<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    ----------

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 1997

                                       OR

  [  ]             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 0-20765

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

               Delaware                                  54-1746596
---------------------------------------         ---------------------------
    (State or other jurisdiction of                   (I.R.S. Employer
    incorporation or organization)                   Identification No.)

     9401 Lee Highway, Suite 300
             Fairfax, VA                                   22031
---------------------------------------         ---------------------------
        (Address of principal                            (Zip Code)
         executive offices)

               Registrant's telephone number, including area code:
                                 (703) 273-7500

          Securities registered pursuant to Section 12(b) of the Act:
                                (Not applicable)

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

                     Common Stock, par value $.01 per share
                     --------------------------------------
                                (Title of class)

                 5 1/2% Convertible Subordinated Notes due 2002
                 ----------------------------------------------
                                (Title of class)

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

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

            The aggregate market value of the voting stock held by
non-affiliates of the registrant, based upon the closing price of the
registrant's common stock as of March 16, 1998 was $330,863,008. */

            The number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date is:

                 Class: Common Stock, par value $.01 per share.

                Outstanding at March 16, 1998: 19,227,450 shares.

                      Documents Incorporated by Reference:

Part II:    Portions of the Annual Report to Stockholders for the year ended
            December 31, 1997.

Part III:   Portions of the definitive proxy statement for the Annual Meeting of
            Stockholders to be held on April 27, 1998.

------------------
*/  Solely for the purposes of this calculation, all directors and executive
officers of the registrant and all stockholders beneficially owning more than 5%
of the registrant's common stock are considered to be affiliates.


<PAGE>   2


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                       Page(s)
<S>       <C>                                                                            <C>
PART I    Item 1.    Business...........................................................  3
          Item 2.    Properties......................................................... 17
          Item 3.    Legal Proceedings.................................................. 17
          Item 4.    Submission of Matters to a Vote of Security Holders................ 17

PART II   Item 5.    Market for Registrant's Common Equity and
                     Related Stockholders Matters....................................... 17
          Item 6.    Selected Financial Data............................................ 17
          Item 7.    Management's Discussion and Analysis of Financial
                     Condition and Results of Operations................................ 17
          Item 7A.   Quantitative and Qualitative Disclosure About Market Risk.......... 18
          Item 8.    Financial Statements and Supplementary Data........................ 18
          Item 9.    Changes in and Disagreements with Accountants on
                     Accounting and Financial Disclosure................................ 18

PART III  Item 10.   Directors and Executive Officers of the Registrant................. 18
          Item 11.   Executive Compensation............................................. 18
          Item 12.   Security Ownership of Certain Beneficial Owners
                     and Management..................................................... 18
          Item 13.   Certain Relationships and Related Transactions..................... 18

PART IV   Item 14.   Exhibits, Financial Statement Schedules, and Reports
                     on Form 8-K........................................................ 18

SIGNATURES.............................................................................. 20
</TABLE>



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<PAGE>   3



This Form 10-K contains certain forward-looking statements relating to the
Company's development and acquisition program that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under the captions "Item 1. Business -- Facility
Development," " -- Facility Acquisitions" and " -- Need for Additional
Financing." Unless the context suggests otherwise, references in this Form 10-K
to the "Company" or "Sunrise" mean Sunrise Assisted Living, Inc. and its
subsidiaries and predecessor entities.

                                     PART I

ITEM 1.    BUSINESS.

GENERAL

           Sunrise Assisted Living, Inc. (the "Company" or "Sunrise") is a
leading provider of assisted living services for seniors. The Company currently
operates 66 facilities in 13 states with a capacity of approximately 5,750
residents, including 59 facilities owned by the Company or in which it has
ownership interests and seven facilities managed for third parties. The Company
had revenues of $89.9 million and net income of $4.0 million in 1997.
Approximately 99% of the Company's revenues were derived from private pay
sources.

           The Company's previously announced three-year growth objectives
include developing at least 55 new Sunrise model assisted living facilities with
an additional resident capacity of more than 4,500 by the end of 1999. To date,
the Company has completed development of 27 such facilities with a resident
capacity of 2,400 and has 16 facilities currently under construction with a
resident capacity of 1,490. The Company has also entered into contracts to
purchase 33 additional sites and to lease two additional sites. During 1997, the
Company acquired four assisted living and independent living facilities with
resident capacity of 274. The Company is pursuing additional development
opportunities and also plans to acquire additional facilities as market
conditions warrant. See "--Facility Development" and "--Facility Acquisitions."

           A subsidiary of the Company has obtained a syndicated revolving
credit facility for $250.0 million to be used for general corporate purposes,
including the continued construction and development of assisted living
facilities. The credit facility is for a term of three years with the right to
extend, and is secured by cross-collateralized first mortgages on the real
property and improvements and first liens on all assets of the subsidiary.
Advances under the facility bear interest at rates from LIBOR plus 1.0% to LIBOR
plus 1.5%. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."

           On June 6, 1997, the Company issued and sold $150.0 million aggregate
principal amount of 5 1/2% convertible subordinated notes due 2002 (the
"Notes"). The Notes bear interest at 5 1/2% per annum payable semiannually on
June 15 and December 15 of each year, beginning December 15, 1997. The
conversion price is $37.1875 (equivalent to a conversion rate of 26.89 shares
per $1,000 principal amount of the Notes). The Notes are redeemable at the
option of the Company commencing June 15, 2000, at specified premiums. The net
proceeds to the Company from the sale of the Notes, after deducting underwriting
discounts and offering expenses, were approximately $145.6 million. On June 10,
1997, the Company used $57.7 million of the net proceeds to pay down floating
rate indebtedness from four financial institutions at a weighted average
interest rate of 8.4%. The balance of the net proceeds are being used to fund
continued development of new Sunrise model facilities and for possible
acquisitions, as well as for working capital and general corporate purposes. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."



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<PAGE>   4

           On June 5, 1996, the Company completed its initial public offering
and on October 31, 1996 the Company completed a follow-on public offering. Net
proceeds to the Company from these two offerings totaled approximately $196.1
million.

           The Company was incorporated in Delaware on December 14, 1994 in
order to combine various activities relating to the development, ownership and
operation of the Sunrise assisted living facilities held by predecessor
entities. The predecessor entities consisted of a management company, a
development company, and various entities that held 100% ownership interests in
15 facilities, 50% ownership interests in five facilities and minority ownership
interests in two facilities.

THE ASSISTED LIVING INDUSTRY

           The Company believes that the assisted living industry is emerging as
a preferred alternative to meet the growing demand for a cost-effective setting
in which to care for the elderly who do not require the more intensive medical
attention provided by a skilled nursing facility but cannot live independently
due to physical or cognitive frailties. In general, assisted living represents a
combination of housing and 24-hour a day personal support services designed to
aid elderly residents with activities of daily living ("ADLs"), such as bathing,
eating, personal hygiene, grooming and dressing. Certain assisted living
facilities may also provide assistance to residents with low acuity medical
needs, or may offer higher levels of personal assistance for incontinent
residents or residents with Alzheimer's disease or other forms of dementia.
Annual expenditures in the assisted living industry have been estimated to be
approximately $12 billion, including facilities ranging from "board and care" to
full-service assisted living facilities such as those operated by the Company.
The Company believes that consumer preference and demographic trends will allow
assisted living to remain one of the fastest growing segments of elder care.

           The assisted living industry is highly fragmented and characterized
by numerous small operators. The scope of assisted living services varies
substantially from one operator to another. Many smaller assisted living
providers do not operate in purpose-built facilities, do not have professionally
trained staff, and may provide only limited assistance with low-level care
activities. The Company believes that few assisted living operators provide a
comprehensive range of assisted living services, such as Alzheimer's care and
other services designed to permit residents to "age in place" within the
facility as they develop further physical or cognitive frailties.

THE SUNRISE OPERATING PHILOSOPHY

           The Sunrise approach to assisted living is a unique combination of
operating philosophy and a signature facility design. Since the first Sunrise
facility opened in 1981, the Company's operating philosophy has been to provide
care and services to its residents in a residential environment in a manner
that: "nurtures the spirit, protects privacy, fosters individuality,
personalizes services, enables freedom of choice, encourages independence,
preserves dignity and involves family and friends." The Company believes that
its operating philosophy is one of its strengths. Furthermore, in implementing
its philosophy, the Company continuously seeks to refine and improve the care
and services it offers. The elements of the operating philosophy focus on: the
involvement of the resident and the resident's family in important care giving
decisions; the Company's proprietary training programs for its management,
Administrators and Care Managers; the Company's quality assurance programs; the
full range of assisted living services offered by the Company; and the
architecture and purpose-built design of Sunrise's "Victorian" model facilities.



