##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-Q

|  |  |                                                                                        
|- |  | ---------------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|  |  |                                                                                        
|  |  | For the quarterly period ended June 30, 2003                                           

or

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|  |  |                                                                                         
|  |  | For the Transition period from          to                                              

Commission file number 1-13498

Assisted Living Concepts, Inc.

(Exact name of registrant as specified in its charter)


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

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

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

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

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

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

The Registrant had 6,431,925 shares of common stock, $.01 par value,
outstanding at August 7, 2003.



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TABLE OF CONTENTS



|                                              |                                                                                               |                                            |  |  |  |  |  | 
|--------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION               
|                                              | Item 1. Financial Statements                                                                 
|                                              |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                                              |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                              |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                              |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                              | Item 3. Quantitative and Qualitative Disclosure About Market Risk                            
|                                              | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION                  
|                                              | Item 1. Legal Proceedings                                                                    
|                                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                   
|EXHIBIT INDEX                                
|EX-12 Ratio of Earnings to Fixed Charges     
|EX-31.1 Certification Pursuant to Section 302
|EX-31.2 Certification Pursuant to Section 302
|EX-32.1 Certification Pursuant to Section 906
|EX-32.2 Certification Pursuant to Section 906



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.

FORM 10-Q
June 30, 2003

INDEXPART I  FINANCIAL INFORMATION

|        |  |                                                                                       |  |                                                                                          |    |                             |   |      |  | 
|------- |  | ------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- | -- | --------------------------- | - | ---- |  | 
|        |  |                                                                                       |  |                                                                                          |    |                             |   | PAGE
|        |  |                                                                                       |  |                                                                                          |    |                             |   |     
|Item 1. |  | Financial Statements                                                                  |  |                                                                                          |    |                            
|        |  | Consolidated Balance Sheets, December 31, 2002 and June 30, 2003                      |  |                                                                                          | 3  |                            
|        |  |                                                                                       |  | Consolidated Statements of Operations, Three and Six Months Ended June 30, 2002 and 2003 |    |                             | 4 |     
|        |  |                                                                                       |  | Consolidated Statements of Cash Flows, Six Months Ended June 30, 2002 and 2003           |    |                             | 5 |     
|        |  |                                                                                       |  | Notes to Consolidated Financial Statements                                               |    |                             | 6 |     
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |                                                                                          | 17 |                            
|Item 3. |  | Quantitative and Qualitative Disclosure About Market Risk                             |  |                                                                                          | 22 |                            
|Item 4. |  | Controls and Procedures                                                               |  |                                                                                          | 23 |                            
|        |  |                                                                                       |  |                                                                                          |    | PART II  OTHER INFORMATION |   |      |  | 
|Item 1. |  | Legal Proceedings                                                                     |  |                                                                                          | 23 |                            
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                   |  |                                                                                          | 23 |                            
|Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                          | 23 |                            

2



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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1. Financial Statements




ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)

|                                                                     |                                                                                                                                                                                                           |                                            |         |        |         |              |         |          |         |             |  | 
|-------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------ | ------- | ------------ | ------- | -------- | ------- | ----------- |  | 
|                                                                     |                                                                                                                                                                                                           |                                            |         |        |         | December 31, |         | June 30,
|                                                                     |                                                                                                                                                                                                           |                                            |         |        |         | 2002         |         | 2003    
|                                                                     |                                                                                                                                                                                                           |                                            |         |        |         |              |         |         
|                                                                     |                                                                                                                                                                                                           |                                            |         |        |         |              |         |          |         | (Unaudited)
|ASSETS                                                              
|Current assets:                                                      |                                                                                                                                                                                                           |                                            |         |        |         |              |         |         
|                                                                     | Cash and cash equivalents                                                                                                                                                                                 |                                            | $       | 7,165  |         |              | $       | 10,256   |        
|                                                                     | Cash restricted for resident security deposits                                                                                                                                                            |                                            |         | 1,929  |         |              |         | 1,673    |        
|                                                                     | Accounts receivable, net of allowance for doubtful accounts of $230 at
December 31, 2002 and $517 at June 30, 2003                                                                                        |                                            |         | 2,715  |         |              |         | 3,420    |        
|                                                                     | Prepaid insurance                                                                                                                                                                                         |                                            |         | 343    |         |              |         | 745      |        
|                                                                     | Prepaid expenses                                                                                                                                                                                          |                                            |         | 991    |         |              |         | 675      |        
|                                                                     | Assets held for sale                                                                                                                                                                                      |                                            |         | 9,727  |         |              |         |         |        
|                                                                     | Cash restricted for workers compensation claims                                                                                                                                                          |                                            |         | 4,696  |         |              |         | 4,407    |        
|                                                                     | Other current assets                                                                                                                                                                                      |                                            |         | 3,193  |         |              |         | 3,150    |        
|                                                                     |                                                                                                                                                                                                           |                                            |         |        |         |              |         |         
|                                                                     |                                                                                                                                                                                                           | Total current assets                       |         |        | 30,759  |              |         |          | 24,326  |            
|Restricted cash                                                      |                                                                                                                                                                                                           |                                            | 5,315   |        |         |              | 5,312   |         
|Property and equipment, net                                          |                                                                                                                                                                                                           |                                            | 177,930 |        |         |              | 183,637 |         
|Deferred income taxes                                                |                                                                                                                                                                                                           |                                            |        |        |         |              | 990     |         
|Other assets, net                                                    |                                                                                                                                                                                                           |                                            | 2,036   |        |         |              | 2,349   |         
|                                                                     |                                                                                                                                                                                                           |                                            |         |        |         |              |         |         
|                                                                     |                                                                                                                                                                                                           | Total assets                               |         | $      | 216,040 |              |         | $        | 216,614 |            
|                                                                     |                                                                                                                                                                                                           |                                            |         |        |         |              |         |         
|LIABILITIES AND SHAREHOLDERS EQUITY                                
|Current liabilities:                                                 |                                                                                                                                                                                                           |                                            |         |        |         |              |         |         
|                                                                     | Accounts payable                                                                                                                                                                                          |                                            | $       | 769    |         |              | $       | 633      |        
|                                                                     | Accrued real estate taxes                                                                                                                                                                                 |                                            |         | 4,836  |         |              |         | 4,009    |        
|                                                                     | Accrued interest expense                                                                                                                                                                                  |                                            |         | 2,174  |         |              |         | 2,024    |        
|                                                                     | Accrued payroll expense                                                                                                                                                                                   |                                            |         | 5,021  |         |              |         | 4,971    |        
|                                                                     | Other accrued expenses                                                                                                                                                                                    |                                            |         | 5,718  |         |              |         | 6,757    |        
|                                                                     | Income taxes payable                                                                                                                                                                                      |                                            |         |       |         |              |         | 1,068    |        
|                                                                     | Resident security deposits                                                                                                                                                                                |                                            |         | 1,991  |         |              |         | 1,562    |        
|                                                                     | Other current liabilities                                                                                                                                                                                 |                                            |         | 976    |         |              |         | 530      |        
|                                                                     | Current portion of unfavorable lease adjustment                                                                                                                                                           |                                            |         | 607    |         |              |         | 583      |        
|                                                                     | Current portion of long-term debt and capital lease obligations                                                                                                                                           |                                            |         | 11,521 |         |              |         | 2,760    |        
|                                                                     |                                                                                                                                                                                                           |                                            |         |        |         |              |         |         
|                                                                     |                                                                                                                                                                                                           | Total current liabilities                  |         |        | 33,613  |              |         |          | 24,897  |            
|Other liabilities                                                    |                                                                                                                                                                                                           |                                            | 463     |        |         |              | 578     |         
|Unfavorable lease adjustment, net of current portion                 |                                                                                                                                                                                                           |                                            | 2,508   |        |         |              | 2,220   |         
|Long-term debt and capital lease obligations, net of current portion |                                                                                                                                                                                                           |                                            | 109,078 |        |         |              | 108,054 |         
|Senior and Junior Secured notes                                      |                                                                                                                                                                                                           |                                            | 41,993  |        |         |              | 49,604  |         
|                                                                     |                                                                                                                                                                                                           |                                            |         |        |         |              |         |         
|                                                                     |                                                                                                                                                                                                           | Total liabilities                          |         |        | 187,655 |              |         |          | 185,353 |            
|Commitments and contingencies                                        |                                                                                                                                                                                                           |                                            |         |        |         |              |         |         
|Shareholders equity:                                                |                                                                                                                                                                                                           |                                            |         |        |         |              |         |         
|                                                                     | Preferred stock, $.01 par value; 3,250,000 shares authorized;
none issued or outstanding                                                                                                                  |                                            |         |       |         |              |         |         |        
|                                                                     | Common stock, $.01 par value; 20,000,000 shares authorized; issued
and outstanding 6,431,759 shares at December 31, 2002 and June 30,
2003 (68,241 shares to be issued upon settlement of pending claims) |                                            |         | 65     |         |              |         | 65       |        
|                                                                     | Additional paid-in capital                                                                                                                                                                                |                                            |         | 32,734 |         |              |         | 33,816   |        
|                                                                     | Accumulated deficit                                                                                                                                                                                       |                                            |         | (4,414 | )       |              |         | (2,620   | )      
|                                                                     |                                                                                                                                                                                                           |                                            |         |        |         |              |         |         
|                                                                     |                                                                                                                                                                                                           | Total shareholders equity                 |         |        | 28,385  |              |         |          | 31,261  |            
|                                                                     |                                                                                                                                                                                                           |                                            |         |        |         |              |         |         
|                                                                     |                                                                                                                                                                                                           | Total liabilities and shareholders equity |         | $      | 216,040 |              |         | $        | 216,614 |            
|                                                                     |                                                                                                                                                                                                           |                                            |         |        |         |              |         |         

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

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ASSISTED LIVING CONCEPTS, INC.

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

|                                                                                         |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |        |        |  
|---------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------------------------ | ------ | ------------------ | ------ | ---------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                                                                         |                                                                                        |                          |        | Three Months Ended |        | Six Months Ended
|                                                                                         |                                                                                        |                          |        | June 30,           |        | June 30,        
|                                                                                         |                                                                                        |                          |        |                    |        |                 
|                                                                                         |                                                                                        |                          |        | 2002               |        | 2003             |        | 2002   |        | 2003
|                                                                                         |                                                                                        |                          |        |                    |        |                  |        |        |        |     
|Revenue                                                                                  |                                                                                        | $                        | 37,813 |                    |        | $                | 41,932 |        |        | $    | 74,827 |        |        | $ | 83,076 |       
|Operating expenses:                                                                      |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |       
|                                                                                         | Residence operating expenses                                                           |                          |        | 26,159             |        |                  |        | 27,720 |        |      |        | 51,627 |        |   |        | 55,443 |       
|                                                                                         | Corporate general and administrative                                                   |                          |        | 5,578              |        |                  |        | 4,760  |        |      |        | 9,895  |        |   |        | 9,102  |       
|                                                                                         | Building rentals                                                                       |                          |        | 3,067              |        |                  |        | 3,119  |        |      |        | 6,105  |        |   |        | 6,224  |       
|                                                                                         | Depreciation and amortization                                                          |                          |        | 1,644              |        |                  |        | 1,701  |        |      |        | 3,256  |        |   |        | 3,377  |       
|                                                                                         |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |       
|                                                                                         |                                                                                        | Total operating expenses |        |                    | 36,448 |                  |        |        | 37,300 |      |        |        | 70,883 |   |        |        | 74,146 |  
|                                                                                         |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |       
|Operating income                                                                         |                                                                                        |                          | 1,365  |                    |        |                  | 4,632  |        |        |      | 3,944  |        |        |   | 8,930  |       
|Other income (expense):                                                                  |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |       
|                                                                                         | Interest expense                                                                       |                          |        | (3,466             | )      |                  |        | (3,429 | )      |      |        | (7,057 | )      |   |        | (6,858 | )     
|                                                                                         | Interest income                                                                        |                          |        | 52                 |        |                  |        | 30     |        |      |        | 106    |        |   |        | 66     |       
|                                                                                         | Other income (expense), net                                                            |                          |        | 18                 |        |                  |        | (67    | )      |      |        | 19     |        |   |        | (71    | )     
|                                                                                         |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |       
|                                                                                         |                                                                                        | Total other expense, net |        |                    | (3,396 | )                |        |        | (3,466 | )    |        |        | (6,932 | ) |        |        | (6,863 | )
|                                                                                         |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |       
|Income (loss) before debt restructure, reorganization costs,
and discontinued operations |                                                                                        |                          | (2,031 | )                  |        |                  | 1,166  |        |        |      | (2,988 | )      |        |   | 2,067  |       
|Debt restructure and reorganization costs                                                |                                                                                        |                          | (219   | )                  |        |                  |       |        |        |      | (666   | )      |        |   |       |       
|                                                                                         |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |       
|Income (loss) from continuing operations before income taxes                             |                                                                                        |                          | (2,250 | )                  |        |                  | 1,166  |        |        |      | (3,654 | )      |        |   | 2,067  |       
|                                                                                         | Income tax expense                                                                     |                          |        |                   |        |                  |        | 403    |        |      |        |       |        |   |        | 767    |       
|                                                                                         |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |       
|Income (loss) from continuing operations                                                 |                                                                                        |                          | (2,250 | )                  |        |                  | 763    |        |        |      | (3,654 | )      |        |   | 1,300  |       
|Discontinued operations:                                                                 |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |       
|                                                                                         | Income (loss) from operations (including gain on sale of
assets of $899 in March 2003) |                          |        | (380               | )      |                  |        |       |        |      |        | (426   | )      |   |        | 830    |       
|                                                                                         | Income tax expense                                                                     |                          |        |                   |        |                  |        |       |        |      |        |       |        |   |        | 336    |       
|                                                                                         |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |       
|Income (loss) from discontinued operations                                               |                                                                                        |                          | (380   | )                  |        |                  |       |        |        |      | (426   | )      |        |   | 494    |       
|                                                                                         |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |       
|Net income (loss)                                                                        |                                                                                        | $                        | (2,630 | )                  |        | $                | 763    |        |        | $    | (4,080 | )      |        | $ | 1,794  |       
|                                                                                         |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |       
|Basic earnings per share:                                                                |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |       
|                                                                                         | Income (loss) from continuing operations                                               |                          | $      | (0.34              | )      |                  | $      | 0.12   |        |      | $      | (0.56  | )      |   | $      | 0.20   |       
|                                                                                         | Income (loss) from discontinued operations                                             |                          |        | (0.06              | )      |                  |        |       |        |      |        | (0.07  | )      |   |        | 0.08   |       
|                                                                                         |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |       
|                                                                                         | Net income (loss)                                                                      |                          |        | (0.40              | )      |                  | $      | 0.12   |        |      | $      | (0.63  | )      |   | $      | 0.28   |       
|                                                                                         |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |       
|Diluted earnings per share:                                                              |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |       
|                                                                                         | Income (loss) from continuing operations                                               |                          | $      | (0.34              | )      |                  | $      | 0.12   |        |      | $      | (0.56  | )      |   | $      | 0.20   |       
|                                                                                         | Income (loss) from discontinued operations                                             |                          |        | (0.06              | )      |                  |        |       |        |      |        | (0.07  | )      |   |        | 0.07   |       
|                                                                                         |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |       
|                                                                                         | Net income (loss)                                                                      |                          | $      | (0.40              | )      |                  | $      | 0.12   |        |      | $      | (0.63  | )      |   | $      | 0.27   |       
|                                                                                         |                                                                                        |                          |        |                    |        |                  |        |        |        |      |        |        |        |   |        |       

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

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ASSISTED LIVING CONCEPTS, INC.

