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                                                                   EXHIBIT 10.12

                              EMPLOYMENT AGREEMENT

                  THIS AGREEMENT ("Agreement") is made and entered into this
23rd day of October, 1997, by and between Gary Anderson, a resident of the State
of Kansas (the "Employee"), and Alternative Living Services, Inc., a Delaware
corporation (the "Company").

                              W I T N E S S E T H:

                  WHEREAS, the Company, Tango Merger Corporation, a Kansas
corporation and a wholly owned subsidiary of the Company ("Merger Sub"), and
Sterling House Corporation, a Kansas corporation ("Sterling"), have entered into
that certain Agreement and Plan of Merger, dated as of July 30, 1997, as amended
as of September 2, 1997 (the "Merger Agreement"), whereby Merger Sub will be
merged with and into Sterling, with Sterling as the surviving corporation, and
Sterling will become a wholly owned subsidiary of the Company (the "Merger");

                  WHEREAS, the Employee has been an employee and officer
of Sterling;

                  WHEREAS, after the Merger, Sterling, as a wholly owned
subsidiary of the Company, will continue to carry on the business previously
carried on by Sterling;

                  WHEREAS, the Company desires to employ the Employee as an
executive officer of the Company effective as of the Effective Time (as defined
in the Merger Agreement);

                  WHEREAS, the Company, on the one hand, and the Employee, on
the other hand, desires to enter into this Agreement, pursuant to which the
Employee will be employed by the Company on the terms and conditions hereinafter
set forth, and to make certain other agreements;

                  NOW THEREFORE, in consideration of the premises and of the
promises and agreements hereinafter set forth, the parties hereto, intending to
be legally bound, hereby agree as follows:

SECTION l.  Employment; Effective Date.

                  Subject to the terms and conditions hereof, the Company hereby
employs the Employee, and the Employee hereby accepts such employment,
commencing on the Closing Date (as defined in the Merger Agreement).






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SECTION 2.  Position.

                  2.1. Title. The Employee shall serve as an officer of the
Company with the title of Senior Vice President of Operations and, as such,
shall report directly to the Executive Vice President of Operations of the
Company; provided, however, that at no time shall the Employee be requested to
perform duties which are not commensurate with the Employee's status as an
executive of the Company. The Employee also consents to serve, without
additional compensation, if elected, as a director of the Company and its
subsidiaries.

                  2.2. Location.  The Employee's location of employment
shall be at Sterling's principal executive offices in Wichita,
Kansas.

                  2.3. Responsibilities. The Employee shall have such additional
responsibilities as directed by the Executive Vice President of Operations of
the Company from time to time. The Employee agrees to devote the Employee's time
during normal business hours to the business and affairs of the Company (except
as otherwise provided herein), to use the Employee's best efforts to promote the
interests of the Company and to perform faithfully and efficiently the
responsibilities assigned to the Employee in accordance with the terms of this
Agreement, to the extent necessary to discharge such responsibilities. This
shall not preclude the Employee from (i) performing services on civic or
charitable boards or committees not significantly interfering with the
performance of the Employee's responsibilities under this Agreement, and (ii)
taking periods of vacation and sick leave to which the Employee is entitled.

SECTION 3.  Term.

                  3.1. Term. The initial term of employment of the Employee (the
"Initial Term") hereunder shall commence on the Closing Date and shall continue
until the earlier (a) the first anniversary date of the Closing Date or (b) the
occurrence of any of the following events:

                           (i) the death or disability of the Employee
                  (disability meaning a physical illness or incapacity that
                  prevents the Employee from performing all of the substantial
                  and material duties of the Employee's then current position of
                  employment with the Company; provided, however, that a
                  disability shall be considered to exist only if the Employee
                  is prevented for a period of three (3) consecutive months
                  following the date such condition commenced and at the end of
                  such three (3) month period the Employee remained so
                  prevented, or if, prior to the expiration of such three

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                  (3) month period, the Employee's attending physician provides
                  the Company with a written prognosis that the illness, injury
                  or other incapacity that results in the Employee's current
                  disabled condition may be reasonably expected to prevent the
                  Employee from performing all of the substantial and material
                  duties of the Employee's then current position of employment
                  with the Company for a period of at least six (6) consecutive
                  months);

