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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549







FORM 10-K

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




For the fiscal year ended December 31, 2002


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
(State or other jurisdiction of
incorporation or organization) |  | 54-1746596
(I.R.S. Employer
Identification No.)
|                                                                        |  |                                                
|7902 Westpark Drive
McLean, VA
(Address of principal
executive offices) |  | 22102
(Zip Code)                               

Registrants telephone number, including area code:

(703) 273-7500


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

|                                                           |  |                                                                  
|---------------------------------------------------------- |  | -----------------------------------------------------------------
|Title of Each Class
Common stock, par value
$.01 per share |  | Name of Each Exchange on Which Registered
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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.    [X]

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

The aggregate market value of the common stock held by non-affiliates of
the registrant computed by reference to the price at which the common stock was
last sold as of June 28, 2002 was $283,953,102. */

The number of shares of the registrants common stock outstanding at March
1, 2003 was 22,440,574.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants 2003 annual meeting proxy statement are
incorporated by reference into Part III hereof.

*/    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.





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TABLE OF CONTENTS

|               |  |          |  |                                                                                                |  |         |    | 
|-------------- |  | -------- |  | ---------------------------------------------------------------------------------------------- |  | ------- | -- | 
|               |  |          |  |                                                                                                |  | Page(s)
|               |  |          |  |                                                                                                |  |        
|PART I         |  | Item 1.  |  | Business                                                                                       |  |         | 3  | 
|               |  | Item 2.  |  | Properties                                                                                     |  |         | 33 | 
|               |  | Item 3.  |  | Legal Proceedings                                                                              |  |         | 33 | 
|               |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  |         | 33 | 
|PART II        |  | Item 5.  |  | Market for Registrants Common Equity and
Related Stockholders Matters                         |  |         | 33 | 
|               |  | Item 6.  |  | Selected Financial Data                                                                        |  |         | 35 | 
|               |  | Item 7.  |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations          |  |         | 37 | 
|               |  | Item 7A. |  | Quantitative and Qualitative Disclosures
About Market Risk                                     |  |         | 64 | 
|               |  | Item 8.  |  | Financial Statements and Supplementary Data                                                    |  |         | 64 | 
|               |  | Item 9.  |  | Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure           |  |         | 64 | 
|PART III       |  | Item 10. |  | Directors and Executive Officers of the Registrant                                             |  |         | 64 | 
|               |  | Item 11. |  | Executive Compensation                                                                         |  |         | 64 | 
|               |  | Item 12. |  | Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters |  |         | 64 | 
|               |  | Item 13. |  | Certain Relationships and Related Transactions                                                 |  |         | 65 | 
|               |  | Item 14. |  | Controls and Procedures                                                                        |  |         | 65 | 
|PART IV        |  | Item 15. |  | Exhibits, Financial Statement Schedules, and Reports
on Form 8-K                               |  |         | 65 | 
|SIGNATURES     |  |          |  |                                                                                                |  | 67      |   
|CERTIFICATIONS |  |          |  | 69                                                                                             | 

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This Form 10-K contains certain forward-looking statements that involve
risks and uncertainties. Although Sunrise believes the expectations reflected
in such forward-looking statements are based on reasonable assumptions, there
can be no assurance that Sunrises expectations will be realized. Sunrises
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including, but not
limited to, development and construction risks, acquisition risks, licensing
risks, business conditions, competition, changes in interest rates, our ability
to execute on our sale/manage back program, market factors that could affect
the value of our properties, the risks of downturns in economic conditions
generally, success in integrating Marriott Senior Living Services operations,
satisfaction of closing conditions and availability of financing for
development and acquisitions. Some of these factors are discussed elsewhere
herein. We assume no obligation to update or supplement forward-looking
statements that become untrue because of subsequent events. Unless the context
suggests otherwise, references herein to Sunrise, the Company,we, us
and our mean Sunrise Assisted Living, Inc. and its consolidated subsidiaries.

PART I

Item 1. Business

Overview

Sunrise is a provider of senior living services in the United States,
Canada and the United Kingdom. Founded in 1981, Sunrise began with a simple
but innovative vision  to create an alternative senior living option that
would emphasize quality of life and quality of care. As of December 31, 2002,
Sunrise operated 200 communities in the United States, seven communities in
Canada and two communities in the United Kingdom, with a total resident
capacity of more than 16,000, including 181 communities owned by Sunrise or in
which it has an ownership interest and 28 communities managed for third
parties. Sunrise has traditionally served as an operator of assisted living
communities but has also offered independent living services and skilled
nursing services at some communities. Sunrise also develops senior living
communities for itself and for joint ventures in which it retains an ownership
interest.

Sunrises long-range strategic objective is to transform itself into a
senior living management services company. Sunrise believes that this
transformation will result in its revenue and earnings becoming increasingly
based on long-term management contracts resulting in more stable and
predictable revenue and earnings streams. Through the execution of its
business plan, Sunrise has made significant progress toward this goal. Sunrise
expects that its progress in this area will be accelerated primarily by (1) the
closing of our acquisition and subsequent integration of Marriott Senior Living
Services, Inc. (see Recent Developments

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below), (2) the development of new communities primarily through joint
ventures and (3) the continuation of our sale/long-term manage back program.

Recent Developments

In December 2002, Sunrise signed a definitive purchase agreement with
Marriott International, Inc. to acquire all of the outstanding stock of
Marriotts wholly owned subsidiary, Marriott Senior Living Services, Inc.,
which owns and operates senior independent full-service and assisted living
communities. Upon the closing of this transaction, which is currently expected
to occur in late March 2003, Sunrise expects to assume management of an
additional 126 operating properties with a total resident capacity of 23,157.
These properties are expected to consist of 110 management contracts and 16
operating leases. Through Sunrises acquisition of all of Marriott Senior
Livings outstanding stock, Sunrise will also acquire 12 land parcels as well
as certain other assets of Marriott Senior Living. At closing, Marriott Senior
Livings approximately 15,000 employees are expected to remain employed by
Marriott Senior Living, which is expected to be renamed Sunrise Senior Living
Services. The closing of this transaction is subject to the receipt of
required regulatory approvals and other closing conditions.

To reflect the substantial expansion of Sunrises senior living business
and the broad scope of services the combined organization will offer, Sunrise
intends to change its name to Sunrise Senior Living, Inc. In addition, in
connection with this transaction, J.W. Marriott, Jr., chairman and chief
executive officer of Marriott International, will join Sunrises Board of
Directors upon the closing of the transaction.

Sunrise will pay approximately $88 million in cash, subject to various
adjustments set forth in the purchase agreement, to acquire all of the
outstanding stock of Marriott Senior Living. Sunrise will also assume
approximately $38 million of working capital liabilities and other funding
obligations, including credit enhancements, and approximately $23 million of
life care endowment obligations, the majority of which are expected to be
refinanced with proceeds from the issuance of new endowment obligations as new
residents enter the communities. In addition, pursuant to the terms of the
purchase agreement, Sunrise expects to pay Marriott approximately $10 million
in connection with Marriott Senior Livings expected acquisition of certain
real property prior to the closing of the transaction. Sunrise will use cash
on hand, including proceeds from its recently completed sale/long-term manage
back transactions, and capacity under its various credit facilities to fund
this purchase price.

