<PAGE>

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20459

                                   FORM 10-Q

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
   ACT OF 1934

  For the quarterly period ended September 30, 2000

                                      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 1-83938

                        ASSISTED LIVING CONCEPTS, INC.
            (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                            <C>
                   Nevada                                        93-1148702
       (State or other jurisdiction of                         (IRS Employer
       incorporation or organization)                       Identification No.)
</TABLE>

                    11835 NE Glenn Widing Drive, Building E
                            Portland, Oregon 97220
                   (Address of principle executive offices)

                                (503) 252-6233
             (Registrant's telephone number, including area code)

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

   The Registrant had 17,120,745 shares of common stock, $.01 par value,
outstanding at November 10, 2000.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>

                         ASSISTED LIVING CONCEPTS, INC.

                                   FORM 10-Q

                               September 30, 2000

                                     INDEX

<TABLE>
<CAPTION>
                                                                             Page
                                                                             ----
 <C>     <S>                                                                 <C>
 PART I--FINANCIAL INFORMATION

 Item 1. Financial Statements

         Consolidated Balance Sheets, December 31, 1999 and September 30,
          2000............................................................     3

         Consolidated Statements of Operations and Consolidated Statements
          of Comprehensive Loss, Three and Nine Months Ended September 30,
          1999 and 2000...................................................     4

                  Consolidated Statements of Cash Flows, Nine Months Ended
          September 30, 1999 and 2000.....................................     5

         Notes to Consolidated Financial Statements.......................     6

 Item 2.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations...........................................    11

         Risk Factors.....................................................    19

 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......    26

 PART II--OTHER INFORMATION

 Item 1. Legal Proceedings................................................    28

 Item 6. Exhibits and Reports on Form 8-K.................................    29
</TABLE>

                                       2
<PAGE>

PART I--FINANCIAL INFORMATION
Item 1 Financial Statements

                         ASSISTED LIVING CONCEPTS, INC.

                          CONSOLIDATED BALANCE SHEETS
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                      December 31, September 30,
                                                          1999         2000
                                                      ------------ -------------
                                                             (unaudited)
<S>                                                   <C>          <C>
                       ASSETS
                       ------

Current assets:
  Cash and cash equivalents.........................    $  7,606     $  8,233
  Restricted cash...................................       7,555        6,541
  Marketable securities, available for sale.........       1,680          --
  Accounts receivable, net of allowance for doubtful
   accounts of $1,062 and $874, respectively........       4,069        3,747
  Prepaid expenses..................................         948        1,001
  Litigation settlement receivable..................         --         1,193
  Other current assets..............................       3,419        2,685
                                                        --------     --------
   Total current assets.............................      25,277       23,400
                                                        --------     --------
Property and equipment..............................     321,622      322,945
  Less accumulated depreciation.....................      15,974       23,104
                                                        --------     --------
  Property and equipment, net.......................     305,648      299,841
                                                        --------     --------
Goodwill, net.......................................       5,077        4,858
Other assets, net...................................      10,186        8,961
                                                        --------     --------
   Total assets.....................................    $346,188     $337,060
                                                        ========     ========

        LIABILITIES AND SHAREHOLDERS' EQUITY
        ------------------------------------

Current liabilities:
  Accounts payable..................................    $  1,318     $  1,365
  Accrued developers fees...........................       1,078          284
  Accrued real estate taxes.........................       4,466        5,472
  Accrued interest expense..........................       1,940        4,094
  Accrued payroll expense...........................       2,773        1,847
  Other accrued expenses............................       2,030        1,999
  Other current liabilities.........................       2,586        2,907
  Current portion of litigation settlement..........         --         9,020
  Current portion of long-term debt.................       1,494        1,699
                                                        --------     --------
   Total current liabilities........................      17,685       28,687
                                                        --------     --------
Other liabilities...................................       5,960        5,876
Non-current portion of litigation settlement........         --         1,000
Long-term debt......................................      71,949       70,632
Convertible subordinated debentures.................     161,250      161,250
                                                        --------     --------
   Total liabilities................................     256,844      267,445
                                                        --------     --------
Commitments and Contingencies
Shareholders' equity:
  Preferred Stock, $.01 par value; 1,000,000 shares
   authorized; None issued and outstanding..........         --           --
  Common Stock, $.01 par value; 80,000,000 shares
   authorized; issued and outstanding 17,120,745
   shares in 1999 and 2000..........................         171          171
  Additional paid-in capital........................     144,443      144,451
Fair market value in excess of historical cost of
 acquired net assets attributable to related party
 transactions.......................................        (239)        (239)
  Accumulated other comprehensive loss..............        (320)         --
  Accumulated deficit...............................     (54,711)     (74,768)
                                                        --------     --------
   Total shareholders' equity.......................      89,344       69,615
                                                        --------     --------
   Total liabilities and shareholders' equity.......    $346,188     $337,060
                                                        ========     ========
</TABLE>

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

                                       3
<PAGE>

                         ASSISTED LIVING CONCEPTS, INC.

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

<TABLE>
<CAPTION>

                                        Three Months Ended Nine Months Ended
                                           September 30,       September 30,
                                        -----------------  ------------------
                                         1999      2000      1999      2000
                                        -------  --------  --------  --------
<S>                                     <C>      <C>       <C>       <C>
Revenues............................... $30,398  $ 35,308  $ 85,460  $102,586
Operating expenses:
  Residence operating expenses.........  20,453    24,049    60,018    69,036
  Corporate general and
   administrative......................   6,057     3,219    15,400    12,333
  Building rentals.....................   3,807     3,702    10,726    11,032
  Building rentals to related party....     300       318       850       952
  Depreciation and amortization........   2,285     2,598     6,552     7,349
  Litigation settlement................     --     10,020       --     10,020
  Site abandonment costs...............      57       --      4,833       --
                                        -------  --------  --------  --------
    Total operating expenses...........  32,959    43,906    98,379   110,722
                                        -------  --------  --------  --------
Operating income (loss)................  (2,561)   (8,598)  (12,919)   (8,136)
                                        -------  --------  --------  --------
Other income (expense):
  Interest expense.....................  (3,962)   (4,128)  (11,058)  (12,246)
  Interest income......................     308       187     1,320       576
  Gain (loss) on sale or disposal of
   assets..............................     --        --       (127)       13
  Loss on sale of marketable
   securities..........................     --        --        --       (368)
  Other income (expense)...............     (41)       94      (138)      104
                                        -------  --------  --------  --------
    Total other income (expense).......  (3,695)   (3,847)  (10,003)  (11,921)
                                        -------  --------  --------  --------
Net loss............................... $(6,256) $(12,445) $(22,922) $(20,057)
                                        -------  --------  --------  --------
Basic and diluted net loss per common
 share................................. $ (0.37) $  (0.73) $  (1.34) $  (1.17)
                                        -------  --------  --------  --------
Basic and diluted weighted average
 common shares outstanding.............  17,121    17,121    17,119    17,121
</TABLE>

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                                 (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                           Three Months
                                         Ended September    Nine Months Ended
                                               30,            September 30,
                                         -----------------  ------------------
                                          1999      2000      1999      2000
                                         -------  --------  --------  --------
<S>                                      <C>      <C>       <C>       <C>
Net loss................................ $(6,256) $(12,445) $(22,922) $(20,057)
Other comprehensive loss:
  Unrealized losses on investments......     (50)      --       (250)      --
                                         -------  --------  --------  --------
Comprehensive loss...................... $(6,306) $(12,445) $(23,172) $(20,057)
                                         -------  --------  --------  --------
</TABLE>

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

                                       4
<PAGE>

                         ASSISTED LIVING CONCEPTS, INC.

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

<TABLE>
<CAPTION>
                                                         Nine Months Ended
                                                    ---------------------------
                                                    September 30, September 30,
                                                        1999          2000
                                                    ------------- -------------
<S>                                                 <C>           <C>
Operating activities:
Net loss..........................................    $(22,922)     $(20,057)
Adjustment to reconcile net loss to net cash (used
 in) provided by operating activities:
  Depreciation and amortization...................       6,552         7,349
  Provision for doubtful accounts.................         161           408
  Site abandonment costs..........................       4,833           --
  Loss on sale of marketable securities...........         --            368
  Loss (gain) on sale of assets...................         127           (13)
  Compensation expense earned on issuance of
   consultant options.............................         --              8
  Compensation expense earned on restricted
   stock..........................................         204           --
Changes in assets and liabilities:
  Accounts receivable.............................      (1,754)          (86)
  Prepaid expenses................................          25           539
  Other current assets............................        (463)       (1,051)
  Other assets....................................       2,247         1,225
  Accounts payable................................       3,199            47
  Accrued expenses................................         --          2,203
  Other current liabilities.......................         --          9,341
  Non-current liabilities.........................       1,527           916
                                                      --------      --------
Net cash (used in) provided by operating
 activities.......................................      (6,264)        1,197
                                                      --------      --------
Investing activities:
  Sale of marketable securities, available for
   sale...........................................       2,000         1,632
  (Increase) decrease in restricted cash..........      (8,718)        1,014
  Proceeds from sale of land and residences.......          19           --
  Purchases of property and equipment.............     (27,020)       (2,104)
                                                      --------      --------
Net cash (used in) provided by investing
 activities.......................................     (33,719)          542
                                                      --------      --------
Financing activities:
  Payments on long-term debt......................      (1,005)       (1,112)
  Proceeds from issuance of common stock..........         154           --
  Retirement of restricted stock..................        (750)          --
                                                      --------      --------
Net cash used in financing activities.............      (1,601)       (1,112)
                                                      --------      --------
Net (decrease) increase in cash and cash
 equivalents......................................     (41,584)          627
Cash and cash equivalents, beginning of period....      55,036         7,606
                                                      --------      --------
Cash and cash equivalents, end of period..........    $ 13,452      $  8,233
                                                      --------      --------
Supplemental disclosure of cash flow information:
  Cash payments for interest......................    $  8,141      $  8,870
  Unrealized loss on marketable securities........    $   (250)     $    --
  Extinguishment of long term debt from lease
   amendments.....................................    $ 29,492      $    --
  Disposal of property, plant and equipment from
   lease amendments...............................    $ 31,488      $    --
  Decrease in construction payable and property
   and equipment..................................    $ (4,545)     $   (794)
  Retirement of restricted stock..................    $  3,412      $    --
</TABLE>

