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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

FORM 10-K

|ý                                                            | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|------------------------------------------------------------ | ----------------------------------------------------------------------------------------
|For the fiscal year ended December 31, 2002                 
|OR                                                          
|o                                                            | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                            to

Commission File Number 001-16817

FIVE STAR QUALITY CARE, INC.

|Maryland(State of Incorporation) |  | 04-3516029(IRS Employer Identification No.)
|-------------------------------- |  | -------------------------------------------

400 Centre Street, Newton, Massachusetts 02458

617-796-8387

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

|Title of each classCommon Stock |  | Name of each exchange on which registeredAmerican Stock Exchange
|------------------------------- |  | ----------------------------------------------------------------

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

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

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ý

Indicate
by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes o    No ý

The
aggregate market value of the voting shares of the registrant held by non-affiliates was $45.5 million based on the $5.59 closing price per common share on the American Stock
Exchange on June 28, 2002. For purposes of this calculation, an aggregate of 315,732.6 common shares held by the directors and officers of the registrant and have been included in the number of
shares held by affiliates, which includes 35,000 common shares held by Senior Housing Properties Trust.

Number
of the registrant's Common Shares outstanding as of March 24, 2003: 8,452,634.

References
in this Annual Report on Form 10-K to the "Company," "Five Star", "FVE", "we", "us" or "our" include Five Star Quality Care, Inc., and its consolidated
subsidiaries, unless the context indicates otherwise.

DOCUMENTS INCORPORATED BY REFERENCE

Certain
information required under Part III of this Annual Report on Form 10-K is to be incorporated herein by reference from our definitive Proxy Statement for the annual
meeting of shareholders currently scheduled for May 6, 2003.

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WARNING CONCERNING FORWARD LOOKING STATEMENTS

THIS ANNUAL REPORT ON FORM 10-K INCLUDES FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND THE FEDERAL
SECURITIES LAWS. THESE FORWARD LOOKING STATEMENTS REFLECT OUR PRESENT BELIEFS AND EXPECTATIONS, BUT THEY ARE NOT GUARANTEED TO OCCUR. FOR EXAMPLE:



SINCE WE BECAME A SEPARATE PUBLIC COMPANY AT THE BEGINNING OF 2002, WE HAVE BEEN UNABLE TO OPERATE PROFITABLY. FORWARD LOOKING STATEMENTS IN THIS ANNUAL REPORT ON FORM
10-K MAY IMPLY THAT WE EXPECT TO OPERATE PROFITABLY IN THE FUTURE. HOWEVER, WE MAY BE UNABLE TO OPERATE PROFITABLY FOR THE REASONS SET FORTH ABOVE OR FOR OTHER REASONS. AN INVESTMENT IN
OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK OF LOSS, AND INVESTORS SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS WHICH MIGHT IMPLY OTHERWISE.

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FIVE STAR QUALITY CARE, INC.  2002 FORM 10-K ANNUAL REPORT    Table of Contents

|         |  |                                                                                                                                                                                  |  | Page
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|PART I   |  |                                                                                                                                                                                 
|Item 1.  |  | Business                                                                                                                                                                         |  | 1   
|Item 2.  |  | Properties                                                                                                                                                                       |  | 13  
|Item 3.  |  | Legal Proceedings                                                                                                                                                                |  | 20  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                                                                              |  | 21  
|PART II  |  |                                                                                                                                                                                 
|Item 5.  |  | Market for the Registrant's Common Equity and Related Shareholder Matters                                                                                                        |  | 22  
|Item 6.  |  | Selected Financial Data                                                                                                                                                          |  | 22  
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                                                                            |  | 24  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                       |  | 33  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                                                                                      |  | 34  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                                                                                             |  | 34  
|PART III |  |                                                                                                                                                                                 
|Item 10. |  | Directors and Executive Officers of the Registrant                                                                                                                               |  | *   
|Item 11. |  | Executive Compensation                                                                                                                                                           |  | *   
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters                                                                                   |  | 35  
|Item 13. |  | Certain Relationships and Related Transactions                                                                                                                                   |  | *   
|         |  | * Incorporated by reference to our Proxy Statement for the Annual Meeting of Shareholders currently scheduled to be held on May 6, 2003, to be filed pursuant to Regulation 14A. |  |     
|Item 14. |  | Controls and Procedures                                                                                                                                                          |  | 35  
|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                                                                                                  |  | 36  

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PART I

Item 1.    Business

GENERAL

We are in the business of operating senior living communities, including independent living and congregate care communities, assisted living facilities and
nursing homes. Our business includes 105 communities containing 14,140 living units, including 51 primarily independent and assisted living communities containing 9,188 units and 54 nursing homes
containing 4,952 units. Of our 51 primarily independent and assisted living communities, we lease 40 containing 8,223 units from Senior Housing Properties Trust, our former parent, including 31 which
are operated by Marriott Senior Living Services, Inc. ("MSLS"), a subsidiary of Marriott International, Inc. ("Marriott") and own and operate 11 communities containing 965 units. All of
our nursing homes are leased from Senior Housing. Combined these 105 communities include 4,849 independent living apartments, 2,669 assisted living suites, 283 special care beds and 6,339 nursing
beds. Our principal executive offices are located at 400 Centre Street, Newton, Massachusetts 02458, and our telephone number is 617-796-8387.

OUR HISTORY

We were created by Senior Housing in April 2000 to operate nursing homes repossessed or acquired from two former Senior Housing tenants. On
December 31, 2001, Senior Housing distributed substantially all of our outstanding shares to its shareholders and we became a separate publicly owned company listed on the American Stock
Exchange. Pursuant to the transaction agreement governing this spin off: Senior Housing capitalized us with $50 million of equity, consisting of cash and working capital, primarily operating
receivables, net of operating payables; we agreed to lease 31 primarily independent and assisted living communities operated by MSLS upon their acquisition by Senior Housing; we leased 55 nursing
homes from Senior Housing; assumed one lease from the town of Campbell, NE; and we
agreed to acquire FSQ, Inc. ("FSQ"), the former operating company of the healthcare business we owned in order to acquire the personnel, systems and assets necessary for our business.

During
2002, we acquired or began to lease 51 senior living communities containing 9,188 units, including the 31 communities operated by MSLS and 20 additional communities. Also during
2002 we ceased operations at two of our facilities, one of which was previously leased from Senior Housing and one of which was previously leased from the town of Campbell, NE.

OUR GROWTH STRATEGY

We believe that the aging of the U.S. population will increase demand for existing senior living apartments, independent living properties, assisted living
communities and nursing homes. Our growth strategy is to capitalize on this demand by leasing or acquiring communities that provide high quality services to residents who pay with private resources.
During 2002, we added 51 primarily independent and assisted living communities to our business which generate 89% of their revenue from residents' private resources, not Medicare or Medicaid. Our
nursing homes derive a majority of their revenues from Medicare and Medicaid. In the future we may decide to expand our nursing home operations; however, if we do so, we expect to price such
acquisitions at levels which take account of the risks associated with Medicare and Medicaid revenues.

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RISK FACTORS

Since we became a separate public company at the end of 2001, we have been unable to operate profitably. Ownership of our securities involves a high degree of
risk. The following is a summary of the material risks:

A small percentage decline in our revenues or increase in our expenses can have a large percentage impact upon our profits.

Our operating revenues for 2002 are $522.2 million, and our loss is $13.2 million. A small percentage decline in our revenues or increase in our
expenses might have a dramatic negative impact upon our income or may produce greater losses.

Our growth strategy may not succeed.

Our business plan includes acquiring additional senior living communities, some of which may be owned and some of which may be leased. An acquisition strategy
involves risks. For example: we may be unable to locate communities available for purchase at acceptable prices; we may be unable to negotiate acceptable lease terms; we may be unable to access the
capital to acquire or operate additional communities; acquired operations may bring with them contingent liabilities which mature; to the extent we incur acquisition financing, our leverage may
increase and combining our present operations with newly acquired operations may be disruptive. For these reasons and others, our business plan to grow may not succeed, the benefits which we hope to
achieve by growing may not be achieved and our existing operations may suffer from a lack of management attention or financial resources if such attention and resources are devoted to a failed growth
strategy.

Medicare or Medicaid rate reductions or a failure of those rates to match increasing costs could increase our losses.

At some of our communities, operating revenues for nursing home services are received from the Medicare and Medicaid programs and 39% of our total revenues in
2002 was derived from these programs. This percentage of our total revenues derived from Medicare and Medicaid in 2002 is derived primarily from the 52 nursing home communities we lease from Senior
Housing. Since 1998, a Medicare prospective payment system has generally lowered Medicare rates paid to senior living communities including many of those that we operate. In October 2002,
temporary increases in Medicare payment rates expired. Our Medicare revenues totaled $68.4 million and $35.4 million during 2002 and 2001, respectively. Assuming our 2003 census of
Medicare residents is comparable to 2002, we estimate that our revenues received from Medicare in 2003 will decline by approximately $6.9 million over 2002 revenues received from Medicare. Our
Medicaid revenues totaled $142.6 million and $127.9 million during 2002 and 2001, respectively. Some of the states in which we operate have reduced or are expected to reduce Medicaid
funding to address state budget shortfalls. The magnitude of the combined Medicare and Medicaid rate reductions cannot currently be estimated, but it may be material. Further Medicare and Medicaid
rates declines may have a dramatic negative impact on our revenues and may produce greater losses.

Nursing home and senior living operators like us are being subjected to increased litigation and insurance costs.

There are various federal and state laws prohibiting fraud by healthcare providers, including criminal provisions that prohibit filing false claims for Medicare
and Medicaid payments and laws that govern patient referrals. The state and federal governments are devoting increasing resources to anti-fraud initiatives against healthcare providers. In
some states, advocacy groups monitor the quality of care at senior living communities, and these groups may bring litigation against operators. Also, in several instances private litigation by nursing
home patients has succeeded in winning very large

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damage awards for alleged abuses. The effect of this litigation and potential litigation has been to increase materially the costs of monitoring and reporting quality of care compliance. In addition,
the cost of medical malpractice insurance has increased significantly and may continue to increase so long as the present litigation environment affecting the operations of nursing homes and other
senior living communities continues. In 2002, we experienced significant increases in our costs related to professional liability insurance. In order to partially offset the increases in professional
liability insurance related to the 74 communities that we operate, we increased the levels of self insurance of most of our communities. We expect our insurance costs to increase, and we cannot now
predict the amount of such increase, or to what extent if at all we may be able to offset any increase through use of higher deductibles, retention amounts, self insurance or other means. Increases in
costs which are not offset may have a dramatic negative impact on our expenses and reserves and may produce greater losses.

Our litigation with Marriott and MSLS is ongoing and its outcome is uncertain.

As described in Item 3, "Legal Proceedings", and in the notes to our financial statements, we and Senior Housing are involved in litigation with Marriott and
MSLS, the operator of 31 communities which we lease from Senior Housing. This litigation may be expensive and have unexpected outcomes.

The sale of MSLS to Sunrise may have adverse consequences to us.

Marriott intends to sell MSLS to Sunrise Assisted Living, Inc. ("Sunrise"). We believe Sunrise's financial condition and reputation as an operator of
senior living communities may be weaker than Marriott's and MSLS's financial condition and operating reputation. The operations and the financial results which we realize from the 31 senior living
communities managed for us by MSLS may decline after Sunrise acquires MSLS.

Our facility based business requires regular capital expenditures.

Physical characteristics of senior living communities are mandated by various governmental authorities. Changes in these regulations may require significant
expenditures. Our leases with Senior Housing require us to maintain our communities in compliance with applicable laws. In the future, our communities may require significant expenditures to address
ongoing required maintenance and make them attractive to residents. Our available financial resources may be insufficient to fund these expenditures.

If we fail to comply with complex regulations which govern our operations we may be subject to sanctions.

State licensing and Medicare and Medicaid laws also require operators of nursing homes and assisted living communities to comply with extensive standards
governing operations. Federal and State agencies administering these laws regularly inspect such communities and investigate complaints. During the past several years, the Federal Centers for Medicare
and Medicaid Services, known as CMS, has increased its efforts to enforce Medicare and Medicaid standards and oversee state survey agencies which inspect senior living communities and investigate
complaints. When deficiencies are identified, sanctions and remedies such as denials of payment for new Medicare and Medicaid admissions, civil money penalties, state oversight and loss of Medicare
and Medicaid participation or licenses may be imposed. CMS and the states are increasingly using such sanctions and remedies when deficiencies, especially those involving findings of substandard care
or repeat violations, are identified. We and MSLS receive notices of potential sanctions and remedies from time to time, and such sanctions have been imposed on some of our nursing homes and assisted
living communities from time to time. As of December 31, 2002 none of the 105 communities we own or lease were under sanctions. If we or MSLS are unable to cure deficiencies which have been
identified or which are identified in the future, such sanctions will be imposed and, if imposed, may have adverse financial consequences to us.

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Receivables from Integrated Health Services, the United States Department of Health and Human Resources and the State of Connecticut may not be collected.

As described in the notes to our financial statements, we have asserted claims for the collection of $1.5 million due to us from the State of Connecticut
and $1.3 million due to us from Integrated Health Services and the Department of Health and Human Services. If we are unsuccessful in collecting these amounts, we will incur related charges.

Anti-takeover provisions in our governing documents and in our material agreements may prevent you from receiving a takeover premium for your shares.

Our charter places restriction on the ability of any person or group to acquire beneficial ownership of more than 9.8% of any class of our equity shares.
Additionally, the terms of our leases with Senior Housing and our shared services agreement with Reit Management & Research LLC ("RMR") contain provisions whereby our rights under these
agreements may be cancelled by Senior Housing and RMR, respectively, upon the acquisition by any person or group of more than 9.8% of our voting stock and upon other change in control events, as
defined in those documents. If the breach of these ownership limitations causes a lease default, shareholders causing the default may become liable to us or to other shareholders for damages. Our
charter and bylaws contain other provisions that may increase the difficulty of acquiring control of us by means of a tender offer, open market purchases, a proxy fight or
otherwise, if the acquisition is not approved by our board of directors. These other anti-takeover provisions include the following:



For
all of these reasons, shareholders may be unable to cause a change of control of us or to realize a change of control premium for their common shares.

We are subject to possible conflicts of interest.

Our continuing business is subject to possible conflicts of interest, as follows:



We
do not believe that these conflicts have caused our business to be adversely affected. However, future business dealings between us and Senior Housing, RMR, Messrs. Portnoy and
Martin and their affiliates may be on terms less favorable to us than we could achieve on an arm's length basis.

Our business is highly competitive and we may be unable to operate profitably.

We compete with numerous other companies which provide senior living alternatives, including home healthcare companies and other real estate based service
providers. Historically, nursing homes have been somewhat protected from competition by state laws requiring certificates of need to develop new communities; however, these barriers are being
eliminated in many states. Also, there are few

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barriers to competition for home healthcare or for independent and assisted living services. Growth in availability of nursing home alternatives, including assisted living communities, has had and
may in the future have the effect of reducing the occupancy or operating profitability at nursing homes including those we operate. Many of our existing competitors are larger and have greater
financial resources than we do. Accordingly, we cannot provide any assurances that we will be able to attract a sufficient number of residents to our communities or that we will be able to attract
employees and keep wages and other employee benefits, insurance costs and other operating expenses at levels which will allow us to operate profitably.

Our existing contracts with Senior Housing and others may inhibit our ability to grow.

So long as we maintain our shared services agreement with RMR or are a tenant under a lease with Senior Housing then we will not acquire or finance any real
estate without first giving Senior Housing or any other publicly owned real estate investment trust or other entity managed by RMR the opportunity to acquire or finance real estate investments of the
type in which Senior Housing or any other publicly owned real estate investment trust or other entity managed by RMR, respectively, invest. These agreements may make it difficult, more expensive or
impossible for us to invest in other real estate in the future. Also, because of our various relationships with Senior Housing and RMR, competitors of those companies may be unwilling to lease senior
living communities to us or conduct business with us. These circumstances may prevent us from realizing some growth opportunities.

Our owned and leased properties are subject to real estate risks.

At December 31, 2002, we owned 11 senior living communities and leased 94 senior living communities from Senior Housing. Our leases require that we pay for
and indemnify Senior Housing from all liabilities associated with the ownership or operation of the communities we lease from Senior Housing which arise prior to or during the terms of our leases.
Also, we may acquire or lease additional real estate in the future. Accordingly, our business is subject to risks associated with real estate, including:



Our business exposes us to environmental risks.

Under various laws in the United States, operators of real estate may be required to investigate and clean up hazardous substances present at their properties,
including but not limited to medical waste, mishandled petroleum products and asbestos containing materials, and may be held liable for property damage or personal injuries that result from such
contamination. These laws also expose us to the possibility that we become liable to reimburse the government for damages and costs it incurs in connection with the contamination. As the owner of real
estate leased to us, Senior Housing may be also subject to similar liabilities, and we have agreed to indemnify Senior Housing from costs it incurs at our leased properties related to environmental
hazards which arise prior to or during the terms of our leases. We can give you no assurance that environmental liabilities are not present in our operated communities or that costs we incur to
remediate contamination or the presence of asbestos will not have a material adverse effect on our business and financial condition.

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TYPES OF SERVICES

Our present business plan contemplates the ownership, leasing and management of senior apartments, independent living apartments or congregate care communities,
assisted living communities and nursing homes. Some communities combine more than one type of service in a single building or campus.

Senior Apartments.Senior apartments are marketed to residents who are generally capable of caring for themselves. Residence
is usually restricted on the basis of age. Purpose built communities may have special function rooms, concierge services, high levels of security and assistance call systems for emergency use.
Residents at these communities who need healthcare or assistance with the activities of daily living are expected to contract independently for these services with home healthcare companies. Our
business at December 31, 2002, included no senior apartments.

Independent Living Apartments.Independent living apartments, or congregate communities, also provide high levels of privacy
to residents and require residents to be capable of relatively high degrees of independence. Unlike a senior apartment community, an independent living apartment usually bundles several services as
part of a regular monthly charge, for example, one or two meals per day in a central dining room, weekly maid service and a social director. Additional services are generally available from staff
employees on a fee-for-service basis. In some congregate care communities, separate parts of the community are dedicated to assisted living or nursing services. At
December 31, 2002, our business included 4,849 independent living apartments in 34 communities; ten of these communities are operated by us and 24 are operated by MSLS for our account.

Assisted Living Suites.Assisted living suites are typically comprised of one bedroom units which include private bathrooms
and efficiency kitchens. Services bundled within one charge usually include three meals per day in a central dining room, daily housekeeping, laundry, medical reminders and 24 hour availability
of assistance with the activities of daily living such as dressing and bathing. Professional nursing and healthcare services are usually available at the community on call or at regularly scheduled
times. At December 31, 2002, our business included 2,669 assisted living suites in 48 communities; 20 of these communities are operated by us and 28 are operated by MSLS for our account.

Specialty Care Suites.Specialty care suites offer specialized programs for patients suffering from specific illnesses,
usually Alzheimer's disease. At December 31, 2002, our business included 283 specialty care suites in nine communities all of which are operated by MSLS for our account.

Nursing Homes.Nursing homes generally provide extensive nursing and healthcare services similar to those available in
hospitals, without the high costs associated with operating theaters, emergency rooms or intensive care units. A typical purpose built nursing home includes mostly two-bed units with a
separate bathroom in each unit and shared dining and bathing facilities. Some private rooms are often available for those residents who can afford to pay higher rates or for patients whose medical
conditions require segregation. Nursing homes are generally staffed by licensed nursing professionals 24 hours per day. At December 31, 2002, our business included 6,339 nursing home
beds in 75 communities; 52 of these communities are operated by us and 23 are operated by MSLS for our account.

OPERATING STRUCTURE

We have five regional offices, which are located in Maryland, Georgia, California, Wisconsin and Nebraska. Each regional office generally oversees multiple states
and is responsible for approximately twenty communities. Each region is headed by a regional director of operations with extensive experience in the senior living industries. Each regional office is
typically supported by a clinical or wellness director, a rehabilitation director, a regional accounts manager, a human resources specialist

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and a sales and marketing specialist. Regional staff are responsible for: overseeing all aspects of community-based operations, including marketing and sales activities; resident care; the hiring of
community executives, care managers and other community-based personnel; compliance with applicable local and state regulatory requirements; and implementation of our development and acquisition plans
within their region.

We
employ about 75 people in our corporate headquarters. Corporate staff members are responsible for: the establishment of company wide policies and procedures relating to resident care;
employee hiring; training; retention; information technology; state and federal reimbursement assistance; state licensing and certification maintenance; legal; community design and development;
community operations; and accounting and finance functions including, accounts payable, payroll, general finance and accounting, and tax planning and compliance. The centralization of these activities
improves efficiency and permits community staff to focus on the delivery of services to our residents.

INDEPENDENT AND ASSISTED LIVING COMMUNITY STAFFING

Each of the independent and assisted living communities we operate for our own account has an executive director responsible for the
day-to-day operations of the community, including: quality of care; resident services; sales and marketing; and financial performance. The executive director is supported by
department heads who oversee the care and service of the residents, a wellness director, who is responsible for coordinating the services necessary to meet the health care needs of our residents and a
marketing director, who is responsible for selling our services. Other key positions include the dining services coordinator, the activities coordinator, and the maintenance coordinator.

NURSING HOME STAFFING

Each of our nursing homes is managed by a state-licensed administrator who is supported by other professional personnel, including a director of nursing,
activities director, marketing director, social services director, business office manager, and physical, occupational and speech therapists. Our directors of nursing are state-licensed nurses who
supervise our registered nurses, licensed practical nurses and nursing assistants. Staff size and composition vary depending on the size and occupancy of each nursing home and on the type of care
provided by the nursing home. The nursing homes contract with physicians who provide medical services.

EMPLOYEES

As of March 14, 2003, we had approximately 6,873 employees, including 4,364 full time equivalents. Approximately 677 employees, including 396 full time
equivalents, are represented under seven collective bargaining agreements, all of which have remaining terms of one to two years. We have no
other employment agreements. We believe relations with our union and non-union employees to be good.

GOVERNMENT REGULATION AND REIMBURSEMENT

Our operations must comply with numerous federal, state and local statutes and regulations. Also, the healthcare industry depends significantly upon federal and
federal/state programs for revenues and, as a result, is vulnerable to the budgetary policies of both the federal and state governments.

Senior Apartments.Generally, government programs do not pay for housing in senior apartments. Rents are paid from the
residents' private resources. Accordingly, the government regulations that apply to these types of properties are generally limited to zoning, building and fire codes, Americans with Disabilities Act
requirements and other life safety type regulations applicable to residential real estate. Government rent subsidies and government assisted development financing for low income senior housing are
exceptions to these general statements. The development and operation of subsidized senior housing properties are subject to numerous governmental regulations.

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Independent Living Apartments.Government benefits generally are not available for services at independent living apartments
and the resident charges in these communities are paid from private resources. However, a number of Federal Supplemental Security Income program benefits pay housing costs for elderly or disabled
residents to live in these types of residential communities. The Social Security Act requires states to certify that they will establish and enforce standards for any category of group living
arrangement in which a significant number of supplemental security income residents reside or are likely to reside. Categories of living arrangements which may be subject to these state standards
include independent living apartments and assisted living communities. Because independent living apartments usually offer common dining facilities, in many locations they are required to obtain
licenses applicable to food service establishments in addition to complying with land use and life safety requirements. In many states, independent living apartment communities are licensed by state
or county health departments, social service agencies or offices on aging with jurisdiction over group residential communities for seniors. To the extent that independent living apartments include
units in which assisted living or nursing services are provided, these units are subject to applicable state licensing regulations, and if the communities receive Medicaid or Medicare funds, to
certification standards. In some states, insurance or consumer protection agencies regulate independent living apartments in which residents pay entrance fees or prepay other costs. One community
which we acquired in 2002 includes 32 independent living apartments where rent rates are regulated by the requirement of a tax exempt bond fiduciary.

Assisted Living Communities.According to the National Academy for State Health Policy, approximately 41 states provide or
are approved to provide Medicaid payments for residents in some assisted living communities under waivers granted by the Federal Centers for Medicare and Medicaid Services, known
as CMS, or under Medicaid state plans, and four other states are planning some Medicaid funding by preparing or requesting waivers to fund assisted living demonstration projects. Because rates paid to
assisted living community operators are lower than rates paid to nursing home operators, some states use Medicaid funding of assisted living as a means of lowering the cost of services for residents
who may not need the higher intensity of health-related services provided in nursing homes. States that administer Medicaid programs for assisted living communities are responsible for monitoring the
services at, and physical conditions of, the participating communities. Different states apply different standards in these matters, but generally we believe these monitoring processes are similar to
the concerned states' inspection processes for nursing homes.

In
light of the large number of states using Medicaid to purchase services at assisted living communities and the growth of assisted living in the 1990s, a majority of states have
adopted licensing standards applicable to assisted living communities. According to the National Academy for State Health Policy, 32 states and the District of Columbia have licensing statutes or
standards specifically using the term "assisted living". 36 states have requirements for facilities servicing people with Alzheimer's disease or dementia. The majority of states have revised their
licensing regulations recently or are reviewing their policies or drafting or revising their regulations. State regulatory models vary; there is no national consensus on a definition of assisted
living, and no uniform approach by the states to regulating assisted living communities. Most state licensing standards apply to assisted living communities whether or not they accept Medicaid
funding. Also, according to the National Academy for State Health Policy, six states require certificates of need from state health planning authorities before new assisted living communities may be
developed. Based on our analysis of current economic and regulatory trends, we believe that assisted living communities that become dependent upon Medicaid payments for a majority of their revenues
may decline in value because Medicaid rates may fail to keep up with increasing costs. We also believe that assisted living communities located in states that adopt certificate of need requirements or
otherwise restrict the development of new assisted living communities may increase in value because these limitations upon development may help ensure higher occupancy and higher
non-governmental rates.

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Two
federal government studies provide background information and make recommendations regarding the regulation of, and the possibility of increased governmental funding for, the
assisted living industry. The first study, an April 1999 report by the General Accounting Office to the Senate Special Committee on Aging on assisted living communities in four states, found a
variety of residential settings serving a wide range of resident health and care needs. The General Accounting Office found that consumers often receive insufficient information to determine whether a
particular community can meet its needs and that state licensing and oversight approaches vary widely. The General Accounting Office anticipates that as the states increase the use of Medicaid to pay
for assisted living, federal financing will likewise grow, and these trends will focus more public attention on the place of assisted living in the continuum of long-term care and upon
state standards and compliance approaches. The second study, a National Study of Assisted Living for the Frail Elderly, was funded by the U.S. Department of Health and Human Services Assistant
Secretary for Planning and Evaluation and reported on the effects of different service and privacy arrangements on resident satisfaction, aging in place and affordability. In 2001 and 2002, the Senate
Special Committee on Aging held hearings on assisted living and its role in the continuum of care and on community-based alternatives to nursing homes. We cannot predict whether these studies will
result in governmental policy changes or new legislation, or what impact any changes may have. Based upon our analysis of current economic and regulatory
trends, we do not believe that the federal government is likely to have a material impact upon the current regulatory environment in which the assisted living industry operates unless it also
undertakes expanded funding obligations, and we do not believe a materially increased financial commitment from the federal government is presently likely. However, we do anticipate that assisted
living communities will increasingly be licensed and regulated by the various states, and that in the absence of federal standards, the states' policies will continue to vary widely.