The Marriott Senior Living portfolio currently includes 126 properties
located in 29 states with a resident capacity of 23,157. The majority of the
properties are clustered in major metropolitan markets, which is consistent
with Sunrises operating strategy. Based on data provided to us by Marriott
International, approximately 50 percent (11,605 resident capacity) of the
portfolio is assisted living, 34 percent (7,846 resident capacity) is
independent living and 16

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percent (3,706 resident capacity) is skilled nursing. At closing, the
properties are expected to be owned by six major owner groups with the two
largest owners comprising 66 percent of the portfolio. Based on data provided
to us by Marriott International, the two largest owners are CNL Retirement
Properties, Inc. (38 properties) and Senior Housing Properties Trust (45
properties). Sunrise is aware of pending litigation between Senior Housing
Properties Trust and Marriott. The definitive purchase agreement between
Sunrise and Marriott provides protection for Sunrise regarding certain
management contracts, including the contracts for the Senior Housing Properties
Trust properties.

The Senior Living Industry

The senior living industry encompasses a broad spectrum of senior living
service and care options, which include independent living, assisted living and
skilled nursing care.



| |  | Independent livingis designed to meet the needs of seniors who choose
to live in an environment surrounded by their peers where they receive
services such as housekeeping, meals and activities, but are not
reliant on assistance with activities of daily living (for example,
bathing, eating and dressing), although some residents may contract
out for those services.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Assisted livingmeets the needs of seniors who seek housing with
supportive care and services including assistance with activities of
daily living, Alzheimers care and other services (for example,
housekeeping, meals and activities).                                                                                                                                    
| 
| |  | Skilled nursingmeets the needs of seniors whose care needs require
24-hour skilled nursing services or who are receiving rehabilitative
services following an adverse event (for example, broken hip and
stroke).                                                                                                                                                            

In all of these settings, seniors may elect to bring in additional care
and services as needed, such as home-health care and end-of-life or hospice
care.

The senior living industry is highly fragmented and characterized by
numerous senior living operators. Senior living providers may operate
freestanding independent living, assisted living or skilled nursing residences,
or communities that feature a combination of senior living options such as
continuing care retirement communities (CCRCs), which typically consist of
large independent living campuses with assisted living and skilled nursing
sections. The level of care and services offered by providers varies along with
the size of communities, number of residents served and design of properties
(for example, purpose-built communities or refurbished structures).

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Sunrise Senior Living Services

Throughout its history, Sunrise has advocated a resident-centered approach
to resident care and service delivery. In select communities, Sunrise offers
independent living services, which include housing, meals, transportation,
activities and housekeeping, and in some communities, Sunrise provides licensed
skilled nursing services for residents who require 24-hour skilled nursing
care. The substantial majority of Sunrises communities currently are assisted
living communities, which offer basic care and services for seniors who need
assistance with some activities of daily living.

Assisted Living

Upon move-in to an assisted living community, Sunrise assesses each
resident, generally with the residents family and physician, and develops an
individualized service plan for the resident. This individual service plan
includes the selection of resident accommodations and a determination of the
appropriate level of care for such resident. The plan is periodically reviewed
and updated by Sunrise, and communicated to the resident, the residents
family, or both.

The range of services offered by Sunrise in its assisted living
communities includes: basic care, consisting of assistance with activities of
daily living and other personalized support services; plus care, consisting of
more frequent and intensive assistance or increased care; and reminiscence
care, consisting of care programs and services to help cognitively impaired
residents, including residents with Alzheimers disease. By offering a full
range of services, Sunrise believes it is better able to accommodate residents
changing needs as they age and develop further physical or cognitive frailties.
Daily net resident fees are generally revised annually whereas fees for
additional care are revised when a change in care needs arises.

Basic Assisted Living Care

Sunrises basic care program provided to assisted living residents
includes:



| |  |  | assistance with activities of daily living, such as eating,
bathing, dressing, personal hygiene, and grooming;
| | - |  | --------------------------------------------------------------------------------------------------------------
|
| |  |  | three meals per day served in a common dining room;                                                           
|
| |  |  | coordination of special diets;                                                                                
|
| |  |  | 24-hour security; emergency call systems in each unit;                                                        
|
| |  |  | transportation to stores and community services;                                                              

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| |  |  | assistance with coordination of physician care, physical
therapy and other medical services;
| | - |  | --------------------------------------------------------------------------------------------
|
| |  |  | health promotion and related programs;                                                      
|
| |  |  | housekeeping services; and                                                                  
|
| |  |  | social and recreational activities.                                                         

Assisted Living Plus Care

Through Sunrises assisted living plus care program, assisted living
residents who require more frequent or intensive assistance or increased care
or supervision are provided extra care and supervision. Sunrise charges an
additional daily fee based on additional staff hours of care and services
provided. The plus care program allows Sunrise, 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,
2002, approximately 40% of Sunrises assisted living residents participated in
the plus care program.

Reminiscence Care

Sunrise believes its reminiscence care program distinguishes it from many
other senior living providers that do not provide such specialized care.
Sunrises reminiscence program provides the attention, care programs and
services needed to help cognitively impaired residents, including residents
with Alzheimers disease, maintain a higher quality of life. Specially trained
staff members provide basic care and other specifically designed care and
services to cognitively impaired residents in separate areas of communities.
Sunrise charges each cognitively impaired resident a daily fee that includes
additional staff time per resident 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, 2002,
approximately 33% of Sunrises assisted living residents participated in the
reminiscence program.

Medication Management

Many of Sunrises assisted living 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. Sunrise
charges an additional fixed daily fee for this service.

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Independent Living, Skilled Nursing and Other Services

In some of its communities, Sunrise also offers independent living for
residents and in other communities, Sunrise offers skilled nursing care.
Sunrise has team members specially trained to serve residents in these
communities in compliance with the appropriate state and federal licensing
statutes. Additionally, Sunrise, through its minority interest in a joint
venture, offers At-Home Assisted Living services in several east coast markets.
The At-Home program offers assisted living services by highly trained staff
members in customers own homes. The At-Home program offers different services
(for example, emergency response/notification, medication set-up and
monitoring, health monitoring and assistance with activities of daily living),
and levels of care from which customers may choose to meet their specific care
needs.

While Sunrise serves the vast majority of a residents needs with its own
staff, some services, such as hospice care, physician care, infusion therapy,
physical and speech therapy and other home health care services, may be
provided to residents at Sunrise communities by third parties. Sunrises staff
members assist residents in locating qualified providers for such health care
services.

Senior Living Community Resident Fees

The average daily resident fee, consisting of net resident fees plus
additional care fees combined, for owned senior living communities opened or
operated by Sunrise for at least 12 months, or that have achieved occupancy
percentages of 95% or above, was approximately $109 for 2002, $104 for 2001 and
$106 for 2000. Approximately 99% of Sunrises resident fee revenues are
derived from private pay sources.

Managed Communities

In addition to managing its owned communities and communities in which it
retains an ownership interest, Sunrise also manages for third-party owners 28
operating communities and two communities under development with a total
resident capacity of over 2,500. The management contracts for these properties
have various terms, in some cases, running through December 2030. Sunrise
intends to continue to capitalize on its brand awareness and further its
transformation to a management services company by seeking to enter into
third-party management and development contracts with other owners of senior
living properties.

Properties

As of December 31, 2002, Sunrise operated 209 senior living properties
with a resident capacity of more than 16,000. In addition, Sunrise had 24
properties with a resident capacity of
2,055 under construction. Sunrise manages both properties that it owns or
in which it has an ownership interest and properties owned by third parties.
The following charts summarize

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Sunrises portfolio of operating properties and
properties under construction as of December 31, 2002.