                                      -4-
<PAGE>   5


     SERVICES

           The Company offers a full range of assisted living services based
upon individual resident needs. Upon admission, the Company, the resident and
the resident's family assess the level of care required and jointly develop a
specific care plan. This care plan includes selection of resident accommodations
and determination of the appropriate level of care. The care plan is
periodically reviewed and updated by the Company, the resident and the
resident's family. By offering a full range of services, including Basic Care,
Assisted Living Plus Care ("Plus Care"), Medication Management and Alzheimer's
Care, the Company can accommodate residents with a broad range of service needs
and enable residents to age in place. In addition, upon admission the Company
generally charges each new resident a one-time community fee typically equal to
two months of daily resident fees, which is refundable on a prorated basis if
the resident leaves the facility during the first 90 days. Daily resident fees
are periodically revised based on increased care or modifications to a
resident's care plan.

           The average daily resident fee for owned facilities operated by the
Company for at least 12 months, or that have achieved stabilization of 95%, was
approximately $78 for 1997 and $80 for 1996 and 1995. Excluding acquired
facilities, the average daily resident fee was approximately $84 for 1997 and
1996 and $80 for 1995.

BASIC CARE

           The Company's Basic Care program is provided to all residents and
includes: assistance with ADLs, such as eating, bathing, dressing, personal
hygiene, and grooming; three meals per day served in a common dining room
(including two seating times per meal); coordination of special diets; 24-hour
security; emergency call systems in each unit; transportation to physician
offices, stores and community services; assistance with coordination of
physician care, physical therapy and other medical services; health promotion
and related programs; personal laundry services; housekeeping services; and
social and recreational activities.

ASSISTED LIVING PLUS CARE

           Through the Company's Plus Care program, residents who require more
frequent or intensive assistance or increased care or supervision are provided
extra care and supervision. The Company charges an additional daily fee based on
additional staff hours of care and services provided. The Plus Care program
allows the Company, through consultation with the resident, the resident's
family and the resident's personal physician, to create an individualized care
and supervision program for residents who might otherwise have to move to a more
medically intensive facility. At December 31, 1997, approximately 32% of the
Company's assisted living residents participated in the Plus Care program.

MEDICATION MANAGEMENT

           Many of the Company's residents also require assistance with
medications. To the extent permitted by state law, the Medication Management
program includes the storage of medications, the distribution of medications as
directed by the resident's physician and compliance monitoring. The Company
charges an additional fixed daily fee for this service. At December 31, 1997,
approximately 46% of the Company's assisted living residents participated in the
Medication Management program.

ALZHEIMER'S CARE

           The Company believes its Alzheimer's Care called the Sunrise
Reminiscence Program distinguishes it from many other assisted living providers
who do not provide such specialized care. The Sunrise Reminiscence Program
provides the attention, care programs and services needed to help cognitively
impaired residents maintain a higher quality of life. Specially trained staff
provide Basic



                                      -5-
<PAGE>   6

Care and other specifically designed care and services to cognitively impaired
residents in separate areas of facilities. The Company charges each cognitively
impaired resident a daily fee that includes one hour of additional staff time
per day. Cognitively impaired residents who require additional care and services
pay a higher daily rate based on additional staff hours of care and services
provided. At December 31, 1997, approximately 21% of the Company's assisted
living residents participated in the Sunrise Reminiscence Program.

THE SUNRISE "VICTORIAN" MODEL FACILITY

           The Company's signature Victorian model facility, first designed in
1985, is a freestanding, residential-style facility with a capacity of 70 to 110
residents. The building ranges in size from approximately 40,000 to 65,000
square feet and is built generally on sites ranging from two to five acres.
Approximately 40% of the building is devoted to common areas and amenities,
including reading rooms, family or living rooms and other areas (such as bistros
and ice cream parlors) designed to promote interaction among residents. The
Company has four basic building plan designs, which provide it with flexibility
in adapting the model to a particular site. The building is usually two or three
stories and of steel frame construction built to institutional health care
standards but strongly residential in appearance. The interior layout is
designed to promote a home-like environment, efficient delivery of resident care
and resident independence.

           Resident units are functionally arranged to provide a "community-
within-a-community" atmosphere. The model facility may be configured with as
many as eight different types of resident units, including double occupancy
units, single units and two- and three-room suites. Sitting areas on each floor
serve as a family or living room. The ground level typically contains a kitchen
and common dining area, administrative offices, a laundry room, a private dining
room, library or living room, and bistro or ice cream parlor. Typically, one
floor or one or two wings of a facility contain resident units and common areas,
including separate dining facilities, specifically designed to serve residents
with Alzheimer's disease or other special needs.

           The architectural and interior design concepts incorporate the
Sunrise operating philosophy of protecting resident privacy, enabling freedom of
choice, encouraging independence and fostering individuality in a homelike
setting. The Company believes its model facility meets the desire of many
individuals to move to a new residence at least as comfortable as their former
home. The Company believes that its residential environments also accomplish
several other objectives, including: (i) lessening the trauma of change for
elderly residents and their families; (ii) achieving operational efficiencies
through proven designs; (iii) facilitating resident mobility and ease of access
by care givers; and (iv) differentiating the Company from other assisted living
and long-term care operators.

OWNED FACILITIES

           The table below sets forth certain information regarding owned
facilities or facilities in which Sunrise has an ownership interest that are
currently operating as well as those under construction or are subject to
purchase contracts and zoned:

<TABLE>
<CAPTION>
                                                              YEAR       DEVELOPED,    SUNRISE
                                                           OPENED BY    ACQUIRED OR    MODEL          RESIDENT      OWNERSHIP
     FACILITY                            LOCATION           SUNRISE     CONST. STATUS  FACILITY       CAPACITY    PERCENTAGE(1)
     --------                            --------           -------     -------------  ---------     --------     -------------
<S>                                     <C>                   <C>       <C>               <C>            <C>          <C>
Sunrise of Oakton                       Oakton, VA            1981      Acquired(2)                       51          100.0%
Sunrise of Leesburg                     Leesburg, VA          1984      Acquired(2)                       35          100.0
Sunrise of Warrenton                    Warrenton, VA         1986      Acquired(2)                       37          100.0
Sunrise of Arlington                    Arlington, VA         1988      Developed         X               58          100.0
Sunrise of Bluemont Park                Arlington, VA         1990                                                    100.0
  Potomac                                                               Developed         X               59
  Shenandoah                                                            Developed         X               77
</TABLE>


