##### Table of Contents









UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20459




---

FORM 10-Q



---



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| | x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30,
2001

OR



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| | o | TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the Transition period from
 to
 .

Commission file number 1-83938

ASSISTED LIVING CONCEPTS, INC.

(Exact name of registrant as specified in its
charter)


|                                                                        |  |                                               
|----------------------------------------------------------------------- |  | ----------------------------------------------
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Nevada
	(State or other jurisdiction of
	incorporation or organization) |  | 93-1148702
	(IRS Employer
	Identification No.)

11835 NE Glenn Widing Drive, Building
E

Portland, Oregon 97220


(Address of principle executive
offices)


(503) 252-6233

(Registrants telephone number, including
area code)


Indicate by check mark whether Registrant
(1) has filed all reports 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
Registrants was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days.  Yes 
x  No 
o

The Registrant had 17,120,745 shares of common
stock, $.01 par value, outstanding at August 6, 2001.









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TABLE OF CONTENTS



|                                |                                                                                                     |  |  |  |  |  |  | 
|------------------------------- | --------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION
|                                | Item 1.Financial Statements                                                                        
|                                | Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations       
|                                | Item 3.Quantitative and Qualitative Disclosure Regarding Market Risk and Risk Sensitive Instruments
|PART II -- OTHER INFORMATION   
|                                | Item 1.Legal Proceedings                                                                           
|                                | Item 6.Exhibits and Reports on Form 8-K                                                            
|SIGNATURES                     
|EXHIBIT 4.1                    
|EXHIBIT 10.1                   
|Exhibit 12                     



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.

FORM 10-Q

June 30, 2001


INDEX

|                                |  |                                                                                            |    |      |    | 
|------------------------------- |  | ------------------------------------------------------------------------------------------ | -- | ---- | -- | 
|                                |  |                                                                                            |    | Page
|                                |  |                                                                                            |    |     
|                               
|                               
|                               
|                               
|PART I  FINANCIAL
	INFORMATION
|Item  1.                        |  | Financial Statements                                                                       |    |      |    | 
|                               
|                               
|                               
|                               
|                                |  | Consolidated Balance Sheets, December 31, 2000
	and June 30, 2001                          |    |      | 1  | 
|                               
|                               
|                               
|                               
|                                |  | Consolidated Statements of Operations, Three and
	Six Months Ended June 30, 2000 and 2001  |    |      | 2  | 
|                               
|                               
|                               
|                               
|                                |  | Consolidated Statements of Cash Flows, Six Months
	Ended June 30, 2000 and 2001            |    |      | 3  | 
|                               
|                               
|                               
|                               
|                                |  | Notes to Consolidated Financial Statements                                                 |    |      | 4  | 
|                               
|                               
|                               
|                               
|Item  2.                        |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations     |    |      | 10 | 
|                               
|                               
|                               
|                               
|                                |  | Risk Factors                                                                               |    |      | 18 | 
|                               
|                               
|                               
|                               
|Item  3.                        |  | Quantitative and Qualitative Disclosures About
	Market Risk and Risk Sensitive Instruments |    |      | 25 | 
|                               
|                               
|                               
|                               
|PART II  OTHER
	INFORMATION   
|                               
|                               
|                               
|                               
|Item  1.                        |  | Legal Proceedings                                                                          |    |      | 26 | 
|                               
|                               
|                               
|                               
|Item  6.                        |  | Exhibits and Reports on Form 8-K                                                           |    |      | 26 | 
|                               
|                               
|                               
|                               
|Signatures                      |  |                                                                                            | 27 |     
|                               
|                               
|                               
|                               
|Exhibit Index                   |  |                                                                                            | 28 |     

i



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##### Table of Contents






PART I  FINANCIAL
INFORMATION




Item 1. Financial
Statements

ASSISTED LIVING CONCEPTS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


ASSETS

|                                                                     |                                                                                                                         |                                            |         |             |         |  |         |         |         | 
|-------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ----------- | ------- |  | ------- | ------- | ------- | 
|                                                                     |                                                                                                                         | December 31,                               |         | June 30,   
|                                                                     |                                                                                                                         | 2000                                       |         | 2001       
|                                                                     |                                                                                                                         |                                            |         |            
|                                                                     |                                                                                                                         |                                            |         | (unaudited)
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Current assets:                                                      |                                                                                                                         |                                            |         |             |         |  |         |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Cash, cash equivalents and cash held for tenant
	security deposits                                                      |                                            | $       | 9,889       |         |  | $       | 5,679   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Accounts receivable, net of allowance for
	doubtful accounts of $1,399 and $353, respectively                           |                                            |         | 2,448       |         |  |         | 2,207   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Prepaid insurance                                                                                                       |                                            |         | 1,765       |         |  |         | 1,094   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Prepaid expenses                                                                                                        |                                            |         | 1,042       |         |  |         | 485     |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Other current assets                                                                                                    |                                            |         | 2,729       |         |  |         | 3,121   |        
|                                                                     |                                                                                                                         |                                            |         |             |         |  |         |        
|                                                                     |                                                                                                                         | Total current assets                       |         |             | 17,873  |  |         |         | 12,586  | 
|                                                                     |                                                                                                                         |                                            |         |             |         |  |         |        
|Restricted cash                                                      |                                                                                                                         |                                            | 6,466   |             |         |  | 8,474   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Property and equipment, net                                          |                                                                                                                         |                                            | 298,744 |             |         |  | 294,669 |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Goodwill, net                                                        |                                                                                                                         |                                            | 4,785   |             |         |  | 4,639   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Other assets, net                                                    |                                                                                                                         |                                            | 8,590   |             |         |  | 11,030  |        
|                                                                     |                                                                                                                         |                                            |         |             |         |  |         |        
|                                                                     |                                                                                                                         | Total assets                               |         | $           | 336,458 |  |         | $       | 331,398 | 
|                                                                     |                                                                                                                         |                                            |         |             |         |  |         |        
|LIABILITIES AND SHAREHOLDERS EQUITY                                
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Current liabilities:                                                 |                                                                                                                         |                                            |         |             |         |  |         |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Accounts payable                                                                                                        |                                            | $       | 2,708       |         |  | $       | 1,525   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Accrued real estate taxes                                                                                               |                                            |         | 4,835       |         |  |         | 3,969   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Accrued interest expense                                                                                                |                                            |         | 1,937       |         |  |         | 2,013   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Accrued payroll expense                                                                                                 |                                            |         | 4,017       |         |  |         | 4,379   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Other accrued expenses                                                                                                  |                                            |         | 4,855       |         |  |         | 3,775   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Bridge loan payable                                                                                                     |                                            |         | 4,000       |         |  |         |        |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Litigation settlement payable                                                                                           |                                            |         | 7,765       |         |  |         | 3,256   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Tenant security deposits                                                                                                |                                            |         | 2,484       |         |  |         | 2,453   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Insurance premium obligation                                                                                            |                                            |         |            |         |  |         | 1,228   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Other current liabilities                                                                                               |                                            |         | 565         |         |  |         | 421     |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Current portion of long-term debt and capital
	lease obligation                                                         |                                            |         | 1,690       |         |  |         | 11,827  |        
|                                                                     |                                                                                                                         |                                            |         |             |         |  |         |        
|                                                                     |                                                                                                                         | Total current liabilities                  |         |             | 34,856  |  |         |         | 34,846  | 
|                                                                     |                                                                                                                         |                                            |         |             |         |  |         |        
|Other liabilities                                                    |                                                                                                                         |                                            | 6,059   |             |         |  | 5,751   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Long-term debt and capital lease obligation, net
	of current portion |                                                                                                                         |                                            | 70,407  |             |         |  | 74,474  |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Convertible subordinated debentures                                  |                                                                                                                         |                                            | 161,250 |             |         |  | 161,250 |        
|                                                                     |                                                                                                                         |                                            |         |             |         |  |         |        
|                                                                     |                                                                                                                         | Total liabilities                          |         |             | 272,572 |  |         |         | 276,321 | 
|                                                                     |                                                                                                                         |                                            |         |             |         |  |         |        
|Commitments and contingencies                                        |                                                                                                                         |                                            |         |             |         |  |         |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Shareholders equity:                                                |                                                                                                                         |                                            |         |             |         |  |         |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Preferred Stock, $.01 par value; 1,000,000 shares
	authorized; none issued or outstanding                               |                                            |         |            |         |  |         |        |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Common Stock, $.01 par value; 80,000,000 shares
	authorized; issued and outstanding 17,120,745 shares in 2000 and
	2001 |                                            |         | 171         |         |  |         | 171     |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Additional paid-in capital                                                                                              |                                            |         | 144,212     |         |  |         | 144,212 |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Accumulated deficit                                                                                                     |                                            |         | (80,497     | )       |  |         | (89,306 | )      
|                                                                     |                                                                                                                         |                                            |         |             |         |  |         |        
|                                                                     |                                                                                                                         | Total shareholders equity                 |         |             | 63,886  |  |         |         | 55,077  | 
|                                                                     |                                                                                                                         |                                            |         |             |         |  |         |        
|                                                                     |                                                                                                                         | Total liabilities and shareholders equity |         | $           | 336,458 |  |         | $       | 331,398 | 
|                                                                     |                                                                                                                         |                                            |         |             |         |  |         |        

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

1



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


(Unaudited)


|                                                              |                                            |                          |        |                  |        |      |        |        |        |   |        |        |        |   |        |        |        |  
|------------------------------------------------------------- | ------------------------------------------ | ------------------------ | ------ | ---------------- | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                                              |                                            |                          |        |                 
|                                                              |                                            | Three Months Ended       |        | Six Months Ended
|                                                              |                                            | June 30,                 |        | June 30,        
|                                                              |                                            |                          |        |                 
|                                                              |                                            | 2000                     |        | 2001             |        | 2000 |        | 2001  
|                                                              |                                            |                          |        |                  |        |      |        |       
|Revenue                                                       |                                            | $                        | 34,146 |                  |        | $    | 37,371 |        |        | $ | 67,278 |        |        | $ | 74,248 |       
|                                                             
|                                                             
|                                                             
|                                                             
|Operating expenses:                                           |                                            |                          |        |                  |        |      |        |        |        |   |        |        |        |   |        |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Residence operating expenses               |                          |        | 22,305           |        |      |        | 24,891 |        |   |        | 44,987 |        |   |        | 50,449 |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Corporate general and administrative       |                          |        | 5,066            |        |      |        | 4,440  |        |   |        | 9,114  |        |   |        | 8,708  |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Building rentals                           |                          |        | 3,685            |        |      |        | 4,151  |        |   |        | 7,330  |        |   |        | 8,322  |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Building rentals to related party          |                          |        | 317              |        |      |        |       |        |   |        | 634    |        |   |        |       |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Depreciation and amortization              |                          |        | 2,339            |        |      |        | 2,571  |        |   |        | 4,751  |        |   |        | 5,123  |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Debt and lease restructure costs           |                          |        |                 |        |      |        | 1,063  |        |   |        |       |        |   |        | 1,366  |       
|                                                              |                                            |                          |        |                  |        |      |        |        |        |   |        |        |        |   |        |       
|                                                              |                                            | Total operating expenses |        |                  | 33,712 |      |        |        | 37,116 |   |        |        | 66,816 |   |        |        | 73,968 |  
|                                                              |                                            |                          |        |                  |        |      |        |        |        |   |        |        |        |   |        |       
|Operating income                                              |                                            |                          | 434    |                  |        |      | 255    |        |        |   | 462    |        |        |   | 280    |       
|                                                              |                                            |                          |        |                  |        |      |        |        |        |   |        |        |        |   |        |       
|Other income (expense):                                       |                                            |                          |        |                  |        |      |        |        |        |   |        |        |        |   |        |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Interest expense                           |                          |        | (4,090           | )      |      |        | (4,905 | )      |   |        | (8,118 | )      |   |        | (9,307 | )     
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Interest income                            |                          |        | 180              |        |      |        | 139    |        |   |        | 389    |        |   |        | 287    |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Gain (loss) on sale and disposal of assets |                          |        | 13               |        |      |        | (52    | )      |   |        | 13     |        |   |        | (88    | )     
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Loss on sale of marketable securities      |                          |        | (368             | )      |      |        |       |        |   |        | (368   | )      |   |        |       |       
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Other income (expense), net                |                          |        | 10               |        |      |        | (48    | )      |   |        | 10     |        |   |        | 19     |       
|                                                              |                                            |                          |        |                  |        |      |        |        |        |   |        |        |        |   |        |       
|                                                              |                                            | Total other expense      |        |                  | (4,255 | )    |        |        | (4,866 | ) |        |        | (8,074 | ) |        |        | (9,089 | )
|                                                              |                                            |                          |        |                  |        |      |        |        |        |   |        |        |        |   |        |       
|Net loss                                                      |                                            | $                        | (3,821 | )                |        | $    | (4,611 | )      |        | $ | (7,612 | )      |        | $ | (8,809 | )     
|                                                              |                                            |                          |        |                  |        |      |        |        |        |   |        |        |        |   |        |       
|Basic and diluted net loss per common share                   |                                            | $                        | (0.22  | )                |        | $    | (0.27  | )      |        | $ | (0.44  | )      |        | $ | (0.51  | )     
|                                                              |                                            |                          |        |                  |        |      |        |        |        |   |        |        |        |   |        |       
|Basic and diluted weighted average common shares
	outstanding |                                            |                          | 17,121 |                  |        |      | 17,121 |        |        |   | 17,121 |        |        |   | 17,121 |       
|                                                              |                                            |                          |        |                  |        |      |        |        |        |   |        |        |        |   |        |       