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

|                                                                                         |                                                           |                                                     |        |                           |        |      |        |        |        |  
|---------------------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------------------------------- | ------ | ------------------------- | ------ | ---- | ------ | ------ | ------ | -
|                                                                                         |                                                           |                                                     |        | Six Months Ended June 30,
|                                                                                         |                                                           |                                                     |        |                          
|                                                                                         |                                                           |                                                     |        | 2002                      |        | 2003
|                                                                                         |                                                           |                                                     |        |                           |        |     
|Operating Activities:                                                                    |                                                           |                                                     |        |                           |        |      |        |       
|Net income (loss)                                                                        |                                                           | $                                                   | (4,080 | )                         |        | $    | 1,794  |       
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |                                                           |                                                     |        |                           |        |      |        |       
|                                                                                         | Depreciation and amortization                             |                                                     |        | 3,359                     |        |      |        | 3,377  |       
|                                                                                         | Stock-based compensation expense                          |                                                     |        |                          |        |      |        | 93     |       
|                                                                                         | Amortization of debt issuance costs                       |                                                     |        | 52                        |        |      |        | 55     |       
|                                                                                         | Amortization of fair value adjustment to building rentals |                                                     |        | (306                      | )      |      |        | (312   | )     
|                                                                                         | Amortization of fair market adjustment to long-term debt  |                                                     |        | 213                       |        |      |        | 184    |       
|                                                                                         | Amortization of discount on long-term debt                |                                                     |        | 211                       |        |      |        | 271    |       
|                                                                                         | Straight line adjustment to building rentals              |                                                     |        | 188                       |        |      |        | 115    |       
|                                                                                         | Interest paid-in-kind                                     |                                                     |        | 610                       |        |      |        | 660    |       
|                                                                                         | Provision for doubtful accounts                           |                                                     |        | 132                       |        |      |        | 456    |       
|                                                                                         | (Gain) loss on sale or disposal of assets                 |                                                     |        | 443                       |        |      |        | (833   | )     
|Changes in assets and liabilities:                                                       |                                                           |                                                     |        |                           |        |      |        |       
|                                                                                         | Accounts receivable                                       |                                                     |        | (136                      | )      |      |        | (1,162 | )     
|                                                                                         | Prepaid expenses                                          |                                                     |        | (1,202                    | )      |      |        | (86    | )     
|                                                                                         | Other current assets                                      |                                                     |        | 172                       |        |      |        | 43     |       
|                                                                                         | Other assets                                              |                                                     |        | (299                      | )      |      |        | (368   | )     
|                                                                                         | Accounts payable                                          |                                                     |        | (218                      | )      |      |        | (136   | )     
|                                                                                         | Accrued expenses                                          |                                                     |        | 1,443                     |        |      |        | 82     |       
|                                                                                         | Other current liabilities                                 |                                                     |        | 294                       |        |      |        | 123    |       
|                                                                                         |                                                           |                                                     |        |                           |        |      |        |       
|                                                                                         |                                                           | Net cash provided by operating activities           |        |                           | 876    |      |        |        | 4,356  |  
|Investing Activities:                                                                    |                                                           |                                                     |        |                           |        |      |        |       
|Decrease (increase) in restricted cash                                                   |                                                           |                                                     | (2,680 | )                         |        |      | 548    |       
|Purchases of property and equipment                                                      |                                                           |                                                     | (1,333 | )                         |        |      | (1,093 | )     
|Sales of properties                                                                      |                                                           |                                                     |       |                           |        |      | 2,569  |       
|                                                                                         |                                                           |                                                     |        |                           |        |      |        |       
|                                                                                         |                                                           | Net cash provided by (used in) investing activities |        |                           | (4,013 | )    |        |        | 2,024  |  
|Financing Activities:                                                                    |                                                           |                                                     |        |                           |        |      |        |       
|Proceeds from long-term debt                                                             |                                                           |                                                     | 3,400  |                           |        |      |       |       
|Payments on long-term debt and capital lease obligations                                 |                                                           |                                                     | (725   | )                         |        |      | (3,289 | )     
|Debt issuance costs                                                                      |                                                           |                                                     | (79    | )                         |        |      |       |       
|                                                                                         |                                                           |                                                     |        |                           |        |      |        |       
|                                                                                         |                                                           | Net cash provided by (used in) financing activities |        |                           | 2,596  |      |        |        | (3,289 | )
|                                                                                         |                                                           |                                                     |        |                           |        |      |        |       
|Net increase (decrease) in cash and cash equivalents                                     |                                                           |                                                     | (541   | )                         |        |      | 3,091  |       
|Cash and cash equivalents, beginning of period                                           |                                                           |                                                     | 6,077  |                           |        |      | 7,165  |       
|                                                                                         |                                                           |                                                     |        |                           |        |      |        |       
|Cash and cash equivalents, end of period                                                 |                                                           | $                                                   | 5,536  |                           |        | $    | 10,256 |       
|                                                                                         |                                                           |                                                     |        |                           |        |      |        |       
|Supplemental disclosure of cash flow information:                                        |                                                           |                                                     |        |                           |        |      |        |       
|                                                                                         | Cash payments for interest                                |                                                     | $      | 5,422                     |        |      | $      | 6,109  |       

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

5



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##### Table of Contents






ASSISTED LIVING CONCEPTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. The Company

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

2. Basis of Presentation

The condensed consolidated financial statements included herein have been
prepared by the Company without audit and in the opinion of management include
all adjustments (all of which are normal and recurring) necessary for a fair
presentation of the results of operations for each of the three and six month
periods ended June 30, 2002 and 2003, pursuant to the rules and regulations of
the Securities and Exchange Commission. The accompanying condensed consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain reclassifications have been made to the
prior period financial statements to conform to the current period
presentation. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations; however the Company believes
that the disclosures in the accompanying financial statements are adequate to
make the information presented not misleading.

The accompanying condensed consolidated financial statements should be read in
conjunction with the Companys annual report on
Form 10-K for the fiscal year ended December 31, 2002 filed with the Securities
and Exchange Commission. The results of operations for the three and six month
periods ended June 30, 2003 are not necessarily indicative of the results for a
full year.

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

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3. Long-Term Debt

As of December 31, 2002 and June 30, 2003, long-term debt consists of the
following (in thousands):

|                                                                                                                            |  |                   |         |               |  |          |         |           |  |   |         |  |  |   |         | 
|--------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ------------- |  | -------- | ------- | --------- |  | - | ------- |  |  | - | ------- | 
|                                                                                                                            |  | December 31, 2002 |         | June 30, 2003
|                                                                                                                            |  |                   |         |              
|                                                                                                                            |  | Carrying          |         | Principal     |  | Carrying |         | Principal
|                                                                                                                            |  | Amount            |         | Amount        |  | Amount   |         | Amount   
|                                                                                                                            |  |                   |         |               |  |          |         |          
|Trust Deed Notes, payable to the State of Oregon
Housing and Community Services Department
(OHCS) due 2028                  |  | $                 | 9,688   |               |  | $        | 9,585   |           |  | $ | 9,603   |  |  | $ | 9,499   | 
|Variable Rate Multifamily Revenue Bonds, payable
to the Washington State Housing Finance
Commission Department due 2028     |  |                   | 7,217   |               |  |          | 7,295   |           |  |   | 7,220   |  |  |   | 7,295   | 
|Variable Rate Demand Housing Revenue Bonds, Series
1997, payable to the Idaho Housing and Finance
Association due 2017      |  |                   | 6,277   |               |  |          | 6,345   |           |  |   | 6,280   |  |  |   | 6,345   | 
|Variable Rate Demand Housing Revenue Bonds, Series
A-1 and A-2 payable to the State of Ohio Housing
Finance Agency due 2018 |  |                   | 11,451  |               |  |          | 11,575  |           |  |   | 10,455  |  |  |   | 10,575  | 
|Housing and Urban Development Insured
Mortgages due 2035                                                                    |  |                   | 7,329   |               |  |          | 7,410   |           |  |   | 7,305   |  |  |   | 7,385   | 
|New Senior Secured Notes due 2009                                                                                           |  |                   | 35,750  |               |  |          | 35,750  |           |  |   | 34,350  |  |  |   | 34,350  | 
|New Junior Secured Notes due 2012                                                                                           |  |                   | 13,925  |               |  |          | 16,225  |           |  |   | 15,254  |  |  |   | 17,154  | 
|Mortgages payable due 2008                                                                                                  |  |                   | 27,995  |               |  |          | 27,948  |           |  |   | 27,674  |  |  |   | 27,675  | 
|G.E. Capital (Previously Heller Healthcare Finance,
Inc.) Credit Facility due 2005                                          |  |                   | 42,691  |               |  |          | 43,516  |           |  |   | 42,277  |  |  |   | 42,991  | 
|Capital lease obligations                                                                                                   |  |                   | 269     |               |  |          | 269     |           |  |   |        |  |  |   |        | 
|                                                                                                                            |  |                   |         |               |  |          |         |           |  |   |         |  |  |   |         | 
|Total long-term debt                                                                                                        |  |                   | 162,592 |               |  | $        | 165,918 |           |  |   | 160,418 |  |  | $ | 163,269 | 
|                                                                                                                            |  |                   |         |               |  |          |         |           |  |   |         |  |  |   |         | 
|Less current portion                                                                                                        |  |                   | 11,521  |               |  |          |         |           |  |   | 2,760   |  |  |   |         | 
|                                                                                                                            |  |                   |         |               |  |          |         |           |  |   |         |  |  |   |         | 
|Long-term debt                                                                                                              |  | $                 | 151,071 |               |  |          |         |           |  | $ | 157,658 |  |  |   |         | 
|                                                                                                                            |  |                   |         |               |  |          |         |           |  |   |         |  |  |   |         | 

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

The Variable Rate Multifamily Revenue Bonds are payable to the Washington State
Housing Finance Commission Department and at June 30, 2003 are secured by a
$7.4 million letter of credit and by buildings, land, furniture and fixtures of
the five Washington residences and had an interest rate of 1.2% at June 30,
2003. The letter of credit expires in January 2004 and had an interest rate of
1.2% at June 30, 2003.

The Variable Rate Demand Housing Revenue Bonds, Series 1997 are payable to the
State of Idaho Housing and Finance Association and at June 30, 2003 are secured
by a $6.5 million letter of credit and by buildings, land, furniture and
fixtures of four Idaho residences and had an interest rate of 1.2% at June 30,
2003. The letter of credit expires in July 2004 and had an interest rate of
1.5% at June 30, 2003.

The Variable Rate Demand Housing Revenue Bonds are payable to the State of Ohio
Housing Finance Agency (OHFA) and at June 30, 2003 are secured by a $10.8
million letter of credit and by buildings, land, furniture and fixtures of six
Ohio residences and had an interest rate of 1.1% at June 30, 2003. The letter
of credit expires in July 2005 and had an interest rate of 1.5% at June 30,
2003.

At June 30, 2003, mortgage loans include three fixed rate loans secured by
seven Texas residences, three Oregon residences and three New Jersey
residences. These loans collectively require monthly principal and interest
payments of $230,000, with balloon payments of $11.8 million, $5.3 million and
$7.2 million due at maturity in May 2008, August 2008 and September 2008,
respectively. These loans bear fixed interest rates from 7.58% to 8.79%.

Housing and Urban Development (HUD) insured mortgages include three separate
loan agreements entered into in 2001. These are fixed rate mortgages, each of
which is secured by a separate facility in Texas. These loans mature between
July 1, 2036 and August 1,

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2036 and collectively require monthly principal and interest payments of
$47,493. The loans bear fixed interest rates between 7.40% and 7.55%.

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

On January 1, 2002 the Debtors emerged from the proceedings under Chapter 11 of
the Bankruptcy Code. The Companys Plan of reorganization included the issuance
of $40.25 million aggregate principal amount of seven-year secured notes (the
New Senior Secured Notes), bearing interest at 10% per annum, payable
semi-annually in arrears, and $15.25 million aggregate principal amount of
ten-year secured notes (the New Junior Secured Notes and collectively with
the New Senior Secured Notes, the New Notes), bearing interest payable in
additional New Junior Secured Notes for three years at 8% per annum and
thereafter payable in cash at 12% per annum, payable semi-annually in arrears.
The New Junior Secured Notes were issued at a discount of $2.6 million. The
discount is being amortized over the life of the New Junior Secured Notes using
the effective interest method. The New Notes are secured by 51 properties as of
June 30, 2003.

Of the $51.5 million outstanding in New Notes, $18.5 million is payable to
related parties at June 30, 2003.