Operating Properties

|                      |  |              |    |         |                   |         |     |  |              |  |         |  |         |  |  |       |       |  |  |       |  |  |  |       | 
|--------------------- |  | ------------ | -- | ------- | ----------------- | ------- | --- |  | ------------ |  | ------- |  | ------- |  |  | ----- | ----- |  |  | ----- |  |  |  | ----- | 
|                      |  | Properties   |    |         | Resident Capacity
|                      |  |              |    |         |                  
|                      |  |              |    |         |                   | Joint   |     |  |              |  |         |  |         |  |  |       | Joint |  |  |       | 
|Location              |  | Consolidated |    | Venture |                   | Managed |     |  | Consolidated |  | Venture |  | Managed
|                      |  |              |    |         |                   |         |     |  |              |  |         |  |        
|California            |  |              | 9  |         |                   |         | 11  |  |              |  | 2       |  |         |  |  | 740   |       |  |  | 957   |  |  |  | 161   | 
|Colorado              |  |              |   |         |                   |         | 6   |  |              |  |        |  |         |  |  |      |       |  |  | 533   |  |  |  |      | 
|Connecticut           |  |              | 2  |         |                   |         | 1   |  |              |  |        |  |         |  |  | 168   |       |  |  | 102   |  |  |  |      | 
|District of Columbia  |  |              |   |         |                   |         |    |  |              |  | 1       |  |         |  |  |      |       |  |  |      |  |  |  | 119   | 
|Florida               |  |              | 1  |         |                   |         |    |  |              |  |        |  |         |  |  | 196   |       |  |  |      |  |  |  |      | 
|Georgia               |  |              | 3  |         |                   |         | 5   |  |              |  | 6       |  |         |  |  | 98    |       |  |  | 630   |  |  |  | 383   | 
|Illinois              |  |              | 3  |         |                   |         | 9   |  |              |  |        |  |         |  |  | 284   |       |  |  | 829   |  |  |  |      | 
|Indiana               |  |              | 4  |         |                   |         |    |  |              |  |        |  |         |  |  | 279   |       |  |  |      |  |  |  |      | 
|Louisiana             |  |              |   |         |                   |         | 2   |  |              |  | 2       |  |         |  |  |      |       |  |  | 161   |  |  |  | 113   | 
|Maryland              |  |              | 5  |         |                   |         | 1   |  |              |  | 4       |  |         |  |  | 466   |       |  |  | 71    |  |  |  | 364   | 
|Massachusetts         |  |              | 1  |         |                   |         | 4   |  |              |  | 5       |  |         |  |  | 31    |       |  |  | 306   |  |  |  | 357   | 
|Michigan              |  |              | 2  |         |                   |         | 5   |  |              |  |        |  |         |  |  | 157   |       |  |  | 404   |  |  |  |      | 
|Minnesota             |  |              | 10 |         |                   |         | 2   |  |              |  |        |  |         |  |  | 292   |       |  |  | 200   |  |  |  |      | 
|Missouri              |  |              | 1  |         |                   |         |    |  |              |  |        |  |         |  |  | 89    |       |  |  |      |  |  |  |      | 
|New Jersey            |  |              | 2  |         |                   |         | 13  |  |              |  | 2       |  |         |  |  | 169   |       |  |  | 1,086 |  |  |  | 177   | 
|New Mexico            |  |              |   |         |                   |         | 2   |  |              |  |        |  |         |  |  |      |       |  |  | 101   |  |  |  |      | 
|New York              |  |              | 4  |         |                   |         | 7   |  |              |  |        |  |         |  |  | 439   |       |  |  | 625   |  |  |  |      | 
|North Carolina        |  |              | 3  |         |                   |         | 1   |  |              |  |        |  |         |  |  | 220   |       |  |  | 91    |  |  |  |      | 
|North Dakota          |  |              | 2  |         |                   |         |    |  |              |  |        |  |         |  |  | 96    |       |  |  |      |  |  |  |      | 
|Ohio                  |  |              | 12 |         |                   |         | 6   |  |              |  |        |  |         |  |  | 761   |       |  |  | 392   |  |  |  |      | 
|Pennsylvania          |  |              | 3  |         |                   |         | 11  |  |              |  | 1       |  |         |  |  | 223   |       |  |  | 905   |  |  |  | 177   | 
|South Carolina        |  |              | 1  |         |                   |         |    |  |              |  |        |  |         |  |  | 39    |       |  |  |      |  |  |  |      | 
|Virginia              |  |              | 12 |         |                   |         | 4   |  |              |  | 5       |  |         |  |  | 691   |       |  |  | 360   |  |  |  | 471   | 
|Washington            |  |              | 1  |         |                   |         | 1   |  |              |  |        |  |         |  |  | 59    |       |  |  | 84    |  |  |  |      | 
|United Kingdom        |  |              |   |         |                   |         | 2   |  |              |  |        |  |         |  |  |      |       |  |  | 229   |  |  |  |      | 
|Canada                |  |              |   |         |                   |         | 7   |  |              |  |        |  |         |  |  |      |       |  |  | 715   |  |  |  |      | 
|                      |  |              |    |         |                   |         |     |  |              |  |         |  |         |  |  |       |       |  |  |       |  |  |  |       | 
|Total Open
Properties |  |              | 81 |         |                   |         | 100 |  |              |  | 28      |  |         |  |  | 5,497 |       |  |  | 8,781 |  |  |  | 2,322 | 
|                      |  |              |    |         |                   |         |     |  |              |  |         |  |         |  |  |       |       |  |  |       |  |  |  |       | 

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Properties Under Construction

|                                             |  |              |    |                   |  |         |     |              |  |              |    |         |  |  |       |  |  |  |        |  |  |  |       | 
|-------------------------------------------- |  | ------------ | -- | ----------------- |  | ------- | --- | ------------ |  | ------------ | -- | ------- |  |  | ----- |  |  |  | ------ |  |  |  | ----- | 
|                                             |  | Properties   |    | Resident Capacity
|                                             |  |              |    |                  
|Location                                     |  | Consolidated |    | Joint Venture     |  | Managed |     | Consolidated |  | JointVenture |    | Managed
|                                             |  |              |    |                   |  |         |     |              |  |              |    |        
|California                                   |  |              |   |                   |  |         | 8   |              |  |              | 1  |         |  |  |      |  |  |  | 624    |  |  |  | 86    | 
|Colorado                                     |  |              |   |                   |  |         | 1   |              |  |              |   |         |  |  |      |  |  |  | 101    |  |  |  |      | 
|Delaware                                     |  |              |   |                   |  |         | 1   |              |  |              |   |         |  |  |      |  |  |  | 71     |  |  |  |      | 
|District of Columbia                         |  |              |   |                   |  |         | 1   |              |  |              |   |         |  |  |      |  |  |  | 116    |  |  |  |      | 
|Georgia                                      |  |              | 1  |                   |  |         |    |              |  |              |   |         |  |  | 71    |  |  |  |       |  |  |  |      | 
|Illinois                                     |  |              | 1  |                   |  |         |    |              |  |              |   |         |  |  | 72    |  |  |  |       |  |  |  |      | 
|Michigan                                     |  |              | 1  |                   |  |         |    |              |  |              | 1  |         |  |  | 84    |  |  |  |       |  |  |  | 104   | 
|New York                                     |  |              | 2  |                   |  |         |    |              |  |              |   |         |  |  | 186   |  |  |  |       |  |  |  |      | 
|Pennsylvania                                 |  |              |   |                   |  |         | 1   |              |  |              |   |         |  |  |      |  |  |  | 92     |  |  |  |      | 
|Virginia                                     |  |              |   |                   |  |         | 1   |              |  |              |   |         |  |  |      |  |  |  | 106    |  |  |  |      | 
|United Kingdom                               |  |              |   |                   |  |         | 1   |              |  |              |   |         |  |  |      |  |  |  | 75     |  |  |  |      | 
|Canada                                       |  |              | 2  |                   |  |         | 1   |              |  |              |   |         |  |  | 161   |  |  |  | 106    |  |  |  |      | 
|                                             |  |              |    |                   |  |         |     |              |  |              |    |         |  |  |       |  |  |  |        |  |  |  |       | 
|Total Properties
Under Construction          |  |              | 7  |                   |  |         | 15  |              |  |              | 2  |         |  |  | 574   |  |  |  | 1,291  |  |  |  | 190   | 
|                                             |  |              |    |                   |  |         |     |              |  |              |    |         |  |  |       |  |  |  |        |  |  |  |       | 
|Total Properties
Open and Under
Construction |  |              | 88 |                   |  |         | 115 |              |  |              | 30 |         |  |  | 6,071 |  |  |  | 10,072 |  |  |  | 2,512 | 
|                                             |  |              |    |                   |  |         |     |              |  |              |    |         |  |  |       |  |  |  |        |  |  |  |       | 

