UNITED STATESSECURITIES AND EXCHANGE
COMMISSIONWashington, D.C. 20549___________________

Form 10-Q

|[ X ] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIESEXCHANGE ACT OF 1934 
|----- | ---------------------------------------------------------------------------------------------
|      |                                                                                              
|      | For the quarterly period ended September 30, 2003                                            
|      |                                                                                              
|[   ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIESEXCHANGE ACT OF 1934
|      |                                                                                              

Commission File Number: 1-12000

ALTERRA HEALTHCARE CORPORATION

|Delaware(State or other jurisdiction of
      incorporation or organization)        |  | 39-1771281(IRS employer identification
  no.)
|----------------------------------------------------------------------------------- |  | ---------------------------------------------
|                                                                                    |  |                                              
|10000 Innovation Drive, Milwaukee, WI(Address of
      principal executive offices) |  | 53226(Zip code)                              
|                                                                                    |  |                                              
|(414) 918-5000(Registrant's telephone number,
      including area code)           



Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

|Yes X |  | No
|----- |  | --

Indicate by check mark whether the registrant is an accelerated filer (as
determined in Rule 12b-2 of the Securities Exchange Act).

|Yes |  | No X
|--- |  | ----

Number of shares of the registrant's Common Stock, $0.01 par value,
outstanding as of September 30, 2003: 22,266,262

---



ALTERRA HEALTHCARE CORPORATION

INDEX



Part I. Financial Information

|        |                                                                                                                         | Page No.
|------- | ----------------------------------------------------------------------------------------------------------------------- | --------
|Item 1. | Financial Statements:                                                                                                   |         
|        |                                                                                                                         |         
|        | Consolidated Balance Sheets as of September 30, 2003 and December 31,
      2002 (unaudited)                            | 1       
|        |                                                                                                                         |         
|        | Consolidated Statements of Operations for the Three and Nine Months
      Ended September 30, 2003 and 2002 (unaudited) | 2-3     
|        |                                                                                                                         |         
|        | Consolidated Statements of Cash Flows for the Nine Months Ended
      September 30, 2003 and 2002 (unaudited)           | 4       
|        |                                                                                                                         |         
|        | Notes to Consolidated Financial Statements (unaudited)                                                                  | 5-16    
|        |                                                                                                                         |         
|Item 2. | Management's Discussion and Analysis of Financial Condition and Results
      of Operations                             | 16-30   
|        |                                                                                                                         |         
|Item 3. | Quantitative and Qualitative Disclosures About Market Risk                                                              | 31      
|        |                                                                                                                         |         
|Item 4. | Controls and Procedures                                                                                                 | 31      
|        |                                                                                                                         |         
|        | Part II. Other Information                                                                                              |         
|        |                                                                                                                         |         
|Item 1. | Legal Proceedings                                                                                                       | 32      
|        |                                                                                                                         |         
|Item 3. | Defaults Upon Senior Securities                                                                                         | 33      
|        |                                                                                                                         |         
|Item 6. | Exhibits and Reports on Form 8-K                                                                                        | 34      



---

PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)



|                                                                                                                                                                        |   | September 30,2003 |   |   | December 31,2002 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------------- | - | - | ---------------- | -
|                                                                                                                                                                        |   |                   |   |   |                  |  
|ASSETS                                                                                                                                                                  |   |                   |   |   |                  |  
|Current assets:                                                                                                                                                         |   |                   |   |   |                  |  
|Cash and cash equivalents                                                                                                                                               | $ | 15,051            |   | $ | 13,797           |  
|Accounts receivable, net                                                                                                                                                |   | 9,638             |   |   | 10,253           |  
|Assets held for sale                                                                                                                                                    |   | 32,851            |   |   | 57,243           |  
|Prepaid expenses and supply inventory                                                                                                                                   |   | 16,731            |   |   | 13,717           |  
|Other current assets                                                                                                                                                    |   | 9,403             |   |   | 11,093           |  
|Total current assets                                                                                                                                                    |   | 83,674            |   |   | 106,103          |  
|Property and equipment, net                                                                                                                                             |   | 388,262           |   |   | 492,125          |  
|Restricted cash and investments                                                                                                                                         |   | 2,204             |   |   | 2,188            |  
|Goodwill, net                                                                                                                                                           |   | 32,257            |   |   | 35,515           |  
|Other assets                                                                                                                                                            |   | 35,764            |   |   | 35,219           |  
|Total assets                                                                                                                                                            | $ | 542,161           |   | $ | 671,150          |  
|                                                                                                                                                                        |   |                   |   |   |                  |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                    |   |                   |   |   |                  |  
|Current liabilities:                                                                                                                                                    |   |                   |   |   |                  |  
|Current installments of long-term obligations                                                                                                                           | $ | 207,921           |   | $ | 722,689          |  
|Current debt maturities on assets held for sale                                                                                                                         |   | 76,584            |   |   | 79,108           |  
|Short-term notes payable                                                                                                                                                |   | --                |   |   | 7,144            |  
|Accounts payable                                                                                                                                                        |   | 3,646             |   |   | 6,812            |  
|Accrued expenses                                                                                                                                                        |   | 45,601            |   |   | 91,196           |  
|Guaranty liability                                                                                                                                                      |   | --                |   |   | 58,500           |  
|Deferred rent and refundable deposits                                                                                                                                   |   | 14,789            |   |   | 14,840           |  
|Total current liabilities                                                                                                                                               |   | 348,541           |   |   | 980,289          |  
|Long-term obligations, less current installments                                                                                                                        |   | 154,903           |   |   | 171,510          |  
|Other long-term obligations                                                                                                                                             |   | 2,876             |   |   | 2,147            |  
|Liabilities subject to compromise                                                                                                                                       |   | 590,393           |   |   | --               |  
|Redeemable preferred stock                                                                                                                                              |   | --                |   |   | 6,132            |  
|Stockholders' equity:                                                                                                                                                   |   |                   |   |   |                  |  
|Preferred stock, 2,500,000 shares authorized;
   1,550,000 of which have been designated at September 30, 2003 
   and December 31, 2002, none of which are outstanding |   | --                |   |   | --               |  
|Common stock, $.01 par value; 100,000,000 shares authorized; 
   of which 22,266,262 were issued and outstanding on
   September 30, 2003 and December 31, 2002         |   | 221               |   |   | 221              |  
|Treasury stock, $.01 par value; 11,639 shares in 2003 and 2002                                                                                                          |   | (163              | ) |   | (163             | )
|Additional paid-in capital                                                                                                                                              |   | 179,526           |   |   | 179,526          |  
|Accumulated deficit                                                                                                                                                     |   | (734,136          | ) |   | (668,512         | )
|Total stockholders' (deficit)                                                                                                                                           |   | (554,552          | ) |   | (488,928         | )
|Total liabilities and stockholders' (deficit)                                                                                                                           | $ | 542,161           |   | $ | 671,150          |  



See accompanying notes to consolidated financial statements
(unaudited).

---

ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)



|                                                                                                                                                                                                                        |   | Three Months Ended
September 30, |   |   | Nine Months Ended
      September 30, |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------------------------- | - | - | ------------------------------------- | -
|                                                                                                                                                                                                                        |   | 2003                             |   |   | 2002                                  |  
|Revenue:                                                                                                                                                                                                                |   |                                  |   |   |                                       |  
|Resident service fees                                                                                                                                                                                                   | $ | 101,639                          |   | $ | 98,626                                |  
|Management fee and other                                                                                                                                                                                                |   | 425                              |   |   | 772                                   |  
|Operating revenue                                                                                                                                                                                                       |   | 102,064                          |   |   | 99,398                                |  
|                                                                                                                                                                                                                        |   |                                  |   |   |                                       |  
|Operating expenses (income):                                                                                                                                                                                            |   |                                  |   |   |                                       |  
|Residence operations                                                                                                                                                                                                    |   | 71,874                           |   |   | 66,200                                |  
|Lease expense                                                                                                                                                                                                           |   | 15,962                           |   |   | 14,755                                |  
|Gain on lease termination                                                                                                                                                                                               |   | --                               |   |   | --                                    |  
|Lease income                                                                                                                                                                                                            |   | (1,270                           | ) |   | (3,913                                | )
|General and administrative                                                                                                                                                                                              |   | 9,009                            |   |   | 11,272                                |  
|Loss (gain) on disposal                                                                                                                                                                                                 |   | (274                             | ) |   | (8,700                                | )
|Depreciation and amortization                                                                                                                                                                                           |   | 5,660                            |   |   | 6,213                                 |  
|Impairment charge                                                                                                                                                                                                       |   | --                               |   |   | --                                    |  
|Total operating expenses                                                                                                                                                                                                |   | 100,961                          |   |   | 85,827                                |  
|Operating income (loss)                                                                                                                                                                                                 |   | 1,103                            |   |   | 13,571                                |  
|                                                                                                                                                                                                                        |   |                                  |   |   |                                       |  
|Other income (expense):                                                                                                                                                                                                 |   |                                  |   |   |                                       |  
|Interest expense, net (excludes contractual interest 
   expense of $3.2 million and $8.9 million for the quarter 
   and nine months ended September 30, 2003, respectively)                                           |   | (7,591)                          |   |   | (10,903)                              |  
|Amortization of financing costs                                                                                                                                                                                         |   | (809                             | ) |   | (930                                  | )
|Gain on debt extinguishments                                                                                                                                                                                            |   | 1,001                            |   |   | --                                    |  
|Convertible debt paid-in-kind ("PIK") interest (excludes contractual
      interest 
   expense of $7.9 million and $21.2 million for the quarter 
   and
      nine months ended September 30, 2003, 
   respectively) |   | (590)                            |   |   | (6,608)                               |  
|Equity in losses of unconsolidated affiliates                                                                                                                                                                           |   | (447                             | ) |   | (1,793                                | )
|Reorganization items                                                                                                                                                                                                    |   | (4,307                           | ) |   | --                                    |  
|Total other expense, net                                                                                                                                                                                                |   | (12,743                          | ) |   | (20,234                               | )
|                                                                                                                                                                                                                        |   |                                  |   |   |                                       |  
|Loss from continuing operations before income taxes and
  cumulative effect of change in accounting principle                                                                                                           |   | (11,640                          | ) |   | (6,663                                | )
|                                                                                                                                                                                                                        |   |                                  |   |   |                                       |  
|Income tax expense                                                                                                                                                                                                      |   | (35                              | ) |   | (30                                   | )
|                                                                                                                                                                                                                        |   |                                  |   |   |                                       |  
|Loss from continuing operations before cumulative effect of
       change in accounting principle                                                                                                                       |   | (11,675                          | ) |   | (6,693                                | )
|                                                                                                                                                                                                                        |   |                                  |   |   |                                       |  
|(Loss) gain on discontinued operations                                                                                                                                                                                  |   | (24,128                          | ) |   | 787                                   |  
|Cumulative effect of change in accounting principle                                                                                                                                                                     |   | --                               |   |   | --                                    |  
|                                                                                                                                                                                                                        |   |                                  |   |   |                                       |  
|Net loss                                                                                                                                                                                                                | $ | (35,803                          | ) | $ | (5,906                                | )
|                                                                                                                                                                                                                        |   |                                  |   |   |                                       |  
|Loss per common share - basic and diluted:                                                                                                                                                                              |   |                                  |   |   |                                       |  
|Loss from continuing operations before cumulative effect of
  change in accounting principle                                                                                                                            |   | (0.52                            | ) |   | (0.30                                 | )

---

|Loss on discontinued operations                     |   | (1.08  | ) |  | 0.03   |   |   | (1.48  | ) |   | (4.85  | )
|--------------------------------------------------- | - | ------ | - |  | ------ | - | - | ------ | - | - | ------ | -
|Cumulative effect of change in accounting principle |   | --     |   |  | --     |   |   | --     |   |   | (1.92  | )
|Net loss per common share - basic and diluted       | $ | (1.60  | ) |  | (0.27  | ) | $ | (2.94  | ) | $ | (7.66  | )
|                                                    |   |        |   |  |        |   |   |        |   |   |        |  
|Weighted average common shares outstanding:         |   |        |   |  |        |   |   |        |   |   |        |  
|Basic and diluted                                   |   | 22,266 |   |  | 22,266 |   |   | 22,266 |   |   | 22,266 |  



See accompanying notes to consolidated financial statements
(unaudited).

---

ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                      |   | Nine Months Ended
      September 30, |  
|------------------------------------------------------------------------------------- | - | ------------------------------------- | -
|                                                                                      |   | 2003                                  |  
|Cash flows from operating activities:                                                 |   |                                       |  
|Net loss                                                                              | $ | (65,624                               | )
|Adjustments to reconcile net loss to net cash provided by operating
      activities: |   |                                       |  
|Depreciation and amortization                                                         |   | 17,484                                |  
|PIK interest                                                                          |   | 3,263                                 |  
|Amortization of deferred financing                                                    |   | 2,209                                 |  
|Cumulative effect of change in accounting principle                                   |   | --                                    |  
|Loss (gain) on disposal                                                               |   | 9,049                                 |  
|Impairment charges                                                                    |   | 2,859                                 |  
|Loss on discontinued operations                                                       |   | 32,983                                |  
|Gain on debt extinguishment                                                           |   | (13,683                               | )
|Equity in net loss from investments in unconsolidated affiliates                      |   | 667                                   |  
|Decrease (increase) in net resident receivables                                       |   | 615                                   |  
|(Increase) decrease in other current assets                                           |   | (1,324                                | )
|Increase (decrease) in accounts payable                                               |   | 4,053                                 |  
|Increase in accrued expenses and deferred rent                                        |   | 8,551                                 |  
|Decrease in past due interest and late fees                                           |   | (2,361                                | )
|Changes in other assets and liabilities, net                                          |   | 1,443                                 |  
|Net cash provided by operating activities                                             |   | 184                                   |  
|                                                                                      |   |                                       |  
|Cash flows from investing activities:                                                 |   |                                       |  
|Payments for property, equipment and project development costs                        |   | (5,229                                | )
|Net proceeds from sale of property and equipment                                      |   | 24,512                                |  
|Proceeds from sale/leaseback transactions                                             |   | 62,368                                |  
|Decrease in notes receivable, net                                                     |   | --                                    |  
|Changes in investments in and advances to unconsolidated affiliates                   |   | 917                                   |  
|Net cash provided by investing activities                                             |   | 82,568                                |  
|                                                                                      |   |                                       |  
|Cash flows from financing activities:                                                 |   |                                       |  
|Repayments of short-term borrowings                                                   |   | --                                    |  
|Repayments of long-term obligations                                                   |   | (99,813                               | )
|Proceeds from issuance of debt                                                        |   | 20,604                                |  
|Payments for financing costs                                                          |   | (2,289                                | )
|Net cash used in financing activities                                                 |   | (81,498                               | )
|                                                                                      |   |                                       |  
|Net increase (decrease) in cash and cash equivalents                                  |   | 1,254                                 |  
|                                                                                      |   |                                       |  
|Cash and cash equivalents:                                                            |   |                                       |  
|Beginning of period                                                                   | $ | 13,797                                |  
|End of period                                                                         | $ | 15,051                                |  
|                                                                                      |   |                                       |  
|Supplemental disclosure of cash flow information:                                     |   |                                       |  
|Cash paid for interest                                                                | $ | 27,919                                |  
|Cash paid for reorganization items                                                    | $ | 4,847                                 |  
|Cash (refunded) paid during period for income taxes                                   | $ | (91                                   | )
|                                                                                      |   |                                       |  
|Non cash items:                                                                       |   |                                       |  
|Deconsolidated assets related to subsidiary stock
transfer                            | $ | --                                    |  
|Deconsolidated liabilities related to subsidiary stock
      transfer                 | $ | --                                    |  

See accompanying notes to consolidated financial statements
(unaudited).