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

As of June 30, 2003, the following annual principal payments are required (in
thousands):

|                                       |      |       |         |        |         | 
|-------------------------------------- | ---- | ----- | ------- | ------ | ------- | 
|July 1, 2003 through December 31, 2003 |      | $     | 1,867   |       
|                                       | 2004 |       |         | 2,942  |        
|                                       | 2005 |       |         | 43,762 |        
|                                       | 2006 |       |         | 2,258  |        
|                                       | 2007 |       |         | 2,408  |        
|Thereafter                             |      |       | 110,032 |       
|                                       |      |       |         |       
|                                       |      | Total |         | $      | 163,269 | 
|                                       |      |       |         |       

The Company has a series of reimbursement agreements with U.S. Bank for letters
of credit that secure certain of our Revenue bonds payable, which total
approximately $24.7 million as of June 30, 2003. As such letters of credit
expire, beginning in January 2004, the Company will need to obtain replacement
letters of credit, post cash collateral or refinance the underlying debt. There
can be no assurance that replacement letters of credit will be procured from
the same or other lending institutions on terms that are acceptable to the
Company. In the event that the Company is unable to obtain a replacement letter
of credit or provide alternate collateral prior to the expiration of any of
these letters of credit, the underlying debt would be in default. The
Companys agreements with U.S. Bank contain restrictive covenants that include
compliance with certain financial ratios.

In May 2002, we amended our existing agreement with U.S. Bank, establishing new
covenants, with which we were in compliance as of June 30, 2003. Failure to
comply with these covenants would constitute an event of default, which would
allow U.S. Bank to declare any amounts outstanding under the loan documents to
be due and payable.

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

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

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4. Income Taxes

The Company anticipates taxable income for both financial reporting and tax
return purposes for the year ending December 31, 2003, and accordingly has
provided for federal and state income taxes on income from continuing
operations and discontinued operations for the six months ended June 30, 2003.
The Company has recorded such income tax expense at the rate of 38.1% for the
six months ended June 30, 2003.

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

|                                           |  |  |      |  
|------------------------------------------ |  |  | ---- | -
|Statutory federal tax rate                 |  |  | 34.0 | %
|State income taxes, net of federal benefit |  |  | 2.6  | %
|Non-deductible expenses                    |  |  | 1.5  | %
|                                           |  |  |      |  
|Effective tax rate                         |  |  | 38.1 | %
|                                           |  |  |      |  

At December 31, 2002, the Company had approximately $93.5 million of net
operating loss (NOL) carryforwards which will expire between 2009 and 2022.
These NOL carryforwards have been reduced to approximately $16 million as a
result of the discharge and cancellation of certain prepetition liabilities
under the Plan. The reduction of the NOL carryforwards was effective on January
1, 2003.

The NOL carryforwards remaining after the application of the cancellation of
indebtedness provisions are subject to certain provisions of the Internal
Revenue Code which restricts the utilization of such NOL carryforwards. In
addition, any net unrealized built-in losses resulting from the excess of tax
basis over the carrying value of the Companys assets (primarily property and
equipment) as of the Effective Date, which are recognized within five years are
also subject to these provisions. Section 382 of the Internal Revenue Code
imposes limitations on the utilization of the NOL carryforwards and built-in
losses after certain changes of ownership of a loss company. The Company is
deemed to be a loss company for these purposes. Under these provisions, the
Companys ability to utilize these NOL carryforwards and built-in losses in the
future will generally be subject to an annual limitation of approximately $1.6
million (the Annual Limitation). There can be no assurance that the Company
will be able to utilize these NOL carryforwards or built-in losses and
therefore, the Company established a 100 percent valuation allowance of
approximately $43.6 million as of Effective Date. Pursuant to SOP 90-7, the
income tax benefit, if any, of the future realization of these NOL
carryforwards and built-in loss deductible temporary differences will be
recorded as an adjustment to additional paid-in capital.

For the year ended December 31, 2002, the Annual Limitation was not utilized
since the Company incurred a loss for financial statement purposes. A 100
percent valuation allowance of approximately $45.0 million was recorded to
offset the associated net deferred tax asset as of December 31, 2002. For the
full fiscal year ending December 31, 2003, the Company anticipates utilizing
the 2003 Annual Limitation as well as some or all of the 2002 unused Annual
Limitation. Because of the uncertainty of anticipating future taxable income,
for the six months ended June 30, 2003 the Company has recorded a charge in
lieu of taxes resulting from the initial recognition of built-in loss Annual
Limitation tax benefits allocated as a credit to additional paid-in capital
pursuant to SOP 90-7. To the extent the Companys 2003 financial statement
income after permanent differences exceeds $3.2 million (the annual limitation
for 2002 and 2003) and depending upon the Companys ability to recognize
deferred tax assets which arose subsequent to the Effective Date, the Companys
effective tax rate for 2003 would likely be less than 38.1%.

Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of June 30, 2003 will be allocated as follows:

|                                                                                      |  |   |      |  |  |         |  | 
|------------------------------------------------------------------------------------- |  | - | ---- |  |  | ------- |  | 
|Additional paid-in capital                                                            |  | $ | 42.5 |  |  | million
|Income tax benefit that would be reported in the consolidated
statement of operations |  |   | 1.3  |  |  | million
|                                                                                      |  |   |      |  |  |         |  | 
|                                                                                      |  | $ | 43.8 |  |  | million
|                                                                                      |  |   |      |  |  |         |  | 

5. Discontinued Operations

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

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In accordance with SFAS No. 144, the results of operations and the gain and
losses from the sales have been included in Income (loss) from discontinued
operations in the accompanying financial statements for the three and six
month periods ended June 30, 2002 and 2003.

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

6. Stock-based Compensation

Previously, the Company accounted for stock-based compensation plans under the
recognition and measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees (APB No. 25) and related interpretations. No
stock-based employee compensation expense for stock options was reflected in
Net Income previous to April 1, 2003, as all stock options granted under those
plans had an exercise price equal to the fair market value of the underlying
common stock on the date of grant. Effective April 1, 2003, the Company
adopted the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, and recognizes compensation expense according to the
prospective transition method under SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. Under this method the Company
expenses the fair value of all new stock options granted after January 1, 2003.
The following table illustrates the effect on net income and earnings per
share had the company applied the fair value accounting method to all of the
Companys stock option grants.

|                                                                                                                                              |                       |   |                             |       |                           |   |      |      |      |   |        |       |   |   |       |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | - | --------------------------- | ----- | ------------------------- | - | ---- | ---- | ---- | - | ------ | ----- | - | - | ----- | ---- | 
|                                                                                                                                              |                       |   | Three Months Ended June 30, |       | Six Months Ended June 30,
|                                                                                                                                              |                       |   |                             |       |                          
|                                                                                                                                              |                       |   | 2002                        |       | 2003                      |   | 2002 |      | 2003
|                                                                                                                                              |                       |   |                             |       |                           |   |      |      |     
|Net income (loss), as reported                                                                                                                |                       | $ | (2,630                      | )     |                           | $ | 763  |      |      | $ | (4,080 | )     |   | $ | 1,794 |     
|Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects                                    |                       |   |                            |       |                           |   | 93   |      |      |   |       |       |   |   | 93    |     
|Deduct: Total stock-based employee compensation
expense determined under fair value method
for all awards granted, net of related tax effects |                       |   | (12                         | )     |                           |   | (118 | )    |      |   | (13    | )     |   |   | (144  | )   
|                                                                                                                                              |                       |   |                             |       |                           |   |      |      |      |   |        |       |   |   |       |     
|Pro forma net income (loss)                                                                                                                   |                       | $ | (2,642                      | )     |                           | $ | 738  |      |      | $ | (4,093 | )     |   | $ | 1,743 |     
|                                                                                                                                              |                       |   |                             |       |                           |   |      |      |      |   |        |       |   |   |       |     
|Net income (loss) per share:                                                                                                                  |                       |   |                             |       |                           |   |      |      |      |   |        |       |   |   |       |     
|                                                                                                                                              | Basic  as reported   |   | $                           | (0.41 | )                         |   | $    | 0.12 |      |   | $      | (0.63 | ) |   | $     | 0.28 | 
|                                                                                                                                              | Basic  pro forma     |   | $                           | (0.41 | )                         |   | $    | 0.11 |      |   | $      | (0.63 | ) |   | $     | 0.27 | 
|                                                                                                                                              | Diluted  as reported |   | $                           | (0.41 | )                         |   | $    | 0.12 |      |   | $      | (0.63 | ) |   | $     | 0.27 | 
|                                                                                                                                              | Diluted  pro forma   |   | $                           | (0.41 | )                         |   | $    | 0.11 |      |   | $      | (0.63 | ) |   | $     | 0.27 | 

7. Income (Loss) Per Share

The weighted average common shares used for basic net income (loss) per common
share were 6,500,000 for the three and six month periods ended June 30, 2002
and 2003. The effect of dilutive stock options using the treasury stock method
added 110,113 shares for the three month period ended June 30, 2003 and 52,519
shares for the six month period ended June 30, 2003. The effect of options for
the three and six month periods ended June 30, 2002 is not considered since
their effect is antidilutive.

8. Subsequent Event

In July 2003, the Company completed an open market purchase of a portion of the Companys outstanding
10% Senior Secured Notes due 2009 and Junior Secured Notes due 2012.  The transaction included the
purchase of $147,889 principal amount of Senior Secured Notes and $34,178 principal amount of Junior
Secured Notes (collectively, the Purchase Notes).  Because the purchase of the Junior Notes is not permitted under the
Indentures and constitutes a Default thereunder, and the purchase of the Senior Notes may not be permitted
and could constitute Default there under, although this issue is not clear, the Company intends to
cure the Default by reversing these transactions and selling the Purchased Notes.  Failure to cure the
Default under the Indentures could have a material adverse effect on the Company.

9. Subsidiary Guarantee of New Notes

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

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ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATING BALANCE SHEETS
JUNE 30, 2003
(in thousands, except share amounts)
(unaudited)