Facility Development

As part of its growth strategy, Sunrise develops and acquires senior
living communities in top U.S. and international major metropolitan markets.
The company develops and acquires these senior living communities for itself
and for joint ventures in which it retains an ownership interest. Sunrise
targets sites for development and acquisition in major metropolitan areas and
their surrounding suburban communities. In evaluating a prospective market,
Sunrise considers a number of factors, including:



| |  |  | population;                 
| | - |  | ----------------------------
|
| |  |  | income and age demographics;

-10-





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| |  |  | 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.

Development

Since its initial public offering in June 1996 through December 31, 2002,
Sunrise has completed development of 119 new model communities with a resident
capacity of approximately 10,400. At December 31, 2002, Sunrise had 24
communities under construction with resident capacity of approximately 2,055
and had entered into contracts to purchase or lease 42 additional sites. These
sites are located in California, Colorado, Illinois, Louisiana, Michigan,
Missouri, New Jersey, New York, Pennsylvania, Washington, Canada, Germany and
the United Kingdom. Sunrise is pursuing additional development opportunities as
market conditions warrant. Sunrise bases its development primarily upon its
model facility that it has developed and refined since the first model facility
was designed in 1985. Use of a standard model allows Sunrise to control
development costs, maintain facility consistency and improve operational
efficiency. Use of the Sunrise model also creates brand awareness in
Sunrises markets.

The primary milestones in the development process are:



| |  |  | site selection and contract signing;                
| | - |  | ----------------------------------------------------
|
| |  |  | feasibility;                                        
|
| |  |  | zoning, site plan approval and building permits; and
|
| |  |  | completion of construction.                         

Once a market has been identified, site selection and contract signing
typically take approximately three to nine months. Zoning and site plan
approval generally take 12 months and are typically the most difficult steps in
the development process due to Sunrises selection of sites in mature
communities which usually require site rezoning. Community construction
normally takes 10 to 12 months. Sunrise 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 community receives a certificate of
occupancy, residents usually begin to move in within one month. The cost
of any particular community may vary considerably based on a variety of
site-specific factors.

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Consistent with Sunrises long-range strategic goal of transforming itself
into a senior living management services company, Sunrise expects substantially
all of its future development activities to be conducted with joint venture
partners. Sunrise has already entered into unconsolidated joint venture
arrangements with third parties to develop projects in the United States,
United Kingdom, Germany and Canada. Sunrise is providing management and
development services to the joint ventures on a contract-fee basis with rights
to acquire the assets in the future, but with no obligation to acquire such
assets. Sunrise has ownership interests in these joint ventures ranging from
seven to twenty percent.

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

Facility Acquisitions

As part of its growth strategy, Sunrise also seeks to acquire attractive
senior living communities in top U.S. and international major metropolitan
markets. In evaluating possible acquisitions, Sunrise considers various
factors, including:



| |  |  | location, construction quality, condition and design of the community;                                       
| | - |  | -------------------------------------------------------------------------------------------------------------
|
| |  |  | current and projected community cash flow;                                                                   
|
| |  |  | the ability to increase revenue, occupancy and cash flow by
providing a full range of senior living services;
|
| |  |  | costs of community repositioning, including any renovations; and                                             
|
| |  |  | the extent to which the acquisition will complement Sunrises
development plans.                             

Sunrise has entered into an investment agreement with the private equity
group of Deutche Bank Real Estate (DBREPE), pursuant to which Sunrise and
DBREPE have agreed to form a joint venture to acquire senior living properties
in the United States. The venture will have approximately $25 million of
available capital and, combined with debt financing, intends to acquire up to
$200 million of senior living properties. Sunrise will operate the acquired
properties under management agreements and will be responsible for the
day-to-day management of the joint venture. During 2002, the joint venture was
established and acquired two properties
in which Sunrise has a minority ownership position. Sunrise has entered
into a long-term management contract to provide management services to these
properties.

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In 1999, Sunrise acquired Karrington Health, Inc., a provider of senior
living services, which, as of the time of the acquisition, had developed 50
communities in the United States with a resident capacity of approximately
2,900.

Sale/Long-Term Manage Back Program

In 2000, Sunrise announced its intention to sell a select number of its
properties, subject to market conditions, while retaining minority ownership
interests and long-term management through operating agreements. This strategy,
as a normal part of operations, enables Sunrise to reduce debt, re-deploy its
capital into new development projects and realize gains on appreciated real
estate. As of December 31, 2002, Sunrise has completed the sale of interests
ranging from 75% to 100% in 57 communities. Sunrise continues to operate 56 of
these 57 communities under long-term operating agreements. Based on a high
level of interest from institutional real estate buyers and Sunrises plans to
accelerate further its transformation to a senior living management services
company, Sunrise expects to expand its sale/long-term manage back program to
include the sale/long-term manage back of more than 20 properties in 2003.

Company Operations

Operating Structure

Sunrise has centralized accounting, finance and other operational
functions at the corporate headquarters and regional office levels in order to
allow community-based personnel to focus on resident care, consistent with
Sunrises operating philosophy. Sunrise maintains its corporate headquarters
office in McLean, Virginia and a business office in Fairfax, Virginia.
Corporate staff members are responsible for: the establishment of company-wide
policies and procedures relating to resident care, employee hiring, training
and retention, community design and development, and community operations;
accounting and finance functions including billing and collection, accounts
payable, general finance and accounting, and tax planning and compliance; and
providing overall strategic direction to Sunrise. Regional staff are
responsible for: overseeing all aspects of community-based operations,
including marketing and sales activities; resident care; the hiring of
community executives, care managers and other community-based personnel;
compliance with applicable local and state regulatory requirements; and
implementation of Sunrises development and acquisition plans within a given
geographic region.

Sunrise is currently organized into two large geographic regions: East and
West, with multiple cluster regions under each. Sunrise has regional offices
in Boston, MA, Long Island, NY, Villanova, PA, Atlanta, GA, Chicago, IL,
Columbus, OH and Claremont, CA that support
the currently opened and/or to-be-opened properties in these markets. All
international activities are currently conducted through joint ventures.
Sunrise also has regional offices in London, England and Toronto, Canada
supporting the Sunrise communities open or under construction in

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those locations. Each of the regions is headed by either a vice president or manager
of operations with extensive experience in the senior housing, health care and
assisted living industries. Each regional cluster is supported typically by a
sales/marketing specialist, a resident care specialist, a human resources
specialist and a dining services specialist. Sunrise expects that all regional
clusters will create similar staff positions as the number of communities in
those regions increases.

