expected volatility of 48.9% for 1998, 50.2% for 1999, and 48.0% to
49.6% for 2000; risk-free interest rates of 4.51% to 4.70% for 1998, 6.47% to
6.63% for 1999, and 6.06% to 6.69% for 2000; and an expected option term of 2
to 5 years for 1998, giving effect to the option repricing, 4 years for 1999.

F-17

EMERITUS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

1998 1999 2000
--------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- --------- --------- --------- ---------

Outstanding at beginning
of year................ 1,089,650 $12.86 1,443,366 $9.84 1,785,083 $9.23
Granted................. 1,471,666 $ 9.79 459,750 $7.45 16,000 $2.73
Exercised............... (1,000) $10.50 (3,600) $9.81 -- --
Canceled................ (1,116,950) $12.80 (114,433) $9.75 (457,293) $9.27
---------- ------ --------- ----- --------- -----
Outstanding at end of
year................... 1,443,366 $ 9.84 1,785,083 $9.23 1,343,790 $9.14
Options exercisable at
year-end............... 308,352 $10.06 616,644 $9.97 785,605 $9.42
Weighted-average fair
value of options
granted during the
year................... $ 4.11 $3.44 $1.24

The following is a summary of stock options outstanding at December 31,
2000:

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

$ 2.56 - 3.00 16,000 9.55 $ 2.73 10,000 $ 2.56
$ 6.50 - 7.81 324,837 8.86 $ 7.26 107,196 $ 7.26
$ 9.63 - 9.81 967,453 7.86 $ 9.76 644,969 $ 9.76
$10.25 - 15.00 35,500 7.30 $12.25 23,440 $12.89
--------- ---- ------ ------- ------
1,343,790 8.11 $ 9.14 785,605 $ 9.42
========= ==== ====== ======= ======

Employee Stock Purchase Plan

In July 1998, the Company adopted an Employee Stock Purchase Plan (the Plan)
to provide substantially all employees who have completed six months of
service an opportunity to purchase shares of its common stock through payroll
deductions, at a price equal to 85% of the fair market value. A total of
200,000 shares are available for purchase under the Plan. Quarterly,
participant account balances are used to purchase shares of stock on the open
market at the lesser of the fair market value of shares on the first or last
day of the participation period. Employees may not exceed $25,000 in annual
purchases, nor 15% of eligible compensation. The Employee Stock Purchase Plan
expires in May 2008. At December 31, 2000, employees purchased an aggregate of
56,295 common shares through the Employee Stock Purchase Plan.

(16) Redeemable Preferred Stock

The Company has authorized 5,000,000 shares of preferred stock, $0.0001 par
value. Pursuant to such authority, in October 1997, the Company sold 25,000
shares of Series A cumulative convertible, exchangeable, redeemable preferred
stock for $25,000,000. The Series A redeemable Preferred Stock is entitled to
receive quarterly dividends payable in cash. The dividend rate is 9% of the
stated value of $25,000,000. Dividends accumulate, whether or not declared or
paid. If cash dividends are not paid quarterly, the dividend rate will
increase to 11% ("default rate") until the unpaid cash dividends have been
fully paid. The preferred stock has a mandatory redemption date of October 24,
2004 at a price equal to $1,000 per share, plus any accrued but unpaid

F-18

EMERITUS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

dividends. Each share of preferred stock may be converted, at the option of
the holder, into 55 shares of common stock. The preferred stock is also
exchangeable in whole only, at the option of the Company, into 9% subordinated
convertible notes due October 24, 2004. The 9% subordinated notes would
contain the same conversion rights, restrictions and other terms as the
preferred stock. For the year ended December 31, 2000, the Company paid
dividends outstanding from 1999 of $2.6 million and two quarters of dividends
for 2000 of $1.1 million. Additionally, there are accumulated dividends for
two quarterly payments of $1.4 million, accrued at the default rate of 11%.

The Company may redeem the preferred stock, in whole or in part, after
October 24, 2001 for $1,050 per share plus accrued dividends, provided that
the market price of common stock is at least 130% of the conversion price for
the preferred stock. In the event of liquidation of the Company, the holders
of outstanding preferred stock are entitled to receive a distribution of
$1,000 per share plus accrued dividends.

(17) Leases

At December 31, 2000, the Company leases office space and 40 assisted living
communities. The office lease expires in 2006 and contains two five-year
renewal options. The community leases expire from 2004 to 2017 and contain two
to six extension options, ranging from five to ten years.