|                                                                    |                                                                |                                            |        |           |         |      |        |                           |        |          |       |              |       |             |       |               |       |               |        |              |        |  |         |         |         |   |         |        |         | 
|------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------ | ------ | --------- | ------- | ---- | ------ | ------------------------- | ------ | -------- | ----- | ------------ | ----- | ----------- | ----- | ------------- | ----- | ------------- | ------ | ------------ | ------ |  | ------- | ------- | ------- | - | ------- | ------ | ------- | 
|                                                                    |                                                                |                                            |        |           |         |      |        | Wholly-Owned Subsidiaries |        |          |       |              |       |             |       |              
|                                                                    |                                                                |                                            |        |           |         |      |        |                           |        |          |       |              |       |             |       |              
|                                                                    |                                                                |                                            |        |           |         |      |        | ALC                       |        |          |       |              |       |             |       |               |       | Non-          |        |              |        |  |         |         |         |  
|                                                                    |                                                                |                                            |        |           |         |      |        | Indiana,                  |        | Carriage |       |              |       |             |       | Participating |       | Consolidating |        | Consolidated
|                                                                    |                                                                |                                            |        | ALC, Inc. |         | Inc. |        | House                     |        | HCI      |       | Subsidiaries |       | Adjustments |       | Total        
|                                                                    |                                                                |                                            |        |           |         |      |        |                           |        |          |       |              |       |             |       |              
|ASSETS                                                             
|Current Assets:                                                     |                                                                |                                            |        |           |         |      |        |                           |        |          |       |              |       |             |       |               |       |               |        |              |        |  |         |         |         |   |         |       
|                                                                    | Cash and cash equivalents                                      |                                            | $      | 10,256    |         |      | $      |                          |        |          | $     |             |       |             | $     |              |       |               | $      |             |        |  | $       |        |         |   | $       | 10,256 |        
|                                                                    | Cash restricted for resident
security deposits                 |                                            |        | 1,673     |         |      |        |                          |        |          |       |             |       |             |       |              |       |               |        |             |        |  |         |        |         |   |         | 1,673  |        
|                                                                    | Accounts receivable, net of
allowance for doubtful accounts    |                                            |        | 3,178     |         |      |        |                          |        |          |       |             |       |             |       |              |       |               |        | 242          |        |  |         |        |         |   |         | 3,420  |        
|                                                                    | Prepaid insurance                                              |                                            |        | 745       |         |      |        |                          |        |          |       |             |       |             |       |              |       |               |        |             |        |  |         |        |         |   |         | 745    |        
|                                                                    | Prepaid expenses                                               |                                            |        | 675       |         |      |        |                          |        |          |       |             |       |             |       |              |       |               |        |             |        |  |         |        |         |   |         | 675    |        
|                                                                    | Cash restricted for workers
compensation claims               |                                            |        | 4,407     |         |      |        |                          |        |          |       |             |       |             |       |              |       |               |        |             |        |  |         |        |         |   |         | 4,407  |        
|                                                                    | Other current assets                                           |                                            |        | 1,139     |         |      |        |                          |        |          |       |             |       |             |       |              |       |               |        | 2,011        |        |  |         |        |         |   |         | 3,150  |        
|                                                                    |                                                                |                                            |        |           |         |      |        |                           |        |          |       |              |       |             |       |               |       |               |        |              |        |  |         |         |         |   |         |       
|                                                                    |                                                                | Total current assets                       |        |           | 22,073  |      |        |                           |       |          |       |              |      |             |       |               |      |               |        |              | 2,253  |  |         |         |        |   |         |        | 24,326  | 
|Restricted cash                                                     |                                                                |                                            | 5,312  |           |         |      |       |                           |        |          |      |              |       |             |      |               |       |               |       |              |        |  |        |         |         |   | 5,312   |       
|Receivable from subsidiaries/parent                                 |                                                                |                                            | 9,380  |           |         |      | 5,023  |                           |        |          |       |              |       |             | 3,289 |               |       |               | 1,068  |              |        |  | (18,760 | )       |         |   |        |       
|Property and equipment, net                                         |                                                                |                                            | 85,529 |           |         |      | 12,444 |                           |        |          | 3,501 |              |       |             | 4,111 |               |       |               | 78,052 |              |        |  |        |         |         |   | 183,637 |       
|Investment in subsidiaries                                          |                                                                |                                            | 29,634 |           |         |      |       |                           |        |          |      |              |       |             |      |               |       |               |       |              |        |  | (29,634 | )       |         |   |        |       
|Deferred income taxes                                               |                                                                |                                            | 990    |           |         |      |       |                           |        |          |      |              |       |             |      |               |       |               |       |              |        |  |        |         |         |   | 990     |       
|Other assets, net                                                   |                                                                |                                            | 1,883  |           |         |      |       |                           |        |          |      |              |       |             |      |               |       |               | 466    |              |        |  |        |         |         |   | 2,349   |       
|                                                                    |                                                                |                                            |        |           |         |      |        |                           |        |          |       |              |       |             |       |               |       |               |        |              |        |  |         |         |         |   |         |       
|                                                                    |                                                                | Total assets                               |        | $         | 154,801 |      |        | $                         | 17,467 |          |       | $            | 3,501 |             |       | $             | 7,400 |               |        | $            | 81,839 |  |         | $       | (48,394 | ) |         | $      | 216,614 | 
|                                                                    |                                                                |                                            |        |           |         |      |        |                           |        |          |       |              |       |             |       |               |       |               |        |              |        |  |         |         |         |   |         |       
|LIABILITIES AND SHAREHOLDERS EQUITY                               
|Current liabilities:                                                |                                                                |                                            |        |           |         |      |        |                           |        |          |       |              |       |             |       |               |       |               |        |              |        |  |         |         |         |   |         |       
|                                                                    | Accounts payable                                               |                                            | $      | 594       |         |      | $      |                          |        |          | $     |             |       |             | $     |              |       |               | $      | 39           |        |  | $       |        |         |   | $       | 633    |        
|                                                                    | Accrued real estate taxes                                      |                                            |        | 2,451     |         |      |        | 446                       |        |          |       | 239          |       |             |       | 102           |       |               |        | 771          |        |  |         |        |         |   |         | 4,009  |        
|                                                                    | Accrued interest expense                                       |                                            |        | 1,837     |         |      |        |                          |        |          |       |             |       |             |       |              |       |               |        | 187          |        |  |         |        |         |   |         | 2,024  |        
|                                                                    | Accrued payroll expense                                        |                                            |        | 4,900     |         |      |        |                          |        |          |       |             |       |             |       |              |       |               |        | 71           |        |  |         |        |         |   |         | 4,971  |        
|                                                                    | Other accrued expenses                                         |                                            |        | 6,700     |         |      |        |                          |        |          |       |             |       |             |       |              |       |               |        | 57           |        |  |         |        |         |   |         | 6,757  |        
|                                                                    | Resident security deposits                                     |                                            |        | 1,414     |         |      |        |                          |        |          |       |             |       |             |       | (1            | )     |               |        | 149          |        |  |         |        |         |   |         | 1,562  |        
|                                                                    | Other current liabilities                                      |                                            |        | 1,355     |         |      |        | 243                       |        |          |       |             |       |             |       |              |       |               |        |             |        |  |         |        |         |   |         | 1,598  |        
|                                                                    | Current portion of unfavorable
lease adjustment                |                                            |        | 505       |         |      |        |                          |        |          |       | 78           |       |             |       |              |       |               |        |             |        |  |         |        |         |   |         | 583    |        
|                                                                    | Current portion of long-term
debt and capital lease
obligation |                                            |        | 1,257     |         |      |        |                          |        |          |       |             |       |             |       |              |       |               |        | 1,503        |        |  |         |        |         |   |         | 2,760  |        
|                                                                    |                                                                |                                            |        |           |         |      |        |                           |        |          |       |              |       |             |       |               |       |               |        |              |        |  |         |         |         |   |         |       
|                                                                    |                                                                | Total current liabilities                  |        |           | 21,013  |      |        |                           | 689    |          |       |              | 317   |             |       |               | 101   |               |        |              | 2,777  |  |         |         |        |   |         |        | 24,897  | 
|Other liabilities                                                   |                                                                |                                            | 533    |           |         |      |       |                           |        |          | 45    |              |       |             |      |               |       |               |       |              |        |  |        |         |         |   | 578     |       
|Unfavorable lease adjustment, net of
current portion                |                                                                |                                            | 1,850  |           |         |      |       |                           |        |          | 309   |              |       |             |      |               |       |               | 61     |              |        |  |        |         |         |   | 2,220   |       
|Long-term debt and capital lease
obligation, net of current portion |                                                                |                                            | 81,901 |           |         |      |       |                           |        |          |      |              |       |             |      |               |       |               | 75,757 |              |        |  |        |         |         |   | 157,658 |       
|Payable to subsidiaries/parent                                      |                                                                |                                            | 18,070 |           |         |      |       |                           |        |          | 690   |              |       |             |      |               |       |               |       |              |        |  | (18,760 | )       |         |   |        |       
|                                                                    |                                                                |                                            |        |           |         |      |        |                           |        |          |       |              |       |             |       |               |       |               |        |              |        |  |         |         |         |   |         |       
|                                                                    |                                                                | Total liabilities                          |        |           | 123,367 |      |        |                           | 689    |          |       |              | 1,361 |             |       |               | 101   |               |        |              | 78,595 |  |         |         | (18,760 | ) |         |        | 185,353 | 
|                                                                    |                                                                |                                            |        |           |         |      |        |                           |        |          |       |              |       |             |       |               |       |               |        |              |        |  |         |         |         |   |         |       
|Commitments and contingencies                                       |                                                                |                                            |        |           |         |      |        |                           |        |          |       |              |       |             |       |               |       |               |        |              |        |  |         |         |         |   |         |       
|Shareholders equity:                                               |                                                                |                                            |        |           |         |      |        |                           |        |          |       |              |       |             |       |               |       |               |        |              |        |  |         |         |         |   |         |       
|                                                                    | Preferred stock                                                |                                            |        |          |         |      |        |                          |        |          |       |             |       |             |       |              |       |               |        |             |        |  |         |        |         |   |         |       |        
|                                                                    | Common stock                                                   |                                            |        | 65        |         |      |        | 16,342                    |        |          |       |             |       |             |       |              |       |               |        |             |        |  |         | (16,342 | )       |   |         | 65     |        
|                                                                    | Additional paid-in capital                                     |                                            |        | 33,989    |         |      |        |                          |        |          |       | 2,549        |       |             |       | 7,365         |       |               |        | 5,667        |        |  |         | (15,754 | )       |   |         | 33,816 |        
|                                                                    | Accumulated deficit                                            |                                            |        | (2,620    | )       |      |        | 436                       |        |          |       | (409         | )     |             |       | (66           | )     |               |        | (2,423       | )      |  |         | 2,462   |         |   |         | (2,620 | )      
|                                                                    |                                                                |                                            |        |           |         |      |        |                           |        |          |       |              |       |             |       |               |       |               |        |              |        |  |         |         |         |   |         |       
|                                                                    |                                                                | Total shareholders equity                 |        |           | 31,434  |      |        |                           | 16,778 |          |       |              | 2,140 |             |       |               | 7,299 |               |        |              | 3,244  |  |         |         | (29,634 | ) |         |        | 31,261  | 
|                                                                    |                                                                |                                            |        |           |         |      |        |                           |        |          |       |              |       |             |       |               |       |               |        |              |        |  |         |         |         |   |         |       
|                                                                    |                                                                | Total liabilities and
shareholdersequity |        | $         | 154,801 |      |        | $                         | 17,467 |          |       | $            | 3,501 |             |       | $             | 7,400 |               |        | $            | 81,839 |  |         | $       | (48,394 | ) |         | $      | 216,614 | 
|                                                                    |                                                                |                                            |        |           |         |      |        |                           |        |          |       |              |       |             |       |               |       |               |        |              |        |  |         |         |         |   |         |       

11



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.

CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2002
(in thousands, except share amounts)

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

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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.

CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended June 30, 2003
(in thousands)
(undaudited)

|                                                                              |                                      |                          |        |          |        |      |      |                           |       |          |      |              |      |       |     |               |    |              |        |        |        |   |        |        |        |  
|----------------------------------------------------------------------------- | ------------------------------------ | ------------------------ | ------ | -------- | ------ | ---- | ---- | ------------------------- | ----- | -------- | ---- | ------------ | ---- | ----- | --- | ------------- | -- | ------------ | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                                                              |                                      |                          |        |          |        |      |      | Wholly-Owned Subsidiaries |       |          |      |             
|                                                                              |                                      |                          |        |          |        |      |      |                           |       |          |      |             
|                                                                              |                                      |                          |        |          |        |      |      | ALC                       |       |          |      |              |      |       |     |               |    | Non-         |        |        |        |  
|                                                                              |                                      |                          |        |          |        |      |      | Indiana,                  |       | Carriage |      |              |      |       |     | participating |    | Consolidated
|                                                                              |                                      |                          |        | ALC,INC. |        | Inc. |      | House                     |       | HCI      |      | Subsidiaries |      | Total
|                                                                              |                                      |                          |        |          |        |      |      |                           |       |          |      |              |      |      
|Revenue                                                                       |                                      | $                        | 75,657 |          |        | $    |     |                           |       | $        |     |              |      | $     |    |               |    | $            | 7,419  |        |        | $ | 83,076 |       
|Operating expenses:                                                           |                                      |                          |        |          |        |      |      |                           |       |          |      |              |      |       |     |               |    |              |        |        |        |   |        |       
|                                                                              | Residence operating expenses         |                          |        | 49,772   |        |      |      | 197                       |       |          |      | 128          |      |       |     |              |    |              |        | 5,346  |        |   |        | 55,443 |       
|                                                                              | Corporate general and administrative |                          |        | 9,102    |        |      |      |                          |       |          |      |             |      |       |     |              |    |              |        |       |        |   |        | 9,102  |       
|                                                                              | Building rentals                     |                          |        | 5,778    |        |      |      |                          |       |          |      | 446          |      |       |     |              |    |              |        |       |        |   |        | 6,224  |       
|                                                                              | Depreciation and amortization        |                          |        | 1,696    |        |      |      | 203                       |       |          |      | 69           |      |       |     | 66            |    |              |        | 1,343  |        |   |        | 3,377  |       
|                                                                              |                                      |                          |        |          |        |      |      |                           |       |          |      |              |      |       |     |               |    |              |        |        |        |   |        |       
|                                                                              |                                      | Total operating expenses |        |          | 66,348 |      |      |                           | 400   |          |      |              | 643  |       |     |               | 66 |              |        |        | 6,689  |   |        |        | 74,146 |  
|                                                                              |                                      |                          |        |          |        |      |      |                           |       |          |      |              |      |       |     |               |    |              |        |        |        |   |        |       
|Operating income (loss)                                                       |                                      |                          | 9,309  |          |        |      | (400 | )                         |       |          | (643 | )            |      |       | (66 | )             |    |              | 730    |        |        |   | 8,930  |       
|                                                                              |                                      |                          |        |          |        |      |      |                           |       |          |      |              |      |       |     |               |    |              |        |        |        |   |        |       
|Other income (expense):                                                       |                                      |                          |        |          |        |      |      |                           |       |          |      |              |      |       |     |               |    |              |        |        |        |   |        |       
|                                                                              | Interest expense                     |                          |        | (3,569   | )      |      |      |                          |       |          |      |             |      |       |     |              |    |              |        | (3,289 | )      |   |        | (6,858 | )     
|                                                                              | Interest income                      |                          |        | 66       |        |      |      |                          |       |          |      |             |      |       |     |              |    |              |        |       |        |   |        | 66     |       
|                                                                              | Management fee income (expense)      |                          |        | 98       |        |      |      |                          |       |          |      | (234         | )    |       |     |              |    |              |        | 136    |        |   |        |       |       
|                                                                              | Lease income (expense)               |                          |        | (1,080   | )      |      |      | 1,080                     |       |          |      |             |      |       |     |              |    |              |        |       |        |   |        |       |       
|                                                                              | Other expense, net                   |                          |        | (71      | )      |      |      |                          |       |          |      |             |      |       |     |              |    |              |        |       |        |   |        | (71    | )     
|                                                                              |                                      |                          |        |          |        |      |      |                           |       |          |      |              |      |       |     |               |    |              |        |        |        |   |        |       
|                                                                              |                                      | Total other expense, net |        |          | (4,556 | )    |      |                           | 1,080 |          |      |              | (234 | )     |     |               |   |              |        |        | (3,153 | ) |        |        | (6,863 | )
|                                                                              |                                      |                          |        |          |        |      |      |                           |       |          |      |              |      |       |     |               |    |              |        |        |        |   |        |       
|Income (loss) from continuing operations
before income taxes                  |                                      |                          | 4,753  |          |        |      | 680  |                           |       |          | (877 | )            |      |       | (66 | )             |    |              | (2,423 | )      |        |   | 2,067  |       
|                                                                              | Income tax expense                   |                          |        | 524      |        |      |      | 243                       |       |          |      |             |      |       |     |              |    |              |        |       |        |   |        | 767    |       
|                                                                              |                                      |                          |        |          |        |      |      |                           |       |          |      |              |      |       |     |               |    |              |        |        |        |   |        |       
|Income (loss) from continuing operations                                      |                                      |                          | 4,229  |          |        |      | 437  |                           |       |          | (877 | )            |      |       | (66 | )             |    |              | (2,423 | )      |        |   | 1,300  |       
|Income (loss) from discontinued operations
(including gain on sale of assets) |                                      |                          | 830    |          |        |      |     |                           |       |          |     |              |      |       |    |               |    |              |       |        |        |   | 830    |       
|                                                                              | Income tax expense                   |                          |        | 336      |        |      |      |                          |       |          |      |             |      |       |     |              |    |              |        |       |        |   |        | 336    |       
|                                                                              |                                      |                          |        |          |        |      |      |                           |       |          |      |              |      |       |     |               |    |              |        |        |        |   |        |       
|Income from discontinued operations                                           |                                      |                          | 494    |          |        |      |     |                           |       |          |     |              |      |       |    |               |    |              |       |        |        |   | 494    |       
|                                                                              |                                      |                          |        |          |        |      |      |                           |       |          |      |              |      |       |     |               |    |              |        |        |        |   |        |       
|                                                                              | Net income (loss)                    |                          | $      | 4,723    |        |      | $    | 437                       |       |          | $    | (877         | )    |       | $   | (66           | )  |              | $      | (2,423 | )      |   | $      | 1,794  |       
|                                                                              |                                      |                          |        |          |        |      |      |                           |       |          |      |              |      |       |     |               |    |              |        |        |        |   |        |       