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

                                       5
<PAGE>

                        ASSISTED LIVING CONCEPTS, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

1. Nature of Business and Summary of Significant Accounting Policies

   Assisted Living Concepts, Inc. (the "Company") owns and operates assisted
living residences which provide housing and services 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 regulations), which
are designed to meet the needs of the Company's residents.

Basis of Presentation and Principles of Consolidation

   These consolidated financial statements have been prepared without being
audited, as allowed by the rules and regulations of the Securities and
Exchange Commission. The accompanying consolidated financial statements
include the Company's accounts and accounts of its wholly owned subsidiaries
that manage, own, and develop assisted living residences. All significant
intercompany accounts and transactions have been eliminated in the
consolidation. Certain information and footnote disclosures that are normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted as allowed by
rules and regulations of the Securities and Exchange Commission. These
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes included in the Company's
annual report on Form 10-K for the year ended December 31, 1999.

   The financial information included in these financial statements contain
all adjustments (which consist of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of results for
the quarterly periods. The results of operations for the nine month period
ended September 30, 2000 do not necessarily indicate the results that are
expected for the full year.

2. Restricted Cash

   Restricted cash consists of: i) $4.3 million related to loan agreements
with U.S. Bank National Association ("U.S. Bank"), ii) $1.0 related to certain
lease agreements and iii) $1.2 million related to required workers
compensation insurance deposits.

3. Marketable Securities

   Marketable securities consisted of highly liquid marketable debt
securities. The aggregate market value of securities held at December 31, 1999
was $1.7 million. These investments, which had a historical cost of
$2.0 million, were classified as available for sale in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." As a result, unrealized investment
losses of $320,000 were included as a component of comprehensive loss and
shareholders' equity at December 31, 1999. These investments were sold and a
realized loss of $368,000 was recognized during the three month period ended
June 30, 2000.

                                       6
<PAGE>

                        ASSISTED LIVING CONCEPTS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


4. Property and Equipment

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

<TABLE>
<CAPTION>
                                                     December 31,  September 30,
                                                         1999          2000
                                                     ------------- -------------
   <S>                                               <C>           <C>
   Land.............................................   $ 21,329      $ 21,348
   Buildings and improvements.......................    286,347       287,154
   Equipment........................................      5,344         5,806
   Furniture........................................      8,602         8,637
                                                       --------      --------
     Total property and equipment...................    321,622       322,945
   Less accumulated depreciation....................     15,974        23,104
                                                       --------      --------
     Property and equipment, net....................   $305,648      $299,841
                                                       --------      --------
</TABLE>

   During the three and nine months ended September 30, 1999, the Company
capitalized interest costs of $258,000 and $1.9 million, respectively,
relating to financing of construction in process. In addition, the Company
capitalized payroll costs that were directly related to the construction and
development of the residences of $156,000 and $569,000 for the three and nine
months ended September 30, 1999, respectively. No such costs were capitalized
during the three and nine months ended September 30, 2000.

5. Legal Proceedings

   In September, 2000, the Company reached an agreement to settle the class
action litigation stemming from the restatement of its financial statements
for the years ended December 31, 1996 and 1997 and the first three quarters of
1998. This settlement is subject to the approval of the United States District
Court for the District of Oregon.

   The total cost of the settlement to the Company will be approximately
$10,020,000 (less $1.0 million of legal fees and expenses to be reimbursed by
the Company's corporate liability insurance carriers and other reimbursements
of approximately $193,000). The Company made a payment of approximately
$2,255,000 on October 23, 2000 towards the settlement. The remaining amount
due will be paid in accordance with a non-interest bearing note collateralized
by eight residences and payable in three installments of approximately
$2,255,000 each, due on January 23, 2001, April 23, 2001 and July 23, 2001,
with final payment of $1.0 million due within 90 days following the July 23,
2001 payment.

   As previously announced, the settlement had been pending the approval of
the Company's corporate liability insurance carriers. These carriers had
raised certain coverage issues that resulted in the filing of litigation
between the Company and the carriers. These carriers have now consented to the
settlement, and the Company and the carriers agreed to dismiss the litigation
regarding coverage issues and to resolve those issues through mediation or
binding arbitration, if the mediation were to fail. Mediation efforts
subsequently failed, and the Company has initiated a binding arbitration
proceeding. To the extent that the carriers are successful, the Company and
the carriers have agreed that the carriers' recovery will not exceed $4.0
million. The parties have further agreed that payment of any such amount
awarded will not be due in any event until 90 days after the Company has
satisfied its obligations to the plaintiffs in the class action, with any such
amount to be subordinated to new or refinancing of existing obligations. The
Company believes it has strong defenses regarding this dispute.

   The Company was served with a complaint, filed May 30, 2000 in the Marion
(Indiana) Superior Court on behalf of the Commissioner of the Indiana State
Department of Health. The complaint alleges that the Company's facility in
Logansport, Indiana, one of its 21 facilities in Indiana, is being operated as
an unlicensed "health facility." It seeks to enjoin the Company from operating
the Logansport facility as a "health facility" until the Company is in
compliance with Indiana law, including obtaining an appropriate license, and
paying a fine of up to $25,000 per day for each day of unlicensed operation.

                                       7
<PAGE>

                        ASSISTED LIVING CONCEPTS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   After the Department of Health filed this lawsuit, the Company met with
representatives of that Department to discuss its compliance with the State's
laws on the services the Company provides to its Logansport residents. It is
the Company's position that it is not operating an unlicensed "health
facility," as the State claims, but that its services are consistent with
those authorized for a Housing With Services Establishment pursuant to Indiana
law. After the meeting with the Department's representatives, the Company
submitted to the Department a settlement proposal that includes a detailed
description of the services currently available at its Logansport facility.
The Department has not yet responded to the Company's settlement proposal. In
the event that the Department were to refuse to settle this lawsuit, the
Department may decide to file similar actions against the Company's other
Indiana facilities. Additionally, in the event the Department refuses to
settle this lawsuit and the Company ultimately fails to prevail, the Company's
occupancy levels, revenues and operations costs at its Logansport and/or other
Indiana facilities may be negatively impacted.

   The Company cannot predict the outcome of the foregoing $4.0 million
dispute or the Indiana litigation and is currently unable to predict the
likelihood of success or the range of possible loss. However, if these matters
were determined adversely to the Company, they could have a material adverse
effect on the Company's financial condition, results of operations, cash flow
and liquidity.

6. Liquidity

   The Company's ability to satisfy its obligations, including payments with
respect to its outstanding indebtedness and lease obligations, will depend on
future performance, which is subject to the Company's ability to stabilize its
operations, and to a certain extent, to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond its
control. The Company had a total of $8.2 million of unrestricted cash and cash
equivalents on hand as of September 30, 2000 and a working capital deficit of
$5.3 million (including current portion of settlement payable of $9.0 million
less settlement receivable of $1.2 million). On October 23, 2000, the Company
made its first payment of approximately $2,255,000 towards the litigation
settlement (see note 5) and on November 1, 2000 made its $4.7 million semi-
annual interest payment on its convertible subordinated debentures. The
Company is obligated to pay the remaining $7.8 million related to the
litigation settlement in accordance with a non-interest bearing note
collateralized by eight residences and payable in three installments of
approximately $2,255,000 each, due on January 23, 2001, April 23, 2001 and
July 23, 2001, with final payment of $1.0 million due within 90 days following
the July 23, 2001 payment. Additionally, the Company's next $4.7 million semi-
annual interest payment on its convertible subordinated debentures is due on
May 1, 2001. The Company may also be required to reimburse its insurance
carriers for up to $4.0 million of costs incurred by the carriers in
connection with the securityholder litigation, depending on the outcome of a
pending dispute over coverage (see note 5).