---

ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1)      Basis of Presentation



These interim unaudited Consolidated Financial Statements have
been prepared on a going concern basis, which assumes continuity of operations
and realization of assets and satisfaction of liabilities in the ordinary course
of business, and in accordance with SOP 90-7, "Financial Reporting by Entities
in Reorganization under the Bankruptcy Code" ("SOP 90-7"). Accordingly, all
pre-petition liabilities subject to compromise are segregated in the unaudited
Consolidated Balance Sheets and classified as liabilities subject to compromise
and are reported on the basis of the expected amount of the allowed claims in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 5,
"Accounting for Contingencies." Liabilities not subject to compromise (such as
secured liabilities and post petition liabilities) are separately classified as
current and non-current. Revenues, expenses, realized gains and losses, interest
income and provisions for losses resulting from the reorganization are reported
separately as Reorganization items, net, except for those required to be
reported as discontinued operations in conformity with SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS No 144"). Cash used
for reorganization items is disclosed separately in the Consolidated Statements
of Cash Flows. Additionally, interest expense accrued subsequent to the
bankruptcy filing that is deemed to be impaired and unlikely to be paid is
excluded from the financial statements.



These interim unaudited Consolidated Financial Statements
include the accounts of Alterra Healthcare Corporation ("Alterra" or the
"Company") and our majority owned subsidiaries. All significant intercompany
accounts have been eliminated in consolidation. In our opinion, all adjustments
(consisting only of normal recurring items) necessary for a fair presentation of
these Consolidated Financial Statements have been included. The results of
operations for the three and nine months ended September 30, 2003 are not
necessarily indicative of the results to be expected for the full fiscal year.
As the accompanying Consolidated Financial Statements do not include all
information and notes necessary for a complete presentation of financial
position, results of operations, and cash flows in conformity with accounting
principles generally accepted in the United States of America, they should be
read in conjunction with the audited consolidated financial statements and notes
thereto included in our Annual Report on Form 10-K, for the year ended December
31, 2002, as amended.



(2)     Chapter 11 Bankruptcy and Restructuring Activities



In February 2001 our overall cash position had declined to a
level which we believed to be insufficient to operate the Company. Accordingly,
in February 2001 we retained financial advisors and special reorganization
counsel to assist us in evaluating alternatives to restore financial viability.
To conserve cash and protect the financial integrity of our operations,
beginning in March 2001 we elected not to make selected scheduled debt service
and lease payments, of which $2.8 million remains unpaid as of September 30,
2003. As a result, we are in default under several of our principal credit
facilities.



In March of 2001 we began to implement a restructuring plan
("Restructuring Plan"), the principal objectives of which are:



-- To create a cash flow positive base of operation by (i)
disposing of under-performing and non-strategic assets, and (ii) allowing
retained residences the opportunity to stabilize (generate sufficient cash flow
to fund operations, capital spending and other cash requirements);

-- To eliminate pending defaults and restructure the Company's
senior financing instruments (secured debt arrangements and leases);

-- To reduce the leverage on the Company's operating
assets;

---

-- To protect the Company's operations during the pendency of
our restructuring by shielding our employees, residents and vendors from any
avoidable adverse consequences of the restructuring; and

-- To the extent practicable, to seek to restore value to the
Company's junior capital constituencies.

The principal components of our Restructuring Plan are the
disposition of selected assets and the restructuring of our capital structure,
including our "senior capital" constituencies comprised principally of our
secured indebtedness and leases (operating and capital), our "junior capital"
constituencies comprised principally of our convertible pay-in-kind (PIK)
debentures, our other convertible subordinated debentures and our equity
capitalization, and our remaining joint venture relationships. Discussions with
various senior capital structure constituencies commenced in the spring of 2001,
and have resulted in a number of restructuring agreements with lenders and
lessors with respect to individual credit and lease facilities.



On January 22, 2003 (the "Petition Date"), we filed a voluntary
petition with the Bankruptcy Court to reorganize under Chapter 11 of the
Bankruptcy Code (the "Bankruptcy" or the "Bankruptcy Case") under case number
03-10254 (the "Chapter 11 Filing"). None of our subsidiaries or affiliates are
included in the Chapter 11 Filing. We believe that our Chapter 11 Filing is an
appropriate and necessary step to conclude the reorganization initiatives
commenced in 2001. The focus of our restructuring efforts in 2001 and 2002 has
been portfolio rationalization and the restructuring of our senior financing
obligations with our secured lenders and lessors. We believe the Bankruptcy will
allow us to complete the restructuring of our senior financing obligations and
to commence and complete the restructuring of our junior capital structure,
which includes unsecured obligations and claims, our convertible subordinated
debentures and our preferred and common stock.



At "first day" Bankruptcy hearings held on January 24, 2003,
the Bankruptcy Court entered orders granting us authority, among other things,
to pay pre-petition and post-petition employee wages, salaries, benefits and
other employee obligations, pay pre-petition claims of certain vendors critical
to the ongoing operations of the Company, pay pre-petition refunds to residents
and continue the existing resident program. We remain in possession of our
assets and properties and continue to operate our business as a
"debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code and the orders
of the Bankruptcy Court.



In conjunction with our Chapter 11 Filing, we secured a $15.0
million debtor-in-possession ("DIP") credit facility from affiliates of certain
principal holders of the Company's pay-in-kind securities issued in the summer
of 2000. The Bankruptcy Court issued an order approving our borrowing up to $6.5
million under the DIP credit facility on an interim basis on January 24, 2003.
On April 9, 2003, the Court issued final approval authorizing the Company to
borrow up to the entire $15.0 million of DIP financing, of which $13.7 million
has been borrowed as of September 30, 2003. We have incurred $4.3 and $10.8
million in reorganization costs for the three and nine months ended September
30, 2003. These reorganization costs include legal, financial advisory, other
professional fees and key employee retention program (the "KERP") and executive
bonus accruals incurred in relation to the reorganization.



Under the Bankruptcy Code, actions to collect pre-petition
indebtedness, as well as most other pending litigation, are stayed and other
contractual pre-petition obligations against the Company generally may not be
enforced. Unless otherwise addressed during the pendency of the Bankruptcy Case,
substantially all pre-petition liabilities are expected to be discharged and/or
treated pursuant to the terms of our plan of reorganization, which will need to
be voted upon by appropriate creditor constituencies and approved by the
Bankruptcy Court.



Under the Bankruptcy Code, we may assume or reject executory
contracts and unexpired leases, subject to the approval of the Bankruptcy Court
and our satisfaction of certain other requirements. In the event we choose to
reject an executory contract or unexpired lease, parties affected by these
rejections may file claims as prescribed by the Bankruptcy Code and/or orders of
the Bankruptcy Court. Unless otherwise agreed, the assumption of an executory
contract or unexpired lease will require the Company to cure all prior monetary
defaults under such executory contract or lease, including all pre-petition
liabilities. In this regard, we expect that liabilities that will be classified
as "subject to compromise" through the Chapter 11 process may arise in the
future as a result of the rejection of additional executory contracts and/or
unexpired leases, and from the determination of the Bankruptcy

---



On February 4, 2003, the Office of the U.S. Trustee for the
District of Delaware appointed an official committee of unsecured creditors in
our Bankruptcy Case. This committee often takes positions on matters that come
before the Court, and is a party with whom the Company has discussed the terms
of our plan of reorganization. There can be no assurance that this committee
will support the Company's positions in the bankruptcy proceedings or the
Company's plan of reorganization. In addition, delays regarding both the
progress of the case and confirmation of any plan of reorganization may occur
based upon issues that could be raised by any of the various creditor
constituencies in the case.



On March 18, 2003 we filed with the Bankruptcy Court schedules
of assets and liabilities and statement of financial affairs setting forth,
among other things, the assets and liabilities as shown by our books and records
at that date, subject to the assumptions contained in certain notes filed in
connection therewith. All of the schedules and the statements of financial
affairs are subject to further amendment and modification. Pursuant to an order
of the Court, we mailed notices to all known creditors identifying the deadline
to file proofs of claim with the court-appointed claims agent, Bankruptcy
Services, LLC, as July 8, 2003. An estimated 3,700 claims were filed as of July
8, 2003 in response to the approximately 210,000 notices sent. Differences
between amounts scheduled by the Company and claims by creditors will be
investigated and resolved in connection with our claims resolution process. The
ultimate number and amount of allowed claims is not presently known, and because
the treatment of such allowed claims will be subject to the terms of a confirmed
plan of reorganization, the ultimate distribution with respect to allowed claims
is not presently ascertainable.



On March 27, 2003, we filed with the Bankruptcy Court a Plan of
Reorganization (as amended, the "Plan") and a Disclosure Statement Accompanying
Plan of Reorganization (the "Disclosure Statement"). Immediately prior to the
filing of our Plan and Disclosure Statement, we also filed a motion (the
"Bidding Procedures Motion") with the Bankruptcy Court seeking approval of
bidding procedures with respect to the solicitation and selection of a
transaction contemplating either (i) the sale of capital stock of the
reorganized Alterra to be effective and funded upon the confirmation and
effectiveness of our Plan (an "Exit Equity Transaction") or (ii) the sale, as a
going concern, of all or substantially all of the assets of Alterra to be
effective and funded upon the confirmation and effectiveness of our Plan (an
"Asset Sale Transaction," together with an Exit Equity Transaction, referred to
herein as a "Liquidity Transaction"). The Bankruptcy Court approved our bidding
procedures on April 10, 2003.



On July 17, 2003, we conducted an auction to identify the
highest and best transaction available to provide for the liquidity needs of the
Company as it emerges from Chapter 11, and to maximize the recovery to the
Company's creditors. FEBC-ALT Investors Inc. (together with its assignee,
FEBC-ALT Investors LLC, "FEBC") was the winning bidder, proposing a merger
transaction pursuant to which FEBC will acquire all of the equity interests in
Alterra (the "Merger"). We understand that FEBC will be capitalized with $78.0
million (subject to increase based upon FEBC's aggregate transaction costs),
including (i) a $15.0 million senior loan to FEBC from an affiliate of Fortress
Investment Trust II LLC ("Fortress"), a private equity fund, and (ii) $63.0 of
aggregate equity contributions. Fortress will provide approximately 78% of the
equity investment to FEBC and will be entitled to appoint a majority of the
directors of reorganized Alterra. Emeritus Corporation and NW Select LLC will
provide the remaining equity capital to FEBC and will each be entitled to
appoint one Alterra director.



On July 22, 2003, we executed an Agreement and Plan of Merger
("Merger Agreement") with FEBC, pursuant to which FEBC will acquire 100% of the
common stock of the Company upon emergence from the Chapter 11 bankruptcy
proceeding. Pursuant to the Merger Agreement, FEBC will pay the Company $76.0
million of merger consideration, which may be adjusted downward in certain
circumstances. The merger consideration will be used (i) to fund costs of the
Company's bankruptcy and reorganization and to provide for the working capital
and other cash needs of the restructured Company and (ii) to fund a distribution
to the Company's unsecured creditors. The consummation of the Merger is subject
to the satisfaction of numerous conditions, including without limitation
confirmation of the Company's Chapter 11 plan of reorganization by the
Bankruptcy Court, receipt of consents and approvals from certain of the
Company's secured lenders and lessors and compliance with applicable state and
local

---



On July 23, 2003, we presented FEBC's Merger proposal as the
winning bid at a Bankruptcy Court hearing in accordance with the court-approved
bidding procedures. Following the hearing, the Bankruptcy Court entered an order
authorizing the Company to execute the Merger Agreement and approving the
proposed Merger as the highest and best bid at the auction conducted by the
Company on July 17, 2003.



We have filed an amended plan of reorganization and an amended
disclosure statement with the Bankruptcy Court to incorporate the terms and
conditions of the Merger. The amended disclosure statement, voting procedures,
solicitation package and ballot forms were approved by the Bankruptcy Court on
September 15, 2003. Ballots were mailed Saturday, September 20, 2003, to those
eligible to vote on the amended plan of reorganization. The deadline to return
ballots was October 17, 2003, although the Company has requested permission from
the Bankruptcy Court to accept ballots and changed ballots submitted subsequent
to the original voting deadline. There can be no assurance that our Plan will be
confirmed by the Court or consummated. If our Plan is not accepted by the
required number of creditors and equity holders, and the Court either terminates
or refuses to extend the Company's exclusive right to file and prosecute a
Chapter 11 plan, any party in interest may subsequently file its own plan of
reorganization. A plan of reorganization must be confirmed by the Bankruptcy
Court, upon certain findings being made by the Bankruptcy Court as required by
the Bankruptcy Code. The Bankruptcy Court may confirm a plan notwithstanding the
non-acceptance of the plan by an impaired class of creditors or equity holders
if certain requirements of the Bankruptcy Code are met.



A confirmed plan of reorganization could materially change the
amounts reported in the financial statements, which do not give effect to all
adjustments of the carrying value of assets or liabilities that might be
necessary as a consequence of a plan of reorganization. At this time, it is not
possible to predict the effect of the Chapter 11 reorganization on our business,
various creditors and security holders or when we will be able to emerge from
the Bankruptcy Case.



The principal components of our restructuring efforts to date
and the further restructuring contemplated by our Plan are summarized below.