13



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC

CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended June 30, 2002
(in thousands)
(undaudited)

|                                                                                            |                                      |                                   |        |           |        |      |      |                           |       |          |      |              |      |       |      |               |    |              |        |        |        |   |        |        |        |  
|------------------------------------------------------------------------------------------- | ------------------------------------ | --------------------------------- | ------ | --------- | ------ | ---- | ---- | ------------------------- | ----- | -------- | ---- | ------------ | ---- | ----- | ---- | ------------- | -- | ------------ | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                                                                            |                                      |                                   |        |           |        |      |      | Wholly-Owned Subsidiaries |       |          |      |             
|                                                                                            |                                      |                                   |        |           |        |      |      |                           |       |          |      |             
|                                                                                            |                                      |                                   |        |           |        |      |      | ALC                       |       |          |      |              |      |       |      |               |    | Non-         |        |        |        |  
|                                                                                            |                                      |                                   |        |           |        |      |      | Indiana,                  |       | Carriage |      |              |      |       |      | Participating |    | Consolidated
|                                                                                            |                                      |                                   |        | ALC, Inc. |        | Inc. |      | House                     |       | HCI      |      | Subsidiaries |      | Total
|                                                                                            |                                      |                                   |        |           |        |      |      |                           |       |          |      |              |      |      
|Revenue                                                                                     |                                      | $                                 | 67,739 |           |        | $    |     |                           |       | $        |     |              |      | $     |     |               |    | $            | 7,088  |        |        | $ | 74,827 |       
|Operating expenses:                                                                         |                                      |                                   |        |           |        |      |      |                           |       |          |      |              |      |       |      |               |    |              |        |        |        |   |        |       
|                                                                                            | Residence operating expenses         |                                   |        | 46,005    |        |      |      | 136                       |       |          |      | 125          |      |       |      |              |    |              |        | 5,361  |        |   |        | 51,627 |       
|                                                                                            | Corporate general and administrative |                                   |        | 9,895     |        |      |      |                          |       |          |      |             |      |       |      |              |    |              |        |       |        |   |        | 9,895  |       
|                                                                                            | Building rentals                     |                                   |        | 5,638     |        |      |      |                          |       |          |      | 467          |      |       |      |              |    |              |        |       |        |   |        | 6,105  |       
|                                                                                            | Depreciation and amortization        |                                   |        | 1,658     |        |      |      | 199                       |       |          |      | 64           |      |       |      | 44            |    |              |        | 1,291  |        |   |        | 3,256  |       
|                                                                                            |                                      |                                   |        |           |        |      |      |                           |       |          |      |              |      |       |      |               |    |              |        |        |        |   |        |       
|                                                                                            |                                      | Total operating expenses          |        |           | 63,196 |      |      |                           | 335   |          |      |              | 656  |       |      |               | 44 |              |        |        | 6,652  |   |        |        | 70,883 |  
|                                                                                            |                                      |                                   |        |           |        |      |      |                           |       |          |      |              |      |       |      |               |    |              |        |        |        |   |        |       
|Operating income (loss)                                                                     |                                      |                                   | 4,543  |           |        |      | (335 | )                         |       |          | (656 | )            |      |       | (44  | )             |    |              | 436    |        |        |   | 3,944  |       
|Other income (expense):                                                                     |                                      |                                   |        |           |        |      |      |                           |       |          |      |              |      |       |      |               |    |              |        |        |        |   |        |       
|                                                                                            | Interest expense                     |                                   |        | (3,775    | )      |      |      |                          |       |          |      |             |      |       |      |              |    |              |        | (3,282 | )      |   |        | (7,057 | )     
|                                                                                            | Interest income                      |                                   |        | 106       |        |      |      |                          |       |          |      |             |      |       |      |              |    |              |        |       |        |   |        | 106    |       
|                                                                                            | Management fee income (expense)      |                                   |        | 89        |        |      |      |                          |       |          |      | (150         | )    |       |      |              |    |              |        | 61     |        |   |        |       |       
|                                                                                            | Lease income (expense)               |                                   |        | (1,080    | )      |      |      | 1,080                     |       |          |      |             |      |       |      |              |    |              |        |       |        |   |        |       |       
|                                                                                            | Other income, net                    |                                   |        | 19        |        |      |      |                          |       |          |      |             |      |       |      |              |    |              |        |       |        |   |        | 19     |       
|                                                                                            |                                      |                                   |        |           |        |      |      |                           |       |          |      |              |      |       |      |               |    |              |        |        |        |   |        |       
|                                                                                            |                                      | Total other income (expense), net |        |           | (4,641 | )    |      |                           | 1,080 |          |      |              | (150 | )     |      |               |   |              |        |        | (3,221 | ) |        |        | (6,932 | )
|                                                                                            |                                      |                                   |        |           |        |      |      |                           |       |          |      |              |      |       |      |               |    |              |        |        |        |   |        |       
|Income (loss) before debt restructure, and reorganization
cost, and discontinued operations |                                      |                                   | (98    | )         |        |      | 745  |                           |       |          | (806 | )            |      |       | (44  | )             |    |              | (2,785 | )      |        |   | (2,988 | )     
|Debt restructure and reorganization costs                                                   |                                      |                                   | (666   | )         |        |      |     |                           |       |          |     |              |      |       |     |               |    |              |       |        |        |   | (666   | )     
|                                                                                            |                                      |                                   |        |           |        |      |      |                           |       |          |      |              |      |       |      |               |    |              |        |        |        |   |        |       
|Income (loss) from continuing operations                                                    |                                      |                                   | (764   | )         |        |      | 745  |                           |       |          | (806 | )            |      |       | (44  | )             |    |              | (2,785 | )      |        |   | (3,654 | )     
|Income (loss) from discontinued operations                                                  |                                      |                                   | (334   | )         |        |      |     |                           |       |          |     |              |      |       | (423 | )             |    |              | 331    |        |        |   | (426   | )     
|                                                                                            |                                      |                                   |        |           |        |      |      |                           |       |          |      |              |      |       |      |               |    |              |        |        |        |   |        |       
|                                                                                            | Net income (loss)                    |                                   | $      | (1,098    | )      |      | $    | 745                       |       |          | $    | (806         | )    |       | $    | (467          | )  |              | $      | (2,454 | )      |   | $      | (4,080 | )     
|                                                                                            |                                      |                                   |        |           |        |      |      |                           |       |          |      |              |      |       |      |               |    |              |        |        |        |   |        |       

14



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##### Table of Contents



ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
Six months ended June 30, 2003
(in thousands)
(unaudited)

|                                                                                        |                                          |                                                           |                                                     |        |           |       |      |     |                           |     |          |      |              |     |       |     |               |    |              |        |       |      |        |        |        |       | 
|--------------------------------------------------------------------------------------- | ---------------------------------------- | --------------------------------------------------------- | --------------------------------------------------- | ------ | --------- | ----- | ---- | --- | ------------------------- | --- | -------- | ---- | ------------ | --- | ----- | --- | ------------- | -- | ------------ | ------ | ----- | ---- | ------ | ------ | ------ | ----- | 
|                                                                                        |                                          |                                                           |                                                     |        |           |       |      |     | Wholly-Owned Subsidiaries |     |          |      |             
|                                                                                        |                                          |                                                           |                                                     |        |           |       |      |     |                           |     |          |      |             
|                                                                                        |                                          |                                                           |                                                     |        |           |       |      |     | ALC                       |     |          |      |              |     |       |     |               |    | Non-         |        |       |      |       
|                                                                                        |                                          |                                                           |                                                     |        |           |       |      |     | Indiana,                  |     | Carriage |      |              |     |       |     | Participating |    | Consolidated
|                                                                                        |                                          |                                                           |                                                     |        | ALC, Inc. |       | Inc. |     | House                     |     | HCI      |      | Subsidiaries |     | Total
|                                                                                        |                                          |                                                           |                                                     |        |           |       |      |     |                           |     |          |      |              |     |      
|Operating Activities:                                                                   |                                          |                                                           |                                                     |        |           |       |      |     |                           |     |          |      |              |     |       |     |               |    |              |        |       |      |        |       
|                                                                                        | Net income (loss)                        |                                                           | $                                                   | 4,723  |           |       | $    | 437 |                           |     | $        | (877 | )            |     | $     | (66 | )             |    | $            | (2,423 | )     |      | $      | 1,794  |       
|Adjustment to reconcile net income (loss)
to net cash provided by operating activities: |                                          |                                                           |                                                     |        |           |       |      |     |                           |     |          |      |              |     |       |     |               |    |              |        |       |      |        |       
|                                                                                        |                                          | Depreciation and amortization                             |                                                     |        | 1,696     |       |      |     | 203                       |     |          |      | 69           |     |       |     | 66            |    |              |        | 1,343 |      |        |        | 3,377  |      
|                                                                                        |                                          | Stock-based compensation expense                          |                                                     |        | 93        |       |      |     |                          |     |          |      |             |     |       |     |              |    |              |        |      |      |        |        | 93     |      
|                                                                                        |                                          | Amortization of deferred financing fees                   |                                                     |        | 55        |       |      |     |                          |     |          |      |             |     |       |     |              |    |              |        |      |      |        |        | 55     |      
|                                                                                        |                                          | Amortization of fair value adjustment
to building rentals |                                                     |        | (271      | )     |      |     |                          |     |          |      | (41          | )   |       |     |              |    |              |        |      |      |        |        | (312   | )    
|                                                                                        |                                          | Amortization of fair market adjustment
to debt            |                                                     |        | 184       |       |      |     |                          |     |          |      |             |     |       |     |              |    |              |        |      |      |        |        | 184    |      
|                                                                                        |                                          | Amortization of note discount                             |                                                     |        | 271       |       |      |     |                          |     |          |      |             |     |       |     |              |    |              |        |      |      |        |        | 271    |      
|                                                                                        |                                          | Straight-line adjustment to building
rentals              |                                                     |        | 115       |       |      |     |                          |     |          |      |             |     |       |     |              |    |              |        |      |      |        |        | 115    |      
|                                                                                        |                                          | Interest paid-in-kind                                     |                                                     |        | 660       |       |      |     |                          |     |          |      |             |     |       |     |              |    |              |        |      |      |        |        | 660    |      
|                                                                                        |                                          | Provision for doubtful accounts                           |                                                     |        | 437       |       |      |     |                          |     |          |      |             |     |       |     |              |    |              |        | 19    |      |        |        | 456    |      
|                                                                                        |                                          | Gain on sale or disposal of assets                        |                                                     |        | (833      | )     |      |     |                          |     |          |      |             |     |       |     |              |    |              |        |      |      |        |        | (833   | )    
|Changes in assets and liabilities:                                                      |                                          |                                                           |                                                     |        |           |       |      |     |                           |     |          |      |              |     |       |     |               |    |              |        |       |      |        |       
|                                                                                        |                                          | Receivable (payable) from subsidiaries/
parent            |                                                     |        | (2,085    | )     |      |     | (963                      | )   |          |      | 844          |     |       |     | (35           | )  |              |        | 2,239 |      |        |        |       |      
|                                                                                        |                                          | Accounts receivable                                       |                                                     |        | (1,189    | )     |      |     |                          |     |          |      |             |     |       |     | 3             |    |              |        | 24    |      |        |        | (1,162 | )    
|                                                                                        |                                          | Prepaid expenses                                          |                                                     |        | (131      | )     |      |     |                          |     |          |      |             |     |       |     |              |    |              |        | 45    |      |        |        | (86    | )    
|                                                                                        |                                          | Other current assets                                      |                                                     |        | 60        |       |      |     |                          |     |          |      |             |     |       |     | 3             |    |              |        | (20   | )    |        |        | 43     |      
|                                                                                        |                                          | Other assets                                              |                                                     |        | (303      | )     |      |     |                          |     |          |      |             |     |       |     |              |    |              |        | (65   | )    |        |        | (368   | )    
|                                                                                        |                                          | Accounts payable                                          |                                                     |        | 360       |       |      |     |                          |     |          |      |             |     |       |     | (1            | )  |              |        | (495  | )    |        |        | (136   | )    
|                                                                                        |                                          | Accrued expenses                                          |                                                     |        | 352       |       |      |     | 161                       |     |          |      | 5            |     |       |     | 31            |    |              |        | (467  | )    |        |        | 82     |      
|                                                                                        |                                          | Other current liabilities                                 |                                                     |        | (120      | )     |      |     | 243                       |     |          |      |             |     |       |     |              |    |              |        |      |      |        |        | 123    |      
|                                                                                        |                                          | Other liabilities                                         |                                                     |        | (12       | )     |      |     |                          |     |          |      | 12           |     |       |     |              |    |              |        |      |      |        |        |       |      
|                                                                                        |                                          |                                                           |                                                     |        |           |       |      |     |                           |     |          |      |              |     |       |     |               |    |              |        |       |      |        |       
|                                                                                        |                                          |                                                           | Net cash provided by operating activities           |        |           | 4,062 |      |     |                           | 81  |          |      |              | 12  |       |     |               | 1  |              |        |       | 200  |        |        |        | 4,356 | 
|Investing Activities:                                                                   |                                          |                                                           |                                                     |        |           |       |      |     |                           |     |          |      |              |     |       |     |               |    |              |        |       |      |        |       
|Decrease in restricted cash                                                             |                                          |                                                           | 548                                                 |        |           |       |     |     |                           |     |         |      |              |     |      |     |               |    |             |        |       |      | 548    |       
|Purchases of property and equipment                                                     |                                          |                                                           | (799                                                | )      |           |       | (81  | )   |                           |     | (12      | )    |              |     | (1    | )   |               |    | (200         | )      |       |      | (1,093 | )     
|Sale of properties                                                                      |                                          |                                                           | 2,569                                               |        |           |       |     |     |                           |     |         |      |              |     |      |     |               |    |             |        |       |      | 2,569  |       
|                                                                                        |                                          |                                                           |                                                     |        |           |       |      |     |                           |     |          |      |              |     |       |     |               |    |              |        |       |      |        |       
|                                                                                        |                                          |                                                           | Net cash provided by (used in) investing activities |        |           | 2,318 |      |     |                           | (81 | )        |      |              | (12 | )     |     |               | (1 | )            |        |       | (200 | )      |        |        | 2,024 | 
|Financing Activities:                                                                   |                                          |                                                           |                                                     |        |           |       |      |     |                           |     |          |      |              |     |       |     |               |    |              |        |       |      |        |       
|Proceeds from long-term debt                                                            |                                          |                                                           |                                                    |        |           |       |     |     |                           |     |         |      |              |     |      |     |               |    |             |        |       |      |       |       
|Payments on long-term debt and capital
lease obligation                                 |                                          |                                                           | (3,289                                              | )      |           |       |     |     |                           |     |         |      |              |     |      |     |               |    |             |        |       |      | (3,289 | )     
|Debt issuance costs                                                                     |                                          |                                                           |                                                    |        |           |       |     |     |                           |     |         |      |              |     |      |     |               |    |             |        |       |      |       |       
|                                                                                        |                                          |                                                           |                                                     |        |           |       |      |     |                           |     |          |      |              |     |       |     |               |    |              |        |       |      |        |       
|                                                                                        |                                          | Net cash used in financing activities                     |                                                     |        | (3,289    | )     |      |     |                          |     |          |      |             |     |       |     |              |    |              |        |      |      |        |        | (3,289 | )    
|                                                                                        |                                          |                                                           |                                                     |        |           |       |      |     |                           |     |          |      |              |     |       |     |               |    |              |        |       |      |        |       
|Net increase in cash and cash equivalents                                               |                                          |                                                           | 3,091                                               |        |           |       |     |     |                           |     |         |      |              |     |      |     |               |    |             |        |       |      | 3,091  |       
|Cash and cash equivalents, beginning of
period                                          |                                          |                                                           | 7,165                                               |        |           |       |     |     |                           |     |         |      |              |     |      |     |               |    |             |        |       |      | 7,165  |       
|                                                                                        |                                          |                                                           |                                                     |        |           |       |      |     |                           |     |          |      |              |     |       |     |               |    |              |        |       |      |        |       
|                                                                                        | Cash and cash equivalents, end of period |                                                           | $                                                   | 10,256 |           |       | $    |    |                           |     | $        |     |              |     | $     |    |               |    | $            |       |       |      | $      | 10,256 |       
|                                                                                        |                                          |                                                           |                                                     |        |           |       |      |     |                           |     |          |      |              |     |       |     |               |    |              |        |       |      |        |       

