##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


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 March 31, 2003

or

|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|[  ] |  | 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 1-13498

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.)

1349 Empire Central, Suite 900
Dallas, TX 75247(Address of principal executive offices)

(214)424-4000(Registrants telephone number, including area code)

11835 NE Glenn Widing Drive, Building E
Portland, Oregon 97220(Former name, former address and former fiscal year, if changed since last report)

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 [  ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).     Yes [  ]    No [X]

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.     Yes
[X]    No [  ]

The Registrant had 6,431,759 shares of common stock, $.01 par value,
outstanding at May 8, 2003.



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TABLE OF CONTENTS



|                               |                                                                                               |                                            |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | Item 1. Financial Statements                                                                 
|                               |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                               |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                               |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                               |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                               | Item 3. Quantitative and Qualitative Disclosure About Market Risk                            
|                               | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION   
|                               | Item 1. Legal Proceedings                                                                    
|                               | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                               | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                    
|EXHIBIT INDEX                 
|EXHIBIT 12                    
|EXHIBIT 99.1                  
|EXHIBIT 99.2                  



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ASSISTED LIVING CONCEPTS, INC.

FORM 10-Q
March 31, 2003

INDEX

|        |  |                                                                                       |  |      | 
|------- |  | ------------------------------------------------------------------------------------- |  | ---- | 
|        |  |                                                                                       |  | Page
|        |  |                                                                                       |  |     
|        |  | PART I  FINANCIAL INFORMATION                                                        |  |      | 
|Item 1. |  | Financial Statements                                                                  |  |      | 
|        |  | Consolidated Balance Sheets, December 31, 2002 and March 31, 2003                     |  | 2    | 
|        |  | Consolidated Statements of Operations, Three Months Ended March 31, 2002 and 2003     |  | 3    | 
|        |  | Consolidated Statements of Cash Flows, Three Months Ended March 31, 2002 and 2003     |  | 4    | 
|        |  | Notes to Consolidated Financial Statements                                            |  | 5    | 
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 16   | 
|Item 3. |  | Quantitative and Qualitative Disclosure About Market Risk                             |  | 20   | 
|Item 4. |  | Controls and Procedures                                                               |  | 21   | 
|        |  | PART II  OTHER INFORMATION                                                           |  |      | 
|Item 1. |  | Legal Proceedings                                                                     |  | 21   | 
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                   |  | 21   | 
|Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  | 21   | 

1



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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)

|                                                                     |                                                                                                                                                                                                            |                                      |                                            |        |   |              |         |           |   |             |  | 
|-------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------------------------------------------ | ------ | - | ------------ | ------- | --------- | - | ----------- |  | 
|                                                                     |                                                                                                                                                                                                            |                                      |                                            |        |   | December 31, |         | March 31,
|                                                                     |                                                                                                                                                                                                            |                                      |                                            |        |   | 2002         |         | 2003     
|                                                                     |                                                                                                                                                                                                            |                                      |                                            |        |   |              |         |          
|                                                                     |                                                                                                                                                                                                            |                                      |                                            |        |   |              |         |           |   | (Unaudited)
|                                                                     |                                                                                                                                                                                                            |                                      |                                            | ASSETS |   |              |         |           |   |             |  | 
|Current assets:                                                      |                                                                                                                                                                                                            |                                      |                                            |        |   |              |         |          
|                                                                     | Cash and cash equivalents                                                                                                                                                                                  |                                      | $                                          | 7,165  |   |              | $       | 6,736     |  
|                                                                     | Cash restricted for resident security deposits                                                                                                                                                             |                                      |                                            | 1,929  |   |              |         | 1,929     |  
|                                                                     | Accounts receivable, net of allowance for doubtful accounts of $230 at
December 31, 2002 and $342 at March 31, 2003                                                                                        |                                      |                                            | 2,715  |   |              |         | 3,313     |  
|                                                                     | Prepaid insurance                                                                                                                                                                                          |                                      |                                            | 343    |   |              |         | 1,020     |  
|                                                                     | Prepaid expenses                                                                                                                                                                                           |                                      |                                            | 991    |   |              |         | 931       |  
|                                                                     | Assets held for sale                                                                                                                                                                                       |                                      |                                            | 9,727  |   |              |         |          |  
|                                                                     | Cash restricted for workers compensation claims                                                                                                                                                            |                                      |                                            | 4,696  |   |              |         | 4,375     |  
|                                                                     | Other current assets                                                                                                                                                                                       |                                      |                                            | 3,193  |   |              |         | 2,886     |  
|                                                                     |                                                                                                                                                                                                            |                                      |                                            |        |   |              |         |           |  
|                                                                     |                                                                                                                                                                                                            |                                      | Total current assets                       |        |   | 30,759       |         |           |   | 21,190      | 
|Restricted cash                                                      |                                                                                                                                                                                                            |                                      | 5,315                                      |        |   |              | 5,323   |          
|Property and equipment, net                                          |                                                                                                                                                                                                            |                                      | 177,930                                    |        |   |              | 184,738 |          
|Deferred income taxes                                                |                                                                                                                                                                                                            |                                      |                                           |        |   |              | 550     |          
|Other assets, net                                                    |                                                                                                                                                                                                            |                                      | 2,036                                      |        |   |              | 2,320   |          
|                                                                     |                                                                                                                                                                                                            |                                      |                                            |        |   |              |         |           |  
|                                                                     |                                                                                                                                                                                                            |                                      | Total assets                               |        | $ | 216,040      |         |           | $ | 214,121     | 
|                                                                     |                                                                                                                                                                                                            |                                      |                                            |        |   |              |         |           |  
|                                                                     |                                                                                                                                                                                                            | LIABILITIES AND SHAREHOLDERS EQUITY |                                            |        |   |              |         |           |   |            
|Current liabilities:                                                 |                                                                                                                                                                                                            |                                      |                                            |        |   |              |         |          
|                                                                     | Accounts payable                                                                                                                                                                                           |                                      | $                                          | 769    |   |              | $       | 1,775     |  
|                                                                     | Accrued real estate taxes                                                                                                                                                                                  |                                      |                                            | 4,836  |   |              |         | 3,626     |  
|                                                                     | Accrued interest expense                                                                                                                                                                                   |                                      |                                            | 2,174  |   |              |         | 1,302     |  
|                                                                     | Accrued payroll expense                                                                                                                                                                                    |                                      |                                            | 5,021  |   |              |         | 4,332     |  
|                                                                     | Other accrued expenses                                                                                                                                                                                     |                                      |                                            | 5,718  |   |              |         | 6,315     |  
|                                                                     | Income taxes payable                                                                                                                                                                                       |                                      |                                            |       |   |              |         | 700       |  
|                                                                     | Resident security deposits                                                                                                                                                                                 |                                      |                                            | 1,991  |   |              |         | 1,776     |  
|                                                                     | Other current liabilities                                                                                                                                                                                  |                                      |                                            | 976    |   |              |         | 449       |  
|                                                                     | Current portion of unfavorable lease adjustment                                                                                                                                                            |                                      |                                            | 607    |   |              |         | 598       |  
|                                                                     | Current portion of long-term debt and capital lease obligation                                                                                                                                             |                                      |                                            | 11,521 |   |              |         | 2,701     |  
|                                                                     |                                                                                                                                                                                                            |                                      |                                            |        |   |              |         |           |  
|                                                                     |                                                                                                                                                                                                            |                                      | Total current liabilities                  |        |   | 33,613       |         |           |   | 23,574      | 
|Other liabilities                                                    |                                                                                                                                                                                                            |                                      | 463                                        |        |   |              | 574     |          
|Unfavorable lease adjustment                                         |                                                                                                                                                                                                            |                                      | 2,508                                      |        |   |              | 2,362   |          
|Long-term debt and capital lease obligations, net of current portion |                                                                                                                                                                                                            |                                      | 109,078                                    |        |   |              | 108,507 |          
|Senior and Junior Secured note                                       |                                                                                                                                                                                                            |                                      | 41,993                                     |        |   |              | 49,138  |          
|                                                                     |                                                                                                                                                                                                            |                                      |                                            |        |   |              |         |           |  
|                                                                     |                                                                                                                                                                                                            |                                      | Total liabilities                          |        |   | 187,655      |         |           |   | 184,155     | 
|Commitments and contingencies                                        |                                                                                                                                                                                                            |                                      |                                            |        |   |              |         |          
|Shareholders equity:                                                |                                                                                                                                                                                                            |                                      |                                            |        |   |              |         |          
|                                                                     | Preferred stock, $.01 par value; 3,250,000 shares authorized; none issued or outstanding                                                                                                                   |                                      |                                            |       |   |              |         |          |  
|                                                                     | Common Stock, $.01 par value; 20,000,000 shares authorized; issued
and outstanding 6,431,759 shares at December 31, 2002 and March 31,
2003 (68,241 shares to be issued upon settlement of pending claims) |                                      |                                            | 65     |   |              |         | 65        |  
|                                                                     | Additional paid-in capital                                                                                                                                                                                 |                                      |                                            | 32,734 |   |              |         | 33,284    |  
|                                                                     | Accumulated deficit                                                                                                                                                                                        |                                      |                                            | (4,414 | ) |              |         | (3,383    | )
|                                                                     |                                                                                                                                                                                                            |                                      |                                            |        |   |              |         |           |  
|                                                                     |                                                                                                                                                                                                            |                                      | Total shareholders equity                 |        |   | 28,385       |         |           |   | 29,966      | 
|                                                                     |                                                                                                                                                                                                            |                                      |                                            |        |   |              |         |           |  
|                                                                     |                                                                                                                                                                                                            |                                      | Total liabilities and shareholders equity |        | $ | 216,040      |         |           | $ | 214,121     | 
|                                                                     |                                                                                                                                                                                                            |                                      |                                            |        |   |              |         |           |  

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

2



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ASSISTED LIVING CONCEPTS, INC.




CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

|                                                                                         |                                                                                  |                          |        |                    |        |      |        |        |        |  
|---------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ------------------------ | ------ | ------------------ | ------ | ---- | ------ | ------ | ------ | -
|                                                                                         |                                                                                  |                          |        | Three Months Ended
|                                                                                         |                                                                                  |                          |        | March 31,         
|                                                                                         |                                                                                  |                          |        |                   
|                                                                                         |                                                                                  |                          |        | 2002               |        | 2003
|                                                                                         |                                                                                  |                          |        |                    |        |     
|Revenue                                                                                  |                                                                                  | $                        | 37,014 |                    |        | $    | 41,144 |       
|Operating expenses:                                                                      |                                                                                  |                          |        |                    |        |      |        |       
|                                                                                         | Residence operating expenses                                                     |                          |        | 25,468             |        |      |        | 27,723 |       
|                                                                                         | Corporate general and administrative                                             |                          |        | 4,317              |        |      |        | 4,342  |       
|                                                                                         | Building rentals                                                                 |                          |        | 3,038              |        |      |        | 3,105  |       
|                                                                                         | Depreciation and amortization                                                    |                          |        | 1,612              |        |      |        | 1,676  |       
|                                                                                         |                                                                                  |                          |        |                    |        |      |        |       
|                                                                                         |                                                                                  | Total operating expenses |        |                    | 34,435 |      |        |        | 36,846 |  
|                                                                                         |                                                                                  |                          |        |                    |        |      |        |       
|Operating income                                                                         |                                                                                  |                          | 2,579  |                    |        |      | 4,298  |       
|Other income (expense):                                                                  |                                                                                  |                          |        |                    |        |      |        |       
|                                                                                         | Interest expense                                                                 |                          |        | (3,591             | )      |      |        | (3,429 | )     
|                                                                                         | Interest income                                                                  |                          |        | 53                 |        |      |        | 36     |       
|                                                                                         | Other income, net                                                                |                          |        | 2                  |        |      |        | (4     | )     
|                                                                                         |                                                                                  |                          |        |                    |        |      |        |       
|                                                                                         |                                                                                  | Total other expense, net |        |                    | (3,536 | )    |        |        | (3,397 | )
|                                                                                         |                                                                                  |                          |        |                    |        |      |        |       
|Income (loss) before debt restructure, reorganization costs, and
discontinued operations |                                                                                  |                          | (957   | )                  |        |      | 901    |       
|Debt restructure and reorganization costs                                                |                                                                                  |                          | (447   | )                  |        |      |       |       
|                                                                                         |                                                                                  |                          |        |                    |        |      |        |       
|Income (loss) from continuing operations before income taxes                             |                                                                                  |                          | (1,404 | )                  |        |      | 901    |       
|                                                                                         | Income tax expense                                                               |                          |        |                   |        |      |        | 364    |       
|                                                                                         |                                                                                  |                          |        |                    |        |      |        |       
|Income (loss) from continuing operations                                                 |                                                                                  |                          | (1,404 | )                  |        |      | 537    |       
|Discontinued operations:                                                                 |                                                                                  |                          |        |                    |        |      |        |       
|                                                                                         | Income (loss) from operations (including gain on sale of assets of $899 in 2003) |                          |        | (46                | )      |      |        | 830    |       
|                                                                                         | Income tax expense                                                               |                          |        |                   |        |      |        | 336    |       
|                                                                                         |                                                                                  |                          |        |                    |        |      |        |       
|Income (loss) from discontinued operations                                               |                                                                                  |                          | (46    | )                  |        |      | 494    |       
|                                                                                         |                                                                                  |                          |        |                    |        |      |        |       
|Net income (loss)                                                                        |                                                                                  | $                        | (1,450 | )                  |        | $    | 1,031  |       
|                                                                                         |                                                                                  |                          |        |                    |        |      |        |       
|Net income (loss) per common share:                                                      |                                                                                  |                          |        |                    |        |      |        |       
|                                                                                         | Basic                                                                            |                          | $      | (0.22              | )      |      | $      | 0.16   |       
|                                                                                         |                                                                                  |                          |        |                    |        |      |        |       
|                                                                                         | Diluted                                                                          |                          | $      | (0.22              | )      |      | $      | 0.16   |       
|                                                                                         |                                                                                  |                          |        |                    |        |      |        |       

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

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ASSISTED LIVING CONCEPTS, INC.




CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

|                                                                                    |                                                           |                                                     |        |                    |        |      |        |        |        |  
|----------------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------------------------------- | ------ | ------------------ | ------ | ---- | ------ | ------ | ------ | -
|                                                                                    |                                                           |                                                     |        | Three Months Ended
|                                                                                    |                                                           |                                                     |        | March 31,         
|                                                                                    |                                                           |                                                     |        |                   
|                                                                                    |                                                           |                                                     |        | 2002               |        | 2003
|                                                                                    |                                                           |                                                     |        |                    |        |     
|Operating Activities:                                                               |                                                           |                                                     |        |                    |        |      |        |       
|Net income (loss)                                                                   |                                                           | $                                                   | (1,450 | )                  |        | $    | 1,031  |       
|Adjustment to reconcile net income (loss) to net cash used in operating activities: |                                                           |                                                     |        |                    |        |      |        |       
|                                                                                    | Depreciation and amortization                             |                                                     |        | 1,667              |        |      |        | 1,676  |       
|                                                                                    | Amortization of debt issuance costs                       |                                                     |        | 20                 |        |      |        | 27     |       
|                                                                                    | Amortization of fair value adjustment to building rentals |                                                     |        | (170               | )      |      |        | (155   | )     
|                                                                                    | Amortization of fair market adjustment to long-term debt  |                                                     |        | 107                |        |      |        | 97     |       
|                                                                                    | Amortization of discount on long-term debt                |                                                     |        | 106                |        |      |        | 135    |       
|                                                                                    | Straight line adjustment to building rentals              |                                                     |        | 86                 |        |      |        | 111    |       
|                                                                                    | Interest paid-in-kind                                     |                                                     |        | 305                |        |      |        | 330    |       
|                                                                                    | Provision for doubtful accounts                           |                                                     |        | 13                 |        |      |        | 252    |       
|                                                                                    | Gain on sale of assets                                    |                                                     |        |                   |        |      |        | (899   | )     
|Changes in assets and liabilities:                                                  |                                                           |                                                     |        |                    |        |      |        |       
|                                                                                    | Accounts receivable                                       |                                                     |        | (100               | )      |      |        | (850   | )     
|                                                                                    | Prepaid expenses                                          |                                                     |        | (2,321             | )      |      |        | (617   | )     
|                                                                                    | Other current assets                                      |                                                     |        | 245                |        |      |        | 307    |       
|                                                                                    | Other assets                                              |                                                     |        | (31                | )      |      |        | (311   | )     
|                                                                                    | Accounts payable                                          |                                                     |        | (254               | )      |      |        | 1,006  |       
|                                                                                    | Accrued expenses                                          |                                                     |        | 313                |        |      |        | (2,174 | )     
|                                                                                    | Other current liabilities                                 |                                                     |        | 795                |        |      |        | (42    | )     
|                                                                                    | Other liabilities                                         |                                                     |        | (7                 | )      |      |        |       |       
|                                                                                    |                                                           |                                                     |        |                    |        |      |        |       
|                                                                                    |                                                           | Net cash used in operating activities               |        |                    | (676   | )    |        |        | (76    | )
|Investing Activities:                                                               |                                                           |                                                     |        |                    |        |      |        |       
|Decrease (increase) in restricted cash                                              |                                                           |                                                     | (1,719 | )                  |        |      | 313    |       
|Purchases of property and equipment                                                 |                                                           |                                                     | (625   | )                  |        |      | (427   | )     
|Sales of properties                                                                 |                                                           |                                                     |       |                    |        |      | 2,569  |       
|                                                                                    |                                                           |                                                     |        |                    |        |      |        |       
|                                                                                    |                                                           | Net cash provided by (used in) investing activities |        |                    | (2,344 | )    |        |        | 2,455  |  
|Financing Activities:                                                               |                                                           |                                                     |        |                    |        |      |        |       
|Proceeds from long-term debt                                                        |                                                           |                                                     | 1,000  |                    |        |      |       |       
|Payments on long-term debt and capital lease obligation                             |                                                           |                                                     | (360   | )                  |        |      | (2,808 | )     
|Debt issuance costs                                                                 |                                                           |                                                     | (79    | )                  |        |      |       |       
|                                                                                    |                                                           |                                                     |        |                    |        |      |        |       
|                                                                                    |                                                           | Net cash provided by (used in) financing activities |        |                    | 561    |      |        |        | (2,808 | )
|                                                                                    |                                                           |                                                     |        |                    |        |      |        |       
|Net decrease in cash and cash equivalents                                           |                                                           |                                                     | (2,459 | )                  |        |      | (429   | )     
|Cash and cash equivalents, beginning of period                                      |                                                           |                                                     | 6,077  |                    |        |      | 7,165  |       
|                                                                                    |                                                           |                                                     |        |                    |        |      |        |       
|Cash and cash equivalents, end of period                                            |                                                           | $                                                   | 3,618  |                    |        | $    | 6,736  |       
|                                                                                    |                                                           |                                                     |        |                    |        |      |        |       
|Supplemental disclosure of cash flow information:                                   |                                                           |                                                     |        |                    |        |      |        |       
|                                                                                    | Cash payments for interest                                |                                                     | $      | 2,705              |        |      | $      | 3,847  |       

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

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ASSISTED LIVING CONCEPTS, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.   The Company

Assisted Living Concepts, Inc., (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.

2.   Basis of Presentation

The condensed consolidated financial statements included herein have been
prepared by the Company without audit and in the opinion of management include
all adjustments (all of which are normal and recurring) necessary for a fair
presentation of the results of operations for the three months ended March 31,
2002 and 2003, pursuant to the rules and regulations of the Securities and
Exchange Commission. The accompanying condensed consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain reclassifications have been made to the
prior period financial statements to conform to the current period
presentation. Certain information and footnote disclosures normally included in
financial statements in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted
pursuant to such rules and regulations; however the Company believes that the
disclosures in the accompanying financial statements are adequate to make the
information presented not misleading.

The accompanying condensed consolidated financial statements should be read in
conjunction with the Companys annual report on
Form 10-K for the fiscal year ended December 31, 2002 filed with the Securities
and Exchange Commission. The results of operations for the three months ended
March 31, 2003 are not necessarily indicative of the results for a full year.

The results of operations for the three months ended March 31, 2002 and 2003
reflect the continuing operations of 177 residences. Results of operations for
five residences sold on September 30, 2002 and two residences sold in March
2003 are included in discontinued operations in the accompanying financial
statements. (See Note 5).

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3.  Long-Term Debt

As of December 31, 2002 and March 31, 2003, long-term debt consists of the
following (in thousands):

|                                                                                                                            |  |                   |         |                |  |          |         |           |  |   |         |  |  |   |         | 
|--------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | -------------- |  | -------- | ------- | --------- |  | - | ------- |  |  | - | ------- | 
|                                                                                                                            |  | December 31, 2002 |         | March 31, 2003
|                                                                                                                            |  |                   |         |               
|                                                                                                                            |  | Carrying          |         | Principal      |  | Carrying |         | Principal
|                                                                                                                            |  | Amount            |         | Amount         |  | Amount   |         | Amount   
|                                                                                                                            |  |                   |         |                |  |          |         |          
|Trust Deed Notes, payable to the State of Oregon
Housing and Community Services
Department (OHCS) due 2028                  |  | $                 | 9,688   |                |  | $        | 9,585   |           |  | $ | 9,643   |  |  | $ | 9,541   | 
|Variable Rate Multifamily Revenue Bonds, payable
to the Washington State Housing Finance
Commission Department due 2028     |  |                   | 7,217   |                |  |          | 7,295   |           |  |   | 7,218   |  |  |   | 7,295   | 
|Variable Rate Demand Housing Revenue Bonds, Series
1997, payable to the Idaho Housing and Finance
Association due
2017      |  |                   | 6,277   |                |  |          | 6,345   |           |  |   | 6,278   |  |  |   | 6,345   | 
|Variable Rate Demand Housing Revenue Bonds, Series
A-1 and A-2 payable to the State of Ohio Housing
Finance Agency due
2018 |  |                   | 11,451  |                |  |          | 11,575  |           |  |   | 10,453  |  |  |   | 10,575  | 
|Housing and Urban Development Insured
Mortgages due
2035                                                                    |  |                   | 7,329   |                |  |          | 7,410   |           |  |   | 7,317   |  |  |   | 7,397   | 
|New Senior Secured Notes due 2009                                                                                           |  |                   | 35,750  |                |  |          | 35,750  |           |  |   | 34,350  |  |  |   | 34,350  | 
|New Junior Secured Notes due 2012                                                                                           |  |                   | 13,925  |                |  |          | 16,225  |           |  |   | 14,788  |  |  |   | 16,824  | 
|Mortgages payable due 2008                                                                                                  |  |                   | 27,995  |                |  |          | 27,948  |           |  |   | 27,859  |  |  |   | 27,813  | 
|G.E. Capital (Previously Heller Healthcare Finance,
Inc.) Credit Facility due
2005                                          |  |                   | 42,691  |                |  |          | 43,516  |           |  |   | 42,440  |  |  |   | 43,171  | 
|Capital lease obligations                                                                                                   |  |                   | 269     |                |  |          | 269     |           |  |   |        |  |  |   | 3       | 
|                                                                                                                            |  |                   |         |                |  |          |         |           |  |   |         |  |  |   |         | 
|Total long-term debt                                                                                                        |  |                   | 162,592 |                |  | $        | 165,918 |           |  |   | 160,346 |  |  | $ | 163,314 | 
|                                                                                                                            |  |                   |         |                |  |          |         |           |  |   |         |  |  |   |         | 
|Less current portion                                                                                                        |  |                   | 11,521  |                |  |          |         |           |  |   | 2,701   |  |  |   |         | 
|                                                                                                                            |  |                   |         |                |  |          |         |           |  |   |         |  |  |   |         | 
|Long-term debt                                                                                                              |  | $                 | 151,071 |                |  |          |         |           |  | $ | 157,645 |  |  |   |         | 
|                                                                                                                            |  |                   |         |                |  |          |         |           |  |   |         |  |  |   |         | 

The Trust Deed Notes payable to OHCS are secured by buildings, land, furniture
and fixtures of six Oregon residences. The notes are payable in monthly
installments including interest at effective rates ranging from 7.375% to 9.0%.

The Variable Rate Multifamily Revenue Bonds are payable to the Washington State
Housing Finance Commission Department and at March 31, 2003 are secured by a
$7.3 million letter of credit and by buildings, land, furniture and fixtures of
the five Washington residences. The letter of credit expires in January 2004
and had an interest rate of 1.3% at March 31, 2003.

The Variable Rate Demand Housing Revenue Bonds, Series 1997 are payable to the
State of Idaho Housing and Finance Association and at March 31, 2003 are
secured by a $6.3 million letter of credit and by buildings, land, furniture
and fixtures of four Idaho residences. The letter of credit expires in 2004 and
had an interest rate of 1.3% at March 31, 2003.

The Variable Rate Demand Housing Revenue Bonds with the State of Ohio Housing
Finance Agency (OHFA) are due July 2018 and at March 31, 2003 are secured by
a $10.6 million letter of credit and by buildings, land, furniture and fixtures
of seven Ohio residences. The letter of credit expires in 2005 and had an
interest rate of 1.25% at March 31, 2003.

At March 31, 2003, mortgage loans include three fixed rate loans secured by
seven Texas residences, three Oregon residences and three New Jersey
residences. These loans collectively require monthly principal and interest
payments of $230,000, with balloon payments of $11.8 million, $5.3 million and
$7.2 million due at maturity in May 2008, August 2008 and September 2008,
respectively. These loans bear fixed annual interest rates from 7.58% to 8.79%.