Nursing Homes-Reimbursement.About 59% of all nursing home revenues in the U.S. in 2001 came from government Medicare and
Medicaid programs, including about 48% from Medicaid programs. Nursing homes are among the most highly regulated businesses in the country. The federal and state governments regularly monitor the
quality of care provided at nursing homes. State health departments conduct surveys of resident care and inspect the physical condition of nursing home properties. These periodic inspections and
occasional changes in life safety and physical plant requirements sometimes require nursing home operators to make significant capital improvements. These mandated capital improvements have in the
past usually resulted in Medicare and Medicaid rate adjustments, albeit on the basis of amortization of expenditures over expected useful lives of the improvements. A new Medicare prospective payment
system, often referred to as PPS, was phased in over three years beginning with cost reporting years starting on or after July 1, 1998. Under this new Medicare payment system, capital costs are
part of the prospective rate and are not facility specific. This new Medicare payment system and other recent legislative and regulatory actions with respect to state Medicaid rates are limiting the
reimbursement levels for some nursing home services. At the same time federal and state enforcement and oversight of nursing homes are increasing, making licensing and certification of these
communities more rigorous. These actions have adversely affected our revenues and increased our expenses.

The
current Medicare payment system was established by the Balanced Budget Act of 1997, and was intended to reduce the rate of growth in Medicare payments for skilled nursing facilities.
Before the current Medicare payment system, Medicare rates were facility-specific and cost-based. Under the current Medicare payment system, skilled nursing facilities receive a fixed
payment for each day of care provided to residents who are Medicare beneficiaries. Each resident is assigned to one of 44 care groups depending on that resident's medical characteristics and service
needs. Per diem payment rates are based on these care groups. Medicare payments cover substantially all services provided to Medicare residents in skilled nursing facilities, including ancillary
services such as rehabilitation therapies. The new Medicare payment system is intended to provide incentives to providers to furnish only necessary services and to deliver those services efficiently.
During the three year phase-in period,

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Medicare rates for skilled nursing facilities were based on a blend of facility specific costs and rates established by the new Medicare payment system. According to the General Accounting Office,
between fiscal year 1998 and fiscal year 1999, the first full year of the new Medicare payment system phase-in, the average Medicare payment per day declined by about 9%.

Since
November 1999, Congress has provided some relief from the impact of the Balanced Budget Act of 1997. Effective April 1, 2000, the Medicare, Medicaid and SCHIP
Balanced Budget Refinement Act of 1999 temporarily boosted payments for certain skilled nursing cases by 20% and allowed skilled nursing facilities to transition more rapidly to the federal payment
system. This Act also increased the new Medicare payment rates by 4% for fiscal years 2001 and 2002 and imposed a two-year moratorium
on some therapy limitations for skilled nursing patients covered under Medicare Part B. In December 2000, the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000
was approved. Effective April 1, 2001 to October 1, 2002, this Act increased the nursing component of the payment rate for each care group by 16.66%. This Act also increased annual
inflation adjustments for fiscal year 2001, increased rehabilitation care group rates by 6.7%, and maintained the previously temporary 20% increase in the other care group rates established in 1999.
However, as of October 1, 2002, the 4% across-the-board increase in Medicare payment rates and the 16.66% increase in the nursing component of the rates expired. The 20%
increase for the skilled nursing care groups and the 6.7% increase in rehabilitation care group rates will expire when the current resource utilization groups are refined.

Because
of the current federal budget deficit and other federal government priorities, such as homeland security and the war on terrorism, we do not expect the federal government to
restore the Medicare rate increases which expired on October 1, 2002. Assuming our 2003 census of Medicare residents is comparable to 2002, we estimate that our revenues received from Medicare
in 2003 will decline by approximately $6.9 million over 2002 revenues received from Medicare. Similarly, because of budget deficits in most states, we expect that Medicaid rate increases will
be less than our cost increases in 2003 and in some instances Medicaid rates may decline. This combination of events may make it increasingly difficult for us to meet our financial obligations and
negatively affect our financial condition and results of operations.

Nursing Homes-Survey And Enforcement.CMS has undertaken an initiative to increase the effectiveness of Medicare and Medicaid
nursing home survey and enforcement activities. CMS' initiative follows a July 1998 General Accounting Office investigation which found inadequate care in a significant proportion of California
nursing homes and the CMS' July 1998 report to Congress on the effectiveness of the survey and enforcement system. In 1999, the U.S. Department of Health and Human Services Office of Inspector
General issued several reports concerning quality of care in nursing homes, and the General Accounting Office issued reports in 1999 and 2000 which recommended that CMS and the states strengthen their
compliance and enforcement practices to better ensure that nursing homes provide adequate care. Since 1998, the Senate Special Committee on Aging has been holding hearings on these issues. CMS is
taking steps to focus more survey and enforcement efforts on nursing homes with findings of substandard care or repeat violations of Medicare and Medicaid standards and to identify chain operated
facilities with patterns of noncompliance. CMS is increasing its oversight of state survey agencies and requiring state agencies to use enforcement sanctions and remedies more promptly when
substandard care or repeat violations are identified, to investigate complaints more promptly, and to survey facilities more consistently. In addition, CMS has adopted regulations expanding federal
and state authority to impose civil money penalties in instances of noncompliance. Medicare survey results and nursing staff hours per resident for each nursing home are posted on the internet at
http://www.medicare.gov. When deficiencies under state licensing and Medicare and Medicaid standards are identified, sanctions and remedies such as denials of payment for new Medicare and Medicaid
admissions, civil monetary penalties, state oversight and loss of Medicare and Medicaid participation or licensure may be imposed. We receive notices of potential sanctions and remedies from time to
time, and such sanctions have been imposed from time to time on us. If we are

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unable to cure deficiencies which have been identified or that are identified in the future, such sanctions may be imposed, and if imposed, may adversely affect our ability to meet our financial
obligations and negatively affect our financial condition and results of operations.

In
2000 and 2002 CMS issued reports on its study linking nursing staffing levels with quality of care, and CMS is assessing the impact that minimum staffing requirements would have on
community costs and operations. In a report presented to Congress in 2002, the Department of Health and Human Services found that 90% of nursing homes lack the nurse and nurse aide staffing necessary
to provide adequate care to residents. The Bush administration has indicated that it does not intend to impose minimum staffing levels or to increase Medicare or Medicaid rates to cover the costs of
increased staff at this time, but CMS is now publishing the nurse staffing level at each nursing home on its internet site to increase market pressures on nursing home operators.

Federal
efforts to target fraud and abuse and violations of anti-kickback laws and physician referral laws by Medicare and Medicaid providers have also increased. In
March 2000, the U.S. Department of Health and Human Services Office of Inspector General issued compliance guidelines for nursing facilities to assist them in developing voluntary compliance
programs to prevent fraud and abuse. Also, new rules governing the privacy, use and disclosure of individually identified health information became final in 2001 and will require compliance in 2003,
with civil and criminal sanctions for noncompliance. An adverse determination concerning any of our licenses or eligibility for Medicare or Medicaid reimbursement or the costs of required compliance
with applicable federal or state regulations could adversely affect our ability to meet our financial obligations and negatively affect our financial condition and results of operations.

Nursing Homes-Certificates Of Need.Most states limit the number of nursing homes by requiring developers to obtain
certificates of need before new facilities may be built. Even states such as California and Texas that have eliminated certificate of need laws often have retained other means of limiting new nursing
home development, such as the use of moratoria, licensing laws or limitations upon participation in the state Medicaid program. We believe that these governmental limitations may make nursing homes
more valuable by limiting competition.

Other Matters.A number of legislative proposals that would affect major reforms of the healthcare system have been
introduced in the U.S. Congress and many state governments, such as programs for national health insurance, additional Medicare and Medicaid reforms and federal and state cost containment measures. We
cannot predict whether any of these legislative proposals will be adopted or, if adopted, what effect, if any, these proposals would have on our business.

LIABILITY INSURANCE

Litigation against senior living operators has been increasing during the past few years. Several cases by nursing home patients or their families who have won
large monetary awards for mistreatment have been widely publicized. The amount of such litigation in Florida and Texas has been particularly significant. As a result, liability insurance costs are
rising and, in some cases, such insurance is not available to some senior living operators.

We
have liability insurance for the 74 properties, which we now operate. Only one of these communities is located in Florida and none are located in Texas. The Florida community has no
nursing home beds. Our current liability insurance expires in June 2003; we expect our insurance costs to increase, and we cannot now predict the amount of any such increase, or to what extent,
if at all, we may be able to offset any increase through use of higher deductibles, retention amounts, self insurance or other means.

MSLS
is responsible for obtaining insurance for the 31 senior living communities which MSLS manages for us. These 31 communities include six in Florida (885 independent living
apartments, 442 assisted living suites and 95 nursing home beds), and five in Texas (900 independent living apartments,

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239 assisted living suites, 108 special care beds and 357 nursing beds). As of December 31, 2002, liability insurance for these communities' operations is provided in part by an insurance
company subsidiary of Marriott International Inc., the current parent of MSLS. Marriott intends to sell MSLS to Sunrise. We do not know if Sunrise will be able to provide similar levels of
insurance for our managed communities nor the cost of such insurance which may be provided by Sunrise.

COMPETITION

The senior living services business is highly competitive. We compete with service providers offering alternate types of services, such as home healthcare
services, as well as other companies providing facility based services. Many of these service providers are larger and have more resources than us.

Our
management team has been recently assembled within the past three years, and, although we believe it is experienced and highly talented, it does not have extensive experience working
together. We expect we may expand our business with Senior Housing; however, Senior Housing is not obligated to provide us with opportunities to lease additional properties. As of December 31,
2002 we have debt totaling $16.1 million, and have large lease obligations and limited financeable assets; and many of our competitors have greater financial resources than we do. For all of
these reasons and others, we cannot provide you any assurance that we will be able to compete successfully for business in the senior living industry.

ENVIRONMENTAL MATTERS

Under various federal, state and local laws, ordinances and regulations, owners as well as tenants and operators of real estate may be required to investigate and
clean up hazardous substances released at a property, and may be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and
clean-up costs incurred in connection with any contamination. Under our leases, we have also agreed to indemnify Senior Housing for any such liabilities related to
the leased communities. In addition, some environmental laws create a lien on a contaminated site in favor of the government for damages and costs it incurs in connection with the contamination, which
lien may be senior in priority to our leases. We have reviewed environmental surveys of our leased and owned communities. Based upon that review we do not believe that any of these properties are
subject to any material environmental contamination. However, no assurances can be given that:



The
presence or discovery of any material environmental containments could have a material adverse impact on us.

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Item 2.    Properties

OUR SENIOR LIVING COMMUNITIES

At December 31, 2002, our business included 105 senior living communities:

|                                                             |  | No. of Units |  |       |  |     |  |      
|------------------------------------------------------------ |  | ------------ |  | ----- |  | --- |  | -----
|
|
|Owned communities (11 communities owned and operated by us)  |  | 524          |  | 441   |  |    |  |     
|Senior Housing Lease No. 1 (54 communities operated by us)   |  | 95           |  | 137   |  |    |  | 4,720
|Senior Housing Lease No. 2 (31 communities managed by MSLS)  |  | 3,978        |  | 1,596 |  | 283 |  | 1,619
|Senior Housing Lease No. 3 (nine communities operated by us) |  | 252          |  | 495   |  |    |  |     
|                                                             |  |              |  |       |  |     |  |      
|Totals:                                                      |  | 4,849        |  | 2,669 |  | 283 |  | 6,339
|                                                             |  |              |  |       |  |     |  |      

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OWNED COMMUNITIES

In April 2002, we purchased five senior living communities from ILM II Senior Living, Inc. and its subsidiary ILM II Holding, Inc. for
$45.5 million. In October 2002, we purchased an additional seven senior living communities from Constellation Health Services, Inc. for $27.0 million. To finance our
October 2002 purchase we sold one community we had purchased in April 2002 to Senior Housing for $12.7 million and assumed $15.8 million of mortgage debt. Our 11 owned
communities contain 965 exclusively independent and assisted living units and are located in six states. The following table provides additional information about these communities and their
operations as of and for the year ended December 31, 2002:

|                                     |  | No. of Units |  | Year ended December 31, 2002 (1) | 
|------------------------------------ |  | ------------ |  | -------------------------------- | 
|
|1. Stockton, CA                      |  | 84           |  | 80                               | 
|2. Florissant, MO                    |  | 115          |  |                                 | 
|3. Omaha, NE                         |  |             |  | 73                               | 
|4. Ft. Myers, FL                     |  | 166          |  | 40                               | 
|5. Bloomfield, CT                    |  |             |  | 58                               | 
|6. Ellicott City, MD                 |  | 159          |  | 70                               | 
|7. Annapolis, MD                     |  |             |  | 30                               | 
|8. Linthicum, MD                     |  |             |  | 30                               | 
|9. Lutherville, MD                   |  |             |  | 30                               | 
|10. Odenton, MD                      |  |             |  | 15                               | 
|11. Pasadena, MD                     |  |             |  | 15                               | 
|                                     |  |              |  |                                  | 
|Totals: 11 communities in six states |  | 524          |  | 441                              | 

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SENIOR HOUSING LEASE NO. 1 COMMUNITIES

We lease and operate 54 senior living communities which are owned by Senior Housing and leased to us under one combined lease. These 54 communities include 52
nursing homes and two assisted living communities; four of the nursing homes also contain some assisted living units or independent living apartments. These 54 communities have 4,952 beds or living
units and are located in 12 states. The following table provides additional information about these communities and their operations as of and for the year ended December 31, 2002:

|                                    |  | No. of Units |  | Year ended December 31, 2002 | 
|----------------------------------- |  | ------------ |  | ---------------------------- | 
|
|1. Arizona                          |  | 2            |  | 125                          | 
|2. California                       |  | 5            |  | 397                          | 
|3. Colorado                         |  | 7            |  | 741                          | 
|4. Connecticut                      |  | 2            |  | 300                          | 
|5. Georgia                          |  | 4            |  | 399                          | 
|6. Iowa                             |  | 7            |  | 475                          | 
|7. Kansas                           |  | 1            |  | 55                           | 
|8. Michigan                         |  | 2            |  | 269                          | 
|9. Missouri                         |  | 1            |  | 75                           | 
|10. Nebraska                        |  | 14           |  | 820                          | 
|11. Wisconsin                       |  | 7            |  | 881                          | 
|12. Wyoming                         |  | 2            |  | 183                          | 
|                                    |  |              |  |                              | 
|Totals: 54 communities in 12 states |  | 54           |  | 4,720                        | 

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SENIOR HOUSING LEASE NO. 2 COMMUNITIES

We lease 31 senior living communities from Senior Housing which are leased to us under one combined lease and managed by MSLS. These communities contain 7,476
living units and are located in 13 states. The following table provides additional information about these communities and their current operations as of and for MSLS's fiscal year ended
January 3, 2003:

|                                    |  | No. of Units |  | Year ended January 3, 2003 (1) | 
|----------------------------------- |  | ------------ |  | ------------------------------ | 
|
|1. Peoria, AZ                       |  | 155          |  | 79                             | 
|2. Scottsdale, AZ                   |  | 167          |  | 33                             | 
|3. Tucson, AZ                       |  | 202          |  | 30                             | 
|4.,5. San Diego, CA                 |  | 246          |  | 100                            | 
|6. Newark, DE                       |  | 62           |  | 26                             | 
|7. Wilmington, DE                   |  | 140          |  | 37                             | 
|8. Wilmington, DE                   |  | 71           |  | 44                             | 
|9. Wilmington, DE                   |  | 62           |  | 15                             | 
|10. Wilmington, DE                  |  |             |  | 51                             | 
|11. Coral Springs, FL               |  | 184          |  | 62                             | 
|12. Deerfield Beach, FL             |  | 198          |  | 33                             | 
|13. Ft. Lauderdale, FL              |  |             |  | 111                            | 
|14. Ft. Myers, FL                   |  |             |  | 85                             | 
|15. Palm Harbor, FL                 |  | 230          |  | 87                             | 
|16. West Palm Beach, FL             |  | 273          |  | 64                             | 
|17. Indianapolis, IN                |  | 117          |  |                               | 
|18. Overland Park, KS               |  | 117          |  | 30                             | 
|19. Lexington, KY                   |  | 140          |  | 9                              | 
|20. Lexington, KY                   |  |             |  | 22                             | 
|21. Louisville, KY                  |  | 240          |  | 24                             | 
|22. Winchester, MA                  |  |             |  | 125                            | 
|23. Lakewood, NJ                    |  | 217          |  | 108                            | 
|24. Albuquerque, NM                 |  | 114          |  | 35                             | 
|25. Columbus, OH                    |  | 143          |  | 87                             | 
|26. Myrtle Beach, SC                |  |             |  | 60                             | 
|27. Dallas, TX                      |  | 190          |  | 38                             | 
|28. El Paso, TX                     |  | 123          |  |                               | 
|29. Houston, TX                     |  | 197          |  | 71                             | 
|30. San Antonio, TX                 |  | 151          |  | 30                             | 
|31. Woodlands, TX                   |  | 239          |  | 100                            | 
|                                    |  |              |  |                                | 
|Totals: 31 communities in 13 states |  | 3,978        |  | 1,596                          | 

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SENIOR HOUSING LEASE NO. 3 COMMUNITIES

We lease and operate nine independent and assisted living senior living communities which are owned by Senior Housing and leased to us under one combined lease.
These nine communities have 747 living units and are located in four states. The following table provides additional information about these communities and their operations as of and for the year
ended December 31, 2002:

|                                     |  | No. of Units |  | Year ended December 31, 2002 (1) | 
|------------------------------------ |  | ------------ |  | -------------------------------- | 
|
|1. Overland Park, KS                 |  | 136          |  |                                 | 
|2. Cary, NC                          |  |             |  | 89                               | 
|3. Fredericksburg, VA                |  |             |  | 82                               | 
|4. Richmond, VA                      |  |             |  | 70                               | 
|5. Bowie, MD                         |  |             |  | 52                               | 
|6. Easton, MD                        |  |             |  | 55                               | 
|7. Frederick, MD                     |  |             |  | 52                               | 
|8. Severna Park, MD                  |  |             |  | 74                               | 
|9. Silver Spring, MD                 |  | 116          |  | 21                               | 
|                                     |  |              |  |                                  | 
|Totals: nine communities in 4 states |  | 252          |  | 495                              | 

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OUR SENIOR HOUSING LEASES

Certain of our subsidiaries lease the communities described above in three separate leases; and we have guaranteed our subsidiaries obligations under these
leases. These leases have been filed as exhibits to this Annual Report on Form 10-K. If you want more information about any lease, you should read the entire lease. The following is a summary
of the material terms of these leases:

Operating Costs.Each lease is a so-called "triple-net" lease which requires us to pay all costs
incurred in the operation of the communities, including the costs of personnel, service to residents, insurance and real estate and personal property taxes.

Minimum Rent.As of December 31, 2002, aggregate minimum rent under our leases is $76.2 million per year: lease
No. 1: $6.9 million per year; lease No. 2: $63.0 million per year; and lease No. 3: $6.3 million per year.

Percentage Rent.We are required to pay additional rent with respect to each lease. This rent is a percentage of the increase
in resident revenues at the leased properties over a base year calculated as follows:

|  |  |                                                                                 |  | Base Year |  | Year Percentage
Rent Commences |  | Amount of
Percentage Rent |  
|- |  | ------------------------------------------------------------------------------- |  | --------- |  | ------------------------------ |  | ------------------------- | -
| |  | Lease No. 1 for 54 nursing homes                                                |  | 2003      |  | 2004                           |  | 3                         | %
| |  | Lease No. 2 for 31 independent and assisted living communities operated by MSLS |  | 2002      |  | 2003                           |  | 5                         | %
| |  | Lease No. 3 for nine independent and assisted living communities                |  | 2004      |  | 2005                           |  | 4                         | %

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Term.The terms of these leases are as follows:

|  |  |                                                                                 |  | Initial
Expiration Date |  | Renewal Terms                                                                                                                                                            
|- |  | ------------------------------------------------------------------------------- |  | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lease No. 1 for 54 nursing homes                                                |  | December 31, 2018       |  | One 15 year renewal option for all, but not less than all, 54 communities. We can only exercise this option if we renew our lease for the 31 communities managed by MSLS.
| |  | Lease No. 2 for 31 independent and assisted living communities operated by MSLS |  | December 31, 2017       |  | Two renewal options totaling 15 years for all, but not less than all, 31 communities. We can only exercise this option if renew our lease for the 54 nursing homes.      
| |  | Lease No. 3 for nine independent and assisted living communities                |  | December 31, 2019       |  | One 15 year renewal option for all, but not less than all, nine communities.                                                                                             

Rent During Renewal Term.Rent during each renewal term is a continuation of minimum rent and percentage rent payable during
the initial term.

Maintenance and Alterations.We are required to operate continuously and maintain, at our expense, the leased communities in
good order and repair, including structural and nonstructural components. We may request Senior Housing to fund amounts needed for repairs and renovations in return for rent adjustments to provide
Senior Housing a return on its investment according to formulas set forth in the leases. At the end of each lease term, we are required to surrender the leased communities in substantially the same
condition as existed on the commencement date of the lease, subject to any permitted alterations and subject to ordinary wear and tear.

Assignment and Subletting.Senior Housing's consent is generally required for any direct or indirect assignment or sublease
of any of the communities. In the event of any assignment or subletting, we will remain liable under the applicable lease.

Environmental Matters.We are required, at our expense, to remove and dispose of any hazardous substance at the leased
communities in compliance with all applicable environmental laws and regulations. We have indemnified Senior Housing for any liability which may arise as a result of the presence of hazardous
substances at any leased communities and from any violation or alleged violation of any applicable environmental law or regulation.

Indemnification and Insurance.With limited exceptions, we are required to indemnify Senior Housing from all liabilities
which may arise from the ownership or operation of the communities. We generally are required to maintain commercially reasonable insurance, including:



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Each
lease requires that Senior Housing be named as an additional insured under these policies.

Damage, Destruction or Condemnation.If any of the leased communities is damaged by fire or other casualty or taken for a
public use, we are generally obligated to rebuild unless the community cannot be restored. If the community cannot be restored, Senior Housing will generally receive all insurance or taking proceeds
and we are liable to Senior Housing for the amount of any deductible or deficiency between the replacement cost and the insurance proceeds, and our rents are adjusted pro rata.

Non Economic Circumstances.If we determine that continued operations of one or more facilities is not economically
practical, we may negotiate with Senior Housing to include a substitute property under the leases or close or sell that community, including Senior Housing's ownership in the property. In the event of
such a sale, Senior Housing receives the net proceeds and our rent for the remaining communities in the affected lease is reduced according to a formula set forth in the lease.

Events of Default.Events of default under each lease include the following:



Remedies.Upon the occurrence of any event of default, each lease provides that, among other things, Senior Housing may, to
the extent legally permitted:



We
are obligated to reimburse Senior Housing for all costs and expenses incurred in connection with any exercise of the foregoing remedies.

Management.We may not enter into, any new management agreement or amend or modify any management agreement with MSLS
affecting any leased community without the prior written consent of Senior Housing.

Lease Subordination.Our leases may be subordinated to any mortgages of the leased properties by Senior Housing described
above.

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Financing Limitations; Security.We may not incur debt secured by our investments in our tenant subsidiaries. Further, our
tenant subsidiaries are prohibited from incurring liabilities other than operating liabilities incurred in the ordinary course of business, liabilities secured by our accounts receivables or purchase
money debt. We are required to pledge 100% of the equity interests of our tenant subsidiaries to Senior Housing or its lenders, and we may pledge equity interests to our lenders only if consented to
by Senior Housing.

FF&E Reserves.As a result of a lease amendment specific to the lease for the 31 communities managed by MSLS, effective
October 1, 2002, we are required to make deposits into accounts we own for replacements and improvements. Senior Housing has a security and remainder interest in these accounts and in all
property purchased with funding from these accounts. Prior to this amendment, we were required to pay these deposits to Senior Housing and we recorded them as rent expense on our consolidated
statement of operations. From the period January 11, 2002, the date we began to lease these communities, through September 30, 2002, we deposited $5.4 million into escrow accounts
owned by Senior Housing that we recorded as rent expense. The amount and use of these escrows are unchanged by the amendment; however subsequent to September 30, 2002, we do not record rent
expense as a result of these deposits.

MARRIOTT SENIOR LIVING SERVICES MANAGEMENT AGREEMENTS

The 31 communities leased from Senior Housing and managed by MSLS are each subject to a management agreement with MSLS. If you want more information about these
agreements, you should read the representative form of management agreement which has been filed as an exhibit to this Annual Report on Form 10-K. The following is a description of the material
terms of the management agreements:

Term.Generally each of the management agreements has an initial term expiring in 2027, with one five-year
renewal term at MSLS's option.

Community Services.Our contract with MSLS delegates to MSLS the responsibility for operations of the managed communities,
including obtaining and maintaining all insurance, establishing resident care policies and procedures, carrying out and supervising all necessary repairs and maintenance, procuring food, supplies,
equipment, furniture and fixtures, and establishing prices, rates and charges for services provided. MSLS also recruits, employs and directs all community based employees.

Central Services.MSLS also furnishes certain central administrative services, which are provided on a central or regional
basis to all senior living communities managed by MSLS. Such services include: (i) marketing and public relations; (ii) human resources program development; (iii) information
systems development and support; and (iv) centralized computer payroll and accounting.

FF&E Reserves and Capital Improvements.MSLS has established a reserve account under each management agreement, referred to
as an FF&E Reserve, to cover the expected recurring cost of replacements and renewals to the furniture, furnishings, fixtures, soft goods, case goods, vehicles and equipment, and for building repairs
and maintenance which are normally capitalized. The FF&E Reserve accounts are funded from the operating revenues of the managed communities. The amount of this funding varies somewhat among the
managed communities; however, for most communities it is currently set at 2.85% of gross revenues and is expected to gradually increase to 3.5%. In the event major capital improvements are required,
or if the amounts set aside in the FF&E Reserve accounts are inadequate for required repairs, we may be required to separately fund such repairs and improvements. Any such separate funding which we
provide increases the amount of our owner's priority, described below. Also, under our lease we have the option to request Senior Housing to provide any required separate funding in return for rent
adjustments to provide Senior Housing a return on its investment according to a formula set forth in the lease.