   The Company believes that its current cash on hand, cash available from
operations and potential financing secured by unencumbered residences will be
sufficient to meet its working capital needs through October 2002. However,
the Company has $161.3 million in principal amount of debentures maturing
between November 2002 and May 2003. The Company is currently exploring various
alternatives to address its financing needs and these maturities. The Company
is seeking to obtain debt financing to fund potential working capital needs
and the repurchase of some of its debentures in the open market. To the extent
that the Company is successful in identifying a source of acceptable
financing, it may also consider the repurchase of certain of its leased
residences. In addition, the Company is also considering issuing new
securities with longer maturities to the holders of its debentures in exchange
for some or all of their debentures. The Company has unencumbered residences
available to use as collateral for these various alternatives. No commitments
are currently in place and there can be no assurance that the Company's
efforts will be successful, in which event the Company will have to consider
other alternatives, including reorganization under the bankruptcy laws or
raising highly dilutive capital through the issuance of equity or equity-
related securities.

                                       8
<PAGE>

                        ASSISTED LIVING CONCEPTS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


7. Subsequent Events

 Management Changes

   Dr. Wilson has resigned as President and CEO and from the Board of
Directors effective October 19, 2000. She will, however, remain active with
the Company as a part time employee until December 31, 2001 and will continue
to represent the Company at various assisted living industry events. The
Company will incur a charge of $800,000 in the fourth quarter of 2000 in
connection with her resignation, such amount to be paid out over the fourteen-
month period ending December 31, 2001.

   On November 8, 2000, the Company's board of directors appointed W. James
Nicol as President and Chief Executive Officer. Mr. Nicol joined the Company's
board of directors and was appointed Chairman of the Board on February 29,
2000. Upon the resignation of Dr. Wilson, effective October 19, 2000,
Mr. Nicol served as the Acting President and CEO until his permanent
appointment. The Company has agreed to pay Mr. Nicol $30,000 per month in
connection with his services as President and CEO. In the event Mr. Nicol is
terminated, he will receive severance pay in the amount of $120,000 (four
months salary).

   On November 8, 2000, the Company's board of directors also appointed Jill
Krueger to serve on the Company's Executive Committee to the board of
directors. Ms. Krueger will receive consulting fees of $5,000 per month in
connection with these services to the Company.

 Modification and Amendment to Rights Agreement

   On November 8, 2000, the Company modified and amended it Rights Agreement
to provide that the common shares issuable on conversion of up to $15,000,000
in principal amount of the Company's outstanding convertible debentures will
not be deemed to be "beneficially owned" as defined under the Rights
Agreement.

 Annual Meeting of Shareholders

   On November 8, 2000 the Company established December 13, 2000 as the record
date for its annual meeting of shareholders. The meeting will be held on
January 16, 2001 in New York, NY.

 Listing status with American Stock Exchange

   The Company's common stock currently is listed on the American Stock
Exchange ("AMEX") under the symbol "ALF," its 5.625% Convertible Subordinated
Debentures currently are listed on AMEX under the symbol "ALS5E03" and its
6.0% Convertible Subordinated Debentures currently are listed on AMEX under
the symbol "ALS6K02." AMEX recently notified the Company that the Company had
fallen below certain of AMEX's continued listing guidelines and that it was
reviewing the Company's listing eligibility. In particular, the Company has
incurred losses from continued operations for each of its past five fiscal
years ending December 31, 1999, and the price per share of the Company's
common stock as quoted on AMEX recently has been below the minimum bid price
of $1.00 per share.

   As of the date of this report, the Company's securities have not been
delisted. The Company may choose to effect a reverse stock split in the event
that the price of its common stock does not otherwise meet the minimum bid
requirement. However, the Company reported a net loss of $0.73 per basic and
diluted share for the third quarter of 2000, and does not expect to report net
income for the quarter or year ended December 31, 2000. The Company has
provided AMEX with additional information and has been involved in ongoing
discussions with AMEX in connection with its review of the Company's listing
eligibility. There can be no assurance, however, that the Company's securities
will continue to be listed on AMEX.

                                       9
<PAGE>

                        ASSISTED LIVING CONCEPTS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   If AMEX were to delist the Company's securities, it is possible that the
securities would continue to trade on other securities exchanges or in over-
the-counter markets and that price quotations would be reported by such
exchanges or through the Nasdaq Stock Market, Inc.'s National Market System or
other sources. However, the extent of the public market for the securities and
the availability of such quotations would depend upon such factors as the
aggregate market value of each class of the securities, the interest in
maintaining a market in such securities on the part of securities firms and
other factors. There can be no assurance that any public market for the
Company's securities will exist in the event that such securities are
delisted.

                                      10
<PAGE>

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 subsidiaries.

Overview

   We operate, own and lease free-standing assisted living residences,
primarily in small middle-market rural and suburban communities with a
population typically ranging from 10,000 to 40,000. We also provide personal
care and support services, and make available routine health care services (as
permitted by applicable regulations) designed to meet the personal and health
care needs of our residents. As of September 30, 2000 we operated 185 assisted
living residences (7,148 units) in 16 states, of which we owned 115 residences
(4,515 units) and leased 70 residences (2,633 units).

   We derive our revenues primarily from resident fees for rent and for the
delivery of assisted living services. Resident fees typically are paid monthly
by residents, their families, state Medicaid agencies or other responsible
parties. Resident fees include revenue derived from a multi-tiered rate
structure, which varies based on the level of care required. Resident fees are
recognized as revenues when services are provided.

   Operating expenses include:

  .  residence operating expenses, such as staff payroll, food, property
     taxes, utilities, insurance and other direct residence operating costs;

  .  general and administrative expenses, consisting of corporate and support
     functions such as legal, accounting, information technology and other
     administrative expenses;

  .  building rentals;

  .  depreciation and amortization;

  .  litigation settlement; and

  .  site abandonment costs.

   The following table sets forth, for the periods presented, the number of
residences and units operated, average occupancy rates and sources of revenue
for our Company. The portion of revenues received from state Medicaid agencies
are labeled as "Medicaid state portion" while the portion of revenues that a
Medicaid-eligible resident must pay out of his or her own resources is labeled
"Medicaid resident portion".

<TABLE>
<CAPTION>
                                                                      Three
                                                                     Months
                                                                      Ended
                                                                    September
                                                                       30,
                                                                   ------------
                                                                   1999   2000
                                                                   -----  -----
   <S>                                                             <C>    <C>
   Total Residences:
     Residences operated (end of period)..........................   181    185
     Units operated (end of period)............................... 6,986  7,148
     Average occupancy rate.......................................  76.0%  81.4%
   Sources of revenue:
     Medicaid state portion.......................................  10.5%  11.2%
     Medicaid resident portion....................................   6.0%   6.3%
     Private......................................................  83.5%  82.5%
                                                                   -----  -----
       Total...................................................... 100.0% 100.0%
                                                                   =====  =====
</TABLE>

                                      11
<PAGE>

   The following tables set forth, for the periods presented, the compilation
of operating results of the Same Store Residences. Same Store Residences are
defined as those residences which were operating throughout comparable
reporting periods.

                     COMPILATION OF SAME STORE RESIDENCES

                THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
               (in thousands except unit and average rent data)

<TABLE>
<CAPTION>
                                     Three Months Ended    Nine Months Ended
                                        September 30,        September 30,
                                     --------------------  ------------------
                                       1999       2000       1999      2000
                                     ---------  ---------  --------  --------
<S>                                  <C>        <C>        <C>       <C>
Revenue............................. $  30,079  $  33,800  $ 83,383  $ 94,357
Residence operating expense.........    19,947     22,822    57,185    62,085
                                     ---------  ---------  --------  --------
  Residence operating income........    10,132     10,978    26,198    32,272
Building rentals....................     4,104      4,013    11,557    11,957
Depreciation and amortization.......     1,970      2,008     5,445     5,376
                                     ---------  ---------  --------  --------
    Total other operating expenses..     6,074      6,021    17,002    17,333
                                     ---------  ---------  --------  --------
Operating income.................... $   4,058  $   4,957  $  9,196  $ 14,939
                                     ---------  ---------  --------  --------
Residences operating................       175        175       165       165
Units operating.....................     6,747      6,747     6,350     6,350
Average occupancy rate (based on
 occupied units)....................      77.7%      82.6%     76.6%     83.1%
Weighted average rent............... $   1,912  $   1,969  $  1,883  $  1,967
Residence operating income margin...      33.7%      32.5%    31.42%     34.2%
</TABLE>

Results of Operations

 Three months ended September 30, 2000 compared to three months ended
 September 30, 1999

   We incurred a net loss of $12.4 million, or $0.73 per basic and diluted
share, on revenue of $35.3 million for the three months ended September 30,
2000 (the "September 2000 Quarter") as compared to a net loss of $6.3 million,
or $0.37 per basic and diluted share, on revenue of $30.4 million for the
three months ended September 30, 1999 (the "September 1999 Quarter").

   We had certificates of occupancy for 185 residences, all of which were
included in our operating results as of the end of the September 2000 Quarter
as compared to 181 residences included in our operating results as of the end
of the September 1999 Quarter.

   Of the residences included in our operating results at the end of the
September 2000 Quarter, we owned 115 residences and leased 70 residences, as
compared to the end of the September 1999 Quarter at which we owned 111
residences and leased 70.