Prior to the Companys Plan of Reorganization, mortgage loans also included a
$5.9 million mortgage loan at a fixed annual interest rate of 8.79%, secured by
one Pennsylvania residence and one South Carolina residence. In accordance with
the Companys Plan of
Reorganization, the Company conveyed two facilities to this lender in
satisfaction of the $5.9 million of debt. The Company continues to operate
these residences under operating leases with the same lender.

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Housing and Urban Development (HUD) Insured mortgages include three separate
loan agreements entered into in 2001. These are fixed rate mortgages, each of
which is secured by one facility in Texas. These loans mature between July 1,
2036 and August 1, 2036 and collectively require monthly principal and interest
payments of $47,493. The loans bear fixed annual interest rates between 7.40%
and 7.55%.

GE Capital credit facility is a secured line of credit up to $44.0 million.
This is a variable rate credit facility, secured by 31 facilities. This credit
facility matures in January 2005, required monthly principal payments of
$50,000 for 2002, and requires monthly principal payments of $65,000 for 2003
and $80,000 for 2004. The interest on the credit facility is calculated at
LIBOR plus 4.5%, floating monthly (not to be less than 8%) and is payable
monthly in arrears.

On January 1, 2002 the Debtors emerged from the proceedings under Chapter 11 of
the Bankruptcy Code. The Companys Plan of reorganization included the issuance
of $40.25 million aggregate principal amount of seven-year secured notes (the
New Senior Secured Notes), bearing interest at 10% per annum, payable
semi-annually in arrears, and $15.25 million aggregate principal amount of
ten-year secured notes (the New Junior Secured Notes and collectively with
the New Senior Secured Notes, the New Notes), bearing interest payable in
additional New Junior Secured Notes for three years at 8% per annum and
thereafter payable in cash at 12% per annum, payable semi-annually in arrears.
The New Junior Secured Notes were issued at a discount of $2.6 million. The
discount will be amortized over the life of the New Junior Secured Notes using
the effective interest method. The New Notes are secured by 51 properties as of
March 31, 2003.

Of the $50.1 million outstanding in New Notes, $20.0 million is payable to
related parties.

As of the Effective Date, the Successor Company revalued its long-term debt in
conjunction with the implementation of fresh-start reporting. At December 31,
2001, an adjustment of $3.1 million was recorded to reduce long-term debt to
its fair market value. Amortization of this adjustment is computed using the
straight-line method over the individual loan life.

As of March 31, 2003, the following annual principal payments are required (in
thousands):

|                                        |       |   |         |         | 
|--------------------------------------- | ----- | - | ------- | ------- | 
|April 1, 2003 through December 31, 2003 |       | $ | 2,415   |        
|2004                                    |       |   | 3,152   |        
|2005                                    |       |   | 43,379  |        
|2006                                    |       |   | 2,258   |        
|2007                                    |       |   | 2,408   |        
|Thereafter                              |       |   | 109,702 |        
|                                        |       |   |         |        
|                                        | Total |   | $       | 163,314 | 
|                                        |       |   |         |        

The Company has a series of reimbursement agreements with U.S. Bank for letters
of credit that secure certain of our Revenue bonds payable, which total
approximately $24.2 million as of March 31, 2003. As such letters of credit
expire, beginning in January 2004, the Company will need to obtain replacement
letters of credit, post cash collateral or refinance the underlying debt. There
can be no assurance that replacement letters of credit will be procured from
the same or other lending institutions on terms that are acceptable to the
Company. In the event that the Company is unable to obtain a replacement letter
of credit or provide alternate collateral prior to the expiration of any of
these letters of credit, the underlying debt would be in default. The
Companys agreements with U.S. Bank contain restrictive covenants that include
compliance with certain financial ratios.

In May 2002, we amended our existing agreement with U.S. Bank, establishing new
covenants, with which we were in compliance as of March 31, 2003. Failure to
comply with these covenants would constitute an event of default, which would
allow U.S. Bank to declare any amounts outstanding under the loan documents to
be due and payable.

In addition to the debt agreements with OHCS related to the six owned
residences in Oregon, the Company has entered into Lease Approval Agreements
with OHCS and the lessor of the Oregon Leases, which obligates the Company to
comply with the terms and conditions of the underlying trust deed relating to
the leased buildings. Under the terms of the OHCS debt agreements, the Company
is required to maintain a capital replacement escrow account to cover expected
capital expenditure requirements for the Oregon Leases and the six OHCS loans.

As a further condition of the OHCS debt agreements, the Company is required to
comply with the terms of certain regulatory agreements which provide, among
other things, that in order to preserve the federal income tax exempt status of
the bonds, the Company is required to lease at least 20% of the units of the
projects to low or moderate income persons as defined in Section 142(d) of the
Internal Revenue Code. There are additional requirements as to the age and
physical condition of the residents with which the

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Company must also comply.
Non-compliance with these restrictions may result in an event of default and
cause acceleration of the scheduled repayment.

4.   Income Taxes

The Company anticipates taxable income for both financial reporting and tax
return purposes for the year ended December 31, 2003, and accordingly has
provided for federal and state income taxes on income from continuing
operations and discontinued operations for the three months ended March 31,
2003. The Company has recorded such income tax expense at the rate of 40.4%,
the estimated effective tax rate for the full fiscal year.

The provision for income taxes differs from the applicable U.S. statutory
federal rate as a result of the following items:

|                                           |  |  |      |  
|------------------------------------------ |  |  | ---- | -
|Statutory federal tax rate                 |  |  | 34.0 | %
|State income taxes, net of federal benefit |  |  | 5.6  |  
|Non-deductible expenses                    |  |  | 0.8  |  
|                                           |  |  |      |  
|Effective tax rate                         |  |  | 40.4 | %
|                                           |  |  |      |  

At December 31, 2002, the Company had approximately $101.4 million of net
operating loss (NOL) carryforwards which will expire between 2009 and 2022.
These NOLs have been reduced to $22.3 million as a result of the discharge and
cancellation of various prepetition liabilities under the Plan. The reduction
of the NOLs was effective on January 1, 2003.

The NOLs remaining after the application of the cancellation of indebtedness
provisions are subject to certain provisions of the Internal Revenue Code which
restricts the utilization of the losses. In addition, any net unrealized
built-in losses resulting from the excess of tax basis over the carrying value
of the Companys assets (primarily property and equipment) as of the Effective
Date, which are recognized within five years are also subject to these
provisions. Section 382 of the Internal Revenue Code imposes limitations on the
utilization of the loss carryforwards and built-in losses after certain changes
of ownership of a loss company. The Company is deemed to be a loss company for
these purposes. Under these provisions, the Companys ability to utilize these
loss carryforwards and built-in losses in the future will generally be subject
to an annual limitation of approximately $1.6 million. For the full fiscal
year ending December 31, 2003, the Company anticipates such limitation will be
applied to recognized built-in losses, thus the Companys estimates include no
utilization of NOLs in 2003.

There can be no assurances that the Company will be able to utilize these NOLs
or built-in losses and therefore the Company has established a 100 percent
valuation allowance to offset the associated net deferred tax asset at December
31, 2002. As of March 31, 2003, the Company anticipates that a portion of such
net deferred tax asset will be offset against current taxable income. In the
three-month period ended March 31, 2003, the Company reduced the valuation
allowance by $550,000, thus reinstating a net deferred tax asset of $550,000 on
the balance sheet at March 31, 2003. Pursuant to SOP 90-7, such income tax
benefit has been recorded as an increase to additional paid-in capital.

Pursuant to SOP 90-7, the income tax benefit, if any, of any future realization
of the remaining NOL carryforwards and other deductible temporary differences
existing as of the Effective Date will be recorded as an adjustment to
additional paid-in capital.

5.    Discontinued Operations

During the three months ended March 31, 2003, the Company sold one residence in
Ohio and one residence in Indiana. The total sales price for these residences
was $2.6 million, and the Company recognized a gain from these sales of
$899,000.

In accordance with SFAS No. 144, the results of operations for these residences
and the gain from the sale have been included in Income (loss) from
discontinued operations in the accompanying financial statements for the three
months ended March 31, 2002 and 2003.

On September 30, 2002 the Company completed the sale of four Florida residences
and one Georgia residence. Consequently, the results of operations for these
residences are included in Income (loss) from discontinued operations in the
accompanying financial statements for the three months ended March 31, 2002.

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6.    Stock-based Compensation

The company accounts for stock-based compensation plans under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had
an exercise price equal to the market value of the underlying common stock on
the date of grant. The following table illustrates the effect on net income and
earnings per share if the company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation.

|                                                                                                                                                    |                       |   |                              |       |      |   |       |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | - | ---------------------------- | ----- | ---- | - | ----- | ---- | 
|                                                                                                                                                    |                       |   | Three Months Ended March 31,
|                                                                                                                                                    |                       |   | 2002                         |       | 2003
|                                                                                                                                                    |                       |   |                              |       |     
|Net income (loss), as reported                                                                                                                      |                       | $ | (1,450                       | )     |      | $ | 1,031 |     
|Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards granted, net of related tax effects |                       |   | (8                           | )     |      |   | (31   | )   
|                                                                                                                                                    |                       |   |                              |       |      |   |       |     
|Pro forma net income (loss)                                                                                                                         |                       | $ | (1,458                       | )     |      | $ | 1,000 |     
|                                                                                                                                                    |                       |   |                              |       |      |   |       |     
|Net income (loss) per share:                                                                                                                        |                       |   |                              |       |      |   |       |     
|                                                                                                                                                    | Basic - as
reported   |   | $                            | (0.22 | )    |   | $     | 0.16 | 
|                                                                                                                                                    | Basic - pro
forma     |   | $                            | (0.22 | )    |   | $     | 0.15 | 
|                                                                                                                                                    | Diluted - as
reported |   | $                            | (0.22 | )    |   | $     | 0.16 | 
|                                                                                                                                                    | Diluted - pro
forma   |   | $                            | (0.22 | )    |   | $     | 0.15 | 

7.    Income (Loss) Per Share

The weighted average common shares used for basic net income (loss) per common
share were 6,500,000 for the three months ended March 31, 2002 and March 31,
2003. The effect of dilutive stock options added 8,976 shares for the three
months ended March 31, 2003. The effect of options for the three months ended
March 31, 2002 is not considered since their effect is antidilutive.

8.    Subsidiary Guarantee of New Notes

The New Notes, issued by the Company, are publicly traded and the repayment of
these notes is guaranteed by three wholly owned subsidiaries of the Company:
ALC Indiana, Inc., Home and Community Care, Inc. (HCI) and Carriage House
Assisted Living, Inc. (Carriage House). The following information is
presented as required under the Securities and Exchange Commission Financial
Reporting Release No. 55 in connection with the guarantee of the New Notes by
the Companys wholly owned subsidiaries. The operating and investing activities
of the separate legal entities included in the consolidating financial
statements are fully interdependent and integrated with the Company and each
other.