Portfolio Rationalization. The Restructuring Plan
called for the disposition of 143 of our residences (collectively, the
"Disposition Assets") that we determined to be non-strategic for one or more of
a variety of reasons, of which 119 residences representing 5,338 resident
capacity have either been sold or transferred to a new lessee as of September
30, 2003. In addition, we sold 21 land parcels and transitioned ownership of 12
residences through deed-in-lieu of foreclosure transactions. The disposition of
the residences included in the Disposition Assets has been accomplished
primarily by actively working with the lenders and lessors to identify new
operators and selling assets through an organized sales process. During the nine
months ended September 30, 2003 we recognized a loss on disposal of $35.0
million, including a loss of $9.0 million in continuing operations and a loss of
$26.0 million in discontinued operations, relating to the disposition of 23
residences and the sale leaseback of 25 residences. Additionally, an impairment
loss of $5.2 million, which represents the difference between seven residences'
carrying value and the residences' estimated fair value less cost to sell, is
included in discontinued operations for the nine months ended September 30,
2003. As of September 30, 2003, approximately $46.0 million is reserved for
losses relating to future asset sales, lease terminations and joint venture
settlements. A condition to our disposing of the remaining Disposition Assets
will be obtaining the consent of the applicable lender or lessor and, in certain
cases, the consent of the applicable joint venture partner.



Restructuring of Our Senior Indebtedness and Leases.
The Company has a complex senior capital structure, comprised of more than ten
significant multi-residence secured credit facilities and six significant
portfolios of operating residences that are leased from real estate investment
trusts (REITs). Many of our secured credit facilities are structured to
incorporate various so-called "bankruptcy-remote" features (i.e., structures
designed to improve the applicable lender's rights and leverage in the event of
a bankruptcy of the parent company, Alterra),

---



The Company commenced negotiations with its secured lenders and
lessors during 2001. Each separate negotiation has been unique and based on the
characteristics of the underlying credit facility, including the credit
facility's collateral, terms and structure. Accordingly, our restructuring needs
and objectives have varied from one credit facility to the next. Depending on
the particular credit facility, we have attempted to reset maturities, address
any deficiencies, reset covenants, obtain waivers of default interest and
penalties, and secure consent from the lenders and lessors for sales of
residences included in their collateral or lease portfolio.



Secured Lender Negotiations. At the outset of our
restructuring, management sought to restructure secured loan facilities that, in
management's view, would generate significant deficiency claims (i.e., claims in
excess of the value of the applicable mortgage portfolio) in the event the
applicable lenders sought to call the loan and foreclose on their collateral.
Five credit facilities, representing $221.8 million in aggregate financing at
September 30, 2003 (secured by mortgages on 35 residences with an aggregate
capacity of 2,702 beds) represent, in our view, significant potential deficiency
claims in the range of $76.8 million to $99.1 million. In these negotiations, we
sought to limit or eliminate these potential deficiency claims against the
Company in exchange for our agreement to cooperate with the applicable lenders
to facilitate an orderly transition of ownership (and, in certain cases,
management) of the mortgaged residences to the lenders or their designees
(through deed-in-lieu of foreclosure transactions or so-called friendly
foreclosures). In transitioning ownership of the mortgaged residences to the
lenders, we offered to provide interim management services to the lenders with
respect to the mortgaged residences. During 2002, we executed definitive
agreements of this type with three different lender groups with regard to three
"impaired" credit facilities, originally representing $104.2 million of
financing secured by 31 residences with an aggregate capacity of 1,520 beds. As
a result of refinancings, asset sales and foreclosures during 2002 and 2003,
$6.8 million of this indebtedness secured by mortgages on two residences is
remaining at September 30, 2003. Additionally, $19.0 million of indebtedness
associated with assets previously disposed of as part of the three executed
definitive agreements, but which are pending final release from the applicable
lender, is also remaining at September 30, 2003.



In May 2002, one significantly "impaired"
lender group that provided $171.0 million in aggregate financing (secured by
mortgages on 26 residences with an aggregate capacity of 2,154 beds) caused
title to all of the stock of our subsidiary that operated these mortgaged
residences to be transferred to a third party. Accordingly, we no longer own
these residences, although we do currently serve as interim manager for this
lender group. As a result of the stock transfer, these residences are no longer
consolidated and operations related to these residences through May 31, 2002 are
reported as discontinued operations. We have accrued $58.5 million related to
our estimated liability associated with our guaranty (including payment of the
termination fee due upon full payment of the mortgage obligations). Such
liability is included in liabilities subject to compromise at September 30,
2003. The liability associated with our guaranty obligation was calculated as
the difference between the fair market value of the assets and the underlying
mortgage obligations.



In January 2003, we entered into agreements with this
lender group pursuant to which: (i) we have agreed to manage these 26 residences
on an interim basis without a management fee, and to cooperate in transitioning
management to any successor manager appointed by the credit participants, and
(ii) the Company is entitled to be released of its guaranty and other principal
obligations (with the exception of certain environmental indemnities) under this
financing structure upon the satisfaction of certain conditions, including the
payment of $5.7 million of fees to the credit participants on or prior to the
confirmation of a plan of reorganization in our Bankruptcy Case. In filings made
with the Bankruptcy Court, representatives of these credit participants have
alleged that the aggregate obligation of Alterra to obtain the release of this
deficiency claim is approximately $10.3 million, not $5.7 million. We dispute
this interpretation of the settlement agreement. If we are unable to enforce the
terms of the settlement agreement in the manner that we believe the parties
intended and are otherwise unable to resolve this dispute, we do not intend to
assume this settlement agreement in connection with the completion of our
Bankruptcy Case. If this settlement agreement is not given effect, the credit
participants for this lender group will have a large unsecured deficiency claim,
which could substantially reduce the funds available for distribution to other
unsecured creditors pursuant to our Plan.

---



In addition to these impaired credit facilities, we are
continuing to seek to negotiate amendments and waivers with the applicable
lenders with respect to our other principal secured credit facilities in order
to, depending on the specific case, reset covenants, obtain consent to sell
certain mortgaged residences, secure waivers of prior defaults and, in certain
cases, to extend scheduled maturities. These credit facilities represent $279.9
million of financing secured by an aggregate of 87 residences with an aggregate
capacity of 4,243 beds as of September 30, 2003. Discussions with certain of
these lenders have commenced, and as of September 30, 2003 we have executed
definitive binding agreements with lenders with respect to $101.3 million of
indebtedness secured by 36 residences with an aggregate capacity of 1,689 beds,
providing for, among other things, extensions of debt maturities, waivers of
prior defaults and amendments of certain covenants. In February 2003 we sold 25
residences with an aggregate capacity of 894 beds, extinguished the related
debt, and leased back the facilities under an operating lease agreement. We also
refinanced $6.9 million of debt secured by 6 residences with a capacity of 182
beds. As a result of this debt extinguishment and refinancing, we recognized a
gain on debt extinguishment of $12.7 million during the quarter ended March 31,
2003.



In July 2003, we negotiated settlement agreements with one
lender group, holding $23.3 million of indebtedness secured by mortgages on
seven residences with an aggregate capacity of 350 beds. Pursuant to these
agreements, we agreed to cooperate with the lender to facilitate an orderly
transition of ownership and management of the mortgaged residences to the lender
or their designee through a deed-in-lieu of foreclosure transaction. In
transitioning ownership of the mortgaged residences to the lender, we offered to
provide interim management services to the lender with respect to the mortgaged
residences through August 2003. In exchange for our cooperation and management
services, the lender has agreed to release any potential deficiency claims. As
of July 31, 2003, all seven residences have been transitioned to a new operator,
with a corresponding loss of $24.1 million recognized in discontinued operations
pending final debt release. In the period in which final debt release is
obtained, we will recognize a gain on debt extinguishment of $24.1 million.



We anticipate that we will need to negotiate restructuring
agreements and to secure waivers and amendments with certain of our secured
lenders as a condition to confirming our Plan and consummating the Merger.



REIT Lessor Negotiations. At September 30, 2003, we had six
multi-residence portfolios leased from various REITs, including those assets
refinanced in February 2003. These portfolios include an aggregate of 225
residences with an aggregate capacity of 9,609 beds. We have entered into
restructuring agreements with respect to all of the five multi-residence lease
portfolios existing prior to February 2003. These restructurings included the
amendment of certain lease covenants and terms and, in three lease facilities,
the conversion of individual leases into single master leases. The cash rent due
under one lease facility was modified through the application of various
deposits held by the landlord to satisfy a portion of the cash rent obligation
in the early years of the restructured master lease.



Restructuring of Junior Capital Structure. As of
September 30, 2003, the Company's junior capital structure is comprised of
unsecured debt of approximately $458.1 million and equity capitalization
consisting of $6.2 million aggregate principal amount of 9.75% Series A
Cumulative Convertible Preferred Stock due May 30, 2007 (the "Series A Stock")
and 22.2 million shares of Common Stock. The principal components of the
Company's unsecured indebtedness as of September 30, 2003 (amounts exclude
accrued but unpaid interest) include:



i.      $16.6 million aggregate principal face amount of promissory
notes issued in connection with the restructuring of certain joint venture
arrangements (the "Unsecured Senior Notes") and $250,000 of other unsecured
notes (the "Unsecured Notes");



ii.      $253.9 million aggregate principal amount of 9.75%
pay-in-kind convertible debentures due May 30, 2007 (the "PIK Debentures")
issued in three separate series in 2000;



iii.      $112.0 million aggregate principal amount of 5.25%
convertible subordinated debentures due December 15, 2002 (the "5.25%
Debentures");

---

iv.      $40.4 million aggregate principal amount of 7.00% convertible
subordinated debentures due June 1, 2004 (the "7.00% Debentures"); and

v.      $34.9 million aggregate principal amount of 6.75% convertible subordinated
debentures due June 30, 2006 (the "6.75% Debentures").



The outstanding 5.25% Debentures, 7.00% Debentures and 6.75%
Debentures (collectively, the "Original Debentures") are subordinated to all
other "senior indebtedness" of the Company (as defined in the applicable
indenture governing such debentures), and the PIK Debentures are subordinated to
all "senior indebtedness" of the Company (as defined in the applicable
indentures governing such debentures), other than the Original Debentures.
Although defined somewhat differently in the several indentures governing the
Original Debentures and the PIK Debentures (collectively, the "Subordinated
Debentures"), "senior indebtedness" is defined to generally include indebtedness
for borrowed money and other similar obligations of Alterra (other than the
other series of Original Debentures).



All of our Subordinated Debentures are currently in default due
to our failure to make coupon payments on the Original Debentures and due to
cross default provisions triggered by payment defaults on our secured debt.



As a result of several notices of default received by the
Company with respect to secured indebtedness that by its terms may be
accelerated by the applicable lenders, neither we nor the applicable indenture
trustees for the Subordinated Debentures are permitted by the subordination
provisions of the indentures governing the respective Subordinated Debentures to
make any payment or distribution on account of the Subordinated Debentures
(other than the payment of PIK coupons on the PIK Debentures). As a result, we
did not make cash interest payments on the Original Debentures in 2001, 2002 and
2003 of $5.5 million, $11.0 million and $11.0 million, respectively. In the
event that the Company is dissolved, liquidated or reorganized, all amounts due
in payment of the Company's "senior indebtedness" must be paid or provided for
before any payment may be made on account of the Subordinated Debentures.



To the extent that the Company is not able to restructure its
capital structure and is forced to liquidate, applicable principles of corporate
law (specifically, the liquidation priority of debt over equity and the priority
of preferred stock over common stock) and the subordination provisions governing
the Subordinated Debentures would dictate that:





- All of our obligations relating to our secured and unsecured loans,
  including the Unsecured Senior Notes (with a principal balance of $16.6
  million at September 30, 2003) and any deficiency claims (estimated at $76.8
  million to $99.1 million at September 30, 2003 (disregarding the contingent
  restructuring agreements described above)) relating to our secured loan
  facilities, would be required to be paid in full before any liquidation
  proceeds are distributed to the holders of our Subordinated Debentures;



- All obligations relating to the PIK Debentures ($253.9 million including
  accrued and unpaid PIK dividends at September 30, 2003) would be required to
  be paid in full before any liquidation proceeds are distributed to the holders
  of our Original Debentures;



- All obligations relating to the Original Debentures ($210.3 million
  including accrued and unpaid interest at September 30, 2003), as well as all
  other indebtedness of the Company, would be required to be paid in full before
  any liquidation proceeds are distributed to the holders of our Series A Stock
  and Common Stock; and



- All liquidation preferences related to our outstanding Series A Preferred
  Stock (approximately $6.2 million as of September 30, 2003) would be required
  to be paid in full before any liquidation proceeds are distributed to the
  holders of our Common Stock.



In restructuring our junior capital structure pursuant to our
Plan, the relative rights in liquidation of our various junior capital
constituencies is a significant factor in determining the extent to which the
claims and interests of these various constituencies will be entitled to any
distribution of value as the Company is restructured.

---





Our original Plan, filed with the Bankruptcy Court on March 27,
2003, contemplated that the Company would conduct a marketing process to solicit
and identify the "highest and best" proposal for a Liquidity Transaction.
Management believes that the Merger, as the highest and best Liquidity
Transaction proposed at the July 17, 2003 auction,  provides fair valuation
of the reorganized Alterra that will facilitate the completion of the
reorganization and will provide a source of liquidity to make distributions of
cash to the holders of various junior capital structure constituents, all to the
extent that such holders are entitled to a distribution pursuant to the Plan
based on applicable principles of bankruptcy and corporate law and the
subordination provisions governing the Subordinated Debentures.



Given the uncertainty as to the outcome of our remaining
restructuring negotiations with senior capital constituencies (including,
without limitation, the extent to which deficiency claims are asserted in the
Bankruptcy Case), and given the impact of operative subordination provisions and
corporate and bankruptcy law doctrines governing the relative rights of holders
of debt and equity interests in the Company, it is very difficult for us to
predict what value, if any, various junior capital constituencies will receive
in the restructured Alterra. Pursuant to the Merger Agreement, the maximum distribution to holders of unsecured claims is approximately $23 million (which included payments pursuant to settlement agreements with holders of deficiency claims), which will likely be adjusted pursuant to the Merger Agreement based on working capital and the cash requirements of the Plan through the Effective Date. Based on our current expectations
and pursuant to our Plan, no distribution of value will be made to certain classes
of unsecured debt or to any class of capital stock of the Company upon the
conclusion of the Bankruptcy Case.



Joint Venture Arrangements. The Restructuring Plan
calls for us to seek to acquire joint venture interests in certain of our
residences in order to simplify our capital structure. In many cases, our
acquisition of these joint venture interests (or termination of the applicable
joint venture's interest in our residences) is necessary for us to satisfy
restructuring requirements established by our senior lenders and
lessors.

As of December 2002, we entered into an agreement with one of
our joint venture partners pursuant to which we have agreed to purchase all of
the remaining joint venture interests not held by the Company in eight
residences and to acquire promissory notes previously issued by the Company
aggregating approximately $3.6 million in exchange for the issuance of a 5-year
unsecured promissory note for $7.2 million from the reorganized Alterra upon
confirmation of our plan of reorganization by the Bankruptcy Court. Accordingly,
the consummation of this transaction will be contingent upon, among other
things, a successful Chapter 11 reorganization of the Company and Bankruptcy
Court approval.