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

2



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


(Unaudited)


|                                                                                        |                                                                                                                                  |                                                      |        |       |        |   |        |        |        |  
|--------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ------ | ----- | ------ | - | ------ | ------ | ------ | -
|                                                                                        |                                                                                                                                  |                                                     
|                                                                                        |                                                                                                                                  | Six Months Ended                                    
|                                                                                        |                                                                                                                                  | June 30,                                            
|                                                                                        |                                                                                                                                  |                                                     
|                                                                                        |                                                                                                                                  | 2000                                                 |        | 2001 
|                                                                                        |                                                                                                                                  |                                                      |        |      
|Operating Activities:                                                                   |                                                                                                                                  |                                                      |        |       |        |   |        |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Net loss                                                                                |                                                                                                                                  | $                                                    | (7,612 | )     |        | $ | (8,809 | )     
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Adjustment to reconcile net loss to net cash used
	in operating activities:             |                                                                                                                                  |                                                      |        |       |        |   |        |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Depreciation and amortization                                                                                                    |                                                      |        | 4,751 |        |   |        | 5,123  |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Provision for doubtful accounts                                                                                                  |                                                      |        | 291   |        |   |        | (21    | )     
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Loss on sale of marketable securities                                                                                            |                                                      |        | 368   |        |   |        |       |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Compensation expense on issuance of consultant
	options                                                                          |                                                      |        | 8     |        |   |        |       |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Loss on disposal of assets                                                                                                       |                                                      |        | (13   | )      |   |        | 88     |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Changes in assets and liabilities:                                                      |                                                                                                                                  |                                                      |        |       |        |   |        |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Accounts receivable                                                                                                              |                                                      |        | (267  | )      |   |        | 262    |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Prepaid expenses                                                                                                                 |                                                      |        | (95   | )      |   |        | 1,228  |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Other current assets                                                                                                             |                                                      |        | 387   |        |   |        | (444   | )     
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Other assets                                                                                                                     |                                                      |        | 889   |        |   |        | 694    |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Accounts payable                                                                                                                 |                                                      |        | (462  | )      |   |        | (1,183 | )     
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Accrued expenses                                                                                                                 |                                                      |        | (915  | )      |   |        | (1,211 | )     
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Insurance premium obligation                                                                                                     |                                                      |        |      |        |   |        | 1,228  |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Other current liabilities                                                                                                        |                                                      |        | 240   |        |   |        | (4,981 | )     
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Other liabilities                                                                                                                |                                                      |        | 18    |        |   |        | (308   | )     
|                                                                                        |                                                                                                                                  |                                                      |        |       |        |   |        |       
|                                                                                        |                                                                                                                                  | Net cash used in operating activities                |        |       | (2,412 | ) |        |        | (8,334 | )
|                                                                                        |                                                                                                                                  |                                                      |        |       |        |   |        |       
|Investing Activities:                                                                   |                                                                                                                                  |                                                      |        |       |        |   |        |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Restricted cash                                                                         |                                                                                                                                  |                                                      | (941   | )     |        |   | (2,008 | )     
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Sale of investment securities                                                           |                                                                                                                                  |                                                      | 1,632  |       |        |   |       |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Purchases of property and equipment                                                     |                                                                                                                                  |                                                      | (1,679 | )     |        |   | (938   | )     
|                                                                                        |                                                                                                                                  |                                                      |        |       |        |   |        |       
|                                                                                        |                                                                                                                                  | Net cash used in investing activities                |        |       | (988   | ) |        |        | (2,946 | )
|                                                                                        |                                                                                                                                  |                                                      |        |       |        |   |        |       
|Financing Activities:                                                                   |                                                                                                                                  |                                                      |        |       |        |   |        |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Proceeds from long-term debt                                                            |                                                                                                                                  |                                                      |       |       |        |   | 14,777 |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Payments on long-term debt and capital lease
	obligation                                |                                                                                                                                  |                                                      | (328   | )     |        |   | (573   | )     
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Payments on bridge loan payable                                                         |                                                                                                                                  |                                                      |       |       |        |   | (4,000 | )     
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Debt issuance costs                                                                     |                                                                                                                                  |                                                      |       |       |        |   | (3,134 | )     
|                                                                                        |                                                                                                                                  |                                                      |        |       |        |   |        |       
|                                                                                        |                                                                                                                                  | Net cash (used in) provided by financing
	activities |        |       | (328   | ) |        |        | 7,070  |  
|                                                                                        |                                                                                                                                  |                                                      |        |       |        |   |        |       
|Net decrease in cash, cash equivalents and cash
	held for tenant security deposits      |                                                                                                                                  |                                                      | (3,728 | )     |        |   | (4,210 | )     
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Cash, cash equivalents and cash held for tenant
	security deposits, beginning of period |                                                                                                                                  |                                                      | 7,606  |       |        |   | 9,889  |       
|                                                                                        |                                                                                                                                  |                                                      |        |       |        |   |        |       
|Cash, cash equivalents and cash held for tenant
	security deposits, end of period       |                                                                                                                                  | $                                                    | 3,878  |       |        | $ | 5,679  |       
|                                                                                        |                                                                                                                                  |                                                      |        |       |        |   |        |       
|Supplemental disclosure of cash flow
	information:                                      |                                                                                                                                  |                                                      |        |       |        |   |        |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Cash payments for interest                                                                                                       |                                                      | $      | 7,500 |        |   | $      | 7,819  |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Decrease in construction payable and property and
	equipment                                                                     |                                                      | $      | (794  | )      |   | $      |       |       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Reclassification of other current and other
	liabilities to current and non-current long-term debt and
	capital lease obligation |                                                      | $      |      |        |   | $      | 550    |       

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

3



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(Unaudited)


1. The Company

Assisted Living Concepts, Inc., a Nevada
Corporation, (the Company) owns, leases and operates
assisted living residences which provide housing to older
persons who need help with the activities of daily living, such
as bathing and dressing. The Company provides personal care and
support services and makes available routine health care
services, as permitted by applicable law, designed to meet the
needs of its residents.

Basis of Presentation and
Principles of Consolidation

These consolidated financial statements have been
prepared without being audited, as allowed by the rules and
regulations of the Securities and Exchange Commission. The
accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries that
own, lease and operate assisted living residences. All
significant intercompany accounts and transactions have been
eliminated in consolidation. Certain information and footnote
disclosures that are normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or
omitted as allowed by rules and regulations of the Securities
and Exchange Commission. These consolidated financial statements
should be read in conjunction with the audited consolidated
financial statements and notes included in the Companys
Annual Report on Form 10-K for the year ended
December 31, 2000.

The financial information included in these
financial statements contain all adjustments (which consist of
normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of results for the
quarterly periods. The results of operations for the three and
six month periods ended June 30, 2001 do not necessarily
indicate the results that are expected for the full year.

Reclassifications

Certain reclassifications have been made in the
prior periods financial statements to conform to the
current periods presentation. Such reclassifications had
no effect on previously reported net loss or total
shareholders equity.

2. Debt and Lease Restructure
Costs

Debt and lease restructure costs include legal,
financial advisory and other professional fees related to the
potential restructuring of the Companys under-performing
loans and leases, and convertible debentures maturing in 2002
and 2003. Since the Company does not expect to raise any new
capital as a result of such restructuring, these amounts are
expensed as incurred in the accompanying financial statements.
Costs were $1.1 million and $1.4 million for the three
and six months ended June 30, 2001, respectively.

4



---



##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(Unaudited)


3. Cash, Cash Equivalents and Cash Held
for Tenant Security Deposits

The Companys cash, cash equivalents and
cash held for tenant security deposits consist of the following
(in thousands):

|                                       |                                                                          |              |       |          |  |   |       |       | 
|-------------------------------------- | ------------------------------------------------------------------------ | ------------ | ----- | -------- |  | - | ----- | ----- | 
|                                       |                                                                          | December 31, |       | June 30,
|                                       |                                                                          | 2000         |       | 2001    
|                                       |                                                                          |              |       |         
|Cash                                   |                                                                          | $            | 2,863 |          |  | $ | 2,097 |      
|                                      
|                                      
|                                      
|                                      
|Cash equivalents                       |                                                                          |              | 4,581 |          |  |   | 1,169 |      
|                                      
|                                      
|                                      
|                                      
|Cash held for tenant security deposits |                                                                          |              | 2,445 |          |  |   | 2,413 |      
|                                       |                                                                          |              |       |          |  |   |       |      
|                                       | Total cash, cash equivalents and cash held for
	tenant security deposits |              | $     | 9,889    |  |   | $     | 5,679 | 
|                                       |                                                                          |              |       |          |  |   |       |      

Cash held for tenant security deposits is a
general unrestricted asset of the Company.

4. Restricted Cash

Restricted cash consists of the following (in
thousands):

|                                                                                 |                       |              |       |          |  |   |       |       | 
|-------------------------------------------------------------------------------- | --------------------- | ------------ | ----- | -------- |  | - | ----- | ----- | 
|                                                                                 |                       | December 31, |       | June 30,
|                                                                                 |                       | 2000         |       | 2001    
|                                                                                 |                       |              |       |         
|Cash held for loan agreements with U.S. Bank
	National Association (U.S. Bank) |                       | $            | 4,354 |          |  | $ | 4,418 |      
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Cash held in accordance with lease agreements                                    |                       |              | 1,001 |          |  |   | 1,022 |      
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Workers compensation deposits                                                   |                       |              | 1,072 |          |  |   | 2,994 |      
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|State regulated restricted tenant security
	deposits                             |                       |              | 39    |          |  |   | 40    |      
|                                                                                 |                       |              |       |          |  |   |       |      
|                                                                                 | Total restricted cash |              | $     | 6,466    |  |   | $     | 8,474 | 
|                                                                                 |                       |              |       |          |  |   |       |      

5. Property and Equipment

The Companys property and equipment, stated
at cost, consists of the following (in thousands):

|                              |                              |              |         |          |  |   |         |         | 
|----------------------------- | ---------------------------- | ------------ | ------- | -------- |  | - | ------- | ------- | 
|                              |                              | December 31, |         | June 30,
|                              |                              | 2000         |         | 2001    
|                              |                              |              |         |         
|Land and improvements         |                              | $            | 21,378  |          |  | $ | 21,383  |        
|                             
|                             
|                             
|                             
|Buildings and improvements    |                              |              | 287,178 |          |  |   | 287,251 |        
|                             
|                             
|                             
|                             
|Equipment                     |                              |              | 7,149   |          |  |   | 7,385   |        
|                             
|                             
|                             
|                             
|Furniture                     |                              |              | 8,638   |          |  |   | 8,679   |        
|                              |                              |              |         |          |  |   |         |        
|                              | Total property and equipment |              |         | 324,343  |  |   |         | 324,698 | 
|                             
|                             
|                             
|                             
|Less accumulated depreciation |                              |              | 25,599  |          |  |   | 30,029  |        
|                              |                              |              |         |          |  |   |         |        
|Property and equipment, net   |                              | $            | 298,744 |          |  | $ | 294,669 |        
|                              |                              |              |         |          |  |   |         |        

6. Insurance Premium
Obligation

During the six months ended June 30, 2001,
the Company entered into several short-term agreements to
finance its annual insurance premiums. These are nine month
agreements and bear interest at annual fixed rates of
approximately 8% to 9%.

5



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(Unaudited)


7. Long-Term Debt

Equipment Financing

Effective February 22, 2001, the Company
entered into a loan agreement to finance technology equipment in
the amount of $550,000. The agreement required an initial
payment of $150,000 (which has been paid) and monthly payments
of $25,000 (principal and interest) until maturity on
August 31, 2002. This loan bears an interest rate of 12.5%
and is secured by the related technology equipment which the
Company purchased during the year ended December 31, 2000.

Heller Financing

On March 2, 2001, the Company entered into
an agreement with Heller Healthcare Finance, Inc.
(Heller) for a line of credit facility up to $45.0
million. This line was scheduled to mature on August 31,
2002 and would have been secured by up to 32 properties.