Community Staffing

Each of Sunrises communities has an executive director responsible for
the day-to-day operations of the community, including quality of care, resident
services, sales and marketing, and financial performance. Each executive
director receives specialized training from Sunrise. Sunrise believes that the
quality and size of its communities, coupled with its competitive compensation
philosophy, have enabled it to attract high-quality, professional executive
directors. The executive director is supported by (a) the department heads,
who oversee the care and service of the communitys assisted living
neighborhood and Alzheimer neighborhood, (b) a nurse, who serves as a case
manager responsible for coordinating the services necessary to meet residents
health care needs and (c) the director of community relations, who is
responsible for selling Sunrise services. Other key positions include the
dining services coordinator, the program coordinator and the maintenance
coordinator.

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. As permitted by state law, 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 community varies
according to the level of care required by the residents of the community and
the numbers of residents receiving Alzheimers care and plus care services.

Sunrise believes that its communities 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.

Staff Education and Training

Sunrise has attracted, and continues to seek, highly dedicated,
experienced personnel. Sunrise has developed a formal training program, the
five star training program, which focuses on providing every employee with
the appropriate skills that are required to ensure the highest quality of
resident care. All managers and direct care staff must complete a
comprehensive

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orientation and the core curriculum, which consists of basic
resident care procedures, Alzheimers care, communication systems, and
activities and dining programming. For the supervisors of direct care staff,
additional program levels provide education in medical awareness and management
skills.

For department managers, Sunrise has developed the mentor program, which
partners each new manager with an experienced, successful manager. Under this
program, new managers typically receive several weeks of training including
classroom, on the job and corporate orientation. Thereafter, the mentor
maintains regular contact with the new manager to provide ongoing support and
guidance. Region-based classroom training also is provided monthly for
department managers in specialized areas, including Sunrises reminiscence
program, the social and volunteer programs, human resources, staffing and
scheduling and medication management.

Sunrise also has developed the executive director in training program,
which offers a structured curriculum to train individuals to become executive
directors at Sunrise. This program recruits successful, strong leaders from
both Sunrise department head ranks as well as professionals from outside
Sunrise and provides them with an accelerated training curriculum to prepare
them to be Sunrise executive directors.

Quality Improvement Processes

Sunrise coordinates quality assurance programs at each of its communities
through its corporate headquarters staff and through its regional offices.
Sunrise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 Sunrise. In addition to ongoing training and performance reviews of care
managers and other employees, Sunrises quality control measures include:

Family and Resident Feedback.Sunrise surveys residents and family
members on a regular basis to monitor the quality of services provided to
residents. 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 Community Inspections.Community inspections are conducted by
regional operations staff on a regular 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, Sunrise
engages an independent service evaluation company to mystery shop Sunrises
communities. These

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professionals assess Sunrises performance from the
perspective of a customer, without the inherent biases of a company employee.
Each community 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.

Sales and Marketing

Sunrises marketing strategy is intended to create awareness of and
preference for Sunrises unique product/service positioning, leading to
inquiries and visits to Sunrise communities from potential residents and their
family members as well as positive referrals from key community sources such as
hospital discharge planners, physicians, clergy, area agencies for the elderly,
skilled nursing communities, home health agencies, social workers, financial
planners and consultants, and others. A central marketing staff develops
overall strategies, systems and programs for promoting Sunrise throughout its
markets and monitors the success of overall and site/region specific marketing
efforts.

Each community has at least one dedicated sales person responsible for
property-specific sales efforts, and each regional cluster generally has a
sales leader responsible for coaching and performance oversight of community
sales staff as well as marketing coordination with the national marketing
staff.

Core marketing and sales communication elements include local and regional
print, local and network radio, direct mail, yellow pages, property signage,
personal contacts with prospective referral sources, open houses, health fairs,
grand openings for new communities, various community receptions and more.

Competition

The senior living industry is competitive. Sunrise competes with numerous
other companies that provide similar senior living alternatives, such as home
health care agencies, community-based service programs, retirement communities,
convalescent centers and other senior living providers. Sunrise believes there
are no one or more dominant companies in the senior living segment. In general,
regulatory and other barriers to competitive entry in the independent living
and assisted living segments of the senior living industry are not substantial,
but such barriers to competitive entry are more substantial for the skilled
nursing segment. Although new construction of senior living communities has
declined significantly, Sunrise has
experienced and expects to continue to experience competition in its efforts to
develop, acquire and operate senior living communities. Some of the present
and potential senior living competitors of Sunrise have, or may obtain, greater
financial resources than Sunrise. Consequently, Sunrise may encounter
competition that could limit its ability to attract residents or expand its
business, which could have a material adverse effect on its revenues and
earnings.

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Government Regulation

Senior living communities 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 and facility to facility, in
general, these requirements include:



| |  |  | personnel education, training, and records;                                                                                                      
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | community services, including:                                                                                                                   
|
| |   |  | - administration of medication;                                                                                                                  
|
| |   |  | - assistance with self-administration of medication; and                                                                                         
|
| |   |  | - the provision of 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 health care services from providers of
a residents choice.

Some communities are also licensed to provide independent living services,
which generally involve lower levels of resident assistance. Other communities
are licensed to provide skilled nursing services, which generally involve
significantly higher levels of resident assistance. Communities which are
licensed, or will be licensed, to provide skilled nursing services may
participate in federal health care programs, including the Medicare and
Medicaid programs. Such communities must meet certain federal requirements
regarding their operations, including requirements related to physical
environment, resident rights, and the provision of
health services. Communities which participate in federal health care programs
are entitled to receive reimbursement from such programs for care furnished to
program beneficiaries. In several of the states in which Sunrise operates or
intends to operate, senior living communities also require a certificate of
need before the community can be opened. In most states, senior living
communities are also subject to state or local building code, fire code, and
food service licensing or certification requirements. Senior living
communities are subject to periodic survey

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or inspection by governmental
authorities to assess and assure compliance with regulatory requirements.
Surveys occur on a regular (often annual or bi-annual) schedule, and special
surveys may result from a specific complaint filed by a resident, a family
member, or a Sunrise competitor.

From time to time in the ordinary course of business, Sunrise receives
deficiency reports, which Sunrise reviews to take appropriate corrective
action. Most inspection deficiencies are resolved through a plan of corrective
action. However, the reviewing agency typically has the authority to take
action against a licensed community where deficiencies are noted. This action
may include imposition of fines, imposition of a provisional or conditional
license, or suspension or revocation of a license, loss of certification as a
provider under federal health care program, or other sanctions. If Sunrise
fails to comply with applicable requirements, Sunrises business and revenues
could be materially and adversely affected. To date, none of the deficiency
reports received by Sunrise has resulted in a suspension, fine, or other
disposition that has had a material adverse effect on Sunrises revenues.

Regulation of the senior living industry is evolving. Sunrises
operations could suffer if future regulatory developments, such as mandatory
increases in scope and quality of care given to residents or consumer
protection regulations are enacted, licensing and certification standards are
revised, or a determination is made that the care provided by one or more of
Sunrises communities exceeds the level of care for which the community is
licensed. If regulatory requirements increase, whether through enactment of
new laws or regulations or changes in the application of existing rules,
Sunrises operations could be adversely affected. Furthermore, there have been
numerous initiatives on the federal and state levels in recent years for reform
affecting payment of health care services. Some aspects of these initiatives
could adversely affect Sunrise, following the closing of Sunrises acquisition
of Marriott Senior Living Services, such as reductions in Medicare or Medicaid
program funding. For example, the Balanced Budget Act of 1997 established a
Prospective Payment System for Medicare skilled nursing facilities under which
facilities are paid a federal per diem rate for most covered nursing facility
services. Under this system, skilled nursing facilities are no longer assured
of receiving Medicare reimbursement adequate to cover the costs of operating
the facilities. The Balanced Budget Act of 1997 also repealed rules which
required state Medicaid payments to nursing facilities to be reasonable and
adequate to cover the costs of efficiently and economically operated
facilities.