In October 2003, we entered into an agreement with our other
principal joint venture partner group pursuant to which we have agreed to
purchase all of the remaining joint venture interests not held by the Company in
32 residences and to secure the release of the Company with respect to all
claims held by these joint venture partners. Pursuant to this settlement
agreement, which was approved by the Bankruptcy Court in late October 2003, the
limited partners will be entitled to receive from reorganized Alterra an
aggregate of $2.9 million of five-year promissory notes of reorganized Alterra
and will be entitled to receive the distribution and treatment under our Plan
that a holder of a $6 million "Class 6" claim will receive in our Bankruptcy
Case. This settlement is contingent upon the confirmation of our Plan and the
consummation of the Merger.



(3)      New Accounting Pronouncements



In July 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. Costs covered by SFAS No. 146 include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity. This statement is
effective for exit or disposal activities that are initiated after December 31,
2002. Accordingly, the Company adopted the provisions of SFAS No. 146 for exit
or disposal activities initiated after December 31, 2002.



In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of FASB
Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34."
This Interpretation elaborates on the

---



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



In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51."
This Interpretation addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. The Interpretation
applies immediately to interests in variable interest entities created after
January 31, 2003, and to interests in variable interest entities obtained after
January 31, 2003. This Interpretation applies in the first period ending after
December 15, 2003, to variable interest entities in which an enterprise holds an
interest that it acquired before February 1, 2003. The Company early adopted
this Interpretation effective for the quarter ended September 30, 2003, and
based on an evaluation of the remaining unconsolidated joint ventures, the 13
residences operating under those joint ventures have been consolidated effective
September 30, 2003.



In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer
classifies and measures three classes of freestanding financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). SFAS 150 was effective for financial instruments
entered into or modified after May 31, 2003, and otherwise was effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
has not entered into or modified any financial instruments within the scope of
SFAS 150 since May 31, 2003, nor does it currently hold any significant
financial instruments within its scope.



(4)      Assets Held for Sale



The Company has adopted plans to dispose of or terminate leases
on 143 residences with an aggregate capacity of 6,499 residents and 33 parcels
of land, of which 119 residences representing 5,338 resident capacity have
either been sold or transferred to a new lessee as of September 30, 2003. In
addition, the Company sold 21 land parcels and transitioned ownership of 12
residences through deed-in-lieu of foreclosure transactions. Residences included
in the disposition plan were identified based on an assessment of a variety of
factors, including geographic location, residence size, operating performance
and lender negotiations. As of September 30, 2003, approximately $36.6 million
is reserved for losses relating to future asset sales or lease terminations.



In accordance with the SFAS No. 121 and SFAS
No. 144 the Company has recorded an impairment loss on its properties to be held
for sale whenever their carrying value cannot be fully recovered through the
estimated cashflows including net sale proceeds. The amount of the impairment
loss to be recognized is the difference between the residence's carrying value
and the residence's estimated fair value less costs to sell. The Company's
policy is to consider a residence to be held for sale or disposition when the
Company has committed to a plan to sell such residence and active marketing
activity has commenced or it is expected to commence in the near term. Also in
accordance with SFAS No. 144, the impairment loss and revenues and expenses of
those residences identified as a disposition asset beginning in January 2002
have been recorded as discontinued operations. Assets held for sale is
principally comprised of net property and equipment, goodwill and the
corresponding mortgage liability. We expect to sell these residences and land
parcels in the next six to twelve months.

---



The following table represents operating information (in
thousands) included in the loss on discontinued operations for the three and
nine months ended September 30, 2003 and 2002, respectively, in accordance with
SFAS No. 144 of the Consolidated Statements of Operations of the Company:





|                                                    |   | For the Three Months EndedSeptember 30, |   |   | For the Nine Months EndedSeptember 30, |  
|--------------------------------------------------- | - | --------------------------------------- | - | - | -------------------------------------- | -
|                                                    |   |                                         |   |  
|                                                    |   | 2003                                    |   |   | 2002                                   |  
|                                                    |   |                                         |   |   |                                        |  
|Loss from operations                                | $ | (177                                    | ) | $ | (2,104                                 | )
|FAS 144 impairment loss                             |   | --                                      |   |   | --                                     |  
|Guaranty liability                                  |   | --                                      |   |   | (3,800                                 | )
|Net asset write off of former subsidiary            |   | --                                      |   |   | --                                     |  
|Gain on debt extinguishment                         |   | --                                      |   |   | 5,954                                  |  
|(Loss) gain on disposal                             |   | (23,951                                 | ) |   | 737                                    |  
|Cumulative effect of change in accounting principle |   | --                                      |   |   | --                                     |  
|(Loss) gain on discontinued operations              | $ | (24,128                                 | ) | $ | 787                                    |  







There are a number of factors that may affect the timing of a
sale and the sale price that will ultimately be achieved for these residences,
including, among other things, the following: potential increased competition
from any other assisted living residences in the area, the relative
attractiveness of assisted living residences for investment purposes, interest
rates, the actual operations of the residence, the ability to retain existing
residents and attract new residents at the residence and a buyout of joint
venture interests. As a result, there is no assurance as to what price will
ultimately be obtained upon a sale of these residences or the timing of such a
sale. The value of the assets held for sale, net of reserves, is reflected in
current assets and the outstanding debt related to the assets held for sale is
reflected in current liabilities on our balance sheet.





(5)     Liabilities Subject to Compromise





Under bankruptcy law, actions by creditors to collect
indebtedness we owe prior to the Petition Date are stayed and certain other
pre-petition contractual obligations may not be enforced against the Company. We
have received approval from the Bankruptcy Court to pay certain pre-petition
liabilities including employee salaries, wages and benefits and certain vendors
critical to the ongoing operations of the Company. Except for certain secured
debt and financing lease obligations, all pre-petition liabilities have been
classified as liabilities subject to compromise in the unaudited Consolidated
Balance Sheets. Adjustments to these claims may result from negotiations,
payments authorized by the Bankruptcy Court order, additional rejection of
executory contracts or other events.



Pursuant to an order of the Bankruptcy Court, the Company
mailed notices to all known creditors to inform them that the deadline for
filing proofs of claim with the Court is July 8, 2003. Amounts that we have
recorded as liabilities may be different than the claim amounts filed by our
creditors. The number and amount of allowable claims cannot be presently
ascertained. The claims reconciliation process may result in adjustments to
allowable claims.



---

The following table summarizes the components of liabilities
subject to compromise in our unaudited Consolidated Balance Sheets as of
September 30, 2003 and proforma December 31, 2002 (in thousands):



|                                                       |   |               |  |   | (Proforma)   | 
|------------------------------------------------------ | - | ------------- |  | - | ------------ | 
|                                                       |   | September 30, |  |   | December 31, | 
|                                                       |   | 2003          |  |   | 2002         | 
|Accounts payable                                       | $ | 7,219         |  | $ | 6,812        | 
|General liability insurance reserve                    |   | 20,588        |  |   | 20,098       | 
|Reserve for loss on joint venture settlements          |   | 9,407         |  |   | 9,407        | 
|Accrued interest on convertible debt and notes payable |   | 24,202        |  |   | 22,371       | 
|Guaranty liability                                     |   | 58,500        |  |   | 58,500       | 
|Notes payable                                          |   | 16,008        |  |   | 15,286       | 
|Short term notes payable                               |   | 7,113         |  |   | 7,144        | 
|PIK Debentures                                         |   | 253,892       |  |   | 252,429      | 
|Original Debentures                                    |   | 187,248       |  |   | 187,248      | 
|Redeemable preferred stock                             |   | 6,216         |  |   | 6,132        | 
|                                                       |   |               |  |   |              | 
|Liabilities subject to compromise                      | $ | 590,393       |  | $ | 585,427      | 





(6)      Net Loss Per Common Share



The following table summarizes the computation of basic and
diluted net loss per share amounts presented in the accompanying consolidated
statements of operations (in thousands, except per share data):





|                                                                                                                                           |   | Three Months Ended
    September 30, |   |   | Nine Months Ended
      September 30, |  
|------------------------------------------------------------------------------------------------------------------------------------------ | - | ------------------------------------ | - | - | ------------------------------------- | -
|                                                                                                                                           |   | 2003                                 |   |   | 2002                                  |  
|Basic:                                                                                                                                     |   |                                      |   |   |                                       |  
|Net loss from continuing operations before cumulative   
      effect of change in accounting principle - attributable to   
common shares | $ | (11,675                              | ) | $ | (6,693                                | )
|Loss on discontinued operations                                                                                                            |   | (24,128                              | ) |   | 787                                   |  
|Cumulative effect of change in accounting principle                                                                                        |   | --                                   |   |   | --                                    |  
|Net loss attributable to common shares                                                                                                     |   | (35,803                              | ) |   | (5,906                                | )
|                                                                                                                                           |   |                                      |   |   |                                       |  
|Weighted average common shares outstanding                                                                                                 |   | 22,266                               |   |   | 22,266                                |  
|                                                                                                                                           |   |                                      |   |   |                                       |  
|Net loss from continuing operations before cumulative 
   effect of change in accounting principle - per share                             | $ | (0.52                                | ) | $ | (0.30                                 | )
|Loss on discontinued operations- per share                                                                                                 |   | (1.08                                | ) |   | 0.03                                  |  
|Cumulative effect of change in accounting principle - 
  per share                                                                         |   | --                                   |   |   | --                                    |  
|Net loss per common share                                                                                                                  | $ | (1.60                                | ) | $ | (0.27                                 | )

Shares issuable upon the conversion of convertible subordinated debentures
and employee stock options have been excluded from the computation because the
effect of their inclusion would be anti-dilutive.

(7)      Subsequent Events

As of November 14, 2003, we sold an additional four land parcels.



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(8) Reclassifications

Reclassifications have been made in the 2002 financial statements to conform
with the 2003 financial statement presentation.

ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a national assisted living company operating assisted
living residences and providing assisted living services in 24 states. Our
ongoing restructuring activities have had a significant impact on our results of
operations and are an important factor in explaining the changes in our results
between 2003 and 2002. As of September 30, 2003 and 2002, we operated or managed
352 and 400 residences with aggregate capacity of 16,646 and 18,789 residents,
respectively.

On January 22, 2003, we filed a voluntary petition with the
Bankruptcy Court to reorganize under Chapter 11 of the Bankruptcy Code. The
Company believes that its Chapter 11 Filing is an appropriate and necessary step
to seek to conclude its reorganization initiatives commenced in 2001. The focus
of our restructuring efforts in 2001 and 2002 was portfolio rationalization and
the restructuring of our senior financing obligations with our secured lenders
and lessors. We believe the Bankruptcy will allow us to complete our
restructuring of our senior financing obligations and to commence and complete
the restructuring of our junior capital structure, which includes unsecured
obligations and claims, our convertible subordinated debentures and our
preferred and common stock.



In conjunction with our Chapter 11 Filing, we secured a $15.0
million DIP credit facility from affiliates of certain principal holders of the
Company's pay-in-kind securities issued in the summer of 2000. The Bankruptcy
Court issued an order approving our borrowing up to $6.5 million under the DIP
credit facility on an interim basis on January 24, 2003. On April 9, 2003, the
Court issued final approval authorizing the availability of the entire $15.0
million of DIP financing.



On March 27, 2003, we filed with the Bankruptcy Court a Plan of
Reorganization and a Disclosure Statement Accompanying Plan of Reorganization.
Immediately prior to the filing of our Plan and Disclosure Statement, we also
filed a "Bidding Procedures Motion" with the Bankruptcy Court seeking approval
of bidding procedures with respect to the solicitation and selection of a
transaction contemplating either (i) the sale of capital stock of the
reorganized Alterra to be effective and funded upon the confirmation and
effectiveness of our Plan or (ii) the sale, as a going concern, of all or
substantially all of the assets of Alterra to be effective and funded upon the
confirmation and effectiveness of our Plan. The Bankruptcy Court approved our
bidding procedures on April 10, 2003.



On July 17, 2003, we conducted an auction to identify the
highest and best transaction available to provide for the liquidity needs of the
Company as it emerges from Chapter 11, and to maximize the recovery to the
Company's creditors. FEBC was the winning bidder, proposing a merger transaction
pursuant to which FEBC will acquire all of the equity interests in Alterra. We
understand that FEBC will be capitalized with $78.0 million (subject to increase
based upon FEBC's aggregate transaction costs), including (i) a $15.0 million
senior loan to FEBC from an affiliate of Fortress Investment Trust II LLC
("Fortress"), a private equity fund, and (ii) $63.0 of aggregate equity
contributions. Fortress will provide approximately 78% of the equity investment
to FEBC and will be entitled to appoint a majority of the directors of
reorganized Alterra. Emeritus Corporation and NW Select LLC will provide the
remaining equity capital to FEBC and will each be entitled to appoint one
Alterra director.



On July 22, 2003, we executed the Merger Agreement with FEBC,
pursuant to which FEBC will acquire 100% of the common stock of the Company upon
emergence from the Chapter 11 bankruptcy proceeding. Pursuant to the Merger
Agreement, FEBC will pay the Company $76.0 million of merger consideration,
which may be adjusted downward in certain circumstances. The merger
consideration will be used (i) to fund costs of the Company's bankruptcy and
reorganization and to provide for the working capital and other cash needs of
the restructured Company and (ii) to fund a distribution to the Company's
unsecured creditors. The consummation of the Merger is subject to the
satisfaction of numerous conditions, including without limitation confirmation
of the Company's Chapter 11 plan of reorganization by the Bankruptcy Court,
receipt of consents and approvals from certain of the Company's secured lenders
and lessors and compliance with applicable state and local health regulatory
licensing requirements. The Merger Agreement provides for the Company to pay to
FEBC a "break-up"



---

On July 23, 2003, we presented FEBC's Merger proposal as the
winning bid at a Bankruptcy Court hearing in accordance with the court-approved
bidding procedures. Following the hearing, the Bankruptcy Court entered an order
authorizing the Company to execute the Merger Agreement and approving the
proposed Merger as the highest and best bid at the auction conducted by the
Company on July 17, 2003.



We have filed an amended Plan and an amended Disclosure
Statement with the Bankruptcy Court to incorporate the terms and conditions of
the Merger. The amended disclosure statement, voting procedures, solicitation
package and ballot forms were approved by the Bankruptcy Court on September 15,
2003. Ballots were mailed Saturday, September 20, 2003, to those eligible to
vote on the amended plan of reorganization. The deadline to return ballots was
October 17, 2003, although the Company has requested permission from the
Bankruptcy Court to accept ballots and changed ballots submitted subsequent to
the original voting deadline. There can be no assurance that our Plan will be
confirmed by the Court or consummated. If our Plan is not accepted by the
required number of creditors and equity holders, and the Court either terminates
or refuses to extend the Company's exclusive right to file and prosecute a
Chapter 11 plan, any party in interest may subsequently file its own plan of
reorganization. A plan of reorganization must be confirmed by the Bankruptcy
Court, upon certain findings being made by the Bankruptcy Court as required by
the Bankruptcy Code. The Bankruptcy Court may confirm a plan notwithstanding the
non-acceptance of the plan by an impaired class of creditors or equity holders
if certain requirements of the Bankruptcy Code are met.