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<PAGE>   7

<TABLE>
<S>                                     <C>                <C>          <C>               <C>          <C>          <C>
  James                                                                 Developed         X               59
Sunrise of Mercer Island                Seattle, WA           1990      Developed         X               59          100.0
Sunrise of Fairfax                      Fairfax, VA           1990      Developed         X               59          100.0(3)
Sunrise of Queen Anne                   Seattle, WA           1991      Acquired                         136           33.3(4)
Sunrise of Frederick                    Frederick, MD         1992      Developed         X               86          100.0
Sunrise of Countryside                  Sterling, VA          1992                                                    100.0
  East Building                                                         Developed(5)      X               66
  West Building                                                         Developed(5)      X               64
Sunrise of Gunston                      Lorton, VA            1992      Developed(5)      X               67          100.0
Sunrise of Atrium                       Boca Raton, FL        1992      Acquired                         210          100.0
Sunrise of Falls Church                 Falls Church, VA      1993      Developed         X               66          100.0
Sunrise of Village House                Gaithersburg, MD      1993      Acquired                         155(6)       100.0
Sunrise of Towson                       Towson, MD            1994      Developed         X               66           13.9(7)
Sunrise of Gardner Park                 Peabody, MA           1994      Developed         X               59           50.0(7)(8)
Sunrise of Annapolis                    Annapolis, MD         1995      Developed         X               88          100.0
Chanate Lodge                           Santa Rosa, CA        1996      Acquired                         120          100.0
Sunrise of Raleigh                      Raleigh, NC           1996      Developed         X               93          100.0
Sunrise of Pikesville                   Pikesville, MD        1996      Developed         X              103          100.0
Huntcliff Summitt                       Atlanta, GA           1996      Acquired                         254          100.0(9)
Sunrise of Northshore                   St. Petersburg, FL    1996      Acquired                         157          100.0(10)
Sunrise of Augusta                      Augusta, GA           1996      Acquired                          42          100.0
Sunrise of Columbus                     Columbus, GA          1996      Acquired                          26          100.0
Sunrise of Greenville                   Greenville, SC        1996      Acquired                          39          100.0
Sunrise of Blue Bell                    Philadelphia, PA      1996      Developed         X               97          100.0
Sunrise of Columbia                     Columbia, MD          1996      Developed         X               96          100.0
Sunrise of Hunter Mill                  Oakton, VA            1997      Developed         X               96          100.0
Sunrise of Sterling Canyon              Valencia, CA          1997      Acquired                         130          100.0
Sunrise of Napa                         Napa Valley, CA       1997      Acquired                          83          100.0
Sunrise of Petaluma                     Petaluma, CA          1997      Developed                         84          100.0(11)
Sunrise of Springfield                  Springfield, VA       1997      Developed         X               98          100.0
Sunrise of Severna Park Building I      Severna Park, MD      1997      Developed         X               99           50.0(3)(7)
Sunrise of Severna Park Building II     Severna Park, MD      1997      Developed         X               74           50.0(3)(7)
Sunrise of Morris Plains                Morris Plains, NJ     1997      Developed         X               95          100.0
Sunrise of Old Tappan                   Old Tappan, NJ        1997      Developed         X               95          100.0
Sunrise of Granite Run                  Granite Run, PA       1997      Developed         X               95          100.0
Sunrise of Abington Building I          Abington, PA          1997      Developed         X               97          100.0
Sunrise of Abington Building II         Abington, PA          1997      Developed         X               71          100.0
Sunrise of Rockville                    Rockville, MD         1997      Developed         X               86          100.0
Sunrise of Alexandria                   Alexandria, VA        1997      Developed         X               92          100.0
Sunrise of Wayne                        Wayne, NJ             1997      Developed         X               90          100.0
Sunrise of Norwood                      Norwood, MA           1997      Developed         X               90          100.0
Sunrise of Wayland                      Wayland, MA           1997      Developed         X               68          100.0
Sunrise of Westfield                    Westfield, NJ         1997      Developed         X               95          100.0
Sunrise of East Cobb                    East Cobb, GA         1997      Developed         X               96          100.0
Sunrise of Dunwoody                     Dunwoody, GA          1997      Acquired                          30          100.0
Sunrise of Weston                       Weston, MA            1997      Acquired                          31          100.0
Sunrise of Fresno                       Fresno, CA            1998      Developed                         84          100.0(11)
Sunrise of Haverford                    Haverford, PA         1998      Developed         X               73          100.0
Sunrise of Decatur                      Decatur, GA           1998      Developed         X               96          100.0
Sunrise of Walnut Creek                 Walnut Creek, CA      1998      Developed         X               85          100.0
Sunrise of Glen Cove                    Glen Cove, NY         1998      Developed         X               83          100.0
Sunrise of Ivey Ridge                   Ivey Ridge, GA        1998      Developed         X               97          100.0
Sunrise of Cohasset                     Cohasset, MA          1998      Developed         X               71          100.0
Sunrise of Holly Orchard                Denver, CO            1998      Developed         X               97          100.0
                                                                                                   -------------
                                                                                                       5,065

Sunrise of Pinehurst                    Denver, CO         2nd Q 1998   Construction      X              100          100.0
</TABLE>



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<PAGE>   8

<TABLE>
<S>                                     <C>                <C>             <C>            <C>           <C>           <C>
Sunrise of Danville                     Danville, CA       2nd Q 1998      Construction                   84          100.0(11)
Sunrise of Huntcliff Summit (Assisted
   Living Expansion)                    Atlanta, GA        2nd Q 1998      Construction   X               96          100.0
Sunrise of Bellevue                     Bellevue, WA       2nd Q 1998      Construction   X               84          100.0
Sunrise of Paramus                      Paramus, NJ        2nd half 1998   Construction   X               75          100.0
Sunrise of Lafayette Hill               Philadelphia, PA
                                          metro region     2nd half 1998   Construction   X               86          100.0
Sunrise of Mission Viejo                Mission Viejo, CA  2nd half 1998   Construction   X              103            9.0
Sunrise of Fairfield                    Fairfield, NJ      2nd half 1998   Construction   X               93          100.0
Sunrise of Oakland Hills                Oakland Hills, CA  2nd half 1998   Construction   X              102          100.0
Sunrise of Paoli                        Paoli, PA          2nd half 1998   Construction   X               96          100.0
Sunrise of East Brunswick               East Brunswick, NY 2nd half 1998   Construction   X               94            9.0
Sunrise of Smithtown                    Smithtown, NY      1st half 1999   Construction   X               90          100.0
Sunrise of Carlsbad                     Carlsbad, CA       1st half 1999   Construction   X              102            9.0
Sunrise of Naperville                   Naperville IL      1st half 1999   Construction   X               91            9.0
Sunrise of Rochester Hills              Rochester, MI      1st half 1999   Construction   X              101            9.0
Sunrise of Buffalo Grove                Buffalo Grove, IL  1st half 1999   Construction   X               93          100.0
Sunrise of Chanate II                   Santa Rosa, CA     2nd half 1998   Zoned          X               49          100.0
Sunrise of Richmond                     Richmond, VA       1st half 1999   Zoned          X               91            9.0
Sunrise of Charlotte                    Charlotte, NC      2nd half 1999   Zoned          X               95          100.0
Sunrise of Farmington Hills             Farmington
                                          Hills, MI        2nd half 1999   Zoned          X               90          100.0
Sunrise of Ann Arbor                    Ann Arbor, MI      2nd half 1999   Zoned          X               85          100.0
Sunrise of Northville                   Northville, MI     2nd half 1999   Zoned          X               91          100.0
Sunrise of Exton                        Exton, PA          2nd half 1999   Zoned          X               78          100.0
                                                                                                   -------------
                                                                                                       2,069    (12)
                                                                                                   -------------
         Total                                                                                         7,134
                                                                                                   =============
</TABLE>

----------

(1)        Fifteen of the wholly owned facilities (Oakton, Leesburg, Warrenton,
           Arlington, Bluemont Park (three facilities), Mercer Island, Fairfax,
           Frederick, Countryside (two facilities), Gunston, Atrium and Falls
           Church) serve as collateral for a $86.7 million mortgage loan.
           Nineteen other wholly owned facilities (Springfield, Morris Plains,
           Old Tappan, Granite Run, Abington (two facilities), Wayne,
           Westfields, Decatur, Walnut Creek, Haverford, Huntcliff Summit
           (assisted living expansion), Lafayette Hill, Oakland Hills, Paramus,
           Paoli, Fairfield, Smithtown, and Bellevue) serve as collateral for a
           $250.0 million syndicated revolving credit facility. Sixteen other
           owned facilities are subject to one or more mortgages or deeds of
           trust that mature between 1998 and 2033 and bear interest at rates
           ranging from 6.870% to 9.750% annually as of December 31, 1997. See
           "Item 7. Management's Discussion and Analysis of Financial Condition
           and Results of Operations -- Liquidity and Capital Resources" and
           Note 6 of Notes to Consolidated Financial Statements. All facilities
           that are wholly owned by the Company are consolidated in the
           Consolidated Financial Statements. The Gardner Park and Severna Park
           facilities are held by limited liability companies or limited
           partnerships in which the Company holds the ownership interests
           indicated in the table. The Company is the general partner or
           managing member of such entities and through the partnership or
           operating agreements and the management agreements for the facilities
           the Company controls their ordinary course business operations.
           Therefore, the Gardner Park and Severna Park facilities are also
           consolidated in the Consolidated Financial Statements. The ordinary
           course business operations of the Queen Anne and Towson facilities
           are not currently controlled by the Company and, therefore, are
           accounted for under the equity method of accounting.

(2)        Each of these facilities has been redeveloped in a manner consistent
           with the Sunrise model.

(3)        Subject to long-term ground lease.




                                      -8-
<PAGE>   9

(4)        This property is held as a tenancy-in-common. The remaining ownership
           interests are owned by unaffiliated third parties. The Company
           manages this facility pursuant to a management contract that is
           subject to annual renewal at the option of the owners.

(5)        These facilities were initially developed by the Company for third
           parties and were subsequently acquired by the Company in 1992.

(6)        This facility is licensed for 40 assisted living residents. The
           remainder of the resident capacity is for independent living
           residents.

(7)        The remaining ownership interests are owned by third parties. Sunrise
           manages each of these facilities.