                           (ii) the mutual written agreement of the parties
                  hereto to terminate the Employee's employment hereunder;

                           (iii) the Company's termination of the Employee's
                  employment hereunder for "cause." For purposes of this
                  Agreement, "cause" for termination of the Employee's
                  employment shall exist only (x) if the Employee is convicted
                  of, or pleads guilty to, any act of fraud, misappropriation or
                  embezzlement, or any felony; (y) if the Employee has engaged
                  in conduct or activities materially damaging to the Company,
                  monetarily or otherwise (it being understood, however, that
                  neither conduct nor activities pursuant to the Employee's
                  exercise of good faith business judgment nor unintentional
                  physical damage to any property of the Company by the Employee
                  shall be a ground for such a determination by the Company); or
                  (z) if the Employee has willfully and continuously failed to
                  substantially perform the Employee's duties hereunder (other
                  than any such failure resulting from incapacity due to
                  physical or mental illness), after a written demand for
                  substantial performance is delivered to the Employee that
                  specifically identifies the manner in which the Company
                  believes that the Employee has not substantially performed
                  those duties, and the Employee has failed to resume
                  substantial performance of such duties on a continuous basis
                  within fourteen (14) days after receiving such demand.
                  Termination for cause shall be made only upon vote of not less
                  than a majority of the directors then in office, after
                  reasonable notice to the Employee and an opportunity for the
                  Employee, together with counsel, to be heard before a duly
                  called meeting of the Board; or

                           (iv) the Employee's termination of employment with
                  the Company for "good reason" upon reasonable notice to the
                  Company. For purposes of this Agreement "good reason" shall
                  exist if (x) the Company materially fails to comply with any
                  of the provisions of this Agreement, other than isolated,
                  insubstantial or inadvertent failures not occurring in bad
                  faith and

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                  which are remedied by the Company promptly after receipt of
                  notice thereof given by the Employee, or (y) the Company
                  changes the duties of the Employee hereunder in any manner
                  which constitutes a diminution of the duties to be performed
                  by the Employee under this Agreement.

The Initial Term hereof, and any renewal term, shall be automatically renewed
for an additional one (l) year period unless either the Employee or the Company
gives notice to the other party that it does not wish to renew this Agreement at
least ninety (90) days preceding the expiration of the Initial Term or any
renewal term, as the case may be.

                  3.2. Payments Upon Termination. If the Employee's employment
is terminated by the Company for "cause" or by the Employee for any reason other
than "good reason," the Company shall pay the Employee the Base Salary (as
defined below) through the effective date of termination at the rate in effect
when notice of termination is given, and the Company shall have no further
obligations to the Employee under this Agreement, subject to the rights and
benefits the Employee may have under employee benefits plans and programs of the
Company in existence as of the effective date of such termination, if any, which
shall be determined in accordance therewith. If the Employee's employment is
terminated by the Company for any reason other than for "cause" or by the
Employee for "good reason," the Company shall continue to pay the Employee the
Base Salary at the rate in effect at the time a notice of termination is given,
together with any applicable bonuses and rights and benefits the Employee may
have under employee benefits plans and programs of the Company in existence as
of the date of such termination, all for the twelve (12) month period following
such termination (the "Extended Period"); provided, however, such payments of
Base Salary and provision of bonuses, rights and benefits hereunder during the
Extended Period shall not be due and payable by the Company to the Employee if
the Employee (i) shall violate the provisions of Section 5 hereof or (ii) during
the Extended Period shall engage in or render any services to or be employed by
any Competing Business (as defined below) in the Area (as defined below) in the
capacity of officer, managerial or executive employee, director, consultant or
shareholder (other than as the owner of less than one percent (1%) of the shares
of a publicly-owned corporation whose shares are traded on a national securities
exchange or in the NASDAQ National Market System).

SECTION 4.  Compensation.

                  4.1. Base Salary. For the Initial Term of the Employee's
employment hereunder, Employee shall be paid a salary (the "Base Salary") at the
annual rate of One Hundred Thirty Five

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Thousand Dollars ($135,000), payable in equal installments in accordance with
the payroll payment practices from time to time adopted by the Company, subject
to required payroll withholding provisions. The Employee's Base Salary shall be
reviewed annually by the Board of Directors of the Company, a committee thereof
or the President, but shall in no event be reduced to less than the Employee's
initial Base Salary as provided above without the consent of the Employee.