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ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
Six months ended June 30, 2002
(in thousands)
(unaudited)

|                                                                                                   |                                                           |                                                      |        |           |        |     |     |                           |     |          |      |              |     |       |      |               |   |              |        |       |        |   |        |        |        |  
|-------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ---------------------------------------------------- | ------ | --------- | ------ | --- | --- | ------------------------- | --- | -------- | ---- | ------------ | --- | ----- | ---- | ------------- | - | ------------ | ------ | ----- | ------ | - | ------ | ------ | ------ | -
|                                                                                                   |                                                           |                                                      |        |           |        |     |     | Wholly-Owned Subsidiaries |     |          |      |             
|                                                                                                   |                                                           |                                                      |        |           |        |     |     |                           |     |          |      |             
|                                                                                                   |                                                           |                                                      |        |           |        |     |     | ALC                       |     |          |      |              |     |       |      |               |   | Non-         |        |       |        |  
|                                                                                                   |                                                           |                                                      |        |           |        |     |     | Indiana,                  |     | Carriage |      |              |     |       |      | Participating |   | Consolidated
|                                                                                                   |                                                           |                                                      |        | ALC, Inc. |        | Inc |     | House                     |     | HCI      |      | Subsidiaries |     | Total
|                                                                                                   |                                                           |                                                      |        |           |        |     |     |                           |     |          |      |              |     |      
|Operating Activities:                                                                              |                                                           |                                                      |        |           |        |     |     |                           |     |          |      |              |     |       |      |               |   |              |        |       |        |   |        |       
|Net income (loss)                                                                                  |                                                           | $                                                    | (1,098 | )         |        | $   | 745 |                           |     | $        | (806 | )            |     | $     | (467 | )             |   | $            | (2,454 | )     |        | $ | (4,080 | )     
|Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |                                                           |                                                      |        |           |        |     |     |                           |     |          |      |              |     |       |      |               |   |              |        |       |        |   |        |       
|                                                                                                   | Depreciation and amortization                             |                                                      |        | 1,702     |        |     |     | 199                       |     |          |      | 64           |     |       |      | 103           |   |              |        | 1,291 |        |   |        | 3,359  |       
|                                                                                                   | Amortization of debt issuance costs                       |                                                      |        | 52        |        |     |     |                          |     |          |      |             |     |       |      |              |   |              |        |      |        |   |        | 52     |       
|                                                                                                   | Amortization of fair value adjustment to
building rentals |                                                      |        | (260      | )      |     |     |                          |     |          |      | (46          | )   |       |      |              |   |              |        |      |        |   |        | (306   | )     
|                                                                                                   | Amortization of fair market adjustment to long-
term debt |                                                      |        | 213       |        |     |     |                          |     |          |      |             |     |       |      |              |   |              |        |      |        |   |        | 213    |       
|                                                                                                   | Amortization of discount on long-term debt                |                                                      |        | 211       |        |     |     |                          |     |          |      |             |     |       |      |              |   |              |        |      |        |   |        | 211    |       
|                                                                                                   | Straight-line adjustment to building rentals              |                                                      |        | 188       |        |     |     |                          |     |          |      |             |     |       |      |              |   |              |        |      |        |   |        | 188    |       
|                                                                                                   | Interest paid-in-kind                                     |                                                      |        | 610       |        |     |     |                          |     |          |      |             |     |       |      |              |   |              |        |      |        |   |        | 610    |       
|                                                                                                   | Provision for doubtful accounts                           |                                                      |        | 137       |        |     |     |                          |     |          |      |             |     |       |      |              |   |              |        | (5    | )      |   |        | 132    |       
|                                                                                                   | Loss on sale of assets                                    |                                                      |        | 20        |        |     |     |                          |     |          |      |             |     |       |      | 423           |   |              |        |      |        |   |        | 443    |       
|Changes in assets and liabilities:                                                                 |                                                           |                                                      |        |           |        |     |     |                           |     |          |      |              |     |       |      |               |   |              |        |       |        |   |        |       
|                                                                                                   | Receivable from subsidiaries/parent                       |                                                      |        | 645       |        |     |     | (862                      | )   |          |      | 816          |     |       |      | (87           | ) |              |        | (512  | )      |   |        |       |       
|                                                                                                   | Accounts receivable                                       |                                                      |        | (145      | )      |     |     |                          |     |          |      |             |     |       |      | 11            |   |              |        | (2    | )      |   |        | (136   | )     
|                                                                                                   | Prepaid expenses                                          |                                                      |        | (1,245    | )      |     |     |                          |     |          |      |             |     |       |      |              |   |              |        | 43    |        |   |        | (1,202 | )     
|                                                                                                   | Other current assets                                      |                                                      |        | 605       |        |     |     |                          |     |          |      |             |     |       |      | 3             |   |              |        | (436  | )      |   |        | 172    |       
|                                                                                                   | Other assets                                              |                                                      |        | (253      | )      |     |     |                          |     |          |      |             |     |       |      |              |   |              |        | (46   | )      |   |        | (299   | )     
|                                                                                                   | Accounts payable                                          |                                                      |        | (24       | )      |     |     |                          |     |          |      |             |     |       |      | (3            | ) |              |        | (191  | )      |   |        | (218   | )     
|                                                                                                   | Accrued expenses                                          |                                                      |        | 2,088     |        |     |     | (59                       | )   |          |      | 8            |     |       |      | 14            |   |              |        | (608  | )      |   |        | 1,443  |       
|                                                                                                   | Other current liabilities                                 |                                                      |        | 371       |        |     |     |                          |     |          |      |             |     |       |      | 3             |   |              |        | (80   | )      |   |        | 294    |       
|                                                                                                   | Other liabilities                                         |                                                      |        | 656       |        |     |     |                          |     |          |      | 18           |     |       |      |              |   |              |        | (674  | )      |   |        |       |       
|                                                                                                   |                                                           |                                                      |        |           |        |     |     |                           |     |          |      |              |     |       |      |               |   |              |        |       |        |   |        |       
|                                                                                                   |                                                           | Net cash provided by (used in) operating
activities  |        |           | 4,473  |     |     |                           | 23  |          |      |              | 54  |       |      |               |  |              |        |       | (3,674 | ) |        |        | 876    |  
|Investing Activities:                                                                              |                                                           |                                                      |        |           |        |     |     |                           |     |          |      |              |     |       |      |               |   |              |        |       |        |   |        |       
|Decrease/increase in restricted cash                                                               |                                                           |                                                      | (2,680 | )         |        |     |    |                           |     |          |     |              |     |       |     |               |   |              |       |       |        |   | (2,680 | )     
|Purchases of property and equipment                                                                |                                                           |                                                      | 2,171  |           |        |     | (23 | )                         |     |          | (54  | )            |     |       |      |               |   |              | (3,427 | )     |        |   | (1,333 | )     
|                                                                                                   |                                                           |                                                      |        |           |        |     |     |                           |     |          |      |              |     |       |      |               |   |              |        |       |        |   |        |       
|                                                                                                   |                                                           | Net cash used in investing activities                |        |           | (509   | )   |     |                           | (23 | )        |      |              | (54 | )     |      |               |  |              |        |       | (3,427 | ) |        |        | (4,013 | )
|Financing Activities:                                                                              |                                                           |                                                      |        |           |        |     |     |                           |     |          |      |              |     |       |      |               |   |              |        |       |        |   |        |       
|Proceeds from long-term debt                                                                       |                                                           |                                                      | (3,701 | )         |        |     |    |                           |     |          |     |              |     |       |     |               |   |              | 7,101  |       |        |   | 3,400  |       
|Payments on long-term debt and capital lease
obligation                                            |                                                           |                                                      | (725   | )         |        |     |    |                           |     |          |     |              |     |       |     |               |   |              |       |       |        |   | (725   | )     
|Debt issuance costs                                                                                |                                                           |                                                      | (79    | )         |        |     |    |                           |     |          |     |              |     |       |     |               |   |              |       |       |        |   | (79    | )     
|                                                                                                   |                                                           |                                                      |        |           |        |     |     |                           |     |          |      |              |     |       |      |               |   |              |        |       |        |   |        |       
|                                                                                                   |                                                           | Net cash provided by (used in )
financing activities |        |           | (4,505 | )   |     |                           |    |          |      |              |    |       |      |               |  |              |        |       | 7,101  |   |        |        | 2,596  |  
|                                                                                                   |                                                           |                                                      |        |           |        |     |     |                           |     |          |      |              |     |       |      |               |   |              |        |       |        |   |        |       
|Net decrease in cash and cash equivalents                                                          |                                                           |                                                      | (541   | )         |        |     |    |                           |     |          |     |              |     |       |     |               |   |              |       |       |        |   | (541   | )     
|Cash and cash equivalents, beginning of period                                                     |                                                           |                                                      | 6,077  |           |        |     |    |                           |     |          |     |              |     |       |     |               |   |              |       |       |        |   | 6,077  |       
|                                                                                                   |                                                           |                                                      |        |           |        |     |     |                           |     |          |      |              |     |       |      |               |   |              |        |       |        |   |        |       
|Cash and cash equivalents, end of period                                                           |                                                           | $                                                    | 5,536  |           |        | $   |    |                           |     | $        |     |              |     | $     |     |               |   | $            |       |       |        | $ | 5,536  |       
|                                                                                                   |                                                           |                                                      |        |           |        |     |     |                           |     |          |      |              |     |       |      |               |   |              |        |       |        |   |        |       

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

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

General

We operate, own and lease free-standing assisted living residences. These
residences are primarily located in small, middle-market, rural and suburban
communities with a population typically ranging from 10,000 to 40,000. As of
June 30, 2003, we had operations in 14 states.

We provide personal care and support services, and make available routine
nursing services (as permitted by applicable law) designed to meet the personal
and health care needs of our residents. We believe that this combination of
residential, personal care, support and health care services provides a
cost-efficient alternative to, and affords an independent lifestyle for,
individuals who do not require the broader array of medical services that
nursing facilities are required by law to provide.

As of June 30, 2003, we operated 177 assisted living residences (6,838 units),
of which we owned 122 residences (4,733 units) and leased 55 residences (2,105
units).