(8)        A current officer and a former employee of the Company each have a
           25% ownership interest in this facility. Sunrise has the right to
           acquire these minority ownership interests for fair market value, as
           determined by an appraiser mutually agreeable to the parties.

(9)        This facility is licensed for 24 assisted living residents. The
           remainder of the resident capacity is for independent living
           residents. Excludes 12 units owned by the occupants thereof. The
           occupants can require the Company to repurchase the units for their
           original purchase prices (aggregating approximately $1.9 million)
           under certain circumstances. The Company has a right to purchase the
           units at fair market value upon the happening of certain events and
           has a right of first refusal on sales of the units.

(10)       This facility is licensed for 26 skilled nursing residents. The
           remainder of the resident capacity is for assisted living residents.

(11)       These are not Sunrise model facilities. Sunrise has entered into
           operating leases with a third-party owner/developer who completed the
           facilities under a design reviewed and approved by Sunrise. These
           facilities are operated under 15-year operating leases, with two
           10-year extension options.

(12)       There can be no assurance that construction delays will not be
           experienced.

FACILITY DEVELOPMENT

           The Company targets sites for development located in major
metropolitan areas and their surrounding suburban communities. In evaluating a
prospective market, the Company considers a number of factors, including
population, income and age demographics, target site visibility, probability of
obtaining zoning approvals, estimated level of market demand and the ability to
maximize management resources in a specific market by clustering its development
and operating activities.

           The Company continues to develop its Victorian model facilities in
major metropolitan markets. The Company's previously announced three-year
growth objectives include developing at least 55 new Sunrise model assisted
living facilities with an additional resident capacity of more than 4,500 by
the end of 1999. To date, the Company has completed development of 27 such new
model facilities with a resident capacity of 2,400 (East Cobb, GA, Fresno, CA,
Haverford, PA, Decatur, GA, Walnut Creek, CA, Glen Cove, NY, Ivey Ridge, GA,
Cohasset, MA, Denver, CO, Alexandria, VA, Norwood, MA, Wayne, NJ, Wayland, MA,
Westfield, NJ, Rockville, MD, Philadelphia, PA (3), Old Tappan, NJ, Morris
Plains, NJ, Severna Park, MD (2), Springfield, VA, Oakton, VA, Petaluma, CA,
Blue Bell, PA, and Columbia, MD) and has 16 facilities under construction with
resident capacity of 1,490. The Company has also entered into contracts to
purchase 33 additional sites and to lease two additional sites, and is
negotiating purchase terms for the remaining sites. These sites are located in
Pennsylvania, Massachusetts, New Jersey, Connecticut, New York, Illinois,
California, Missouri, Kansas, and Virginia. The Company is pursuing additional
development opportunities as market conditions warrant. Historically, the
Company has completed all but one of the facilities for



                                      -9-
<PAGE>   10

which it has obtained zoning approval. The Company bases its development upon
its "Victorian" model facility that it has developed and refined since the first
model facility was designed in 1985. Use of a standard model allows the Company
to control development costs, maintain facility consistency and improve
operational efficiency. Use of the Sunrise model also creates "brand" awareness
in the Company's markets.

           The primary milestones in the development process are (i) site
selection and contract signing, (ii) zoning and site plan approval and (iii)
completion of construction. Once a market has been identified, site selection
and contract signing typically take approximately one to three months. Zoning
and site plan approval generally take 10 to 12 months and are typically the most
difficult steps in the development process due to the Company's selection of
sites in established communities which usually require site rezoning. Facility
construction normally takes 10 to 12 months. The Company believes its extensive
development experience gives it an advantage relative to certain of its
competitors in obtaining necessary governmental approvals and completing
construction in a timely manner. After a facility receives a certificate of
occupancy, residents usually begin to move in within one month. Since 1993, the
total capitalized cost to develop, construct and open a Sunrise model facility,
including land acquisition and construction costs, has ranged from approximately
$8.5 million to $12.0 million. The cost of any particular facility may vary
considerably based on a variety of site-specific factors.

           The Company's development activities are coordinated by its
experienced 30-person development staff, which has extensive real estate
acquisition, engineering, general construction and project management
experience. Architectural design and hands-on construction functions are usually
contracted to experienced outside architects and contractors.

           The Company's ability to achieve its development plans will depend
upon a variety of factors, many of which are beyond the Company's control. There
can be no assurance that the Company will not suffer delays in its development
program, which could slow the Company's growth. The successful development of
additional assisted living facilities will involve a number of risks, including
the possibility that the Company may be unable to locate suitable sites at
acceptable prices or may be unable to obtain, or may experience delays in
obtaining, necessary zoning, land use, building, occupancy, licensing and other
required governmental permits and authorizations. The Company may also incur
construction costs that exceed original estimates, may not complete construction
projects on schedule and may experience competition in the search for suitable
development sites. The Company relies on third-party general contractors to
construct its new assisted living facilities. There can be no assurance that the
Company will not experience difficulties in working with general contractors and
subcontractors, which could result in increased construction costs and delays.
Further, facility development is subject to a number of contingencies over which
the Company will have little control and that may adversely affect project cost
and completion time, including shortages of, or the inability to obtain, labor
or materials, the inability of the general contractor or subcontractors to
perform under their contracts, strikes, adverse weather conditions and changes
in applicable laws or regulations or in the method of applying such laws and
regulations. Accordingly, if the Company is unable to achieve its development
plans, its business, financial condition and results of operations could be
adversely affected.

FACILITY ACQUISITIONS

           The Company's previously announced growth plan included the
acquisition of up to 15 facilities by the end of 1999, of which nine have been
acquired. In evaluating possible acquisitions, the Company considers, among
other factors, (i) location, construction quality, condition and design of the
facility, (ii) current and projected facility cash flow, (iii) the ability to
increase revenue, occupancy and cash flow by




                                      -10-
<PAGE>   11

providing a full range of assisted living services, (iv) costs of facility
repositioning (including renovations, if any) and (v) the extent to which the
acquisition will complement the Company's development plans.

           There can be no assurance that the Company's acquisition of assisted
living facilities will be completed at the rate currently expected, if at all.
The success of the Company's acquisitions will be determined by numerous
factors, including the Company's ability to identify suitable acquisition
candidates, competition for such acquisitions, the purchase price, the financial
performance of the facilities after acquisition and the ability of the Company
to integrate effectively the operations of acquired facilities. Any failure by
the Company to integrate or operate acquired facilities effectively may have a
material adverse effect on the Company's business, financial condition and
results of operations.

NEED FOR ADDITIONAL FINANCING

           To achieve its growth objectives, the Company will need to obtain
substantial additional resources to fund its development, construction and
acquisition activities. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation." The Company expects that the
number of owned and operated facilities will increase substantially as it
pursues its development and acquisition programs for new assisted living
facilities. This rapid growth will place significant demands on the Company's
management resources. The Company's ability to manage its growth effectively
will require it to continue to expand its operational, financial and management
information systems and to continue to attract, train, motivate, manage and
retain key employees. If the Company is unable to manage its growth effectively,
its business, financial condition and results of operations could be adversely
affected.

MANAGED FACILITIES

           The Company also manages for third-party owners seven operating
facilities and one facility under construction with total resident capacity of
756, including, four in Massachusetts, two in New Jersey, one in Pennsylvania,
and one in Virginia. The two facilities in New Jersey are Sunrise model
facilities. The management contract expiration dates range from October 1998 to
January 2002. The Company owns $5.4 million carrying value of tax exempt
mortgage bonds on the Pennsylvania facility. One of the Massachusetts facilities
is licensed for 139 continuing care retirement community residents. Pursuant to
the management agreement with one of the New Jersey facilities, the company has
a right of first refusal to purchase the facility if the owner receives a bona
fide offer to purchase the facility during the term of the management agreement.
The Company does not provide financial or accounting services to the Virginia
facility.

           The Company also manages two skilled nursing facilities, Pembrook and
Prospect Park, located in West Chester and Prospect Park, Pennsylvania,
respectively. The Pembrook facility has 240 beds and the Prospect Park facility
has 180 beds. Both of these facilities are owned by a single unaffiliated
nonprofit corporation. The management contracts for these facilities were
initially entered into in May 1994 and expire in April 1999. The Company
received management fee revenues of approximately $0.4 million in 1997 for these
two facilities. The Company is entitled to receive a deferred management fee of
approximately $0.7 million, as of December 31, 1997, if the owners terminate the
management agreement or sell the properties. The Company does not provide
financial or accounting services for these facilities.