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Fees.For its management services, MSLS receives a base fee generally equal to 5% of the managed communities' gross revenues,
plus an incentive fee generally equal to 20% of operating cash flows in excess of owner's priority amounts, as defined in the agreements. For its central services, MSLS receives a fee generally equal
to 2% of gross revenues. Generally, through the earlier of (i) the end of June 2004 or (ii) the date on which certain performance criteria have been met, payment of up to one half
of this central services fee (i.e., 1% of gross revenues) is conditional, and is waived if specified annual profit targets are not achieved. During 2002 management and central services fees paid to
MSLS totaled $16.6 million.

Owner's Priority.We receive the profits of the MSLS managed communities on a priority basis before MSLS receives any
incentive fees for community services or any conditional central services fees. The amount of the owner's priority for each managed community is established based upon a specified rate of return on
historical capital investments in these communities, including capital improvements during the term of the management agreements which are funded by us or Senior Housing in addition to the FF&E
Reserve. For fiscal years 2002 and 2001, the aggregate amount of owner's priority for all 31 communities was $69.3 million and $68.9 million, respectively.

Pooling.Twenty-nine of the communities are subject to pooling arrangements whereby the calculation and payment
of FF&E Reserves, fees payable to MSLS and owner's priority for several groups of these 29 communities are combined.



Item 3. Legal Proceedings

In January 2002 we leased 31 senior living communities with 7,476 living units from Senior Housing. At the time these properties were leased and through
today they were and are managed by MSLS, a 100% owned subsidiary of Marriott. Because of the manner in which this transaction was structured, we and Senior Housing both became parties to the
management contracts with MSLS, we are primarily responsible for all matters affecting the properties operations and MSLS's management. Many of the management services provided to these 31 communities
by MSLS are in practice provided by Marriott.

Shortly
after we began to lease these communities, we began to question the financial and operations management provided by MSLS and Marriott. Among other matters, we questioned:
(i) whether Marriott's pooled insurance costs were fairly allocated to the communities and to other operations of Marriott; (ii) whether Marriott realized unfair profits by purchasing
goods and services for these communities from Marriott affiliated businesses; (iii) whether Marriott and MSLS improperly charged the communities for home office personnel and costs which should
have been borne by Marriott and MSLS in return for their management fees; (iv) whether excessive amounts of the 31 communities revenues were retained by MSLS and Marriott as working capital
cash and used for other Marriott operations without compensation to us; (v) whether deposits received from the communities' residents were improperly retained by Marriott or MSLS and used
interest free for their own purposes; (vi) whether MSLS and Marriott were directing business away from the managed communities to other properties which MSLS operates for its own account;
(vii) whether adequate collection procedures were in effect to reduce bad debt expenses or if uncollectable revenues were accrued to inflate management fees; (viii) whether MSLS and
Marriott refused to prepare a plan to close a chronically loss producing property in order to continue collecting management fees; and (ix) generally whether the managed

20

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communities are being properly marketed and managed. Marriott and MSLS denied that they breached their obligations under the management contracts; however, as result of these inquiries and other
demand notices, Marriott has to date paid us a total of approximately $2.3 million.

In
July 2002, Marriott publicly announced its intention to exit the senior living management business and hired an investment bank to auction MSLS. We and Senior Housing submitted
a combined bid for MSLS, but that bid was not accepted. During this auction process, we and Senior Housing asserted that the management contracts require our approval for, or otherwise restricted, the
sale of MSLS. Marriott denied this assertion.

On
November 27, 2002, Marriott and MSLS sued us in the Circuit Court for Montgomery County, Maryland. This lawsuit seeks a declaration that Marriott and MSLS have not breached the
management contracts, or, if they have breached, that such breach(es) is (are) not sufficiently material to permit termination of the management contracts. We and Senior Housing have answered that
there have been
material breaches sufficient to terminate the management contracts and have counter-claimed for money damages. A preliminary injunction was issued in this case on January 8, 2003, upon
Marriott's and MSLS's request, which prohibits us from terminating the management contracts until completion of the trial. We and Senior Housing have appealed the preliminary injunction ruling. No
schedule for that appeal has as yet been established. A preliminary trial date has been established for this Maryland case in April 2004.

Also
on November 27, 2002, we and Senior Housing sued Marriott and MSLS in the Superior Court for Middlesex County, Massachusetts. An amended complaint was filed on
January 27, 2003. Among other matters, this lawsuit sought a declaration that we and Senior Housing may terminate the management agreements in the event of a sale of MSLS. In
December 2002, our and Senior Housing's request for a preliminary injunction to prevent the sale of MSLS until trial was denied. Thereafter on December 30, 2002, Marriott announced that
it has entered an agreement to sell MSLS to Sunrise. A hearing on our and Senior Housing's request for a preliminary determination of the rights of the parties upon completion of the proposed sale was
held on February 21, 2003. At the same February 21 hearing, the court also considered Marriott's and MSLS's motion to dismiss the amended complaint. On March 4, 2003, the
Massachusetts Court granted the motion to dismiss. We and Senior Housing intend to seek reconsideration of this decision and are considering whether to appeal the Massachusetts court decision.

We
believe that Marriott and MSLS have materially breached the management agreements. We also believe that the management agreements may be terminated if MSLS is sold to Sunrise.
However, the factual and legal issues involved in this litigation are complex and the final outcome of this litigation cannot be predicted. Also, this litigation is likely to be expensive to conduct
and the total amount of this expense cannot be estimated at this time.

We
continue to pay rent for the 31 communities involved in this litigation. If the management contracts are terminated, we believe we will be able to operate the communities involved in
this litigation. We are unable to predict whether MSLS owned by Sunrise will be able to manage these communities or whether that management may adversely affect our ability to meet our financial
obligations.

In
the ordinary course of business we are involved in other litigation incidental to our business; however, we are not aware of any other material pending legal proceeding affecting us
for which we might become liable or the outcome of which we expect to have a material impact on us, except the litigation with Marriott and MSLS described above.

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

None.

21

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PART II

Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters

Our common shares are traded on the American Stock Exchange under the symbol "FVE". The following table sets forth for the periods indicated the high and low
closing price for our common shares as reported by the American Stock Exchange:

Low

High2001December 17 to 31

$
6.12

$
7.502002First Quarter


6.97


8.75Second Quarter


5.35


7.35Third Quarter


1.07


5.50Fourth Quarter


0.96


2.09


The
closing price of our common shares on the American Stock Exchange on March 24, 2003, was $1.18 per share.

As
of March 14, 2003, there were 4,367 shareholders of record of our common shares, and we estimate that as of such date there was approximately 72,000 beneficial owners of our
common shares. Our charter places a restriction on the ability of any person or group to acquire beneficial ownership of more than 9.8% of any class of our equity shares. Additionally, the terms of
our leases with Senior Housing and our agreement with RMR contain provisions whereby our rights under these agreements may be cancelled by Senior Housing and RMR, respectively, upon the acquisition by
any person or group of more than 9.8% of any of our voting stock and upon other change in control events, as defined in those agreements. If the breach of these ownership limitations causes a lease
default, shareholders causing the default may become liable to us or to other shareholders for damages.

We
do not expect to pay dividends in the foreseeable future.

Item 6. Selected Financial Data

The following table presents selected financial data which has been derived from our historical financial statements for the period from April 27, 2000
(the date we commenced operations) through December 31, 2002. The following data should be read in conjunction with, and is qualified in its entirety by reference to, our financial statements
and the notes thereto included elsewhere in this Annual Report on Form 10-K. As discussed under "Management's Discussion and Analysis of Financial Condition and Results of
Operations", we are a relatively new company and our historical financial

22

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information is not fully reflective of our current operations. Accordingly, you should not place undue reliance on our historical financial information.

|                                        |                                                | Year ended December 31, |   |         |  
|--------------------------------------- | ---------------------------------------------- | ----------------------- | - | ------- | -
|
|
|
|Operating data:                         |                                                |                         |   |         |  
|                                        | Total revenues                                 |                         | $ | 522,511 |  
|                                        | Net (loss) income from continuing operations   |                         |   | (10,376 | )
|                                        | Net (loss) income from discontinued operations |                         |   | (2,798  | )
|                                        | Net (loss) income                              |                         | $ | (13,174 | )
|Per common share data:                  |                                                |                         |   |         |  
|                                        | (Loss) income from continuing operations       |                         | $ | (1.37   | )
|                                        | (Loss) income from discontinued operations     |                         |   | (0.37   | )
|                                        | Net (loss) income                              |                         | $ | (1.74   | )
|Balance sheet data (as of December 31): |                                                |                         |   |         |  
|                                        | Total assets                                   |                         | $ | 133,197 |  
|                                        | Total indebtedness                             |                         |   | 16,123  |  
|                                        | Total shareholders' equity                     |                         |   | 65,047  |  

The following table presents selected financial data derived from historical financial statements of our two predecessors. The following data
should be read in conjunction with the financial statements and notes thereto entitled Combined Financial Statements of the Forty-two Communities Acquired by Senior Housing Properties
Trust from Integrated Health Services, Inc. and Combined Financial Statements of Certain Mariner Post-Acute Network Communities (Operated by subsidiaries of Mariner
Post-Acute Network) included in this Annual Report on Form 10-K, and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Historical
Results of Operations-Mariner Predecessor" and "Historical Results of Operations-Integrated Predecessor". The following table presents the information from 1998 to 2000.

Year ended December 31,2000

1999

1998(in thousands)Integrated PredecessorOperating data:Operating revenues

$
135,378

$
130,333

$
140,116Net loss


(25,252
)

(126,939
)

(17,183
)Balance sheet data (as of December 31):Total assets

$
34,942

$
61,274

$
190,553Long term liabilities





17,500


17,751Mariner PredecessorOperating data:Operating revenues

$
85,325

$
86,945

$
105,486Net loss


(7,421
)

(43,804
)

(7,710
)Balance sheet data (as of December 31):Total assets

$
23,052

$
17,433

$
62,502Long term liabilities


32,091


28,603


33,195


23

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

We were incorporated in Delaware in April 2000 and reincorporated in Maryland in September 2001. We were formed as a 100% owned subsidiary of Senior
Housing. Effective July 1, 2000, we assumed the operations of healthcare communities from two bankrupt former tenants of Senior Housing. Pursuant to tax laws applicable to REITs, Senior Housing
engaged FSQ, Inc., an independent operating company formed by our managing directors, to manage these communities. At the time we assumed operations of these communities, we had not received
substantially all of the required licenses for these communities. As a result, for the period from July 1, 2000, through December 31, 2000, we accounted for the operations of these
communities using the equity method of accounting and we only recorded the net income from these operations. Thereafter, we obtained all necessary licenses to operate these communities, and on
January 1, 2001, we began to consolidate the results of operations of these communities. On December 31, 2001, Senior Housing distributed substantially all of our shares to its
shareholders in a spin off transaction and we became a separately traded public company. Also, on January 2, 2002, in order to acquire the personnel, systems and assets necessary to operate
these communities, we acquired FSQ, Inc. by merger.

Since
we succeeded to substantially all of the business formerly conducted by subsidiaries or units of two former tenants of Senior Housing, these subsidiaries and units are considered
to be our predecessors. We have included the financial statements of these predecessors in this Annual Report on Form 10-K and discuss their results of operations. Our predecessors'
financial statements are entitled: Certain Mariner Post-Acute Network Communities (Operated by subsidiaries of Mariner Post-Acute Network) (referred to herein as Mariner
Predecessor); and Forty-two Communities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc. (referred to herein as Integrated Predecessor).

Our
revenues consist primarily of payments for services provided to residents at our communities. The payments are either made by the residents, their families or insurers, referred to
as private pay revenues, or by the Medicare and Medicaid programs. On a pro forma basis, after giving full year effect to the 51 communities we leased or acquired in 2002, for the year ended
December 31, 2002,
private pay revenues represented 61% of our total revenues. Our expenses consist primarily of rent, wages and benefits of personnel, food, supplies, insurance and other resident care costs, as well as
taxes, and other property related costs.

OUR HISTORICAL RESULTS OF OPERATIONS

As described above, until completion of the spin off, we operated as a subsidiary of Senior Housing. Our past operations as Senior Housing's subsidiary prior to
2002 differ from our 2002 and current operations as an independent public company. Specifically, in the 2000 and 2001 periods we operated only 56 communities for Senior Housing, which owned the real
estate as well as the operations. Effective December 31, 2001, we began to lease these 56 communities (now 54 communities) from Senior Housing which continued to own the real estate. In
January 2002, we began to lease an additional 31 communities from Senior Housing that are managed by MSLS. In April 2002, we acquired and began to operate five additional senior living
communities. In October 2002, we began to operate 15 additional owned or leased senior living communities. Also, our principal source of financing for us as a subsidiary of Senior Housing prior
to 2002 was intercompany advances from Senior Housing, an entity with financial resources substantially in excess of ours. Because of these differences, we believe that our historical results of
operations for periods prior to 2002 described below are not comparable to our 2002 operations or our expected future operations. The following tables present an overview of our portfolio for the
years ended December 31, 2002 and 2001 which

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shows the differences in the size of our operations during these periods and "Same Store" results for the communities' operations, including periods prior to their acquisition by us.

|                                           |  | 2002 |         | 2001 |   | % Change |  
|------------------------------------------ |  | ---- | ------- | ---- | - | -------- | -
|Revenues from residents (in 000s)          |  | $    | 522,214 |      | $ | 221,177  |  
|Community expenses (in 000s)               |  | $    | 420,258 |      | $ | 202,925  |  
|Total expenses (in 000s)                   |  | $    | 532,887 |      | $ | 219,875  |  
|No. of communities (end of period)         |  |      | 105     |      |   | 56       |  
|No. of living units (end of period)        |  |      | 14,140  |      |   | 5,211    |  
|Occupancy                                  |  |      | 89      | %    |   | 90       | %
|Average daily rate                         |  | $    | 114     |      | $ | 132      |  
|Revenue per day per available unit         |  | $    | 101     |      | $ | 116      |  
|Percent of revenues from Medicare/Medicaid |  |      | 39      | %    |   | 78       | %
|Percent of revenues from private/other     |  |      | 61      | %    |   | 22       | %

|                                           |  | "Same Store" Communities
(communities that we operated
continuously since 1/1/01) |         | Total Portfolio at 12/31/02
(includes data for periods
prior to our operation) |  
|------------------------------------------ |  | --------------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------ | -
|
|Revenues from residents (in 000s)          |  | $                                                                                 | 229,400 |                                                                                | $
|Community expenses (in 000s)               |  | $                                                                                 | 212,785 |                                                                                | $
|No. of communities (end of period)         |  |                                                                                   | 54      |                                                                                |  
|No. of living units (end of period)        |  |                                                                                   | 4,952   |                                                                                |  
|Occupancy                                  |  |                                                                                   | 89      | %                                                                              |  
|Average daily rate                         |  | $                                                                                 | 142     |                                                                                | $
|Revenue per day per available unit         |  | $                                                                                 | 127     |                                                                                | $
|Percent of revenues from Medicare/Medicaid |  |                                                                                   | 79      | %                                                                              |  
|Percent of revenues from private/other     |  |                                                                                   | 21      | %                                                                              |  

Year ended December 31, 2002, versus year ended December 31, 2001

Revenues from residents for 2002 were $522.2 million, an increase of 136% over revenues from residents of $221.2 million for 2001. This increase is
attributable primarily to our lease of 31 communities on January 11, 2002, our acquisition of five communities on April 1, 2002, and our acquisition or lease of 15 communities on
October 25, 2002. Revenues from residents at the communities we operated throughout 2002 and 2001 were $229.4 million and $221.4 million, respectively, an increase of 4%. This
increase is due primarily to higher per diem charges to residents and slightly higher occupancy. Revenues from residents at the 105 communities we operated at December 31, 2002, were
$562.7 million for 2002, an increase of 4% over revenues from residents of $541.3 million in 2001 (including revenues which relate to periods prior to our operation of some of these
communities). This increase is principally attributable to higher per diem charges to residents offset somewhat by a 1% decline in occupancy. About 39% of our revenues from residents in 2002 were
received from Medicare and Medicaid, compared to 78% in 2001. This decrease is due largely to our lease of 40 and acquisition
of 11 communities during 2002, all of which are focused on services to residents who pay with private resources.

Since
1998, a Medicare prospective payment system has generally lowered Medicare rates paid to senior living communities including many that we operate. In October 2002, temporary
increases in Medicare payment rates expired. Our Medicare revenues totaled $68.4 million and $35.4 million during 2002 and 2001, respectively. These amounts do not include communities
where operations were ceased by us in 2002. This increase is due to the addition to our business in January 2002 of 31 communities which are operated for us by MSLS and an increase in Medicare
revenue at the 54 nursing homes which we operated in both 2001 and 2002 caused primarily by the 16% increase in Medicare resident days at these nursing homes. Because the Medicare rate increases
expired in October 2002, assuming

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our 2003 census of Medicare residents is comparable to 2002, we estimate that our revenues received from Medicare in 2003 will decline by approximately $6.9 million over 2002 revenues received
from Medicare.

Our
31 communities which are managed by MSLS generated $26.9 million, or 10%, of their revenue in 2002 from Medicare, versus $26.9 million, or 10%, in 2001. Our 54 nursing
homes generated $41.5 million, or 18% of their revenue in 2002 from Medicare, versus $35.4 million, or 16%, in 2001. The 20 independent and assisted living communities which we operate
for our own account do not participate in the Medicare program and generate no Medicare revenues.

Some
state governments have reduced or are planning to reduce Medicaid rates to address state budget shortfalls. In 2002, 29% of our total revenues, or $142.6 million, were
Medicaid revenues, versus $127.9 million in 2001, an increase of 11%. These amounts do not include revenues at communities where our operations ceased in 2002. This increase is due to the
addition to our business in January 2002 of 31 communities operated for us by MSLS which generate some Medicaid revenues and an increase in Medicaid revenue at our 54 nursing homes caused
primarily by the 6% increase in Medicaid rates at these nursing homes. The magnitude of possible future Medicaid rate reductions cannot currently be estimated, but it may be material.

Our
31 communities which are managed by MSLS generated $10.2 million, or 4% of their revenue in 2002, from Medicaid, versus $9.9 million, or 4%, in 2001, from Medicaid. Our
54 nursing homes generated $132.3 million or 58% of their revenue in 2002 from Medicaid, versus $127.9 million, or 58% in 2001. The 20 independent and assisted living communities which
we operate for our own account do not participate in the Medicaid program and generate no Medicaid revenues.

Interest
income increased by $205,000 in 2002 compared to 2001 due to earnings on higher cash balances in the 2002 period.

Expenses
for 2002 were $532.9 million, an increase of 142% over expenses of $220.0 million for 2001. Our wages and benefits costs increased from $155 million to
$237.7 million, or 53%, primarily due to expenses at the 51 communities we leased or acquired in 2002. Other operating expenses, which include utilities, housekeeping, dietary, maintenance,
insurance and community level administrative costs, rose from $47.9 million to $182.5 million or 281%, again primarily due to expenses at the 51 communities we leased or acquired in
2002. During 2001, MSLS did not manage any communities for us and we were a subsidiary of Senior Housing that did not lease any communities. As a result, we did not incur management fees to MSLS or
rent expense in 2001. Community level operating expenses related to the communities we operated throughout 2002 and 2001, were $212.8 million and $202.7 million, respectively, an
increase of 5%. This increase is principally attributable to higher insurance premiums, an increase in reserves for the self funded portion of our insurance programs and higher wage and benefit costs,
which were partially offset by a decrease in expenses from our reduced use of higher cost, third party staffing. Community level operating expenses at the 105 communities that we operated at
December 31, 2002, were $467.5 million for 2002, an increase of 7% over community expenses for 2001 (including expenses which relate to periods prior to our operation at some of these
communities). This increase resulted principally from higher insurance premiums, an increase in reserves for the self funded portion of our insurance programs and higher wage and benefit costs.

Our
general and administrative expenses for 2002 were $15.4 million, a decrease of 1% over 2001, primarily due to operational start up costs incurred during 2001 which we did not
incur in 2002 which were only partially offset by increased costs in 2002 associated with operating as a separate, publicly owned company and the legal and other costs incurred in connection with our
litigation with Marriott and MSLS.

26

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Depreciation expense in 2002 was $1.9 million, an increase of 46% over depreciation expense of $1.3 million in 2001. The increase is attributable to our purchase of 11
communities in 2002.

Loss
from discontinued operations for 2002 was $2.8 million, an increase of $2 million over the loss in 2001. This increase was the result of reserves recorded for Medicaid
receivables due from the State of Connecticut related to community closure costs and an asset impairment charge related to a closed community.

As
a result of the factors described above, our net loss for 2002 was $13.2 million, compared to a profit of $527,000 in 2001. Our net loss per share in 2002 was $1.74. Assuming
the shares outstanding as of December 31, 2001, were outstanding for all of 2001, our earnings per share would have been $0.11 for 2001.

Year ended December 31, 2001, versus year ended December 31, 2000

We did not begin to operate the senior living communities of our predecessors or generate revenue until July 1, 2000. Therefore, our results for 2001 are
not comparable to 2000.

Revenues
for 2001 were $221.3 million. On a combined basis, the two predecessor entities had revenues of $220.7 million for 2000. This increase was due mainly to an
increase in the average daily rate received during these periods.

Expenses
for 2001 were $219.9 million. On a combined basis, the predecessor entities had expenses of $253.4 million for 2000. The decrease is due primarily to rent and
interest expenses which were included in the 2000 expenses of our predecessors but were zero in 2001 because, after Senior Housing's repossessions and foreclosures, rent and interest payments on our
predecessors' leases and mortgages ceased.

Period from April 27, 2000 (date our operations commenced) through December 31, 2000

This period was our first period of operations and, therefore, there is no comparable period.

During
2000 we accounted for our investment in these operating businesses using the equity method of accounting. As a result, the reported revenues include only our equity in earnings of
these investees. Revenues for 2000 were $2.2 million and represent the net amount of net patient revenues in excess of expenses of these operations for the 2000 period. Net patient revenues at
the operating businesses for the period ended December 31, 2000, were $114.5 million and expenses incurred for the period were $112.0 million.

Historical Results Of Operations-Mariner Predecessor2000

Our Mariner Predecessor conducted operations of 17 communities leased from Senior Housing for a period of time in 2000. The 2000 operations of the Mariner
Predecessor during the period prior to its acquisition by Senior Housing differ from our operations as follows:



We
believe that because of these differences, these historical results of operations are not comparable to our operations. Specifically, the historical operations include: revenues and
operating expenses for only 17 communities, one of which has since been closed, while currently we generate revenues and incur operating expenses at 105 communities; depreciation expenses which relate
to real

27

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estate and amortization expenses which relate to goodwill, while we have less depreciable assets and no amortizing goodwill; expenses related to allocation of corporate overhead by the parent of
these operations, while we incur different corporate expenses; rent expense under a lease which has been cancelled; charges for impairments of long lived assets of substantial amounts, while we have
incurred lesser such charges; and interest expense incurred on debt which is different from our debt and internal costs.

In
2000, our Mariner predecessor had revenues of $85.3 million, incurred expenses of $92.6 million, and realized a net loss of $7.4 million.

Historical Results Of Operations-Integrated Predecessor2000

Our Integrated Predecessor conducted operations of 42 communities leased from or mortgaged to Senior Housing for a period of time in 2000. The operations of the
Integrated Predecessor during the period prior to its acquisition by Senior Housing differ from our operations as follows:



We
believe that because of these differences, the historical results of operations are not comparable to our operations. Specifically, the historical operations include: revenues and
operating expenses for only 42 communities, one of which has since been closed, while we currently generate revenues and incur operating expenses at 105 communities; depreciation expenses which relate
to real estate and amortization expenses which relate to intangible assets, while our depreciable and amortizable assets are less substantial; expenses related to corporate overhead and management
fees charged by the parent of the Integrated Predecessor, while we incur different corporate expenses; rent expense under a lease which has been canceled; charges for impairments of long lived assets
of substantial amounts, while we have incurred lesser such charges; and interest expense incurred on debt which is different from our debt and internal costs.

In
2000, our Integrated predecessor had revenues of $135.4 million, incurred expenses of $160.6 million and realized a net loss of $25.3 million.

LIQUIDITY AND CAPITAL RESOURCES

Our total assets at December 31, 2002, were $133.2 million compared to $68 million at December 31, 2001. The increase is primarily a
result of our capital raising, acquisition and leasing activities in 2002. At December 31, 2002, we had cash and cash equivalents of $10.3 million and $8.7 million available on
our revolving credit facility. For 2002 and 2001: cash provided by (and used in) operating activities was $9.9 million and ($293,000), respectively, cash used in investing activities was
$48.6 million and
$2.2 million, respectively and cash provided by financing activities was $25.1 million and $21.1 million, respectively.

We
lease 94 communities from Senior Housing. Our leases with Senior Housing require us to pay a total of $76.2 million of minimum rent annually. Percentage rent on these leases
begins in 2003 and 2004. We expect percentage rent to be modest relative to our total rental obligations. If events of default under the leases occur, Senior Housing has the ability to accelerate our
rent payments. At March 24, 2003, we believe we are in compliance with the terms of our leases.

28

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Our
primary source of cash to fund operating expenses, including rent, principal and interest payments on our mortgage debt and routine capital expenditures, is our revenues from
services to residents at our communities. Changes in laws and regulations which impact Medicare or Medicaid rates, on which some of our communities rely, may materially affect our future results. In
October 2002 temporary increases in Medicare payment rates expired. Assuming our 2003 census of Medicare residents is comparable to 2002, we estimate that our revenues received from Medicare in
2003 will decline by approximately $6.9 million over 2002 revenues received from Medicare. Some of the states in which we operate have reduced or are planning to reduce Medicaid funding to
address state budget shortfalls. The magnitude of combined Medicare and Medicaid revenue reductions cannot currently be estimated, but it may be material. We expect recent increases in the costs of
insurance, especially tort liability insurance, workers compensation and employee health insurance costs, which are affecting the senior living industry, will continue to have a material adverse
impact upon our future results of operations. As discussed in note 17 to our financial statements, a failure by Integrated Health Services, the United States Department of Health and Human
Services or the State of Connecticut to make payments that we believe are due to us would have a material adverse impact upon our future results and deny us access to those cash proceeds to which we
believe we are entitled. It is also possible that our litigation with Marriott and MSLS and potential transfer of the related management agreements, as discussed in note 17 to our financial
statements, may have an adverse impact on our financial results or increase our working capital requirements. Despite these contingencies, however, we believe that a combination of some or all of our
efforts to increase revenues, contain or reduce costs, our ability to borrow on the revolving credit facility, our ability to obtain financing from Senior Housing for capital improvements made to
communities leased from Senior Housing and the possibility of sales or financings of our owned communities will be sufficient to meet our working capital needs, operating expenses, rent payments to
Senior Housing, debt service and capital expenditures in the short term, or next 12 months, and in the normal course of our business for the foreseeable future.