Minimum lease payments under noncancelable operating leases at December 31,
2000 are as follows:

In thousands

2001......................................................... $ 26,305
2002......................................................... 26,611
2003......................................................... 26,836
2004......................................................... 26,792
2005......................................................... 25,205
Thereafter................................................... 132,764
--------
$264,513
========

Rent expense under noncancelable operating leases was approximately
$42,217,000, $25,135,000 and $24,240,000 for 1998, 1999 and 2000,
respectively. A number of operating leases provide for additional lease
payments after 24 months computed at 5% of additional revenues of the
community. In 2000, additional rent under this provision was not significant.

(18) Sales and Acquisitions

In 1998, the Company entered into a sale/leaseback transaction with a REIT,
pursuant to which the REIT acquired a community previously owned by the
Company and leased the community back to the Company. The Company has no
continuing involvement outside of leasing and operating the community.

In 1998, the Company acquired two communities that it previously leased from
a REIT for an aggregate purchase price of $13.5 million. These acquisitions
were financed through borrowings.

In 1998 the Company sold interests in three assisted living communities for
an aggregate sales price of $25 million, including the assumption of a $14.8
million mortgage obligation and $1.8 million in notes receivable, to
partnerships in which the Company's principal shareholder is a partner and
realized cumulative gains of $475,000 which are included in other income, net.
The Company retains management interests in each community through management
contracts and a residual economic interest in two of the communities.

F-19

EMERITUS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

In December 1998 the Company disposed of its leasehold interest in the
Emeritrust communities, comprised of 22 leased communities and three owned
communities. The Emeritrust communities were sold to an entity in which a
principal shareholder of the Company is an investor. Pursuant to the
transaction, the Company manages all 25 communities under a three-year
management contract and receives management fees of 5% of revenues, which is
currently payable. In addition, the Company receives 2% of revenues,
contingent upon the communities achieving positive cash flows as defined in
the management agreement. The management agreement provides the Company an
option to purchase the 22 previously leased communities at a formula price and
a right of first refusal on the three previously owned communities. The
management agreement further stipulates a cash shortfall funding requirement
by the Company to the extent the Emeritrust communities generate cash
deficiencies in excess of $4.5 million. In 1999, the Emeritrust communities
incurred $6.4 million in cash operating losses, which included $1.9 million of
management fees earned by the Company. The funding obligation was $1.9
million, net of the $4.5 million of cash operating losses funded by the
Emeritrust investor group. In 2000, the Emeritrust communities incurred $4.9
million in cash operating losses, which represented the gross increase to the
funding obligation and included $2.1 million in management fees earned by the
Company. Previously deferred gains and the gain on this transaction,
collectively totaling approximately $13 million, have been deferred, given the
continuing financial involvement of the Company as stipulated in the
management agreement.

In March 1999, the Company completed a disposition of its leasehold
interests in the Emeritrust II communities, comprised of 21 additional
communities, consisting of 16 currently operational communities and five
development communities. The Emeritrust II communities were sold to an entity
in which a principal shareholder of the Company is an investor. Pursuant to
the transaction, the Company manages all 21 communities pursuant to a three
year management contract and receives management fees of 5% of revenues
currently payable as well as 2% of revenues which is contingent upon the
communities achieving positive cash flows. The management agreement provides
the Company an option to purchase the 19 previously leased communities at a
formula price. The management agreement further stipulates a cash shortfall
funding requirement by the Company to the extent the development communities
generate cash deficiencies in excess of $2.3 million. In 1999, the 21
Emeritrust II communities did not generate cash operating losses in excess of
the amounts funded by the Emeritrust II investor group, and therefore, no
funding requirement was required by the Company. They additionally earned $1.5
million in management fees. In 2000, the five Emeritrust II development
communities incurred aggregate cash operating losses of $1.6 million,
including $360,000 in management fees earned by the Company. The 16 remaining
Emeritrust operating communities are not subject to a deficit funding
obligation and we earned $1.9 million in management fees.

The Company has certain rights to re-acquire the Emeritrust and Emeritrust
II communities. They have an option to purchase 22 of the Emeritrust
communities as a group and have an option to purchase all 21 of the Emeritrust
II communities as a group, for which they must give notice of their intent to
exercise by December 12, 2001. The Company also has the right of first refusal
through December 31, 2001 to re-purchase the three Emeritrust communities they
had previously owned.

F-20

EMERITUS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Although the funding obligations described above include management fees
earned by the Company under the management agreements, we do not recognize
these management fees as revenue in our financial statements to the extent we
are funding the cash operating losses that include them. Correspondingly, the
Company recognizes the funding obligation under the agreement, less the
applicable management fees, as additional expense in the financial statements
under the category "Other, net."