   Revenues. Revenues were $35.3 million for the September 2000 Quarter as
compared to $30.4 million for the September 1999 Quarter, a net increase of
$4.9 million.

   Revenue increases consisted of:

  .  $3.7 million related to the 175 Same Store Residences (6,747 units); and

  .  $1.2 million related to the 10 residences (401 units) which commenced
     operations during or subsequent to the September 1999 Quarter.

                                      12
<PAGE>

   The increase in revenue from Same Store Residences resulted from a
combination of:

  .  An increase in average occupancy to 82.6% for the September 2000 Quarter
     as compared to 77.7% for the September 1999 Quarter; and

  .  An increase in average monthly rental rate to $1,969 for the September
     2000 Quarter as compared to $1,912 for the September 1999 Quarter.

   Residence Operating Expenses. Residence operating expenses were $24.0
million for the September 2000 Quarter compared to $20.5 million for the
September 1999 Quarter, a net increase of $3.5 million.

   Of this increase:

  .  $2.9 million related to the 175 Same Store Residences (6,747 units); and

  .  $600,000 related to the 10 residences (401 units) which commenced
     operations during or subsequent to the September 1999 Quarter.

   Residence operating expenses for the Same Store Residences were $22.8
million for the September 2000 Quarter as compared to $19.9 million for the
September 1999 Quarter, an increase of $2.9 million.

   Of this increase in Same Store residence operating expenses:

  .  $1.6 million related to increases in real estate taxes as a result of
     changes in assessments;

  .  $400,000 related to increases in state and local taxes which include
     franchise and other revenue based taxes; and

  .  $1.0 million related to expenses associated with the increase in average
     occupancy at the Same Store Residences subsequent to the September 1999
     Quarter.

   Corporate, General and Administrative. Corporate, general and
administrative expenses were $3.2 million for the September 2000 Quarter
compared to $6.1 million for the September 1999 Quarter. Our corporate general
and administrative expenses before capitalized payroll costs were $3.2 million
for the September 2000 Quarter as compared to $6.2 million for the September
1999 Quarter, a decrease of approximately $3.0 million. As a result of the
completion of our development projects, we did not capitalize payroll costs
during the September 2000 Quarter. We capitalized $156,000 of payroll costs
for the September 1999 Quarter. The decrease was due to the following:

  .  $1.9 million as a result of decrease of professional, investor
     relations, and printing fees. Higher professional, investor relations,
     and printing fees in the September 1999 Quarter were associated with
     higher legal, financial advisory and accounting costs due to the
     restatement of our earnings for the years ended December 31, 1996 and
     1997 and the first three quarters of 1998;

  .  $1.2 million as a result of reimbursement of legal and professional fees
     from our insurance carrier as a result of the settlement of our
     litigation related to the restatement of the financial statements for
     the years ended December 31, 1996 and 1997 and the first three fiscal
     quarters of 1998. Of the $1.2 million in reimbursements, we incurred
     approximately $300,000 of these expenses during the September 2000
     Quarter, approximately $300,000 during the six months ended June 30,
     2000 and the remaining approximate $600,000 during the year ended
     December 31, 1999;

  .  $250,000 as a result of a decrease in payroll and payroll related costs;
     and

  .  $110,000 as a result of a decrease in travel and related costs.

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

  .  $420,000 as a result of increased network costs associated with the
     development of our communication infrastructure, including dial-up and
     intranet access for our remote locations.

                                      13
<PAGE>

   Building Rentals. Building rentals decreased to $4.0 million in the
September 2000 Quarter from $4.1 million in the corresponding 1999 period, a
decrease of $100,000. This decrease was due to an increase in the amortization
of the deferred gain on the sale and leaseback of certain properties.

   Depreciation and Amortization. Depreciation and amortization expense was
$2.6 million for the September 2000 Quarter compared to $2.3 million in the
September 1999 Quarter, a net increase of $300,000. The increase is due to
depreciation expense related to the ten residences that commenced operations
during or subsequent to the September 1999 Quarter.

   Litigation Settlement. During the September 2000 Quarter we settled the
class action litigation related to the restatement of our financial statements
for the years ended December 31, 1996 and 1997 and the first three fiscal
quarters of 1998. The total cost of this settlement to us was $10.0 million.
Accordingly, we recognized a charge of $10.0 million during the September 2000
Quarter. We will receive reimbursements of approximately $1.2 million dollars
from our corporate liability insurance carriers and other parties in relation
to the settlement. The $1.2 million of reimbursements has been recorded as a
reduction of corporate, general and administrative expenses as discussed
above.

   Site Abandonment Costs. As the result of our decision to terminate new
construction we recorded site abandonment costs of $57,000 in the September
1999 Quarter with respect to certain sites which we determined we would not
develop.

   Interest Expense. Interest expense was $4.1 million for the September 2000
Quarter compared to $4.0 million for the September 1999 Quarter. Interest
expense before capitalized interest for the September 2000 Quarter was
$4.1 million compared to $4.2 million for the September 1999 Quarter, a
decrease of approximately $100,000.

   As a result of the completion of our development projects, we did not
capitalize interest costs in the September 2000 Quarter. In the September 1999
Quarter, we capitalized $258,000 of interest directly related to financing
development activities.

   Interest Income. Interest income was $187,000 for the September 2000
Quarter compared to $308,000 for the September 1999 Quarter, a decrease of
$121,000. The decrease in interest income is due to lower average cash
balances available for investment during the September 2000 Quarter.

   Net Loss. As a result of the above, we incurred a net loss of $12.4 million
or $0.73 per share for the September 2000 Quarter, compared to a net loss of
$6.3 million, or $0.37 per share for the September 1999 Quarter.

 Nine Months ended September 30, 2000 compared to Nine Months ended September
 30, 1999

   We incurred a net loss of $20.1 million, or $1.17 per basic and diluted
share, on revenue of $102.6 million for the nine months ended September 30,
2000 (the "September 2000 YTD Period"), as compared to a net loss of $22.9
million or $1.34 per basic and diluted share, on revenues of $85.5 million for
the nine months ended September 30, 1999 (the "September 1999 YTD Period").

   Revenues. Revenues were $102.6 million for the September 2000 YTD Period as
compared to $85.5 million for the September 1999 YTD Period, a net increase of
$17.1 million.

   Of this increase:

  .  $11.0 million related to the 165 Same Store Residences (6,350 units);
     and

  .  $6.1 million related to 20 residences (798 units) which commenced
     operations during or subsequent to the September 1999 YTD Period.

                                      14
<PAGE>

   Revenues from Same Store Residences were $94.4 million for the September
2000 YTD Period as compared to $83.4 million for the September 1999 YTD
Period, an increase of $11.0 million. The increase in revenue from Same Store
Residences was a combination of:

  .  An increase in average occupancy to 83.1% for the September 2000 YTD
     Period as compared to average occupancy of 76.6% for the September 1999
     YTD Period; and

  .  An increase in average monthly rental rate to $1,967 for the September
     2000 YTD Period as compared to $1,883 for the September 1999 YTD Period.

   Residence Operating Expenses. Residence operating expenses were $69.0
million for the September 2000 YTD Period compared to $60.0 million for the
September 1999 YTD Period, a net increase of $9.0 million.

   Of this increase:

  .  $4.9 million related to 165 Same Store Residences (6,350 units); and

  .  $4.1 million related to the 20 residences (798 units) which commenced
     operations during or subsequent to the September 1999 YTD Period.

   Residence operating expenses for the Same Store Residences were $62.1
million for the September 2000 YTD Period as compared to $57.2 million for the
September 1999 YTD Period, an increase of $4.9 million.

   Of this increase in Same Store residence operating expenses:

  .  $2.0 million related to increases in real estate taxes as a result of
     changes in assessments;

  .  $600,000 related to increases in state and local taxes which include
     franchise and other revenue based taxes; and

  .  $2.3 million related to expenses associated with the increase in average
     occupancy at the Same Store Residences subsequent to the September 1999
     YTD Period.

   Corporate, General and Administrative. Corporate, general and
administrative expenses were $12.3 million for the September 2000 YTD Period
compared to $15.4 million in the September 1999 YTD Period. Our corporate,
general and administrative expenses before capitalized payroll costs were
$12.3 million for the September 2000 YTD Period as compared to $16.0 million
for the September 1999 YTD Period, a decrease of $3.7 million. As a result of
the completion of our development projects, we did not capitalize payroll
costs during the September 2000 YTD Period. We capitalized $569,000 of payroll
costs for the September 1999 YTD Period. Corporate, general and administrative
expenses decreased due to the following:

  .  $1.2 million as a result of reimbursement of legal and professional fees
     from our insurance carrier as a result of the settlement of our
     litigation related to the restatement of the financial statements for
     the years ended December 31, 1996 and 1997 and the first three quarters
     of 1998. Of the $1.2 million in reimbursements, we incurred
     approximately $600,000 of these expenses during the September 2000 YTD
     Period and the remaining approximate $600,000 during the year ended
     December 31, 1999;

  .  $900,000 as a result of decreased payroll and related expenses. Payroll
     expenses in the September 1999 YTD Period included $960,000 of
     separation costs related to certain terminated corporate employees as
     compared to $350,000 of such costs for the September 2000 YTD Period;

  .  $2.3 million as a result of decreased professional fees. Higher
     professional fees in the September 1999 YTD Period were associated with
     higher legal, financial advisory and accounting costs due to regulatory
     issues, securityholder litigation and the restatement of our earnings
     for fiscal 1996 and 1997 periods and the interim 1998 periods;

  .  $240,000 as a result of a decrease in travel related expenses; and

  .  $160,000 related to costs incurred in 1999 related to the closure of our
     home health operations.