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ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATING BALANCE SHEETS
MARCH 31, 2003

|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |        |         |  | 
|------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------ | ------ | ------ | --------- |  | ------------- | ------ | ------------------------- |  | -------- | ----- | ------------ |  | ----------- | ----- | ------------- |  | ------------- | ------ | ------------ |  | ------- | ------- | ------- | - | ------- | ------ | ------- |  | 
|                                                                    |                                                                |                                            |        |        |           |  |               |        | Wholly-Owned Subsidiaries |  |          |       |              |  |             |       |              
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |              
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        | Non-         |  |         |         |         |   |         |        |        
|                                                                    |                                                                |                                            |        |        |           |  |               |        | ALC                       |  | Carriage |       |              |  |             |       | Participating |  | Consolidating |        | Consolidated
|                                                                    |                                                                |                                            |        |        | ALC, Inc. |  | Indiana, Inc. |        | House                     |  | HCI      |       | Subsidiaries |  | Adjustments |       | Total        
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |              
|ASSETS                                                             
|Current Assets:                                                     |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |       
|                                                                    | Cash and cash
equivalents                                      |                                            | $      | 6,736  |           |  | $             |       |                           |  | $        |      |              |  | $           |      |               |  | $             |       |              |  | $       |        |         |   | $       | 6,736  |        
|                                                                    | Cash restricted for
resident security deposit                  |                                            |        | 1,929  |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               |       |              |  |         |        |         |   |         | 1,929  |        
|                                                                    | Accounts receivable, net                                       |                                            |        | 3,068  |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               | 245    |              |  |         |        |         |   |         | 3,313  |        
|                                                                    | Prepaid insurance                                              |                                            |        | 1,020  |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               |       |              |  |         |        |         |   |         | 1,020  |        
|                                                                    | Prepaid expenses                                               |                                            |        | 909    |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               | 22     |              |  |         |        |         |   |         | 931    |        
|                                                                    | Cash restricted for workers
compensation claims               |                                            |        | 4,375  |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               |       |              |  |         |        |         |   |         | 4,375  |        
|                                                                    | Other current assets                                           |                                            |        | 1,064  |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               | 1,822  |              |  |         |        |         |   |         | 2,886  |        
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |        |        
|                                                                    |                                                                | Total current assets                       |        |        | 19,101    |  |               |        |                          |  |          |       |             |  |             |       |              |  |               |        | 2,089        |  |         |         |        |   |         |        | 21,190  | 
|Restricted cash                                                     |                                                                |                                            | 5,323  |        |           |  |              |        |                           |  |         |       |              |  |            |       |               |  |              |        |              |  |        |         |         |   | 5,323   |       
|Receivable from subsidiaries/parent                                 |                                                                |                                            | 3,432  |        |           |  | 4,578         |        |                           |  |         |       |              |  | 3,264       |       |               |  | 1,310         |        |              |  | (12,584 | )       |         |   |        |       
|Property and equipment, net                                         |                                                                |                                            | 84,966 |        |           |  | 12,478        |        |                           |  | 3,524    |       |              |  | 4,143       |       |               |  | 79,627        |        |              |  |        |         |         |   | 184,738 |       
|Investment in subsidiaries                                          |                                                                |                                            | 30,921 |        |           |  |              |        |                           |  |         |       |              |  |            |       |               |  |              |        |              |  | (30,921 | )       |         |   |        |       
|Deferred income taxes                                               |                                                                |                                            | 550    |        |           |  |              |        |                           |  |         |       |              |  |            |       |               |  |              |        |              |  |        |         |         |   | 550     |       
|Other assets, net                                                   |                                                                |                                            | 1,891  |        |           |  |              |        |                           |  |         |       |              |  |            |       |               |  | 429           |        |              |  |        |         |         |   | 2,320   |       
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |        |        
|                                                                    |                                                                | Total assets                               |        | $      | 146,184   |  |               | $      | 17,056                    |  |          | $     | 3,524        |  |             | $     | 7,407         |  |               | $      | 83,455       |  |         | $       | (43,505 | ) |         | $      | 214,121 | 
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |        |        
|LIABILITIES AND SHAREHOLDERS EQUITY                               
|Current liabilities:                                                |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |       
|                                                                    | Accounts payable                                               |                                            | $      | 1,263  |           |  | $             |       |                           |  | $        |      |              |  | $           |      |               |  | $             | 512    |              |  | $       |        |         |   | $       | 1,775  |        
|                                                                    | Accrued real estate taxes                                      |                                            |        | 2,309  |           |  |               | 365    |                           |  |          | 298   |              |  |             | 75    |               |  |               | 579    |              |  |         |        |         |   |         | 3,626  |        
|                                                                    | Accrued interest expense                                       |                                            |        | 1,256  |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               | 46     |              |  |         |        |         |   |         | 1,302  |        
|                                                                    | Accrued payroll expense                                        |                                            |        | 4,320  |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               | 12     |              |  |         |        |         |   |         | 4,332  |        
|                                                                    | Other accrued expenses                                         |                                            |        | 6,271  |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               | 44     |              |  |         |        |         |   |         | 6,315  |        
|                                                                    | Resident security deposits                                     |                                            |        | 1,578  |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               | 198    |              |  |         |        |         |   |         | 1,776  |        
|                                                                    | Other current liabilities                                      |                                            |        | 1,024  |           |  |               | 125    |                           |  |          |      |              |  |             |      |               |  |               |       |              |  |         |        |         |   |         | 1,149  |        
|                                                                    | Current portion of unfavorable
lease adjustment                |                                            |        | 517    |           |  |               |       |                           |  |          | 81    |              |  |             |      |               |  |               |       |              |  |         |        |         |   |         | 598    |        
|                                                                    | Current portion of long-term
debt and capital lease
obligation |                                            |        | 1,255  |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               | 1,446  |              |  |         |        |         |   |         | 2,701  |        
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |        |        
|                                                                    |                                                                | Total current liabilities                  |        |        | 19,793    |  |               |        | 490                       |  |          |       | 379          |  |             |       | 75            |  |               |        | 2,837        |  |         |         |        |   |         |        | 23,574  | 
|Other liabilities                                                   |                                                                |                                            | 535    |        |           |  |              |        |                           |  | 39       |       |              |  |            |       |               |  |              |        |              |  |        |         |         |   | 574     |       
|Unfavorable lease adjustment                                        |                                                                |                                            | 1,971  |        |           |  |              |        |                           |  | 328      |       |              |  |            |       |               |  | 63            |        |              |  |        |         |         |   | 2,362   |       
|Long-term debt and capital lease
obligation, net of current portion |                                                                |                                            | 81,474 |        |           |  |              |        |                           |  |         |       |              |  |            |       |               |  | 76,171        |        |              |  |        |         |         |   | 157,645 |       
|Payable to subsidiaries/parent                                      |                                                                |                                            | 12,147 |        |           |  |              |        |                           |  | 437      |       |              |  |            |       |               |  |              |        |              |  | (12,584 | )       |         |   |        |       
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |        |        
|                                                                    |                                                                | Total liabilities                          |        |        | 115,920   |  |               |        | 490                       |  |          |       | 1,183        |  |             |       | 75            |  |               |        | 79,071       |  |         |         | (12,584 | ) |         |        | 184,155 | 
|Shareholders equity:                                               |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |       
|                                                                    | Common stock                                                   |                                            |        | 65     |           |  |               | 16,342 |                           |  |          |      |              |  |             |      |               |  |               |       |              |  |         | (16,342 | )       |   |         | 65     |        
|                                                                    | Additional paid-in capital                                     |                                            |        | 33,457 |           |  |               |       |                           |  |          | 2,549 |              |  |             | 7,365 |               |  |               | 5,667  |              |  |         | (15,754 | )       |   |         | 33,284 |        
|                                                                    | Retained earnings
(accumulated deficit)                        |                                            |        | (3,258 | )         |  |               | 224    |                           |  |          | (208  | )            |  |             | (33   | )             |  |               | (1,283 | )            |  |         | 1,175   |         |   |         | (3,383 | )      
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |        |        
|                                                                    |                                                                | Total shareholders equity                 |        |        | 30,264    |  |               |        | 16,566                    |  |          |       | 2,341        |  |             |       | 7,332         |  |               |        | 4,384        |  |         |         | (30,921 | ) |         |        | 29,966  | 
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |        |        
|                                                                    |                                                                | Total liabilities and
shareholdersequity |        | $      | 146,184   |  |               | $      | 17,056                    |  |          | $     | 3,524        |  |             | $     | 7,407         |  |               | $      | 83,455       |  |         | $       | (43,505 | ) |         | $      | 214,121 | 
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |        |        

10



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.

CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2002

|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |        |         |  | 
|------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------ | ------ | ------ | --------- |  | ------------- | ------ | ------------------------- |  | -------- | ----- | ------------ |  | ----------- | ----- | ------------- |  | ------------- | ------ | ------------ |  | ------- | ------- | ------- | - | ------- | ------ | ------- |  | 
|                                                                    |                                                                |                                            |        |        |           |  |               |        | Wholly-Owned Subsidiaries |  |          |       |              |  |             |       |              
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |              
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        | Non-         |  |         |         |         |   |         |        |        
|                                                                    |                                                                |                                            |        |        |           |  |               |        | ALC                       |  | Carriage |       |              |  |             |       | Participating |  | Consolidating |        | Consolidated
|                                                                    |                                                                |                                            |        |        | ALC, Inc. |  | Indiana, Inc. |        | House                     |  | HCI      |       | Subsidiaries |  | Adjustments |       | Total        
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |              
|ASSETS                                                             
|Current Assets:                                                     |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |       
|                                                                    | Cash and cash equivalents                                      |                                            | $      | 7,165  |           |  | $             |       |                           |  | $        |      |              |  | $           |      |               |  | $             |       |              |  | $       |        |         |   | $       | 7,165  |        
|                                                                    | Cash restricted for resident
security deposits                 |                                            |        | 1,929  |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               |       |              |  |         |        |         |   |         | 1,929  |        
|                                                                    | Accounts receivable, net                                       |                                            |        | 2,446  |           |  |               |       |                           |  |          |      |              |  |             | 3     |               |  |               | 266    |              |  |         |        |         |   |         | 2,715  |        
|                                                                    | Prepaid insurance                                              |                                            |        | 343    |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               |       |              |  |         |        |         |   |         | 343    |        
|                                                                    | Prepaid expenses                                               |                                            |        | 946    |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               | 45     |              |  |         |        |         |   |         | 991    |        
|                                                                    | Assets held for sale                                           |                                            |        | 9,727  |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         | 9,727  |        
|                                                                    | Cash restricted for workers
compensation claims               |                                            |        | 4,696  |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               |       |              |  |         |        |         |   |         | 4,696  |        
|                                                                    | Other current assets                                           |                                            |        | 1,199  |           |  |               |       |                           |  |          |      |              |  |             | 3     |               |  |               | 1,991  |              |  |         |        |         |   |         | 3,193  |        
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |        |        
|                                                                    |                                                                | Total current assets                       |        |        | 28,451    |  |               |        |                          |  |          |       |             |  |             |       | 6             |  |               |        | 2,302        |  |         |         |        |   |         |        | 30,759  | 
|Restricted cash                                                     |                                                                |                                            | 5,315  |        |           |  |              |        |                           |  |         |       |              |  |            |       |               |  |              |        |              |  |        |         |         |   | 5,315   |       
|Receivable from subsidiaries/parent                                 |                                                                |                                            | 9,745  |        |           |  | 6,454         |        |                           |  |         |       |              |  | 2,780       |       |               |  |              |        |              |  | (18,979 | )       |         |   |        |       
|Property and equipment, net                                         |                                                                |                                            | 81,328 |        |           |  | 12,565        |        |                           |  | 3,558    |       |              |  | 4,176       |       |               |  | 76,303        |        |              |  |        |         |         |   | 177,930 |       
|Investment in subsidiaries                                          |                                                                |                                            | 27,632 |        |           |  |               |        |                           |  |         |       |              |  |            |       |               |  |              |        |              |  | (27,632 | )       |         |   |         |       
|Other assets, net                                                   |                                                                |                                            | 1,635  |        |           |  |              |        |                           |  |         |       |              |  |            |       |               |  | 401           |        |              |  |        |         |         |   | 2,036   |       
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |        |        
|                                                                    |                                                                | Total assets                               |        | $      | 154,106   |  |               | $      | 19,019                    |  |          | $     | 3,558        |  |             | $     | 6,962         |  |               | $      | 79,006       |  |         | $       | (46,611 | ) |         | $      | 216,040 | 
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |        |        
|LIABILITIES AND SHAREHOLDERS EQUITY                               
|Current liabilities:                                                |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |       
|                                                                    | Accounts payable                                               |                                            | $      | 234    |           |  | $             |       |                           |  | $        |      |              |  | $           | 1     |               |  | $             | 534    |              |  | $       |        |         |   | $       | 769    |        
|                                                                    | Accrued real estate taxes                                      |                                            |        | 2,830  |           |  |               | 285    |                           |  |          | 234   |              |  |             | 71    |               |  |               | 1,416  |              |  |         |        |         |   |         | 4,836  |        
|                                                                    | Accrued interest expense                                       |                                            |        | 2,147  |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               | 27     |              |  |         |        |         |   |         | 2,174  |        
|                                                                    | Accrued payroll expense                                        |                                            |        | 4,960  |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               | 61     |              |  |         |        |         |   |         | 5,021  |        
|                                                                    | Other accrued expenses                                         |                                            |        | 5,669  |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               | 49     |              |  |         |        |         |   |         | 5,718  |        
|                                                                    | Resident security deposits                                     |                                            |        | 1,779  |           |  |               |       |                           |  |          |      |              |  |             | (1    | )             |  |               | 213    |              |  |         |        |         |   |         | 1,991  |        
|                                                                    | Other current liabilities                                      |                                            |        | 976    |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               |       |              |  |         |        |         |   |         | 976    |        
|                                                                    | Current portion of unfavorable
lease adjustment                |                                            |        | 525    |           |  |               |       |                           |  |          | 82    |              |  |             |      |               |  |               |       |              |  |         |        |         |   |         | 607    |        
|                                                                    | Current portion of long-term
debt and capital lease
obligation |                                            |        | 8,817  |           |  |               |       |                           |  |          |      |              |  |             |      |               |  |               | 2,704  |              |  |         |        |         |   |         | 11,521 |        
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |        |        
|                                                                    |                                                                | Total current liabilities                  |        |        | 27,937    |  |               |        | 285                       |  |          |       | 316          |  |             |       | 71            |  |               |        | 5,004        |  |         |         |        |   |         |        | 33,613  | 
|Other liabilities                                                   |                                                                |                                            | 430    |        |           |  |              |        |                           |  | 33       |       |              |  |            |       |               |  |              |        |              |  |        |         |         |   | 463     |       
|Unfavorable lease adjustment                                        |                                                                |                                            | 2,095  |        |           |  |              |        |                           |  | 347      |       |              |  |            |       |               |  | 66            |        |              |  |        |         |         |   | 2,508   |       
|Long-term debt and capital
lease obligation, net of
current portion |                                                                |                                            | 78,852 |        |           |  |              |        |                           |  |         |       |              |  |            |       |               |  | 72,219        |        |              |  |        |         |         |   | 151,071 |       
|Payable to subsidiaries/parent                                      |                                                                |                                            | 16,234 |        |           |  |              |        |                           |  | 1,236    |       |              |  |            |       |               |  | 1,509         |        |              |  | (18,979 | )       |         |   |        |       
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |        |        
|                                                                    |                                                                | Total liabilities                          |        |        | 125,548   |  |               |        | 285                       |  |          |       | 1,932        |  |             |       | 71            |  |               |        | 78,798       |  |         |         | (18,979 | ) |         |        | 187,655 | 
|Shareholders equity:                                               |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |       
|                                                                    | Common stock                                                   |                                            |        | 65     |           |  |               | 16,342 |                           |  |          |      |              |  |             |      |               |  |               |       |              |  |         | (16,342 | )       |   |         | 65     |        
|                                                                    | Additional paid-in capital                                     |                                            |        | 32,907 |           |  |               |       |                           |  |          | 2,548 |              |  |             | 7,365 |               |  |               | 5,667  |              |  |         | (15,753 | )       |   |         | 32,734 |        
|                                                                    | Accumulated deficit                                            |                                            |        | (4,414 | )         |  |               | 2,392  |                           |  |          | (922  | )            |  |             | (474  | )             |  |               | (5,459 | )            |  |         | 4,463   |         |   |         | (4,414 | )      
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |        |        
|                                                                    |                                                                | Total shareholders equity                 |        |        | 28,558    |  |               |        | 18,734                    |  |          |       | 1,626        |  |             |       | 6,891         |  |               |        | 208          |  |         |         | (27,632 | ) |         |        | 28,385  | 
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |        |        
|                                                                    |                                                                | Total liabilities and
shareholders equity |        | $      | 154,106   |  |               | $      | 19,019                    |  |          | $     | 3,558        |  |             | $     | 6,962         |  |               | $      | 79,006       |  |         | $       | (46,611 | ) |         | $      | 216,040 | 
|                                                                    |                                                                |                                            |        |        |           |  |               |        |                           |  |          |       |              |  |             |       |               |  |               |        |              |  |         |         |         |   |         |        |        