In March 2001, in connection with a restructuring of the mortgage loan on
the Emeritrust I communities, the management agreement with the Company was
amended (1) to extend to December 2001 the period to give notice of the
Company's intent to purchase all of the Emeritrust I communities and (2) to
modify the calculation of management fees on the Emeritrust I communities to
3% of revenue, payable out of cash flows, and an additional 4% of revenue,
payable out of 50% of cash flows. The Company remains obligated to fund cash
operating deficits.

In September 1999, the Company acquired a community that it previously
leased for a purchase price of $8.0 million. This acquisition was financed
through borrowings.

(19) Commitments and Contingencies

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

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

(20) Liquidity

The Company has incurred significant operating losses since its inception,
including net losses in excess of $20 million in each of 1999 and 2000. To
date, the Company has been unable to stabilize operations and occupancy at
levels that would generate positive cash flow or earnings, and, therefore, is
dependent on third party financing or disposition of assets to fund
operations. The Company cannot guarantee that third party financing or
disposition of assets will be available timely or at all, or on terms
attractive to the Company. In addition, as of December 31, 2000, the Company's
working capital deficit was approximately $81 million, due in part to
$73.2 million of mortgage debt that matures on April 29, 2001. The Company has
been in discussions with the lender regarding an extension of the debt's
maturity, but has reached no agreement at this time and has no alternative
commitment for refinancing. If the Company is unable to extend the maturity of
this debt, the lender could declare the entire amount immediately due and
payable at maturity and could begin foreclosure proceedings with respect to
the ten assisted living properties that secure this debt. In addition, many of
the Company's debt instruments and leases contain "cross-default" provisions
pursuant to which a default under one obligation can cause a default under one
or more other obligations. Such cross-default provisions affect 35 assisted
living properties owned or leased by the Company. Accordingly, the inability
to extend the debt due in April could have a further material adverse effect
on the Company's financial condition if any other lender or lessor notifies
the Company that it is in default under any debt instrument or lease.

The foregoing factors raise doubt about the Company's ability to continue as
a going concern. The Company is pursuing several initiatives to mitigate this
doubt, including continued discussions regarding extension of the debt due in
April and conducting advance discussions with other lenders and lessors that
may be affected by cross-default provisions. The Company is taking further
steps to stabilize operations at positive cash flow levels, including
implementing rate increases and pursuing additional programs to increase
occupancy, and if necessary, the sale of selected assets.

F-21

EMERITUS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(21) Quarterly Results (Unaudited)

Q1 Q2 Q3 Q4
------- ------- ------- --------

2000
Total operating revenue................... $30,566 $30,350 $30,822 $ 33,454
Income (loss) from operations............. (748) 622 535 (928)
Loss before extraordinary item and
cumulative effect of change in accounting
principle................................ (5,298) (3,582) (4,941) (8,115)
Net loss.................................. (5,298) (3,582) (4,941) (8,115)
Net loss to common shareholders........... $(6,373) $(4,671) $(6,503) $ (9,716)
Loss per common share--basic and diluted:
Loss before extraordinary item and
cumulative effect of change in
accounting principle................... $ (0.63) $ (0.46) $ (0.64) $ (0.96)
Loss per common share................... $ (0.63) $ (0.46) $ (0.64) $ (0.96)

1999
Total operating revenue................... $34,179 $28,884 $29,854 $ 29,725
Income (loss) from operations............. (35) 533 (469) (2,208)
Loss before extraordinary item and
cumulative effect of change in accounting
principle................................ (2,956) (2,008) (1,267) (14,473)
Net loss.................................. (2,956) (2,008) (1,600) (14,473)
Net loss to common shareholders........... $(3,511) $(2,569) $(2,167) $(15,040)
Loss per common share--basic and diluted:
Loss before extraordinary item and
cumulative effect of change in
accounting principle................... $ (0.33) $ (0.24) $ (0.17) $ (1.45)
Loss per common share................... $ (0.33) $ (0.24) $ (0.20) $ (1.45)

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

F-22

EMERITUS CORPORATION

VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1998, 1999 and 2000

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

Year ended December 31,
1998:
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables.............. $348 $695 $505 $538
==== ==== ==== ====
Year ended December 31,
1999:
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables.............. $538 $693 $648 $583
==== ==== ==== ====
Year ended December 31,
2000:
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables.............. $583 $359 $348 $594
==== ==== ==== ====

- --------
(1) Represents amounts written off

F-23