                                      -11-
<PAGE>   12
COMPANY OPERATIONS

OPERATING STRUCTURE

           The Company has centralized accounting, finance and other operational
functions at the corporate headquarters and regional office levels in order to
allow facility-based personnel to focus on resident care, consistent with the
Company's operating philosophy. Headquarters staff members in Fairfax, Virginia
are responsible for: the establishment of Company-wide policies and procedures
relating to, among other things, resident care, facility design and facility
operations; billing and collection; accounts payable; finance and accounting;
management of the Company's development and acquisition activities; development
of employee training materials and programs; and providing overall strategic
direction to the Company. Regional staff are responsible for: overseeing all
aspects of facility-based operations, including marketing activities; resident
care; the hiring of Administrators, Care Managers and other facility-based
personnel; compliance with applicable local and state regulatory requirements;
and implementation of the Company's development and acquisition plans within a
given geographic region.

           The Company is currently organized into several regions. Each of the
regions is headed by a Regional Senior Vice President or Vice President with
extensive experience in the long-term care and assisted living industries. The
regional staff typically consists of a Marketing Specialist, a Resident Care
Specialist and a Human Resources Specialist. The Company's largest region also
has separate Marketing Specialists for existing facilities and those in
development, an Activities Specialist, a Regulatory Specialist, a Dietary
Specialist and a Maintenance Specialist. The Company expects that all regions
will create similar staff positions as the number of facilities in those regions
increases.

FACILITY STAFFING

           Each of the Company's facilities has an Administrator responsible for
the day-to-day operations of the facility, including quality of care, social
services and financial performance. Each Administrator receives specialized
training from the Company. The Company believes that the quality and size of its
facilities, coupled with its competitive compensation philosophy, have enabled
it to attract high-quality, professional Administrators. The Administrator is
supported by the Director of Resident Care, a nurse who oversees the Care
Managers and is directly responsible for day-to-day care of the residents, and
by the Director of Community Relations, who oversees marketing and outreach
programs. Other key positions include the Director of Dining Services, the
Activities Director, and in certain homes, the Director of Alzheimer's Care.

           Care Managers, who work on full-time, part-time and flex-time
schedules, provide most of the hands-on resident care, such as bathing, dressing
and other personalized care services (including housekeeping, meal service and
resident activities). To the extent permitted by state law, nurses, or Care
Managers who complete a special training program, supervise the storage and
distribution of medications. The use of Care Managers to provide substantially
all services to residents has the benefits of consistency and continuity in
resident care. In most cases, the same Care Manager assists the resident in
dressing, dining and coordinating daily activities. The number of Care Managers
working in a facility varies according to the level of care required by the
residents of the facility and the numbers of residents receiving Alzheimer's
Care and Plus Care services. The number of Care Managers ranges from three
(Leesburg facility) to 20 (Atrium facility) on the day shifts and from two Care
Managers (Leesburg) to seven Care Managers (Atrium) on the night shift.

           The Company believes that its facilities can be most efficiently
managed by maximizing direct resident and staff contact. Employees involved in
resident care, including the administrative staff, are trained in the Care
Manager duties and participate in supporting the care needs of the residents.
Accounting functions are centralized so that administrative staff may devote
substantially all of their time to care giving.




                                      -12-
<PAGE>   13

           The Company has attracted, and continues to seek, highly dedicated,
experienced personnel. The Company has adopted formal training procedures and
review and evaluation procedures to help ensure quality care for its residents.
The Company believes that education, training and development enhance the
effectiveness of its employees. All employees are required to complete the
Company's training program, which centers around its proprietary "Five-Star
Educational Program." This program includes a core curriculum consisting of care
basics, Alzheimer's care, resident care procedures and communication skills. For
Care Managers who desire to advance into facility management, the Five-Star
Education Program provides additional training in medical awareness and
management skills. There are also leadership certifications in areas such as
community relations, facility management, recruiting, staffing, human resources
and regulations. Sunrise also has developed an "Administrator-in-Training
("AIT") Program" that places an Administrator trainee in an existing facility to
learn the position based on hands-on experience and direct supervision from a
current Administrator. The AIT Program is intended to ensure that enough
Sunrise-trained professionals will be available to manage acquired and newly
developed facilities.

QUALITY ASSURANCE

           The Company coordinates quality assurance programs at each of its
facilities through its corporate headquarters staff and through its regional
offices. The Company's commitment to quality assurance is designed to achieve a
high degree of resident and family member satisfaction with the care and
services provided by the Company. In addition to ongoing training and
performance reviews of Care Managers and other employees, the Company's quality
control measures include:

           Family and Resident Feedback. The Company surveys residents and
family members on a regular basis to monitor the quality of services provided to
residents. Approximately 30 days after moving into a facility, a resident or
family member is surveyed by a Sunrise representative to inquire about their
initial level of satisfaction. Thereafter, annual written surveys are used to
appraise and monitor the level of satisfaction of residents and their families.
A toll-free telephone line also is maintained which may be used at any time by a
resident's family members to convey comments.

           Regular Facility Inspections. Facility inspections are conducted by
regional vice presidents and other regional staff on at least a monthly basis.
These inspections cover: the appearance of the exterior and grounds; the
appearance and cleanliness of the interior; the professionalism and friendliness
of staff; resident care plans; the quality of activities and the dining program;
observance of residents in their daily living activities; and compliance with
government regulations.

           Third-Party Reviews. To further evaluate customer service, the
Company engages an independent service evaluation company to "mystery shop" the
Company's facilities. These professionals assess the Company's performance from
the perspective of a customer, without the inherent biases of a Company
employee. Each facility is "shopped" at least three times per year in person, as
well as one or more times per month by telephone. To evaluate medication
management, third-party pharmacists conduct periodic reviews of on-site handling
and storage of medications, record-keeping and coordination of medications.

MARKETING AND SALES

           The Company's marketing strategy is intended to create awareness of
the Company and its services among potential residents and their family members
and referral sources, such as hospital discharge planners, physicians, clergy,
area agencies for the elderly, skilled nursing facilities, home health agencies
and social workers. A central marketing staff develops overall strategies for
promoting the Company throughout its markets and monitors the success of the
Company's marketing efforts. Each regional office generally has at least one
Marketing Specialist and each facility typically has a Director of Community
Relations who oversees marketing and outreach programs. In addition to direct
contacts



                                      -13-

<PAGE>   14

with prospective referral sources, the Company also relies on print
advertising, yellow pages advertising, direct mail, signage and special events,
such as grand openings for new facilities, health fairs and community
receptions.

THIRD-PARTY RESIDENT SERVICES

           While the Company serves the vast majority of a resident's needs with
its own staff, certain services, such as physician care, infusion therapy,
physical and speech therapy and other home health care services, may be provided
to residents at Sunrise facilities by third parties. Company staff assist
residents in locating qualified providers for such health care services. In
October 1996, the Company entered into an affiliation agreement with Jefferson
Health System ("JHS"), an integrated health care system located in Philadelphia,
Pennsylvania, pursuant to which JHS has agreed to provide residents of Sunrise
facilities located in the Philadelphia metropolitan region, on a preferred (but
non-exclusive) basis, with access to certain health care services offered by
JHS. Such health care services may include hospital services, physician
services, rehabilitation services, home health services and products and mental
health services.

COMPETITION

           The long-term care industry is highly competitive and the Company
believes that the assisted living segment, in particular, will become even more
competitive in the future. The Company will be competing with numerous other
companies providing similar long-term care alternatives such as home health care
agencies, facility-based service programs, retirement communities and
convalescent centers. In general, regulatory and other barriers to competitive
entry in the assisted living industry are not substantial. In pursuing its
growth strategy, the Company expects to face competition in its efforts to
develop and acquire assisted living facilities. Some of the Company's present
and potential competitors are significantly larger and have, or may obtain,
greater financial resources than the Company. Consequently, there can be no
assurance that the Company will not encounter increased competition that could
limit its ability to attract residents or expand its business and that could
have a material adverse effect on its business, financial condition and results
of operations. Moreover, if the development of new assisted living facilities
outpaces demand for those facilities in certain markets, such markets may become
saturated. Such an oversupply of facilities could cause the Company to
experience decreased occupancy, depressed margins and lower operating results.
Providers of assisted living and related services compete for residents
primarily on the basis of quality of care, price, reputation, physical
appearance of the facilities, services offered, family and physician preferences
and location. As assisted living receives increased attention, the Company
believes that competition will grow from new local and regional companies that
operate, manage and develop assisted living facilities within the same
geographic areas as the Company.