As of June 27, 2001, the Company amended its
line of credit facility with Heller, reducing the aggregate line
of credit available from $45.0 million to
$20.0 million. This amended line bears an interest rate of
3.85% over the three-month LIBOR rate floating monthly and
requires monthly interest-only payments until maturity. The
amended line is secured by 26 properties. The maturity date for
the amended line is September 28, 2001; accordingly, the
outstanding balance is included in current portion of long-term
debt in the accompanying financial statements. If the Company or
any of the borrower subsidiaries is not subject to
Chapter 11 of the U.S. Bankruptcy Code before such date,
the borrower subsidiaries may extend the maturity date to the
earlier of May 31, 2002, or the earliest date on which the
Company or any of the borrower subsidiaries is subject to such a
petition. Fees incurred to date, including commitment fees,
funding fees, closing fees and professional fees associated with
the establishment of this line of credit and amendment were
$2.9 million. The balance outstanding on this line is $10.1
million at June 30, 2001 ($12.2 million at
August 6, 2001).

As amended, the facility may be used to pay trade
payables, certain professional fees relating to its debt and
lease restructuring, closing costs and other anticipated costs,
and to fund an interest reserve and tenant deposit account. As
amended, the line of credit facility may no longer be used to
fund interest payments on the Companys convertible
debentures, to repurchase leased facilities or debentures, or to
fund future payments in connection with the Companys class
action litigation settlement. While the line remains
outstanding, the Company has agreed that it will not sell or
grant mortgages on all but one of its remaining unencumbered
properties, unless the net proceeds are used to repurchase the
Companys convertible debentures or otherwise reduce its
indebtedness (if approved by Heller).

The line of credit is guaranteed by the Company;
however, as amended, the filing of a petition under
Chapter 11 of the U.S. Bankruptcy Code by the Company no
longer triggers an event of default under the loan agreement.

Housing and Urban Development
(HUD) Insured Financing

On June 14, 2001, the Company entered into
two loan agreements for $1.8 million and $2.7 million with
Red Mortgage Capital, Inc. (Red Mortgage) for
long-term HUD insured financing. Each loan is secured by a
property in Texas, each loan matures on July 1, 2036 and
together require monthly principal and interest payments of
$31,000. Each of these loans bears a fixed annual interest rate
of 7.40%. Of the $4.5 million in proceeds,
$4.0 million was used to pay off bridge financing provided
by Red Mortgage, $200,000 was used for loan closing costs,
$190,000 was used to pay down the Heller line of credit and the
remaining proceeds were used to fund escrow accounts.

6



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(Unaudited)


On July 19, 2001, the Company entered into a
$3.0 million loan agreement with Red Mortgage for long-term
HUD insured financing. This loan is secured by one property in
Texas, matures on July 1, 2036 and requires monthly
principal and interest payments of $20,000. This loan bears a
fixed annual interest rate of 7.55%. $2.8 million of the
proceeds were used to pay down the Heller line of credit and the
remaining proceeds were used for loan closing fees and to fund
escrow accounts.

U.S. Bank Loan Amendment

On March 12, 2001, in exchange for a waiver
of U.S. Banks right to declare an event of default for the
Companys failure to comply with certain financial
covenants as of December 31, 2000 and March 31, 2001,
and for the modification of certain financial covenants, the
Company agreed to maintain minimum cash balances of
$11.0 million at the end of each fiscal quarter, except for
the fiscal quarter ending June 30, 2001 which has a
required minimum balance of $8.0 million. The amendment
also requires the Company to deposit $500,000 in cash collateral
with U.S. Bank in the event certain regulatory actions are
commenced with respect to the properties securing its
obligations to U.S. Bank. U.S. Bank is required to
release such deposits upon satisfactory resolution of the
regulatory action. As of the date of this filing, no such
additional deposits have been required. Failure to comply with
any covenant constitutes an event of default, which will allow
U.S. Bank (at its discretion) to declare any amounts outstanding
under the loan documents to be due and payable.

In May, 2001, the Company received a waiver of
U.S. Banks right to declare an event of default for the
Companys failure to meet the March 31, 2001 cash
balance requirements set forth in the March 12, 2001 U.S.
Bank loan amendment.

Additionally, in August, 2001, the Company
received a waiver of U.S. Banks right to declare an event
of default for the Companys failure to meet the
June 30, 2001 cash balance requirements and other financial
ratios set forth in the amended U.S. Bank loan agreement. There
can be no assurance that the Company will be able to meet these
requirements as of the end of future quarters or that U.S. Bank
will grant waivers of any such future failure to meet these
requirements.

Many of the Companys debt instruments and
leases contain cross-default provisions pursuant to
which a default under one obligation can cause a default under
one or more other obligations. Accordingly, if enforced, the
Company could experience a material adverse effect on its
financial condition.

8. Litigation

Arbitration of Insurance Coverage
Dispute

In September, 2000, the Company reached an
agreement to settle the class action litigation relating to the
restatement of its consolidated financial statements for the
years ended December 31, 1996 and 1997 and the first three
fiscal quarters of 1998. This agreement received final court
approval on November 30, 2000 and the Company was dismissed
from the litigation with prejudice. Although the Company has
been dismissed from the litigation with prejudice, an
outstanding dispute regarding coverage exists with the
Companys corporate liability insurance carriers. The
Company and the insurance carriers agreed to resolve this
dispute through binding arbitration. To the extent that the
carriers are successful, they have agreed that their recovery is
not to exceed $4.0 million. The carriers further agreed
that payment of any such amount awarded or agreed to will not be
due in any event until 90 days after the Company has
satisfied its obligations to the plaintiffs in the class action,
with any such amount to be subordinated to new or refinancing of
existing obligations. The Company believes it has strong
defenses regarding this dispute and consequently has not
recorded a liability in relation to this matter.

Although the Company believes it has strong
defenses regarding its dispute with the insurance carriers, the
Company cannot predict the outcome of this arbitration and
currently is unable to evaluate the likelihood

7



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(Unaudited)


of success or the range of possible loss.
However, if such arbitration were determined adversely to the
Company, such a determination could have a material adverse
effect on its financial condition, results of operations, cash
flow and liquidity.

Other Litigation

In addition to the matter referred to above, the
Company is involved in various lawsuits and claims arising in
the normal course of business. In the aggregate, settlement of
such suits and claims should not have a material adverse effect
on the Companys financial condition, results of
operations, cash flow and liquidity.

9. Liquidity

The Company will have to pay all outstanding
balances under the Heller line of credit maturing on
September 28, 2001 (which the borrower subsidiaries may
extend, if the Company or any borrower subsidiaries is not
subject to Chapter 11 of the U.S. Bankruptcy Code before
such date, to the earlier of May 31, 2002 or the date on
which the Company or any of the borrower subsidiaries is subject
to Chapter 11) and $161.3 million in principal amount
of convertible debentures maturing in November 2002 and May
2003. The Company does not have sufficient liquidity to pay
these amounts as they mature and is currently exploring various
refinancing and restructuring alternatives. The Company has 38
unencumbered residences, 37 of which are subject to negative
covenants not to encumber them unless the net proceeds are used
to repurchase the Companys convertible debentures or
otherwise reduce its indebtedness (if approved by Heller). If
the Company makes its final payment on the litigation payable on
October 23, 2001, the Company will have 8 additional
unencumbered residences, none of which will be subject to
negative covenants.

The Company has retained a financial advisor to
explore possible restructuring options with respect to its
convertible debentures. The Companys financial advisors
and the financial advisors of an unofficial committee (the
Committee) of the holders of 64% in principal amount
of the Companys two series of convertible debentures
(collectively, the Debentures) worked together from
March, 2001 to July, 2001, negotiating restructuring options
with respect to the Debentures. On July 2, 2001, the
Company announced that the Committee had not accepted a proposal
concerning a restructuring of the Debentures that the Company
made to the Committees advisors on April 12, 2001,
nor had the Committee reached a consensus on any counteroffer. A
confidentiality agreement and agreement to restrict trading of
securities, dated May 24, 2001 (the Confidentiality
Agreement), between the Company and the individual
Committee members, expired June 30, 2001. The Company had
entered into the Confidentiality Agreement to facilitate
negotiations with the Debenture holders concerning a restructure.

The Company has continued its negotiations with
certain members of the original Committee. The Company believes
that such negotiations will lead to a consensual restructuring
of the Debentures which will result in a significant reduction
in principal amount of the Debentures and a substantial
dilution, or elimination of, the Companys existing common
stock ownership. The Company is also in negotiations with
lenders and lessors of certain of the Companys loans and
leases associated with under-performing properties. If the
Company reaches an agreement with the Debenture holders, it is
anticipated that the restructuring will be implemented through a
prenegotiated plan of reorganization under
Chapter 11 of the United States Bankruptcy Code through
which certain under-performing leases may be rejected and
certain under-performing properties subject to mortgages may be
conveyed in full satisfaction of the indebtedness due. However,
no agreement is currently in place and there can be no assurance
that the Company will reach an agreement with the Debenture
holders, lenders and lessors on a consensual restructuring of
these obligations.

If the Company is unable to implement a
prenegotiated plan, it will likely seek protection under
Chapter 11 of the United States Bankruptcy Code. If it does
so, no event of default will be triggered under the Heller line
of credit, as amended.

8



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(Unaudited)


In either event, the Company expects to incur
substantial costs for financial advisory, legal, accounting and
lender fees that are currently estimated to exceed
$6.0 million.

10. Subsequent Events

HUD
Insured Financing

On July 19, 2001, the Company borrowed
$3.0 million under a loan agreement with Red Mortgage for
long-term HUD insured financing (Note 7).

Amendment of Shareholder Rights Agreement

On July 26, 2001, the Company modified and
amended its Rights Agreement by and between it and American
Stock Transfer and Trust Company, dated June 12, 1997, as
previously modified and amended on November 8, 2000 (the
Rights Agreement), by changing the expiration date
from June 12, 2007 to July 26, 2001. As a result of
this action, the preferred share purchase rights granted under
the Rights Agreement also expired on July 26, 2001.

9



---



##### Table of Contents








|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
	of Financial Condition and Results of Operations

References in this section to ALC,
the Company, us or we refer
to Assisted Living Concepts, Inc. and its wholly-owned
subsidiaries.

Overview

We operate, own and lease free-standing assisted
living residences. These residences are primarily located in
small middle-market rural and suburban communities with a
population typically ranging from 10,000 to 40,000. We provide
personal care and support services, and make available routine
nursing services (as permitted by applicable law) designed to
meet the personal and health care needs of our residents. As of
June 30, 2001, we had operations in 16 states.

We experienced significant and rapid growth
between 1994 and 1998, primarily through the development of
assisted living residences and, to a lesser extent, through the
acquisition of assisted living residences, opening our last
twenty residences in 1999. At the closing of our initial public
offering in November 1994, we had an operating base of five
leased residences (137 units) located in Oregon. As of
June 30, 2001, we operated 185 residences (7,149
units), of which we owned 115 residences (4,515 units) and
leased 70 residences (2,634 units).

We derive our revenues primarily from resident
fees for room, board and care. Resident fees typically are paid
monthly by residents, their families, state Medicaid agencies or
other third parties. Resident fees include revenue derived from
a multi-tiered rate structure, which varies based on the level
of care provided. Resident fees are recognized as revenues when
services are provided. Our operating expenses include:



| |   |                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | residence operating expenses, such as staff
	payroll, food, property taxes, utilities, insurance and other
	direct residence operating expenses;                    
|
| |  | general and administrative expenses consisting of
	regional management and corporate support functions such as
	legal, accounting and other administrative expenses;
|
| |  | building rentals;                                                                                                                                                   
|
| |  | depreciation and amortization; and                                                                                                                                  
|
| |  | debt and lease restructure costs.                                                                                                                                   

We anticipate that the majority of our revenues
will continue to come from private pay sources. However, we
believe that by having located residences in states with
favorable regulatory and reimbursement climates, we should have
a stable source of residents eligible for Medicaid reimbursement
to the extent that private pay residents are not available and,
in addition, provide our private pay residents with alternative
sources of income when their private funds are depleted and they
become Medicaid eligible.

Although we manage the mix of private paying
tenants and Medicaid paying tenants residing in our facilities,
any significant increase in our Medicaid population could have
an adverse effect on our financial position, results of
operations or cash flows, particularly if states operating these
programs continue to limit, or more aggressively seek limits on,
reimbursement rates. See Risk Factors  We
Depend on Reimbursement by Third-Party Payors.