                  4.2. Bonus. The Company shall pay the Employee a bonus in an
amount equal to 30% of the Base Salary on the earlier to occur of (i) the first
anniversary of the Closing Date or (ii) the date on which the Employee's
employment is terminated by the Company for any reason other than for "cause" or
by the Employee for "good reason."

                  4.3. Incentive Bonuses. As additional compensation hereunder,
the Company may, in the sole discretion of the Board of Directors, pay the
Employee an annual bonus (the "Annual Bonus") for each fiscal year during the
term of the Employee's employment hereunder. Subject to Section 3.2 of this
Agreement, if the Employee's employment hereunder is terminated pursuant to the
terms of this Agreement prior to the end of a calendar year, the Employee's
Annual Bonus with respect to that year shall be prorated for the portion of such
year during which the Employee was employed by the Company.

                  4.4. Stock Options. The Board of Directors of the Company
shall grant to the Employee, as of the Closing Date, options to purchase the
number of shares of common stock of the Company (the "Common Stock") equal to
the quotient of $101,250 divided by the closing price per share of the Common
Stock as reported by the American Stock Exchange on the Closing Date (the
"Closing Date Price") pursuant to the terms of the Company's Amended and
Restated 1995 Incentive Compensation Plan, which options shall have an exercise
price per share equal to the Closing Date Price and which options shall vest and
first become exercisable at the rate of 25% per year on the first, second, third
and fourth anniversary of the date of grant. Such options shall no longer be
exercisable as of and following the tenth (10th) anniversary of the date of
grant of such options.

                  4.5.     Insurance.

         (a) Life and Other Insurance. The Company shall provide to the Employee
such term life and group travel, accident, accidental death and dismemberment
insurance and long and short term disability insurance, or their equivalents, as
is provided from time to time for other executive officers of the Company of
comparable stature and title. The Company shall be entitled, at its sole option
and expense, to arrange for and keep in effect,

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during the term of the Employee's employment hereunder, so long as the Employee
is insurable, key man insurance on the Employee in an amount determined by the
Board of Directors, such policy or policies to name the Company or its designee
as the beneficiary under such policy or policies. The Employee shall reasonably
cooperate with the Company in procuring such key man insurance as the Company
shall elect to purchase.

         (b) Medical Insurance. During the term of the Employee's employment
hereunder, the Company shall, at its expense, provide or arrange for and keep in
effect, hospitalization, major medical and similar medical and health insurance
for the Employee and the Employee's family, as is provided from time to time for
executive officers of the Company of comparable stature and title.

                  4.6. Vacation. The Employee shall be entitled to paid vacation
during each year of employment hereunder in accordance with the Company's
vacation policy for executive employees. For purposes of determining the number
of vacation days to which the Employee is entitled pursuant to the Company's
vacation policy, the Employee shall be entitled to credit for his time as an
employee of Sterling.

                  4.7. Retirement Benefits. During the term of employment
hereunder, the Employee shall have the same rights as comparable executive
officers of the Company to participate in all profit-sharing, pension and other
retirement plans as are now, or as may hereafter be, established by the Company
for such executives.

                  4.8. Out-of-Pocket Expenses. The Company shall reimburse the
Employee for all reasonable out-of-pocket expenses incurred by the Employee in
connection with the performance of the Employee's duties hereunder upon
presentation to the Company of appropriate vouchers therefor.

                  4.9. Automobile Expense Allowance. During the term of the
Employee's employment hereunder, the Company shall pay to the Employee an
automobile allowance of $450.00 per month, plus mileage in accordance with the
Company's mileage reimbursement policy, as in effect from time to time.

                  4.10. Payroll Processing. The parties hereto agree that
payroll processing of amounts due Employee by the Company hereunder may be
executed by either the Company or one of its subsidiaries, including Sterling
and BCI Construction, Inc.

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SECTION 5.  Restrictive Covenants.

         (a) The Employee acknowledges that the covenants herein are necessary
to protect the goodwill and other value of the Company and in view of the unique
and essential nature of the services the Employee is to perform hereunder, the
irreparable injury that would befall the Company should the Employee breach such
covenants.