Critical Accounting Policies



In response to the Securities and Exchange Commission's Release
Numbers 33-8040, Cautionary Advice Regarding Disclosure About Critical
Accounting Policies,and 33-8056, Commission Statement about Management's
Discussion and Analysis of Financial Condition and Results of Operations,we
have identified the following critical accounting policies that affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. The preparation of our consolidated financial statements
in conformity with accounting principles generally accepted in the United States
of America requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities.



On an ongoing basis, we evaluate our estimates, including those
related to revenue recognition and the allowance for doubtful accounts
receivable and asset impairment. We state these accounting policies in the notes
to our consolidated financial statements and at relevant sections in this
discussion and analysis. Our estimates are based on information that is
currently available to us and on various other assumptions that we believe are
reasonable under the circumstances. Actual results could vary from those
estimates and those estimates could be different under different assumptions or
conditions.



Financial Reporting During Reorganization Proceedings.
The consolidated financial statements have been prepared on a going
concern basis, which assumes continuity of operations and realization of assets
and satisfaction of liabilities in the ordinary course of business, and in
accordance with SOP 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code". Accordingly, all pre-petition liabilities subject to
compromise are segregated in the unaudited consolidated balance sheets and
classified as liabilities subject to compromise and are reported on the basis of
the expected amount of the allowed claims in accordance with SFAS No. 5.
Liabilities not subject to compromise (such as secured liabilities and post
petition liabilities) are separately classified as current and non-current.
Revenues, expenses, realized gains and losses, interest income and provisions
for losses resulting from the reorganization are reported separately as
Reorganization items, net, except for those required to be reported as
discontinued operations in conformity with SFAS No. 144. Cash used for
reorganization items is disclosed separately in the consolidated statements of
cash flows.

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Principles of Consolidation. The consolidated financial
statements include the accounts of the Alterra Healthcare Corporation and its
majority-owned subsidiaries. Results of operations of the majority-owned
subsidiaries are included from the date of acquisition. All significant
intercompany balances and transactions with such subsidiaries have been
eliminated in the consolidation. Investments in other affiliated companies in
which we have a minority ownership position are accounted for on the equity
method.



Revenue Recognition. Resident service fee
revenue, which is recorded when services are rendered, consists primarily of
resident service fees that are reported at net realizable amounts.



We must make estimates of the uncollectibility of our accounts
receivable related deferred rent and other revenue or income. We specifically
analyze accounts receivable and historical bad debts when evaluating the
adequacy of the allowance for doubtful accounts receivable. These estimates have
a direct impact on our net income, because a higher bad debt allowance would
result in lower net income. The Securities and Exchange Commission's Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition, provides guidance
on the application of generally accepted accounting principles to selected
revenue recognition issues. We believe that our revenue recognition policy is
appropriate and in accordance with generally accepted accounting principles and
SAB No. 101.

Long-Lived Assets. Property and equipment are stated at
cost, net of accumulated depreciation. Property and equipment under capital
leases are stated at the present value of minimum lease payments. Depreciation
is computed over the estimated lives of the assets using the straight-line
method. Buildings and improvements are depreciated over 20 to 40 years, and
furniture, fixtures, and equipment are depreciated over three to seven years.
Maintenance and repairs are expensed as incurred.



We apply Statement of Financial Accounting Standards (SFAS) No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, to
recognize and measure impairment of long-lived assets. We review each long-lived
asset for impairment whenever events or circumstances indicate that the carrying
value of a real estate investment may not be recoverable. The review of
recoverability is based on an estimate of the future undiscounted cash flows,
excluding interest charges, expected to result from the real estate investment's
use and eventual disposition. These cash flows consider factors such as expected
future operating income, trends and prospects, as well as the effects of leasing
demand, competition and other factors. If impairment exists due to the inability
to recover the carrying value of a real estate investment, an impairment loss is
recorded to the extent that the carrying value exceeds estimated fair market
value.



Assets held for sale are carried at the lower of carrying
amount or fair value, less costs to sell. Depreciation and amortization are
suspended during the period held for sale. We are required to make subjective
assessments as to whether there are impairments in the value of our real estate
properties. These assessments have a direct impact on our net income, because
taking an impairment loss results in an immediate negative adjustment to net
income.



The Company is seeking to negotiate restructurings of several
of its principal secured debt and lease obligations and, upon completing these
negotiations, will seek to restructure its principal unsecured debt obligations,
comprised primarily of the outstanding convertible debentures. Furthermore, at
September 30, 2003 and December 31, 2002, the Company was in violation of
certain debt covenants.



Income Taxes. Income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are recognized
for the expected future tax consequences attributable to temporary differences
between the 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 expected to apply to taxable income in the
years in which those 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.

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Three Months Ended September 30, 2003 Compared to the Three
Months Ended September 30, 2002



Residence Service Fees. Residence service fees for the
three months ended September 30, 2003 were $101.6 million, representing an
increase of $3.0 million from the $98.6 million for the comparable 2002 period.
This increase resulted primarily from the rate increases instituted during the
past 12 months offset by a decline in occupancy rates. Average rates were $2,912
and $2,829 as of September 30, 2003 and 2002, respectively. Company-wide
occupancy was 82.0% and 83.5% as of September 30, 2003 and 2002, respectively.
In addition, the Company operated 48 fewer residences (aggregate decrease in
resident capacity of 16,646 beds) in the 2003 period than the 2002 period as a
result of asset sales and dispositions.



Other Revenues. Other revenues for the three months ended
September 30, 2003 were $425,000, a decrease of $347,000 from the $772,000 of
other revenue for the three months ended September 30, 2002. The decrease is
attributable to reduced development and franchise activity and a reduction in
management fees on residences which were either managed for third parties or for
entities in which we held a minority ownership position. Management fees include
charges for transitional services to recruit and train staff, initial and
recurring fees for use of our name and branding, initial and recurring fees for
use of our methodologies, services for assisting with finance processing, and
ongoing management services provided to operate the residence.



Residence Operating Expenses. Residence operating
expenses for the three months ended September 30, 2003 increased to $71.9
million from $66.2 million in the three-month period ended September 30, 2002.
Operating expenses as a percentage of resident service fees for the three months
ended September 30, 2003 and 2002 were 70.7% and 67.1%, respectively. This
percentage increase resulted primarily from increased wages, general liability
insurance, health and workers compensation insurance expense, residence
maintenance and utility expenses during the quarter ended September 30, 2003.



Lease Expense. Lease expense for the three months ended
September 30, 2003 was $16.0 million, compared to $14.8 million in the
comparable period in 2002. This increase is the result of the February 2003
sale/leaseback of 25 residences, offset by lease terminations and restructurings
that occurred during the past 12 months.



Lease Income. We earned $1.3 million of lease income for
the three months ended September 30, 2003, compared to $3.9 million for the
comparable period in 2002, on residences owned or leased by us and leased or
subleased to unconsolidated joint ventures. This decrease in lease income
occurred due to a reduction in the number of unconsolidated joint ventures
operating Alterra residences from 24 to 13 as of September 30, 2002 and 2003,
respectively. Lease payment obligations of the unconsolidated joint venture
entities are generally equivalent to the debt service payable by us on the
leased residences, and thereby offset our costs associated with obtaining and
maintaining financing for such residences.

General and Administrative Expense. For the three months
ended September 30, 2003, general and administrative expenses were $9.0 million
compared to $9.5 million before $1.8 million in restructuring costs for the
comparable period in 2002, representing a decrease as a percentage of operating
revenue from 9.6% in the 2002 period compared to 8.8% in the 2003 period. This
decrease in on-going expenses in the 2003 period was primarily attributable to
cost reductions which we have implemented to improve corporate efficiencies. An
additional $3.6 million of KERP and executive bonus accruals and professional
fees, including legal and financial advisory fees incurred by the creditors
committee and by the Company related to the reorganization are being reported
separately in accordance with SOP 90-7.



Loss (Gain) on Disposal. We adopted a plan to dispose of
143 residences with aggregate capacity of 6,499 residents and 33 parcels of
land. During the three months ended September 30, 2002 we sold or terminated
leases on seven residences (346 resident capacity) and seven land parcels
resulting in a gain on disposal of $1.2 million. Additionally, as a result of
various asset refinancings, three assets were removed from the Disposition Asset
classification and a corresponding gain of $7.5 million was recognized in
accordance with SFAS No. 121 due to the reversal of the related loss reserve
estimates associated with those assets.



During the three months ended September 30, 2003, we recognized
a gain on disposal of $274,000 resulting from the sale of two residences (116
resident capacity).



---

Depreciation and Amortization.  Depreciation and amortization for the three months ended September 30, 2003, was $5.7 million
representing a decrease of $553,000, or 8.9%, from the $6.2 million of
depreciation and amortization for 2002. This decrease is the result of the
February 2003 sale/leaseback of 25 residences and the asset dispositions which
occurred during the past 12 months.



Interest Expense, Net. Interest expense, net of interest
income, was $7.6 million for the three months ended September 30, 2003 compared
to $10.9 million of net interest expense for the comparable 2002 period. As a
result of our decision to reduce development and construction activity beginning
in 2001, all construction activity has stopped and no capitalized interest was
recorded for the quarters ended September 30, 2003 or 2002. Interest income for
the 2003 period was $36,000 as compared to $119,000 for the 2002 period. In
accordance with SOP 90-7, the interest expense for the quarter ended September
30, 2003 excludes $3.2 million of contractual convertible debt and note payable
interest obligations incurred subsequent to the bankruptcy filing on January 22,
2003, contributing to the decrease from September 30, 2002.



Amortization of Financing Costs. Amortization of financing
costs for the three months ended September 30, 2003 was $809,000 compared to
$930,000 of amortized financing costs for the comparable 2002 period. This
decrease is the result of debt retirements and fully amortized financing
costs.



Gain on Debt Extinguishment. During the three months ended
September 30, 2003, we recorded a gain on debt extinguishments of $1.0 million
that resulted from the restructuring of one lease portfolio representing ten
residences. This gain is recognized in other operating expenses in accordance
with SFAS No. 145, "Recission of FASB Statement No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections", which the Company adopted in
2002.



PIK Interest, Net. "Pay-In-Kind" (PIK) interest for the
three months ended September 30, 2003 and 2002 was $590,000 and $6.6 million,
respectively, and includes interest expense on the PIK Debentures which were
issued in May and August 2000. In accordance with SOP 90-7, the PIK interest
expense for the quarter ended September 30, 2003 excludes $7.9 million of
contractual PIK interest obligations incurred subsequent to the bankruptcy
filing on January 22, 2003, resulting in the decrease from the quarter ended
September 30, 2002.



Equity in Losses of Unconsolidated Affiliates. Equity in
losses of unconsolidated affiliates for the three months ended September 30,
2003, was $447,000 representing a decrease of $1.3 million from $1.8 million of
losses for the comparable 2002 period. The decrease in equity in losses of
unconsolidated affiliates is due to a reduction in the number of joint ventures
operating Alterra residences from 24 at September 30, 2002 to 13 at September
30, 2003. Additionally, in accordance with FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51",
based on an evaluation performed by the Company, effective September 30, 2003
the remaining unconsolidated joint ventures were deemed variable interest
entities and the 13 residences operating under those joint ventures have been
consolidated.



Reorganization Costs. Reorganization costs were $4.3
million for the quarter ended September 30, 2003. These costs include $3.7
million in professional fees, including legal and financial advisory fees
incurred by the creditors committee and by the Company related to the
reorganization and $589,000 in bonus expense accruals associated with the
Bankruptcy Court approved KERP and executive bonus plans.



Income Taxes. For the quarters ended September 30, 2003 and
2002, we recorded a current state and local income tax provision of $35,000 and
$30,000, respectively.



As of September 30, 2003 and 2002, we do not have a deferred
tax asset. In accordance with SFAS No. 109, we are required to continuously
evaluate the recoverability of the deferred tax assets based on the criteria
that it is "more likely than not" that the deferred taxes will be recoverable
through future taxable income. This evaluation is made based on our internal
projections which are routinely updated to reflect more recent operating trends.
Based on our current financial projections, we are uncertain that we will
recover these net deferred tax assets through future taxable income. In
addition, the utilization of our $545.1 million Net Operating Loss carryforward
could be subject to limitations based on the change of control provisions in the
Internal Revenue Code which may become operative in a liquidity transaction or
through implementation of our Plan. Accordingly, we have established a valuation
allowance against the entire deferred tax assets. As of September 30, 2003 and
2002, this valuation allowance was $265.0 million and $200.8 million,
respectively.



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Loss on Discontinued Operations.Included in
discontinued operations for the three months ended September 30, 2003 are the
operating losses associated with those residences identified as disposition
assets subsequent to January 1, 2002 in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lives Assets." Additionally,
a loss on disposal of $24.0 million associated with the transition to a new
operator of seven residences (350 resident capacity) is included in discontinued
operations for the three months ended September 30, 2003.



Included in discontinued operations for the three months ended
September 30, 2002 are the operating losses associated with those residences
identified as disposition assets subsequent to January 1, 2002 in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lives
Assets." Also included in discontinued operations for the three months ended
September 30, 2002 is a gain on disposal of $737,000 associated with the
disposition of two residences (86 resident capacity), a gain of $6.0 million
related to a debt extinguishment paid on our behalf as a result of a
restructuring settlement, and a loss of $3.8 million associated with a guaranty
liability.



Nine Months Ended September 30, 2003 Compared to the Nine
Months Ended September 30, 2002



Residence Service Fees. Residence service fees for the nine
months ended September 30, 2003 were $307.8 million, representing an increase of
$7.8 million from the $300.0 million for the comparable 2002 period. This
increase resulted primarily from the rate increases instituted during the past
12 months offset by a decline in occupancy rates. Average rates were $2,912 and
$2,829 as of September 30, 2003 and 2002, respectively. Company-wide occupancy
was 82.0% and 83.5% as of September 30, 2003 and 2002, respectively. In
addition, the Company operated 48 fewer residences (aggregate decrease in
resident capacity of 2,143 beds) in the 2003 period than the 2002 period as a
result of asset sales.