10



---



##### Table of Contents



Results of Operations

The following table sets forth, for the periods
presented, results of operations (in millions), operating
expenses as a percentage of revenue, the number of total
residences and units operated, average occupancy and rental
rates and the sources of our revenue. The portion of revenues
received from state Medicaid agencies are labeled as
Medicaid state paid portion while the portion of our
revenues that a Medicaid-eligible resident must pay out of his
or her own resources is labeled Medicaid resident paid
portion.

|                                                        |                                            |                                   |       |                   |       |           |       |          |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |       |       |  
|------------------------------------------------------- | ------------------------------------------ | --------------------------------- | ----- | ----------------- | ----- | --------- | ----- | -------- | ----- | ---- | ---- | ---- | --- |  | ----- | ------ | ---- |  | ----- | ----- | ----- | - | ----- | ----- | ----- | -
|                                                        |                                            |                                   |       |                  
|                                                        |                                            | Three Months Ended June 30,       |       | Three Months     
|                                                        |                                            |                                   |       | Ended            
|                                                        |                                            |                                   |       | Percentage        |       | June 30, 
|                                                        |                                            |                                   |       | Increase/         |       | Increase/ |       |         
|                                                        |                                            | 2000                              |       | 2001              |       | Decrease  |       | Decrease |       | 2000 |      | 2001
|                                                        |                                            |                                   |       |                   |       |           |       |          |       |      |      |     
|                                                        |                                            |                                   |       |                  
|                                                        |                                            | (in millions, except percentages) |       | (as percentage of
|                                                        |                                            |                                   |       | revenue)         
|                                                       
|                                                       
|                                                       
|                                                       
|Revenue                                                 |                                            | $                                 | 34.1  |                   |       | $         | 37.4  |          |       | $    | 3.3  |      |     |  | 9.7   | %      |      |  | 100.0 | %     |       |   | 100.0 | %    
|                                                       
|                                                       
|                                                       
|                                                       
|Operating expenses:                                     |                                            |                                   |       |                   |       |           |       |          |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Residence operating expenses               |                                   |       | 22.3              |       |           |       | 24.9     |       |      |      | 2.6  |     |  |       | 11.7   |      |  |       | 65.4  |       |   |       | 66.6  |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Corporate general and administrative       |                                   |       | 5.1               |       |           |       | 4.4      |       |      |      | (0.7 | )   |  |       | (13.7  | )    |  |       | 15.0  |       |   |       | 11.8  |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Building rentals                           |                                   |       | 4.0               |       |           |       | 4.1      |       |      |      | 0.1  |     |  |       | 3.0    |      |  |       | 11.7  |       |   |       | 11.2  |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Depreciation and amortization              |                                   |       | 2.3               |       |           |       | 2.6      |       |      |      | 0.3  |     |  |       | 13.0   |      |  |       | 6.7   |       |   |       | 7.0   |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Debt and lease restructure costs           |                                   |       |                  |       |           |       | 1.1      |       |      |      | 1.1  |     |  |       | 100.0  |      |  |       |      |       |   |       | 2.9   |      
|                                                        |                                            |                                   |       |                   |       |           |       |          |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |      
|                                                        |                                            | Total operating expenses          |       |                   | 33.7  |           |       |          | 37.1  |      |      |      | 3.4 |  |       |        | 10.1 |  |       |       | 98.8  |   |       |       | 99.5  |  
|                                                        |                                            |                                   |       |                   |       |           |       |          |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |      
|Operating income                                        |                                            |                                   | 0.4   |                   |       |           | 0.3   |          |       |      | (0.1 | )    |     |  | 0.3   |        |      |  | 1.2   |       |       |   | 0.5   |      
|                                                        |                                            |                                   |       |                   |       |           |       |          |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |      
|Other income (expense):                                 |                                            |                                   |       |                   |       |           |       |          |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Interest expense                           |                                   |       | (4.1              | )     |           |       | (4.9     | )     |      |      | (0.8 | )   |  |       | (19.5  | )    |  |       | (12.0 | )     |   |       | (13.1 | )    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Interest income                            |                                   |       | 0.2               |       |           |       | 0.1      |       |      |      | (0.1 | )   |  |       | 0.4    |      |  |       | 0.6   |       |   |       | 0.3   |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Gain (loss) on sale and disposal of assets |                                   |       |                  |       |           |       | (0.1     | )     |      |      | (0.1 | )   |  |       | (100.0 | )    |  |       |      |       |   |       | (0.3  | )    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Loss on sale of marketable securities      |                                   |       | (0.4              | )     |           |       |         |       |      |      | 0.4  |     |  |       | 100.0  |      |  |       | (1.2  | )     |   |       |      |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Other income (expense), net                |                                   |       | .1                |       |           |       |         |       |      |      | (0.1 | )   |  |       | (100.0 | )    |  |       | (1.2  | )     |   |       |      |      
|                                                        |                                            |                                   |       |                   |       |           |       |          |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |      
|                                                        |                                            | Total other expense               |       |                   | (4.3  | )         |       |          | (4.9  | )    |      |      | 0.6 |  |       |        | 14.0 |  |       |       | (12.6 | ) |       |       | (13.1 | )
|                                                        |                                            |                                   |       |                   |       |           |       |          |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |      
|Net loss                                                |                                            | $                                 | (3.8  | )                 |       | $         | (4.6  | )        |       | $    | (0.8 | )    |     |  | (20.5 | )%     |      |  | (11.4 | )%    |       |   | (12.6 | )%   
|                                                        |                                            |                                   |       |                   |       |           |       |          |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |      
|Other Data:                                             |                                            |                                   |       |                   |       |           |       |          |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|Residences operated (end of period)                     |                                            |                                   | 185   |                   |       |           | 185   |          |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|Units operated (end of period)                          |                                            |                                   | 7,148 |                   |       |           | 7,149 |          |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|Average occupancy rate (based on occupied units)        |                                            |                                   | 79.8  | %                 |       |           | 83.9  | %        |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|End of period occupancy rate (based on occupied
	units) |                                            |                                   | 82.2  | %                 |       |           | 84.2  | %        |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|Average monthly rental rate                             |                                            | $                                 | 1,965 |                   |       | $         | 2,056 |          |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|Sources of revenue:                                     |                                            |                                   |       |                   |       |           |       |          |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Medicaid state paid portion                |                                   |       | 10.6              | %     |           |       | 12.7     | %     |      |      |      |     |  |       |        |      |  |       |       |       |   |       |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Medicaid resident paid portion             |                                   |       | 5.9               |       |           |       | 6.6      |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Private resident paid portion              |                                   |       | 83.5              |       |           |       | 80.7     |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |       |      
|                                                        |                                            |                                   |       |                   |       |           |       |          |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |      
|                                                        |                                            | Total                             |       |                   | 100.0 | %         |       |          | 100.0 | %    |      |      |     |  |       |        |      |  |       |       |       |   |       |       |       |  
|                                                        |                                            |                                   |       |                   |       |           |       |          |       |      |      |      |     |  |       |        |      |  |       |       |       |   |       |      

Three months ended June 30, 2001
compared to three months ended June 30, 2000:

We incurred a net loss of $4.6 million, or
$0.27 per basic and diluted common share, on revenue of
$37.4 million for the three months ended June 30, 2001
(the June 2001 Quarter) as compared to a net loss of
$3.8 million or $0.22 per basic and diluted common share,
on revenues of $34.1 million for the three months ended
June 30, 2000 (the June 2000 Quarter).

Revenues.Revenues
were $37.4 million for the June 2001 Quarter as compared to
$34.1 million for the June 2000 Quarter, a net increase of
$3.3 million. The increase in revenue was attributable to a
combination of an increase in average occupancy to 83.9% and
average monthly rental rate to $2,056 for the June 2001 Quarter
as compared to average occupancy of 79.8% and average monthly
rental rate of $1,965 for June 2000 Quarter.

Residence Operating Expenses.Residence operating expenses were
$24.9 million for the June 2001 Quarter as compared to
$22.3 million for the June 2000 Quarter, a net increase of
$2.6 million.

11



---



##### Table of Contents



The principal elements of the increase in
operating expenses include:



| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | $2.2 million related to an increase in
	payroll costs as a result of increases in occupancy, wages and
	benefits;       
|
| |  | $300,000 related to a 13% increase in utility
	costs;                                                                   
|
| |  | $400,000 related to an increase in kitchen
	expense as a result of increases in occupancy, and                          
|
| |  | $500,000 related to increases in professional and
	property liability insurance premiums and deductibles or
	retentions.

These increases were offset by the following
decreases:



| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | a decrease of $600,000 in property tax expense as
	a result of changes in assessments and related estimates; and
|
| |  | a decrease of $300,000 in bad debt expense due to
	more timely collection of aged accounts receivables.         

Corporate, General and Administrative.Corporate, general and administrative
expenses were $4.4 million for the June 2001 Quarter
compared to $5.1 million for the June 2000 Quarter,
decrease of approximately $700,000.

The principal elements of the decrease include:



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | $500,000 related to legal fees associated with
	the class action litigation incurred during the June 2000
	Quarter;
|
| |  | $50,000 decrease in travel and entertainment
	expenses; and                                                        
|
| |  | $150,000 decrease in payroll and related expenses.                                                                 

Building Rentals.Building rentals were
$4.2 million for the June 2001 Quarter as compared to
$4.0 million for the June 2000 Quarter, an increase of
$200,000. The increase was due to annual rent escalators.

Depreciation and Amortization.Depreciation and amortization expense
was $2.6 million in the June 2001 Quarter as compared to
$2.3 million in the June 2000 Quarter. The increase is due
to depreciation expense related to the equipment acquired to
support our communications infrastructure.

Debt and Lease Restructure Costs.Debt and lease restructure costs were
$1.1 million for the June 2001 Quarter. These are
professional fees, including legal and financial advisory fees,
related to the potential restructuring of our under-performing
loans and leases, and our convertible debentures maturing in
2002 and 2003. Since we do not expect to raise any new capital
as a result of such restructuring, these amounts are expensed as
incurred in the accompanying financial statements.

Interest Expense.Interest expense was $4.9 million
for the June 2001 Quarter compared to $4.1 million for the
June 2000 Quarter, an increase of $800,000. The increase was
related to interest incurred on our $4.0 million bridge
loan entered into in November 2000, interest costs associated
with our draws of $10.3 million on the Heller line of
credit and the related amortization of financing fees associated
with this line which was entered into in March 2001.

Interest Income.Interest income was $139,000 for the
June 2001 Quarter compared to $180,000 for the June 2000
Quarter, a decrease of $41,000. This decrease is the result of
decreased balances in cash and cash equivalents.

Net Loss.As a
result of the above, we incurred a net loss of $4.6 million
or $0.27 per basic and diluted common share for the June 2001
Quarter, compared to a net loss of $3.8 million, or $0.22
per basic and diluted common share, for the June 2000 Quarter.

12



---



##### Table of Contents



Six months ended June 30, 2001
compared to six months ended June 30, 2000:

The following table sets forth, for the periods
presented, results of operations (in millions), operating
expenses as a percentage of revenue, the number of total
residences and units operated, average occupancy and rental
rates and the sources of our revenue. The portion of revenues
received from state Medicaid agencies are labeled as
Medicaid state paid portion while the portion of our
revenues that a Medicaid-eligible resident must pay out of his
or her own resources is labeled Medicaid resident paid
portion.