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



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

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

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

Fresh-Start Reporting

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

Sales of Residences

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

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Critical Accounting Policies and Estimates

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

Results of Operations

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

|                                                                                         |                                                                  |                          |       |                             |      |                           |       |      |      |      |       |      |      |   |       |      |      |  
|---------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ------------------------ | ----- | --------------------------- | ---- | ------------------------- | ----- | ---- | ---- | ---- | ----- | ---- | ---- | - | ----- | ---- | ---- | -
|                                                                                         |                                                                  |                          |       | Three Months Ended June 30, |      | Six Months Ended June 30,
|                                                                                         |                                                                  |                          |       |                             |      |                          
|                                                                                         |                                                                  |                          |       | 2002                        |      | 2003                      |       | 2002 |      | 2003
|                                                                                         |                                                                  |                          |       |                             |      |                           |       |      |      |     
|Revenue                                                                                  |                                                                  |                          | 100.0 |                             |      |                           | 100.0 |      |      |      | 100.0 |      |      |   | 100.0 |     
|Operating expenses:                                                                      |                                                                  |                          |       |                             |      |                           |       |      |      |      |       |      |      |   |       |     
|                                                                                         | Residence operating expenses                                     |                          |       | 69.2                        |      |                           |       | 66.1 |      |      |       | 69.0 |      |   |       | 66.7 |     
|                                                                                         | Corporate general and administrative                             |                          |       | 14.8                        |      |                           |       | 11.4 |      |      |       | 13.2 |      |   |       | 11.0 |     
|                                                                                         | Building rentals                                                 |                          |       | 8.1                         |      |                           |       | 7.4  |      |      |       | 8.2  |      |   |       | 7.5  |     
|                                                                                         | Depreciation and amortization                                    |                          |       | 4.3                         |      |                           |       | 4.1  |      |      |       | 4.3  |      |   |       | 4.1  |     
|                                                                                         |                                                                  |                          |       |                             |      |                           |       |      |      |      |       |      |      |   |       |     
|                                                                                         |                                                                  | Total operating expenses |       |                             | 96.4 |                           |       |      | 89.0 |      |       |      | 94.7 |   |       |      | 89.3 |  
|                                                                                         |                                                                  |                          |       |                             |      |                           |       |      |      |      |       |      |      |   |       |     
|Operating income                                                                         |                                                                  |                          | 3.6   |                             |      |                           | 11.0  |      |      |      | 5.3   |      |      |   | 10.7  |     
|Other income (expense):                                                                  |                                                                  |                          |       |                             |      |                           |       |      |      |      |       |      |      |   |       |     
|                                                                                         | Interest expense                                                 |                          |       | (9.2                        | )    |                           |       | (8.2 | )    |      |       | (9.4 | )    |   |       | (8.3 | )   
|                                                                                         | Interest income                                                  |                          |       | 0.1                         |      |                           |       | 0.1  |      |      |       | 0.1  |      |   |       | 0.1  |     
|                                                                                         | Other income, net                                                |                          |       | 0.0                         |      |                           |       | (0.2 | )    |      |       | 0.0  |      |   |       | (0.1 | )   
|                                                                                         |                                                                  |                          |       |                             |      |                           |       |      |      |      |       |      |      |   |       |     
|                                                                                         |                                                                  | Total other expense, net |       |                             | (9.0 | )                         |       |      | (8.3 | )    |       |      | (9.3 | ) |       |      | (8.3 | )
|Income (loss) before debt restructure, reorganization costs, and
discontinued operations |                                                                  |                          | (5.4  | )                           |      |                           | 2.8   |      |      |      | (4.0  | )    |      |   | 2.4   |     
|Debt restructure and reorganization costs                                                |                                                                  |                          | (0.6  | )                           |      |                           |      |      |      |      | (0.9  | )    |      |   |      |     
|                                                                                         |                                                                  |                          |       |                             |      |                           |       |      |      |      |       |      |      |   |       |     
|Income (loss) from continuing operations before income taxes                             |                                                                  |                          | (6.0  | )                           |      |                           | 2.8   |      |      |      | (4.9  | )    |      |   | 2.4   |     
|                                                                                         | Income tax expense                                               |                          |       |                            |      |                           |       | 1.0  |      |      |       |     |      |   |       | 0.8  |     
|                                                                                         |                                                                  |                          |       |                             |      |                           |       |      |      |      |       |      |      |   |       |     
|Income (loss) from continuing operations                                                 |                                                                  |                          | (6.0  | )                           |      |                           | 1.8   |      |      |      | (4.9  | )    |      |   | 1.6   |     
|Discontinued operations:                                                                 |                                                                  |                          |       |                             |      |                           |       |      |      |      |       |      |      |   |       |     
|                                                                                         | Income (loss) from operations (including gain on sale of assets) |                          |       | (1.0                        | )    |                           |       |     |      |      |       | (0.6 | )    |   |       | 1.0  |     
|                                                                                         | Income tax expense                                               |                          |       |                            |      |                           |       |     |      |      |       |     |      |   |       | (0.4 | )   
|                                                                                         |                                                                  |                          |       |                             |      |                           |       |      |      |      |       |      |      |   |       |     
|Income (loss) from discontinued operations                                               |                                                                  |                          | (1.0  | )                           |      |                           |      |      |      |      | (0.6  | )    |      |   | 0.6   |     
|                                                                                         |                                                                  |                          |       |                             |      |                           |       |      |      |      |       |      |      |   |       |     
|Net income (loss)                                                                        |                                                                  |                          | (7.0  | )                           |      |                           | 1.8   |      |      |      | (5.5  | )    |      |   | 2.2   |     
|                                                                                         |                                                                  |                          |       |                             |      |                           |       |      |      |      |       |      |      |   |       |     

|                                              |                                                  |                                |   |                             |        |                           |   |       |        |      |   |       |        |   |   |       |        |  
|--------------------------------------------- | ------------------------------------------------ | ------------------------------ | - | --------------------------- | ------ | ------------------------- | - | ----- | ------ | ---- | - | ----- | ------ | - | - | ----- | ------ | -
|                                              |                                                  |                                |   | Three Months Ended June 30, |        | Six Months Ended June 30,
|                                              |                                                  |                                |   |                             |        |                          
|                                              |                                                  |                                |   | 2002                        |        | 2003                      |   | 2002  |        | 2003
|                                              |                                                  |                                |   |                             |        |                           |   |       |        |     
|Other Data Relating to Continuing Operations: |                                                  |                                |   |                             |        |                           |   |       |        |      |   |       |        |   |   |      
|                                              | Residences operated (end of period)              |                                |   | 177                         |        |                           |   | 177   |        |      |   | 177   |        |   |   | 177   |       
|                                              | Units operated (end of period)                   |                                |   | 6,844                       |        |                           |   | 6,838 |        |      |   | 6,844 |        |   |   | 6,838 |       
|                                              | Average occupancy rate (based on occupied units) |                                |   | 84.5                        | %      |                           |   | 87.6  | %      |      |   | 84.4  | %      |   |   | 87.8  | %     
|                                              | Average monthly rental rate                      |                                | $ | 2,159                       |        |                           | $ | 2,301 |        |      | $ | 2,140 |        |   | $ | 2,268 |       
|                                              | Sources of revenue:                              |                                |   |                             |        |                           |   |       |        |      |   |       |        |   |   |       |       
|                                              |                                                  | Medicaid state paid portion    |   |                             | 12.70  | %                         |   |       | 13.60  | %    |   |       | 12.40  | % |   |       | 13.30  | %
|                                              |                                                  | Medicaid resident paid portion |   |                             | 7.70   | %                         |   |       | 8.70   | %    |   |       | 7.70   | % |   |       | 8.70   | %
|                                              |                                                  | Private resident paid portion  |   |                             | 79.60  | %                         |   |       | 77.70  | %    |   |       | 79.90  | % |   |       | 78.00  | %
|                                              |                                                  |                                |   |                             |        |                           |   |       |        |      |   |       |        |   |   |      
|                                              |                                                  | Total                          |   |                             | 100.00 | %                         |   |       | 100.00 | %    |   |       | 100.00 | % |   |       | 100.00 | %
|                                              |                                                  |                                |   |                             |        |                           |   |       |        |      |   |       |        |   |   |      

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Three months ended June 30, 2003 compared to three months ended June 30, 2002:

The Company recorded net income of $763,000 on revenues of $41.9 million for
the three months ended June 30, 2003 (the June 2003 Quarter) compared to a
net loss of $2.6 million on revenues of $37.8 million for the three months
ended June 30, 2002 (the June 2002 Quarter).

Revenues increased $4.1 million for the June 2003 Quarter compared to the June
2002 Quarter primarily due to an increase in average occupancy percentage of
approximately three percent and an increase in average rental rate received
from residents of approximately $142 per month. In March 2003 the Company
instituted a rent increase in all its residences.

Residence operating expenses increased $1.6 million for the June 2003 Quarter
compared to the June 2002 Quarter but decreased as a percentage of revenue from
69.2% to 66.1%. Of the increase, $1.3 million is attributable to an increase
in payroll expenses, which decreased slightly as a percentage of revenue. The
increase in payroll is primarily due to an increase in benefits and workers
compensation expense, additional personnel, and increased salaries and wages,
including expenses related to employee incentives. An increase in utilities
expense of $537,000 in addition to less significant increases in other expense
categories comprise the remaining increase in residence operating expenses from
the June 2002 Quarter to the June 2003 Quarter. These increases were offset
primarily by a decrease of $186,000 in insurance costs, primarily liability
insurance, and less significant decreases in other expense categories.

Corporate, general and administrative expenses decreased $818,000 for the June
2003 Quarter compared to the June 2002 Quarter and decreased as a percentage of
revenue from 14.8% to 11.4%. This decrease is primarily related to $700,000 of
severance expenses incurred in the June 2002 Quarter related to management
changes. The Company incurred no severance expenses during the June 2003
Quarter. Also contributing to the decrease in administrative expenses was a
$318,000 decrease in travel related expenses from the June 2002 Quarter to the
June 2003 Quarter. These expenses decreased primarily due to the completion of
the corporate office relocation to Dallas, Texas in May 2003 and the corporate
offices new facilities being more centrally located to the Companys
residences. These decreases were offset primarily by increases from the June
2002 Quarter to the June 2003 Quarter in bonus expenses and other employee
incentives and hiring expenses of $280,000 and stock option expense of $93,000.
Effective April 1, 2003, the Company has voluntarily elected to expense stock
options issued by the Company during 2003.

Building rentals increased $52,000 for the June 2003 Quarter compared to the
June 2002 Quarter but decreased as a percentage of revenue from 8.1% to 7.4%.

Depreciation and amortization expense increased by $57,000 for the June 2003
Quarter compared to the June 2002 Quarter.

Interest expense decreased $37,000 for the June 2003 Quarter compared to the
June 2002 Quarter. The decrease is due to the overall reduction of
indebtedness.

Debt restructure and reorganization costs were $219,000 for the June 2002
Quarter. These are professional fees, including legal and investment advisory
fees, related to the Companys Plan of Reorganization which became effective
January 1, 2002. The Company did not incur these expenses in the June 2003
Quarter.

Results from discontinued operations during the June 2002 Quarter include
results of operations, sales-related expenses from residences that were
subsequently sold and gains and/or losses related to those sales. All results
and sales expenses related to previously sold residences had been recorded
prior to the June 2003 Quarter.

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Income tax expense was $403,000 for the June 2003 Quarter. The Company
anticipates taxable income for both financial reporting and tax return purposes
for the year ended December 31, 2003, and accordingly has provided for federal
and state income taxes on income from continuing operations and discontinued
operations for the three months ended June 30, 2003. The Company has recorded
such income tax expense at the rate of 38.1%, the estimated effective tax rate
for the full fiscal year, less the effect of the change in the estimate from
the three months ended March 31, 2003. To the extent the Companys 2003
financial statement income after permanent differences exceeds $3.2 million
(the annual limitation for 2002 and 2003) and depending upon the Companys
ability to recognize deferred tax assets which arose subsequent to the
Effective Date, the Companys effective tax rate for 2003 would likely be less
than 38.1%.

Six months ended June 30, 2003 compared to six months ended June 30, 2002:

The Company recorded net income of $1.8 million on revenues of $83.1 million
for the six months ended June 30, 2003 compared to a net loss of $4.1 million
on revenues of $74.8 million for the six months ended June 30, 2002.

Revenues increased $8.2 million for the six months ended June 2003 compared to
the six months ended June 2002 primarily due to an increase in average
occupancy percentage of approximately 3.4 percent and an increase in average
rental rate received from residents of approximately $128 per month. In March
2003 the Company instituted a rent increase in all its residences.

Residence operating expenses increased $3.8 million for the six months ended
June 2003 compared to the six months ended June 2002 but decreased as a
percentage of revenue from 69.0% to 66.7%. Of the increase, $2.5 million is
attributable to an increase in payroll expenses, which decreased slightly as a
percentage of revenue. The increase in payroll is primarily due to an increase
in benefits and workers compensation expense, additional personnel, and
increased salaries and wages, including expenses related to employee
incentives. An increase in utilities expense of $1.0 million in addition to
less significant increases in other expense categories comprise the remaining
increase in residence operating expenses from the six months ended June 2002 to
the six months ended June 2003. These increases were offset primarily by a
decrease of $368,000 in insurance costs, primarily liability insurance, and
less significant decreases in other expense categories.

Corporate, general and administrative expenses decreased $793,000 for the six
months ended June 2003 compared to the six months ended June 2002 and decreased
as a percentage of revenue from 13.2% to 11.0%. This decrease is primarily
related to $700,000 of severance expenses incurred in the six months ended June
2002 related to management changes. The Company incurred no severance expenses
during the six months ended June 2003. Also contributing to the decrease in
administrative expenses was a $385,000 decrease in travel related expenses from
the six months ended June 2002 to the six months ended June 2003. These
expenses decreased primarily due to the completion of the corporate office
relocation to Dallas, Texas in May 2003 and the corporate offices new
facilities being more centrally located to the Companys residences. These
decreases were offset primarily by increases from the six months ended June
2002 to the six months ended June 2003 in bonus expenses and other employee
incentives and hiring expenses of $382,000 and stock option expense of $93,000.
Effective April 1, 2003, the Company has voluntarily elected to expense stock
options issued by the Company during 2003.

Building rentals increased $119,000 for the six months ended June 2003 compared
to the six months ended June 2002 but decreased as a percentage of revenue from
8.2% to 7.5%.

Depreciation and amortization expense increased by $121,000 for the six months
ended June 2003 compared to the six months ended June 2002.

Interest expense decreased $199,000 for the six months ended June 2003 compared
to the six months ended June 2002. The decrease is due to the overall
reduction of indebtedness.

Debt restructure and reorganization costs were $666,000 for the six months
ended June 2002. These are professional fees, including legal and investment
advisory fees, related to the Companys Plan of Reorganization which became
effective January 1, 2002. The Company did not incur these expenses in the six
months ended June 2003.

Results from discontinued operations during the six months ended June 2002
include results of operations, sales-related expenses from residences that were
subsequently sold and gains and/or losses related to those sales. The results
from discontinued operations during the six months ended June 2003 include
results of operations, sales-related expenses from residences which were sold
during March 2003, and gains and/or losses related to those sales.

Income tax expense was $1.1 million for the six months ended June 2003. The
Company anticipates taxable income for both financial reporting and tax return
purposes for the year ended December 31, 2003, and accordingly has provided for
federal and state income

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taxes on income from continuing operations and discontinued operations for the
six months ended June 30, 2003. The Company has recorded such income tax
expense at the rate of 38.1%, the estimated effective tax rate for the full
fiscal year. To the extent the Companys 2003 financial statement income after
permanent differences exceeds $3.2 million (the annual limitation for 2002 and
2003) and depending upon the Companys ability to recognize deferred tax assets
which arose subsequent to the Effective Date, the Companys effective tax rate
for 2003 would likely be less than 38.1%.