Other Revenues. Other revenues for the nine months ended
September 30, 2003 were $1.2 million, a decrease of $1.4 million from the $2.6
million of other revenue for the nine months ended September 30, 2002. The
decrease is attributable to reduced development and franchise activity and a
reduction in management fees on residences which were either managed for third
parties or for entities in which we held a minority ownership position.
Management fees include charges for transitional services to recruit and train
staff, initial and recurring fees for use of our name and branding, initial and
recurring fees for use of our methodologies, services for assisting with finance
processing, and ongoing management services provided to operate the
residence.



Residence Operating Expenses. Residence operating
expenses for the nine months ended September 30, 2003 increased to $213.5
million from $198.4 million in the nine month period ended September 30, 2002.
Operating expenses as a percentage of resident service fees for the nine months
ended September 30, 2003 and 2002 were 69.4% and 66.1%, respectively. This
percentage increase resulted primarily from increased wages, general liability
insurance, health and workers compensation insurance expense, residence
maintenance and utility expenses.



Lease Expense. Lease expense for the nine months ended
September 30, 2003 was $47.3 million, compared to $43.9 million in the
comparable period in 2002. This increase is the result of the February 2003
sale/leaseback of 25 residences, offset by lease terminations and restructurings
that occurred during the past 12 months.



Gain on Lease Termination. The $6.2 million gain on lease
termination consists of deferred gains recognized due to a new master lease
completed during the three months ended June 30, 2002.



Lease Income. We earned $3.8 million of lease income for
the nine months ended September 30, 2003, compared to $11.9 million for the
comparable period in 2002, on residences owned or leased by us and leased or
subleased to unconsolidated joint ventures. This decrease in lease income
occurred due to a reduction in the number of unconsolidated joint ventures
operating Alterra residences from 24 to 13 as of September 30, 2002 and 2003,
respectively. Lease payment obligations of the unconsolidated joint venture
entities are generally equivalent to the debt service payable by us on the
leased residences, and thereby offset our costs associated with obtaining and
maintaining financing for such residences.

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General and Administrative Expense. For the nine months
ended September 30, 2003, general and administrative expenses were $27.5 million
compared to $26.7 million before $8.0 million in restructuring costs for the
comparable period in 2002, representing an increase as a percentage of operating
revenue from 8.8% in the 2002 period to 8.9% in the 2003 period. An additional
$10.1 million of KERP and executive bonus accruals and professional fees,
including legal and financial advisory fees incurred by the creditors committee
and by the Company related to the reorganization are being reported separately
in accordance with SOP 90-7.



Loss on Disposal. We adopted a plan to dispose of 143
residences with aggregate capacity of 6,499 residents and 33 parcels of land.
During the nine months ended September 30, 2002 we sold or terminated leases on
23 residences (1,119 resident capacity) and nine land parcels resulting in a
gain on disposal of $12.7 million. Additionally, as a result of various asset
refinancings, three assets were removed from the Disposition Asset
classification and a corresponding gain of $7.5 million was recognized in
accordance with SFAS No. 121 resulting from the reversal of the related loss
reserve estimates associated with those assets.



During the nine months ended September 30, 2003, we recognized
a loss on disposal of $9.0 million resulting from the sale of eight residences
(340 resident capacity) and the sale leaseback of 25 residences (894 resident
capacity). In addition, the loss on disposal includes a $2.4 million charge
relating to outstanding receivables associated with a joint venture termination
which occurred in a prior period.



Depreciation and Amortization. Depreciation and
amortization for the nine months ended September 30, 2003, was $17.5 million,
representing a decrease of $700,000 from the $18.2 million of depreciation and
amortization for 2002.



Impairment Charge.We recognized an impairment charge of
$2.9 million in accordance with SFAS No. 144 during the nine months ended
September 30, 2003. This impairment charge was based on the difference between
an asset's carrying amount and fair value, where the fair value was determined
by estimating the present value of estimated future cash flows.



Interest Expense, Net. Interest expense, net of interest
income, was $24.5 million for the nine months ended September 30, 2003 compared
to $35.1 million of net interest expense for the comparable 2002 period, prior
to $937,000 of bank penalties paid in the period. As a result of our decision to
reduce development and construction activity beginning in 2001, all construction
activity has stopped and no capitalized interest was recorded for the nine
months ended September 30, 2003 or 2002. Interest income for the 2003 period was
$126,000 as compared to $252,000 for the 2002 period. In accordance with SOP
90-7, the interest expense for the nine months ended September 30, 2003 excludes
$8.9 million of contractual convertible debt and note payable interest
obligations incurred subsequent to the bankruptcy filing on January 22, 2003,
contributing to the decrease from September 30, 2002.



Amortization of Financing Costs. Amortization of financing
costs for the nine months ended September 30, 2003 was $2.2 million compared to
$4.1 million of amortized financing costs for the comparable 2002 period. This
decrease is the result of debt retirements and fully amortized financing
costs.



Gain on Debt Extinguishment. During the nine months ended
September 30, 2003, we recorded a gain on debt extinguishments of $13.7 million
that resulted from the sale/leaseback and refinancing of 32 residences
previously financed pursuant to two secured debt facilities and the
restructuring of one lease portfolio representing ten residences. This gain is
recognized in other operating expenses in accordance with SFAS No. 145,
"Recission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections", which the Company adopted in 2002.



PIK Interest, Net. "Pay-In-Kind" (PIK) interest for the
nine months ended September 30, 2003 and 2002 was $3.3 million and $19.3
million, respectively, and includes interest expense on the PIK Debentures which
were issued in May and August 2000. In accordance with SOP 90-7, the PIK
interest expense for the nine months ended September 30, 2003 excludes $21.2
million of contractual PIK interest obligations incurred subsequent to the
bankruptcy filing on January 22, 2003, resulting in the decrease from the nine
months ended September 30, 2002.



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Equity in Losses of Unconsolidated Affiliates. Equity in
losses of unconsolidated affiliates for the nine months ended September 30,
2003, was $667,000 representing a decrease of $5.4 million from the $6.1 million
of losses for the comparable 2002 period. The decrease in equity in losses of
unconsolidated affiliates is due to a reduction in the number of joint ventures
operating Alterra residences from 24 at September 30, 2002 to 13 at September
30, 2003. Additionally, in accordance with FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51",
effective September 30, 2003, the remaining unconsolidated joint ventures were
deemed variable interest entities and the 13 residences operating under those
joint ventures have been consolidated.



Reorganization Costs. Reorganization costs were $10.8
million for the nine months ended September 30, 2003. These costs include $9.8
million in trustee and professional fees, including legal and financial advisory
fees incurred by the creditors committee and by the Company related to the
reorganization and $1.0 million in bonus expense accruals associated with the
Bankruptcy Court approved KERP and executive bonus plans.



Income Taxes. For the nine months ended September 30, 2003
and 2002, we recorded a current state and local income tax provision of $85,000
and $90,000, respectively.



As of September 30, 2003 and 2002, we do not have a deferred
tax asset. In accordance with SFAS No. 109, we are required to continuously
evaluate the recoverability of the deferred tax assets based on the criteria
that it is "more likely than not" that the deferred taxes will be recoverable
through future taxable income. This evaluation is made based on our internal
projections which are routinely updated to reflect more recent operating trends.
Based on our current financial projections, we are uncertain that we will
recover these net deferred tax assets through future taxable income. In
addition, the utilization of our $545.1 million Net Operating Loss carryforward
could be subject to limitations based on the change of control provisions in the
Internal Revenue Code which may become operative in a liquidity transaction or
through implementation of our Plan. Accordingly, we have established a valuation
allowance against the entire deferred tax assets. As of September 30, 2003 and
2002, this valuation allowance was $265.0 million and $200.8 million,
respectively.



Loss on Discontinued Operations.Included in
discontinued operations for the nine months ended September 30, 2003 are the
operating losses associated with those residences identified as disposition
assets subsequent to January 1, 2002 in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lives Assets." Additionally,
impairment losses totaling $5.2 million, which represent the difference between
a residences' carrying value and the residences' estimated fair value less costs
to sell, a loss of $2.0 million associated with the disposition of eight
residences (390 resident capacity), and a loss of $24.0 million associated with
the transition to a new operator of seven residences (350 resident capacity) are
included in discontinued operations for the nine months ended September 30,
2003.



Included in discontinued operations for the nine months ended
September 30, 2002 are the operating losses associated with those residences
identified as disposition assets subsequent to January 1, 2002 in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lives
Assets." Additionally, impairment losses totaling $10.6 million, which represent
the difference between a residences' carrying value and the residences'
estimated fair value less costs to sell, a gain on disposal of $1.6 million
associated with the disposition of three residences (124 resident capacity), and
the write off of $24.0 million in net assets of a former subsidiary at the time
of the transfer of the stock of the subsidiary, are included in discontinued
operations for the period ended September 30, 2002. Also included in
discontinued operations for the nine months ended September 30, 2002 is a loss
of $58.5 million related to our estimated liability associated with our guaranty
obligation of the former subsidiary, a loss of $11.9 million recognized in
accordance with Statement of Financial Accounting Standards SFAS No. 142,
"Goodwill and Other Intangible Assets" and a gain of $6.0 million related to a
debt extinguishment paid on our behalf as a result of a restructuring
settlement.



Cumulative Effect of Change in Accounting Principle. In
June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," having a required effective date for fiscal years beginning after
December 15, 2001. Under

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Liquidity and Capital Resources



At September 30, 2003, we had $15.1 million in unrestricted
cash and cash equivalents and a working capital deficit of $264.9 million
(excluding $590.4 million of liabilities deemed to be subject to compromise)
compared to unrestricted cash and cash equivalents of $13.8 million and a
working capital deficit of $874.2 million at September 30, 2002. Additionally,
$7.6 million and $9.2 million of restricted cash is included in other current assets
as of September 30, 2003 and December 31, 2002, respectively.



For the nine months ended September 30, 2003, operating cash
flow was $184,000 compared to $26.0 million for the nine months ended September
30, 2002. The cash flow for the 2002 and 2003 periods reflect our decision to
discontinue paying debt service and lease payments to selected lenders and
lessors.



In conjunction with our Chapter 11 Filing, in January 2003 we
secured a $15.0 million DIP credit facility from affiliates of certain principal
holders of the Company's pay-in-kind securities issued in the summer of 2000.
The Bankruptcy Court issued an order approving our borrowing up to $6.5 million
under the DIP credit facility on an interim basis on January 24, 2003.
Additional borrowings of up to a total $15.0 million under the DIP credit
facility were approved by the Bankruptcy Court on April 9, 2003. As of September
30, 2003, $13.7 million has been borrowed under the DIP credit facility.



Historically, we financed our operations and growth through a
combination of various forms of real estate financing (mortgage financing,
synthetic leases, financing leases and sale/leasebacks), capital contributions
from joint venture partners and the sale of our securities (Common Stock,
preferred stock and Subordinated Debentures) and, to a lesser extent, cash from
operations. At September 30, 2003, we had $903.7 million of outstanding debt
principally consisting of $441.2 million of Subordinated Debentures having a
weighted average interest rate of 8.12%, $111.7 million of fixed rate debt
having a weighted average interest rate of 7.48%, capitalized and financing
lease obligations of $77.0 million having a weighted average interest rate of
11.48%, $236.2 million of variable rate debt having a weighted average interest
rate of 5.65%, and $16.0 million and $21.6 million of notes payable and
short-term borrowings, respectively.



Our principal credit and financing agreements, including our
Subordinated Debentures and our lease agreements, include cross-default
provisions that provide that a material default under our other credit
facilities constitutes a default under that credit or financing agreement.
Accordingly, any material default arising under one of our credit or financing
agreements could result (and, as discussed below, has resulted) in many of our
other major credit and financing arrangements being in default. In addition, our
principal credit and financing agreements include various financial covenants
and other restrictions, including: (i) fixed charge coverage requirements,
typically measured on a trailing four quarter basis and which generally increase
over the term of the applicable credit agreement; (ii) maximum leverage ratios
which limit our aggregate senior indebtedness to total capitalization; (iii)
various minimum net worth or tangible net worth requirements; (iv) in some
cases, property specific debt service coverage requirements and similar
financial covenants of the type referenced above applicable to individual
properties or to the pool of residences financed by the applicable lender; and
(v) the maintenance of operating and other reserves for the benefit of the
residences serving as collateral for the applicable lender. We are currently not
in compliance with certain of these covenants, although we have negotiated
limited in time waivers with certain lenders and lessors. Additionally, under
some of our credit and sale/leaseback facilities we are required to secure
lender or lessor consent prior to engaging in mergers, business combinations or
change in control transactions. Certain consents, waivers and approvals will
need to be secured from certain of our lenders and lessors in order to
consummate the Merger with FEBC.



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We elected not to fund certain debt service and lease payment
obligations due in 2001, 2002 and 2003 without the consent of the applicable
lender or lessor. Through additional payments, prepayments associated with asset
sales and application of escrowed amounts, as of September 30, 2003, $2.8
million of delinquent outstanding scheduled debt service remains unpaid
(excluding delinquent scheduled debt service relating to the $590.4 million of
liabilities subject to compromise). We have received a written notice of
acceleration from lenders with respect to indebtedness aggregating $50.9 million
at September 30, 2003. In addition, indebtedness of approximately $123.1 million
has fully matured and is past due. Many of our other credit and lease facilities
are in technical default as a result of these payment defaults associated with
other loan and lease facilities, but several of these lenders and lessors have
executed limited in time waivers. We have received written notices of default
from most of these lenders or lessors, three lessors have terminated leases for
20 residences (1,068 resident capacity) and other lenders have elected to apply
deposits and reserve funds of ours held by such lenders against the past due
payments. Five lenders have activated or have indicated that they may activate
"cash traps" of bank accounts relating to the operation of residences mortgaged
to such lenders, either pursuant to arrangements set forth in the applicable
loan documents or as negotiated with the Company. We are also in litigation with
a former lessor with respect to their damage claim associated with the early
termination of their 11 residence lease portfolio.



Our operations will require significant additional capital
resources in the future in order to fund: (i) the professional fees and other
related costs associated with our Bankruptcy Case and Restructuring Plan; (ii)
our ongoing debt service and lease obligations, including repayment of our DIP
credit facility and maturities of our long-term debt and refinancing of short
term debt; (iii) deferred capital expenditures; (iv) normalizing our
professional and general liability insurance programs; and (v) general working
capital needs. Since July 1, 2001, due to our limited cash resources and a
general lack of availability of traditional professional and general liability
insurance products, we have maintained substantially lower levels of liability
insurance than would be desirable given actuarial estimates. Accordingly, our
Restructuring Plan contemplates higher cash requirements for insurance in the
future than we have incurred in the recent past.