Debt Instruments and Covenants

In October 2002, we entered into a revolving credit facility. The interest rate on borrowings on this facility is LIBOR plus a spread. The maximum amount
available under this facility is $12.5 million, and is subject to limitations based upon qualifying collateral. The borrower under this facility is a subsidiary that we organized with the
intention that it be "bankruptcy-remote". Certain of our other subsidiaries sell or contribute their healthcare accounts receivable to the borrower on a true sale basis and make
certain representations and other undertakings in favor of the borrower in connection with each sale. The seller subsidiaries have granted security interests in their assets to secure their
obligations to the borrower. We guarantee the obligations of the seller subsidiaries obligations to the borrower subsidiary and have pledged the stock or membership interests in each of the seller
subsidiaries to the borrower. The borrower has in turn collaterally assigned these undertakings, guarantees and collateral to the revolving credit facility lenders, and has granted a security interest
in the purchased receivables and all of its other assets to secure its obligations under the facility. The facility is available for acquisitions, working capital and general business purposes. The
facility contains covenants and events of default requiring the maintenance of collateral, minimum net worth and certain other financial ratios, among other customary provisions. The accounts
receivable collateralizing the facility totaled $19.2 million, net of allowances of $1.5 million, as of December 31, 2002. In certain circumstances and subject to available
collateral and lender approvals the maximum amounts which we may draw under this credit agreement may be increased to $25.0 million. As of December 31, 2002, no loans were outstanding
under the facility. At March 24, 2003, we believe we are in compliance with all applicable covenants under this revolving credit agreement and no loans are outstanding.

In
connection with our October 2002 acquisition of a community, we assumed HUD insured mortgages totaling approximately $15.8 million. The weighted average interest cost on
this debt is 8.98% per year. Principal and interest is due monthly through 2033. These mortgages are not recourse

29

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to us and are secured by one of our owned communities with 229 living units. A portion of this debt is refinanceable in June 2003 and all of this debt may be refinanced beginning in 2004. This
mortgage debt was recorded, as required by generally accepted accounting principles, or GAAP, at its estimated fair value on the date we assumed it, or $16.2 million. The approximate $400,000
difference between our contractual obligation and our carry value is being amortized over the estimated period the mortgages will remain outstanding. These mortgages contain standard HUD mortgage
covenants. At March 24, 2003, we believe we are in compliance with all material covenants of these mortgages.

Related Parties

On December 31, 2001, Senior Housing distributed substantially all of our shares to its shareholders. In order to effect this spin off and to govern
relations after the spin off, we entered into agreements with Senior Housing, and others. Among other matters, these agreements provide:



As
of December 31, 2002, we leased 94 of our 105 senior living communities from Senior Housing for aggregate annual minimum rent of $76.2 million. In the future, we may
transact additional business with Senior Housing. We believe that our current leases with Senior Housing were entered into on reasonable commercial terms. However, because of the historical and
continuing relationships which we have, these continuing and possibly expanding business relationships may not be arm's length and may not be on the same or as favorable terms as we enter with third
parties with whom we did not have such relationships.

During
2002 we acquired seven senior living communities from a third party for $27 million. Prior to this acquisition Senior Housing waived its right to acquire these assets,
subject to a continuing right to acquire or finance these assets in the event we determine to sell or finance them. To finance the cash portion of our purchase, we sold a senior living community to
Senior Housing, which we purchased in April 2002, for $12.7 million, its approximate carrying value. Simultaneous with our acquisition, Senior Housing acquired eight other senior living
communities from the same third party. We acquired operating assets and liabilities related to these eight communities. We began to lease these eight communities and the community we sold to Senior
Housing for minimum annual rent of

30

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$6.3 million. The terms of this transaction with Senior Housing were negotiated on our behalf by our independent director who is not on the board of Senior Housing.

As
discussed more fully in Item 3. "Legal Proceedings", during 2002, we and Senior Housing became jointly involved in litigation with Marriott and MSLS, the operator of 31 of the
senior living communities which we leased from Senior Housing beginning in 2002. We believe that Marriott and MSLS have materially breached the management agreements for these 31 communities. We also
believe that the management agreements may be terminated if MSLS is sold to Sunrise. Marriott announced that it had entered an agreement to sell MSLS to Sunrise on December 30, 2002. However,
the factual
and legal issues involved in this litigation are complex and the final outcome of this litigation cannot be predicted. Also, this litigation is likely to be expensive to conduct and the total amount
of this expense cannot be estimated at this time.

We
have an agreement with RMR to provide administrative services to us. RMR is owned by Messrs. Martin and Portnoy, who are our managing directors and members of our board of
directors. RMR is compensated at an annual rate equal to 0.6% of our total revenues. Aggregate fees paid to RMR for services during 2002 were $2.9 million. The fact that RMR has
responsibilities to other entities, including our landlord, Senior Housing, could create conflicts and, in the event of such conflicts between Senior Housing and us, the shared services agreement
allows RMR to prefer its responsibility to Senior Housing. The terms of our shared services agreement are annually reviewed and approved by our directors who are not owners or employees of RMR, and we
believe these terms are commercially reasonable. However, because of these historical and continuing relationships our shared services agreement may not be arm's length and may not be on the same or
as favorable terms as we might enter with third parties with whom we did not have such relationships.

Our
Chief Executive Officer and Chief Financial Officer are also officers and employees of RMR. These officers devote a substantial majority of their business time to our affairs and the
remainder to RMR's affairs which are separate from ours. We believe the compensation we pay to these officers reflects their division of business time. However, periodically, these individuals may
divide their business time differently than they do currently and their compensation from us may become disproportionate to this division.

During
2002 we acquired FSQ, an entity owned by Messrs. Martin and Portnoy, in a merger transaction that was entered into as part of our spin off from Senior Housing. We acquired
all of the stock of FSQ and Messrs. Martin and Portnoy each received 125,000 of our common shares. The board of trustees of Senior Housing received an opinion from an internationally recognized
investment banking firm, to the effect that the merger was fair, from a financial point of view, to us. The terms of this merger were approved by Senior Housing's trustees other than
Messrs. Martin and Portnoy.

Messrs. Martin
and Portnoy own the building in which our headquarters is located. Our lease for space was originally executed by FSQ when FSQ was owned by Messrs. Martin
and Portnoy. This lease expires in 2011. During 2002, we paid rent under this lease of $539,000. We believe that this lease and the rent rate were commercially reasonable at the time they were
entered. However, because of this historical and continuing relationship among us, FSQ and Messrs. Portnoy and Martin, this lease may not be arm's length and it may not be on the same or as
favorable terms as we might have with third parties with whom we did not have such relationships.

In
March 2003, Senior Housing terminated a lease for a nursing home community in St. Joseph, Missouri and evicted the tenant, which was not current in its rent obligations to
Senior Housing. We have agreed to manage this nursing home until it is re-leased or sold. We will be paid a management fee of 5% of the gross revenues from this nursing home.

31

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Until
March 31, 1997, Mr. Portnoy was a partner of Sullivan & Worcester LLP, our counsel and counsel to Senior Housing, RMR and affiliates of each of the foregoing,
and he received payments from that firm during 2002 in respect of his retirement.

Critical Accounting Policies

Our most critical accounting policies concern revenue recognition, our assessment of the net realizable value of our accounts receivable, the realizability of
long term assets, accounting for long term care contracts, accounting for business combinations and our assessment of reserves related to our self insurance programs.

Our
revenue recognition policies involve judgments about Medicare and Medicaid methodologies. These judgments are based principally upon our experience with these programs. We recognize
revenues when services are provided and revenues are earned and these amounts are reported at their estimated net realizable amounts. Some Medicare and Medicaid revenues are subject to audit and
retroactive adjustment.

Our
policies for valuing accounts receivable involve significant judgments based upon our experience, including consideration of the age of the receivable, the terms of the agreements
with our residents or their third party payors, the resident or payors stated intent to pay, the resident or payors financial capacity and other factors which may include litigation or appeal
proceedings.

We
monitor our long-term assets to determine whether any impairment of these assets may have occurred. If the facts and circumstances indicate that an impairment may have
occurred, we evaluate the asset's carrying value to determine whether an impairment charge is required. This process includes a review of historical and projected future financial results realized or
to be realized from the affected assets, market for sale and the like. This process requires that estimates be made and errors in our judgments or estimates could have a material effect on our
financial statements.

At
certain of our facilities, we offer long-term care contracts under which residents pay a one-time deposit in exchange for reduced charges during their stay.
The one-time deposits may be refundable or non-refundable, or partially refundable and partially non-refundable. We record such deposits as a long-term
obligation and amortize the non-refundable portion of such deposits into revenue over our estimate of the periods during which future services will be provided. We base these estimates on
our experience, actuarial information and other factors.

During
2002, we began to lease or acquire 51 communities. We accounted for each of these transactions as a purchase business combination in accordance with Statement of Financial
Accounting Standards No. 141. Purchase accounting requires that we make certain judgments and estimates based on our experience, including determining the fair value and useful lives of assets
acquired and the fair value of liabilities assumed. Some of our judgments and estimates are also based upon published industry statistics.

Our
policies for determining reserves for the self funded part of our insurance programs and for our self insurance programs involve significant judgments based upon our experience,
including projected settlements for pending claims, known incidents which we expect may result in claims, estimates of incurred but not yet reported claims and incidents, claims experience, estimated
litigation costs and other factors. We also periodically receive and rely upon recommendations from professional consultants in establishing these reserves.

In
the future we may need to revise the judgments, estimates and assessment we use to formulate our critical accounting policies to incorporate information which is not now known. We
cannot predict the effect changes to these premises underlying our critical accounting policies may have on our future results of operations, although such changes could be material and adverse.

32

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Inflation and Deflation

Inflation in the past several years in the United States has been modest. Future inflation might have both positive or negative impacts on our business. Rising
price levels may allow us to increase occupancy charges to residents, but may also cause our operating costs, including our percentage rent, to increase. Also our ability to increase prices related to
Medicare and Medicaid reimbursements might be limited despite inflation.

Deflation
would likely have a negative impact upon us. A large component of our expenses consist of minimum rental obligations to Senior Housing. Accordingly we believe that a general
decline in price levels which could cause our charges to residents to decline would likely not be fully offset by a decline in our expenses.

Seasonality

Our business is subject to modest effects of seasonality. During the calendar fourth quarter holiday periods nursing home and assisted living residents are
sometimes discharged to join family celebrations and admission decisions are often deferred. The first quarter of each calendar year usually coincides with increased illness among nursing home and
assisted living residents which can result in increased costs or discharges to hospitals. As a result of these factors, nursing home and assisted living operations sometimes produce greater earnings
in the second and third quarters of a calendar year and lesser earnings in the first and fourth quarters. We do not believe that this seasonality will cause fluctuations in our revenues or operating
cash flow to such an extent that we will have difficulty paying our expenses, including rent, which do not fluctuate seasonally.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk through our monitoring of available financing
alternatives. Our strategy to manage exposure to changes in interest rates is unchanged since December 31, 2001. Other than as described below we do not now anticipate any significant changes
in our exposure to fluctuations in interest rates or in how we manage this risk in the future.

Changes
in market interest rates also affect the fair value of our debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in
market interest rates increase the fair value of our fixed rate debt. For example: based upon discounted cash flow analysis, if prevailing interest rates were to decline by 10% and other credit market
considerations remained unchanged, the market value of our $15.8 million mortgage debt outstanding on December 31, 2002, would increase by about $1.3 million; and, similarly, if
prevailing interest rates were to increase by 10%, the market value of our $15.8 million mortgage debt would decline by about $1.1 million.

Our
revolving credit facility bears interest at floating rates and matures in October 2005. As of December 31, 2002, we had zero outstanding under this revolving credit
facility. We borrow in U.S. dollars and borrowings under our revolving credit facility are subject to interest at LIBOR plus a spread. Accordingly, we are vulnerable to changes in U.S. dollar based
short term rates, specifically LIBOR. A change in interest rates would not affect the value of any outstanding floating rate debt but would affect our operating results. For example, if the maximum
amount of our credit facility of $12.5 million were drawn and interest rates decrease or increase by 1% per annum, our interest expense would decrease or increase by $125,000 per year, or $0.02
per share, respectively. If interest rates were to change gradually over time, the impact would be spread over time.

Our
exposure to fluctuations in interest rates may increase in the future if we incur debt to fund acquisitions or otherwise.

33

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Item 8. Financial Statements and Supplementary Data

The information required by this Item is included elsewhere in this Annual Report on Form 10-K. Our financial statements and financial
statement schedules begin on Page F-1 (see index in Item 15(a)).

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

34

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PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by Item 10 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the
end of our fiscal year.

Item 11. Executive Compensation

The information required by Item 11 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the
end of our fiscal year.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

Equity Compensation Plan Information. The following table provides a summary as of December 31, 2002, of common shares reserved for issuance pursuant to
our 2001 Stock Option and Stock Incentive Plan.

|                                                           |       | Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a) |      | Weighted-average exercise price of outstanding options, warrants and rights
(b) |      | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c) |        
|---------------------------------------------------------- | ----- | ----------------------------------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------- | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------- | -------
|Equity compensation plans approved by security holders     |       | None                                                                                            |      | None                                                                            |      | 645,000                                                                                                                                         | (1)    
|Equity compensation plans not approved by security holders |       | None                                                                                            |      | None                                                                            |      | None                                                                                                                                            |        
|                                                           |       |                                                                                                 |      |                                                                                 |      |                                                                                                                                                 |        
|                                                           | Total |                                                                                                 | None |                                                                                 | None |                                                                                                                                                 | 645,000

---

The
remainder of the information required by Item 12 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of
our fiscal year.

Item 13. Certain Relationships and Related Transactions

The information required by Item 13 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the
end of our fiscal year.

Item 14. Controls and Procedures

a)    Within
the 90 days prior to the date of this report, our management carried out an evaluation, under the supervision and with the participation of our President
and Chief Executive Officer and Treasurer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14(c) and 15d-14(c). Based upon that evaluation, our President and Chief Executive Officer and Treasurer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings.

b)    There
have been no significant changes in our internal controls or in other factors that could significantly affect those controls since our evaluation of these controls,
including any corrective actions with regard to significant deficiencies and material weaknesses.

35

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Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

|                                                                                                                                                                      |  | Page
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Consolidated Financial Statements of Five Star Quality Care, Inc.                                                                                                     |  |     
|Report of Independent Auditors                                                                                                                                        |  | F-1 
|Consolidated Balance Sheet at December 31, 2002 and 2001                                                                                                              |  | F-2 
|Consolidated Statement of Operations for the years ended December 31, 2002, and 2001, and the period April 27, 2000 (Inception) through December 31, 2000             |  | F-3 
|Consolidated Statement of Shareholders' Equity for the years ended December 31, 2002, and 2001, and the period April 27, 2000 (Inception) through December 31, 2000   |  | F-4 
|Consolidated Statement of Cash Flows for the year ended December 31, 2002, and 2001, and the period April 27, 2000 (Inception) through December 31, 2000              |  | F-5 
|Notes to Consolidated Financial Statements                                                                                                                            |  | F-6 
|Combined Financial Statements of the Forty-two Communities Acquired by Senior Housing Properties Trust from Integrated Health Services, Inc. (Integrated Predecessor) |  |     
|Independent Auditors' Report                                                                                                                                          |  | F-21
|Combined Balance Sheet at December 31, 2000                                                                                                                           |  | F-22
|Combined Statement of Operations for the year ended December 31, 2000                                                                                                 |  | F-23
|Combined Statement of Changes in Net Equity (Deficit) of Parent Company for the year ended December 31, 2000                                                          |  | F-24
|Combined Statement of Cash Flows for the year ended December 31, 2000                                                                                                 |  | F-25
|Notes to Combined Financial Statements                                                                                                                                |  | F-26
|Schedule II-Valuation and Qualifying Accounts for the year ended December 31, 2000                                                                                    |  | F-33
|Combined Financial Statements of Certain Mariner Post-Acute Network Communities (Operated by subsidiaries of Mariner Post-Acute Network) (Mariner Predecessor)        |  |     
|Report of Independent Auditors                                                                                                                                        |  | F-34
|Combined Balance Sheet at December 31, 2000                                                                                                                           |  | F-35
|Combined Statement of Operations for the year ended December 31, 2000                                                                                                 |  | F-36
|Combined Statement of Divisional Equity (Deficit) for the year ended December 31, 2000                                                                                |  | F-37
|Combined Statement of Cash Flows for the year ended December 31, 2000                                                                                                 |  | F-38
|Notes to Combined Financial Statements                                                                                                                                |  | F-39
|Schedule II-Valuation and Qualifying Accounts for the year ended December 31, 2000                                                                                    |  | F-47

During
the fourth quarter of 2002, we filed the following Current Reports on Form 8-K:



36

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|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1*        |  | Transaction Agreement, dated December 7, 2001, by and among Senior Housing Properties Trust, certain subsidiaries of Senior Housing Properties Trust party thereto, the Registrant, certain subsidiaries of the Registrant
party thereto, FSQ, Inc., Hospitality Properties Trust, HRPT Properties Trust and Reit Management & Research LLC                                                                                                                                                                                           
|2.2*        |  | Agreement of Merger, dated December 5, 2001, among the Registrant, FSQ Acquisition, Inc. and FSQ, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                
|2.3**       |  | Sale-Purchase Agreement between ILM II Senior Living, Inc. and ILM II Holding, Inc. and the Registrant, dated January 23, 2002, as amended by First Amendment to Sale-Purchase Agreement among ILM II Senior
Living, Inc., ILM II Holding, Inc. and Five Star Quality Care, Inc., dated February 22, 2002 and Second Amendment to Sale-Purchase Agreement among ILM II Senior Living, Inc., ILM II Holding, Inc., and Five
Star Quality Care, Inc., dated March 1, 2002                                                               
|2.4***      |  | Purchase and Sale Agreement, dated as of August 26, 2002, by and among Constellation Health Services, Inc. and certain of its subsidiaries, as Seller, and Constellation Real Estate Group, Inc., as Guarantor,
 and Senior Housing Properties Trust, as Buyer, as amended by First Amendment to Purchase and Sale Agreement, dated as of October 25, 2002, by and among Constellation Health Services, Inc. and certain of its subsidiaries, as Seller, and
Senior Housing Properties Trust and the Registrant, collectively as Buyer
|3.1****     |  | Articles of Amendment and Restatement of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|3.2         |  | Second Amended and Restated Bylaws of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.1****     |  | Specimen Certificate for shares of common stock of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.2         |  | Description of Capital Stock of the Registrant (contained in Exhibits 3.1 and 3.2)                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.1****    |  | Stock Purchase Agreement, dated August 9, 2001, among Senior Housing Properties Trust, SNH/CSL Properties Trust, Crestline Capital Corporation and CSL Group, Inc.                                                                                                                                                                                                                                                                                                                                                                    
|10.2*****   |  | Amendment to Stock Purchase Agreement, dated November 5, 2001, among Senior Housing Properties Trust, SNH/CSL Properties Trust, Crestline Capital Corporation and CSL Group, Inc.                                                                                                                                                                                                                                                                                                                                                     
|10.3**      |  | Shared Services Agreement, dated January 2, 2002, between the Registrant and Reit Management & Research LLC                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.4**      |  | Amendment No. 1 to Shared Services Agreement between the Registrant and Reit Management & Research LLC, dated January 14, 2002                                                                                                                                                                                                                                                                                                                                                                                                        
|10.5****   |  | 2001 Stock Option and Stock Incentive Plan of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.6******  |  | Master Lease Agreement, dated December 31, 2001, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant                                                                                                                                                                                                                                                                                                                                                         
|10.7******  |  | Guaranty Agreement, dated December 31, 2001, made by the Registrant, as Guarantor, for the benefit of the Landlord under the Master Lease Agreement, dated December 31, 2001, by and among certain affiliates of
Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant                                                                                                                                                                                                                            
|10.8**      |  | Pledge of Shares of Beneficial Interest Agreement, dated December 31, 2001, made by the Registrant for the benefit of the Landlord under the Master Lease Agreement, dated December 31, 2001, by and among certain
affiliates of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant                                                                                                                                                                                                            

37

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|10.9**      |  | Security Agreement, dated December 31, 2001, by and among Five Star Quality Care Trust and the Landlord under the Master Lease Agreement by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and
Five Star                                                                                                                    
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  | Quality Care Trust, as Tenant, dated December 31, 2001                                                                                                                                                                                                                                                                                                     
|10.10****** |  | Amended Master Lease Agreement, dated January 11, 2002, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, as
Tenant                                                                                                                                       
|10.11       |  | First Amendment to Amended Master Lease Agreement, dated October 1, 2002, by and among certain affiliates of Senior Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust,
as Tenant                                                                                                                     
|10.12****** |  | Guaranty Agreement, dated January 11, 2002, made by the Registrant, as Guarantor, for the benefit of the Landlord under the Amended Master Lease Agreement, dated January 11, 2002, by and among certain affiliates of Senior
Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, as Tenant           
|10.13**     |  | Pledge of Shares of Beneficial Interest Agreement, dated January 11, 2002, made by FSQ, Inc. for the benefit of the Landlord under the Amended Master Lease Agreement, dated January 11, 2002, by and among certain
affiliates of Senior Housing Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, as Tenant
|10.14**     |  | Security Agreement, dated January 11, 2002, by and among FS Tenant Holding Company Trust and the Landlord under the Amended Master Lease Agreement, dated January 11, 2002, by and among certain affiliates of Senior Housing
Properties Trust, as Landlord, and FS Tenant Holding Company Trust and FS Tenant Pool III Trust, as Tenant                   
|10.15**#    |  | Representative Form of Composite Copy of Operating Agreement, as amended through December 13, 2001 between subsidiaries of the Registrant and Marriott Senior Living Services, Inc.                                                                                                                                                                        
|10.16****#  |  | Representative Form of Pooling Agreement by and between certain subsidiaries of the Registrant and Marriott Senior Living Services, Inc.                                                                                                                                                                                                                   
|10.17***    |  | Lease Agreement, dated October 25, 2002, by and between SNH CHS Properties Trust, as Landlord, and FVE-CHS LLC, as Tenant                                                                                                                                                                                                                                  
|10.18       |  | Guaranty Agreement, dated October 25, 2002, for the benefit of SNH CHS Properties Trust and Senior Housing Properties Trust made by the Registrant                                                                                                                                                                                                         
|10.19       |  | Guaranty Agreement, dated October 25, 2002, for the benefit of SNH CHS Properties Trust made by Five Star Quality Care-MD, LLC, Five Star Quality Care-NC, LLC and Five Star Quality Care-VA, LLC                                                                                                                                                          
|10.20       |  | Pledge Agreement, dated October 25, 2002, made by FSQ, Inc. for the benefit of SNH CHS Properties Trust                                                                                                                                                                                                                                                    
|10.21       |  | Security Agreement, dated October 25, 2002, by and between FVE-CHS LLC and SNH CHS Properties Trust                                                                                                                                                                                                                                                        
|10.22       |  | Security Agreement, dated October 25, 2002, by and among among Five Star Quality Care-MD, LLC, Five Star Quality Care-NC, LLC, Five Star Quality Care-VA, LLC and SNH CHS Properties Trust                                                                                                                                                                 

38

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|10.23        |  | Deed of Trust Note, dated May 22, 1986, by and between the Registrant (successor in interest to The Heartlands Retirement CommunityEllicott City I, Inc., successor in interest to Health Park Housing
Limited Partnership) and The Bank of New York (successor in interest to Mercantile-Safe Deposit and Trust Company)        
|------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.24        |  | Second Deed of Trust Note, dated July 31, 1997, by and between the Registrant (successor in interest to The Heartlands Retirement CommunityEllicott City I, Inc.) and Mercantile Mortgage
Corporation                                                                                                                            
|10.25******* |  | Receivables Purchase and Transfer Agreement, dated as of October 24, 2002, among the Registrant, as Primary Servicer, the Providers named therein, and FSQC Funding Co., LLC, as Purchaser                                                                                                                                        
|10.26******* |  | Loan and Security Agreement, dated as of October 24, 2002, among FSQC Funding Co., LLC, as Borrower, the Lenders party thereto, Dresdner Kleinwort Wasserstein LLC, as Co-Program Manager, Syndication Agent
and Lead Arranger, Healthcare Finance Group, Inc., as Co-Program Manager, and HFG Healthco-4 LLC, as Collateral Agent
|10.27******* |  | Guaranty Agreement, dated as of October 24, 2002, made by the Registrant, Five Star Quality Care Trust and Five Star Quality Care Holding Co., Inc. in favor of FSQC Funding Co., LLC                                                                                                                                             
|10.28******* |  | Pledge Agreement, dated as of October 24, 2002, among Five Star Quality Care Trust and Five Star Quality Care Holding Co., Inc., as Grantors, and HFG Healthco-4 LLC, as Collateral Agent for the benefit of
the Lenders and as assignee of the Purchaser                                                                         
|10.29******* |  | Assignment of Contracts as Collateral Security, dated as of October 24, 2002, between FSCQ Funding Co., LLC and HFG Healthco-4, LLC, as Collateral Agent                                                                                                                                                                          
|21.1         |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                    
|99.1         |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                            

---

|*       |  | Incorporated by reference to Senior Housing Properties Trust's Current Report on Form 8-K, dated December 13, 2001.             
|------- |  | --------------------------------------------------------------------------------------------------------------------------------
|**      |  | Incorporated by reference to the Registrant's Registration Statement on Form S-1, File No. 333-83648.                           
|***     |  | Incorporated by reference to the Registrant's Current Report on Form 8-K, dated October 25, 2002, as amended on January 9, 2003.
|****    |  | Incorporated by reference to the Registrant's Registration Statement on Form S-1, File No. 333-69846.                           
|*****   |  | Incorporated by reference to Senior Housing Properties Trust's Current Report on Form 8-K, dated November 5, 2001.              
|******  |  | Incorporated by reference to Senior Housing Properties Trust's Current Report on Form 8-K, dated December 31, 2001.             
|******* |  | Incorporated by reference to the Registrant's Registration Quarterly Report on Form 10-Q, dated November 14, 2002.              
|       |  | Indicates a management contract or a compensatory plan, contract or arrangement.                                                
|#       |  | Agreement filed is illustrative of numerous other agreements to which the Registrant is a party.                                