Liquidity and Capital Resources

At June 30, 2003, we had a working capital deficit of $571,000 and unrestricted
cash and cash equivalents of $10.3 million.

Net cash provided by operating activities was $4.4 million during the six
months ended June 30, 2003. The primary sources were net income of $1.8
million and the $3.4 million adjustment for depreciation and amortization.

Net cash provided by investing activities was $2.0 million during the six
months ended June 30, 2003. The source was the sale of properties for $2.6
million.

Net cash used in financing activities was $3.3 million during the six months
ended June 30, 2003, all of which related to payments on long-term debt.

Related to the New Notes, in June 2003 the Company received a notice of default
from the Trustee indicating that the Company failed to comply with a
non-financial covenant under the Indentures pertaining to the New Notes that
requires the Company to deliver an annual opinion stating that all filings,
recordings or other actions that are necessary to maintain the Liens under the
Collateral Documents (as such terms are defined under the Indentures pertaining
to the New Notes) have been done, or that no such action is required. The
Company has delivered the required annual opinions to the Trustee and has
received notice from the Trustee that the Default referenced in the Notice has
been cured.

In July 2003, the Company completed an open market
purchase of a portion of the Companys outstanding 10% Senior
Secured Notes due 2009 and Junior Secured Notes due 2012. The transaction
included the purchase of $147,889 principal amount of Senior Secured
Notes and $34,178 principal amount of Junior Secured Notes
(collectively, the Purchased Notes). Because the purchase
of the Junior Notes is not permitted under the Indentures and
constitutes a Default there under, and the purchase of the Senior Notes may not be permitted and could constitute Default
there under, although this issue is not clear, the Company intends to
cure the Default by reversing these transactions and selling the
Purchased Notes. Failure to cure
the Default under the Indentures could have a material adverse effect
on the Company.

As of June 30, 2003, approximately $24.2 million of our indebtedness was
secured by letters of credit issued by U.S. Bank which have termination dates
prior to the maturity of the underlying debt. As such letters of credit expire,
beginning in January 2004, we will need to obtain replacement letters of
credit, post cash collateral or refinance the underlying debt. There can be no
assurance that we will be able to procure replacement letters of credit from
the same or other lending institutions, or that if available, such letters of
credit would be 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. Any such default could have a material adverse
effect on the Company.

Our credit agreements with U.S. Bank contain certain restrictive and financial
covenants, including certain financial ratios. The agreements also require us
to deposit $500,000 in cash collateral with U.S. Bank in the event certain
regulatory actions are commenced with respect to the properties securing our
obligations to U.S. Bank. U.S. Bank is required to release such deposits upon
satisfactory resolution of the regulatory action. As of the date of this
filing, no such deposits have been required.

In May 2002, we amended our existing agreement with U.S. Bank, establishing new
covenants, with which we were in compliance as of June 30, 2003. Failure to
comply with these covenants would constitute an event of default, which would
allow U.S. Bank to declare any amounts outstanding under the loan documents to
be due and payable.

The Company leases 37 of its facilities, representing 1,426 units, from LTC
Properties, Inc. In accordance with the Companys plan of reorganization,
effective January 1, 2002, the Company entered into a Master Lease Agreement
with LTC under which 16 leases were consolidated. This Master Lease Agreement
provides for aggregate rent reductions of $875,000 per year and restructures
the provision related to minimum rent increases for the 16 properties for the
initial remaining term. The Master Lease Agreement and other LTC lease
agreements also provides LTC with the option to exercise certain remedies,
including the termination of the Master Lease Agreement and the other LTC
leases, upon the occurrence of an Event of Default. A change of control of the
Company is deemed to be an Event of Default. A change of control is deemed to
occur if, among other things, (i) any person, directly or indirectly, is or
becomes the beneficial owner of thirty percent (30%) or more of the combined
voting power of the Companys outstanding voting securities, (ii) the
stockholders approve under certain conditions a merger or consolidation of the
Company with another corporation or entity, or (iii) the stockholders approve a
plan of liquidation or sale of all or substantially all of the assets of the
Company. If the surviving entity has a net worth of $75 million or more, the
change of control does not constitute an Event of Default. In addition,

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there are cross default provisions in the LTC leases. At the same time that the
Company entered into the Master Lease Agreement, it also amended 16 other
leases with LTC under which the renewal rights of certain of those leases are
tied together differently than previously with certain other leases. Below is
summarized financial information for the 37 properties:

|                             |  |                    |       |          |  |               |       |              |  |           |       |          |  |   |       |  |  |   |       |  |  |   |       | 
|---------------------------- |  | ------------------ | ----- | -------- |  | ------------- | ----- | ------------ |  | --------- | ----- | -------- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                             |  | Three months ended
|(in thousands)               |  |                   
|(unaudited)                  |  | March 31,          |       | June 30, |  | September 30, |       | December 31, |  | March 31, |       | June 30,
|                             |  | 2002               |       | 2002     |  | 2002          |       | 2002         |  | 2003      |       | 2003    
|                             |  |                    |       |          |  |               |       |              |  |           |       |         
|Revenue                      |  | $                  | 7,873 |          |  | $             | 7,921 |              |  | $         | 8,315 |          |  | $ | 8,292 |  |  | $ | 8,448 |  |  | $ | 8,776 | 
|Residence operating expenses |  |                    | 5,182 |          |  |               | 5,214 |              |  |           | 5,432 |          |  |   | 5,493 |  |  |   | 5,469 |  |  |   | 5,442 | 
|Building rentals             |  |                    | 2,120 |          |  |               | 2,120 |              |  |           | 2,120 |          |  |   | 2,120 |  |  |   | 2,149 |  |  |   | 2,149 | 
|Depreciation & amortization  |  |                    | 2     |          |  |               | 5     |              |  |           | 10    |          |  |   | 13    |  |  |   | 15    |  |  |   | 17    | 
|                             |  |                    |       |          |  |               |       |              |  |           |       |          |  |   |       |  |  |   |       |  |  |   |       | 
|Total operating expenses     |  |                    | 7,304 |          |  |               | 7,339 |              |  |           | 7,562 |          |  |   | 7,626 |  |  |   | 7,633 |  |  |   | 7,608 | 
|                             |  |                    |       |          |  |               |       |              |  |           |       |          |  |   |       |  |  |   |       |  |  |   |       | 
|Operating income             |  | $                  | 569   |          |  | $             | 582   |              |  | $         | 753   |          |  | $ | 666   |  |  | $ | 815   |  |  | $ | 1,168 | 
|                             |  |                    |       |          |  |               |       |              |  |           |       |          |  |   |       |  |  |   |       |  |  |   |       | 

An Event of Default under the LTC leases including a change of control of the
Company that resulted in the termination of the LTC leases would significantly
impair the Companys cash flow from operations and could have a material
adverse effect on the Company.

Under the Senior Notes and Junior Notes the Company is required to make an
offer (the Change of Control Offer) to repurchase the Senior Notes and the
Junior Notes upon the occurrence of a change of control of the Company. A
change of control as defined in the Indentures includes, among other things,
the acquisition by any person or group of beneficial ownership greater than 50%
of the total voting power of the common stock of the Company. The Change of
Control Offer must be at a price equal to 101% of the principal amount of the
Senior Notes and Junior Notes, together with accrued and unpaid interest. The
occurrence of a change of control under the Indentures could have a material
adverse effect on the Company.

Pursuant to Amendment No. 9 to Schedule 13D/A, dated June 13, 2003, filed on
behalf of BRU Holdings Company, Inc., LLC, BET Associates, L.P., Bruce E. Toll
and Jennifer Toll (the Filing Persons), the Filing Persons have indicated
that they have acquired the Companys securities for investment purposes but
are currently re-evaluating their position and possible alternative future
courses of action, including the possibility of seeking to acquire control of
the Company, although no specific plan or proposal has been formulated.
According to Amendment No. 10, to Schedule 13D/A, dated July 9, 2003, the
Filing Persons have acquired 18.96% of the Companys common stock. Based on a
Form 4 filed by Bruce Toll on August 5, 2003, the Filing Persons now
beneficially own 1,234,640 shares (19.2%) of the Companys common stock.

Certain of our leases and loan agreements, including the LTC leases, contain
covenants and cross-default provisions such that a default on one of those
agreements could cause us to be in default on one or more other agreements
which would have a material adverse effect on the Company.

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

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

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




Item 3. Quantitative and Qualitative Disclosure About Market Risk

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

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

For variable rate debt, changes in interest rates generally do not impact the
fair market value of the debt instrument, but do affect our future results of
operations and cash flows. We had variable rate debt of $67.2 million
outstanding at June 30, 2003 with a weighted average interest rate of 5.6%, of
which $43 million has an interest rate floor of 8.0%. Assuming that our balance
of variable rate debt remains constant, each one-percent increase in interest
rates would result in an annual increase in interest expense, and a
corresponding decrease in net cash flows, of $242,000 until the interest rate
floor is exceeded. Conversely, each one-percent decrease in interest rates
would result in an annual decrease in interest expense, and a corresponding
increase in net cash flows, of $242,000.

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

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

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




Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management with the participation of our Chief Executive Officer and our
Chief Financial Officer, has evaluated our disclosure controls and procedures
(as defined in Securities Exchange Act of 1934 (the Exchange Act) Rules
13a-15(e) and 15d-15(e) as of the end of the period covered by this report
pursuant to Rule 13a-15(b) under the Exchange Act). Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that, as
of the end of the period covered by this report, our disclosure controls and
procedures are effective to ensure that information required to be disclosed in
reports that we file or submit under the Exchange Act is (1) recorded,
processed, summarized and reported in a timely manner, and (2) accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.

Changes in Internal Controls

There has been no change in our internal control over financial reporting that
occurred during our last fiscal quarter that has materially affected or is
reasonably likely to materially affect, our internal control over financial
reporting.




PART II  OTHER INFORMATION




Item 1. Legal Proceedings

We are involved from time to time in ordinary, routine or regulatory legal
proceedings incidental to our business. As of August 14, 2003, we believe that
such legal proceedings should not have a material adverse effect on our
business.




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

The Companys annual shareholder meeting was held on May 8, 2003. At this
meeting the shareholders re-elected the seven current directors. The seven
directors, along with the voting results are as follows:

|                      |  |                  |           |                  |  |  |           | 
|--------------------- |  | ---------------- | --------- | ---------------- |  |  | --------- | 
|                      |  | Number of shares |           | Number of shares
|Name                  |  | voting for       |           | withheld voting 
|                      |  |                  |           |                 
|W. Andrew Adams       |  |                  | 5,112,905 |                  |  |  | 1,216,181 | 
|Andre C. Dimitriadis  |  |                  | 6,326,226 |                  |  |  | 2,860     | 
|Richard C. Ladd       |  |                  | 6,326,226 |                  |  |  | 2,860     | 
|Mark Holliday         |  |                  | 6,326,226 |                  |  |  | 2,860     | 
|Matthew G. Patrick    |  |                  | 6,326,226 |                  |  |  | 2,860     | 
|Leonard M. Tannenbaum |  |                  | 5,112,905 |                  |  |  | 1,216,181 | 
|Steven L. Vick        |  |                  | 6,326,226 |                  |  |  | 2,860     | 




Item 6. Exhibits and Reports on Form 8-K



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

|        |  |                                                                        
|------- |  | -----------------------------------------------------------------------
|Exhibit |  |                                                                        
|Number  |  |                                                                        
|12      |  | Ratio of Earnings to Fixed Charges                                     
|        |  |                                                                        
|31.1    |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|        |  |                                                                        
|31.2    |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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|     |  |                                                                                                                       
|---- |  | ----------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                       
|     |  |                                                                                                                       
|32.1 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|     |  |                                                                                                                       
|32.2 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



| |  |  | We filed a report on Form 8-K on May 8, 2003 pursuant to Item 5 of Form 8-K
announcing the Companys termination of the sale of its South Carolina
facilities.                        
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We filed a report on Form 8-K on May 14, 2003 pursuant to Items 5 and 7 of
Form 8-K announcing the Companys financial results for the quarter ended
March 31, 2003.                  
|
| |  |  | We filed a report on Form 8-K on June 25, 2003 pursuant to Item 5 of Form
8-K announcing the Companys receipt of a Notice of Default from the
Trustee under the Companys Indentures.

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SIGNATURES

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

|                |  |                                |  |                        |  |                                                
|--------------- |  | ------------------------------ |  | ---------------------- |  | -----------------------------------------------
|                |  | ASSISTED LIVING CONCEPTS, INC.
|                |  | Registrant                     |  |                       
|                |  |                                |  |                        |  |                                                
|                |  | By:                            |  | /s/ Matthew Patrick   
|                |  |                                |  |                       
|                |  |                                |  | Name:                  |  | Matthew Patrick                                
|                |  |                                |  | Title:                 |  | Senior Vice President, Chief Financial Officer,
|                |  |                                |  |                        |  | Secretary and Treasurer                        
|                |  |                                |  |                        |  |                                                
|August 14, 2003 |  |                                |  |                        |  |                                                
|                |  |                                |  |                        |  |                                                
|                |  | By:                            |  | /s/ Stephan M. Kearney
|                |  |                                |  |                       
|                |  |                                |  | Name:                  |  | Stephan M. Kearney                             
|                |  |                                |  | Title:                 |  | Vice President, Controller and                 
|                |  |                                |  |                        |  | Chief Accounting Officer                       
|                |  |                                |  |                        |  |                                                
|August 14, 2003 |  |                                |  |                        |  |                                                

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EXHIBIT INDEX

|        |  |                                                                                                                       
|------- |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                       
|Number  |  |                                                                                                                       
|        |  |                                                                                                                       
|12      |  | Ratio of Earnings to Fixed Charges                                                                                    
|        |  |                                                                                                                       
|31.1    |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                               
|        |  |                                                                                                                       
|31.2    |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                               
|        |  |                                                                                                                       
|32.1    |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|        |  |                                                                                                                       
|32.2    |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

26