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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.

CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2003

|                                                                              |                                      |   |                          |        |          |        |      |     |                           |     |          |     |              |      |       |    |               |     |              |        |      |        |        |        |   |        |  
|----------------------------------------------------------------------------- | ------------------------------------ | - | ------------------------ | ------ | -------- | ------ | ---- | --- | ------------------------- | --- | -------- | --- | ------------ | ---- | ----- | -- | ------------- | --- | ------------ | ------ | ---- | ------ | ------ | ------ | - | ------ | -
|                                                                              |                                      |   |                          |        |          |        |      |     | Wholly-Owned Subsidiaries |     |          |     |             
|                                                                              |                                      |   |                          |        |          |        |      |     |                           |     |          |     |             
|                                                                              |                                      |   |                          |        |          |        |      |     |                           |     |          |     |              |      |       |    |               |     |              |        | Non- |        |        |        |  
|                                                                              |                                      |   |                          |        |          |        |      |     | ALC Indiana,              |     | Carriage |     |              |      |       |    | participating |     | Consolidated
|                                                                              |                                      |   |                          |        | ALC,INC. |        | Inc. |     | House                     |     | HCI      |     | Subsidiaries |      | Total
|                                                                              |                                      |   |                          |        |          |        |      |     |                           |     |          |     |              |      |      
|Revenue                                                                       |                                      | $ | 37,481                   |        |          | $      |     |     |                           | $   |         |     |              | $    |      |    |               | $   | 3,663        |        |      | $      | 41,144 |       
|Operating expenses:                                                           |                                      |   |                          |        |          |        |      |     |                           |     |          |     |              |      |       |    |               |     |              |        |      |        |        |       
|                                                                              | Residence operating expenses         |   |                          | 24,894 |          |        |      | 90  |                           |     |          | 64  |              |      |       |   |               |     |              | 2,675  |      |        |        | 27,723 |  
|                                                                              | Corporate general and administrative |   |                          | 4,342  |          |        |      |    |                           |     |          |    |              |      |       |   |               |     |              |       |      |        |        | 4,342  |  
|                                                                              | Building rentals                     |   |                          | 2,882  |          |        |      |    |                           |     |          | 223 |              |      |       |   |               |     |              |       |      |        |        | 3,105  |  
|                                                                              | Depreciation and amortization        |   |                          | 837    |          |        |      | 101 |                           |     |          | 34  |              |      |       | 33 |               |     |              | 671    |      |        |        | 1,676  |  
|                                                                              |                                      |   |                          |        |          |        |      |     |                           |     |          |     |              |      |       |    |               |     |              |        |      |        |        |       
|                                                                              |                                      |   | Total operating expenses |        |          | 32,955 |      |     |                           | 191 |          |     |              | 321  |       |    |               | 33  |              |        |      | 3,346  |        |        |   | 36,846 |  
|                                                                              |                                      |   |                          |        |          |        |      |     |                           |     |          |     |              |      |       |    |               |     |              |        |      |        |        |       
|Operating income                                                              |                                      |   | 4,526                    |        |          |        | (191 | )   |                           |     | (321     | )   |              |      | (33   | )  |               |     | 317          |        |      |        | 4,298  |       
|Other income (expense):                                                       |                                      |   |                          |        |          |        |      |     |                           |     |          |     |              |      |       |    |               |     |              |        |      |        |        |       
|                                                                              | Interest expense                     |   |                          | (1,765 | )        |        |      |    |                           |     |          |    |              |      |       |   |               |     |              | (1,664 | )    |        |        | (3,429 | )
|                                                                              | Interest income                      |   |                          | 36     |          |        |      |    |                           |     |          |    |              |      |       |   |               |     |              |       |      |        |        | 36     |  
|                                                                              | Management fee income (expense)      |   |                          | (177   | )        |        |      |    |                           |     |          | 113 |              |      |       |   |               |     |              | 64     |      |        |        |       |  
|                                                                              | Lease income (expense)               |   |                          | (540   | )        |        |      | 540 |                           |     |          |    |              |      |       |   |               |     |              |       |      |        |        |       |  
|                                                                              | Other income, net                    |   |                          | (4     | )        |        |      |    |                           |     |          |    |              |      |       |   |               |     |              |       |      |        |        | (4     | )
|                                                                              |                                      |   |                          |        |          |        |      |     |                           |     |          |     |              |      |       |    |               |     |              |        |      |        |        |       
|                                                                              |                                      |   | Total other expense, net |        |          | (2,450 | )    |     |                           | 540 |          |     |              | 113  |       |    |               |    |              |        |      | (1,600 | )      |        |   | (3,397 | )
|                                                                              |                                      |   |                          |        |          |        |      |     |                           |     |          |     |              |      |       |    |               |     |              |        |      |        |        |       
|Income (loss) from continuing operations
before income taxes                  |                                      |   | 2,076                    |        |          |        | 349  |     |                           |     | (208     | )   |              |      | (33   | )  |               |     | (1,283       | )      |      |        | 901    |       
|                                                                              | Income tax expense                   |   |                          | 239    |          |        |      | 125 |                           |     |          |    |              |      |       |   |               |     |              |       |      |        |        | 364    |  
|                                                                              |                                      |   |                          |        |          |        |      |     |                           |     |          |     |              |      |       |    |               |     |              |        |      |        |        |       
|Income (loss) from continuing operations                                      |                                      |   | 1,837                    |        |          |        | 224  |     |                           |     | (208     | )   |              |      | (33   | )  |               |     | (1,283       | )      |      |        | 537    |       
|Income (loss) from discontinued operations
(including gain on sale of assets) |                                      |   | 830                      |        |          |        |     |     |                           |     |         |     |              |      |      |    |               |     |             |        |      |        | 830    |       
|                                                                              | Income tax expense                   |   |                          | 336    |          |        |      |    |                           |     |          |    |              |      |       |   |               |     |              |       |      |        |        | 336    |  
|                                                                              |                                      |   |                          |        |          |        |      |     |                           |     |          |     |              |      |       |    |               |     |              |        |      |        |        |       
|Income (loss) from discontinued operations                                    |                                      |   | 494                      |        |          |        |     |     |                           |     |         |     |              |      |      |    |               |     |             |        |      |        | 494    |       
|                                                                              |                                      |   |                          |        |          |        |      |     |                           |     |          |     |              |      |       |    |               |     |              |        |      |        |        |       
|                                                                              |                                      |   | Net Income (loss)        |        | $        | 2,331  |      |     | $                         | 224 |          |     | $            | (208 | )     |    | $             | (33 | )            |        | $    | (1,283 | )      |        | $ | 1,031  |  
|                                                                              |                                      |   |                          |        |          |        |      |     |                           |     |          |     |              |      |       |    |               |     |              |        |      |        |        |       

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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC

CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2002

|                                                                                            |                                      |                                   |        |           |        |               |      |                           |     |          |      |              |      |       |     |               |     |              |       |        |       |   |        |        |        |  
|------------------------------------------------------------------------------------------- | ------------------------------------ | --------------------------------- | ------ | --------- | ------ | ------------- | ---- | ------------------------- | --- | -------- | ---- | ------------ | ---- | ----- | --- | ------------- | --- | ------------ | ----- | ------ | ----- | - | ------ | ------ | ------ | -
|                                                                                            |                                      |                                   |        |           |        |               |      | Wholly-Owned Subsidiaries |     |          |      |             
|                                                                                            |                                      |                                   |        |           |        |               |      |                           |     |          |      |             
|                                                                                            |                                      |                                   |        |           |        |               |      |                           |     |          |      |              |      |       |     |               |     |              |       | Non-   |       |   |        |       
|                                                                                            |                                      |                                   |        |           |        |               |      | ALC                       |     | Carriage |      |              |      |       |     | Participating |     | Consolidated
|                                                                                            |                                      |                                   |        | ALC, Inc. |        | Indiana, Inc. |      | House                     |     | HCI      |      | Subsidiaries |      | Total
|                                                                                            |                                      |                                   |        |           |        |               |      |                           |     |          |      |              |      |      
|Revenue                                                                                     |                                      | $                                 | 33,541 |           |        | $             |     |                           |     | $        |     |              |      | $     |    |               |     | $            | 3,473 |        |       | $ | 37,014 |       
|Operating expenses:                                                                         |                                      |                                   |        |           |        |               |      |                           |     |          |      |              |      |       |     |               |     |              |       |        |       |   |        |       
|                                                                                            | Residence operating expenses         |                                   |        | 22,699    |        |               |      | 71                        |     |          |      | 62           |      |       |     |              |     |              |       | 2,636  |       |   |        | 25,468 |       
|                                                                                            | Corporate general and administrative |                                   |        | 4,317     |        |               |      |                          |     |          |      |             |      |       |     |              |     |              |       |       |       |   |        | 4,317  |       
|                                                                                            | Building rentals                     |                                   |        | 2,805     |        |               |      |                          |     |          |      | 233          |      |       |     |              |     |              |       |       |       |   |        | 3,038  |       
|                                                                                            | Depreciation and amortization        |                                   |        | 823       |        |               |      | 99                        |     |          |      | 32           |      |       |     | 33            |     |              |       | 625    |       |   |        | 1,612  |       
|                                                                                            |                                      |                                   |        |           |        |               |      |                           |     |          |      |              |      |       |     |               |     |              |       |        |       |   |        |       
|                                                                                            |                                      | Total operating expenses          |        |           | 30,644 |               |      |                           | 170 |          |      |              | 327  |       |     |               | 33  |              |       |        | 3,261 |   |        |        | 34,435 |  
|                                                                                            |                                      |                                   |        |           |        |               |      |                           |     |          |      |              |      |       |     |               |     |              |       |        |       |   |        |       
|Operating income (loss)                                                                     |                                      |                                   | 2,897  |           |        |               | (170 | )                         |     |          | (327 | )            |      |       | (33 | )             |     |              | 212   |        |       |   | 2,579  |       
|Other income (expense):                                                                     |                                      |                                   |        |           |        |               |      |                           |     |          |      |              |      |       |     |               |     |              |       |        |       |   |        |       
|                                                                                            | Interest expense                     |                                   |        | (2,063    | )      |               |      |                          |     |          |      |             |      |       |     |              |     |              |       | (1,528 | )     |   |        | (3,591 | )     
|                                                                                            | Interest income                      |                                   |        | 53        |        |               |      |                          |     |          |      |             |      |       |     |              |     |              |       |       |       |   |        | 53     |       
|                                                                                            | Management fee income (expense)      |                                   |        | (92       | )      |               |      |                          |     |          |      | 75           |      |       |     |              |     |              |       | 17     |       |   |        |       |       
|                                                                                            | Lease income (expense)               |                                   |        | (1,769    | )      |               |      | 540                       |     |          |      |             |      |       |     |              |     |              |       | 1,229  |       |   |        |       |       
|                                                                                            | Other income, net                    |                                   |        | 2         |        |               |      |                          |     |          |      |             |      |       |     |              |     |              |       |       |       |   |        | 2      |       
|                                                                                            |                                      |                                   |        |           |        |               |      |                           |     |          |      |              |      |       |     |               |     |              |       |        |       |   |        |       
|                                                                                            |                                      | Total other income (expense), net |        |           | (3,869 | )             |      |                           | 540 |          |      |              | 75   |       |     |               |    |              |       |        | (282  | ) |        |        | (3,536 | )
|                                                                                            |                                      |                                   |        |           |        |               |      |                           |     |          |      |              |      |       |     |               |     |              |       |        |       |   |        |       
|Income (loss) before debt restructure, and reorganization
cost, and discontinued operations |                                      |                                   | (972   | )         |        |               | 370  |                           |     |          | (252 | )            |      |       | (33 | )             |     |              | (70   | )      |       |   | (957   | )     
|Debt restructure and reorganization costs                                                   |                                      |                                   | 447    |           |        |               |     |                           |     |          |     |              |      |       |    |               |     |              |      |        |       |   | 447    |       
|                                                                                            |                                      |                                   |        |           |        |               |      |                           |     |          |      |              |      |       |     |               |     |              |       |        |       |   |        |       
|Income (loss) from continuing operations                                                    |                                      |                                   | (1,419 | )         |        |               | 370  |                           |     |          | (252 | )            |      |       | (33 | )             |     |              | (70   | )      |       |   | (1,404 | )     
|Income (loss) from discontinued operations                                                  |                                      |                                   | (60    | )         |        |               |     |                           |     |          |     |              |      |       | (32 | )             |     |              | 46    |        |       |   | (46    | )     
|                                                                                            |                                      |                                   |        |           |        |               |      |                           |     |          |      |              |      |       |     |               |     |              |       |        |       |   |        |       
|                                                                                            |                                      | Net income (loss)                 |        | $         | (1,479 | )             |      | $                         | 370 |          |      | $            | (252 | )     |     | $             | (65 | )            |       | $      | (24   | ) |        | $      | (1,450 | )
|                                                                                            |                                      |                                   |        |           |        |               |      |                           |     |          |      |              |      |       |     |               |     |              |       |        |       |   |        |       