39

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40

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Report of Independent Auditors

To
the Directors and Shareholders of Five Star Quality Care, Inc.

We
have audited the accompanying consolidated balance sheet of Five Star Quality Care, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years ended December 31, 2002 and 2001, and the period April 27, 2000 (inception) through December 31, 2000. These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Five Star Quality Care, Inc. as of
December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for the years ended December 31, 2002 and 2001, and the period April 27, 2000
(inception) through December 31, 2000, in conformity with accounting principles generally accepted in the United States.

|                                    |  | /s/ Ernst & Young LLP
|----------------------------------- |  | ---------------------
|Boston, Massachusetts
March 7, 2003 |  |                      

F-1

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FIVE STAR QUALITY CARE, INC.        CONSOLIDATED BALANCE SHEET        (dollars in thousands, except share data)

|                                                                                                                                                               |                                                                                                        | December 31, |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ------------ | -------
|
|ASSETS                                                                                                                                                         |                                                                                                        |              |        
|Current assets:                                                                                                                                                |                                                                                                        |              |        
|                                                                                                                                                               | Cash and cash equivalents                                                                              |              | $      
|                                                                                                                                                               | Accounts receivable, net of allowance of $3,902 and $3,787 at December 31, 2002 and 2001, respectively |              |        
|                                                                                                                                                               | Due from Senior Housing Properties Trust                                                               |              |        
|                                                                                                                                                               | Prepaid expenses and other current assets                                                              |              |        
|                                                                                                                                                               |                                                                                                        |              |        
|                                                                                                                                                               | Total current assets                                                                                   |              |        
|Property and equipment, net                                                                                                                                    |                                                                                                        |              | 70,329 
|Restricted cash                                                                                                                                                |                                                                                                        |              | 13,311 
|Other long term assets                                                                                                                                         |                                                                                                        |              | 1,248  
|                                                                                                                                                               |                                                                                                        |              |        
|                                                                                                                                                               |                                                                                                        | $            | 133,197
|                                                                                                                                                               |                                                                                                        |              |        
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                           |                                                                                                        |              |        
|Current liabilities:                                                                                                                                           |                                                                                                        |              |        
|                                                                                                                                                               | Accounts payable and accrued expenses                                                                  |              | $      
|                                                                                                                                                               | Accrued compensation and benefits                                                                      |              |        
|                                                                                                                                                               | Due to Senior Housing Properties Trust                                                                 |              |        
|                                                                                                                                                               | Mortgages payable                                                                                      |              |        
|                                                                                                                                                               | Accrued real estate taxes                                                                              |              |        
|                                                                                                                                                               | Other current liabilities                                                                              |              |        
|                                                                                                                                                               |                                                                                                        |              |        
|Total current liabilities                                                                                                                                      |                                                                                                        |              | 34,445 
|Long term liabilities:                                                                                                                                         |                                                                                                        |              |        
|                                                                                                                                                               | Mortgages payable                                                                                      |              |        
|                                                                                                                                                               | Other long term liabilities                                                                            |              |        
|                                                                                                                                                               |                                                                                                        |              |        
|Total long term liabilities                                                                                                                                    |                                                                                                        |              | 33,705 
|Commitments and contingencies                                                                                                                                  |                                                                                                        |              |        
|Shareholders' equity:                                                                                                                                          |                                                                                                        |              |        
|Preferred stock, par value $0.01: 1,000,000 shares authorized, none issued                                                                                     |                                                                                                        |              |       
|Common stock, par value $0.01: 10,000,000 shares authorized, 8,452,634 and 4,374,334 shares issued and outstanding at December 31, 2002 and 2001, respectively |                                                                                                        |              | 84     
|Additional paid-in capital                                                                                                                                     |                                                                                                        |              | 78,926 
|Accumulated deficit                                                                                                                                            |                                                                                                        |              | (13,963
|                                                                                                                                                               |                                                                                                        |              |        
|Total shareholders' equity                                                                                                                                     |                                                                                                        |              | 65,047 
|                                                                                                                                                               |                                                                                                        |              |        
|                                                                                                                                                               |                                                                                                        | $            | 133,197
|                                                                                                                                                               |                                                                                                        |              |        

The
accompanying notes are an integral part of these financial statements.

F-2

---



FIVE STAR QUALITY CARE, INC.        CONSOLIDATED STATEMENT OF OPERATIONS        (dollars in thousands, except per share data)

|                                                             |                                                         |   |         |         |   | Period April 27,
2000
(Inception)
through
December 31,
2000 |        
|------------------------------------------------------------ | ------------------------------------------------------- | - | ------- | ------- | - | ----------------------------------------------------------- | -------
|
|
|REVENUES:                                                    |                                                         |   |         |         |   |                                                             |        
|                                                             | Net revenues from residents                             |   | $       | 522,214 |   | $                                                           | 221,177
|                                                             | Income from communities' operations                     |   |         |        |   |                                                             |       
|                                                             | Interest income                                         |   |         | 297     |   |                                                             | 92     
|                                                             |                                                         |   |         |         |   |                                                             |        
|Total revenues                                               |                                                         |   | 522,511 |         |   | 221,269                                                     |        
|EXPENSES:                                                    |                                                         |   |         |         |   |                                                             |        
|                                                             | Wages and benefits                                      |   |         | 237,714 |   |                                                             | 155,012
|                                                             | Other operating expenses                                |   |         | 182,542 |   |                                                             | 47,949 
|                                                             | Management fee to Marriott Senior Living Services, Inc. |   |         | 16,643  |   |                                                             |       
|                                                             | Rent to Senior Housing Properties Trust                 |   |         | 75,389  |   |                                                             |       
|                                                             | General and administrative                              |   |         | 15,415  |   |                                                             | 15,593 
|                                                             | Depreciation and amortization                           |   |         | 1,885   |   |                                                             | 1,321  
|                                                             | Impairment of assets                                    |   |         | 150     |   |                                                             |       
|                                                             | Interest expense                                        |   |         | 198     |   |                                                             |       
|                                                             | Restructuring costs                                     |   |         | 122     |   |                                                             |       
|                                                             | Spin off and merger expense, non recurring              |   |         | 2,829   |   |                                                             |       
|                                                             |                                                         |   |         |         |   |                                                             |        
|Total expenses                                               |                                                         |   | 532,887 |         |   | 219,875                                                     |        
|                                                             |                                                         |   |         |         |   |                                                             |        
|(Loss) income from continuing operations before income taxes |                                                         |   | (10,376 | )       |   | 1,394                                                       |        
|Provision for income taxes                                   |                                                         |   |        |         |   |                                                            |        
|                                                             |                                                         |   |         |         |   |                                                             |        
|(Loss) income from continuing operations                     |                                                         |   | (10,376 | )       |   | 1,394                                                       |        
|(Loss) income from discontinued operations                   |                                                         |   | (2,798  | )       |   | (867                                                        | )      
|                                                             |                                                         |   |         |         |   |                                                             |        
|Net (loss) income                                            |                                                         | $ | (13,174 | )       | $ | 527                                                         |        
|                                                             |                                                         |   |         |         |   |                                                             |        
|Weighted average shares outstanding                          |                                                         |   | 7,556   |         |   | 4,374                                                       |        
|                                                             |                                                         |   |         |         |   |                                                             |        
|Basic and diluted (loss) income per share from:              |                                                         |   |         |         |   |                                                             |        
|                                                             | Continuing operations                                   |   | $       | (1.37   | ) | $                                                           | 0.32   
|                                                             | Discontinued operations                                 |   |         | (0.37   | ) |                                                             | (0.20  
|                                                             |                                                         |   |         |         |   |                                                             |        
|                                                             | Net (loss) income per share                             |   | $       | (1.74   | ) | $                                                           | 0.12   
|                                                             |                                                         |   |         |         |   |                                                             |        

The
accompanying notes are an integral part of these financial statements.

F-3

---



FIVE STAR QUALITY CARE, INC.        CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY        (dollars in thousands, except share data)

|                                                       |  | Number of
Shares |  | Common
Stock |    | Additional
Paid-in
Capital |   | Accumulated
Deficit |   | Total |        
|------------------------------------------------------ |  | ---------------- |  | ------------ | -- | -------------------------- | - | ------------------- | - | ----- | -------
|Balance at April 27, 2000 (inception)                  |  | 1,000            |  | $            |   |                            | $ | 1                   |   | $     |       
|Contribution from Senior Housing Properties Trust, net |  |                 |  |              |   |                            |   | 56,003              |   |       |       
|Net loss                                               |  |                 |  |              |   |                            |   |                    |   |       | (1,316 
|                                                       |  |                  |  |              |    |                            |   |                     |   |       |        
|Balance at December 31, 2000                           |  | 1,000            |  |              |   |                            |   | 56,004              |   |       | (1,316 
|Issuance of stock, pursuant to spin-off                |  | 4,373,334        |  |              | 44 |                            |   | 189                 |   |       |       
|Distribution to Senior Housing Properties Trust, net   |  |                 |  |              |   |                            |   | (5,215              | ) |       |       
|Net income                                             |  |                 |  |              |   |                            |   |                    |   |       | 527    
|                                                       |  |                  |  |              |    |                            |   |                     |   |       |        
|Balance at December 31, 2001                           |  | 4,374,334        |  |              | 44 |                            |   | 50,978              |   |       | (789   
|Issuance of stock, pursuant to merger of FSQ, Inc.     |  | 250,000          |  |              | 2  |                            |   | 1,873               |   |       |       
|Issuance of stock, pursuant to equity offering         |  | 3,823,300        |  |              | 38 |                            |   | 26,039              |   |       |       
|Stock grants                                           |  | 5,000            |  |              |   |                            |   | 36                  |   |       |       
|Net loss                                               |  |                 |  |              |   |                            |   |                    |   |       | (13,174
|                                                       |  |                  |  |              |    |                            |   |                     |   |       |        
|Balance at December 31, 2002                           |  | 8,452,634        |  | $            | 84 |                            | $ | 78,926              |   | $     | (13,963
|                                                       |  |                  |  |              |    |                            |   |                     |   |       |        

The
accompanying notes are an integral part of these financial statements.

F-4

---



FIVE STAR QUALITY CARE, INC.        CONSOLIDATED STATEMENT OF CASH FLOWS        (dollars in thousands)

|                                                       |                                                                                                |                                            |                                           |         |         | Period April 27,
2000
(Inception)
through
December 31,
2000 |       
|------------------------------------------------------ | ---------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------------------------------------- | ------- | ------- | ----------------------------------------------------------- | ------
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                  |                                                                                                |                                            |                                           |         |         |                                                             |       
|                                                       | Net (loss) income                                                                              |                                            | $                                         | (13,174 | )       | $                                                           | 527   
|                                                       | Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities: |                                            |                                           |         |         |                                                             |       
|                                                       |                                                                                                | Depreciation and amortization              |                                           |         | 1,885   |                                                             |       
|                                                       |                                                                                                | Spin-off and merger expense                |                                           |         | 2,798   |                                                             |       
|                                                       |                                                                                                | Impairment of assets                       |                                           |         | 150     |                                                             |       
|                                                       |                                                                                                | Loss (income) from discontinued operations |                                           |         | 2,837   |                                                             |       
|                                                       |                                                                                                | Provision for bad debt expense             |                                           |         | (1,916  | )                                                           |       
|                                                       |                                                                                                | Income from communities' operations        |                                           |         |        |                                                             |       
|                                                       |                                                                                                | Changes in assets and liabilities:         |                                           |         |         |                                                             |       
|                                                       |                                                                                                |                                            | Accounts receivable                       |         |         | 12,310                                                      |       
|                                                       |                                                                                                |                                            | Prepaid expenses and other current assets |         |         | 778                                                         |       
|                                                       |                                                                                                |                                            | Accounts payable and accrued expenses     |         |         | 6,802                                                       |       
|                                                       |                                                                                                |                                            | Accrued compensation and benefits         |         |         | 524                                                         |       
|                                                       |                                                                                                |                                            | Due from Senior Housing Properties Trust  |         |         | (3,480                                                      | )     
|                                                       |                                                                                                |                                            | Other current liabilities                 |         |         | 441                                                         |       
|                                                       |                                                                                                |                                            |                                           |         |         |                                                             |       
|                                                       | Cash provided by (used in) operating activities                                                |                                            |                                           | 9,947   |         |                                                             | (293  
|                                                       |                                                                                                |                                            |                                           |         |         |                                                             |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                  |                                                                                                |                                            |                                           |         |         |                                                             |       
|                                                       | Transfer of working capital by lease                                                           |                                            |                                           | 10,722  |         |                                                             |      
|                                                       | Change in restricted cash                                                                      |                                            |                                           | (7,445  | )       |                                                             |      
|                                                       | Real estate acquisitions, net of assumed mortgage                                              |                                            |                                           | (44,927 | )       |                                                             |      
|                                                       | Furniture and equipment purchases                                                              |                                            |                                           | (6,954  | )       |                                                             | (2,176
|                                                       | Investment in communities' operations                                                          |                                            |                                           |        |         |                                                             |      
|                                                       |                                                                                                |                                            |                                           |         |         |                                                             |       
|                                                       |                                                                                                | Cash used in investing activities          |                                           |         | (48,604 | )                                                           |       
|                                                       |                                                                                                |                                            |                                           |         |         |                                                             |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                  |                                                                                                |                                            |                                           |         |         |                                                             |       
|                                                       | Proceeds from issuance of common stock, net                                                    |                                            |                                           | 26,113  |         |                                                             | 233   
|                                                       | Owners contribution, net                                                                       |                                            |                                           |        |         |                                                             | 12,783
|                                                       | Payment of deferred financing costs                                                            |                                            |                                           | (1,055  | )       |                                                             | (1,016
|                                                       | Proceeds from mortgage payable                                                                 |                                            |                                           |        |         |                                                             | 9,100 
|                                                       |                                                                                                |                                            |                                           |         |         |                                                             |       
|                                                       |                                                                                                | Cash provided by financing activities      |                                           |         | 25,058  |                                                             |       
|                                                       |                                                                                                |                                            |                                           |         |         |                                                             |       
|Net cash (used in) provided by discontinued operations |                                                                                                |                                            | (1,074                                    | )       |         | (867                                                        | )     
|                                                       |                                                                                                |                                            |                                           |         |         |                                                             |       
|Change in cash and cash equivalents                    |                                                                                                |                                            | (14,673                                   | )       |         | 17,764                                                      |       
|Cash and cash equivalents at beginning of year         |                                                                                                |                                            | 24,943                                    |         |         | 7,179                                                       |       
|                                                       |                                                                                                |                                            |                                           |         |         |                                                             |       
|Cash and cash equivalents at end of year               |                                                                                                | $                                          | 10,270                                    |         | $       | 24,943                                                      |       
|                                                       |                                                                                                |                                            |                                           |         |         |                                                             |       
|SUPPLEMENTAL CASH FLOW INFORMATION:                    |                                                                                                |                                            |                                           |         |         |                                                             |       
|                                                       | Cash paid for interest                                                                         |                                            | $                                         | 145     |         | $                                                           |      
|Non-cash investing and financing activities:           |                                                                                                |                                            |                                           |         |         |                                                             |       
|                                                       | Acquisition of assets by merger                                                                |                                            |                                           | (1,052  | )       |                                                             |      
|                                                       | Assumption of liabilities by merger                                                            |                                            |                                           | 2,006   |         |                                                             |      
|                                                       | Assumption of mortgage                                                                         |                                            |                                           | 15,775  |         |                                                             |      
|                                                       | Issuance of common stock for merger                                                            |                                            |                                           | 1,875   |         |                                                             |      
|                                                       | Assumption of assets by lease                                                                  |                                            |                                           | (12,061 | )       |                                                             |      
|                                                       | Assumption of liabilities by lease                                                             |                                            |                                           | 22,783  |         |                                                             |      
|                                                       | Contribution of real estate and related property from Senior Housing Properties Trust          |                                            |                                           |        |         |                                                             | (2,232
|                                                       | Distribution of real estate and other assets to Senior Housing Properties Trust                |                                            |                                           |        |         |                                                             | 29,330
|                                                       | Liabilities assumed by communities' operations                                                 |                                            |                                           |        |         |                                                             |      
|                                                       | Assumption of mortgage payable by Senior Housing Properties Trust                              |                                            |                                           |        |         |                                                             | (9,100

The accompanying notes are an integral part of these financial statements.

F-5

---



FIVE STAR QUALITY CARE, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (dollars in thousands, except per share data)

1.    Organization and Business

Five Star Quality Care, Inc. (the "Company") was organized on April 27, 2000, as a wholly owned subsidiary of Senior Housing Properties Trust
("Senior Housing"). The Company was incorporated in Delaware in 2000 and reincorporated in Maryland on September 20, 2001. Effective July 1, 2000, the Company assumed the operations of
healthcare communities from two former bankrupt tenants of Senior Housing.

On
December 31, 2001, Senior Housing distributed all of the Company's common shares to its shareholders (the "Spin-Off"). Concurrent with the Spin-Off, the
Company entered into a lease for 56 nursing home communities and a transaction agreement with Senior Housing and others to govern the initial capitalization of the Company and other events related to
the Spin-Off. Pursuant to the transaction agreement, the Company's initial capitalization of $50,000 was provided by Senior Housing. In connection with the Spin-Off, the
Company (i) transferred seven properties and other assets with a net book value at December 31, 2001, of $29,330 to Senior Housing, (ii) conveyed a mortgage obligation of $9,100
at December 31, 2001, to Senior Housing and (iii) obtained title to two properties with a net book value of $2,232 at December 31, 2001, from Senior Housing.

On
January 2, 2002, the Company acquired FSQ, Inc. ("FSQ") in order to acquire the personnel, systems and assets necessary to manage the healthcare communities it leases
from Senior Housing. On January 11, 2002, the Company entered into a lease with Senior Housing for 31 independent and assisted living communities managed by Marriott Senior Living
Services, Inc. ("MSLS"), a subsidiary of Marriott International, Inc. ("Marriott"). On April 1, 2002, the Company purchased and began to operate five additional independent and
assisted living communities. On October 25, 2002, the Company
sold one community purchased on April 1, 2002 to Senior Housing and entered into a lease with Senior Housing for that community and eight other independent and assisted living communities. On
that same day the Company also purchased and began operating seven additional independent and assisted living communities.

At
December 31, 2002, the Company's business included 105 communities containing 14,140 units, including 51 primarily independent and assisted living communities containing 9,188
units and 54 nursing homes containing 4,952 units.

The
Company has experienced losses and estimates the revenues received from Medicare and Medicaid will decline and the cost of insurance will increase. In addition, the cost of the
Company's litigation with Marriott and MSLS may be significant and the potential transfer of the related management agreements may have an adverse impact on the Company's financial results or increase
its working capital requirements (see note 17). Management believes that a combination of some or all of the Company's efforts to increase revenues, contain or reduce costs, its ability to borrow on
its revolving credit facility, the Company's ability to obtain financing from Senior Housing for capital improvements made to communities leased from Senior Housing and the possibility of sales or
financings of its owned communities will be sufficient for the Company to meet its working capital needs, operating expenses, rent payments to Senior Housing, debt service and capital expenditures in
the normal course of its business for the foreseeable future.

F-6

---

2.    Summary of Significant Accounting Policies

Basis of Presentation.The accompanying consolidated financial statements include the accounts of the Company and all of its
subsidiaries. All intercompany transactions have been eliminated.

The
Company was owned by Senior Housing until December 31, 2001; and 2000 and 2001 transactions are presented on Senior Housing's historical basis. During 2000 and 2001,
substantially all of the cash from the communities' operations received by the Company was deposited in and commingled with Senior Housing's general funds, and Senior Housing provided funds for
working capital and other cash required by the Company. General and administrative expenses in 2000 and 2001 are comprised of costs incurred by Senior Housing and charged to the Company primarily
based on a specific identification basis, which in the opinion of management is reasonable. It is not practicable to estimate additional costs that would have been incurred by the Company as a
separate entity during 2000 and 2001.

Communities'
operations commenced by the Company on July 1, 2000, were initially subject to completion of state and Federal regulatory processes, which were substantially
completed on December 31, 2000. As a result, for the period July 1, 2000, through December 31, 2000, the communities were accounted for using the equity method. Net income from
these operations for the 2000 period is reported as income from communities' operations in the Consolidated Statement of Operations.

Under
the terms of the management agreements for the communities managed by MSLS the Company has provided MSLS with working capital to be used in the operation of the communities. The
components of the working capital, primarily cash and cash equivalents, inventories, trade accounts receivable and accounts payable, are controlled by MSLS on the Company's behalf, but the Company
retains the risks and rewards associated with the underlying assets and liabilities. Accordingly, the components of this working capital (including cash and cash equivalents of $2,655 at
December 31, 2002) are included in the Company's consolidated balance sheet.

Estimates and assumptions.Preparation of these financial statements in conformity with accounting principles generally
accepted in the Unites States requires management to make estimates and assumptions that may affect the amounts reported in these financial statements and related notes. The actual results could
differ from these estimates.

Cash and cash equivalents.Cash and cash equivalents, consisting of overnight repurchase agreements and
short-term investments with original maturities of three months or less at the date of purchase, are carried at cost plus accrued interest, which approximates market.

Restricted cash.Restricted cash as of December 31, 2002, includes the following: (1) $3,860 deposited by the
Company as security for letters of credit which secure obligations arising from the Company's professional liability insurance program, (2) $521 escrowed by the Company required by certain
healthcare regulatory agencies, (3) $1,150 escrowed by the Company for future capital expenditures, as required by the management agreements with MSLS, (4) $419 escrowed by the Company
related to real estate taxes and capital expenditures as required by mortgages and (5) $7,361 that have been escrowed related to continuing care contracts for certain MSLS managed communities
(see note 8).

Accounts receivable and reserves.Accounts receivable are recorded at their estimated net realizable value. In the case of
receivables generated from residents, reserves for uncollectible amounts

F-7

---

are estimated based upon factors which include, but are not limited to, the age of the receivable and the terms of the agreements with residents or their third party payors. In the case of other
receivables, such as those due from various governments or other entities with which the Company has transacted business, reserves are estimated based upon factors which include, but are not limited
to, the agreements with such payors, their stated intent to pay, their financial capacity to pay and other factors which may include litigation. Accounts receivable reserves are estimates and the
Company periodically reviews and revises these estimates based on new information; and such adjustments may be material.

During
2002, 2001 and 2000, the Company increased its allowance for doubtful accounts reserve by $4,387, $3,283 and $2,200, respectively, and wrote off accounts receivable of $4,502,
$1,696 and $1, respectively.

Included
in accounts receivable as of December 31, 2002 and 2001 are amounts due from the Federal Government Medicare program of $11,026 and $14,020, respectively, and amounts due
from various state Medicaid programs of $14,985 and $17,979, respectively.

Deferred finance costs.Issuance costs related to borrowings are capitalized and amortized over the terms of the respective
loans. The unamortized balance of deferred finance costs and accumulated amortization were $828 and $51, respectively, at December 31, 2002. The weighted average amortization period is
approximately three years. The amortization expense to be incurred over the next thee years as of December 31, 2002 is $276 in 2003, $276 in 2004 and $225 in 2005.

Income taxes.Prior to the Spin-Off, substantially all of the Company's taxable income was included in the
taxable income of Senior Housing for federal income tax purposes. Senior Housing qualified as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended, and, prior to
December 31, 2001, the Company was a subsidiary of Senior Housing. After the Spin-Off, the Company is a separate taxable "C" corporation and responsible for its own tax liabilities
and filings.

The
Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
prescribes an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial
statement carrying amounts and the tax bases of assets and liabilities. Because the Company has a short operating history as a separate company during which it has generated no taxable income, it has
fully reserved the value of the net deferred tax asset (see note 6).

Real estate properties.Depreciation on real estate properties is expensed on a straight-line basis over
estimated useful lives of up to 40 years for buildings and improvements and up to 12 years for personal property. Management regularly evaluates whether events or changes in
circumstances have occurred that could indicate an impairment in the value of long-lived assets. If there is an indication that the carrying value of an asset is not recoverable,
management estimates the projected undiscounted cash flows of the related individual properties (the lowest level for which there are identifiable cash flows independent of other groups of assets) to
determine if an impairment loss should be recognized. The amount of impairment loss is determined by comparing the historical carrying value of the asset to its estimated fair value. Estimated fair
value is determined through an evaluation of recent financial performance and projected discounted cash flows of properties using standard industry valuation techniques. In addition to consideration
of impairment upon the events or changes in circumstances described above, management regularly evaluates the remaining lives of its long-lived assets. If estimated lives are changed, the
carrying value of affected assets is allocated over

F-8

---

the revised remaining lives. During 2002, the Company wrote off certain impaired assets with a carrying value of $772.

Self insurance.The Company is self insured up to certain retained limits for workers' compensation, professional liability,
and, as of August 2002, employee health insurance. Claims in excess of these retained limits are insured by third party insurance providers up to contractual limits, over which the Company is
self insured. The Company accrues the estimated cost of self insured amounts based on projected settlements for pending claims, known incidents which it expects may result in claims, estimates of
incurred but not yet reported claims and incidents and expected changes in premiums for insurance provided by third party insurers where its policies provide for retroactive adjustments. Periodically
these estimates are adjusted based upon the Company's claims experience, recommendations from its professional consultants, changes in market conditions and other factors; and such adjustments may be
material.

Restructuring costs.During 2002, the Company reduced the number of its regional offices and had staff reductions in its home
office. As a result, the Company incurred restructuring costs of $122 for severance payments to terminated employees all of which was paid in 2002.

Per common share amounts.Loss per share for the year ended December 31, 2002, is computed using the weighted average
number of shares outstanding during the year. Earnings per share for the year ended December 31, 2001 and the period April 27, 2000 (inception) through December 31, 2000, have
been presented as if the shares outstanding at December 31, 2001, were outstanding as of April 27, 2000. The Company has no common share equivalents, instruments convertible into common
shares or other dilutive instruments.

Revenue recognition.The Company's revenues are derived primarily from services to residents at communities it owns or
leases. The Company accrues revenues when services are provided and revenues are earned. Some of its services are provided with the expectation of payment from governments or other third party payors;
related revenues are reported at their estimated net realizable amounts at the time the services are provided. Approximately 39% and 78% of 2002 and 2001 net resident revenues, respectively, were
derived from payments under Federal and state medical assistance programs. The Company accrues for revenues when services are provided at standard charges adjusted to amounts estimated to be received
under governmental programs and other third-party contractual arrangements. Revenues under some of these programs are subject to audit and retroactive adjustment.