STAFFING AND LABOR COSTS

           The Company competes with various health care services providers,
including other elderly care providers, in attracting and retaining qualified or
skilled personnel. A shortage of nurses or other trained personnel or general
inflationary pressures may require the Company to enhance its wage and benefits
package to compete effectively for personnel. The Company's general and
administrative expenses (which consist primarily of staffing and labor expenses,
including hiring additional staff and increasing the salary and benefits of
existing staff) as a percentage of operating revenue were 11.6% for 1997, 21.2%
for 1996, and 18.5% for 1995. The reduction of general and administrative
expenses as a percentage of operating revenue decreased in 1997 as compared to
1996 primarily because operating revenue increased at a much faster rate than
general and administrative expenses. There can be no assurance that the
Company's labor costs will not increase as a percentage of operating revenue.
Any significant failure by the Company to attract and retain qualified
employees, to control its labor costs or



                                      -14-
<PAGE>   15
STAFF EDUCATION AND TRAINING


to match increases in its labor expenses with corresponding increases in
revenues could have a material adverse effect on the Company's business,
financial condition and results of operations.

GOVERNMENT REGULATION

           The Company's facilities are subject to regulation and licensing by
state and local health and social service agencies and other regulatory
authorities, although requirements vary from state to state. In general, these
requirements address, among other things: personnel education, training, and
records; facility services, including administration of medication, assistance
with self-administration of medication, and limited nursing services; monitoring
of resident wellness; physical plant specifications; furnishing of resident
units; food and housekeeping services; emergency evacuation plans; and resident
rights and responsibilities, including in some states the right to receive
certain health care services from providers of a resident's choice. Certain of
the Company's facilities are also licensed to provide independent living
services which generally involve lower levels of resident assistance. In several
states in which the Company operates or intends to operate, assisted living
facilities also require a certificate of need before the facility can be opened.
In most states, assisted living facilities also are subject to state or local
building code, fire code and food service licensure or certification
requirements. Like other health care facilities, assisted living facilities are
subject to periodic survey or inspection by governmental authorities. From time
to time in the ordinary course of business, the Company receives deficiency
reports. The Company reviews such reports and seeks to take appropriate
corrective action. Although most inspection deficiencies are resolved through a
plan of correction, the reviewing agency typically is authorized to take action
against a licensed facility where deficiencies are noted in the inspection
process. Such action may include imposition of fines, imposition of a
provisional or conditional license or suspension or revocation of a license or
other sanctions.

           Any failure by the Company to comply with applicable requirements
could have a material and adverse effect on the Company's business, financial
condition and results of operations. Regulation of the assisted living industry
is evolving and the Company's operations could also be adversely affected by,
among other things, future regulatory developments such as mandatory increases
in scope and quality of care to be afforded residents and revisions to licensing
and certification standards. Increased regulatory requirements could increase
costs of compliance with such requirements.

           The Company also is subject to Federal and state anti-remuneration
laws, such as the Medicare/ Medicaid anti-kickback law which govern certain
financial arrangements among health care providers and others who may be in a
position to refer or recommend patients to such providers. These laws prohibit,
among other things, certain direct and indirect payments that are intended to
induce the referral of patients to, the arranging for services by, or the
recommending of, a particular provider of health care items or services. The
Medicare/Medicaid anti-kickback law has been broadly interpreted to apply to
certain contractual relationships between health care providers and sources of
patient referral. Similar state laws vary from state to state, are sometimes
vague and seldom have been interpreted by courts or regulatory agencies.
Violation of these laws can result in loss of licensure, civil and criminal
penalties, and exclusion of health care providers or suppliers from
participation in (i.e., furnishing covered items or services to beneficiaries
of) the Medicare and Medicaid programs. There can be no assurance that such laws
will be interpreted in a manner consistent with the practices of the Company.

           Management is not aware of any non-compliance by the Company with
applicable regulatory requirements that would have a material adverse effect on
the Company's financial condition or results of operations.




                                      -15-
<PAGE>   16
ENVIRONMENTAL RISKS

           Under various federal, state and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real property may be
held liable for the cost of removal or remediation of certain hazardous or toxic
substances, including, without limitation, asbestos-containing materials, that
could be located on, in or under such property. Such laws and regulations often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of the hazardous or toxic substances. The costs of
any required remediation or removal of these substances could be substantial and
the liability of an owner or operator as to any property is generally not
limited under such laws and regulations and could exceed the property's value
and the aggregate assets of the owner or operator. The presence of these
substances or failure to remediate such substances properly may also adversely
affect the owner's ability to sell or rent the property, or to borrow using the
property as collateral. Under these laws and regulations, an owner, operator or
an entity that arranges for the disposal of hazardous or toxic substances, such
as asbestos-containing materials, at a disposal site may also be liable for the
costs of any required remediation or removal of the hazardous or toxic
substances at the disposal site. In connection with the ownership or operation
of its properties, the Company could be liable for these costs, as well as
certain other costs, including governmental fines and injuries to persons or
properties. As a result, the presence, with or without the Company's knowledge,
of hazardous or toxic substances at any property held or operated by the
Company, or acquired or operated by the Company in the future, could have an
adverse effect on the Company's business, financial condition and results of
operations. Environmental audits performed on the Company's properties have not
revealed any significant environmental liability that management believes would
have a material adverse effect on the Company's business, financial condition or
results of operations. No assurance can be given that existing environmental
audits with respect to any of the Company's properties reveal all environmental
liabilities.

LIABILITY AND INSURANCE

           The Company's business entails an inherent risk of liability. In
recent years, participants in the long-term care industry, including the
Company, have become subject to an increasing number of lawsuits alleging
negligence or related legal theories, many of which involve large claims and
significant legal costs. The Company is from time to time subject to such suits
as a result of the nature of its business. The Company currently maintains
insurance policies in amounts and with such coverage and deductibles as it
believes are adequate, based on the nature and risks of its business, historical
experience and industry standards. The Company also currently maintains
professional liability insurance and general liability insurance. The Company's
medical professional liability coverage is limited to $1,000,000 per occurrence
and $3,000,000 in the aggregate for all claims per annual policy period. The
non-medical professional liability insurance coverage is limited to $5,000,000
per wrongful act and $7,000,000 in the aggregate. The general liability
insurance is limited to $1,000,000 per facility/per event, with additional
specific limitations of $100,000 per event (premises damage), $5,000 per event
(medical expenses) and $1,000 per event (resident's property damage). The
Company also has an umbrella excess liability protection policy in the total
amount of $25,000,000. There can be no assurance that claims will not arise
which are in excess of the Company's insurance coverage or are not covered by
the Company's insurance coverage. A successful claim against the Company not
covered by, or in excess of, the Company's insurance could have a material
adverse effect on the Company's financial condition and results of operations.
Claims against the Company, regardless of their merit or eventual outcome, may
also have a material adverse effect on the Company's ability to attract
residents or expand its business and would require management to devote time to
matters unrelated to the operation of the Company's business. In addition, the
Company's insurance policies must be renewed annually and there can be no
assurance that the Company will be able to continue to obtain liability
insurance coverage in the future or, if available, that such coverage will be
available on acceptable terms.




                                      -16-
<PAGE>   17
EMPLOYEES

           At December 31, 1997, the Company had 3,377 employees, including
2,060 full-time employees, of which 105 were employed at the Company's
headquarters. The Company believes employee relations are good.

ITEM 2.    PROPERTIES.

           The Company leases its corporate office, regional offices, and
warehouse space under various leases. The leases have terms of five to seven
years. The corporate lease has an option to terminate after twelve months from
the most recent expansion commencement. The initial annual lease payments of the
corporate leases amount to $258,000, and the base rent is subject to annual
increases based on the Consumer Price Index from a minimum of 2% to a maximum
cap of 3% per year. The initial annual base rent payments under the warehouse
lease amount to $148,000. Various other leases expire during 1998 and 1999.

           The Company also has entered into operating leases for five
facilities and three long-term ground leases related to other facilities. The
operating lease terms vary from fifteen years, with two ten-year extension
options. The ground leases have terms of seventy-five years to ninety-nine
years. For information regarding facilities owned by the Company or in which it
holds interests, see "Item 1. Business -- Owned Facilities" and "-- Facility
Development."

ITEM 3.    LEGAL PROCEEDINGS.