         (b) The Employee further acknowledges that the Employee's services to
be provided hereunder are of a special, unique and extraordinary character and
that the Employee's position with the Company will place the Employee in a
position of confidence and trust with the customers and employees of the Company
and allow the Employee access to Confidential Information (as defined below).

         (c) The Employee further acknowledges that the type and periods of
restrictions imposed by the covenants in this Section 5 are fair and reasonable
and that such restrictions will not prevent the Employee from earning a
livelihood.

         (d) The Employee further acknowledges that (i) the Company is engaged
in the business of developing, owning, acquiring and operating assisted living
facilities and specialty care facilities for the treatment of individuals
suffering from Alzheimer's disease; (ii) the Company conducts its business
activity in and throughout the Area (as defined below); and (iii) Competing
Businesses (as defined below) are engaged in businesses like and similar to the
business of the Company.

         (e) Having acknowledged the foregoing, the Employee covenants and
agrees with the Company that the Employee will not, directly or indirectly:

                           (i) while in the Company's employ and after the
                  termination of the Employee's employment for any reason
                  whatsoever (whether voluntarily or involuntarily), disclose,
                  use or otherwise exploit, except as may be necessary in the
                  performance of the Employee's duties hereunder, any
                  Confidential Information disclosed to the Employee or of which
                  the Employee became aware by reason of the Employee's
                  employment with the Company;

                           (ii) while in the Company's employ and through the
                  period ending eighteen (18) months after the termination of
                  the Employee's employment for any reason whatsoever (whether
                  voluntarily or involuntarily), employ or attempt to employ or
                  assist anyone else in employing in any Competing Business in
                  the Area any

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                  managerial or executive employee of the Company (whether or
                  not such employment is full time or is pursuant to a written
                  contract with the Company); and

                           (iii) while in the Company's employ and through the
                  period ending twelve (12) months after the termination of the
                  Employee's employment (whether voluntarily or involuntarily)
                  for any reason whatsoever, except for (x) termination by the
                  Company without cause or (y) termination by the Employee for
                  "good reason" or (z) expiration of the Initial Term without
                  renewal pursuant to Section 3.1 hereof by virtue of notice of
                  nonrenewal given by the Company to the Employee pursuant to
                  Section 3.1 hereof, engage in or render any services to or be
                  employed by any Competing Business in the Area in the capacity
                  of officer, managerial or executive employee, director,
                  management or strategic consultant or shareholder (other than
                  as the owner of less than one (l%) percent of the shares of a
                  publicly-owned corporation whose shares are traded on a
                  national securities exchange or on the NASDAQ National Market
                  System).

         (f) The Employee agrees that upon the termination of the Employee's
employment for any reason whatsoever (whether voluntarily or involuntarily), the
Employee will not take or retain without written authorization, and the Employee
will promptly deliver to the Company, originals and all copies of all papers,
files or other documents containing any Confidential Information and all other
property belonging to the Company and in the Employee's possession or under the
Employee's control.

         (g) For purposes of this Section 5, the term (i) "Area" means a
twenty-five (25) mile radius of any congregate living community or assisted
living or specialty care facility owned, managed or operated by the Company at
the time the Employee's employment hereunder is terminated; (ii) "Competing
Business" means the business of developing, owning, acquiring or operating
assisted living facilities, specialty assisted care facilities for the treatment
of individuals suffering from Alzheimer's disease or congregate living
communities; and (iii) "Confidential Information" means any and all data,
knowledge and information relating to the business of the Company (whether or
not constituting a trade secret) that is, has been or will be obtained by or
disclosed to the Employee or of which the Employee became or becomes aware as a
consequence of or through the Employee's relationship with the Company and that
has value to the Company and is not generally known by its competitors,
provided, however, that no information will be deemed confidential unless it is
known to the Employee to be confidential information or has been reduced to
writing and

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marked clearly and conspicuously as confidential information. Confidential
Information shall not include any data or information that has been voluntarily
disclosed to the public by the Company (except where such public disclosure has
been made without authorization by the Company), or that has been independently
developed and disclosed by others, or that otherwise enters the public domain
through lawful means. Confidential Information includes, but is not limited to,
information relating to the Company's financial affairs, processes, services,
customers, executive officers or employees compensation, research, development,
purchasing, accounting or marketing.