In
October 2002, temporary increases in Medicare payment rates expired. Medicare revenues totaled $68,400 and $35,400 during 2002 and 2001, respectively. Assuming the Company's
2003 census of Medicare residents is comparable to 2002, it estimates that revenues received from Medicare in 2003 will decline by approximately $6,900 from 2002 revenues received from Medicare.
Medicaid revenues totaled $142,600 and $127,900 during 2002 and 2001, respectively. Some of the states in which the Company operates have reduced or announced plans to reduce Medicaid funding to
address state
budget shortfalls. The magnitude of the combined Medicare and Medicaid rate reductions impact upon the Company currently cannot be estimated, but it may be material. Medicare and Medicaid rates
declines may have a negative impact on the Company's revenues and may increase the Company's losses.

New Accounting Pronouncements.In 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 141
"Business Combinations" ("FAS141"), SFAS No. 142 "Goodwill and

F-9

---

Other Intangible Assets" ("FAS 142") and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). The Company's adoption of
FAS 141, FAS 142 and FAS 144 on January 1, 2002, had no effect on the Company's financial position or results of operations at that time. See note 12 regarding
discontinued operations.

In
April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("FAS 145"). The provisions of this standard eliminate the requirement that a gain or loss from the extinguishment of debt be classified as a extraordinary item, unless it can be considered
unusual in nature and infrequent in occurrence. The Company will implement FAS 145 on January 1, 2003, which implementation is currently expected to have no impact on the Company's
financial position or results of operations.

In
July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" ("FAS 146"). FAS 146 reconsiders all of the
prior guidance regarding restructuring charges, employee termination benefits and other costs to exit an activity. FAS 146 applies to costs associated with (a) certain termination
benefits (commonly identified as one-time termination benefits), (b) costs to terminate a contract that is not a capital lease, and (c) other associated costs including costs
to consolidate facilities or relocate employees. FAS 146, which may be adopted early, is effective for exit and disposal activities initiated after December 31, 2002. The Company is
currently evaluating FAS 146 and is unable, at this time, to determine the impact, if any, that might exist as a result of adopting this standard.

Reclassifications.Reclassifications have been made to the prior years' financial statements to conform to the current year's
presentation.

3.    Income From Communities' Operations

Effective July 1, 2000, the Company assumed operating responsibility for healthcare communities pending final required healthcare regulatory approvals.
Because all licensing approvals had not been received by December 31, 2000, net income from these communities is reflected as income from communities' operations in the Consolidated Statements
of Operations for the period April 27, 2000 (inception) through December 31, 2000.

Summary
financial data for these communities' operations is as follows:

July 1 through
December 31, 2000Revenues

$
106,954Expenses


104,732Income from communities' operations

$
2,222


F-10

---

4.    Property and Equipment

Property and equipment, as of December 31, 2002 and 2001, consist of:

2002

2001Land

$
4,947

$
237Buildings and improvements


57,468


1,999Furniture, fixtures and equipment


9,663


88572,078


3,121Accumulated depreciation


(1,749
)

(207
)$
70,329

$
2,914


5.    Line of Credit

On October 24, 2002, a subsidiary of the Company entered into a revolving credit facility agreement. The interest rate on borrowings on this facility is
LIBOR plus a spread. The maximum amount available under this facility is $12,500, and is subject to limitations based upon qualifying collateral. The facility is available for acquisitions, working
capital and general business purposes. The facility is secured by accounts receivable (totaling $19,172, net of allowances of $1,548, as of December 31, 2002) generated at some of the Company's
communities and contains covenants such as maintenance of collateral, maintenance of lockbox accounts designed to provide access to the collateral and related collections to lenders, consolidated
minimum net worth and certain other financial ratios. Accounts receivable which secure the facility are transferred by our subsidiary operators to a wholly-owned finance subsidiary of ours. In certain
circumstances subject to lender and collateral availability, the maximum borrowings under this facility may be increased to $25,000. As of December 31, 2002 zero was outstanding under the
facility.

6.    Income Taxes

Significant components of the Company's deferred tax assets and liabilities as of December 31, 2002 and 2001, are as follows:

2002

2001Deferred tax assets (liabilities):Allowance for doubtful accounts

$
1,671

$
1,325Accrued liabilities


600


Net operating loss carry forwards


3,112


168Book vs. tax depreciation


(163
)

1,977Continuing care contracts


2,235


Deferred income


200


Net deferred tax asset before valuation allowance


7,655


3,470Valuation allowance


(7,655
)

(3,470
)Net deferred tax asset

$


$



During
2001 some of the Company's subsidiaries were taxable entities separate from Senior Housing and generated net operating loss carryforwards for tax purposes. These subsidiary net

F-11

---

operating loss carryforwards total $168 at December 31, 2002, and may be used under certain conditions to reduce the Company's future taxable income. For the year ended December 31,
2002, the Company estimates that it created an additional net operating loss carry forward of $5,347 for tax purposes. Because the Company has a short operating history as a separate company during
which it has generated no taxable income, it has fully reserved the value of the net deferred tax asset. As a result, the Company has recorded no income tax benefit for the years ended
December 31, 2002 and 2001. The net operating loss carryforwards will expire beginning in 2020, if unused.

The
provision for taxes on net (losses) income differs from the amount computed by applying the U.S. federal income tax rate as a result of the following:

For the years ended December 31,2002

2001

2000Taxes at statutory U.S. federal income tax rate

34.0
%
34.0
%
34.0
%State and local income taxes, net of federal tax benefit

4.0
%
4.0
%
4.0
%Non deductible spin-off and merger expenses

(8.4
%)


Other

2.2
%


Effective tax rate

31.8
%
38
%
38
%Tax valuation allowance

(31.8
%)
(38
%)
(38
%)


7.    Mortgages Payable

One of the properties acquired by a subsidiary of the Company in October 2002 is encumbered by two mortgage notes secured by first and second deeds of
trust. These deeds of trust mortgages are guaranteed by the United States Department of Housing and Urban Development ("HUD"). The property must meet HUD's standards and regulations, and our
subsidiary is subject to restrictions as to operating policies, distributions, operating expenditures and maintenance of 32 units as qualified subsidized housing. Monthly payments are required to be
made into a replacement reserve fund from which withdrawals are subject to the approval of HUD. In addition, the subsidiary is required to make monthly escrow deposits for taxes and insurance. These
mortgage obligations are non-recourse to the Company.

First
Mortgage

Second
Mortgage

TotalPrincipal balance at December 31, 2002

$
9,342

$
6,434

$
15,776Mortgage premium


220


127


347Total mortgage payable

$
9,562

$
6,561

$
16,123Less current portion


(92
)

(49
)

(141
)Long term portion

$
9,470

$
6,512

$
15,982Cash interest rate


9.65
%

8.00
%Effective interest rate


6.75
%

6.75
%Amortization period


40 Years


35 YearsMaturity date


December 2028


November 2033


F-12

---

Principal
payments due under the terms of these mortgages are as follows:

2003

$
1412004


1562005


1702006


1862007


204Thereafter


14,919Total

$
15,776


As
required by SFAS No. 142, mortgage premiums totaling $412 were established in accounting for the acquisition of the mortgaged property in order to record the assumed mortgages
at their estimated fair value. The mortgage premiums will be amortized as a reduction to interest expense over the estimated period the mortgages will remain outstanding. Interest expense on the
mortgages was $198 for the year ended December 31, 2002, which is net of mortgage premium amortization of $65.

8.    Continuing Care Contracts

Long term liabilities as of December 31, 2002, includes $10,681 related to continuing care contracts at some of the communities managed for us by MSLS.
These contracts require residents to make advance payments which are recognized as revenues over the periods in which the service obligations are expected to be satisfied, and, to a lesser extent
refundable security deposits. Portions of these advances payments are included in restricted cash on the Company's balance sheet.

F-13

---



9.    Leases

Effective January 1, 2002, the Company entered into a noncancelable lease with Senior Housing for 56 communities. The lease is a "triple-net"
lease which requires that the Company pay for all costs incurred in the operation of the communities, including the cost of insurance and real estate taxes. The lease also requires the Company to
maintain the communities during the lease term and to indemnify Senior Housing for any liability which may arise from its ownership during the lease term. The lease initially required minimum rent
payments to Senior Housing of $7,000 per year and percentage rent starting in 2004. In 2002, the Company ceased to operate one of these leased communities. Pursuant to the lease terms, that community
was sold, the net proceeds were paid to Senior Housing and the annual rent was reduced by 10% of the net sales proceeds or $77. The revised annual minimum rent payable to Senior Housing is $6,923. The
lease expires on December 31, 2018, and the Company has one renewal option for an additional 15 years.

On
January 11, 2002, the Company entered into a second noncancelable lease with Senior Housing for 31 retirement communities. These communities are managed by MSLS. The lease is a
"triple-net" lease which requires that the Company pay for all costs incurred in the operation of the communities, including insurance and real estate taxes. The lease also requires the
Company to maintain the communities during the lease term and to indemnify Senior Housing for any liability which may arise from its ownership during the lease term. The lease expires on
December 31, 2017, and the Company has two renewal options totaling an additional 15 years.

In
connection with this lease the Company acquired the working capital of the communities which included cash and cash equivalents of $5,482. As described in Note 2, the
components of this working capital are controlled by MSLS. The Company also assumed the long term liabilities of the communities which consisted primarily of advance payments received from residents
for future services. In accordance with the agreement governing this transaction and the Spin-Off, Senior Housing agreed to fund the excess of the liabilities the Company assumed over the assets
acquired. This resulted in a $5,240 cash transfer to the Company from Senior Housing.

On
October 25, 2002, the Company and Senior Housing agreed to modify this lease. Prior to this lease modification, the Company was required to make periodic deposits into an
escrow account for future capital expenditures at these 31 leased communities. These deposits were paid to Senior Housing and were recorded as rent expense on the Company's consolidated statement of
operations. From the period January 11, 2002 through September 30, 2002, the Company deposited $5,376 into escrow accounts owned by Senior Housing that was recorded as rent expense. As a
result of this modification, effective October 1, 2002, the deposits are made into escrow accounts which the Company owns and Senior Housing has a security and remainder interest in these
accounts and in all property purchased with funding from these accounts. The amount and use of these escrows are unchanged by this amendment; however, subsequent to September 30, 2002, the
Company does not record rent expense as a result of these deposits.

On
October 25, 2002, the Company sold one community to Senior Housing for approximately $12,700, which was the approximate net book value of that community and its estimated fair
value at the time of the sale to Senior Housing. On the same day the Company leased this property along with eight other senior living properties from Senior Housing. The lease is a
"triple-net" lease and requires that the Company pay for all costs incurred in the operation of the communities, including insurance and real estate taxes. The lease also requires the
Company to maintain the communities during the

F-14

---

lease term and to indemnify Senior Housing for any liability which may arise from its ownership during the lease term. The lease requires minimum rent payments to Senior Housing of $6,285 per year
and percentage rent starting in 2005. The lease expires on December 31, 2019, and the Company has one renewal option for an additional 15 years.

The
future minimum rent required by these three leases as of December 31, 2002, is as follows:

2003

$
76,2082004


76,2082005


76,2082006


76,2082007


76,208Thereafter


781,573$
1,162,613


10.  Shareholders' Equity

During 2002, the Company issued 3,823,300 common shares, in an underwritten public offering, for gross proceeds of approximately $28,522. Proceeds received, net
of underwriting commissions and other costs, were $26,077.

On
May 7, 2002, the Company issued 1,000 common shares to each of its five directors as part of their annual compensation. The shares were valued at $7.10 per share, which was the
closing price of the Company's common shares on the American Stock Exchange on the date of issue.

The
Company reserved 650,000 shares of the Company's common shares under the terms of the 2001 Incentive Share Award Plan (the "Award Plan"). During the year ended December 31,
2002, no common shares were awarded to officers of the Company.

11.  Acquisitions

In January 2002, the Company entered into a lease with Senior Housing for 31 independent and assisted living communities managed by MSLS. In connection with this
transaction, the Company acquired the net working capital of the communities of $6,537, assumed certain long term liabilities totaling $12,202 and received cash from Senior Housing of $5,665. The
Company preliminarily allocated the purchase price on the basis of the fair value of assets acquired and liabilities assumed.

In
April 2002, the Company purchased five senior living communities for $45,500 in cash, all of which was allocated to the property and equipment acquired.

In
October 2002, the Company purchased an additional seven senior living communities for $27,000, all of which was allocated to the property and equipment acquired. To finance this
purchase, the Company sold one of its existing communities to Senior Housing for approximately $12,700 and assumed $15,798 of mortgage debt, which had a fair value of $16,210. In connection with this
transaction, the Company leased another eight senior living communities from Senior Housing.

Each
of these acquisitions has been accounted for using the purchase method of accounting. As such, the results of operations of each of the communities acquired have been included in
the

F-15

---

Company's statement of operations from the date of acquisition. No goodwill was recorded related to any of the acquisitions.

The
Company has not yet finalized the purchase accounting with respect to these acquisitions due to certain information that has been unavailable since the date of the transactions.

12.  Pro Forma Information (Unaudited)

Pro forma operating results assuming commencement of operations as of January 1, 2001, of the 51 communities the Company acquired or leased during 2002,
and assuming that the Company's sale of 3,823,000 common shares occurred on January 1, 2001, are as follows:

2002

2001(unaudited)Revenues

$
563,193

$
545,662Expenses


573,688


542,173Net (loss) income from continuing operations


(10,495
)

3,489Loss from discontinued operations


(2,798
)

(867
)Net (loss) income

$
(13,293
)
$
2,622Weighted average shares outstanding


8,447


8,447Net (loss) income per share

$
(1.57
)
$
0.31


13.  Discontinued Operations

During 2002, the Company ceased operations at two leased nursing homes: one community in Phoenix, Arizona, which was leased from Senior Housing; and one community
in Campbell, Nebraska, which was leased from that municipality. The Arizona community was closed and subsequently sold by Senior Housing for $770 which caused a $77 reduction in annual minimum rent
payable in accordance with the lease terms. The operations of the Nebraska community were assumed by its owner. As of December 31, 2002, substantially all of the Company's assets and
liabilities related to these nursing homes have been disposed of and paid, respectively.

Also
in 2002, the Company decided to sell one additional nursing home located in Connecticut. Until this decision, the Company was exploring alternative uses for this property, including
the possibility of developing age restricted housing at this community. The Company's decision to abandon these efforts and sell this property resulted in the classification of this community as a
discontinued operation in 2002. The shut down of the healthcare operations of this community occurred in 2001 and was accomplished pursuant to an agreement with, and authorization from, the
Connecticut Department of Social Services. That agreement provides for certain Medicaid rate adjustments to compensate for shut down losses attributable to Medicaid patients who were residents at the
community. The Company recorded a receivable of approximately $1,450 of expected Medicaid rate adjustments for these shut down costs. In November 2002, the Company received a revised notice
from the Connecticut Medicaid authorities that rate adjustments totaling about only $512 would be authorized. The remainder of this receivable has been written off by the Company and is included in
the loss from discontinued operations for 2002. In addition, during 2002, the Company recorded an asset impairment charge of

F-16

---

$772 related to this community, primarily because of a decline in the value of skilled nursing bed licenses which are held for sale.

The
financial statements for all periods presented have been reclassified to present these three communities as discontinued operations. Below is a summary of the operating results of
these communities:

Year ended December 31,Period April 27, 2000
(Inception) through
December 31, 20002002

2001Revenues

$
2,655

$
8,057

$
7,530Expenses


5,453


8,924


7,232Net (loss) income

$
(2,798
)
$
(867
)
$
298


14.  Transactions With Affiliates Other Than Community Leases

On October 1, 2000, the Company entered into management agreements with FSQ to manage the operations of the communities it then owned.
Messrs. Martin and Portnoy, the Company's managing directors, owned FSQ until its merger with the Company, on January 2, 2002. In the merger with FSQ, the Company issued 125,000 shares
to each of Messrs. Portnoy and Martin and assumed all of the assets and liabilities of FSQ. During 2001 and 2000, management fees paid to FSQ totaled approximately $11,500 and $5,100,
respectively.

During
2000, HRPT Properties Trust ("HRPT"), an affiliate of Senior Housing, foreclosed on a mortgage with a principal balance outstanding of $2,400 that had been in default. The
collateral security for this mortgage was an assisted living community in the vicinity of a nursing home operated by the Company. In November 2000, a subsidiary of the Company purchased this
community from HRPT for $2,300, its appraised value.

Pursuant
to the Spin-Off transaction agreement, Senior Housing agreed to contribute $50,000 of net working capital to the Company on December 31, 2001. Amounts were
estimated on December 31, 2001, and the transaction agreement provided that a true up of amounts contributed would be completed subsequent to the year end. The amount owed to Senior Housing was
approximately $3,300 as of December 31, 2001. This amount was paid to Senior Housing by the Company during 2002.

Pursuant
to the Spin-Off transaction agreement, the Company entered into a shared services agreement with Reit Management and Research, LLC ("RMR"). Messrs. Martin and
Portnoy own RMR. RMR performs services for the Company that RMR historically performed for FSQ, Inc. The Company pays RMR a fee equal to 0.6% of revenues. This agreement automatically renews
each year unless the Company or RMR decide to cancel the agreement. During 2002, the Company paid RMR $2,990 for services related to this contract.

As
part of the Spin-Off transaction, and in order that HRPT could make a round lot distribution to its shareholders of one for 100 of Company shares which HRPT received as a
shareholder of Senior Housing, HRPT acquired 7,000 shares of common stock from the Company for $7.26 per share. This purchase price per share was determined as the average trading price of the
Company's shares on the date of the Spin-Off as reported by the American Stock Exchange.

The
Company leases its headquarters from an entity owned by Messrs. Martin and Portnoy. The lease expires in 2011. The rent paid by the Company in 2002 was $539.

F-17

---

15.  Employee Benefit Plan

During 2001, the Company established an employee savings plan under the provisions of the Internal Revenue Code section 401(k). All employees are eligible
to participate in the plan and are entitled, upon termination or retirement, to receive their portion of the plan assets. The Company does not contribute to this plan, but does pay certain expenses of
the plan. Plan expenses were $24 and $30 for the years ended December 31, 2002 and 2001, respectively.

16.  Fair Value of Financial Instruments

The Company's financial instruments are limited to cash and cash equivalents, accounts receivable, accounts payable, continuing care contracts and mortgages
payable. The fair value of these financial instruments was not materially different from their carrying values at December 31, 2002 and 2001. The Company's estimates of fair values were based
on current market prices and discounted cash flow analysis.

17.  Commitments and Contingencies

Connecticut Strike Costs.During 2001, nursing homes that the Company operated in Connecticut were involved in a statewide
labor dispute. During a strike, the Company incurred costs to hire temporary staff and provide security services for residents and temporary employees. At about the time of this strike, the Governor
of Connecticut and the Connecticut Department of Social Services stated and agreed to adjust Medicaid rates to compensate for a portion of these increased costs. Litigation was brought by the striking
union against the Governor and Commissioner of the Department of Social Services, and, on September 13, 2002, the United States District Court for Connecticut issued a declaratory ruling that
Medicaid subsidies other than those to reimburse costs incurred to protect the health and safety of residents are violations of federal labor law. The Connecticut Department of Social Services
continues to review and process the Company's claims for these adjustments, which total approximately $1,500 as of December 31, 2002. Also, the Company received and recognized as revenue
approximately $350 of such payments in 2001. In the event that the Connecticut Department of Social Services determines not to make payments or seeks reimbursement of payments previously made, and the
Company's defenses and claims are not fully successful, it may incur related losses from a failure to collect these receivables in the future. The Company intends to vigorously pursue these claims.

Receivables from Integrated Health Service/Department of Health and Human Services.During 2000, the Company assumed the
operations of 40 nursing homes from Integrated Health Services, Inc. and certain related entities (together "IHS"), a company in bankruptcy, pursuant to a court approved settlement agreement.
Because of complex legal and governmental processes necessary to transfer nursing home licenses and Medicare and Medicaid payments, arrangements were agreed for IHS to continue to receive payments
from such third party payors for services provided at the nursing homes following our assumption of operations, including an agreement among the Company, IHS and the Secretary of the United States
Department of Health and Human Services ("HHS"). These arrangements were approved by the bankruptcy court and generally honored by IHS with respect to approximately $42,000 received by IHS for the
Company's account. The Company initially believed IHS had received an additional $2,000 which was due and this amount was included in accounts receivable at September 30, 2002.

When
IHS refused to pay this amount the Company commenced suit in the bankruptcy court in August 2002. Following the filing of the suit settlement discussions were started. In
December 2002,

F-18

---

IHS paid approximately $700 of the receivable balance. IHS has asserted that it is only obligated to deliver funds received from third party payors. Recently the Company has begun settlement
discussions with HHS concerning the remaining $1,300 of the receivable balance which may not have been paid by HHS. The Company intends to vigorously pursue these claims, but the Company cannot
predict the outcome of this litigation, the settlement discussions or its ability to collect amounts which are due from IHS or HHS. If the Company does not collect this claim the uncollected amounts,
net of applicable reserves, may be recorded as a loss in future periods.

Marriott Management Agreements.Shortly after the Company began to lease the 31 communities managed by MSLS and Marriott, it
began to question their financial and operations management. Among other matters, it questioned: (i) whether Marriott's pooled insurance costs were fairly allocated
to the communities and to other operations of Marriott; (ii) whether Marriott realized unfair profits by purchasing goods and services for these communities from Marriott affiliated businesses;
(iii) whether Marriott and MSLS improperly charged the communities for home office personnel and costs which should have been borne by Marriott and MSLS in return for their management fees;
(iv) whether excessive amounts of the 31 communities revenues were retained by MSLS and Marriott as working capital cash and used for other Marriott operations without compensation to the
Company; (v) whether deposits received from the communities' residents were improperly retained by Marriott or MSLS and used interest free for Marriott's own purposes; (vi) whether MSLS
and Marriott were directing business away from the managed communities to other properties which MSLS operates for its own account; (vii) whether adequate collection procedures were in effect
to reduce bad debt expenses or if uncollectable revenues were accrued to inflate management fees; (viii) whether MSLS and Marriott refused to prepare a plan to close a chronically loss
producing community in order to continue collecting management fees; and (ix) generally whether the managed communities are being properly marketed and managed. Marriott and MSLS denied that
they breached their obligations under the management contracts; however, as result of these inquiries and demand notices from the Company, Marriott has to date paid the Company a total of
approximately $2,300.

In
July 2002, Marriott publicly announced its intention to exit the senior living management business and hired an investment bank to auction MSLS. The Company and Senior Housing
submitted a combined bid for MSLS, but that bid was not accepted. During this auction process, the Company and Senior Housing asserted that the management contracts require their approval for, or
otherwise restricted, the sale of MSLS. Marriott denied this assertion.

On
November 27, 2002, Marriott and MSLS sued the Company and Senior Housing in the Circuit Court for Montgomery County, Maryland. This lawsuit seeks a declaration that Marriott
and MSLS have not breached the management contracts, or, if they have breached, that their breaches are not sufficiently material to permit termination of the management contracts. The Company and
Senior Housing have answered that there have been material breaches sufficient to terminate the management contracts and have counter-claimed for money damages. A preliminary injunction was issued in
this case on January 28, 2003, upon Marriott's and MSLS's request, which prohibits the Company and Senior Housing from terminating the management contracts until completion of the trial. The
Company and Senior Housing have appealed the preliminary injunction ruling. No schedule for that appeal has as yet been established. The trial on this case has been preliminarily scheduled for
April 2004.

Also
on November 27, 2002, the Company and Senior Housing sued Marriott and MSLS in the Superior Court for Middlesex County, Massachusetts. An amended complaint was filed on
January 27, 2003. Among other matters, this lawsuit sought a declaration that the Company and Senior Housing

F-19

---

may terminate the management agreements in the event of a sale of MSLS. In December 2002, the Company's and Senior Housing's request for a preliminary injunction to prevent the sale of MSLS
until trial was denied. Thereafter, on December 30, 2002, Marriott announced that it has entered an agreement to sell MSLS to Sunrise Assisted Living, Inc. ("Sunrise"). A hearing on the
Company's and Senior Housing's request for a preliminary determination of the rights of the parties upon completion of the proposed sale was held on February 21, 2003. At the same
February 21 hearing, the court also considered Marriott's and MSLS's motion to dismiss the amended complaint. On March 4, 2003, the Massachusetts Court granted the motion to dismiss. The
Company and Senior Housing intend to seek
clarification of their rights upon sale of MSLS to Sunrise and are considering whether to appeal the Massachusetts court decision.

The
Company believes that Marriott and MSLS have materially breached the management agreements. The Company also believes that the management agreements may be terminated if MSLS is sold
to Sunrise. However, the factual and legal issues involved in this litigation are complex and the final outcome of this litigation cannot be predicted. Also, this litigation is likely to be expensive
to conduct and the total amount of this expense cannot be estimated at this time.

The
Company has continued to pay rent for the 31 communities involved in this litigation. If the management contracts are terminated, the Company believes it will be able to operate the
communities involved in this litigation. The Company is unable to predict whether MSLS owned by Sunrise will be able to manage these communities or whether that management may adversely affect the
Company's ability to meet its financial obligations.

18.  Selected Quarterly Financial Data (Unaudited)

Following is summary unaudited quarterly results of operations for the years ended December 31, 2002 and 2001 and the period April 27, 2000
(Inception) through December 31, 2000:

|                                 |  | 2002
|-------------------------------- |  | ----
|
|Revenues                         |  | $   
|Net (loss) income                |  |     
|(Loss) earnings per common share |  | $   

|                                     |  | 2001
|------------------------------------ |  | ----
|
|Revenues                             |  | $   
|Net (loss) income                    |  |     
|(Loss) earnings per common share (1) |  | $   

---

19.  Segment Information

The Company operates in one reportable segment, which is the business of operating senior living communities, including independent living and congregate care
communities, assisted living
communities and nursing homes. All operations and assets of the Company are located in the United States.

F-20

---



Independent Auditors' Report

The
Board of Directors
Senior Housing Properties Trust:

We
have audited the accompanying combined balance sheet of the Forty-two facilities acquired by Senior Housing Properties Trust from Integrated Health Services, Inc.
(Acquired Facilities) as described in note 1 as of December 31, 2000 and the related statement of operations, changes in net equity (deficit) of parent company and cash flows for the
year then ended. In connection with our audit of the combined financial statements, we also have audited the financial statement schedule of valuation and qualifying accounts. These financial
statements and the financial statement schedule are the responsibility of the Acquired Facilities' management. Our responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audit.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Acquired Facilities as of December 31,
2000 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion,
the related financial statement schedule, when considered in relation to the basic combined financial statements taken as a whole, presents fairly, in all material respects, the information set forth
therein.

|                                       |  | /s/KPMG LLP
|-------------------------------------- |  | -----------
|Baltimore, Maryland
September 13, 2001 |  |            

F-21

---



FORTY-TWO FACILITIES ACQUIRED BY
SENIOR HOUSING PROPERTIES TRUST FROM
INTEGRATED HEALTH SERVICES, INC.