                                      15
<PAGE>

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

  .  $820,000 as a result of increased network costs associated with the
     development of our communications infrastructure, including dial-up and
     intranet access for our remote locations; and

  .  $250,000 as a result of increases in insurance cost, including increases
     in coverage and rates.

   Building Rentals. Building rentals were $12.0 million for the September
2000 YTD Period as compared to $11.6 million for the September 1999 YTD
Period, an increase of $400,000. This increase was primarily due to the
following:

  .  $840,000 due to the March 1999 amendment of 16 of our operating leases
     which were previously accounted for as financings. The amendment
     eliminated our continuing involvement in the residences in the form of a
     fair value purchase option. As a result, the leases were accounted for
     as operating leases, effective March 31, 1999. Accordingly, rent expense
     related to such leases after the date of the amendment, has been
     classified as building rentals, rather than interest expense as
     previously recorded.

   The increase was offset by a decrease in building rentals of:

  .  $130,000 due primarily to the amendment of certain operating leases to
     contain escalating rent payments that are considered contingent. Prior
     to such amendment, the leases contained rent escalation clauses that
     were not deemed contingent, resulting in the recognition of lease
     expense on a straight line basis over the term instead of an a cash
     basis; and

  .  $300,000 in amortization of gain on sale leaseback transactions during
     the September 2000 YTD period. The increase is due primarily to the
     amortization of the gain associated with the amended operating leases
     previously accounted for as financings as described above.

   Depreciation and Amortization. Depreciation and amortization expense was
$7.3 million for the September 2000 YTD Period compared to $6.6 million for
the September 1999 YTD Period, a net increase of $700,000. The increase in
depreciation and amortization was due primarily to the depreciation expense
related to the 20 new residences that opened during fiscal 1999.

   Litigation Settlement. During the September 2000 YTD Period we settled the
class action litigation related to the restatement of our financial statements
for the years ended December 31, 1996 and 1997 and the first three fiscal
quarters of 1998. The total cost of this settlement to us was $10.0 million.
Accordingly, we recognized a charge of $10.0 million during the September 2000
YTD Period. We will receive reimbursements of approximately $1.2 million
dollars from our corporate liability insurance carriers and other parties in
relation to the settlement. The $1.2 million of reimbursements has been
recorded as a reduction of corporate, general and administrative expenses
during the September 2000 YTD Period.

   Site Abandonment Costs. As the result of our decision to terminate new
construction we recorded site abandonment costs of $4.8 million during the
September 1999 YTD Period with respect to certain sites which we determined we
would not develop. We do not anticipate incurring similar write-offs in the
future.

   Interest Expense. Interest expense was $12.2 million for the September 2000
YTD Period as compared to $11.0 million for the September 1999 YTD Period.
Interest expense before capitalized interest for the September 2000 YTD Period
was $12.2 million as compared to $12.9 million for the September 1999 YTD
Period, a net decrease of $700,000. This decrease was due to the following:

  .  $840,000 due to the March 1999 amendment of 16 of our operating leases
     which were previously accounted for as financings, as discussed above.
     Accordingly, interest expense related to such leases prior to the date
     of the amendment, has been classified as building rentals, rather than
     interest expense as previously recorded; and

  .  $95,000 due to interest expense associated with the repayment of joint
     venture advances in February 1999.

                                      16
<PAGE>

   The decrease was offset by increases in interest expense of:

  .  $35,000 due to increase in interest rate on variable rate debt; and

  .  $200,000 due to financing fees related to letters of credit.

   As a result of the completion of our development projects, we did not
capitalize interest costs in the September 2000 YTD Period. In the September
1999 YTD Period, we capitalized $1.9 million of interest directly related to
financing development activities.

   Other income (expense). Other income was $104,000 for the September 2000
YTD Period as compared to other expense of $138,000 for the September 1999 YTD
Period. Other income earned during the September 2000 YTD Period primarily
related to a contract to provide development services to a third party. Other
expenses during the September 1999 YTD Period primarily related to the
repurchase of the operations of 17 residences formerly operated pursuant to
our joint venture agreements.

Liquidity and Capital Resources

   At September 30, 2000, we had a working capital deficit of $5.3 (including
current portion of settlement payable of $9.0 million less settlement
receivable of $1.2 million) and unrestricted cash and cash equivalents of $8.2
million.

   Net cash provided by operating activities was $1.2 million during the nine
months ended September 30, 2000.

   Net cash provided by investing activities totaled $529,000 during the nine
months ended September 30, 2000. The primary source of cash was $1.6 million
related to the sale of marketable securities and a decrease of $1.0 million of
restricted cash primarily related to the release of funds restricted in
accordance to agreements with U.S. Bank National Association ("U.S. Bank"). We
used $2.1 million of cash in investing activities related to capital
expenditures.

   Net cash used in financing activities totaled $1.1 million during the nine
months ended September 30, 2000. The use of cash in financing activities was
due to payments on long term debt.

   During the third quarter of 1999, we amended certain loan agreements with
U.S. Bank. Pursuant to the amendment, we agreed to provide $8.3 million of
additional cash collateral in exchange for the waiver of certain possible
defaults related to the delivery of financial statements and compliance with
financial covenants, including an amendment to certain financial covenants.
The amendment also provides for the release of the additional collateral upon
the achievement of specified performance targets, provided that we are in
compliance with the other terms of the loan agreements. We achieved certain of
these specified targets during the fourth quarter of fiscal 1999 and the first
quarter of fiscal 2000 resulting in the release of $1.2 million and $1.1
million of the restricted cash, respectively.

   On July 21, 2000, we finalized an agreement with U.S. Bank whereby U.S.
Bank agreed to modify and waive certain financial covenants with which we
would have otherwise failed to comply as of June 30, 2000. In exchange for the
modification and waiver of financial covenants through the quarters ended June
30, 2000 and September 30, 2000, we provided three previously unencumbered
Washington state properties as additional collateral. The agreement also
provided for the release of $1.8 million of cash collateral currently held by
U.S. Bank (see Note 2 of the financial statements included in Part I) upon the
satisfaction of certain conditions, which were satisfied in August 2000. We
cannot assure you that we will comply in the future with the modified
financial covenants included in the agreement.

   Our ability to satisfy our obligations, including payments with respect to
our outstanding indebtedness and lease obligations, will depend on future
performance, which is subject to our ability to stabilize our operations, and
to a certain extent, to general economic, financial, competitive, legislative,
regulatory and other factors that

                                      17
<PAGE>

are beyond our control. On October 23, 2000, we made our first payment of
approximately $2,255,000 towards the litigation settlement (see note 5 of the
financial statements included in Part I) and on November 1, 2000 we made our
$4.7 million semi-annual interest payment on our convertible subordinated
debentures. We are obligated to pay the remaining $7.8 million related to the
litigation settlement in accordance with a non-interest bearing note
collateralized by eight residences and payable in three installments of
approximately $2,255,000 each, due on January 23, 2001, April 23, 2001 and
July 23, 2001, with final payment of $1.0 million due within 90 days following
the July 23, 2001 payment. Additionally, our next $4.7 million semi-annual
interest payment on our convertible subordinated debentures is due on May 1,
2001. We may also be required to reimburse our insurance carriers for up to
$4.0 million of costs incurred by the carriers in connection with the
securityholder litigation, depending on the outcome of a pending dispute over
coverage (see Part II, Item I of this report).

   We believe that our current cash on hand, cash available from operations
and potential financing secured by unencumbered residences will be sufficient
to meet our working capital needs through October 2002. However, we have
$161.3 million in principal amount of debentures maturing between November
2002 and May 2003. We are currently exploring various alternatives to address
our financing needs and these maturities. We are seeking to obtain debt
financing to fund potential working capital needs and the repurchase of some
of our debentures in the open market. To the extent that we are successful in
identifying a source of acceptable financing, we may also consider the
repurchase of certain of our leased residences. In addition, we are also
considering issuing new securities with longer maturities to the holders of
our debentures in exchange for some or all of their debentures. We have
unencumbered residences available to use as collateral for these various
alternatives. No commitments are currently in place and there can be no
assurance that our efforts will be successful, in which event we will have to
consider other alternatives, including reorganization under the bankruptcy
laws or raising highly dilutive capital through the issuance of equity or
equity-related securities.

Recent Accounting Pronouncements

   In June 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
FASB Statement No. 133." This statement is effective as of the first quarter
of fiscal years beginning after June 15, 2000. We do not expect the adoption
of this statement to have a significant impact on our financial condition or
results of operations.