|                                                        |                                            |                                   |       |                   |       |            |       |          |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |       |       |  
|------------------------------------------------------- | ------------------------------------------ | --------------------------------- | ----- | ----------------- | ----- | ---------- | ----- | -------- | ----- | ---------- | ---- | ---- | --- |  | ----- | ------ | ----- | - | ----- | ----- | ----- | - | ----- | ----- | ----- | -
|                                                        |                                            |                                   |       |                   |       |            |       |          |       |           
|                                                        |                                            |                                   |       |                   |       |            |       |          |       | Six Months
|                                                        |                                            |                                   |       | Ended            
|                                                        |                                            | Six Months Ended June 30,         |       | June 30,         
|                                                        |                                            |                                   |       |                  
|                                                        |                                            |                                   |       | Percentage        |       |           
|                                                        |                                            |                                   |       | Increase/         |       | Increase/  |       |         
|                                                        |                                            | 2000                              |       | 2001              |       | (Decrease) |       | Decrease |       | 2000       |      | 2001
|                                                        |                                            |                                   |       |                   |       |            |       |          |       |            |      |     
|                                                        |                                            |                                   |       |                  
|                                                        |                                            | (in millions, except percentages) |       | (as percentage of
|                                                        |                                            |                                   |       | revenue)         
|                                                       
|                                                       
|                                                       
|                                                       
|Revenue                                                 |                                            | $                                 | 67.3  |                   |       | $          | 74.2  |          |       | $          | 6.9  |      |     |  | 10.3  | %      |       |   | 100.0 | %     |       |   | 100.0 | %    
|                                                       
|                                                       
|                                                       
|                                                       
|Operating expenses:                                     |                                            |                                   |       |                   |       |            |       |          |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Residence operating expenses               |                                   |       | 45.0              |       |            |       | 50.4     |       |            |      | 5.4  |     |  |       | 12.0   |       |   |       | 66.9  |       |   |       | 67.9  |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Corporate general and administrative       |                                   |       | 9.1               |       |            |       | 8.7      |       |            |      | (0.4 | )   |  |       | (4.4   | )     |   |       | 13.5  |       |   |       | 11.7  |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Building rentals                           |                                   |       | 8.0               |       |            |       | 8.3      |       |            |      | 0.3  |     |  |       | 3.8    |       |   |       | 11.9  |       |   |       | 11.2  |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Depreciation and amortization              |                                   |       | 4.8               |       |            |       | 5.1      |       |            |      | 0.3  |     |  |       | 6.3    |       |   |       | 7.1   |       |   |       | 6.9   |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Debt and lease restructure costs           |                                   |       |                  |       |            |       | 1.4      |       |            |      | 1.4  |     |  |       | 100.0  |       |   |       |      |       |   |       | 1.9   |      
|                                                        |                                            |                                   |       |                   |       |            |       |          |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |      
|                                                        |                                            | Total operating expenses          |       |                   | 66.9  |            |       |          | 73.9  |            |      |      | 7.0 |  |       |        | 10.5  |   |       |       | 99.4  |   |       |       | 99.6  |  
|                                                        |                                            |                                   |       |                   |       |            |       |          |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |      
|Operating income                                        |                                            |                                   | 0.4   |                   |       |            | 0.3   |          |       |            | (0.1 | )    |     |  | (25.0 | )      |       |   | 0.6   |       |       |   | 0.4   |      
|                                                        |                                            |                                   |       |                   |       |            |       |          |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |      
|Other income (expense):                                 |                                            |                                   |       |                   |       |            |       |          |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Interest expense                           |                                   |       | (8.1              | )     |            |       | (9.3     | )     |            |      | (1.2 | )   |  |       | (14.8  | )     |   |       | (12.0 | )     |   |       | (12.5 | )    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Interest income                            |                                   |       | 0.4               |       |            |       | 0.3      |       |            |      | (0.1 | )   |  |       | (25.0  | )     |   |       | 0.6   |       |   |       | 0.4   |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Gain (loss) on sale and disposal of assets |                                   |       |                  |       |            |       | (0.1     | )     |            |      | (0.1 | )   |  |       | (100.0 | )     |   |       |      |       |   |       | (0.1  | )    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Loss on sale of marketable securities      |                                   |       | (0.4              | )     |            |       |         |       |            |      | 0.4  |     |  |       | 100.0  |       |   |       | (0.6  | )     |   |       |      |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Other income (expense), net                |                                   |       | 0.1               |       |            |       |         |       |            |      | (0.1 | )   |  |       | (100.0 | )     |   |       | (0.6  | )     |   |       |      |      
|                                                        |                                            |                                   |       |                   |       |            |       |          |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |      
|                                                        |                                            | Total other expense               |       |                   | (8.0  | )          |       |          | (9.1  | )          |      |      | 1.1 |  |       |        | (12.3 | ) |       |       | (12.0 | ) |       |       | (12.3 | )
|                                                        |                                            |                                   |       |                   |       |            |       |          |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |      
|Net loss                                                |                                            | $                                 | (7.6  | )                 |       | $          | (8.8  | )        |       | $          | (1.1 | )    |     |  | (14.3 | )%     |       |   | (11.4 | )%    |       |   | (11.9 | )%   
|                                                        |                                            |                                   |       |                   |       |            |       |          |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |      
|Other Data:                                             |                                            |                                   |       |                   |       |            |       |          |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|Residences operated (end of period)                     |                                            |                                   | 185   |                   |       |            | 185   |          |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|Units operated (end of period)                          |                                            |                                   | 7,148 |                   |       |            | 7,149 |          |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|Average occupancy rate (based on occupied units)        |                                            |                                   | 79.2  | %                 |       |            | 83.6  | %        |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|End of period occupancy rate (based on occupied
	units) |                                            |                                   | 82.2  | %                 |       |            | 84.2  | %        |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|Average monthly rental rate                             |                                            | $                                 | 1,959 |                   |       | $          | 2,048 |          |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|Sources of revenue:                                     |                                            |                                   |       |                   |       |            |       |          |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Medicaid state paid portion                |                                   |       | 10.8              | %     |            |       | 12.3     | %     |            |      |      |     |  |       |        |       |   |       |       |       |   |       |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Medicaid resident paid portion             |                                   |       | 6.1               |       |            |       | 6.8      |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |       |      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Private resident paid portion              |                                   |       | 83.1              |       |            |       | 80.7     |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |       |      
|                                                        |                                            |                                   |       |                   |       |            |       |          |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |      
|                                                        |                                            | Total                             |       |                   | 100.0 | %          |       |          | 100.0 | %          |      |      |     |  |       |        |       |   |       |       |       |   |       |       |       |  
|                                                        |                                            |                                   |       |                   |       |            |       |          |       |            |      |      |     |  |       |        |       |   |       |       |       |   |       |      

We incurred a net loss of $8.8 million, or
$0.51 per basic and diluted common share, on revenue of
$74.2 million for the six months ended June 30, 2001
(the June 2001 YTD Period) as compared to a net loss
of $7.6 million or $0.44 per basic and diluted common
share, on revenues of $67.3 million for the six months
ended June 30, 2000 (the June 2000 YTD Period).

Revenues.Revenues
were $74.2 million for the June 2001 YTD Period as compared
to $67.3 million for the June 2000 YTD Period, a net
increase of $6.9 million. The increase in revenue was
attributable to a combination of an increase in average
occupancy to 83.6% and average monthly rental rate to $2,048 for
the June 2001 YTD Period as compared to average occupancy of
79.2% and average monthly rental rate of $1,959 for June 2000
YTD Period.

Residence Operating Expenses.Residence operating expenses were
$50.4 million for the June 2001 YTD Period as compared to
$45.0 million for the June 2000 YTD Period, a net increase
of $5.4 million.

13



---



##### Table of Contents



The principal elements of the increase in
operating expenses include:



| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | $4.1 million related to an increase in
	payroll costs as a result of increases in occupancy, wages and
	benefits;       
|
| |  | $700,000 related to a 17% increase in utility
	costs;                                                                   
|
| |  | $150,000 related to increased hiring expenses;                                                                          
|
| |  | $500,000 related to an increase in kitchen
	expense as a result of increases in occupancy; and                          
|
| |  | $950,000 related to increases in professional and
	property liability insurance premiums and deductibles or
	retentions.

These increases were offset by the following
decreases:



| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | decrease of $700,000 in property tax expense as a
	result of changes in assessments and related estimates; and
|
| |  | decrease in bad debt of $300,000 due to more
	timely collection of aged receivables.                          

Corporate, General and Administrative.Corporate, general and administrative
expenses were $8.7 million for the June 2001 YTD Period
compared to $9.1 million for the June 2000 YTD Period,
decrease of approximately $400,000.

The principal elements of the decrease include:



| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | $350,000 of legal and accounting fees associated
	with the class action litigation incurred during the June 2000
	YTD Period;
|
| |  | $200,000 related to decrease in director and
	officer insurance premium for the 2001 renewal period; and                     
|
| |  | $150,000 related to decreased payroll expenses.                                                                              

The decrease was offset by increases in
corporate, general and administrative expense of:



| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | $130,000 as a result of implementation of
	communication infrastructure and decrease in dial-up related
	charges; and
|
| |  | $160,000 related to hiring and retention
	consulting.                                                                

Building Rentals.Building rentals were
$8.3 million for the June 2001 YTD Period as compared to
$8.0 million for the June 2000 YTD period, an increase of
$300,000. The increase was due to annual rent escalators and to
a retroactive rent increase of $145,000 paid to one lessor
during the March 2001 Quarter.

Depreciation and Amortization.Depreciation and amortization expense
was $5.1 million in the June 2001 YTD Period as compared to
$4.8 million in the June 2000 YTD Period, an increase of
$300,000. The increase is due to depreciation expense related to
the equipment acquired to support our communications
infrastructure.

Debt and Lease Restructure Costs.Debt and lease restructure costs were
$1.4 million for the June 2001 YTD Period. These are
professional fees, including legal and financial advisory fees,
related to the potential restructuring of our under-performing
loans and leases, and our convertible debentures maturing in
2002 and 2003. Since we do not expect to raise any new capital
as a result of such restructuring, these amounts are expensed as
incurred in the accompanying financial statements.

Interest Expense.Interest expense was $9.3 million
for the June 2001 YTD Period compared to $8.1 million for
the June 2000 YTD Period, an increase of $1.2 million. The
increase was related to interest incurred on our
$4.0 million bridge loan entered into in November 2000,
interest costs associated with our draws of $10.3 million
on the Heller line of credit and the related amortization of
financing fees associated with this line which was entered into
in March 2001.

Interest Income.Interest income was $287,000 for the
June 2001 YTD Period compared to $389,000 for the June 2000 YTD
Period, a decrease of $102,000. This decrease is the result of
decreased balances in cash and cash equivalents.

14



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##### Table of Contents



Net Loss.As a
result of the above, we incurred a net loss of $8.8 million
or $0.51 per basic and diluted common share for the June 2001
YTD Period, compared to a net loss of $7.6 million, or
$0.44 per basic and diluted common share, for the June 2000 YTD
Period.

Liquidity and Capital Resources

At June 30, 2001, we had a working capital
deficit of $22.3 million (including current portion of
litigation settlement payable of $3.3 million and Heller
line of credit of $10.1 million) and unrestricted cash,
cash equivalents and cash held for tenant security deposits of
$5.7 million.

Net cash used in operating activities was
$8.3 million during the six months ended June 30,
2001. The primary uses were reductions of $1.2 million in
accrued liabilities, $1.2 million in accounts payable and
$5.0 million in other current liabilities consisting
primarily of payments of $4.5 million on our class action
litigation settlement payable. These uses were offset by an
increase of $1.2 million in prepaid expenses.

Net cash used in investing activities was
$2.9 million during the six months ended June 30,
2001. The primary use was an increase of $2.0 million in
restricted cash related to workers compensation deposits
required by our insurance carrier. Funds will be withdrawn from
this account as 2001 workers compensation claims are
incurred and paid.

Net cash provided by financing activities was
$7.1 million during the six months ended June 30,
2001. We received proceeds of $4.5 million in connection
with long-term HUD insured financing secured by two Texas
properties and $10.3 million in draws on our Heller line of
credit during the six months ended June 30, 2001. Costs
associated with the closing of the HUD insured financings and
the establishment of the Heller line of credit were $200,000 and
$2.9 million, respectively. Of the $4.5 million in
proceeds we received from the HUD insured financing,
$4.0 million was used to pay off our $4.0 million
bridge loan payable, $200,000 was used for HUD insured loan
closing costs, $190,000 was used to pay down the Heller line of
credit and the remaining proceeds were used to fund escrow
accounts. Principal payments on long term debt and capital lease
obligations were $573,000 for the six months ended June 30,
2001.

On March 12, 2001, in exchange for a waiver
of U.S. Banks right to declare an event of default for our
failure to comply with certain financial covenants as of
December 31, 2000 and March 31, 2001, and for the
modification of certain financial covenants, we agreed to
maintain minimum cash balances of $11.0 million at the end
of each fiscal quarter, except for the fiscal quarter ending
June 30, 2001, which had a required minimum balance of
$8.0 million. The amendment also requires us to deposit
$500,000 in cash collateral with U.S. Bank in the event certain
regulatory actions are commenced with respect to the properties
securing our obligations to U.S. Bank. U.S. Bank is required to
release such deposits upon satisfactory resolution of the
regulatory action.

In May, 2001, we received a waiver of U.S.
Banks right to declare an event of default for our failure
to meet the March 31, 2001 cash balance requirements set
forth in the March 12, 2001 U.S. Bank loan amendment.

Additionally, in August, 2001, we received a
waiver of U.S. Banks right to declare an event of default
for our failure to meet the June 30, 2001 cash balance
requirements and other financial ratios set forth in the amended
U.S. Bank loan agreement. There can be no assurance that we will
be able to meet these requirements as of the end of future
quarters or that U.S. Bank will grant waivers of any such future
failure to meet these requirements.

Failure to comply with any covenant constitutes
an event of default, which will allow U.S. Bank (at its
discretion) to declare any amounts outstanding under the loan
documents to be due and payable. Certain of our leases and loan
agreements contain covenants and cross-default provisions such
that a default on one of those agreements could cause us to be
in default on one or more other agreements.

On March 2, 2001, we entered into an
agreement with Heller Healthcare Finance, Inc.
(Heller) for a line of credit facility up to
$45.0 million. This line was scheduled to mature on
August 31, 2002 and would have been secured by up to 32
properties.

15



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##### Table of Contents



As of June 27, 2001, we amended the line of
credit facility with Heller, reducing the aggregate line of
credit available from $45.0 million to $20.0 million.
This amended line bears an interest rate of 3.85% over the
three-month LIBOR rate floating monthly and requires monthly
interest-only payments until maturity. The amended line is
secured by 26 properties. The maturity date for the amended line
is September 28, 2001; accordingly, the outstanding balance
is included in current portion of long-term debt in the
accompanying financial statements. If the Company or any of our
borrower subsidiaries is not subject to Chapter 11 of the
U.S. Bankruptcy Code before such date, the borrower subsidiaries
may extend the maturity date to the earlier of May 31,
2002, or the earliest date on which the Company or any of our
borrower subsidiaries files such a petition. Fees incurred to
date, including commitment fees, funding fees, closing fees and
professional fees associated with the establishment of this line
of credit and amendment were $2.9 million. The balance
outstanding on this line is $10.1 million at June 30,
2001 ($12.2 million at August 6, 2001).