Sunrise is also subject to certain federal and state anti-remuneration
laws, such as the federal health care programs anti-kickback law, which governs
various types of financial arrangements among health care providers and others
who may be in a position to refer or recommend patients to these providers.
This law prohibits direct and indirect remuneration that is intended to induce
the referral of patients to, the arranging of services by, or the recommending
of, a particular provider of health care items or services. The federal health
care program anti-kickback laws has been interpreted to apply to some
contractual relationships between health

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care providers and sources of patient
referral. Additionally, in some states, Sunrise operates or will operate
communities for which bills are submitted to federal and/or state health care
programs, including state Medicaid waiver programs for assisted living
communities, the Medicare skilled nursing community benefit program, the
Medicaid nursing facility benefit program or some other federal or state health
care program. Consequently, Sunrise is subject to federal and state laws which
prohibit anyone from presenting, or causing to be presented, claims for
reimbursement which are false, fraudulent, or are for items or services that
were not provided as claimed. Violation of any of these laws can result in
loss of licensure, civil or criminal penalties, and exclusion of health care
providers or suppliers from furnishing covered items or services to
beneficiaries of the federal health care program. Similar state laws vary from
state to state, are sometimes vague, and have rarely been interpreted by courts
or regulatory agencies. Sunrise cannot be sure that these laws will be
interpreted consistently with Sunrises practices.

Sunrise is also subject to federal and state laws designed to protect the
confidentiality of patient health information. The U.S. Department of Health
and Human Services (HHS) has issued rules pursuant to the Health Insurance
Portability and Accountability Act of 1996 (HIPAA) relating to the privacy of
such information. Although many of the announced standards have not yet become
effective, they will govern Sunrises use and disclosure of health information
at some communities. Sunrise is in the process of evaluating the effect of the
HIPAA rules on these communities. Although the new health information
standards may have a significant effect on the manner in which Sunrise handles
health data and communicates with payors at some communities, Sunrise believes
that the cost of compliance will not have a material adverse effect on our
business, financial condition or results of operations.

Employees

At December 31, 2002, Sunrise had 11,808 employees, including 7,525
full-time employees, of which 319 were employed at Sunrises headquarters and
business office. Sunrise believes employee relations are good.

Website

Sunrises Internet website is at http://www.sunriseassistedliving.com.
Sunrise makes available free of charge on or through its website its annual
report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) of the Securities Exchange
Act of 1934 as soon as reasonably practicable after such material is
electronically filed with, or furnished to, the Securities and Exchange
Commission.

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Segments

Sunrise has two business segments: Sunrise Management Services and Sunrise
Properties. For information regarding these segments, see Item 7,
Managements Discussion and Analysis of Financial Condition and Results of
Operations and Note 20 to Sunrises consolidated financial statements.

Risk Factors

In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, set forth below are cautionary statements
identifying important factors that could cause actual events or results to
differ materially from any forward-looking statements made by or on behalf of
us, whether oral or written. We wish to ensure that any forward-looking
statements are accompanied by meaningful cautionary statements in order to
maximize to the fullest extent possible the protections of the safe harbor
established in the Private Securities Litigation Reform Act of 1995.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the following important factors that could cause
actual events or results to differ materially from our forward-looking
statements.

Risks Relating to Sunrises Business



| |  |  | The operations of Sunrise and Marriott Senior Living Services may
not be integrated successfully, and the intended benefits of the
transaction may not be realized, each of which could have a negative
impact on the revenues, expenses and operating results of Sunrise
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The completion of Sunrises acquisition of Marriott Senior Living Services
poses risks for the ongoing operations of Sunrise, including that:



| | - |  | the Marriott Senior Living Services portfolio may not perform as well as Sunrise
anticipates due to various factors, including disruptions caused by the integration of
operations with Sunrise, changes in macro-economic conditions and the termination of
some of the management agreements that comprise the Marriott Senior Living Services
portfolio;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | the diversion of management attention to the integration of the operations of Marriott
Senior Living Services could have a material adverse effect on the continued operation
and expansion of Sunrises existing business;                                                                                                                                
|
| | - |  | Sunrise may not effectively integrate the operations of Marriott Senior Living Services;                                                                                                                                                                                                                                                                   

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| | - |  | Sunrise may experience difficulties and incur greater than anticipated expenses related
to the assimilation and retention of Marriott Senior Living Services employees; and                  
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | following the transaction, Sunrise may not achieve expected cost savings and operating
efficiencies, such as the elimination of redundant administrative costs and property
management costs.

If Sunrise fails to successfully integrate Marriott Senior Living Services
and/or fails to realize the intended benefits of the transaction, such failure
could have a material adverse effect on the revenues, expenses and operating
results of Sunrise and the market price of Sunrises common stock could decline
from its market price at the time of completion of the acquisition.



| |  |  | Liability claims against us in excess of insurance limits could
adversely affect our financial condition and results of operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------

The senior living business entails an inherent risk of liability. In
recent years, we, as well as other participants in our industry, have become
subject to an increasing number of lawsuits alleging negligence or related
legal theories. Many of these lawsuits involve large claims and significant
legal costs. We maintain liability insurance policies in amounts and with the
coverage and deductibles we believe are adequate based on the nature and risks
of our business, historical experience and industry standards. The liability
insurance currently maintained by us has the following coverage limits:

|                    |  |                                                                                                                                                                                                                                       |  |                                                                                                                                                                                
|------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Type of Coverage    |  | Coverage Limits                                                                                                                                                                                                                       |  | Examples of Incidents Covered                                                                                                                                                  
|                    |  |                                                                                                                                                                                                                                       |  |                                                                                                                                                                                
| General
liability |  |  $11,000,000 per
occurrence, with
additional specific
limitations for
particular
categories of
claims that fall
under the general
liability category;
the general
liability coverage
carries a
$1,000,000 per
occurrence
deductible. |  |  premises claims by third
parties, not including
residents; 
 personal injury and
advertising injury;
 independent contractors;
and 
 fire damage to other
rented locations

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|                                     |  |                                                                                                                                                                                                                                                                                                  |  |                                                                                                                              
|------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -----------------------------------------------------------------------------------------------------------------------------
|Healthcare
professional
liability    |  |  $11,000,000 per
occurrence,
$11,000,000 in
aggregate for the
policy year; coverage
limits for the
general and
healthcare
professional
liability are
combined with each
eroding the annual
aggregate; healthcare
professional
liability coverage
carries a $1,000,000
per occurrence
deductible |  |  negligence claims
involving residents                                                                                      
|                                     |  |                                                                                                                                                                                                                                                                                                  |  |                                                                                                                              
| Umbrella excess
liability          |  |  $40,000,000 per
policy year; coverage
is in excess of the
general liability and
health care
professional
liability limits                                                                                                                                                                      |  |  same as under
general liability and
health care
professional
liability coverages                                           
|                                     |  |                                                                                                                                                                                                                                                                                                  |  |                                                                                                                              
| Non-medical
professional
liability |  |  $5,000,000 per
wrongful
act/$7,000,000 total;
coverage limits do
not overlap with
general liability,
healthcare
professional
liability or umbrella
excess liability
limits and are in
excess of a $50,000
per occurrence
retention                                                             |  |  claims against our
development or
management company
subsidiaries by third
parties for whom we
develop or manage
properties