Combined Balance Sheet (Note 1)        December 31, 2000        (Dollars in thousands)

|Assets                                          |                                                                        |   |        |       
|----------------------------------------------- | ---------------------------------------------------------------------- | - | ------ | ------
|Current assets:                                 |                                                                        |   |        |       
|                                                | Cash and cash equivalents                                              |   | $      | 4,514 
|                                                | Patient accounts and third-party payor settlements receivable (note 3) |   |        | 29,266
|                                                | Other current assets                                                   |   |        | 576   
|                                                |                                                                        |   |       
|Total current assets                            |                                                                        |   | 34,356 |       
|Equipment less accumulated depreciation of $12  |                                                                        |   | 586    |       
|                                                |                                                                        |   |       
|                                                |                                                                        | $ | 34,942 |       
|                                                |                                                                        |   |       
|Liabilities and Net Deficit of Parent Company   |                                                                        |   |        |       
|Current liabilities:                            |                                                                        |   |        |       
|Accounts payable and accrued expenses (note 4)  |                                                                        | $ | 9,499  |       
|Due to Senior Housing Properties Trust (note 5) |                                                                        |   | 27,323 |       
|                                                |                                                                        |   |       
|Total current liabilities                       |                                                                        |   | 36,822 |       
|Commitments and contingencies (notes 6 and 9)   |                                                                        |   |        |       
|Net deficit of Parent Company                   |                                                                        |   | (1,880 | )     
|                                                |                                                                        |   |       
|                                                |                                                                        | $ | 34,942 |       
|                                                |                                                                        |   |       

See
accompanying notes to combined financial statements.

F-22

---



FORTY-TWO FACILITIES ACQUIRED BY
SENIOR HOUSING PROPERTIES TRUST FROM
INTEGRATED HEALTH SERVICES, INC.

Combined Statement of Operations (Note 1)        Year ended December 31, 2000        (Dollars in thousands)

Total patient service revenues

$
135,378Costs and expenses:Operating expenses


131,916Depreciation and amortization


889Rent (note 6)


9,102Interest, net


2,053Loss on settlement of lease and mortgage obligations (note 1)


16,670Total costs and expenses


160,630Net loss

($
25,252
)


See
accompanying notes to combined financial statements.

F-23

---



FORTY-TWO FACILITIES ACQUIRED BY
SENIOR HOUSING PROPERTIES TRUST FROM
INTEGRATED HEALTH SERVICES, INC.

Combined Statement of Changes in Net Equity (Deficit) of Parent Company (Note 1)        Year ended December 31, 2000        (Dollars in thousands)

|Balance at December 31, 1999                     |  | $  | 30,610  |  
|------------------------------------------------ |  | -- | ------- | -
|Net contributions from (distributions to) Parent |  |    | (7,238  | )
|Net loss                                         |  |    | (25,252 | )
|                                                 |  |    |        
|Balance at December 31, 2000                     |  | ($ | 1,880   | )
|                                                 |  |    |        

See
accompanying notes to combined financial statements.

F-24

---



FORTY-TWO FACILITIES ACQUIRED BY
SENIOR HOUSING PROPERTIES TRUST FROM
INTEGRATED HEALTH SERVICES, INC.

Combined Statement of Cash Flows (Note 1)        Year ended December 31, 2000        (Dollars in thousands)

|Cash flows from operating activities:                |                                                                             |                                                                           |         |       
|---------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ------- | ------
|                                                     | Net loss                                                                    |                                                                           | ($      | 25,252
|                                                     | Adjustments to reconcile net loss to net cash used by operating activities: |                                                                           |         |       
|Loss on settlement of lease and mortgage obligations |                                                                             |                                                                           | 16,670  |       
|                                                     |                                                                             | Depreciation and amortization                                             |         |       
|                                                     |                                                                             | Increase in patient accounts and third-party payor settlements receivable |         |       
|                                                     |                                                                             | Decrease in other current assets                                          |         |       
|                                                     |                                                                             | Decrease in accounts payable                                              |         |       
|                                                     |                                                                             |                                                                           |        
|Net cash used by operating activities                |                                                                             |                                                                           | (15,646 | )     
|                                                     |                                                                             |                                                                           |        
|Cash flows from investing activities:                |                                                                             |                                                                           |         |       
|                                                     | Purchases of property, plant, and equipment                                 |                                                                           |         | (1,472
|                                                     |                                                                             |                                                                           |        
|Net cash used by investing activities                |                                                                             |                                                                           | (1,472  | )     
|                                                     |                                                                             |                                                                           |        
|Cash flows from financing activities:                |                                                                             |                                                                           |         |       
|                                                     | Repayments of long-term debt                                                |                                                                           |         | (137  
|                                                     | Net distributions to parent company                                         |                                                                           |         | (7,238
|                                                     | Advances from Senior Housing Properties Trust                               |                                                                           |         | 27,323
|                                                     |                                                                             |                                                                           |        
|Net cash provided by financing activities            |                                                                             |                                                                           | 19,948  |       
|                                                     |                                                                             |                                                                           |        
|Increase in cash and cash equivalents                |                                                                             |                                                                           | 2,830   |       
|Cash and cash equivalents, beginning of year         |                                                                             |                                                                           | 1,684   |       
|                                                     |                                                                             |                                                                           |        
|Cash and cash equivalents, end of year               |                                                                             | $                                                                         | 4,514   |       
|                                                     |                                                                             |                                                                           |        

See
accompanying notes to combined financial statements.

F-25

---



FORTY-TWO FACILITIES ACQUIRED  BY SENIOR HOUSING PROPERTIES TRUST FROM  INTEGRATED HEALTH SERVICES, INC.  Notes to Combined Financial Statements        December 31, 2000    
(Dollars in thousands)

(1)  Background and Basis of Presentation

Prior to July 7, 2000, Integrated Health Services, Inc. (IHS or the Parent Company), through its wholly owned subsidiaries, operated various skilled
nursing facilities with respect to which Senior Housing Properties Trust (SNH) was owner/lessor or first mortgage lender. In January 2000, IHS ceased making rent and interest payments on these
obligations and subsequently filed for bankruptcy in February 2000.

On
July 7, 2000, effective as of July 1, 2000, the Bankruptcy Court approved a settlement agreement whereby IHS' lease and mortgage obligations to a subsidiary of SNH were
cancelled and IHS conveyed nine nursing homes and one parcel of non-operating real property to SNH. As a result, SNH has obtained the operations of 42 facilities previously operated by IHS
(the Acquired Facilities). IHS managed the Acquired Facilities under a management agreement with SNH for the period from July 1, 2000 to September 30, 2000. An affiliate of SNH has
managed the Acquired Facilities subsequent to September 30, 2000.

The
Acquired Facilities' financial statements are presented for the purposes of complying with the Securities and Exchange Commission's rules and regulations regarding acquired
businesses.

The
combined financial statements of the Acquired Facilities reflect the historical accounts of the skilled nursing facilities, including allocations of general and administrative
expenses from the IHS corporate office to the individual facilities. Such corporate office allocations, calculated as a percentage of revenue, are based on determinations that management believes to
be reasonable. However, IHS has operated certain other businesses and has provided certain services to the Acquired Facilities, including financial, legal, accounting, human resources and information
systems services. Accordingly, expense allocations to the Company may not be representative of costs of such services to be incurred in the future (see note 8).

The
financial statements for periods prior to July 1, 2000 represent the financial position and results of operations of the Acquired Facilities as reflected in the accounts of
IHS' subsidiaries. Such subsidiaries leased 19 facilities from SNH, owned 11 facilities with respect to which SNH was mortgagee, and owned, leased or managed 12 other facilities not previously
affiliated with SNH.

The
financial statements for the period subsequent to July 1, 2000 represent the financial position and results of operations of the Acquired Facilities as described above and
give effect to the terms of the aforementioned settlement agreement. Accordingly, as of July 1, 2000, the accounts of the Acquired Facilities no longer include the property, plant and equipment
and intangible assets of the facilities conveyed to SNH, related mortgage debt, mortgage interest, and depreciation and amortization of such facilities. The loss on settlement of lease and mortgage
obligations of $16,670 represents the carrying value of the tangible and intangible assets of the facilities conveyed to SNH, less the related mortgage debt.

F-26

---

The
operating results of the Acquired Facilities for the six-month period ended June 30, 2000 (prior to the settlement agreement) and the six-month period
ended December 31, 2000 are summarized below:

|                               |                               | Six months
ended
June 30,
2000 |        | Six months
ended
December 31,
2000 |        | Year
ended
December 31,
2000 |        
|------------------------------ | ----------------------------- | ------------------------------ | ------ | ---------------------------------- | ------ | ---------------------------- | -------
|Total patient service revenues |                               | $                              | 65,195 |                                    | 70,183 |                              | 135,378
|                               |                               |                                |        |                                    |        |                              |        
|Costs and expenses:            |                               |                                |        |                                    |        |                              |        
|                               | Operating expenses            |                                |        | 63,865                             |        | 68,051                       |        
|                               | Depreciation and amortization |                                |        | 876                                |        | 13                           |        
|                               | Rent (note 9)                 |                                |        | 6,323                              |        | 2,779                        |        
|                               | Interest, net                 |                                |        | 2,053                              |        |                             |        
|                               | Loss on settlement            |                                |        |                                   |        | 16,670                       |        
|                               |                               |                                |        |                                    |        |                              |        
|                               |                               | Total costs and expenses       |        |                                    | 73,117 |                              | 87,513 
|                               |                               |                                |        |                                    |        |                              |        
|                               |                               | Loss before income taxes       |        | $                                  | (7,922 | )                            | (17,330
|                               |                               |                                |        |                                    |        |                              |        

(2)  Summary of Significant Accounting Policies



Revenues, primarily patient services revenues related to room and board charges, ancillary charges and revenues of pharmacy, rehabilitation and similar service
operations, are recorded at established rates and adjusted for differences between such rates and estimated amounts reimbursable by third-party payors. Medicare revenue is recognized pursuant to the
Prospective Payment System (PPS). Under PPS, per diem federal rates were established for urban and rural areas. Rates are case-mix adjusted using Resource Utilization Groups. PPS is
implemented over a three-year transition period that blends a facility-specific payment rate with the federal case-mix adjusted rate.

Estimated
settlements under third-party payor retrospective rate setting programs (primarily Medicaid) are accrued in the period that related services are rendered. Settlements
receivable and related revenues under such programs are based on annual cost reports prepared in accordance with federal and state regulations, which reports are subject to audit and retroactive
adjustment. In the opinion of management, adequate provision has been made therefore, and such adjustments in determining final settlements will not have a material effect on financial position or
results of operations.



Cash equivalents consist of highly liquid debt instruments with original maturities of three months or less.

F-27

---



Property, plant and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated
useful lives of the related assets, generally 25 years for land improvements, 10 years for equipment, 40 years for buildings and the term of the lease for costs of leasehold
interests and improvements.



The Acquired Facilities are included in the Parent Company's consolidated federal income tax return. The income taxes reported in the Acquired Facilities
financial statements are an allocation of income taxes calculated as if the Acquired Facilities were a separate taxpayer, in accordance with Statement of Financial Accounting Standards No. 109
(SFAS No. 109),Accounting for Income Taxes.

Deferred
income taxes are recognized for the tax consequences of temporary differences between financial statement carrying amounts and the related tax bases of assets and liabilities as
required by SFAS No. 109. Such tax effects are measured by applying enacted statutory tax rates applicable to future years in which the differences are expected to reverse, and any change in
tax rates will be recognized in the period that includes the date of enactment.



The Parent Company transfers excess cash from and makes working capital advances and corporate allocations to the Acquired Facilities. These advances include
amounts to fund cash shortfalls, capital expenditures, advances for accounts payable and amounts paid for employee benefits and other programs administered by the Parent Company. The resulting net
balance of the aforementioned transactions, the Parent Company's initial investment in the Acquired Facilities and the cumulative deficit of the Acquired Facilities is classified as Net Deficit of
Parent Company in the accompanying balance sheet.



The Acquired Facilities' patient services are provided through 42 facilities located in 10 states throughout the United States. The Acquired Facilities generally
do not require collateral or other security in extending credit to patients; however, the Acquired Facilities routinely obtain assignments of (or are otherwise entitled to receive) benefits receivable
under the health insurance programs, plans or policies of patients (e.g., Medicare, Medicaid, commercial insurance, and managed care organizations) (see note 3).



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

F-28

---

(3)  Patient Accounts and Third-Party Payor Settlements Receivable

Patient accounts and third-party payor settlements receivable consist of the following at December 31, 2000:

Patient accounts

$
28,996Third-party payor settlements


13,14742,143Allowance for doubtful accounts and contractual adjustments


(12,877
)$
29,266


Patient
accounts receivable and third party payor settlements receivable from the Federal government (Medicare) were approximately $14,246 at December 31, 2000.
Amounts receivable from various states (Medicaid) were approximately $17,161 at December 31, 2000.

(4)  Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses are summarized as follows at December 31, 2000:

Accounts payable

$
5,105Accrued salaries and wages


3,015Other accrued expenses


1,379$
9,499


(5)  Due to Senior Housing Properties Trust (SNH)

Subsequent to July 1, 2000, SNH advanced funds for operating expenses and working capital of the Acquired Facilities and allocated facility rents. Such
advances bear no interest (see notes 6 and 8).

(6)  Leases

The Acquired Facilities leased equipment under short-term operating leases having rental costs of approximately $1,146 in 2000. Leases of facilities
were terminated in 2000 as discussed in note 1; however, in accordance with Staff Accounting Bulletin No. 55,Allocation of Expenses and Related Disclosure in
Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity, $2,159 is included in rent expense for the period subsequent to July 1,
2000, representing an allocation of the total estimated fair market rental value of facilities. The annual fair market rental value has been estimated for a combined group of facilities, including the
Acquired Facilities, and has been allocated based on the respective total revenues of the facilities.

(7)  Income Taxes

The Acquired Facilities have been included in the Parent Company's consolidated federal income tax return. No income tax provision or benefit was allocated to the
loss before income taxes for the year ended December 31, 2000.

F-29

---

The
amount computed by applying the Federal corporate tax rate of 35% in 2000 to loss before income taxes is summarized as follows:

Income tax computed at statutory rates

$
(7,648
)State income taxes, net of Federal tax benefit and nondeductible items


(1,044
)Jobs tax credit


(70
)Valuation allowance adjustment


8,762$



Deferred
income tax assets at December 31, 2000, are summarized as follows:

Allowance for doubtful accounts

$
(5,018
)Net operating loss carryforwards


(57,627
)Job tax credit carryovers


(254
)Total before valuation allowance


(62,899
)Valuation allowance


62,899Net deferred tax asset

$



(8)  Other Related Party Transactions

Corporate administrative and general expenses (included in operating expenses) represent management fees for certain services, including financial, legal,
accounting, human resources and information systems services provided by the Parent Company. Management fees have been provided at approximately 6% of total revenues of each facility.

Management
fees charged by the Parent Company were $4,311 for the nine months ended September 30, 2000, and have been determined based on an allocation of the Parent Company's
corporate general and administrative expenses. Such allocation has been made because specific identification of expenses is not practicable. Management believes that this allocation method is
reasonable. However, management believes that the Acquired Facilities' corporate administrative and general expenses on a stand-alone basis may have been different had the Acquired Facilities operated
as an unaffiliated entity. Management fees charged by an SNH affiliate were $1,773 for the three months ended December 31, 2000.

(9)  Certain Significant Risks and Uncertainties

The following information is provided in accordance with the AICPA Statement of Position No. 94-6,Disclosure of
Certain Significant Risks and Uncertainties.

The
Acquired Facilities and others in the healthcare business are subject to certain inherent risks, including the following:



F-30

---



Such
inherent risks require the use of certain management estimates in the preparation of the Acquired Facilities financial statements and it is reasonably possible that a change in such
estimates may occur.

The
Acquired Facilities receives payment for a significant portion of services rendered to patients from the Federal government under Medicare and from the states in which its facilities
and/or services are located under Medicaid. The Acquired Facilities operations are subject to a variety of Federal, state and local legal and regulatory risks, including without limitation the federal
Anti-Kickback statute and the federal Ethics in Patient Referral Act (so-called Stark Law), many of which apply to virtually all companies engaged in the health care services
industry. The Anti-Kickback statute prohibits, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare and
Medicaid patients. The Stark Law prohibits, with limited exceptions, financial relationships between ancillary service providers and referring physicians. Other regulatory risks assumed by the
Acquired Facilities and other companies engaged in the health care industry are as follows:



In
response to the aforementioned regulatory risks, the Parent Company formed a Corporate Compliance Department in 1996 to help identify, prevent and deter instances of Medicare and
Medicaid noncompliance. Although the Parent Company and the Acquired Facilities strive to manage these regulatory risks, there can be no assurance that federal and/or state regulatory agencies that
currently have jurisdiction over matters including, without limitation, Medicare, Medicaid and other government reimbursement programs, will take the position that the Acquired Facilities business and
operations are in compliance with applicable law or with the standards of such regulatory agencies.

F-31

---

In
some cases, violation of such applicable law or regulatory standards by the Acquired Facilities can carry significant civil and criminal penalties and can give rise to qui tam
litigation. In this connection, the Acquired Facilities are a defendant in certain actions or the subject of investigations concerning alleged violations of the False Claims Act or of Medicare
regulations. As a result of the Parent Company's and the Acquired Facilities' financial position, various agencies of the federal government accelerated efforts to reach a resolution of all
outstanding claims and issues related to the Parent Company's and the Acquired Facilities' alleged violations of healthcare statutes and related causes of action. The Parent Company has commenced
global settlement negotiations with the government; however, the Parent Company is unable to assess fully the merits of the government's monetary claims at this time. In addition, the Parent Company
is unable to determine the amount, if any, that might relate to the Acquired Facilities.

The
BBA, enacted in August 1997, made numerous changes to the Medicare and Medicaid programs that are significantly affecting the Acquired Facilities. With respect to Medicare,
the BBA provides, among other things, for a prospective payment system for skilled nursing facilities. As a result, in 2000 the Acquired Facilities bore the cost risk of providing care inasmuch as
they receive specified reimbursement for each treatment regardless of actual cost. With respect to Medicaid, the BBA repeals the so-called Boren Amendment, which required state Medicaid
programs to reimburse nursing facilities for the costs that are incurred by efficiently and economically operated providers in order to meet quality and safety standards. As a result, states now have
considerable flexibility in establishing payment rates and the Management believes many states are moving toward a prospective payment type system for skilled nursing facilities.

The
BBA mandates the establishment of a PPS for Medicare skilled nursing facility services, under which facilities are paid a fixed fee for virtually all covered services. PPS is being
phased in over a four-year period, effective January 1, 1999 for the Acquired Facilities. During the first three years, payments will be based on a blend of the facility's
historical costs and a pre-determined federal rate. Thereafter, the per diem rates will be based 100% on the federal cost rate. Under PPS, each patient's clinical status is evaluated and
placed into a payment category. The patient's payment category dictates the amount that the provider will receive to care for the patient on a daily basis. The per diem rate covers (i) all
routine inpatient costs currently paid under Medicare Part A, (ii) certain ancillary and other items and services currently covered separately under Medicare Part B on a
"pass-through" basis, and (iii) certain capital costs. The Acquired Facilities ability to offer the ancillary services required by higher acuity patients, such as those in its
subacute care programs to Medicare beneficiaries, in a cost-effective manner will continue to be critical to the Acquired Facilities services and will affect the profitability. To date the
per diem reimbursement rates have generally been significantly less than the amount the Acquired Facilities received on a daily basis under cost based reimbursement, particularly in the case of higher
acuity patients. As a result, PPS has had a material adverse impact on the Acquired Facilities' results of operations and financial condition.

The
Acquired Facilities are also subject to malpractice and related claims, which arise in the normal course of business and which could have a significant effect on the Acquired
Facilities. As a result, the Acquired Facilities maintained occurrence basis professional and general liability insurance with coverage and deductibles which management believes to be appropriate.

F-32

---



FORTY-TWO FACILITIES ACQUIRED BY
SENIOR HOUSING PROPERTIES TRUST FROM
INTEGRATED HEALTH SERVICES, INC.

Schedule IIValuation and Qualifying Accounts        For the year ended December 31, 2000        (Dollars in thousands)

|Column A                         |  | Column B |       | Column C |       | Column D |        | Column E
|-------------------------------- |  | -------- | ----- | -------- | ----- | -------- | ------ | --------
|
|Allowance for doubtful accounts: |  |          |       |          |       |          |        |         
|Year ended December 31, 2000     |  | $        | 8,966 |          | 5,001 |          | (1,090 | )       
|                                 |  |          |       |          |       |          |        |         

---

See
accompanying independent auditors' report.

F-33

---



REPORT OF INDEPENDENT AUDITORS

To
the Board of Directors and Shareholders of
Five Star Quality Care, Inc.:

We
have audited the accompanying combined balance sheet of Certain Mariner Post-Acute Network Facilities (Operated by subsidiaries of Mariner Post-Acute
Network, Inc.) (the "Facilities"), as defined in Note 1, as of December 31, 2000, and the related combined statements of operations, divisional equity (deficit), and cash flows
for the year then ended. Our audit also included the financial statement schedule listed in the Index on page F-47. These financial statements and schedule are the responsibility of the
Facilities' management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Certain Mariner Post-Acute Network
Facilities (Operated by subsidiaries of Mariner Post-Acute Network, Inc.), as defined in Note 1, at December 31, 2000, and the combined results of their operations and
their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

|                                         |  | /s/ ERNST & YOUNGLLP
|---------------------------------------- |  | --------------------
|September 19, 2001
Boston, Massachusetts |  |                     

F-34

---



CERTAIN MARINER POST-ACUTE NETWORK FACILITIES  (OPERATED BY SUBSIDIARIES OF MARINER POST-ACUTE NETWORK)  (DEBTOR IN POSSESSION AS OF JANUARY 20, 2000)        COMBINED BALANCE SHEET(Dollars in thousands)December 31, 2000

|Assets                                                          |                                                                                    |   |         |       
|--------------------------------------------------------------- | ---------------------------------------------------------------------------------- | - | ------- | ------
|Current assets:                                                 |                                                                                    |   |         |       
|                                                                | Cash and cash equivalents                                                          |   | $       | 2,508 
|                                                                | Patient receivables, less allowance for doubtful accounts of $1,834                |   |         | 7,501 
|                                                                | Other receivables                                                                  |   |         | 3,489 
|                                                                | Other current assets                                                               |   |         | 477   
|                                                                |                                                                                    |   |        
|Total current assets                                            |                                                                                    |   | 13,975  |       
|Property and equipment:                                         |                                                                                    |   |         |       
|                                                                | Building improvements                                                              |   |         | 4,128 
|                                                                | Furniture, fixtures and equipment                                                  |   |         | 635   
|                                                                |                                                                                    |   |        
|                                                                |                                                                                    |   | 4,763   |       
|                                                                | Less accumulated depreciation                                                      |   |         | (3,725
|                                                                |                                                                                    |   |        
|                                                                |                                                                                    |   | 1,038   |       
|Goodwill, net                                                   |                                                                                    |   | 8,012   |       
|Other assets                                                    |                                                                                    |   | 27      |       
|                                                                |                                                                                    |   |        
|Total assets                                                    |                                                                                    | $ | 23,052  |       
|                                                                |                                                                                    |   |        
|Liabilities and divisional deficit                              |                                                                                    |   |         |       
|Current liabilities:                                            |                                                                                    |   |         |       
|                                                                | Accounts payable and accrued expenses                                              |   | $       | 12,645
|                                                                | Accrued wages and related liabilities                                              |   |         | 3,570 
|                                                                | Due to Senior Housing Properties Trust                                             |   |         | 5,760 
|                                                                | Current portion of unfavorable lease obligations and other non-current liabilities |   |         | 3,673 
|                                                                |                                                                                    |   |        
|Total current liabilities                                       |                                                                                    |   | 25,648  |       
|Liabilities subject to compromise                               |                                                                                    |   | 7,111   |       
|Unfavorable lease obligations and other non-current liabilities |                                                                                    |   | 24,980  |       
|                                                                |                                                                                    |   |        
|Total liabilities                                               |                                                                                    |   | 57,739  |       
|Commitments and contingencies                                   |                                                                                    |   |         |       
|Divisional deficit                                              |                                                                                    |   | (34,687 | )     
|                                                                |                                                                                    |   |        
|Total liabilities and divisional deficit                        |                                                                                    | $ | 23,052  |       
|                                                                |                                                                                    |   |        

See
accompanying notes.

F-35

---



CERTAIN MARINER POST-ACUTE NETWORK FACILITIES  (OPERATED BY SUBSIDIARIES OF MARINER POST-ACUTE NETWORK)  (DEBTOR IN POSSESSION AS OF JANUARY 20, 2000)        COMBINED STATEMENT OF OPERATIONS(Dollars in thousands)Year ended December 31, 2000

|Revenues:                  |                                           |   |        |       
|-------------------------- | ----------------------------------------- | - | ------ | ------
|                           | Net patient revenues                      |   | $      | 85,128
|                           | Other                                     |   |        | 197   
|                           |                                           |   |       
|Total revenues             |                                           |   | 85,325 |       
|Expenses:                  |                                           |   |        |       
|                           | Salaries, wages and benefits              |   |        | 55,033
|                           | Nursing, dietary and other supplies       |   |        | 5,445 
|                           | Ancillary services                        |   |        | 4,077 
|                           | Facility general and administrative costs |   |        | 7,205 
|                           | Allocation of corporate overhead          |   |        | 4,101 
|                           | Insurance                                 |   |        | 4,496 
|                           | Rent                                      |   |        | 8,748 
|                           | Depreciation and amortization             |   |        | 1,766 
|                           | Provision for bad debts                   |   |        | 1,758 
|                           |                                           |   |       
|Total expenses             |                                           |   | 92,629 |       
|                           |                                           |   |       
|Loss from operations       |                                           |   | (7,304 | )     
|Interest expense           |                                           |   | (121   | )     
|Interest income            |                                           |   | 4      |       
|                           |                                           |   |       
|Loss before income taxes   |                                           |   | (7,421 | )     
|Provision for income taxes |                                           |   |       |       
|                           |                                           |   |       
|Net Loss                   |                                           | $ | (7,421 | )     
|                           |                                           |   |       

See
accompanying notes.