On June 14, 2001, we entered into two loan
agreements for $1.8 million and $2.7 million with Red
Mortgage Capital, Inc. (Red Mortgage) for long-term
HUD insured financing. Each loan is secured by a property in
Texas, each loan matures on July 1, 2036 and together
require monthly principal and interest payments of $31,000. Each
loan bears a fixed annual interest rate of 7.40%.

We made four payments of $2.3 million each
towards our class action litigation settlement on
October 23, 2000, January 23, 2001, April 23,
2001 and July 23, 2001, and on May 31, 2001 we made
our $4.7 million semi-annual interest payment on our
convertible subordinated debentures. We are obligated to pay the
remaining $1.0 million related to the litigation settlement
on October 23, 2001. Eight properties currently secure our
class action litigation settlement payable which will become
unencumbered upon final payment on October 23, 2001.
Additionally, our next $4.7 million semi-annual interest
payment on our convertible subordinated debentures is due on
November 1, 2001. If our corporate liability insurance
carriers were to prevail in the pending coverage dispute, now
subject to binding arbitration, we could also be required to pay
our insurance carriers up to $4.0 million in damages (see
Part II, Item 1 of this report).

Approximately $27.2 million of our
indebtedness was secured by letters of credit as of
June 30, 2001 which in some cases have termination dates
prior to the maturity of the underlying debt. As such letters of
credit expire, beginning in 2003, we will need to obtain
replacement letters of credit, post cash collateral or refinance
the underlying debt. There can be no assurance that we will be
able to procure replacement letters of credit from the same or
other lending institutions on terms that are acceptable to us.
In the event that we are unable to obtain a replacement letter
of credit or provide alternate collateral prior to the
expiration of any of these letters of credit, we would be in
default on the underlying debt.

We will have to pay all outstanding balances
under the Heller line of credit maturing on September 28,
2001 (which the borrower subsidiaries may extend if we or any
borrower subsidiary is not subject to Chapter 11 of the
U.S. Bankruptcy Code before such date to the earlier of
May 31, 2002 or the date on which we or any borrower
subsidiary is subject to Chapter 11) and
$161.3 million in principal amount of convertible
debentures maturing in November 2002 and May 2003. We do not
have sufficient liquidity to pay these amounts as they mature
and are currently exploring various refinancing and
restructuring alternatives. We have 38 unencumbered residences,
37 of which are subject to negative covenants not to encumber
them unless the net proceeds are used to repurchase our
convertible debentures or otherwise reduce our indebtedness (if
approved by Heller). If we make our final payment on the
litigation payable on October 23, 2001, we will have 8
additional unencumbered residences, none of which will be
subject to negative covenants.

We have retained a financial advisor to explore
possible restructuring options with respect to our convertible
debentures. Our financial advisors and the financial advisors of
an unofficial committee (the Committee) of the
holders of 64% in principal amount of the Companys two
series of convertible debentures (collectively, the
Debentures) have worked together from March, 2001 to
July, 2001, negotiating restructuring options with respect to
our Debentures. On July 2, 2001, we announced that the
Committee had not accepted a proposal concerning a restructuring
of the Debentures that we had made to the Committees
advisors on April 12, 2001, nor had the Committee reached a
consensus on any counteroffer. A confidentiality agreement and
agreement to restrict trading of securities, dated May 24,
2001 (the Confidentiality Agreement), between us and
the individual Committee members, expired June 30, 2001. We
had

16



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##### Table of Contents



entered into the Confidentiality Agreement to
facilitate negotiations with the Debenture holders concerning a
restructure.


We have continued our negotiations with certain
members of the original Committee. We believe that such
negotiations will lead to a consensual restructuring of the
Debentures which will result in a significant reduction in
principal amount of our Debentures and a substantial dilution,
or elimination of, our existing common stock ownership. We are
also in negotiations with lenders and lessors of certain of our
loans and leases associated with under-performing properties. If
we reach an agreement with the Debenture holders, it is
anticipated that the restructuring would be implemented through
a prenegotiated plan of reorganization under
Chapter 11 of the United States Bankruptcy Code through
which certain under-performing leases may be rejected and
certain properties subject to under-performing mortgages may be
conveyed in full satisfaction of the indebtedness due. However,
no agreement is currently in place and there can be no assurance
that we will reach an agreement with the Debenture holders,
lenders and lessors on a consensual restructuring of these
obligations.

If we are unable to implement a prenegotiated
plan, we will likely seek protection under Chapter 11 of
the United States Bankruptcy Code. If we do so, no event of
default will be triggered under the Heller line of credit, as
amended.

In either event, we expect to incur substantial
costs for financial advisory, legal, accounting and lender fees
that are currently estimated to exceed $6.0 million.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards
Board (FASB) issued FASB Statements Nos. 141 and 142
(FAS 141 and FAS 142), Business
Combinations and Goodwill and Other Intangible
Assets. FAS 141 replaces APB 16 and eliminates
pooling-of-interests accounting prospectively. It also provides
guidance on purchase accounting related to the recognition of
intangible assets and accounting for negative goodwill.
FAS 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Under
FAS 142, goodwill will be tested annually and whenever
events or circumstances occur indicating that goodwill might be
impaired. FAS 141 and FAS 142 are effective for all
business combinations initiated after June 30, 2001.

Upon adoption of FAS 142, amortization of
goodwill recorded for business combinations consummated prior to
July 1, 2001 will cease, and intangible assets acquired
prior to July 1, 2001 that do not meet the criteria for
recognition under FAS 141 will be reclassified to goodwill.
Companies are required to adopt FAS 142 for fiscal years
beginning after December 15, 2001. The Company will adopt
FAS 142 on January 1, 2002. In connection with the
adoption of FAS 142, the Company will be required to
perform a transitional goodwill impairment assessment. The
Company has not yet determined the impact these standards will
have on its results of operations and financial position.

17



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##### Table of Contents



RISK FACTORS

Set forth below are the risks that we believe are
material. This report on Form 10-Q, including the risks
discussed below, contains forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements
may be affected by risks and uncertainties, including without
limitation (i) our ability to control costs and improve
operating margins, (ii) the degree to which our future
operating results and financial condition will be affected by
litigation described in this report, (iii) the possibility
that we will experience a decrease in occupancy in our
residences, which would adversely affect residence revenues and
operating margins, (iv) our ability to operate our
residences in compliance with evolving regulatory requirements
(v) the degree to which our future operating results and
financial condition may be affected by a reduction in Medicaid
reimbursement rates, and (vi) the possibility that we will
not be able to restructure our $161.3 million of
convertible debentures due in November 2002 and May 2003, in
which event we are likely to seek protection under
Chapter 11 of the United States Bankruptcy Code. In light
of such risks and uncertainties, our actual results could differ
materially from such forward-looking statements. Except as may
be required by law, we do not undertake any obligation to
publicly release any revisions to any forward-looking statements
contained herein to reflect events and circumstances occurring
after the date hereof or to reflect the occurrence of
unanticipated events.

We Will Need to Restructure Our Obligations
and are Considering a Prenegotiated Plan of Reorganization under
Chapter 11 of the United States Bankruptcy Code.

We will have to pay all outstanding balances
under the Heller line of credit maturing on September 28,
2001 (which the borrower subsidiaries may extend, if we or any
of the borrower subsidiaries is not subject to Chapter 11
of the U.S. Bankruptcy Code before such date, to the earlier of
May 31, 2002 or the date on which we or any borrower
subsidiary is subject to Chapter 11) and
$161.3 million in principal amount of convertible
debentures maturing in November 2002 and May 2003. We do not
have sufficient liquidity to pay these amounts as they mature
and are currently exploring various refinancing and
restructuring alternatives. We have 38 unencumbered residences,
37 of which are subject to negative covenants not to encumber
them unless the net proceeds are used to repurchase our
convertible debentures or otherwise reduce our indebtedness (if
approved by Heller). If we make our final payment on the
litigation payable on October 23, 2001, we will have 8
additional unencumbered residences, none of which will be
subject to negative covenants.

We have retained a financial advisor to explore
possible restructuring options with respect to our convertible
debentures. Our financial advisors and the financial advisors of
an unofficial committee (the Committee) of the
holders of 64% in principal amount of our two series of
convertible debentures (collectively, the
Debentures) worked together from March, 2001 to
July, 2001, negotiating restructuring options with respect to
our Debentures. On July 2, 2001, we announced that the
Committee had not accepted the proposal concerning a
restructuring of the Debentures that we had made to the
Committees advisors on April 12, 2001, nor had the
Committee reached a consensus on any counteroffer. A
confidentiality agreement and agreement to restrict trading of
securities, dated May 24, 2001 (the Confidentiality
Agreement), between us and the individual Committee
members, expired June 30, 2001. We had entered into the
Confidentiality Agreement to facilitate negotiations with the
Debenture holders concerning a restructure.

We have continued our negotiations with certain
members of the original Committee. We believe that such
negotiations will lead to a consensual restructuring of the
Debentures which will result in a significant reduction in
principal amount of our Debentures and a substantial dilution,
or elimination of, our existing common stock ownership. We are
also in negotiations with lenders and lessors of certain of our
loans and leases associated with under-performing properties. If
we reach an agreement with the Debenture holders, it is
anticipated that the restructuring will be implemented through a
prenegotiated plan of reorganization under
Chapter 11 of the United States Bankruptcy Code through
which certain under-performing leases may be rejected and
certain properties subject to under-performing mortgages may be
conveyed in full satisfaction of the indebtedness due. However,
no agreement is currently in place and there can be no assurance
that we will reach an agreement with the convertible debenture
holders, lenders and lessors on a consensual restructuring of
these obligations.

18



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##### Table of Contents



If we are unable to implement a prenegotiated
plan, we will likely seek protection under Chapter 11 of
the United States Bankruptcy Code.

In either event, we expect to incur substantial
costs for financial advisory, legal, accounting and lender fees
that are currently estimated to exceed $6.0 million.

We Are Highly Leveraged; Our Loan and Lease
Agreements Contain Financial Covenants.

We are highly leveraged. We had total
indebtedness, including short term portion, of
$250.8 million as of June 30, 2001. In addition, we
had shareholders equity of $55.1 million as of
June 30, 2001. The degree to which we are leveraged could
have important consequences, including:



| |   |                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | making it more difficult to satisfy our debt or
	lease obligations;                                                                                                                                                                                                                       
|
| |  | increasing our vulnerability to general adverse
	economic and industry conditions;                                                                                                                                                                                                        
|
| |  | limiting our ability to obtain additional
	financing;                                                                                                                                                                                                                                     
|
| |  | requiring dedication of a substantial portion of
	our cash flow from operations to the payment of principal and
	interest on our debt and leases, thereby reducing the
	availability of such cash flow to fund working capital, capital
	expenditures or other general corporate purposes;
|
| |  | limiting our flexibility in planning for, or
	reacting to, changes in our business or industry; and                                                                                                                                                                                       
|
| |  | placing us at a competitive disadvantage to less
	leveraged competitors.                                                                                                                                                                                                                  

Several of our debt instruments and leases
contain financial covenants, including debt-to-cash flow and net
worth tests. On March 12, 2001, in exchange for a waiver of
U.S. Banks right to declare an event of default for our
failure to comply with certain financial covenants as of
December 31, 2000 and March 31, 2001, and for the
modification of certain financial covenants, we agreed to
maintain minimum cash balances of $11.0 million at the end
of each fiscal quarter, except for the fiscal quarter ending
June 30, 2001 which has a required minimum balance of
$8.0 million. The amendment also requires us to deposit
$500,000 in cash collateral with U.S. Bank in the event certain
regulatory actions are commenced with respect to the properties
securing our obligations to U.S. Bank. U.S. Bank is required to
release such deposits upon satisfactory resolution of the
regulatory action. As of the date of this filing, no such
additional deposits have been required.

In May, 2001, we received a waiver of U.S.
Banks right to declare an event of default for our failure
to meet the quarterly cash balance requirements set forth in the
March 12, 2001 U.S. Bank loan amendment.

Additionally, in August, 2001, we received a
waiver of U.S. Banks right to declare an event of default
for our failure to meet the quarterly cash balance requirements
and other financial covenants set forth in the amended U.S. Bank
loan agreements.