           The Company is involved in various lawsuits and claims arising in the
normal course of business. In the opinion of management of the Company, although
the outcomes of these suits and claims are uncertain, in the aggregate they
should not have a material adverse effect on the Company's business, financial
condition and results of operations.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

           Not applicable.

                                     PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
           MATTERS.

           The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "SNRZ." Other information set forth under the caption
"Corporate Information" on page 40 of the Company's 1997 Annual Report to
Stockholders is incorporated by reference herein.

ITEM 6.    SELECTED FINANCIAL DATA.

           The information set forth under the caption "Selected Financial and
Operating Data" on page 17 of the Company's 1997 Annual Report to Stockholders
is incorporated by reference herein.

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATION

           The information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 18 to 24
of the Company's 1997 Annual Report to Stockholders is incorporated by reference
herein.



                                      -17-
<PAGE>   18


ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

           Not applicable.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

           The consolidated financial statements set forth on pages 26 to 37 of
the Company's 1997 Annual Report to Stockholders are incorporated by reference
herein.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE.

           Not applicable.

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

           The information set forth under the captions "Election of Directors
-- Information as to Nominees and Other Directors," "-- Other Executive
Officers," and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's 1998 Annual Meeting Proxy Statement, which the Company intends to file
within 120 days after its fiscal year-end, is incorporated by reference herein.

ITEM 11.   EXECUTIVE COMPENSATION.

           The information set forth under the captions "Compensation of
Directors" and "Executive Compensation and Other Information" in the Company's
1998 Annual Meeting Proxy Statement, which the Company intends to file within
120 days after its fiscal year-end, is incorporated herein by reference.

ITEM 12.   SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

           The information set forth under the captions "Stock Owned by
Management" and "Principal Holders of Voting Securities" in the Company's 1998
Annual Meeting Proxy Statement, which the Company intends to file within 120
days after its fiscal year-end, is incorporated by reference herein.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

           The information set forth under the caption "Certain Transactions" in
the Company's 1998 Annual Meeting Proxy Statement, which the Company intends to
file within 120 days after its fiscal year-end, is incorporated by reference
herein.

                                     PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

           (a) List of documents filed as part of Form 10-K.

               (1)  Financial Statements:

                    Consolidated Balance Sheets -- December 31, 1997 and 1996.

                    Consolidated Statements of Operations for the years ended
                    December 31, 1997, 1996 and 1995.

                    Consolidated Statements of Changes in Stockholders'
                    (Deficit) Equity.

                    Consolidated Statements of Cash Flows for the years ended
                    December 31, 1997, 1996 and 1995.



                                      -18-
<PAGE>   19

                    Notes to Consolidated Financial Statements.

                    Report of Independent Auditors.

                    The remaining information appearing in the Company's 1997
                    Annual Report to Stockholders is not deemed to be filed as
                    part of this Report, except as expressly provided herein.

               (2)  Financial Statements Schedules:

                    All schedules for which provision is made in the applicable
                    accounting regulations of the Securities and Exchange
                    Commission are not required under the related instructions
                    or are inapplicable or are included in the consolidated
                    financial statements.

               (3)  Exhibits:

                    The Exhibits filed as part of this Annual Report on Form
                    10-K are listed on the Index to Exhibits on pages 23 to 28
                    and are incorporated by reference herein.

           (b) Reports on Form 8-K.

               None.

           (c) Exhibits.

               The Company hereby files as part of this Annual Report on Form
               10-K the Exhibits listed in the Index to Exhibits.

           (d) Financial Statement Schedules.

               Not applicable.



                                      -19-
<PAGE>   20


                                   SIGNATURES

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

                                             SUNRISE ASSISTED LIVING, INC.
                                      ------------------------------------------
                                                     Registrant

                                      By:  /s/ Paul J. Klaassen
                                         ---------------------------------------
                                         Paul J. Klaassen
                                         Chairman of the Board and
                                         Chief Executive Officer

                                                      3/26/98
                                         ---------------------------------------
                                                        Date

           Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<S>                                               <C>
By: /s/ Paul J. Klaassen                                        3/26/98
    ----------------------------------            ------------------------------------
     Paul J. Klaassen                                             Date
     Chairman of the Board, and
     Chief Executive Officer
     (Principal Executive Officer)

By: /s/ David W. Faeder                                         3/24/98
    ----------------------------------            ------------------------------------
     David W. Faeder                                              Date
     President, Chief Financial
     Officer and Director
     (Principal Financial Officer)

By: /s/ Larry E. Hulse                                          3/26/98
    ----------------------------------            ------------------------------------
     Larry E. Hulse                                               Date
     Controller
     (Principal Accounting Officer)

By: /s/ Ronald V. Aprahamian                                    3/24/98
    ----------------------------------            ------------------------------------
     Ronald V. Aprahamian                                         Date
     Director

By:
    ----------------------------------            ------------------------------------
     David G. Bradley                                             Date
     Director
</TABLE>



                                      -20-
<PAGE>   21

<TABLE>
<S>                                               <C>
By: /s/ Thomas J. Donohue                                       3/29/98
    ----------------------------------            ------------------------------------
     Thomas J. Donohue                                            Date
     Director

By:
    ----------------------------------            ------------------------------------
     Richard A. Doppelt                                           Date
     Director

By: /s/ Teresa M. Klaassen                                      3/24/98
    ----------------------------------            ------------------------------------
     Teresa M. Klaassen                                           Date
     Executive Vice President,
     Secretary and Director

By:
    ----------------------------------            ------------------------------------
     Scott F. Meadow                                              Date
     Director
</TABLE>



                                      -21-
<PAGE>   22





                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                                                               Page (by
                                                                                              Sequential
Exhibit                                                                                       Numbering
Number                           Identity of Exhibit                                           System)
------                           -------------------                                          ---------
<S>        <C>                                                                                <C>
3.1        Restated Certificate of Incorporation of the Company (Exhibit 3.1 to
           the Company's Form S-1 Registration Statement No. 333- 13731).

3.2        Amended and Restated Bylaws of the Company, as amended (Exhibit 3 to
           the Company's Form 10-Q for the quarter ended September 30, 1997).

4.1        Form of Common Stock certificate (Exhibit 4.1 to the Company's Form
           S-1 Registration Statement No. 333-13731).

4.2        Stockholder Rights Agreement (Exhibit 4.2 to the Company's Form S-1
           Registration Statement No. 333-13731).

10.1       Assignment and Contribution Agreement, effective as of January 4,
           1995, by and between Paul and Teresa Klaassen and the Company
           (Exhibit 10.1.1 to the Company's Form S-1 Registration Statement No.
           333-2582).

10.2       Assignment and Contribution Agreement, dated as of January 4, 1995,
           by and between Paul J. Klaassen and Teresa M. Klaassen, Sunrise
           Partners, L.P. and Sunrise Assisted Living Investments, Inc. (Exhibit
           10.1.2 to the Company's Form S-1 Registration Statement No.
           333-2582).

10.3       Letter Agreement, dated January 4, 1995, from Paul J. Klaassen and
           Teresa M. Klaassen to the Series A Preferred Stockholders regarding
           cash distributions from Sunrise Retirement Investments, Inc., Sunrise
           Terrace of Gunston, Inc., Sunrise Terrace of Countryside, Inc. and
           Sunrise Atrium, Inc. (Exhibit
</TABLE>


                                      -22-
<PAGE>   23


<TABLE>
<S>        <C>
           10.19 to the Company's Form S-1 Registration Statement No. 33-2852).

10.4       Registration Agreement, dated January 4, 1995, by and among the
           Company, the Investors (as defined therein) and Paul and Teresa
           Klaassen (Exhibit 10.3 to the Company's Form S-1 Registration
           Statement No. 333-2582).

10.5       Promissory Note, dated June 8, 1994, executed by Sunrise Assisted
           Living Limited Partnership in favor of General Electric Capital
           Corporation (Exhibit 10.4 to the Company's Form S-1 Registration
           Statement No. 333-2582).

10.6       Indemnity Agreement dated as of June 8, 1994 by Paul J. Klaassen and
           Teresa M. Klaassen to and for the benefit of General Electric Capital
           Corporation (Exhibit 10.4.1 to the Company's Form S-1 Registration
           Statement No. 333-2582).

10.7       First Loan Modification Agreement dated as of February 15, 1996 by
           and between General Electric Capital Corporation and Sunrise Assisted
           Living Limited Partnership (Exhibit 10.4.2 to the Company's Form S-1
           Registration Statement No. 333-2582).