13



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
Three months ended March 31, 2003

|                                                                                         |                                        |                                                            |                                                     |       |           |       |               |     |                           |     |          |      |              |   |       |     |               |   |              |        |       |      |        |       |        |       |  
|---------------------------------------------------------------------------------------- | -------------------------------------- | ---------------------------------------------------------- | --------------------------------------------------- | ----- | --------- | ----- | ------------- | --- | ------------------------- | --- | -------- | ---- | ------------ | - | ----- | --- | ------------- | - | ------------ | ------ | ----- | ---- | ------ | ----- | ------ | ----- | -
|                                                                                         |                                        |                                                            |                                                     |       |           |       |               |     | Wholly-Owned Subsidiaries |     |          |      |             
|                                                                                         |                                        |                                                            |                                                     |       |           |       |               |     |                           |     |          |      |             
|                                                                                         |                                        |                                                            |                                                     |       |           |       |               |     |                           |     |          |      |              |   |       |     |               |   |              |        | Non-  |      |        |       |       
|                                                                                         |                                        |                                                            |                                                     |       |           |       |               |     | ALC                       |     | Carriage |      |              |   |       |     | Participating |   | Consolidated
|                                                                                         |                                        |                                                            |                                                     |       | ALC, Inc. |       | Indiana, Inc. |     | House                     |     | HCI      |      | Subsidiaries |   | Total
|                                                                                         |                                        |                                                            |                                                     |       |           |       |               |     |                           |     |          |      |              |   |      
|Operating Activities:                                                                    |                                        |                                                            |                                                     |       |           |       |               |     |                           |     |          |      |              |   |       |     |               |   |              |        |       |      |        |      
|                                                                                         | Net income (loss)                      |                                                            | $                                                   | 2,331 |           |       | $             | 224 |                           |     | $        | (208 | )            |   | $     | (33 | )             |   | $            | (1,283 | )     |      | $      | 1,031 |       
|Adjustment to reconcile net loss to net cash provided by
(used in) operating activities: |                                        |                                                            |                                                     |       |           |       |               |     |                           |     |          |      |              |   |       |     |               |   |              |        |       |      |        |      
|                                                                                         |                                        | Depreciation and amortization                              |                                                     |       | 837       |       |               |     | 101                       |     |          |      | 34           |   |       |     | 33            |   |              |        | 671   |      |        |       | 1,676  |      
|                                                                                         |                                        | Provision for doubtful accounts                            |                                                     |       | 239       |       |               |     |                          |     |          |      |             |   |       |     |              |   |              |        | 13    |      |        |       | 252    |      
|                                                                                         |                                        | Amortization of debt issuance costs                        |                                                     |       | 27        |       |               |     |                          |     |          |      |             |   |       |     |              |   |              |        |      |      |        |       | 27     |      
|                                                                                         |                                        | Amortization of fair value adjustments
to building rentals |                                                     |       | (138      | )     |               |     |                          |     |          |      | (20          | ) |       |     |              |   |              |        | 3     |      |        |       | (155   | )    
|                                                                                         |                                        | Interest paid-in-kind                                      |                                                     |       | 330       |       |               |     |                          |     |          |      |             |   |       |     |              |   |              |        |      |      |        |       | 330    |      
|                                                                                         |                                        | Amortization of fair value adjustment of debt              |                                                     |       | 97        |       |               |     |                          |     |          |      |             |   |       |     |              |   |              |        |      |      |        |       | 97     |      
|                                                                                         |                                        | Amortization of note discount                              |                                                     |       | 135       |       |               |     |                          |     |          |      |             |   |       |     |              |   |              |        |      |      |        |       | 135    |      
|                                                                                         |                                        | Straight-line adjustment to building rental                |                                                     |       | 111       |       |               |     |                          |     |          |      |             |   |       |     |              |   |              |        |      |      |        |       | 111    |      
|                                                                                         |                                        | Gain on sale of assets                                     |                                                     |       | (899      | )     |               |     |                          |     |          |      |             |   |       |     |              |   |              |        |      |      |        |       | (899   | )    
|Changes in assets and liabilities:                                                       |                                        |                                                            |                                                     |       |           |       |               |     |                           |     |          |      |              |   |       |     |               |   |              |        |       |      |        |      
|                                                                                         |                                        | Receivable (payable) from subsidiaries/parent              |                                                     |       | (1,020    | )     |               |     | (516                      | )   |          |      | 124          |   |       |     | (10           | ) |              |        | 1,422 |      |        |       |       |      
|                                                                                         |                                        | Accounts receivable                                        |                                                     |       | (874      | )     |               |     |                          |     |          |      |             |   |       |     | 3             |   |              |        | 21    |      |        |       | (850   | )    
|                                                                                         |                                        | Prepaid expenses                                           |                                                     |       | (640      | )     |               |     |                          |     |          |      |             |   |       |     |              |   |              |        | 23    |      |        |       | (617   | )    
|                                                                                         |                                        | Other current assets                                       |                                                     |       | 135       |       |               |     |                          |     |          |      |             |   |       |     | 3             |   |              |        | 169   |      |        |       | 307    |      
|                                                                                         |                                        | Other assets                                               |                                                     |       | (283      | )     |               |     |                          |     |          |      |             |   |       |     |              |   |              |        | (28   | )    |        |       | (311   | )    
|                                                                                         |                                        | Accounts payable                                           |                                                     |       | 1,029     |       |               |     |                          |     |          |      |             |   |       |     | (1            | ) |              |        | (22   | )    |        |       | 1,006  |      
|                                                                                         |                                        | Accrued expenses                                           |                                                     |       | (1,450    | )     |               |     | 80                        |     |          |      | 64           |   |       |     | 4             |   |              |        | (872  | )    |        |       | (2,174 | )    
|                                                                                         |                                        | Other current liabilities                                  |                                                     |       | (153      | )     |               |     | 125                       |     |          |      |             |   |       |     | 1             |   |              |        | (15   | )    |        |       | (42    | )    
|                                                                                         |                                        | Other liabilities                                          |                                                     |       | (6        | )     |               |     |                          |     |          |      | 6            |   |       |     |              |   |              |        |      |      |        |       |       |      
|                                                                                         |                                        |                                                            |                                                     |       |           |       |               |     |                           |     |          |      |              |   |       |     |               |   |              |        |       |      |        |       |       
|                                                                                         |                                        |                                                            | Net
cash provided by (used in) operating activities |       |           | (192  | )             |     |                           | 14  |          |      |              |  |       |     |               |  |              |        |       | 102  |        |       |        | (76   | )
|                                                                                         |                                        |                                                            |                                                     |       |           |       |               |     |                           |     |          |      |              |   |       |     |               |   |              |        |       |      |        |       |       
|Investing Activities:                                                                    |                                        |                                                            |                                                     |       |           |       |               |     |                           |     |          |      |              |   |       |     |               |   |              |        |       |      |        |      
|Increase in restricted cash                                                              |                                        |                                                            | 313                                                 |       |           |       |              |     |                           |     |         |      |              |   |      |     |               |   |             |        |       |      | 313    |      
|Purchases of property and equipment                                                      |                                        |                                                            | (311                                                | )     |           |       | (14           | )   |                           |     |         |      |              |   |      |     |               |   | (102         | )      |       |      | (427   | )    
|Sale of properties                                                                       |                                        |                                                            | 2,569                                               |       |           |       |              |     |                           |     |         |      |              |   |      |     |               |   |             |        |       |      | 2,569  |      
|                                                                                         |                                        |                                                            |                                                     |       |           |       |               |     |                           |     |          |      |              |   |       |     |               |   |              |        |       |      |        |       |       
|                                                                                         |                                        |                                                            | Net cash provided by (used in) investing            |       |           | 2,571 |               |     |                           | (14 | )        |      |              |  |       |     |               |  |              |        |       | (102 | )      |       |        | 2,455 |  
|                                                                                         |                                        |                                                            |                                                     |       |           |       |               |     |                           |     |          |      |              |   |       |     |               |   |              |        |       |      |        |       |       
|Financing Activities:                                                                    |                                        |                                                            |                                                     |       |           |       |               |     |                           |     |          |      |              |   |       |     |               |   |              |        |       |      |        |      
|Payments on long-term debt and capital lease obligation                                  |                                        |                                                            | (2,808                                              | )     |           |       |              |     |                           |     |         |      |              |   |      |     |               |   |             |        |       |      | (2,808 | )    
|                                                                                         |                                        |                                                            |                                                     |       |           |       |               |     |                           |     |          |      |              |   |       |     |               |   |              |        |       |      |        |       |       
|Net cash provided by (used in) financing activities                                      |                                        |                                                            | (2,808                                              | )     |           |       |              |     |                           |     |         |      |              |   |      |     |               |   |             |        |       |      | (2,808 | )    
|                                                                                         |                                        |                                                            |                                                     |       |           |       |               |     |                           |     |          |      |              |   |       |     |               |   |              |        |       |      |        |       |       
|Net decrease in cash and cash equivalents                                                |                                        |                                                            | (429                                                | )     |           |       |              |     |                           |     |         |      |              |   |      |     |               |   |             |        |       |      | (429   | )    
|Cash and cash equivalents, beginning of year                                             |                                        |                                                            | 7,165                                               |       |           |       |              |     |                           |     |         |      |              |   |      |     |               |   |             |        |       |      | 7,165  |      
|                                                                                         |                                        |                                                            |                                                     |       |           |       |               |     |                           |     |          |      |              |   |       |     |               |   |              |        |       |      |        |       |       
|                                                                                         | Cash and cash equivalents, end of year |                                                            | $                                                   | 6,736 |           |       | $             |    |                           |     | $        |     |              |   | $     |    |               |   | $            |       |       |      | $      | 6,736 |       
|                                                                                         |                                        |                                                            |                                                     |       |           |       |               |     |                           |     |          |      |              |   |       |     |               |   |              |        |       |      |        |       |       