Failure to comply with any covenant constitutes
an event of default, which will allow U.S. Bank (at its
discretion) to declare any amounts outstanding under the loan
documents to be due and payable. We cannot provide assurance
that we will comply in the future with the modified financial
covenants included in the agreement, or with the financial
covenants set forth in our other debt agreements and leases. If
we fail to comply with one or more of the U.S. Bank covenants or
any other debt or lease covenants (after giving effect to any
applicable cure period), the lender or lessor may declare us in
default of the underlying obligation and exercise any available
remedies, which may include:



| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | in the case of debt, declaring the entire amount
	of the debt immediately due and payable;
|
| |  | foreclosing on any residences or other collateral
	securing the obligation; and           
|
| |  | in the case of a lease, terminating the lease and
	suing for damages.                     

Many of our debt instruments and leases contain
cross-default provisions pursuant to which a default
under one obligation can cause a default under one or more other
obligations. Accordingly, if enforced, we could experience a
material adverse effect on our financial condition.

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We Have Incurred Significant Increases in
Utility Costs Related to Increases in Utility Rates During the
Three and Six Months Ended June 30, 2001 and Are Advised
That We Should Anticipate Substantial Future
Increases.

During the three and six months ended
June 30, 2001 we experienced significant increases in
utility rates, and have been advised that we should anticipate
substantial increases in the future which could have a material
adverse effect on our financial condition, results of operations
or cash flows. We may attempt to add utility surcharges to our
rental rates; however, there can be no assurance that we will be
successful in doing so or that such surcharges will be high
enough to cover rate increases we may incur. See Part I,
Item 2 of this report.

Possible American Stock Exchange
Delisting.

Our common stock currently is listed on the AMEX
under the symbol ALF, our 5.625% Debentures
currently are listed on AMEX under the symbol
ALS5E03 and our 6.0% Debentures currently are listed
on AMEX under the symbol ALS6K02. AMEX has notified
us that we have fallen below certain of AMEXs continued
listing guidelines and that it is reviewing our listing
eligibility. In particular, we have incurred losses from
continued operations for each of our past six fiscal years
ending December 31, 2000, and last two fiscal quarters
ending June 30, 2001, and the price per share of our common
stock as quoted on AMEX recently has been below the minimum bid
price of $1.00 per share. We have provided AMEX with additional
information and have been involved in ongoing discussions with
AMEX in connection with its review of our listing eligibility.
While AMEX has decided not to delist us at this time, they will
continue to review our listing status.

If AMEX were to delist our securities, it is
possible that the securities would continue to trade on the
over-the-counter market. However, the extent of the public
market for the securities and the availability of quotations
would depend upon such factors as the aggregate market value of
each class of securities, the interest in maintaining a market
in such securities on the part of securities firms and other
factors. There can be no assurance that any public market for
our securities will exist in the event that our securities are
delisted.

We May Incur Significant Costs and Liability
as a Result of Litigation.

Arbitration of Insurance Coverage
Dispute

In September 2000, we reached an agreement to
settle the class action litigation relating to the restatement
of our financial statements for the years ended
December 31, 1996 and 1997 and the first three fiscal
quarters of 1998. This agreement received final court approval
on November 30, 2000, and we were dismissed from the
litigation with prejudice. Although we have been dismissed from
the litigation with prejudice, an outstanding dispute regarding
coverage exists with our corporate liability insurance carriers
and us. We have agreed with our insurance carriers to resolve
this dispute through binding arbitration. To the extent that the
carriers are successful, they have agreed that their recovery
will not exceed $4.0 million. The carriers further agreed
that payment of any such amount awarded will not be due in any
event until 90 days after we have satisfied our obligations
to the plaintiffs in the class action, with any such amount to
be subordinated to new or refinancing of existing obligations.
We believe that we have strong defenses regarding this dispute
and consequently have not recorded a liability in relation to
this matter.

Although we believe we have strong defenses
regarding our dispute with our insurance carriers, we cannot
predict the outcome of this arbitration and currently are unable
to evaluate the likelihood of success or the range of possible
loss. However, if such arbitration were determined adversely to
us, such a determination could have a material adverse effect on
our financial condition, results of operations, cash flow and
liquidity.

Other
Litigation

In addition to the matter referred above, we are
involved in various lawsuits and claims arising in the normal
course of business. In the aggregate, settlement of such suits
and claims should not have a material adverse effect on our
financial condition, results of operations, cash flow and
liquidity. However, if these

20



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matters were determined adversely to us, such a
determination could have a material adverse effect on our
financial condition, results of operations, cash flow and
liquidity.


We Are Subject to Significant Government
Regulation.

The operation of assisted living facilities and
the provision of health care services are subject to federal
laws, and state and local licensure, certification and
inspection laws that regulate, among other matters:



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | the number of licensed residences and units per
	residence;                
|
| |  | the provision of services;                                                 
|
| |  | equipment;                                                                 
|
| |  | staffing, including professional licensing and
	criminal background checks;
|
| |  | operating policies and procedures;                                         
|
| |  | fire prevention measures;                                                  
|
| |  | environmental matters;                                                     
|
| |  | resident characteristics;                                                  
|
| |  | physical design and compliance with building and
	safety codes;            
|
| |  | confidentiality of medical information;                                    
|
| |  | safe working conditions;                                                   
|
| |  | family leave; and                                                          
|
| |  | disposal of medical waste.                                                 

Our cost to comply with these regulations is
significant. In addition, it could adversely affect our
financial condition or results of operations if a court or
regulatory tribunal were to determine that we had failed to
comply with any of these laws or regulations. Because these laws
and regulations are amended from time to time we cannot predict
when and to what extent liability may arise. See
Confidentiality of Medical Information,
Restrictions Imposed by Laws Benefiting Disabled
Persons and Medical Waste.

In the ordinary course of our business, we
receive and have received notices of deficiencies for failure to
comply with various regulatory requirements. We review such
notices and, in most cases, we will agree with the regulator
upon the steps to be taken to bring the facility into compliance
with regulatory requirements. From time to time, we may dispute
the matter and sometimes will seek a hearing if we do not agree
with the regulator. In some cases or upon repeat violations, the
regulator may take one or more adverse actions against a
facility. These adverse actions can include:



| |   |                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the imposition of fines  we paid
	$16,000 and $8,800, respectively, in the aggregate for the year
	ended December 31, 2000 and the six months ended
	June 30, 2001;                                                                                                                         
|
| |  | temporary stop placement of admission of new
	residents, or imposition of other conditions to admission of new
	residents to the facility  four residences (two in
	Washington and two in Idaho) in 2000, two continued into 2001,
	one of which is still in stop placement as of this date;
|
| |  | termination of a facilitys Medicaid
	contract;                                                                                                                                                                                                                                              
|
| |  | conversion of license to provisional status; and                                                                                                                                                                                                                                             
|
| |  | suspension or revocation of a facilitys
	license, which in both 2000 and 2001 included one residence in
	Washington against which the state has commenced license
	revocation procedures. This matter is still pending at the time
	of this filing.                                         

To date, these adverse actions have resulted in
minimal fines and temporary suspension of admissions at certain
residences. Because regulations vary from one jurisdiction to
another and because determinations

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regarding whether to make a license provisional,
to suspend or revoke a license, or to impose a fine, are subject
to administrative discretion, it is difficult for us to predict
whether a particular remedy will be sought or obtained in any
given case. These types of regulatory enforcement actions may
adversely affect residence occupancy levels, revenues and costs
of operation. We cannot guarantee that federal, state, or local
governments will not impose additional restrictions on our
activities that could materially adversely affect us.


The operation of our residences is subject to
federal and state laws prohibiting fraud by health care
providers, including criminal provisions, which prohibit filing
false claims or making false statements to receive payment or
certification under Medicaid, or failing to refund overpayments
or improper payments. Violation of these provisions is a felony
punishable by up to five years imprisonment and/or $25,000
fines. Civil provisions prohibit the knowing filing of a false
claim or the knowing use of false statements to obtain payment.
The penalties for such a violation are fines of not less than
$5,000 or more than $10,000, plus treble damages, for each claim
filed.

State and federal governments are devoting
increasing attention and resources to anti-fraud initiatives
against health care providers. The Health Insurance Portability
and Accountability Act of 1996 (HIPAA) (see
Confidentiality of Medical Information) and the
Balanced Budget Act of 1997 expanded the penalties for health
care fraud, including broader provisions for the exclusion of
providers from the Medicaid program. We have established
policies and procedures that we believe are sufficient to ensure
that our facilities will operate in substantial compliance with
these anti-fraud and abuse requirements. While we believe that
our business practices are consistent with Medicaid criteria,
those criteria are often vague and subject to change and
interpretation. Aggressive anti-fraud actions, however, could
have an adverse effect on our financial position, results of
operations or cash flows.

Overbuilding in the Assisted Living
Industry.

We believe that many assisted living markets have
been overbuilt. Regulation and other barriers to entry into the
assisted living industry are not substantial. The effects of
such overbuilding include (a) significantly longer fill-up
periods, (b) pressure to lower or refrain from increasing
rates, (c) competition for workers in already tight labor
markets and (d) lower margins until excess units are
absorbed. We believe that each local market is different, and we
are and will continue to react in a variety of ways to the
specific competitive environment that exists in each market.
There can be no assurance that we will be able to compete
effectively in those markets where overbuilding exists, or that
future overbuilding in other markets where we operate residences
will not adversely affect our operations.

We May Not Be Able to Attract and Retain
Qualified Employees and Control Labor Costs.

We compete with other providers of long-term care
with respect to attracting and retaining qualified personnel. We
also depend upon the available labor pool of low-wage employees.
A shortage of qualified personnel may require us to enhance our
wage and benefits packages in order to compete. Some of the
states in which we operate impose licensing requirements on
individuals serving as program directors at assisted living
residences and others may adopt similar requirements. We cannot
guarantee that our labor costs will not increase, or that, if
they do increase, they can be matched by corresponding increases
in revenues.

Our Properties Are Geographically Concentrated
and We Depend on the Economies of the Specific Areas in Which We
Operate Our Properties.

We depend significantly on the economies of
Texas, Indiana, Oregon, Ohio and Washington. As of June 30,
2001, 21.6% of our properties were in Texas, 11.4% in Indiana,
10.3% in Oregon, 9.7% in Ohio and 8.6% in Washington. Adverse
changes in general economic factors affecting the respective
health care industries or laws and regulatory environment in any
of these states could have a material adverse effect on our
financial condition and results of operations.

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We Depend on Reimbursement by Third-Party
Payors.

Although revenues at a majority of our residences
come primarily from private payors, a portion of our revenues
depend upon reimbursements from third-party government payors,
including state Medicaid waiver programs. For the years ended
December 31, 1998, 1999 and 2000 and the six months ended
June 30, 2000 and June 30, 2001, direct payments
received from Medicaid funded programs accounted for
approximately 10.7%, 10.4%, 11.1%, 10.7% and 12.3% respectively,
of our revenue. Also, our tenant-paid portion of Medicaid
revenue accounted for approximately 5.8%, 5.9%, 6.2%, 6.0% and
6.8% respectively, of our revenue during the years ended
December 31, 1998, 1999 and 2000 and the six months ended
June 30, 2000 and June 30, 2001. We expect that state
Medicaid waiver programs will continue to constitute a
significant source of our revenue in the future. Furthermore, we
cannot guarantee that our proportionate percentage of revenue
received from Medicaid waiver programs will not increase. There
are continuing efforts by governmental and private third-party
payors to contain or reduce the costs of health care by lowering
reimbursement rates, increasing case management review of
services and negotiating reduced contract pricing. Also, there
has been, and our management expects that there will continue to
be, additional proposals attempting to reduce the federal and
some state budget deficits by limiting Medicaid reimbursement in
general. Adoption of any of these proposals could have a
material adverse effect on our business, financial condition,
results of operations and prospects. The State of Oregon
recently proposed a substantial reduction in Medicaid funding
which was ultimately not adopted.

We anticipate that revenues at a majority of our
residences will continue to come from private pay sources.
However, we believe that by having located residences in states
with favorable regulatory and reimbursement climates, we should
have a stable source of residents eligible for Medicaid
reimbursement to the extent that private pay residents are not
available and, in addition, provide our private pay residents
with alternative sources of income if their private funds are
depleted and they become Medicaid eligible.