10.8       Second Loan Modification Agreement dated as of May 1, 1996 by and
           between General Electric Capital Corporation and Sunrise Assisted
           Living Limited Partnership (Exhibit 10.4.3 to the Company's Form S-1
           Registration Statement No. 333-2582).

10.9       Letter Agreement dated as of May 1, 1996 by and between General
           Electric Capital Corporation and Sunrise Assisted Living Limited
           Partnership (Exhibit 10.4.4 to the Company's Form S-1 Registration
           Statement No. 333-2582).

10.10      Letter agreement dated as of December 30, 1996 by and between General
           Electric Capital Corporation and Sunrise Assisted Living Partnership
           (Exhibit 10.11 to the Company's 1996 Form 10-K).
</TABLE>



                                      -23-
<PAGE>   24


<TABLE>
<S>        <C>
10.11      Third Loan Modification Agreement dated as of March 4, 1997 by and
           between General Electric Capital Corporation and Sunrise Assisted
           Living Limited Partnership.

10.12      Credit Line Deed of Trust and Security Agreement, Assignment of
           Leases and Rents, Fixture Filing and Financing Statement, dated as of
           June 8, 1994 (Arlington, Bluemont Park and Falls Church) (Exhibit
           10.5 to the Company's Form S-1 Registration Statement No. 333-2582).

10.13      Credit Line Deed of Trust and Security Agreement, Assignment of
           Leases and Rents, Fixture Filing and Financing Statement, dated as of
           June 8, 1994 (Gunston and Oakton) (Exhibit 10.6 to the Company's Form
           S-1 Registration Statement No. 333-2582).

10.14      Credit Line Deed of Trust and Security Agreement, Assignment of
           Leases and Rents, Fixture Filing and financing Statement, dated as of
           June 8, 1994 (Fairfax Leasehold) (Exhibit 10.7 to the Company's Form
           S-1 Registration Statement No. 333-2582).

10.15      Credit Line Deed of Trust and Security Agreement, Assignment of
           Leases and Rents, Fixture Filing and Financing Statement, dated as of
           June 8, 1994 (Warrenton) (Exhibit 10.8 to the Company's Form S-1
           Registration Statement No. 333-2582).

10.16      Credit Line Deed of Trust and Security Agreement, Assignment of
           Leases and Rents, Fixture Filing and Financing Statement, dated as of
           June 8, 1994 (Countryside and Leesburg) (Exhibit 10.9 to the
           Company's Form S-1 Registration Statement No. 333-2582).

10.17      First Mortgage and Security Agreement, Assignment of Leases and
           Rents, Fixture Filing and Financing Statement, dated as of June 8,
           1994 (Boca Raton) (Exhibit 10.10 to the Company's Form S-1
           Registration Statement No. 333-2582).

10.18      First Deed of Trust and Security Agreement, Assignment of Leases and
           Rents, Fixture Filing and
</TABLE>


                                      -24-
<PAGE>   25


<TABLE>
<S>        <C>
           Financing Statement, dated as of June 8, 1994 (Frederick) (Exhibit
           10.11 to the Company's Form S-1 Registration Statement No. 333-2582).

10.19      First Deed of Trust and Security Agreement, Assignment of Leases and
           Rents, Fixture Filing and Financing Statement, Dated as of June 8,
           1994 (Mercer Island) (Exhibit 10.12 to the Company's Form S-1
           Registration Statement No. 333-2582).

10.20      1995 Stock Option Plan, as amended.

10.21      1996 Directors' Stock Option Plan, as amended.

10.22      Stock Option Agreement, entered into, effective as of January 4,
           1995, by and between the Company and David W. Faeder (Exhibit 10.14
           to the Company's Form S-1 Registration Statement No. 333-2582).

10.23      Amendment No. 1 to Stock Option Agreement by and between the Company
           and David W. Faeder (Exhibit 10.14.1 to the Company's Form S-1
           Registration Statement No. 333-13731).

10.24      1996 Non-Incentive Stock Option Plan, as amended.

10.25      1997 Stock Option Plan, as amended.

10.26      Amended and Restated Lease Agreement and Assignment of Leasehold
           Right, dated June 6, 1994, by and among Barbara M. Volentine and
           Teresa M. Klaassen, the Executor of the Estate of Eldon J. Merritt,
           Sunrise Assisted Living Limited Partnership Assisted Living Group --
           Fairfax Associates, and Sunrise Foundation, Inc. (Exhibit 10.15 to
           the Company's Form S-1 Registration Statement No. 333-2582).

10.27      Ground Lease, dated June 7, 1994, by and between Sunrise Assisted
           Living Limited Partnership and Paul J. Klaassen and Teresa M.
           Klaassen (Exhibit 10.16 to the Company's Form S-1 Registration
           Statement No. 333-2582).

10.28      Amended and Restated Agreement of Sublease, Indemnification and
           Easements dated February 5,
</TABLE>



                                      -25-
<PAGE>   26

<TABLE>
<S>        <C>
           1995 by and between Assisted Living Group -- Fairfax Associates and
           Sunrise Foundation, as amended (Exhibit 10.17 to the Company's Form
           S-1 Registration Statement No. 333-2582).

10.29      Loan Agreement, dated as of March 19, 1996, between the Company and
           Creditanstalt-Bankverein (Exhibit 10.20 to the Company's Form S-1
           Registration Statement No. 333-2582).

10.30      Warrant Agreement, dated as of March 19, 1996, between the Company
           and Creditanstalt-Bankverein (Exhibit 10.21 to the Company's Form S-1
           Registration Statement No. 333-2582).

10.31.1    Amended, Restated, Consolidated and Increased Master Promissory Note
           dated as of December 23, 1997 by and between NationsBank, N. A. as
           agent and for certain additional lenders and Sunrise East Assisted
           Living Limited Partnership.

10.31.2    Amended and Restated Financing and Security Agreement dated as of
           December 23, 1997 by and between NationsBank, N. A. as agent and for
           certain additional lenders and Sunrise East Assisted Living Limited
           Partnership.

10.31.3    Amended and Restated Master Construction Loan Agreement dated as of
           December 23, 1997 by and between NationsBank, N. A. as agent and for
           certain additional lenders and Sunrise East Assisted Living Limited
           Partnership.

10.31.4    Management Fee Subordination Agreement dated as of December 23, 1997
           by and between NationsBank, N. A. as agent and for certain additional
           lenders and Sunrise East Assisted Living Limited Partnership.

10.31.5    Amended and Restated Pledge, Assignment and Security Agreement dated
           as of December 23, 1997 by and between NationsBank, N. A. as agent
           and for certain additional lenders and Sunrise East Assisted Living
           Limited Partnership.
</TABLE>



                                      -26-
<PAGE>   27


<TABLE>
<S>        <C>
10.31.6    Master Guaranty of Performance dated as of December 23, 1997 by and
           between NationsBank, N. A. as agent and for certain additional
           lenders and Sunrise East Assisted Living Limited Partnership.

10.31.7    Amended and Restated Collateral Assignment of Operating Agreements
           and Management Contracts dated as of December 23, 1997 by and
           between NationsBank, N. A. as agent and for certain additional
           lenders and Sunrise East Assisted Living Limited Partnership.

10.31.8    Amended and Restated Collateral Assignment of Licenses, Participation
           Agreements and Resident Agreements dated as of December 23, 1997 by
           and between NationsBank, N. A. as agent and for certain additional
           lenders and Sunrise East Assisted Living Limited Partnership.

10.31.9    Amended and Restated Master Guarantee of Payment Agreement dated as
           of December 23, 1997 by and between NationsBank, N. A. as agent and
           for certain additional lenders and Sunrise East Assisted Living
           Limited Partnership.

10.32      Form of Indemnification Agreement (Exhibit 10.24 to the Company's
           Form S-1 Registration Statement No. 333-2582).

13         1997 Annual Report to Stockholders (which is not deemed to be "filed"
           except to the extent that portions thereof are expressly incorporated
           by reference in this Annual Report on Form 10-K).

21         Subsidiaries of the Registrant.

23         Consent of Ernst & Young LLP.

27.1       Financial Data Schedule as of and for the year ended December
           31, 1997.

27.2       Restated Financial Data Schedule as of and for the nine months ended
           September 30, 1997, as of and for the six months ended June 30,
           1997, and as of and for the three months ended March 31, 1997.

27.3       Restated Financial Data Schedule as of and for the year ended
           December 31, 1996, as of and for the nine  months ended September
           30, 1996, and as of and for the six months ended June 30, 1996.

</TABLE>



                                      -27-