   In March 2000, the Financial Accounting Standards Board, or FASB, issued
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation--an interpretation of APB Opinion No. 25, (FIN 44). We adopted
the provisions of FIN 44 as of the reported effective dates and this adoption
has not had a significant impact on our financial condition or results of
operations.

                                      18
<PAGE>

                                 RISK FACTORS

   Set forth below are certain risks that we believe are material. This report
on Form 10-Q, including the risks discussed below, contains forward-looking
statements made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements may
be affected by risks and uncertainties, including without limitation, (i) our
ability to control costs and improve operating margins, (ii) the degree to
which our future operating results and financial condition will be affected by
litigation described in this report, (iii) the possibility that we will
experience slower fill-up of our newer residences and/or declining occupancy
in our stabilized residences, either of which would adversely affect residence
operating margins, (iv) our ability to operate our facilities in compliance
with evolving regulatory requirements and (v) the possibility that we will not
be able to obtain financing needed to fund our future operations and retire
our 6% Debentures and our 5.625% Debentures due in 2002 and 2003,
respectively. In light of such risks and uncertainties, our actual results
could differ materially from such forward-looking statements. Except as may be
required by law, we do not undertake any obligation to publicly release any
revisions to any forward-looking statements contained herein to reflect events
and circumstances occurring after the date hereof or to reflect the occurrence
of unanticipated events.

We are highly leveraged; our loan and lease agreements contain financial
covenants.

   We are highly leveraged. We had total indebtedness, including short term
portion, of $233.6 million as of September 30, 2000. In addition, we had
shareholders' equity of $69.6 million as of September 30, 2000. The degree to
which we are leveraged could have important consequences, including:

  .  making it more difficult to satisfy our debt or lease obligations;

  .  increasing our vulnerability to general adverse economic and industry
     conditions;

  .  limiting our ability to obtain additional financing;

  .  requiring dedication of a substantial portion of our cash flow from
     operations to the payment of principal of, and interest on, our debt or
     leases, thereby reducing the availability of such cash flow to fund
     working capital, capital expenditures or other general corporate
     purposes;

  .  limiting our flexibility in planning for, or reacting to, changes in our
     business or industry; and

  .  placing us at a competitive disadvantage to less leveraged competitors.

   Several of our debt instruments and leases contain financial covenants,
including debt to cash flow and net worth tests. Our credit agreements with
U.S. Bank require us to comply with two financial ratios that became more
restrictive commencing in the second quarter of 2000. On July 21, 2000, we
finalized an agreement with U.S. Bank whereby U.S. Bank agreed to modify and
waive these financial covenants with which we would have otherwise failed to
comply as of June 30, 2000 and September 30, 2000. In exchange for the
modification and waiver of financial covenants for the quarters ended June 30,
2000 and September 30, 2000, we provided three previously unencumbered
Washington state properties as additional collateral. We cannot provide
assurance that we will comply in the future with the modified financial
covenants included in the agreement, or with the financial covenants set forth
in our other debt instruments and leases. If we fail to comply with one or
more of the U.S. Bank covenants or any other debt or lease covenants (after
giving effect to any applicable cure period), the lender or lessor may declare
us in default of the underlying obligation and exercise any available
remedies, which may include:

  .  in the case of debt, declaring the entire amount of the debt immediately
     due and payable;

  .  foreclosing on any residences or other collateral securing the
     obligation;

  .  in the case of a lease, terminating the lease and suing for damages.

   In addition, many of our debt instruments and leases contain "cross-
default" provisions pursuant to which a default under one obligation can cause
a default under one or more other obligations. Accordingly, it could have a
material adverse effect on our financial condition if any lender or lessor
notifies us that we are in default under any debt instrument or lease.

                                      19
<PAGE>

We will require additional financing.

   Our ability to satisfy our obligations, including payments with respect to
our outstanding indebtedness and lease obligations, will depend on future
performance, which is subject to our ability to stabilize our operations, and
to a certain extent, to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. We had a total of
$8.2 million of unrestricted cash and cash equivalents on hand and a working
capital deficit of $5.3 million (including current portion of settlement
payable of $9.0 million less settlement receivable of $1.2 million) as of
September 30, 2000. On October 23, 2000, we made our first payment of
approximately $2,255,000 towards the litigation settlement (see note 5 of the
financial statements included in Part I) and on November 1, 2000 we made our
$4.7 million semi-annual interest payment on our convertible subordinated
debentures. We are obligated to pay the remaining $7.8 million related to the
litigation settlement in accordance with a non-interest bearing note
collateralized by eight residences and payable in three quarterly installments
of approximately $2,255,000 each, due on January 23, 2001, April 23, 2001 and
July 23, 2001, with final payment of $1.0 million due within 90 days following
the July 23, 2001 payment. Additionally, our next $4.7 million semi-annual
interest payment on our convertible subordinated debentures is due on May 1,
2001. We may also be required to reimburse our insurance carriers for up to
$4.0 million of costs incurred by the carriers in connection with the
securityholder litigation, depending on the outcome of a pending dispute over
coverage (see Part II, Item I of this report).

   We believe that our current cash on hand, cash available from operations
and potential financing secured by unencumbered residences will be sufficient
to meet our working capital needs through October 2002. However, we have
$161.3 million in principal amount of debentures maturing between November
2002 and May 2003. We are currently exploring various alternatives to address
our financing needs and these maturities. We are seeking to obtain debt
financing to fund potential working capital needs and the repurchase of some
of our debentures in the open market. To the extent we are successful in
identifying a source of acceptable financing, we may also consider the
repurchase of certain of our leased residences. In addition, we are also
considering issuing new securities with longer maturities to the holders of
our debentures in exchange for some or all of their debentures. We have
unencumbered residences available to use as collateral for these various
alternatives. No commitments are currently in place and there can be no
assurance that our efforts will be successful, in which event we will have to
consider other alternatives, including reorganization under the bankruptcy
laws or raising highly dilutive capital through the issuance of equity or
equity-related securities.

   Approximately $27.5 million of our indebtedness was secured by letters of
credit as of September 30, 2000 which in some cases have termination dates
prior to the maturity of the underlying debt. As such letters of credit
expire, beginning in 2003, we will need to obtain replacement letters of
credit, post cash collateral or refinance the underlying debt. There can be no
assurance that we will be able to procure replacement letters of credit from
the same or other lending institutions on terms that are acceptable to us. In
the event that we are unable to obtain a replacement letter of credit or
provide alternate collateral prior to the expiration of any of these letters
of credit, we would be in default on the underlying debt.

Possible American Stock Exchange delisting.

   Our common stock currently is listed on the American Stock Exchange
("AMEX") under the symbol "ALF," our 5.625% Debentures currently are listed on
AMEX under the symbol "ALS5E03" and our 6.0% Debentures currently are listed
on AMEX under the symbol "ALS6K02." AMEX recently notified us that we had
fallen below certain of AMEX's continued listing guidelines and that it was
reviewing our listing eligibility. In particular, we have incurred losses from
continued operations for each of its past five fiscal years ending December
31, 1999, and the price per share of our common stock as quoted on AMEX
recently has been below the minimum bid price of $1.00 per share.

   As of the date of this report, our securities have not been delisted. We
may choose to effect a reverse stock split in the event that the price of our
common stock does not otherwise meet the minimum bid requirement. However, we
reported a net loss of $0.73 per basic and diluted share for the third quarter
of 2000, and do not

                                      20
<PAGE>

expect to report net income for the quarter or year ended December 31, 2000.
We have provided AMEX with additional information and have been involved in
ongoing discussions with AMEX in connection with its review of our listing
eligibility. There can be no assurance, however, that our securities will
continue to be listed on AMEX.

   If AMEX were to delist our securities, it is possible that the securities
would continue to trade on other securities exchanges or in the over-the-
counter market and that price quotations would be reported by such exchanges
or through the Nasdaq Stock Market, Inc.'s National Market System or other
sources. However, the extent of the public market for the securities and the
availability of such quotations would depend upon such factors as the
aggregate market value of each class of the securities, the interest in
maintaining a market in such securities on the part of securities firms and
other factors. There can be no assurance that any public market for our
securities will exist in the event that such securities are delisted.

We may incur significant costs and liability as a result of litigation.

   We were served with a complaint, filed May 30, 2000 in the Marion (Indiana)
Superior Court on behalf of the Commissioner of the Indiana State Department
of Health. The complaint alleges that our facility in Logansport, Indiana, one
of our 21 facilities in Indiana, is being operated as an unlicensed "health
facility". It seeks to enjoin us from operating the Logansport facility as a
"health facility" until we are in compliance with Indiana law, including
obtaining an appropriate license, and paying a fine of up to $25,000 per day
for each day of unlicensed operation. See Part II, Item 1 for a discussion of
this litigation.