We cannot be sure that claims will not arise that are in excess of our
coverage or not covered by our insurance policies. Also, the above deductible,
or self-insured retention, is accrued based on an actuarial projection of
future liabilities. In the event this accrual is inadequate, our operating
results could be negatively affected. If a successful claim is made against us
and it is not covered by our insurance or exceeds the policy limits, our
financial condition and results of operations could be materially and adversely
affected. Claims against us, regardless of their merit or eventual outcome,
also could have a material adverse effect on our ability to attract residents
or expand our business and could require our management to devote

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time to matters unrelated to the operation of our business. We also have to
renew our policies every year and negotiate acceptable terms for coverage,
exposing us to the volatility of the insurance markets, including the
possibility of rate increases.



| |  |  | Any delays we experience in developing new facilities could impede
our growth and adversely affect our revenues and results of operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------

Our growth objectives include the development of a significant number of
new senior living communities, both domestically and internationally and either
directly or through joint ventures with development partners. We currently have
20 communities under construction with a resident capacity of approximately
1,675 residents. As of December 31, 2002, we had entered into contracts to
purchase or lease 42 additional development sites. Of these sites, we have
received zoning approval from the applicable municipal authority to construct a
senior living facility on 36 sites and we are pursuing zoning approval on the
remaining sites. In the ordinary course of our business, we evaluate new sites
and opportunities for further growth on an ongoing basis.

Our ability to successfully achieve these development plans will depend
upon a variety of factors, many of which are outside our control. These factors
include:



| |  |  | difficulties or delays experienced in obtaining zoning, land use, building, occupancy,
licensing and other required governmental permits for the construction of new
facilities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | failure to complete construction of new communities on budget and on schedule;                                                                                                  
|
| |  |  | failure of third-party contractors and subcontractors to perform under their contracts;                                                                                         
|
| |  |  | Shortages of labor or materials that could delay projects or make them more expensive;                                                                                          
|
| |  |  | adverse weather conditions that could delay construction projects;                                                                                                              
|
| |  |  | difficulties in finding suitable sites for future development activities at acceptable
prices; and                                                                              
|
| |  |  | increased costs as a result of addressing changes in laws and regulations or how
existing laws and regulations are applied.                                                     

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We cannot assure you that we will not experience delays in completing
facilities under construction or in development or that we will be able to
identify suitable sites at acceptable prices for future development activities.
If we fail to achieve our development plans, our growth could slow, which would
adversely impact our revenues and results of operations.



| |  |  | Our failure to secure additional financing to fund our development
activities could slow our growth and could adversely affect our
revenues and results of operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

We will need to obtain additional financial resources to fund our
development and construction activities. We currently estimate that the
existing credit facilities, together with existing working capital, proceeds
from sales of selected senior living communities as a normal part of our
operations, financing commitments and financing expected to be available, will
be sufficient to fund communities currently under construction. Additional
financing will, however, be required to complete additional development and to
refinance existing indebtedness. We estimate that it will cost approximately
$54 million to complete the communities we currently have under construction.
As of December 31, 2002, we had entered into contracts to purchase or lease 42
additional sites for a total contracted purchase price of $92 million. We
estimate that it will cost approximately $445 million to develop these
communities. We expect that our cash flow from operations, together with
borrowings under existing credit facilities and proceeds from expected future
sales of selected senior living facilities, will be sufficient to fund the
development sites for these additional senior living facilities for at least
the next twelve months. We expect from time to time to seek additional funding
through public or private financing sources, including equity or debt
financing. If we are not able to obtain additional financing on favorable
terms, we may have to delay or eliminate all or some of our development
projects, which could adversely affect our revenues and results of operations.



| |  |  | Our failure to generate sufficient cash flow to cover required
interest, principal and operating lease payments could result in
defaults of the related debt or operating leases.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

At December 31, 2002, we had mortgage, construction and other indebtedness
totaling $457 million and unused lines of credit totaling $304 million. We
intend to continue financing our communities through mortgage financing and
possibly operating leases or other types of financing, including lines of
credit. We cannot assure you that we will generate sufficient cash flow from
operations to cover required interest, principal and operating lease payments.
Any payment or other default could cause the lender to foreclose upon the
facilities securing the indebtedness or, in the case of an operating lease,
could terminate the lease, with a consequent loss of income and asset value to
us. In some cases, the indebtedness is secured by the community and a pledge of
our interests in the community. In the event of a default, the lender could
avoid judicial procedures required to foreclose on real property by foreclosing
on the pledge instead, thus accelerating the lenders acquisition of the
facility. Further, because our

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mortgages generally contain cross-default and cross-collateralization
provisions, a payment or other default by us could affect a significant number
of facilities.



| |  |  | Our failure to comply with financial covenants contained in debt
instruments could result in the acceleration of the related debt.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------

There are various financial covenants and other restrictions in our debt
instruments, including provisions which:



| |  |  | require us to meet specified financial tests. For example, our $265
million construction line of credit requires us to have a consolidated
tangible net worth of at least $284 million and to maintain a
consolidated minimum cash liquidity balance of at least $25 million
and to meet other financial ratios. These tests are administered on a
monthly or quarterly basis, depending on the covenant;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | require consent for changes in management or control of us. For
example, our $265 million construction line of credit requires the
lenders consent for any merger where Paul Klaassen or Teresa Klaassen
does not serve as our chairman of the board and chief executive
officer;                                                                                                                       
|
| |  |  | restrict the ability of our subsidiaries to borrow additional funds,
dispose of assets or engage in mergers or other business combinations
without lender consent; and                                                                                                                                                                                                                                   
|
| |  |  | require that we maintain minimum occupancy levels at our facilities.
For example, our $265 million construction line of credit requires
that 85% occupancy be achieved after 15 months for a newly opened
facility and, following this period, be maintained at or above that
level.                                                                                                                     

If we fail to comply with any of these requirements, then the related
indebtedness could become due and payable prior to its stated due date. We
cannot assure you that we could pay this debt if it became due. Further, our
construction line of credit contains a cross-default provision pursuant to
which a default on other indebtedness by us or by any of our consolidated
subsidiaries under the construction line of credit could result in the ability
of the lenders to declare a default under and accelerate the indebtedness due
under the construction line of credit.



| |  |  | Our failure to sell selected senior living facilities in the future
could adversely affect our revenues and results of operations, and harm
our ability to finance the construction of new communities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As part of our normal operations, we sell selected senior living
communities and, in connection with these sales, we generally enter into
long-term management contracts to manage

-25-



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these communities and, in many cases, retain an equity interest in the
projects. This strategy of selling selected senior living communities has
enabled us to reduce our debt, re-deploy our capital into new development
projects and realize gains on appreciated real estate. The sale of our
facilities is subject to various market conditions and we cannot assure you
that we can continue to sell communities or realize gains at or near amounts
that have been recognized in the past. If we are unable to continue to
implement our strategy of selling selected senior living communities, our
revenues, results of operations and our ability to finance the construction of
new facilities could be materially adversely affected.



| |  |  | Interest rate increases could adversely affect our earnings because
a portion of our total debt is floating rate debt.
| | - |  | ----------------------------------------------------------------------------------------------------------------------

At December 31, 2002, we had approximately $114 million of floating-rate
debt at a weighted average interest rate of 3.87%. Debt incurred in the future
also may bear interest at floating rates. Therefore, increases in prevailing
interest rates could increase our interest payment obligations, which would
negatively impact earnings. For example, a one percent increase in interest
rates would increase annual interest expense by approximately $1 million based
on the amount of floating-rate debt at December 31, 2002.



| |  |  | Early termination of our management service agreements could cause
a loss in revenues.
| | - |  | --------------------------------------------------------------------------------------

Approximately $180 million in revenues were generated through third-party
and joint venture management service agreements in 2002. We provide management
services to third party and joint venture owners to operate senior living
communities and provide management and consulting services to third parties on
market and site selection, pre-opening sales and marketing, start-up training
and management services for facilities under development and construction. The
terms of our third-party management service agreements generally are five years
and the terms of our management agreements entered into in connection with our
sale/long-term manage back transactions generally range from 25 to 30 years. In
most cases, either party to the agreements may terminate upon the occurrence of
an event of default caused by the other party. In addition, subject to our
rights to cure deficiencies, property owners may terminate us as manager if any
licenses or certificates necessary for operation are revoked, if there is a
change in control of Sunrise or if we do not maintain a minimum stabilized
occupancy level in the community. Also, in some instances, a property owner may
terminate the management agreement relating to a particular community if we are
in default under other management agreements relating to other communities
owned by the same property owner or its affiliates. Early termination of our
management agreements could cause a loss in revenues.