F-36

---



CERTAIN MARINER POST-ACUTE NETWORK FACILITIES  (OPERATED BY SUBSIDIARIES OF MARINER POST-ACUTE NETWORK)  (DEBTOR IN POSSESSION AS OF JANUARY 20, 2000)        COMBINED STATEMENT OF DIVISIONAL EQUITY
(DEFICIT)(Dollars in thousands)Year ended December 31, 2000

|Balance at January 1, 2000   |                                | $ | (29,030 | )     
|---------------------------- | ------------------------------ | - | ------- | ------
|                             | Contributions from Parent, net |   |         | 1,764 
|                             | Net loss                       |   |         | (7,421
|                             |                                |   |        
|Balance at December 31, 2000 |                                | $ | (34,687 | )     
|                             |                                |   |        

See
accompanying notes.

F-37

---



CERTAIN MARINER POST-ACUTE NETWORK FACILITIES  (OPERATED BY SUBSIDIARIES OF MARINER POST-ACUTE NETWORK)  (DEBTOR IN POSSESSION AS OF JANUARY 20, 2000)        COMBINED STATEMENT OF CASH FLOWS(Dollars in thousands)Year ended December 31, 2000

|Operating activities                                                                  |                                                                                 |                                                                                 |       |       
|------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ----- | ------
|                                                                                      | Net loss                                                                        |                                                                                 | $     | (7,421
|                                                                                      | Adjustments to reconcile net loss to net cash provided by operating activities: |                                                                                 |       |       
|                                                                                      |                                                                                 | Depreciation and amortization                                                   |       |       
|                                                                                      |                                                                                 | Amortization of unfavorable lease obligations and other non-current liabilities |       |       
|                                                                                      |                                                                                 | Provision for bad debts                                                         |       |       
|Increase (decrease) in cash arising from changes in operating assets and liabilities: |                                                                                 |                                                                                 |       |       
|                                                                                      | Patient receivables                                                             |                                                                                 |       | 3,567 
|                                                                                      | Other receivables                                                               |                                                                                 |       | (3,168
|                                                                                      | Other assets                                                                    |                                                                                 |       | (9    
|                                                                                      | Accounts payable and accrued expenses                                           |                                                                                 |       | 3,007 
|                                                                                      | Accrued wages and related liabilities                                           |                                                                                 |       | (14   
|                                                                                      | Due to Senior Housing Properties Trust                                          |                                                                                 |       | 5,760 
|                                                                                      |                                                                                 |                                                                                 |      
|Net cash provided by operating activities                                             |                                                                                 |                                                                                 | 1,573 |       
|                                                                                      |                                                                                 |                                                                                 |      
|Investing activities                                                                  |                                                                                 |                                                                                 |       |       
|Purchases of property and equipment                                                   |                                                                                 |                                                                                 | (829  | )     
|                                                                                      |                                                                                 |                                                                                 |      
|Net cash used in investing activities                                                 |                                                                                 |                                                                                 | (829  | )     
|                                                                                      |                                                                                 |                                                                                 |      
|Financing activities                                                                  |                                                                                 |                                                                                 |       |       
|Capital contributions, net                                                            |                                                                                 |                                                                                 | 1,764 |       
|Net cash provided by financing activities                                             |                                                                                 |                                                                                 | 1,764 |       
|                                                                                      |                                                                                 |                                                                                 |      
|Net increase in cash                                                                  |                                                                                 |                                                                                 | 2,508 |       
|Cash at beginning of year                                                             |                                                                                 |                                                                                 |      |       
|                                                                                      |                                                                                 |                                                                                 |      
|Cash at end of year                                                                   |                                                                                 | $                                                                               | 2,508 |       
|                                                                                      |                                                                                 |                                                                                 |      

See
accompanying notes.

F-38

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CERTAIN MARINER POST-ACUTE NETWORK FACILITIES  (OPERATED BY SUBSIDIARIES OF MARINER POST-ACUTE NETWORK)  (DEBTOR IN POSSESSION AS OF JANUARY 20, 2000)        NOTES TO COMBINED FINANCIAL STATEMENTS

1.    Organization

The combined financial statements of Certain Mariner Post-Acute Network Facilities (the "Facilities") include the accounts of 17 nursing home
facilities and certain related assets and liabilities owned and controlled by Mariner Post-Acute Network, Inc. ("Mariner" or the "Parent"). The Facilities are owned by wholly owned
subsidiaries of GranCare, Inc. ("GranCare"), a wholly owned subsidiary of Mariner. The Facilities constitute a division of Mariner and are not separate legal entities.

Mariner,
formerly known as Paragon Health Network, Inc., was formed in November 1997 through the recapitalization by merger of Living Centers of America, Inc.
("LCA") with a newly-formed entity owned by certain affiliates of Apollo Management, L.P. and the subsequent merger of GranCare (the "GranCare Merger").

Mariner
and certain of its respective subsidiaries, including those subsidiaries operating the Facilities, filed separate voluntary petitions (collectively, the "Chapter 11 Filings") for
relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") on
January 18, 2000 (the "Petition Date"). Mariner is presently operating its business as a debtor-in-possession and is subject to the jurisdiction of the Bankruptcy Court
while a plan of reorganization is formulated. Mariner's and its subsidiaries' need to seek relief afforded by the Bankruptcy Code is due, in part, to the significant financial pressure created by the
implementation of the Balanced Budget Act of 1997.

Mariner,
through its GranCare subsidiaries, leased the Facilities from a wholly owned subsidiary of Senior Housing Properties Trust ("SNH"), which succeeded to the interests of Health
and Retirement
Properties Trust ("HRPT Properties"). On May 10, 2000, the Bankruptcy Court approved a settlement agreement (the "Settlement Agreement") between Mariner, certain of its GranCare subsidiaries,
and subsidiaries of SNH. The Settlement Agreement is effective at the close of business on June 30, 2000 and is subject to obtaining regulatory approvals in the states where the Facilities are
located. Based upon the terms of the Settlement Agreement: (a) the Facilities leased by the GranCare subsidiaries and the related personal property were assigned to subsidiaries of SNH and
(b) Mariner agreed to manage the Facilities transferred to the SNH during a transition period that was expected to last less than six months. As of December 31, 2000, the transition
period has ended and management of the Facilities is being performed by SNH.

As
specified in the Settlement Agreement, certain assets and liabilities reflected on the accompanying combined balance sheet as of December 31, 2000 will remain with Mariner
including liabilities subject to compromise, unfavorable lease obligations and goodwill. In connection with the Settlement Agreement, outstanding indebtedness of the Facilities was terminated (see
Note 6) and Mariner paid SNH at closing approximately $2,335,000 to settle its obligations for property taxes payable and certain employee accrued liabilities. The aforementioned transaction
has not been reflected in the accompanying combined financial statements.

The
Settlement Agreement is contingent upon SNH obtaining licenses and other governmental approvals necessary to operate the Facilities. SNH has applied for all of the required licenses
and, as of January 31, 2001, the required licenses for substantially all of these facilities have been received.

F-39

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2.    Summary of Significant Accounting Policies

Basis of presentation

The accompanying combined financial statements have been prepared on the basis of accounting principles applicable to going concerns and contemplate the
realization of assets and the settlement of liabilities and commitments in the normal course of business. The financial statements do not include adjustments, if any, to reflect the possible future
effects on the recoverability and classification of recorded assets or the amounts and classifications of liabilities that may result from the outcome of these uncertainties. The accompanying combined
financial statements have also been presented in conformity with the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting of Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"). SOP 90-7 requires the segregation of liabilities subject to compromise by the Bankruptcy Court as of the Petition Date
and identification of all transactions and events that are directly associated with the reorganization of the Facilities. Pursuant to SOP 90-7, prepetition liabilities are reported on the
basis of
the expected amounts of such allowed claims, as opposed to the amounts for which those claims may be settled. Under a confirmed plan of reorganization, those claims may be settled at amounts
substantially less than their allowed amounts.

Substantially
all of the patient revenues and other income received by the Facilities is deposited in and commingled with the Parent's general corporate funds. Certain cash requirements
of the Facilities were paid by the Parent and were charged directly to the Facilities. General and administrative costs of the Parent were allocated to the Facilities based upon management's estimate
of the actual costs based upon the Facilities' level of operations. The Parent maintains insurance policies for the Facilities for workers' compensation, general and professional liability and
employee health and dental insurance (see Note 7). In the opinion of management, the method for allocating Mariner's corporate general and administrative and insurance expenses is reasonable.
It is not practicable to estimate additional costs, if any, that would have been incurred if the Facilities were not controlled by Mariner.

Property and equipment

Property and equipment is presented at cost. Maintenance and repairs are charged to operations as incurred and replacements and significant improvements, which
would extend the useful life are capitalized. Depreciation and amortization are expensed over the estimated useful lives of the assets on a straight-line basis as follows:

Building improvements

1015 yearsFurniture, fixtures and equipment

315 years


Depreciation
expense related to property and equipment for the year ended December 31, 2000 was approximately $1,307,000.

Goodwill

Goodwill represents the excess of acquisition cost over the fair market value of net assets acquired in the GranCare Merger. Goodwill of approximately $53,177,000
was recorded at the Facilities and is
being amortized on a straight-line basis over 30 years. Management periodically re-evaluates goodwill and makes any adjustments, if necessary, whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable or the estimated useful life has changed. Accumulated

F-40

---

amortization at December 31, 2000 was approximately $1,159,000. Amortization of goodwill charged to expense was approximately $459,000 for the year ended December 31, 2000.

Impairment of long-lived assets

Statement of Financial Accounting Standards No. 121,"Accounting for the Impairment of
Long-Lived Assets to be Disposed Of," requires impairment losses to be recognized for long-lived assets when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by the long-lived assets are not sufficient to recover the assets' carrying amount. Goodwill is also evaluated for recoverability by estimating the
projected undiscounted cash flows, excluding interest, of the related business activities.

The
impairment loss of long-lived assets, including goodwill, is measured by comparing the carrying amount of the asset to its fair value with any excess of the carrying
value over the fair value written off. Fair market value is determined by various valuation techniques including discounted cash flow. No impairment charges were recorded in 2000.

Non-current liabilities

Non-current liabilities principally include unfavorable lease obligations related to facilities acquired in the GranCare Merger. The unfavorable lease
obligations are amortized as a reduction of rent expense over the remaining lease term.

Revenue recognition

Net patient revenue includes patient revenues payable by patients and amounts reimbursable by third party payors under contracts. Patient revenues payable by
patients are recorded at established billing rates. Patient revenues to be reimbursed by contracts with third-party payors are recorded at the amount estimated to be realized under these contractual
arrangements. Revenues from Medicare and Medicaid are generally based on reimbursement of the reasonable direct and indirect costs of providing services to program participants or, for the Facilities'
cost reporting periods beginning January 1, 1999, determined under the Prospective Payment System ("PPS"). Management separately estimates revenues due from each third party with which it has a
contractual arrangement and records anticipated settlements with these parties in the contractual period during which services were rendered.

The
amounts actually reimbursable under Medicare and Medicaid cost reimbursement programs for periods prior to January 1, 1999 are determined by filing cost reports that are then
subject to audit and retroactive adjustment by the payor.

Legislative
changes to state or federal reimbursement systems may also retroactively affect recorded revenues. Changes in estimated revenues due in connection with Medicare and Medicaid
may be recorded by management subsequent to the year of origination and prior to final settlement based on improved estimates. Such adjustments and final settlements with third party payors are
reflected in operations at the time of the adjustment or settlement. Medicare revenues represented 21%, and Medicaid revenues represented 55% of net revenues for the year ended December 31,
2000.

In
April 1995, the Health Care Finance Administration ("HCFA") issued a memorandum to its Medicare fiscal intermediaries as a guideline to assess costs incurred by inpatient
providers relating to payment of occupational and speech language pathology services furnished under arrangements that include contracts between therapy providers and inpatient providers. While not
binding on the fiscal intermediaries, the memorandum suggested certain rates to assist the fiscal intermediaries in making

F-41

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annual "prudent buyer" assessments of speech and occupational therapy rates paid by inpatient providers. In addition, HCFA has promulgated new salary equivalency guidelines effective April 1,
1998, which updated the then current physical therapy and respiratory therapy rates and established new guidelines for occupational therapy and speech therapy. These new payment guidelines were in
effect until the Facilities transitioned to PPS, at which time payment for therapy services were included in the PPS rate. HCFA, through its intermediaries, is also subjecting physical therapy,
occupational therapy and speech therapy to a heightened level of scrutiny resulting in increasing audit activity. A majority of the Facilities' provider and rehabilitation contracts provided for
indemnification of the facilities for potential liabilities in connection with reimbursement for rehabilitation services. There can be no assurance that actions ultimately taken by HCFA with regard to
reimbursement rates for such therapy services will not materially adversely affect the Facilities results of operations.

Laws
and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Management believes that the Facilities are in compliance with all applicable
laws and regulations, and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and
Medicaid programs.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain
estimates and assumptions that may affect the
amounts reported in these financial statements and related notes. The actual results could differ from these estimates.

Income taxes

The Parent files a consolidated federal income tax return. Throughout the years and periods presented herein, the Facilities' operations were included in the
Parent's income tax returns. The income tax provision reported in the combined financial statements is an allocation of the Parent's total income tax provision. The Facilities' allocation was
determined based on a calculation of income taxes as if the Facilities were a separate taxpayer, in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Income taxes paid was zero for the period presented.

Non-current
deferred income taxes arise primarily from timing differences resulting from the recognition of rent expense for tax and financial reporting purposes and from the
use of accelerated depreciation for tax purposes. Current deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and financial reporting purposes
which are expected to reverse within one year.

3.    Proceedings Under Chapter 11 of the Bankruptcy Code

On January 18, 2000, Mariner and certain of its respective subsidiaries, including those subsidiaries operating the Facilities, filed voluntary petitions
for relief under Chapter 11 of the Bankruptcy Code (the "Chapter 11 Proceedings"). Mariner is presently operating its business as a debtor-in-possession and is subject to the
jurisdiction of the Bankruptcy Court while a plan of reorganization is formulated.

F-42

---

As a debtor-in-possession, Mariner is authorized to operate its business but may not engage in transactions outside its ordinary course of business without the approval of the
Bankruptcy Court.

While
the Chapter 11 Proceedings constituted a default under Mariner's and such subsidiaries' various financing arrangements, Section 362 of the Bankruptcy Code imposes an
automatic stay that generally precludes any creditors and other interested parties under such arrangements from taking any remedial action in response to any such resulting default outside of the
Chapter 11 Proceedings with obtaining relief from the automatic stay from the Bankruptcy Court.

On
January 19, 2000, Mariner received approval from the Bankruptcy Court to pay prepetition and postpetition employee wages, salaries, benefits and other employee obligations. The
Bankruptcy Court also approved orders granting authority to pay prepetition claims of certain critical vendors, utilities
and patient obligations. All other prepetition liabilities at December 31, 2000 are disclosed in Note 5 as liabilities subject to compromise. The Facilities have been and intend to
continue to pay postpetition claims to all vendors and providers in the ordinary course of business.

4.    Going Concern and Issues Affecting Liquidity

The accompanying combined financial statements have been prepared assuming that the Facilities will continue to operate as a going concern. The Facilities have
violated certain covenants of its loan agreement, have experienced significant losses and have a working capital deficiency of approximately $11,673,000 and a divisional deficit of approximately
$34,687,000 as of December 31, 2000. Mariner and certain of its subsidiaries, including those subsidiaries operating the Facilities, filed voluntary petitions for relief under Chapter 11 of the
Bankruptcy Code. These matters, among others, raise substantial doubt about the Facilities ability to continue as a going concern.

As
described in Note 1, on May 10, 2000 the Bankruptcy Court approved a settlement agreement between Mariner and SNH whereby the Facilities leased by Mariner and related
personal property were assigned to affiliates of SNH. SNH agreed to provide working capital to the facilities. The agreement is effective at the close of business on June 30, 2000 and is
subject to obtaining regulatory approvals in the states where the Facilities are located. At December 31, 2000, $5,760,000 had been advanced to the facilities by SNH.

On
December 31, 2000, SNH has approximately $173,000,000 available for borrowing under a $270,000,000 bank credit facility. Management of SNH believes that the available
borrowings under the bank credit facility are sufficient to provide the necessary working capital to the Facilities for operations subsequent to the closing of the June 30, 2000 transaction.

5.    Liabilities Subject to Compromise

"Liabilities subject to compromise" represents liabilities incurred prior to the commencement of the Chapter 11 Proceedings. These liabilities, consisting
primarily of long-term debt and certain accounts payable, represent the Facilities' estimate of known or potential prepetition claims to be resolved in connection with the Chapter 11
Proceedings. Such claims remain subject to future adjustments based on negotiations, actions of the Bankruptcy Court, further developments with respect to disputed claims, future rejection of
executory contracts or unexpired leases, determination as to the value of any collateral securing claims, treatment under the plan of reorganization and other events. Payment for these amounts will be
established in connection with the plan of reorganization. A

F-43

---

summary of the principal categories of claims classified as liabilities subject to compromise at December 31, 2000 is as follows (in thousands):

Accounts payable and accrued expenses

$6,223Long-term debt

888$7,111


6.    Debt

On December 28, 1990, a mortgage loan agreement was entered into for $15,000,000 with HRPT Properties, secured by two nursing home facilities' (Northwest
Health Care Center and River Hills West Health Care Center) land, building and improvements. The interest rate on the note was 11.5%. The loan was repaid in September 1998.

On
March 28, 1992, a loan agreement was entered into with HRPT Properties for the purpose of funding renovations to the Christopher East facility, maturing on January 31,
2013. Advances to AMS Properties, Inc. totaled approximately $883,000 for the year ended December 31, 2000. The loan is interest bearing and principal is payable upon maturity. The
interest rate on the note is 13.75%. The Bankruptcy Proceedings are considered an Event of Default as defined in the loan agreement. In consideration of the terms of the Settlement Agreement, the
Christopher East note obligation was terminated in July 2000. Interest paid was approximately $60,000 during the year ended December 31, 2000.

7.    Transactions with Affiliates

Mariner provided various services to the Facilities including, but not limited to, financial, legal, insurance, information systems, employee benefit plans and
certain administrative services, as required. The combined financial statements reflect charges for certain corporate general and administrative expenses from Mariner's corporate office to the
Facilities. Such corporate charges represent allocations based on determinations management believes to be reasonable (5% of total revenues). Administrative costs charged by Mariner were approximately
$2,133,000 for the year ended December 31, 2000. For the year ended December 31, 2000, fees charged by SNH for management services were approximately $1,968,000, all of which have been
paid.

The
Facilities participated in the various benefit plans of Mariner, primarily the profit sharing and 401(k) plans. These plans include matching provisions for employee contributions to
the 401(k) plan. The financial statements reflect charges for benefits attributable to the Facilities' employees. Such amounts totaled approximately $108,000 for the year ended December 31,
2000.

Through
March 31, 1998, the Facilities participated in a program for insurance of workers' compensation risks through a captive insurance subsidiary of Mariner. Effective
March 31, 1998, Mariner purchased a fully-insured workers' compensation policy with no deductible or retention with a catastrophic policy in place to cover any loss above $500,000 per
occurrence. Additionally, in 1998 Mariner purchased general and professional liability insurance through a third party. The maximum loss exposure with respect to this policy is $100,000 per
occurrence.

Mariner
obtains and provides insurance coverage for health, life and disability, auto, general liability and workers' compensation through its self-insurance and outside
insurance programs and allocates to the Facilities based on its estimate of the actual costs incurred on behalf of the Facilities.

F-44

---

Total insurance costs allocated were approximately $2,537,000 for the year ended December 31, 2000. These costs are included in facility general and administrative costs in the accompanying
combined statements of operations.

8.    Commitments and Contingencies

As discussed in Note 1, the Facilities are party to various agreements between GranCare and SNH. SNH is the lessor with respect to the Facilities leased by
two subsidiaries of GranCare (the "Tenant Entities") under operating leases. Pursuant to a Collateral Pledge Agreement dated October 31, 1997, Mariner provided an unlimited guaranty to SNH,
which is secured by a cash collateral deposit of $15,000,000, the earned interest on which is retained by SNH. In June 2000, the Facilities ceased payment of rents. As part of the Settlement
Agreement, Mariner was released from its lease obligations.

Rent
expense, net of amortization of unfavorable lease obligation, for all operating leases was approximately $8,748,000 for the year ended December 31, 2000.

From
time to time, the Facilities have been subject to various legal proceedings in the ordinary course of business. In the opinion of management, except as described below, there are
currently no proceedings which could potentially have a material adverse effect on the Facilities' financial position or results of operations after taking into account the insurance coverage
maintained by Mariner. Although management believes that any of the proceedings discussed below will not have a material adverse impact on the Facilities if determined adversely to the Facilities,
given the Facilities' current financial condition, lack of liquidity and the current lack of aggregate limit under Mariner's current
GL/PL insurance policy, settling a large number of cases within the Company's $1,000,000 self-insured retention limit could have a material adverse effect on the Facilities.

On
August 26, 1996, a class action complaint was asserted against GranCare in the Denver, Colorado District Court. On March 15, 1998, the Court entered an Order in which it
certified a class action in the matter. On June 10, 1998, Mariner filed a Motion to Dismiss all claims and Motion for Summary Judgment Precluding Recovery of Medicaid Funds and these motions
were partially granted by the Court on October 30, 1998. Plaintiffs filed a writ with the Colorado Supreme Court and an appeal with the Colorado Court of Appeals. The Supreme Court writ has
been denied, the Court of Appeals matter has been briefed and Oral Argument was set for January 18, 2000. In accordance with the Chapter 11 Proceedings and more particularly, Section 362
of the Bankruptcy Code, this matter was stayed on January 18, 2000. However, Mariner did agree to limited relief from the stay in order to allow for certain parts of the appeal to continue. On
January 4, 2001, the Court of Appeals reversed the District Court's decision. Mariner is currently considering whether to pursue a request for rehearing and/or appeal to the Colorado Supreme
Court. The Company intends to vigorously contest the remaining allegations of class status.

F-45

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9.    Income Taxes

The components of the net deferred tax asset at December 31, 2000 are approximately as follows (in thousands):

Deferred tax assets:Bad debts

$
325Amounts related to property and equipment


1,681Payroll and benefits


271Unfavorable lease obligations and other liabilities


11,304NOL carryforwards


11,878Total deferred tax assets


25,459Less valuation allowance


(25,459
)Net deferred tax asset

$



The
Facilities have established a full valuation allowance, which completely offsets all net deferred tax assets generated from the Facilities' net losses because its
future realizability is uncertain. The net change in the valuation allowance was an increase of approximately $2,715,000 at December 31, 2000.

The
provision for income taxes varies from the amount determined by applying the Federal statutory rate to pre-tax loss for the year ended December 31, 2000 as a
result of the following:

Federal statutory income tax rate

(34.0
)%Increase (decrease) in taxes resulting from:State and local taxes, net of federal tax benefits

(4.7
)Permanent book/tax differences, primarily resulting from goodwill amortization

2.1Change in valuation allowance

36.6Effective tax rate


%


10.  Concentrations of Credit Risk

Financial instruments that potentially subject the Facilities to concentration of credit risk consist principally of trade receivables. There have been, and the
Facilities expect that there will continue to be, a number of proposals to limit reimbursement allowable to skilled nursing facilities. Should the related government agencies suspend or significantly
reduce contributions to the Medicare or Medicaid programs, the Facilities' ability to collect its receivables would be adversely impacted.

Management
believes that the remaining receivable balances from various payors, including individuals involved in diverse activities, subject to differing economic conditions, do not
represent a concentration of credit risk to the Facilities. Management continually monitors and adjusts its allowance for doubtful accounts associated with its receivables.

11.  Fair Value of Financial Instruments

The Facilities financial instruments include notes payable. Fair values for fixed rate debt instruments were estimated based on the present value of cash flows
that would be paid on the note over the remaining note term using the Facilities' current incremental borrowing rate rather than the stated interest rate on the notes. The fair values of the financial
instruments approximate their carrying values.

F-46

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CERTAIN MARINER POST-ACUTE NETWORK FACILITIES  (OPERATED BY SUBSIDIARIES OF MARINER POST-ACUTE NETWORK)  (DEBTOR IN POSSESSION AS OF JANUARY 20, 2000)        SCHEDULE IIVALUATION AND
QUALIFYING ACCOUNTS(Dollars in thousands)Year ended December 31, 2000

|Description                      |  | Balance at
beginning of
year |       | Charged
(Credited) to
operations |   | Write-offs/
Recoveries |  | Other |        | Balance at
end of year
|-------------------------------- |  | ---------------------------- | ----- | -------------------------------- | - | ---------------------- |  | ----- | ------ | ----------------------
|Year ended December 31, 2000:    |  |                              |       |                                  |   |                        |  |       |        |                       
|Allowance for doubtful accounts: |  | $                            | 1,534 |                                  | $ | 1,758                  |  | $     | (1,458 | )                     
|                                 |  |                              |       |                                  |   |                        |  |       |        |                       
|                                 |  | $                            | 1,534 |                                  | $ | 1,758                  |  | $     | (1,458 | )                     
|                                 |  |                              |       |                                  |   |                        |  |       |        |                       

F-47

---

SIGNATURES

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

| |  | FIVE STAR QUALITY CARE, INC.
| |  | ----------------------------
| |  | By:                         

Dated:
March 27, 2003

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, or by their attorney-in-fact, in
the capacities and on the dates indicated.

|Signatures                                      |  | Title                                 |  | Date          
|----------------------------------------------- |  | ------------------------------------- |  | --------------
|                                                |  |                                       |  |               
|/s/EVRETT W. BENTONEvrett W. Benton             |  | President and Chief Executive Officer |  | March 27, 2003
|/s/BRUCE J. MACKEY JR.Bruce J. Mackey Jr.       |  | Chief Financial Officer and Treasurer |  | March 27, 2003
|/s/BARRY M. PORTNOYBarry M. Portnoy             |  | Managing Director                     |  | March 27, 2003
|/s/GERARD M. MARTINGerard M. Martin             |  | Managing Director                     |  | March 27, 2003
|/s/BRUCE M. GANSBruce M. Gans                   |  | Director                              |  | March 27, 2003
|/s/JOHN L. HARRINGTONJohn L. Harrington         |  | Director                              |  | March 27, 2003
|/s/ARTHUR G. KOUMANTZELISArthur G. Koumantzelis |  | Director                              |  | March 27, 2003

---

CERTIFICATIONS

I,
Evrett W. Benton, certify that:

|Date: March 27, 2003 |  | /s/EVRETT W. BENTONEvrett W. Benton
President and Chief Executive Officer
|-------------------- |  | -------------------------------------------------------------------------

---

I,
Bruce J. Mackey Jr., certify that:

|Date: March 27, 2003 |  | /s/BRUCE J. MACKEY JR.Bruce J. Mackey Jr.
Treasurer and Chief Financial Officer
|-------------------- |  | -------------------------------------------------------------------------------

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