The following table sets forth the sources of our
revenue for states where we participate in Medicaid programs.
The portion of revenues received from state Medicaid agencies
are labeled as Medicaid State Paid Portion while the
portion of our revenues that a Medicaid-eligible resident must
pay out of his or her own resources is labeled Medicaid
Tenant Paid Portion.

|           |  |                                |      |                                |  |          |      |         |  |         |      |         |  |  |      |   |  |  |      |   |  |  |      |  
|---------- |  | ------------------------------ | ---- | ------------------------------ |  | -------- | ---- | ------- |  | ------- | ---- | ------- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|           |  |                                |      |                               
|           |  | Six Months Ended June 30, 2000 |      | Six Months Ended June 30, 2001
|           |  |                                |      |                               
|           |  |                                |      |                                |  |          |      |        
|           |  | Medicaid                       |      | Private                        |  | Medicaid |      | Private
|           |  |                                |      |                                |  |          |      |        
|           |  | State                          |      | Tenant                         |  | Tenant   |      | State   |  | Tenant  |      | Tenant 
|           |  | Paid                           |      | Paid                           |  | Paid     |      | Paid    |  | Paid    |      | Paid   
|           |  | Portion                        |      | Portion                        |  | Portion  |      | Portion |  | Portion |      | Portion
|           |  |                                |      |                                |  |          |      |         |  |         |      |        
|Oregon     |  |                                | 27.8 | %                              |  |          | 15.4 | %       |  |         | 56.8 | %       |  |  | 28.7 | % |  |  | 16.6 | % |  |  | 54.7 | %
|          
|          
|          
|          
|Washington |  |                                | 26.6 | %                              |  |          | 13.9 | %       |  |         | 59.5 | %       |  |  | 30.0 | % |  |  | 17.1 | % |  |  | 52.9 | %
|          
|          
|          
|          
|Idaho      |  |                                | 5.0  | %                              |  |          | 1.5  | %       |  |         | 93.5 | %       |  |  | 15.8 | % |  |  | 10.7 | % |  |  | 73.5 | %
|          
|          
|          
|          
|Arizona    |  |                                | 9.6  | %                              |  |          | 6.7  | %       |  |         | 83.7 | %       |  |  | 14.6 | % |  |  | 12.5 | % |  |  | 72.9 | %
|          
|          
|          
|          
|New Jersey |  |                                | 15.1 | %                              |  |          | 7.6  | %       |  |         | 77.3 | %       |  |  | 19.5 | % |  |  | 6.3  | % |  |  | 74.2 | %
|          
|          
|          
|          
|Texas      |  |                                | 12.9 | %                              |  |          | 8.2  | %       |  |         | 78.9 | %       |  |  | 15.3 | % |  |  | 7.9  | % |  |  | 76.8 | %
|          
|          
|          
|          
|Nebraska   |  |                                | 8.0  | %                              |  |          | 4.1  | %       |  |         | 87.9 | %       |  |  | 9.1  | % |  |  | 5.5  | % |  |  | 85.4 | %

Although we manage the mix of private paying
tenants and Medicaid paying tenants residing in our facilities,
any significant increase in our Medicaid population could have
an adverse effect on our financial position, results of
operations or cash flows, particularly if the states operating
these programs continue to limit, or more aggressively seek
limits on, reimbursement rates.

Confidentiality of Medical
Information.

In 1996, the HIPAA law created comprehensive new
requirements regarding the confidentiality of medical
information that is or has been electronically transmitted or
maintained. Under the 1996 law, Congress required the Department
of Health and Human Services to promulgate regulations. The
requirements set forth in the regulations are extensive and may
require us to significantly change the way we maintain and
transmit healthcare information for our residents.

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Healthcare providers must take reasonable
steps to ensure that the provider, as well as the
providers business partners, comply with the laws
requirements. Therefore, we may be required to ensure that the
other entities with which we do business are also in compliance
with these laws. HIPAA also created certain consumer rights with
which we may be required to comply, including a right of notice
regarding our information practices, a right of access to
inspect and copy such individuals protected medical
information, and a right to receive an accounting of all
disclosures made by us, with certain exceptions. Significant
changes in these regulations have recently occurred but
enforcement is not expected until April, 2003. The costs to
comply with these final regulations could have an adverse effect
on our financial position, results of operations, cash flows and
prospects.

Restrictions Imposed by Laws Benefiting
Disabled Persons.

Under the Americans with Disabilities Act of
1990, all places of public accommodation are required to meet
certain federal requirements related to access and use by
disabled persons. A number of additional federal, state and
local laws exist that also may require us to modify existing
residences to allow disabled persons to access the residences.
We believe that our residences are either substantially in
compliance with present requirements or are exempt from them.
However, if required changes cost more than anticipated, or must
be made sooner than anticipated, we would incur additional
costs. Further legislation may impose additional burdens or
restrictions related to access by disabled persons, and the
costs of compliance could be substantial.

Medical Waste.

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

We May Be Liable for Losses Not Covered by or
in Excess of Our Insurance.

Providing services in the senior living industry
involves an inherent risk of liability. Participants in the
senior living and long-term care industry are subject to
lawsuits alleging negligence or related legal theories, many of
which may involve large claims and result in the incurrence of
significant legal defense costs. We currently maintain insurance
policies to cover such risks in amounts which we believe are in
keeping with industry practice. There can be no assurance that a
claim in excess of our insurance will not be asserted. A claim
against us not covered by, or in excess of, our insurance, could
have a material adverse affect on us.

Based on poor loss experience, insurers for the
long term care industry have become increasingly wary of
liability exposures. A number of insurance carriers have stopped
writing coverage to this market, and those remaining have
increased premiums and deductibles substantially. While nursing
homes have been the primary targets of these insurers, assisted
living companies, including us, have experienced premium and
deductible increases. During our claim year ended
December 31, 2000, our professional liability insurance
coverage included deductible levels of $100,000 per incident;
for the claim year ending December 31, 2001 this deductible has
been replaced with a retention level of $250,000, except in
Florida and Texas in which the retention level is $500,000. In
certain states, particularly Florida and Texas, many long-term
care providers are facing very difficult renewals. There can be
no assurance that we will be able to obtain liability insurance
in the future or that, if such insurance is available, it will
be available on terms acceptable to us.

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We Could Incur Significant Costs Related to
Environmental Remediation or Compliance.

We are subject to various federal, state and
local environmental laws, ordinances and regulations. Some of
these laws, ordinances and regulations hold a current or
previous owner, lessee or operator of real property liable for
the cost of removal or remediation of some hazardous or toxic
substances that could be located on, in or under such property.
These laws and regulations often impose liability whether or not
we knew of, or were responsible for, the presence of the
hazardous or toxic substances. The costs of any required
remediation or removal of these substances could be substantial.
Furthermore, there is no limit to our liability under such laws
and regulations. As a result, our liability could exceed our
propertys value and aggregate assets. The presence of
these substances or failure to remediate these substances
properly may also adversely affect our ability to sell or lease
the property, or to borrow using our property as collateral.

We may be liable under some laws and regulations
as an owner, operator or an entity that arranges for the
disposal of hazardous or toxic substances at a disposal site. In
that event, we may be liable for the costs of any required
remediation or removal of the hazardous or toxic substances at
the disposal site. In connection with the ownership or operation
of our properties, we could be liable for these costs, as well
as some other costs, including governmental fines and injuries
to persons or properties. As a result, any hazardous or toxic
substances which are present, with or without our knowledge, at
any property we hold or operate could have an adverse effect on
our business, financial condition or results of operations.






|        |                                                                                               
|------- | ----------------------------------------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosure
	Regarding Market Risk and Risk Sensitive
	Instruments

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

For fixed rate debt, changes in interest rates
generally affect the fair market value of the debt instrument,
but not our earnings or cash flows. We do not have an obligation
to prepay any of our fixed rate debt prior to maturity, and
therefore, interest rate risk and changes in the fair market
value of our fixed rate debt will not have an impact on our
earnings or cash flows until we decide, or are required, to
refinance such debt.

For variable rate debt, changes in interest rates
generally do not impact the fair market value of the debt
instrument, but do affect our future earnings and cash flows. We
had variable rate debt of $37.3 million outstanding at June
30, 2001 with a weighted average interest rate of 4.9%. Assuming
that our balance of variable rate debt remains constant at
$37.3 million, each one-percent increase in interest rates
would result in an annual increase in interest expense, and a
corresponding decrease in cash flows, of $373,000. Conversely,
each one-percent decrease in interest rates would result in an
annual decrease in interest expense, and a corresponding
increase in cash flows, of $373,000.

We are also exposed to market risks from
fluctuations in interest rates and the effects of those
fluctuations on market values of our cash equivalents and
short-term investments. These investments generally consist of
overnight investments that are not significantly exposed to
interest rate risk, except to the extent that changes in
interest rates will ultimately affect the amount of interest
income earned and cash flow from these investments.

We do not have any derivative financial
instruments in place to manage interest costs, but that does not
mean we will not use them as a means to manage interest rate
risk in the future.

We do not use foreign currency exchange forward
contracts or commodity contracts and do not have foreign
currency exposure.

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PART II  OTHER
INFORMATION




Item 1. Legal
Proceedings

Arbitration of Insurance Coverage
Dispute

In September 2000, we reached an agreement to
settle the class action litigation relating to the restatement
of our financial statements for the years ended
December 31, 1996 and 1997 and the first three fiscal
quarters of 1998. This agreement received final court approval
on November 30, 2000 and we were dismissed from the
litigation with prejudice. Although we have been dismissed from
the litigation with prejudice, an outstanding dispute regarding
coverage exists with our corporate liability insurance carriers
and us. We have agreed with our insurance carriers to resolve
this dispute through binding arbitration. To the extent that the
carriers are successful, they have agreed that their recovery
will not exceed $4.0 million. The carriers further agreed
that payment of any such amount awarded will not be due in any
event until 90 days after we have satisfied our obligations to
the plaintiffs in the class action, with any such amount to be
subordinated to new or refinancing of existing obligations. We
believe that we have strong defenses regarding this dispute and
consequently have not recorded a liability in relation to this
matter.

Although we believe we have strong defenses
regarding our dispute with the insurance carriers, we cannot
predict the outcome of this arbitration and currently are unable
to evaluate the likelihood of success or the range of possible
loss. However, if such arbitration were determined adversely to
us, such a determination could have a material adverse effect on
our financial condition, results of operations, cash flow and
liquidity.

Other Litigation

In addition to the matter referred to above, we
are involved in various lawsuits and claims arising in the
normal course of business. In the aggregate, settlement of such
suits and claims should not have a material adverse effect on
our financial condition, results of operations, cash flow and
liquidity. However, if these matters were determined adversely
to us, such a determination could have a material adverse effect
on our financial condition, results of operations, cash flow and
liquidity.




Item 6. Exhibits and Reports on
Form 8-K

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

|        |      |  |  |                                                                                                                                                                                                                                                            
|------- | ---- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      | 
|Number  |      | 
|        |      | 
|        | 4.1  |  |  | Amendment to Rights Agreement                                                                                                                                                                                                                              
|        | 10.1 |  |  | First Amendment to Loan Documents, as of
	June 27, 2001, between ALC Ohio, Inc., ALC Pennsylvania,
	Inc., ALC Iowa, Inc., ALC Nebraska, Inc., ALC New Jersey, Inc.,
	ALC Indiana, Inc., Assisted Living Concepts, Inc. and Heller
	Healthcare Finance, Inc.
|        | 12   |  |  | Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                         

(b)  Reports on Form 8-K.

On April 27, 2001, we filed a report on
Form 8-K announcing that we entered into discussions with
our convertible debenture holders and major lessors and that we
planned to defer our May 1, 2001 interest payment on our
convertible debentures.

On May 25, 2001, we filed a report on
Form 8-K announcing that we made our interest payment on
our convertible debentures and that we entered into
confidentiality and standstill agreements with certain debenture
holders.

On July 2, 2001, we filed a report on
Form 8-K announcing the June 30, 2001 expiration of a
confidentiality and trading agreement with the debenture holder
committee; disclosing confidential information provided to the
committee members; and no agreement had been reached on
debenture restructuring.

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SIGNATURES

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



| |                               
| | ------------------------------
| | ASSISTED LIVING CONCEPTS, INC.
| | Registrant                    

August 8, 2001

| |     |                   
| | --- | ------------------
| | By: | /s/ DREW Q. MILLER

| |                      
| | ---------------------
| |                      
| | Name:  Drew Q. Miller

| |        |                       
| | ------ | ----------------------
| | Title: | Senior Vice President,

| |                                       
| | --------------------------------------
| | Chief Financial Officer and
	Treasurer

August 8, 2001

| |     |                         
| | --- | ------------------------
| | By: | /s/ M. CATHERINE MALONEY

| |                            
| | ---------------------------
| |                            
| | Name:  M. Catherine Maloney

| |        |                   
| | ------ | ------------------
| | Title: | Vice President and

| |                         
| | ------------------------
| | Chief Accounting Officer

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EXHIBIT INDEX

|        |      |  |  |                                                                                                                                                                                                                                                            
|------- | ---- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      | 
|Number  |      | 
|        |      | 
|        | 4.1  |  |  | Amendment to Rights Agreement                                                                                                                                                                                                                              
|        | 10.1 |  |  | First Amendment to Loan Documents, as of
	June 27, 2001, between ALC Ohio, Inc., ALC Pennsylvania,
	Inc., ALC Iowa, Inc., ALC Nebraska, Inc., ALC New Jersey, Inc.,
	ALC Indiana, Inc., Assisted Living Concepts, Inc. and Heller
	Healthcare Finance, Inc.
|        | 12   |  |  | Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                         

28