         (h) The Employee acknowledges that irreparable loss and injury would
result to the Company upon the breach of any of the covenants contained in this
Section 5 and that damages arising out of such breach would be difficult to
ascertain. The Employee hereby agrees that, in addition to any other remedies
provided at law or in equity, the Company may petition and obtain from a court
of law or equity both temporary and permanent injunctive relief to prevent a
breach by the Employee of any covenant contained in this Section 5. The parties
hereto agree that all references to the Company in this Section 5 shall include,
unless the context otherwise requires, all subsidiaries and affiliates of the
Company.

SECTION 6. Miscellaneous.

                  6.1. Binding Effect. This Agreement shall inure to the benefit
of and shall be binding upon the Employee, the Employee's executor,
administrator, heirs, personal representatives, successors and assigns, and upon
the Company and its successors and assigns; provided, however, that the
obligations and duties of the Employee may not be assigned or delegated.

                  6.2. Governing Law. This Agreement shall be deemed to be made
in, and all respects shall be interpreted, construed, enforced and governed by
and in accordance with, the laws of the State of Wisconsin, without giving
effect to any principles of conflicts of laws.

                  6.3. Invalid Provisions. The parties hereto agree that the
agreements, provisions and covenants contained in this Agreement (including,
without limitation, the agreements, provisions and covenants contained in
Section 5 hereof) are severable and divisible, that none of such agreements,
provisions or covenants depends upon any other provision, agreement or covenant
or its enforceability, and that each such agreement, provision and covenant
constitutes an enforceable obligation between the Company and the Employee.
Consequently, the parties hereto agree that neither the invalidity nor the
unenforceability


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of any agreement, provision or covenant of this Agreement shall affect the other
agreements, provisions or covenants hereof, and this Agreement shall remain in
full force and effect and be construed in all respects as if such invalid or
unenforceable agreement, provision or covenant were omitted.

                  6.4. Headings. The section and paragraph headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.

                  6.5. Notices. All communications provided for hereunder shall
be in writing and shall be deemed to be given when delivered in person or
deposited in the United States mail, first class, registered mail, return
receipt requested, with proper postage prepaid, and

         (a)      If to the Employee, addressed to:

                                   Gary Anderson
                                   453 S. Webb Road
                                   Suite 500
                                   Wichita, KS  67207
                                   Facsimile:    (316) 684-8948

         (b)      If to the Company, addressed to:

                                   Alternative Living Services, Inc.
                                   450 N. Sunnyslope Road
                                   Suite 300
                                   Brookfield, Wisconsin 53005
                                   Attention:    President
                                   Facsimile:     (414) 789-6677

                  with a copy to:
                                  Rogers & Hardin LLP
                                  2700 Cain Tower, Peachtree Center
                                  229 Peachtree Street, N.E.
                                  Atlanta, Georgia 30303
                                  Attention:   Alan C. Leet, Esq.
                                  Facsimile:   (404) 525-2224

or at such other place or places or to such other person or persons as shall be
designated in writing by the parties hereto in the manner provided above for
notices.

                  6.6. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.


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                  6.7. Waiver of Breach. The waiver by the Company or by the
Employee of a breach of any provision, agreement or covenant of this Agreement
by the Employee or by the Company, respectively, shall not operate or be
construed as a waiver of any prior or subsequent breach of the same or any other
provision agreement or covenant.

                  6.8. Entire Agreement. This Agreement is intended by the
parties hereto to be the final expression of their agreement and is the complete
and exclusive statement thereof notwithstanding any representation or statements
to the contrary heretofore made. This Agreement replaces in its respective
entirety any and all prior agreements, arrangements, understandings or
commitments between the Company and/or any of its predecessors and affiliates
and the Employee relating to the Employee's employment or other services
rendered to or for the benefit of the Company and/or any of its predecessors and
affiliates. This Agreement may be modified only by written instrument signed by
each of the parties hereto.

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                  IN WITNESS WHEREOF, the Employee has duly executed, and the
Company has caused this Agreement to be duly executed by its duly authorized
officers, and the parties have caused this Agreement to be delivered, all as of
the day and year first written above.


                                    COMPANY:


                                    ALTERNATIVE LIVING SERVICES, INC.



                                    By:  _________________________________
                                    Its: _________________________________



                                    EMPLOYEE:


                                    ______________________________________
                                    Gary Anderson

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