   After the Department of Health filed this lawsuit, we met with
representatives of that Department to discuss our compliance with the State's
laws on the services we provide our Logansport residents. It is our position
that we are not operating an unlicensed "health facility," as the State
claims, but that our services are consistent with those authorized for a
Housing With Services Establishment pursuant to Indiana law. After that
meeting with the Department's representatives, we submitted to the Department
a settlement proposal that includes a detailed description of the services
currently available at our Logansport facility. The Department has not yet
responded to our settlement proposal. In the event that the Department were to
refuse to settle this lawsuit, the Department may decide to file similar
actions against our other Indiana facilities. Additionally, in the event the
Department refuses to settle this lawsuit and we ultimately fail to prevail,
our occupancy levels, revenues and operation costs at Logansport and/or our
other Indiana facilities may be negatively impacted.

   We cannot predict the outcome of the foregoing litigation and currently are
unable to predict the likelihood of success or the range of possible loss.
However, if the foregoing litigation were determined adversely to us, such a
determination could have a material adverse effect on our financial condition,
results of operations, cash flow and liquidity.

We are subject to significant government regulation.

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

  .  the number of licensed residences;

  .  the provision of services;

  .  equipment;

  .  staffing, including professional licensing and criminal background
     checks;

  .  operating policies and procedures;

  .  fire prevention measures;

  .  environmental matters;

                                      21
<PAGE>

  .  resident characteristics;

  .  physical design and compliance with building and safety codes;

  .  confidentiality of medical information;

  .  safe working conditions;

  .  family leave; and

  .  disposal of medical waste.

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

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

  .  the imposition of fines;

  .  temporary stop placement of admission of new residents, or imposition of
     other conditions to admission of new residents to the facility;

  .  termination of a facility's Medicaid contract; and

  .  conversion of license to provisional status, suspension or revocation of
     a facility's license.

   During 1998, 1999 and the first nine months of 2000, these adverse actions
resulted in minimal fines and temporary suspension of admissions at certain
residences. On September 8, 2000, the State of Washington Department of Social
and Health Services issued a notice of the imposition of a stop placement of
admissions and the revocation of license of our facility in Sumner,
Washington. We appealed that notice and the discovery process has not yet
begun. The hearing is scheduled for February 20-23 and 26, 2001. Because
regulations vary from one jurisdiction to another and because determinations
regarding whether to make a license provisional, to suspend or revoke a
license, or to impose a fine, are subject to administrative discretion, it is
difficult for us to predict whether a particular remedy will be sought or
obtained in any given case. These types of regulatory enforcement actions may
adversely affect residence occupancy levels, revenues and costs of operation.
We cannot guarantee that federal, state, or local governments will not impose
additional restrictions on our activities that could materially adversely
affect us. See "We may incur significant costs and liability as a result of
litigation."

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

   State and federal governments are devoting increasing attention and
resources to anti-fraud initiatives against health care providers. The Health
Insurance Portability and Accountability Act of 1996 ("HIPAA") and

                                      22
<PAGE>

the Balanced Budget Act of 1997 expanded the penalties for health care fraud,
including broader provisions for the exclusion of providers from the Medicaid
program. We have established policies and procedures that we believe are
sufficient to ensure that our facilities will operate in substantial
compliance with these anti-fraud and abuse requirements. While we believe that
our business practices are consistent with Medicaid criteria, those criteria
are often vague and subject to change and interpretation. Aggressive anti-
fraud actions, however, could have an adverse effect on our financial
position, results of operations or cash flows.

Overbuilding in the assisted living industry.

   We believe that many assisted living markets have become or are on the
verge of becoming overbuilt. Regulation and other barriers to entry into the
assisted living industry are not substantial. In addition, because the segment
of the population that can afford to pay our daily resident fee is finite, the
development of new assisted living facilities could outpace demand. The short
term effects of overbuilding include (a) significantly longer fill-up periods
(2-3 years as compared to 12-18 months previously experienced), (b) pressure
to lower or refrain from increasing rates and (c) competition for workers in
already tight labor markets. Long-term effects include lower margins for an
estimated 3-5 years until excess units are absorbed. We believe that each
local market is different, and we are and will continue to react in a variety
of ways to the specific competitive environment that exists in each market.
There can be no assurance that we will be able to compete effectively in those
markets where overbuilding exists, or that future overbuilding in other
markets where we have opened residences will not adversely affect our
operations.

We may not be able to attract and retain qualified employees and control labor
costs.

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

Our properties are geographically concentrated and we depend on the economies
of the specific areas in which we operate our properties.

   We depend significantly on the economies of Texas, Indiana, Oregon, Ohio
and Washington. As of September 30, 2000, 21.6% of our properties were in
Texas, 11.4% in Indiana, 10.3% in Oregon, 9.7% in Ohio and 8.6% in Washington.
Adverse changes in general economic factors affecting the respective health
care industries or laws and regulatory environment in each of these states
could have a material adverse effect on our financial condition and results of
operations.

We depend on reimbursement by third-party payors.

   Although revenue at a majority of our residences come primarily from
private payors, a portion of our revenues depend upon reimbursements from
third-party government payors, including state Medicaid waiver programs. For
the nine months ended September 30, 2000, direct payments received from
Medicaid funded programs accounted for approximately 10.4% and 10.8%
respectively, of our revenue. Also, our tenant-paid portion of Medicaid
revenue accounted for approximately 5.9% and 6.1% respectively, of our revenue
during the nine months ended September 30, 2000. We expect that state Medicaid
waiver programs will continue to constitute a significant source of our
revenue in the future. Furthermore, we cannot guarantee that our proportionate
percentage of revenue received from Medicaid waiver programs will not
increase. There are continuing efforts by governmental and private third-party
payors to contain or reduce the costs of health care by lowering reimbursement
rates, increasing case management review of services and negotiating reduced
contract pricing. Recent changes include the development and implementation of
a prospective payment system ("PPS")

                                      23
<PAGE>

for reimbursement of various healthcare services. While it is unclear what
effects PPS will have on our reimbursement from state Medicaid waiver
programs, it is possible that our revenues and profitability may be affected
adversely. Also, there has been, and our management expects that there will
continue to be, additional proposals attempting to reduce the federal and some
state budget deficits by limiting Medicaid reimbursement in general. Adoption
of any of these proposals at either the federal or the state level could have
a material adverse effect on our business, financial condition, results of
operations and prospects.

   We anticipate that revenues at a majority of our residences will continue
to come from private payors. However, we believe that locating residences in
states with favorable regulatory and reimbursement climates should provide a
stable source of residents eligible for Medicaid reimbursement to the extent
that private pay residents are not available and, in addition, provide our
private pay residents with alternative sources of income if their private
funds are depleted and they become Medicaid eligible. Although we will seek to
manage the mix of private paying tenants and Medicaid paying tenants residing
in our facilities, any shift to a high Medicaid population could have an
adverse affect on our financial position, results of operations or cash flows,
particularly if third-party government payors such as Medicaid continue to
seek limits on reimbursement rates.

Confidentiality of medical information.

   In 1996, the HIPAA law created comprehensive new requirements regarding the
confidentiality of medical information that is or has been electronically
transmitted or maintained. Under the 1996 law, Congress required the
Department of Health and Human Services to promulgate regulations, which were
proposed in November 1999. The requirements set forth in the proposed
regulations are extensive and may require to us to significantly change the
way we maintain and transmit healthcare information for our residents.

   Under the proposed regulations, healthcare providers must take "reasonable
steps" to ensure that the provider, as well as the provider's business
partners, comply with the law's requirements. Therefore, under the proposed
regulations, we may be required to ensure that the other entities with which
we do business are also in compliance with these laws. HIPAA also created
certain consumer rights with which we may be required to comply, including a
right of notice regarding our information practices, a right of access to
inspect and copy such individual's protected medical information, and a right
to receive an accounting of all disclosures made by us, with certain
exceptions. Although the proposed regulations have not yet been finalized and
it is anticipated that significant changes in the proposed regulations will
occur prior to finalization, we do not expect that the costs to comply with
the final regulations will have an adverse effect on our financial position,
results of operations or cash flows.

Restrictions imposed by laws benefiting disabled persons.

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

Medical waste.

   Our facilities generate potentially infectious waste due to the illness or
physical condition of the residents, including, for example, blood-soaked
bandages, swabs and other medical waste products and incontinence products of
those residents diagnosed with infectious diseases. The management of
potentially infectious medical waste, including handling, storage,
transportation, treatment and disposal, is subject to regulation under various
laws, both federal and state. These laws and regulations set forth the
management requirements, as well as permit, record keeping, notice and
reporting obligations. Any finding that we are not in compliance with these

                                      24
<PAGE>

laws and regulations could adversely affect our business operations and
financial condition. Because these laws and regulations are amended from time
to time, we cannot predict when and to what extent liability may arise. In
addition, because these environmental laws vary from state to state, expansion
of our operations to states where we do not currently operate may subject us
to additional restrictions on the manner in which we operate our facilities.

We may be liable for losses not covered by or in excess of our insurance.