Additionally, growth in residence operating cash flow has been
slower than projected as a result of (i) increased operating costs, including
labor, utilities and liability insurance and (ii) slower fill rates in our
pre-stabilized residences and reduction in occupancy levels in certain of our
stabilized residences. As a result of ongoing operating losses and these
identified future capital needs, we expect that our projected cash needs during
2003 will exceed our projected identified cash resources. To satisfy these cash
shortfalls and to preserve the integrity of our operations, we are seeking to
consummate the Merger and are pursuing our Restructuring Plan which seeks, among
other things, to dispose of a significant number of our residences which operate
with cash shortfalls, to defer some of our secured debt maturities until those
dispositions and negotiated restructurings of our principal debt and lease
obligations can occur, and to restructure our junior capital structure. See
"Business- Chapter 11 Bankruptcy and Restructuring Activities".



To address our long-term liquidity and capital needs, including
our upcoming debt maturities, we intend to (i) seek to consummate the Merger;
(ii) continue our negotiations with our lenders, lessors, joint venture
partners, and to seek to implement the Restructuring Plan and the Plan; (iii)
continue to implement operating initiatives focused on overall rate and
occupancy improvement and overhead reductions; (iv) dispose of under-performing
and non-strategic residences in order to reduce associated financing costs,
operating expenses and to generate cash; and (v) seek to identify sources of
financing to refinance pending and near term debt maturities. As our
Restructuring Plan and the Plan are largely dependent upon our ability to
implement negotiated consensual restructuring arrangements with our various
capital structure constituencies, no assurances may be given as to whether we
will be able to restructure the Company or to restore value to various of our
capital structure constituencies.

At the outset of our restructuring, management sought to
restructure secured loan facilities that, in management's view, would generate
significant deficiency claims (i.e., claims in excess of the value of the
applicable mortgage portfolio) in the event the applicable lenders sought to
call the loan and foreclose on their collateral. Management believes that five
credit facilities representing $221.8 million in aggregate financing at
September 30, 2003 (secured by mortgages on 35 residences with a capacity of
2,702 beds) appear to represent significant potential deficiency claims in the
range of $76.8 million to $99.1 million. In these negotiations, we sought to
limit or eliminate these potential deficiency claims against the Company in
exchange for our agreement to cooperate with the applicable lenders to
facilitate an orderly transition of ownership (and, in certain cases,
management) of the mortgaged residences to the lenders or their designees
(through deed-in-lieu of foreclosure transactions or so-called friendly
foreclosures). In transitioning ownership of the mortgaged residences to the
lenders, we offered to provide interim or long-term management services to the
lenders with respect to the mortgaged residences. As noted above, during 2002,
we executed definitive agreements of this type with three different lender
groups with regard to three "impaired" credit facilities, originally
representing $104.2 million of financing secured by 31 residences with an
aggregate capacity of 1,520 beds. As a result of refinancings, asset sales and
foreclosures during 2002 and 2003, $6.8 million of this indebtedness secured by
mortgages on two residences is remaining at September 30, 2003.

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In May 2002, the lender group for one "impaired" facility,
representing $171.0 million in aggregate financing (secured by mortgages on 26
residences with an aggregate capacity of 2,154 beds) caused title to all of the
stock of our subsidiary that operated these mortgaged residences to be
transferred to a third party. Accordingly, we no longer own these residences,
although we do currently manage these residences for this lender group and are
actively negotiating with the lender group seeking to limit or eliminate any
deficiency claim arising under our guaranty of this financing. As a result of
the stock transfer, these residences are no longer consolidated and operations
related to these residences through May 31, 2002 are reported as discontinued
operations. We have accrued $58.5 million related to our estimated liability
associated with our guaranty (including payment of the termination fee due upon
full payment of the mortgage obligations). Such liability is included in
liabilities subject to compromise at September 30, 2003. The liability
associated with our guaranty obligation was calculated as the difference between
the fair market value of the assets and the underlying mortgage obligations.



In January 2003, we entered into agreements with this lender
group pursuant to which: (i) we have agreed to manage these 26 residences on an
interim basis without a management fee, and to cooperate in transitioning
management to any successor manager appointed by the credit participants, and
(ii) the Company is entitled to be released of its guaranty and other principal
obligations (with the exception of certain environmental indemnities) under this
financing structure upon the satisfaction of certain conditions, including the
payment of $5.7 million of fees to the credit participants on or prior to the
confirmation of a plan of reorganization in our Bankruptcy Case. In filings made
with the Bankruptcy Court, representatives of these credit participants have
alleged that the aggregate obligation of Alterra to obtain the release of this
deficiency claim is approximately $10.3 million, not $5.7 million. We dispute
this interpretation of the settlement agreement. If we are unable to enforce the
terms of the settlement agreement in the manner that we believe the parties
intended and are otherwise unable to resolve this dispute, we do not intend to
assume this settlement agreement in connection with the completion of our
Bankruptcy Case. If this settlement agreement is not given effect, the credit
participants for this lender group will have a large unsecured deficiency claim,
which could substantially reduce the funds available for distribution to other
unsecured creditors pursuant to our Plan.



In addition to these impaired credit facilities, we are
continuing to seek to negotiate amendments and waivers with the applicable
lenders with respect to our other principal secured credit facilities in order
to, depending on the specific case, reset covenants, obtain consent to sell
certain mortgaged residences, secure waivers of prior defaults and, in certain
cases, to extend scheduled maturities. These credit facilities represent $279.9
million of financing secured by an aggregate of 87 residences with an aggregate
capacity of 4,243 beds as of September 30, 2003. Discussions with certain of
these lenders have commenced, and as of September 30, 2003 we have executed
definitive binding agreements with lenders with respect to $101.3 million of
indebtedness secured by 36 residences with an aggregate capacity of 1,689 beds,
providing for, among other things, extensions of debt maturities, waivers of
prior defaults and amendments of certain covenants. In February 2003 we sold 25
residences with an aggregate capacity of 894 beds, extinguished the related
debt, and leased back the facilities under an operating lease agreement. We also
refinanced $6.9 million of debt secured by six residences with a capacity of 182
beds. We anticipate that we will need to negotiate restructuring agreements and
to secure waivers and amendments with most of our secured lenders as a condition
to confirming our Plan and consummating the Merger.



In July 2003, we negotiated settlement agreements with one
lender group, holding $23.3 million of indebtedness secured by mortgages on
seven residences with an aggregate capacity of 350 beds. Pursuant to these
agreements, we agreed to cooperate with the lender to facilitate an orderly
transition of ownership and management of the mortgaged residences to the lender
or their designee through a deed-in-lieu of foreclosure transaction. In
transitioning ownership of the mortgaged residences to the lender, we offered to
provide interim management services to the lender with respect to the mortgaged
residences through August 2003. In exchange for our cooperation and management
services, the lender has agreed to release any potential deficiency claims. As
of July 31, 2003, all seven residences have been transitioned to a new
operator.



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As of September 30, 2003, we had six multi-residence portfolios
leased from various REITs, including those assets refinanced in February 2003.
These portfolios include an aggregate of 225 residences with an aggregate
capacity of 9,609 beds. We have entered into restructuring agreements with
respect to the five multi-residence lease portfolios existing prior to February
2003. These restructurings included the amendment of certain lease covenants and
terms and, in three lease facilities, the conversion of individual leases into
single master leases. The cash rent due under one lease facility was modified
through the application of various deposits held by the landlord to satisfy a
portion of the cash rent obligation in the early years of the restructured
master lease. We anticipate that we will need to secure further waivers and
amendments from our principal lessors as a condition to confirming our Plan and
consummating the Merger.



As of September 30, 2003, the Company's junior capital
structure is comprised of unsecured debt of approximately $458.1 million and
equity capitalization consisting of $6.2 million aggregate principal amount of
9.75% Series A Cumulative Convertible Preferred Stock due May 30, 2007 and 22.2
million shares of Common Stock. The principal components of the Company's
unsecured indebtedness as of September 30, 2002 (amounts exclude accrued but
unpaid interest) include:



i.      $16.6 million aggregate principal face amount of promissory
notes issued in connection with the restructuring of certain joint venture
arrangements (the "Unsecured Senior Notes") and $250,000 of other unsecured
notes (the "Unsecured Notes");



ii.      $253.9 million aggregate principal amount of 9.75%
pay-in-kind convertible debentures due May 30, 2007 (the "PIK Debentures")
issued in three separate series in 2000;



iii.      $112.0 million aggregate principal amount of 5.25%
convertible subordinated debentures due December 15, 2002 (the "5.25%
Debentures");

iv.      $40.4 million aggregate principal amount of 7.00% convertible
subordinated debentures due June 1, 2004 (the "7.00% Debentures"); and

v.      $34.9 million aggregate principal amount of 6.75% convertible subordinated
debentures due June 30, 2006 (the "6.75% Debentures").



The outstanding 5.25% Debentures, 7.00% Debentures and 6.75%
Debentures (collectively, the "Original Debentures") are subordinated to all
other "senior indebtedness" of the Company (as defined in the applicable
indenture governing such debentures), and the PIK Debentures are subordinated to
all "senior indebtedness" of the Company (as defined in the applicable
indentures governing such debentures), other than the Original Debentures.
Although defined somewhat differently in the several indentures governing the
Original Debentures and the PIK Debentures (collectively, the "Subordinated
Debentures"), "senior indebtedness" is defined to generally include indebtedness
for borrowed money and other similar obligations of Alterra (other than the
other series of Original Debentures).



All of our Subordinated Debentures are currently in default due
to our failure to make coupon payments on the Original Debentures and due to
cross default provisions triggered by payment defaults on our secured debt.



As a result of several notices of default received by the
Company with respect to secured indebtedness that by its terms may be
accelerated by the applicable lenders, neither we nor the applicable indenture
trustees for the Subordinated Debentures are permitted by the subordination
provisions of the indentures governing the respective Subordinated Debentures to
make any payment or distribution on account of the Subordinated Debentures
(other than the payment of PIK coupons on the PIK Debentures). As a result, we
did not make cash interest payments on the Original Debentures in 2001, 2002 and
2003 of $5.5 million, $11.0 million and $11.0 million, respectively. In the
event that the Company is dissolved, liquidated or reorganized, all amounts due
in payment of the Company's "senior indebtedness" must be paid or provided for
before any payment may be made on account of the Subordinated Debentures.



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To the extent that the Company is not able to restructure its
capital structure and is forced to liquidate, applicable principles of corporate
law (specifically, the liquidation priority of debt over equity and the priority
of preferred stock over common stock) and the subordination provisions governing
the Subordinated Debentures would dictate that:



- All of our obligations relating to our secured and unsecured loans,
  including the Unsecured Senior Notes (with a principal balance of $16.6
  million at September 30, 2003) and any deficiency claims (estimated at $76.8
  million to $99.1 million at September 30, 2003 (disregarding the restructuring
  agreements described above)) relating to our secured loan facilities, would be
  required to be paid in full before any liquidation proceeds are distributed to
  the holders of our Subordinated Debentures;



- All obligations relating to the PIK Debentures ($253.9 million including
  accrued and unpaid PIK dividends at September 30, 2003) would be required to
  be paid in full before any liquidation proceeds are distributed to the holders
  of our Original Debentures;



- All obligations relating to the Original Debentures ($210.3 million
  including accrued and unpaid interest at September 30, 2003), as well as all
  other indebtedness of the Company, would be required to be paid in full before
  any liquidation proceeds are distributed to the holders of our Series A Stock
  and Common Stock; and



- All liquidation preferences related to our outstanding Series A Preferred
  Stock (approximately $6.2 million as of September 30, 2003) would be required
  to be paid in full before any liquidation proceeds are distributed to the
  holders of our Common Stock.





In restructuring our junior capital structure pursuant to our
Plan, the relative rights in liquidation of our various junior capital
constituencies is a significant factor in determining the extent to which the
claims and interests of these various constituencies will be entitled to any
distribution of value as the Company is restructured.



Our original Plan, filed with the Bankruptcy Court on March 27,
2003, contemplated that the Company would conduct a marketing process in order
to solicit and identify the "highest and best" proposal for a Liquidity
Transaction. Management believes that the Merger, as the highest and best
Liquidity Transaction proposed at the July 17, 2003 auction, provides fair
valuation of the reorganized Alterra that will facilitate the completion of the
reorganization and will provide a source of liquidity to make distributions of
cash to the holders of various junior capital structure constituents, all to the
extent that such holders are entitled to a distribution pursuant to applicable
principals of bankruptcy law and the subordination provisions governing the
Subordinated Debentures.



Given the uncertainty as to the outcome of our remaining
restructuring negotiations with senior capital constituencies (including,
without limitation, the extent to which deficiency claims are asserted in the
Bankruptcy Case) and given the impact of operative subordination provisions and
corporate and bankruptcy law doctrines governing the relative rights of holders
of debt and equity interests in the Company, it is very difficult for us to
predict what value, if any, various junior capital constituencies will receive
in the restructured Alterra. Pursuant to the Merger Agreement, the maximum distribution to holders of unsecured claims is approximately $23 million (which included payments pursuant to settlement agreements with holders of deficiency claims), which will likely be adjusted pursuant to the Merger Agreement based on working capital and the cash requirements of the Plan through the Effective Date. Based on our current expectations and
pursuant to our Plan, no distribution of value will be made to certain classes
of unsecured debt or to any class of capital stock of the Company upon the
conclusion of the Bankruptcy Case.



The Restructuring Plan calls for us to seek to acquire joint
venture interests in certain of our residences in order to simplify our capital
structure. In many cases, our acquisition of these joint venture interests (or
termination of the applicable joint venture's interest in our residences) is
necessary for us to satisfy restructuring requirements established by our senior
lenders and lessors.

As of December 2002,
we entered into an agreement with one of our joint venture partners pursuant to
which we have agreed to purchase all of the remaining joint venture interests
not held by the Company in eight residences and to acquire promissory notes
previously issued by the Company aggregating approximately $3.6 million in
exchange for the issuance of a 5-year unsecured promissory note for $7.2 million
from the reorganized Alterra upon confirmation of our plan of reorganization by
the Bankruptcy Court. Accordingly, the consummation of this transaction will be
contingent upon, among other things, a successful Chapter 11 reorganization of
the Company and Bankruptcy Court approval.



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In October 2003, we entered into an agreement with our other
principal joint venture partner group pursuant to which we have agreed to
purchase all of the remaining joint venture interests not held by the Company in
32 residences and to secure the release of the Company with respect to all
claims held by these joint venture partners. Pursuant to this settlement
agreement, which was approved by the Bankruptcy Court in late October 2003, the
limited partners will be entitled to receive from reorganized Alterra an
aggregate of $2.9 million of five-year promissory notes of reorganized Alterra
and will be entitled to receive the distribution and treatment under our Plan
that a holder of a $6 million "Class 6" claim will receive in our Bankruptcy
Case. This settlement is contingent upon the confirmation of our Plan and the
consummation of the Merger.