14



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
Three months ended March 31, 2002

|                                                                                                  |                                                           |                                                      |        |           |        |     |     |                           |   |          |      |              |     |       |     |               |    |              |       |        |        |   |        |        |        |  
|------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ---------------------------------------------------- | ------ | --------- | ------ | --- | --- | ------------------------- | - | -------- | ---- | ------------ | --- | ----- | --- | ------------- | -- | ------------ | ----- | ------ | ------ | - | ------ | ------ | ------ | -
|                                                                                                  |                                                           |                                                      |        |           |        |     |     | Wholly-Owned Subsidiaries |   |          |      |             
|                                                                                                  |                                                           |                                                      |        |           |        |     |     |                           |   |          |      |             
|                                                                                                  |                                                           |                                                      |        |           |        |     |     | ALC                       |   |          |      |              |     |       |     |               |    | Non-         |       |        |        |  
|                                                                                                  |                                                           |                                                      |        |           |        |     |     | Indiana,                  |   | Carriage |      |              |     |       |     | Participating |    | Consolidated
|                                                                                                  |                                                           |                                                      |        | ALC, Inc. |        | Inc |     | House                     |   | HCI      |      | Subsidiaries |     | Total
|                                                                                                  |                                                           |                                                      |        |           |        |     |     |                           |   |          |      |              |     |      
|Operating Activities:                                                                             |                                                           |                                                      |        |           |        |     |     |                           |   |          |      |              |     |       |     |               |    |              |       |        |        |   |        |       
|Net income (loss)                                                                                 |                                                           | $                                                    | (1,479 | )         |        | $   | 370 |                           |   | $        | (252 | )            |     | $     | (65 | )             |    | $            | (24   | )      |        | $ | (1,450 | )     
|Adjustment to reconcile net income
(loss) to net cash provided by
(used in) operating activities: |                                                           |                                                      |        |           |        |     |     |                           |   |          |      |              |     |       |     |               |    |              |       |        |        |   |        |       
|                                                                                                  | Depreciation and amortization                             |                                                      |        | 845       |        |     |     | 99                        |   |          |      | 32           |     |       |     | 51            |    |              |       | 640    |        |   |        | 1,667  |       
|                                                                                                  | Amortization of debt issuance costs                       |                                                      |        | 20        |        |     |     |                          |   |          |      |             |     |       |     |              |    |              |       |       |        |   |        | 20     |       
|                                                                                                  | Amortization of fair value
adjustment to building rentals |                                                      |        | (144      | )      |     |     |                          |   |          |      | (23          | )   |       |     |              |    |              |       | (3     | )      |   |        | (170   | )     
|                                                                                                  | Amortization of fair market
adjustment to long-term debt  |                                                      |        | 4         |        |     |     |                          |   |          |      |             |     |       |     |              |    |              |       | 103    |        |   |        | 107    |       
|                                                                                                  | Amortization of discount on long-term debt                |                                                      |        | 106       |        |     |     |                          |   |          |      |             |     |       |     |              |    |              |       |       |        |   |        | 106    |       
|                                                                                                  | Straight-line adjustment to
building rentals              |                                                      |        | 86        |        |     |     |                          |   |          |      |             |     |       |     |              |    |              |       |       |        |   |        | 86     |       
|                                                                                                  | Interest paid-in-kind                                     |                                                      |        | 305       |        |     |     |                          |   |          |      |             |     |       |     |              |    |              |       |       |        |   |        | 305    |       
|                                                                                                  | Provision (recoveries) for doubtful accounts              |                                                      |        | 26        |        |     |     |                          |   |          |      |             |     |       |     |              |    |              |       | (13    | )      |   |        | 13     |       
|Changes in assets and liabilities:                                                                |                                                           |                                                      |        |           |        |     |     |                           |   |          |      |              |     |       |     |               |    |              |       |        |        |   |        |       
|                                                                                                  | Receivable from subsidiaries/parent                       |                                                      |        | 1,568     |        |     |     | (531                      | ) |          |      | 211          |     |       |     | 4             |    |              |       | (1,252 | )      |   |        |       |       
|                                                                                                  | Accounts receivable                                       |                                                      |        | (116      | )      |     |     |                          |   |          |      |             |     |       |     | 11            |    |              |       | 5      |        |   |        | (100   | )     
|                                                                                                  | Prepaid expenses                                          |                                                      |        | (2,343    | )      |     |     |                          |   |          |      |             |     |       |     |              |    |              |       | 22     |        |   |        | (2,321 | )     
|                                                                                                  | Other current assets                                      |                                                      |        | 206       |        |     |     | (9                        | ) |          |      | 3            |     |       |     |              |    |              |       | 45     |        |   |        | 245    |       
|                                                                                                  | Other assets                                              |                                                      |        | (12       | )      |     |     |                          |   |          |      |             |     |       |     |              |    |              |       | (19    | )      |   |        | (31    | )     
|                                                                                                  | Accounts payable                                          |                                                      |        | (213      | )      |     |     |                          |   |          |      |             |     |       |     | (4            | )  |              |       | (37    | )      |   |        | (254   | )     
|                                                                                                  | Accrued expenses                                          |                                                      |        | 1,147     |        |     |     | 71                        |   |          |      | 62           |     |       |     | 11            |    |              |       | (978   | )      |   |        | 313    |       
|                                                                                                  | Other current liabilities                                 |                                                      |        | 854       |        |     |     |                          |   |          |      |             |     |       |     |              |    |              |       | (59    | )      |   |        | 795    |       
|                                                                                                  | Other liabilities                                         |                                                      |        | (15       | )      |     |     |                          |   |          |      | 8            |     |       |     |              |    |              |       |       |        |   |        | (7     | )     
|                                                                                                  |                                                           |                                                      |        |           |        |     |     |                           |   |          |      |              |     |       |     |               |    |              |       |        |        |   |        |       
|                                                                                                  |                                                           | Net cash provided by (used in)
operating activities  |        |           | 845    |     |     |                           |  |          |      |              | 41  |       |     |               | 8  |              |       |        | (1,570 | ) |        |        | (676   | )
|Investing Activities:                                                                             |                                                           |                                                      |        |           |        |     |     |                           |   |          |      |              |     |       |     |               |    |              |       |        |        |   |        |       
|Increase in restricted cash                                                                       |                                                           |                                                      | (1,719 | )         |        |     |    |                           |   |          |     |              |     |       |    |               |    |              |      |        |        |   | (1,719 | )     
|Purchases of property and equipment                                                               |                                                           |                                                      | (355   | )         |        |     |    |                           |   |          | (41  | )            |     |       | (8  | )             |    |              | (221  | )      |        |   | (625   | )     
|                                                                                                  |                                                           |                                                      |        |           |        |     |     |                           |   |          |      |              |     |       |     |               |    |              |       |        |        |   |        |       
|                                                                                                  |                                                           | Net cash provided by (used in)
investing activities  |        |           | (2,074 | )   |     |                           |  |          |      |              | (41 | )     |     |               | (8 | )            |       |        | (221   | ) |        |        | (2,344 | )
|Financing Activities:                                                                             |                                                           |                                                      |        |           |        |     |     |                           |   |          |      |              |     |       |     |               |    |              |       |        |        |   |        |       
|Proceeds from long-term debt                                                                      |                                                           |                                                      | (791   | )         |        |     |    |                           |   |          |     |              |     |       |    |               |    |              | 1,791 |        |        |   | 1,000  |       
|Payments on long-term debt and
capital lease obligation                                           |                                                           |                                                      | (360   | )         |        |     |    |                           |   |          |     |              |     |       |    |               |    |              |      |        |        |   | (360   | )     
|Debt issuance costs                                                                               |                                                           |                                                      | (79    | )         |        |     |    |                           |   |          |     |              |     |       |    |               |    |              |      |        |        |   | (79    | )     
|                                                                                                  |                                                           |                                                      |        |           |        |     |     |                           |   |          |      |              |     |       |     |               |    |              |       |        |        |   |        |       
|                                                                                                  |                                                           | Net cash provided by (used in )
financing activities |        |           | (1,230 | )   |     |                           |  |          |      |              |    |       |     |               |   |              |       |        | 1,791  |   |        |        | 561    |  
|                                                                                                  |                                                           |                                                      |        |           |        |     |     |                           |   |          |      |              |     |       |     |               |    |              |       |        |        |   |        |       
|Net decrease in cash and cash equivalents                                                         |                                                           |                                                      | (2,459 | )         |        |     |    |                           |   |          |     |              |     |       |    |               |    |              |      |        |        |   | (2,459 | )     
|Cash and cash equivalents,
beginning of period                                                    |                                                           |                                                      | 6,077  |           |        |     |    |                           |   |          |     |              |     |       |    |               |    |              |      |        |        |   | 6,077  |       
|                                                                                                  |                                                           |                                                      |        |           |        |     |     |                           |   |          |      |              |     |       |     |               |    |              |       |        |        |   |        |       
|Cash and cash equivalents, end of period                                                          |                                                           | $                                                    | 3,618  |           |        | $   |    |                           |   | $        |     |              |     | $     |    |               |    | $            |      |        |        | $ | 3,618  |       
|                                                                                                  |                                                           |                                                      |        |           |        |     |     |                           |   |          |      |              |     |       |     |               |    |              |       |        |        |   |        |       

15



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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.

General

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. As of
March 31, 2003, we had operations in 14 states.

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. We believe that this combination of
residential, personal care, support and health care services provides a
cost-efficient alternative to, and affords an independent lifestyle for,
individuals who do not require the broader array of medical services that
nursing facilities are required by law to provide.

As of March 31, 2003, we operated 177 assisted living residences (6,844 units),
of which we owned 122 residences (4,739 units) and leased 55 residences (2,105
units). At March 31, 2003, we had an occupancy rate of 88.3% and an average
combined monthly rate for rent and services of $2,235 per unit.

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 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                                                                                                                                
|
| |  |  | interest expense related to debt.                                                                                                                                 

We anticipate that the majority of our revenues will continue to come from
private pay sources. However, we believe that by having located some of our
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 residents and Medicaid paying
residents 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.

Certain Transactions and Events

Fresh-Start Reporting

Upon the Effective Date of our Plan of reorganization, we adopted fresh-start
reporting in accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7, Financial Reporting By Entities in
Reorganization Under the Bankruptcy Code (SOP 90-7). In connection with the
adoption of fresh-start reporting, a new entity has been deemed created for
financial reporting purposes. For financial reporting purposes, we adopted the
provisions of fresh-start reporting effective December 31, 2001. In adopting
the requirements of fresh-start reporting as of December 31, 2001, we were
required to value our assets and liabilities at their estimated fair value and
eliminate our accumulated deficit at December 31, 2001.

16



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##### Table of Contents



Sales of Residences

During the three months ended March 31, 2003, the Company sold one residence in
Ohio and one residence in Indiana. The total sales price for these residences
was $2.6 million, and the Company recognized a gain from these sales of
$899,000.

Due to the purchasers inability to obtain suitable financing, the Company has
entered into an agreement to terminate the proposed sale of the Companys nine
South Carolina facilities. Six of the facilities are owned and pledged as
collateral for the Senior Secured Notes and Junior Secured Notes; three of the
facilities are leased from a national REIT. The Company had previously
announced the pending sale of these properties and proposed use of the proceeds
to redeem a portion of the Senior Secured Notes, which will now not occur.

Due to the recent improved operating performance of the South Carolina
facilities, the Company has decided not to sell these assets at this time. For
at least the near term, the Company intends to continue to operate the
facilities on an on-going basis.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate these
estimates, including those related to bad debts, income taxes, the carrying
value of long-lived assets, financing operations, contingencies and litigation.
We base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.