   The provision of health care services entails an inherent risk of
liability. In recent years, participants in the long-term care industry have
been subject to an increasing number of lawsuits alleging malpractice or
related legal theories. Many of these lawsuits involve large claims and
significant defense costs. In addition, we may be subject to claims alleging
violations of federal or state laws relating to safe working conditions,
environmental matters and the use and disposal of hazardous or potentially
hazardous substances such as medical waste. We currently maintain liability
insurance intended to cover such claims. We believe our insurance is in
keeping with industry standards. We cannot guarantee, however, that claims in
excess of our insurance coverage or claims not covered by our insurance
coverage will not arise. A successful claim against us not covered by, or in
excess of, our insurance coverage could have a material adverse effect upon
our financial condition or results of operations. We cannot guarantee that we
will be able to renew liability insurance coverage or that, if such coverage
is available, it will be available on acceptable terms. Our current policies
are in effect through December 31, 2000.

We could incur significant costs related to environmental remediation or
compliance.

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

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

                                      25
<PAGE>

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

   For variable rate debt, changes in interest rates generally do not impact
the fair market value of the debt instrument, but do affect our future
earnings and cash flows. We had variable rate debt of $27.5 million
outstanding at September 30, 2000 with a weighted average interest rate of
4.35%. Assuming that our balance of variable rate debt remains constant at
$27.5 million, each one-percent increase in interest rates would result in an
annual increase in interest expense, and a corresponding decrease in cash
flows, of $275,000. Conversely, each one-percent decrease in interest rates
would result in an annual decrease in interest expense, and a corresponding
increase in cash flows, of $275,000.

                                      26
<PAGE>

 The table below presents principal cash flows and related weighted average
interest rates by expected maturity dates (in thousands).

<TABLE>
<CAPTION>
                                   December 31, Expected Maturity Date                  December 31, September 30,
                         -------------------------------------------------------------      1999         2000
                          2000    2001    2002     2003     2004   Thereafter  Total     Fair Value   Fair Value
                         ------  ------  -------  -------  ------  ---------- --------  ------------ -------------
<S>                      <C>     <C>     <C>      <C>      <C>     <C>        <C>       <C>          <C>
Long-term Debt
  Fixed rate............ $  920  $  980  $ 1,025  $ 1,080  $1,140   $39,545   $ 44,690    $ 44,690     $ 44,836
  Average interest
  rate..................   7.93%   7.93%    7.93%    7.93%   7.93%     7.93%      7.93%
  Variable rate......... $  574  $  620  $   670  $   724  $  781   $25,384   $ 28,753    $ 28,753     $ 27,495
  Average interest
  rate..................   4.35%   4.35%    4.35%    4.35%   4.35%     4.35%      4.35%
                         ------  ------  -------  -------  ------   -------   --------    --------     --------
    Total long-term
    debt................ $1,494  $1,600  $ 1,695  $ 1,804  $1,921   $64,929   $ 73,443    $ 73,443     $ 72,331

Convertible debentures
  6.0% Debentures....... $  --   $  --   $86,250  $   --   $  --    $   --    $ 86,250    $ 50,888     $ 49,500
  Average interest
  rate..................    6.0%    6.0%     6.0%     6.0%    6.0%      6.0%       6.0%
  5.625% Debentures..... $  --   $  --   $   --   $75,000  $  --    $   --    $ 75,000    $ 43,500     $ 46,375
  Average interest
  rate..................  5.625%  5.625%   5.625%   5.625%  5.625%    5.625%     5.625%
                         ------  ------  -------  -------  ------   -------   --------    --------     --------
    Total convertible
    debentures.......... $  --   $  --   $86,250  $75,000  $  --    $   --    $161,250    $ 94,388     $ 95,875
                         ------  ------  -------  -------  ------   -------   --------    --------     --------
    Total long-term debt
    and convertible
    debentures.......... $1,494  $1,600  $87,945  $76,804  $1,921   $64,929   $234,693    $167,831     $168,206
                         ======  ======  =======  =======  ======   =======   ========    ========     ========
</TABLE>

 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.

                                       27
<PAGE>

PART II--OTHER INFORMATION

Item 1. Legal Proceedings

   We reached an agreement to settle the class action litigation relating to
the restatement of our financial statements for the years ended December 31,
1996 and 1997 and the first three quarters of 1998 in September, 2000.

   The total cost of the settlement to us will be approximately $10,020,000
(less $1.0 million of legal fees and expenses to be reimbursed by our
corporate liability insurance carriers and other reimbursements of
approximately $193,000). We made a payment of approximately $2,255,000 on
October 23, 2000 towards the settlement. The remaining amount due will be paid
in accordance with a non-interest bearing note collateralized by eight
residences, and payable in three installments of approximately $2,255,000
each, due on January 23, 2001, April 23, 2001 and July 23, 2001, with final
payment of $1.0 million due within 90 days following the July 23, 2001
payment.

   As previously announced, the settlement had been pending the approval of
our corporate liability insurance carriers. These carriers had raised certain
coverage issues that resulted in the filing of litigation between us and the
carriers. These carriers have now consented to the settlement, and we and the
carriers have agreed to dismiss the litigation regarding coverage issues and
to resolve those issues through mediation or binding arbitration, if the
mediation were to fail. Mediation efforts subsequently failed, and we have
initiated a binding arbitration proceeding. To the extent that the carriers
are successful, we and the carriers have agreed that the carriers' recovery
will not exceed $4.0 million. The parties have further agreed that payment of
any such amount awarded will not be due in any event until 90 days after we
have satisfied our obligations to the plaintiffs in the class action, with any
such amount to be subordinated to new or refinancing of existing obligations.
We believe that we have strong defenses regarding this dispute.

   As a result of the class action settlement, we have recorded a charge of
approximately $10,020,000, which is partially offset by a reduction in
general, and administrative expenses of approximately $1,193,000 as a result
of the reimbursement of legal fees and expenses incurred in connection with
the litigation. Accordingly, the settlement has resulted in an increase in net
loss of $8,827,000 (or approximately $0.52 per basic and diluted share) for
the third quarter of 2000 and for the year ending December 31, 2000.

   We were served with a complaint, filed May 30, 2000 in the Marion (Indiana)
Superior Court on behalf of the Commissioner of the Indiana State Department
of Health. The complaint alleges that our facility in Logansport, Indiana, one
of our 21 facilities in Indiana, is being operated as an unlicensed "health
facility." It seeks to enjoin us from operating the Logansport facility as a
"health facility" until we are in compliance with Indiana law, including
obtaining an appropriate license, and paying a fine of up to $25,000 per day
for each day of unlicensed operation.

   After the Department of Health filed this lawsuit, we met with
representatives of that Department to discuss our compliance with the State's
laws on the services we provide our Logansport residents. It is our position
that we are not operating an unlicensed "health facility," as the State
claims, but that our services are consistent with those authorized for a
Housing With Services Establishment pursuant to Indiana law. After the meeting
with the Department's representatives, we submitted to the Department a
settlement proposal that includes a detailed description of the services
currently available at our Logansport facility. The Department has not yet
responded to our settlement proposal. In the event that the Department were to
refuse to settle this lawsuit, the Department may decide to file similar
actions against our other Indiana facilities. Additionally, in the event the
Department refuses to settle this lawsuit and we ultimately fail to prevail,
our occupancy levels, revenues and operation costs at Logansport and/or our
other Indiana facilities may be negatively impacted.

   We cannot predict the outcome of the $4.0 million dispute or the Indiana
litigation and currently are unable to predict the likelihood of success or
the range of possible loss. However, if these matters were determined
adversely to us, such determinations could have a material adverse effect on
our financial condition, results of operations, cash flow and liquidity.

                                      28
<PAGE>

   In addition to the matters referred to in the immediately preceding
paragraphs, we are involved in various lawsuits and claims arising in the
normal course of business. Although the outcomes of these other suits and
claims are uncertain and because of the early stages of these matters,
management cannot estimate the losses or range of losses, should the outcomes
be unfavorable. In the aggregate, such other suits and claims should not have
a material adverse effect on our financial condition, results of operations,
cash flow or liquidity.

ITEM 6. Exhibits and Reports on Form 8-K

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

<TABLE>
<CAPTION>
       Exhibit
       Number
       -------
       <C>     <S>
        10.1   Employment Agreement with Drew Q. Miller
        12     Ratio of Earnings to Fixed Charges
        27     Financial Data Schedule
</TABLE>

    (b)  Reports on Form 8-K. We filed a report on Form 8-K on August 16,
         2000 pursuant to Item 5 of Form 8-K stating the Company and
         certain of its past and present officers and directors (the
         "Plaintiffs") filed a lawsuit (the "Lawsuit") against National
         Union Fire Insurance Company of Pittsburgh, PA. and its directors
         and officers against certain losses, including alleged securities
         law claims.

      We filed a report on Form 8-K on September 1, 2000 pursuant to Item 5
      of Form 8-K stating the Company had reached an agreement with respect
      to the class action litigation stemming from the restatement of its
      financial statements for the years ended December 31, 1996 and 1997
      and the first three quarters of fiscal 1998.

                                      29
<PAGE>

                                  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

November 13, 2000                                  /s/ Drew Q. Miller
                                          By: _________________________________
                                             Name: Drew Q. Miller
                                             Title: Chief Financial Officer

November 13, 2000                               /s/ M. Catherine Maloney
                                          By: _________________________________
                                             Name: M. Catherine Maloney
                                             Title: Vice President and Chief
                                                 Accounting Officer

                                      30