As of September 30, 2003, our current portion of long-term debt
totaled $284.5 million. These current maturities include debt and lease
obligations that are in default or pursuant to cross-default provisions and may
be declared in default and accelerated at the lender's election, obligations
associated with assets classified as held for sale, and amounts that have fully
matured and are past due as of September 30, 2003. Additionally, $441.1 million
of Subordinated Debentures are classified as liabilities subject to compromise.



On July 22, 2003, we executed the Merger Agreement with FEBC,
pursuant to which FEBC will acquire 100% of the common stock of the Company upon
emergence from the Chapter 11 bankruptcy proceeding. Pursuant to the Merger
Agreement, FEBC will pay the Company $76.0 million of merger consideration,
which may be adjusted downward in certain circumstances. The merger
consideration will be used (i) to fund costs of the Company's bankruptcy and
reorganization and to provide for the working capital and other cash needs of
the restructured Company and (ii) to fund a distribution to the Company's
unsecured creditors. The consummation of the Merger is subject to the
satisfaction of numerous conditions, including without limitation confirmation
of the Company's Chapter 11 plan of reorganization by the Bankruptcy Court,
receipt of consents and approvals from certain of the Company's secured lenders
and lessors and compliance with applicable state and local health regulatory
licensing requirements.





Impact of Inflation



To date, inflation has not had a significant impact on us.
Inflation could, however, affect our results of operations due to our dependence
on our senior resident population who rely on liquid assets and relatively fixed
incomes to pay for our services. As a result, we may not be able to increase
residence service fees to account fully for increased operating expenses. In
structuring our fees we attempt to anticipate inflation levels, but there can be
no assurance that we will be able to anticipate fully or otherwise respond to
any future inflationary pressures.



Forward-Looking Statements



The statements in this quarterly report relating to matters
that are not historical facts are forward-looking statements based on
management's belief and assumptions using currently available information.
Although we believe that the expectations reflected in these forward-looking
statements are reasonable, we cannot give any assurances that these expectations
will prove to be correct. These statements involve a number of risks and
uncertainties, including, but not limited to, the ability of the Company to
satisfy its operating and capital needs

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ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK



Market risk represents the risk of changes in value of a
financial instrument, derivative or non-derivative, caused by fluctuations in
interest rates, foreign exchange rates and equity prices. Changes in these
factors may cause fluctuations in the Company's earnings and cash flows.



We performed a sensitivity analysis which presents the
hypothetical change in fair value of those financial instruments held by us at
September 30, 2003, which are sensitive to changes in interest rates. Market
risk is estimated as the potential change in fair value resulting from an
immediate hypothetical one-percentage point parallel shift in the yield curve.
The fair value of the debt included in the analysis is $236.2 million. Although
not expected, a one-percentage point change in the interest rates would have
caused our annual interest expense to change by approximately $2.4 million.
Accordingly, a significant increase in LIBOR based interest rates could have a
material adverse effect on our earnings.



Although a majority of the debt and lease payment obligations
we have as of or during the nine months ended September 30, 2003 are not subject
to floating interest rates, indebtedness that we may incur in the future may
bear interest at a floating rate.



We do not presently use financial derivative instruments to
manage interest costs. We do not use foreign currency exchange rate forward
contracts or commodity contracts and do not have foreign currency exposure as of
September 30, 2002.





ITEM 4. CONTROLS AND PROCEDURES



The Company maintains "disclosure controls and procedures", as
such term is defined under Securities Exchange Act Rule 13a-14(c), that are
designed to ensure that information required to be disclosed in the Company's
Securities Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, the Company's
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives and the Company's management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. The Company has carried out an evaluation, within the
90 days prior to the date of filing of this report, under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
upon their evaluation and subject to the foregoing, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective in ensuring that material information relating to the
Company, is made known to the Chief Executive Officer and Chief Financial
Officer by others within the Company during the period in which this report was
being prepared.



There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date the Company completed its
evaluation.



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PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in various legal proceedings
relating to claims arising in the ordinary course of our business. Neither we
nor any of our subsidiaries is a party to any legal proceeding other than the
Bankruptcy Case, the outcome of which, individually or in the aggregate, is
expected to have a material adverse affect on our financial condition or results
of operations, with the possible exception of the matters described below. As a
result of the Chapter 11 Filing, each of these matters has been stayed as
against the Company pending further relief from the Bankruptcy Court. Pending
litigation against the Company's subsidiaries and other affiliates has not been
stayed by the Bankruptcy Case.



As previously described, on January 22, 2003, the Company filed
the Chapter 11 Filing with the Bankruptcy Court (Case No. 03-10254). See "Management's Discussion and Analysis and Results of Operations - Liquidity of Capital Reserves."



We elected not to fund certain debt service and lease payment
obligations due during 2001, 2002 and 2003 without the consent of the applicable
lender or lessor. Through additional payments, prepayments associated with asset
sales and application of escrowed amounts, as of September 30, 2003, we had $2.8
million of remaining delinquent outstanding scheduled debt service due to
lenders (excluding delinquent scheduled debt service related to the $590.4
million of liabilities deemed subject to compromise). We have received a written
notice of acceleration from lenders with respect to indebtedness aggregating
$50.9 million as of September 30, 2003. Additionally, indebtedness of
approximately $123.1 million has fully matured and is past due. Many of our
other credit and lease facilities are in technical default as a result of these
payment defaults associated with other loan and lease facilities, but several of
these lenders and lessors have executed limited in time waivers. We are also in
default under various financial and other covenants contained in certain of our
credit and lease arrangements. We have received written notices of default from
most of these lenders or lessors, three lessors have terminated leases for 17
residences (940 resident capacity) and other lenders have elected to apply
deposits and reserve funds of ours held by such lenders against the past due
payments. Five lenders have activated or are in the process of activating "cash
traps" of bank accounts relating to the operation of residences mortgaged to
such lenders, either pursuant to arrangements set forth in the applicable loan
documents or as subsequently negotiated with the Company. We are also in
litigation commenced in 2001 in the Chancery Court of Davidson County,
Tennessee, with a former lessor who has asserted a damage claim arising out of
the early termination of its 11 residence lease portfolio.



The Company's Subordinated Debentures include subordination
provisions that prohibit the Company from making interest payments to the
debenture holders (other than payment-in-kind coupon payments) after the
occurrence of payment defaults on the Company's senior indebtedness. As such, we
defaulted in making coupon payments on our 5.25%, 6.75% and 7.00% Debentures
aggregating approximately $5.5 million in July 2001, and $11.0 million in 2002
and 2003.



We are seeking to address all of our pending defaults of our
senior and junior capital structure obligations through our Restructuring Plan
and the Bankruptcy Case. However, our Restructuring Plan is dependent upon our
ability to negotiate consensual modifications and waivers with certain of our
senior capital structure constituents. Absent an agreed upon resolution with
these third parties and assuming, in certain cases to the extent applicable,
such parties secure relief from the stay of the Bankruptcy Case from the
Bankruptcy Court, our lenders and lessors may begin exercising remedies under
their applicable financing agreements that could substantially hinder or disrupt
our efforts to restructure the Company and result in a liquidation of the
Company.



We are also subject to various professional and liability
claims. Since July 1, 2001, due to our limited cash resources and a general lack
of availability of traditional professional and general liability insurance
products, we have maintained levels of liability insurance that are
substantially lower than would be desirable given actuarial estimates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations- Liquidity and Capital Resources" for further discussion.



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ITEM 3.      DEFAULTS UPON SENIOR SECURITIES

In order to maintain sufficient operating liquidity, we elected
not to fund certain 2001, 2002 and 2003 debt service and lease payment
obligations without the consent of the applicable lender. Through additional
payments, prepayments associated with asset sales and application of escrowed
amounts, as of September 30, 2003, we had $2.8 million of remaining outstanding
debt service (excluding delinquent scheduled debt service related to the $590.4
million of liabilities deemed subject to compromise). We have received a written
notice of acceleration from lenders with respect to indebtedness aggregating
$50.9 million. In addition, indebtedness of approximately $123.1 million has
fully matured and is past due. Many of our other credit and lease facilities are
in technical default as a result of these payment defaults associated with other
loan and lease facilities, but several of these lenders and lessors have
executed limited in time waivers. We have received written notices of default
from most of these lenders or lessors, three lessors have terminated leases for
20 residences (1,068 beds) and other lenders or lessors have elected to apply
our deposits and reserve funds held by such lenders and lessors against past due
payments. Five lenders have activated or are in the process of activating "cash
traps" of bank accounts relating to the operation of residences mortgaged to
such lenders.



We are also in litigation with a former lessor with respect to
their damage claim associated with the early termination of their 11 residence
lease portfolio.



We expect that absent an agreed upon resolution, other lenders
and lessors may also begin exercising remedies under their loan and lease
documents. We are not aware of any further steps taken by these lenders to
exercise their remedies subsequent to the acceleration or maturity of the debt
and we are currently working with these lenders to extend maturities and to
enter into forbearance agreements as we seek to implement our Restructuring
Plan.



The indentures pursuant to which the $441.2 million of
outstanding Subordinated Debentures were issued include as an event of default
the acceleration of any other indebtedness of the Company of a specified amount
(ranging from $1.0 million to $10.0 million). Accordingly, as a result of
notices of acceleration that we received with respect to $59.0 million of
mortgage indebtedness, we are in default with respect to our $441.2 million of
Subordinated Debentures.



We sought forbearance agreements from certain of our lenders
and lessors with respect to debt service and lease payments due in 2001 and
2002, but did not have written agreements in place with most of our lenders and
lessors at the time these payments were due. As we did not make certain loan and
lease payments during 2001 and 2002, we are now in default with respect to these
obligations. Management believes that, despite the pendency of these defaults,
during the near term the majority of these lenders and lessors will continue to
participate in restructuring discussions with us. No assurances may be given,
however, that this will be the case. As our principal credit, lease and other
financing facilities are cross defaulted to a material default occurring under
other credit, lease or financing facilities, a payment default under one such
facility results in our being in default under many other such facilities, which
could adversely affect our ability to restructure without reorganization
proceedings.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



|ExhibitNumber |     | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------------- | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              | (a) | Exhibits.  The following exhibits are filed as part of
      this report.                                                                                                                                                                                                                                                                                                                                                                                                                     
|              |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.1          |     | Agreed Order for Adequate Protection and Relief from the
      Automatic Stay, as signed by the United States Bankruptcy Court for the
      District of Delaware on May 12, 2003, in connection with facilities
      financed by the Registrant with The Federal National Mortgage Association
      ("FNMA") (certain exhibits to this agreement have been omitted; the
      Registrant agrees to furnish supplementally to the Commission, upon
      request, a copy of these exhibits).
|10.2          |     | Form of Deed in Lieu of Foreclosure Agreement between
      FNMA, ALS Kansas, Inc. and the Registrant dated as of July 31, 2003
      (certain exhibits to this agreement have been omitted; the Registrant
      agrees to furnish supplementally to the Commission, upon request, a copy
      of these exhibits).                                                                                                                                                                          
|10.3          |     | Schedule of Deed in Lieu of Foreclosure Agreements which
      are substantially similar to the Form of Deed in Lieu of Foreclosure
      Agreement filed herewith as Exhibit 10.2.                                                                                                                                                                                                                                                                                                           
|10.4          |     | Stipulation of Registrant and U.S. Bank National
      Association Providing for the Disposition of Certain Properties and for
      Relief from the Automatic Stay dated June 9, 2003 and Order Approving the
      Stipulation, as signed by the United States Bankruptcy Court for the
      District of Delaware on June 24, 2003.                                                                                                                                                        
|10.5          |     | Settlement Agreement, Mutual Release and Assignment dated
      as of October 11, 2003 by and among the Registrant, The Margolick
      Financial Group LP, the Limited Partnerships named therein and the
      Settling Limited Partners named therein (certain exhibits to this
      agreement have been omitted; the Registrant agrees to furnish
      supplementally to the Commission, upon request, a copy of these
      exhibits).                                                 
|11.1          |     | Statement Regarding Computation of Net Income Per
      Share.                                                                                                                                                                                                                                                                                                                                                                                                                                
|31.1          |     | Certification of Chief Executive Officer of the
      Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                   
|31.2          |     | Certification of Chief Financial Officer of the
      Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                   
|32.1          |     | Certification of Chief Executive Officer of the
      Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                   
|32.2          |     | Certification of Chief Financial Officer of the
      Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.                                                                                                                                                                                                                                                                                                                                                             
|              |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              | (b) | Reports on Form 8-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|              |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              | 1.  | A report on Form 8-K dated October 7, 2003, reporting
      pursuant to Item 5 on a press release dated October 7, 2003, announcing
      further details of its post Chapter 11 ownership and operating
      plan.                                                                                                                                                                                                                                                                          
|              |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Milwaukee, State of
Wisconsin, on the 14th day of November, 2003.



|                        |  | ALTERRA HEALTHCARE CORPORATION                                               
|----------------------- |  | -----------------------------------------------------------------------------
|                        |  |                                                                              
|                        |  | /s/ Mark W. Ohlendorf                                                        
|Date: November 14, 2003 |  | By: Mark W. Ohlendorf, President, Chief Financial Officer and
      Secretary

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EXHIBIT 11.1 COMPUTATION OF NET INCOME PER SHARE

|                                                                                                                                     |   | Three Months EndedSeptember 30, |   |   | Nine Months EndedSeptember 30, |  
|------------------------------------------------------------------------------------------------------------------------------------ | - | ------------------------------- | - | - | ------------------------------ | -
|                                                                                                                                     |   | 2003                            |   |   | 2002                           |  
|Basic:                                                                                                                               |   |                                 |   |   |                                |  
|Net loss from continuing operations before cumulative
      effect of change in accounting principle - attributable to common shares | $ | (11,675                         | ) | $ | (6,693                         | )
|Loss on discontinued operations                                                                                                      |   | (24,128                         | ) |   | 787                            |  
|Cumulative effect of change in accounting principle                                                                                  |   | --                              |   |   | --                             |  
|Net loss attributable to common shares                                                                                               |   | (35,803                         | ) |   | (5,906                         | )
|                                                                                                                                     |   |                                 |   |   |                                |  
|Weighted average common shares outstanding                                                                                           |   | 22,266                          |   |   | 22,266                         |  
|                                                                                                                                     |   |                                 |   |   |                                |  
|Net loss from continuing operations before cumulative
      effect of change in accounting principle - per share                     | $ | (0.52                           | ) | $ | (0.30                          | )
|Loss on discontinued operations- per share                                                                                           |   | (1.08                           | ) |   | 0.03                           |  
|Cumulative effect of change in accounting principle- per
      share                                                                 |   | --                              |   |   | --                             |  
|Net loss per common share                                                                                                            | $ | (1.60                           | ) | $ | (0.27                          | )



Diluted: Not included as convertible debentures are antidilutive.

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