17



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##### Table of Contents



Results of Operations

The following table sets forth, for the periods presented, 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 March 31,
|                                                                                         |                                                                  |                          |       | 2002                         |      | 2003
|                                                                                         |                                                                  |                          |       |                              |      |     
|Revenue                                                                                  |                                                                  |                          | 100.0 |                              |      |      | 100.0 |     
|Operating expenses:                                                                      |                                                                  |                          |       |                              |      |      |       |     
|                                                                                         | Residence operating expenses                                     |                          |       | 68.8                         |      |      |       | 67.4 |     
|                                                                                         | Corporate general and administrative                             |                          |       | 11.7                         |      |      |       | 10.6 |     
|                                                                                         | Building rentals                                                 |                          |       | 8.2                          |      |      |       | 7.5  |     
|                                                                                         | Depreciation and amortization                                    |                          |       | 4.3                          |      |      |       | 4.0  |     
|                                                                                         |                                                                  |                          |       |                              |      |      |       |     
|                                                                                         |                                                                  | Total operating expenses |       |                              | 93.0 |      |       |      | 89.5 |  
|                                                                                         |                                                                  |                          |       |                              |      |      |       |     
|Operating income                                                                         |                                                                  |                          | 7.0   |                              |      |      | 10.5  |     
|Other income (expense):                                                                  |                                                                  |                          |       |                              |      |      |       |     
|                                                                                         | Interest expense                                                 |                          |       | (9.7                         | )    |      |       | (8.4 | )   
|                                                                                         | Interest income                                                  |                          |       | 0.1                          |      |      |       | 0.1  |     
|                                                                                         | Other income, net                                                |                          |       | 0.0                          |      |      |       | (0.0 | )   
|                                                                                         |                                                                  |                          |       |                              |      |      |       |     
|                                                                                         |                                                                  | Total other expense, net |       |                              | (9.6 | )    |       |      | (8.3 | )
|Income (loss) before debt restructure, reorganization costs, and
discontinued operations |                                                                  |                          | (2.6  | )                            |      |      | 2.2   |     
|Debt restructure and reorganization costs                                                |                                                                  |                          | (1.2  | )                            |      |      |      |     
|                                                                                         |                                                                  |                          |       |                              |      |      |       |     
|Income (loss) from continuing operations before income taxes                             |                                                                  |                          | (3.8  | )                            |      |      | 2.2   |     
|                                                                                         | Income tax expense                                               |                          |       |                             |      |      |       | 0.9  |     
|                                                                                         |                                                                  |                          |       |                              |      |      |       |     
|Income (loss) from continuing operations                                                 |                                                                  |                          | (3.8  | )                            |      |      | 1.3   |     
|Discontinued operations:                                                                 |                                                                  |                          |       |                              |      |      |       |     
|                                                                                         | Income (loss) from operations (including gain on sale of assets) |                          |       | (0.1                         | )    |      |       | 2.0  |     
|                                                                                         | Income tax expense                                               |                          |       |                             |      |      |       | 0.8  |     
|                                                                                         |                                                                  |                          |       |                              |      |      |       |     
|Income (loss) from discontinued operations                                               |                                                                  |                          | (0.1  | )                            |      |      | 1.2   |     
|                                                                                         |                                                                  |                          |       |                              |      |      |       |     
|Net income (loss)                                                                        |                                                                  |                          | (3.9  | )                            |      |      | 2.5   |     
|                                                                                         |                                                                  |                          |       |                              |      |      |       |     

|                                             |                                                  |                                |   |                              |        |      |   |       |        |  
|-------------------------------------------- | ------------------------------------------------ | ------------------------------ | - | ---------------------------- | ------ | ---- | - | ----- | ------ | -
|                                             |                                                  |                                |   | Three Months Ended March 31,
|                                             |                                                  |                                |   | 2002                         |        | 2003
|                                             |                                                  |                                |   |                              |        |     
|Other Data Related to Continuing Operations: |                                                  |                                |   |                              |        |      |   |      
|                                             | Residences operated (end of period)              |                                | $ | 177                          |        |      | $ | 177   |       
|                                             | Units operated (end of period)                   |                                |   | 6,842                        |        |      |   | 6,844 |       
|                                             | Average occupancy rate (based on occupied units) |                                |   | 84.3                         | %      |      |   | 88.3  | %     
|                                             | Average monthly rental rate                      |                                | $ | 2,121                        |        |      | $ | 2,235 |       
|                                             | Sources of revenue:                              |                                |   |                              |        |      |   |       |       
|                                             |                                                  | Medicaid state paid portion    |   |                              | 12.13  | %    |   |       | 12.88  | %
|                                             |                                                  | Medicaid resident paid portion |   |                              | 7.50   | %    |   |       | 8.42   | %
|                                             |                                                  | Private resident paid portion  |   |                              | 80.37  | %    |   |       | 78.70  | %
|                                             |                                                  |                                |   |                              |        |      |   |      
|                                             |                                                  | Total                          |   |                              | 100.00 | %    |   |       | 100.00 | %
|                                             |                                                  |                                |   |                              |        |      |   |      

Three months ended March 31, 2003 compared to three months ended March 31,
2002:

The Company recorded net income of $1.0 million on revenues of $41.1 million
for the three months ended March 31, 2003 (the March 2003 Quarter) compared
to a net loss of $1.5 million on revenues of $37.0 million for the three months
ended March 31, 2002 (the March 2002 Quarter).

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Revenues increased $4.1 million for the March 2003 Quarter compared to the
March 2002 Quarter primarily due to an increase in average occupancy of
approximately four percent and an increase in average rental rate received from
residents of approximately $114 per month. In March 2003 the Company
instituted a rent increase in its residences.

Residence operating expenses increased $2.3 million for the March 2003 Quarter
compared to the March 2002 Quarter but decreased as a percentage of revenue
from 68.8% to 67.4%. Of the increase, $1.1 million is attributable to an
increase in payroll expenses, which decreased slightly as a percentage of
revenue. The increase in payroll is primarily due to an increase in benefits,
additional personnel, and increased salaries and wages. An increase in
utilities expense of $0.4 million in addition to less significant increases in
other expense categories comprise the remaining increase in residence operating
expenses from the March 2002 Quarter to the March 2003 Quarter. These
increases were offset primarily by a decrease of $180,000 in insurance costs,
primarily liability insurance, and less significant decreases in other expense
categories.

Corporate, general and administrative expenses increased $25,000 for the March
2003 Quarter compared to the March 2002 Quarter but decreased as a percentage
of revenue from 11.7% to 10.6%. Increased expenses from the relocation of the
Companys headquarters from Portland, Oregon to Dallas, Texas including rent,
hiring expenses and temporary help expenses were offset by decreases in
information technology related expenses and other payroll related expenses.

Building rentals increased $67,000 for the March 2003 Quarter compared to the
March 2002 Quarter but decreased as a percentage of revenue from 8.2% to 7.5%.

Depreciation and amortization expense increased by $64,000 for the March 2003
Quarter compared to the March 2002 Quarter.

Interest expense decreased $162,000 for the March 2003 Quarter compared to the
March 2002 Quarter. The decrease is due to the overall reduction of
indebtedness.

Debt restructure and reorganization costs were $447,000 for the March 2002
Quarter. These are professional fees, including legal and investment advisory
fees, related to the Companys Plan of reorganization which became effective
January 1, 2002. The Company did not incur these expenses in the March 2003
Quarter.

Income tax expense was $700,000 for the March 2003 Quarter, of which $150,000
related to state income taxes. The Company anticipates taxable income for both
financial reporting and tax return purposes for the year ended December 31,
2003, and accordingly has provided for federal and state income taxes on income
from continuing operations and discontinued operations for the three months
ended March 31, 2003. The Company has recorded such income tax expense at the
rate of 40.4%, the estimated effective tax rate for the full fiscal year.

Liquidity and Capital Resources

At March 31, 2003, we had a working capital deficit of $2.4 million and
unrestricted cash and cash equivalents of $6.7 million.

Net cash used in operating activities was $76,000 during the March 2003
Quarter. The primary sources included net income of $1.0 million and an
increase in accounts payable of $1.0 million. The increase in accounts payable
was primarily due to increased operating expenses at the residences and
expenses relating to the move of the corporate office. These sources were
offset primarily by a decrease of $2.2 million in accrued expenses, and
increases of $850,000 and $617,000 in accounts receivable and prepaid expenses,
respectively. The decrease in accrued expenses was primarily due to property
tax payments made during the March 2003 Quarter, while the increases in
accounts receivable and prepaid expenses were primarily due to increased
revenues and insurance premium payments, respectively.

Net cash provided by investing activities was $2.5 million during the March
2003 Quarter. The primary source resulted from the sales of properties for $2.6
million.

Net cash used in financing activities was $2.8 million during the March 2003
Quarter, all of which related to payments on long-term debt.

As of March 31, 2003, approximately $24.2 million of our indebtedness was
secured by letters of credit issued by U.S. Bank, which in some cases, have
termination dates prior to the maturity of the underlying debt. As such letters
of credit expire, beginning in January 2004, 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

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expiration of any of these letters
of credit, we would be in default on the underlying debt. Any such default
could have a material adverse effect on the Company.

Our credit agreements with U.S. Bank contain certain restrictive and financial
covenants, including certain financial ratios. The agreements also require 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 deposits have been required.

In May 2002, we amended our existing agreement with U.S. Bank, establishing new
covenants, with which we were in compliance as of March 31, 2003. Failure to
comply with these covenants would constitute an event of default, which would
allow U.S. Bank 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 which would have a material adverse
effect on the Company.

Our ability to make payments on and to refinance any of our indebtedness, to
satisfy our lease obligations and to fund planned capital expenditures will
depend on our ability to generate cash in the future. This, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control.

Based upon our current level of operations, we believe that our current cash on
hand and cash flow from operations are sufficient to meet our liquidity needs
for at least the next twelve months.

There can be no assurance, however, that our business will generate sufficient
cash flow from operations, or that currently anticipated cost savings and
operating improvements will be realized on schedule, both of which may be
necessary to enable us to pay our indebtedness, to satisfy our lease
obligations and to fund our other liquidity needs. As a result, we may need to
refinance all or a portion of our indebtedness, on or before maturity. There
can be no assurance that we will be able to refinance any of our indebtedness,
on commercially reasonable terms or at all.




Item 3.Quantitative and Qualitative Disclosure About Market Risk

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

For fixed rate debt, changes in interest rates generally affect the fair market
value of the debt instrument, but not our results of operations 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 results of
operations 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 results of
operations and cash flows. We had variable rate debt of $67.4 million
outstanding at March 31, 2003 with a weighted average interest rate of 6.1%, of
which $43.2 million has an interest rate floor of 8.0%. Assuming that our
balance of variable rate debt remains constant, each one-percent increase in
interest rates would result in an annual increase in interest expense, and a
corresponding decrease in net cash flows, of $242,000. Conversely, each
one-percent decrease in interest rates would result in an annual decrease in
interest expense, and a corresponding increase in net cash flows, of $242,000.

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.

20



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##### Table of Contents






Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our chief executive officer and our chief financial officer, after evaluating
our disclosure controls and procedures (as defined in Securities Exchange Act
of 1934 (the Exchange Act) Rules 13a-14(c) and 15-d-14(c)) as of a date (the
Evaluation Date) within 90 days before the filing date of this Quarterly
Report on Form 10-Q, have concluded that as of the Evaluation Date, our
disclosure controls and procedures are effective to ensure that information we
are required to disclose in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.

Changes in Internal Controls

Subsequent to the Evaluation Date, there were no significant changes in our
internal controls or in other factors that could significantly affect our
controls, nor, to our knowledge, were there any significant deficiencies or
material weaknesses in our internal controls. As a result, no corrective
actions were required or undertaken.




PART II  OTHER INFORMATION




Item 1.Legal Proceedings

We are involved from time to time in ordinary, routine or regulatory legal
proceedings incidental to our business. As of May 8, 2003, we believe that such
legal proceedings should not have a material adverse effect on our business.




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

None.




Item 6.Exhibits and Reports on Form 8-K



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

|        |  |                                                                                                                       
|------- |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                       
|Number  |  |                                                                                                                       
|12      |  | Ratio of Earnings to Fixed Charges                                                                                    
|        |  |                                                                                                                       
|99.1    |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|        |  |                                                                                                                       
|99.2    |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002



|(b) |  | Reports on Form 8-K
We filed a report on Form 8-K on March 10, 2003 pursuant to Item 5 of Form
8-K announcing the Companys earnings for the fourth quarter and pending
sale of its South Carolina facilities.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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
| |                                           |                                                                                                                                
| | By:
Title:                                | /s/ MATTHEW PATRICK

Name:  Matthew PatrickSenior Vice President, Chief Financial Officer,
             Secretary and Treasurer

May 12, 2003

| |     |                                                                                                                             
| | --- | ----------------------------------------------------------------------------------------------------------------------------
| | By: | /s/ STEPHAN M. KEARNEY

Name:  Stephan M. Kearney
Title: Vice President, Controller and
            Chief Accounting Officer

May 12, 2003

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CERTIFICATIONS

I, Steven Vick, certify that:

1.         I have reviewed this quarterly report on Form 10-Q of Assisted Living
Concepts, Inc;

2.         Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.        Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.        The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the Evaluation
Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        

5.        The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| | a) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        

6.        The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date:  May 12, 2003

| |                                                                         
| | ------------------------------------------------------------------------
| | /s/ Steven L. Vick

Steven L. Vick
President and Chief Executive Officer

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CERTIFICATIONS

I, Matthew G. Patrick, certify that:

1.             I have reviewed this quarterly report on Form 10-Q of Assisted Living
Concepts, Inc;

2.             Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.             Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.             The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | a. |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the Evaluation
Date); and                                                                                                  
|
| | c. |  | presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        

5.             The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| | a. |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        

6.             The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date:   May 12, 2003

| |                                                                   
| | ------------------------------------------------------------------
| | /s/ Matthew G. Patrick

Matthew G. Patrick
Chief Financial Officer

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EXHIBIT INDEX

|        |  |                                                                                                                       
|------- |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                       
|Number  |  |                                                                                                                       
|        |  |                                                                                                                       
|12      |  | Ratio of Earnings to Fixed Charges                                                                                    
|        |  |                                                                                                                       
|99.1    |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
|        |  |                                                                                                                       
|99.2    |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002

25