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| |  |  | Our revenues have historically depended on private pay sources.
| | - |  | ---------------------------------------------------------------

Assisted living services, which represents a substantial portion of our
senior living services, currently are not generally reimbursable under
government reimbursement programs, such as Medicare and Medicaid. Accordingly,
substantially all of our resident fee revenues are derived from private pay
sources consisting of income or assets of residents or their family members. In
general, because of the expense associated with building new facilities and the
staffing and other costs of providing the assisted living services at these
facilities, only seniors with income or assets meeting or exceeding the
comparable median in the regions where our facilities are located typically can
afford to pay the daily resident fees.



| |  |  | If development of new senior living communities outpaces demand, we
could experience decreased occupancy, depressed margins or lower
operating results.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

We believe that some secondary senior living markets have become or are on
the verge of becoming overbuilt. Regulation and other barriers to entry into
the assisted living industry, which represents a substantial portion of our
senior living services, are not substantial. Consequently, development of new
senior living communities could outpace demand. Overbuilding in any of our
market areas could, therefore, cause us to experience decreased occupancy,
depressed margins or lower operating results.



| |  |  | Termination of resident agreements could adversely affect our
revenues and earnings.
| | - |  | ------------------------------------------------------------------------------------

State regulations governing assisted living facilities require written
resident agreements with each resident. Most of these regulations also require
that each resident have the right to terminate the resident agreement for any
reason on reasonable notice. Consistent with these regulations, the resident
agreements signed by us allow residents to terminate their agreement on 30
days notice. Thus, we cannot contract with residents to stay for longer
periods of time, unlike typical apartment leasing arrangements that involve
lease agreements with specified leasing periods of up to a year or longer. If a
large number of residents elected to terminate their resident agreements at or
around the same time, then our revenues and earnings could be adversely
affected. In addition, the advanced age of our average residents means that the
resident turnover rate in our senior living facilities may be difficult to
predict.



| |  |  | If we do not effectively manage our growth, our business and
financial results could be adversely affected.
| | - |  | -----------------------------------------------------------------------------------------------------------

We expect that the number of our owned and operated communities will
increase substantially as we pursue our future growth plans. This rapid growth
will place demands on our management resources. Our ability to manage our
growth effectively will require that we continue to expand our operational,
financial and management systems and that we continue to



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attract, train, motivate, manage and retain key employees. If we are unable to
manage our growth effectively, our business and financial results could be
adversely affected.



| |  |  | Departure of our key officers could harm our business.
| | - |  | ------------------------------------------------------

Our future success depends, to a significant extent, upon the continued
services of Paul J. Klaassen, our chairman of the board and chief executive
officer and founder; Teresa M. Klaassen, our executive vice president,
secretary, chief cultural officer and founder; and Thomas B. Newell, our
president. Other than Mr. Klaassen, who entered into a five-year employment
agreement with us in September 2000, none of our key officers have employment
agreements. If we were to lose the services of any of these individuals, our
business and financial results could be adversely affected.



| |  |  | The discovery of environmental problems on any of the communities
we own or operate could result in substantial costs to us.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------

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 costs of removal or remediation of hazardous or toxic
substances, including asbestos-containing materials, that could be located on,
in or under a property. These laws and regulations often impose liability
without regard to whether or not the owner or operator knew of, or was
responsible for, the presence or release of the hazardous or toxic substances.
The costs of any required remediation or removal of these substances could be
substantial. In addition, the liability of an owner or operator is generally
not limited and could exceed the propertys value and the aggregate assets of
the owner or operator. An owner or operator or an entity that arranges for the
disposal of hazardous or toxic substances at a disposal site also may be liable
for the costs of any required remediation or removal of hazardous or toxic
substances at the disposal site.

We engage consultants to conduct Phase I environmental studies of
development sites that are placed under contract. If the Phase I study
indicates the existence or the possibility of the existence of hazardous or
toxic substances on the property, a Phase II study is requested and performed.
The Phase I and Phase II studies, as applicable, may not reveal all
environmental liabilities. There could be, therefore, material environmental
liabilities of which we are unaware. In connection with the ownership or
operation of our communities, we could be liable for the costs of remediation
or removal of hazardous or toxic substances. We also could be liable for other
costs, including governmental fines and damages for injuries to persons or
properties. As a result, the presence, with or without our knowledge, of
hazardous or toxic substances at any property owned or operated by us, or
acquired or operated by us in the future, could have an adverse effect on our
financial condition or earnings.



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| |  |  | Failure to comply with existing environmental laws regarding
management of infectious medical waste could harm our business and
financial condition.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

Some of our facilities generate infectious medical waste due to the
illness or physical condition of the residents, including, for example, blood
soaked bandages, swabs and other medical waste products and incontinence
products of those residents diagnosed with an infectious disease. The
management of infectious medical waste, including handling, storage,
transportation, treatment and disposal, is subject to regulation under various
laws, including federal and state environmental laws. These environmental laws
set forth the management requirements, as well as permit, recordkeeping, notice
and reporting obligations. Each of our facilities has an agreement with a waste
management company for the proper disposal of all infectious medical waste. Any
finding that we are not in compliance with these environmental laws could
adversely affect our business operations and financial condition.

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

Risks Relating to the Senior Living Industry



| |  |  | Competition in our industry is high and may increase, which could
impede our growth and have a material adverse effect on our revenues
and earnings.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

The senior living industry is highly competitive. We compete with numerous
other companies that provide similar senior living alternatives, such as home
health care agencies, facility-based service programs, retirement communities,
convalescent centers and other senior living providers. In general, regulatory
and other barriers to competitive entry in the independent and assisted living
segments of the senior living industry are not as substantial as in other
health industries, but such barriers to competitive entry are more substantial
for the skilled nursing segment of the senior living industry. In pursuing our
growth strategies, we have experienced and expect to continue to experience
competition in our efforts to develop, acquire and operate senior living
facilities. Consequently, we may encounter competition that could limit our
ability to attract new residents or expand our business, which could have a
material adverse effect on our revenues and results of operations.



| |  |  | Our success depends on attracting and retaining skilled personnel,
and increased competition for or a shortage of skilled personnel could
increase our staffing and labor costs, which we may not be able to
offset by increasing the rates we charge to our residents.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We compete with various health care services providers, including other
elderly care providers, in attracting and retaining qualified and skilled
personnel. We depend on our ability to

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attract and retain skilled management
personnel who are responsible for the day-to-day operations of each of our
residences. A shortage of nurses or other trained personnel or general
inflationary pressures may require that we enhance our pay and benefits package
to compete effectively for such personnel. We may not be able to offset such
added costs by increasing the rates we charge to our residents. If there is an
increase in these costs or if we fail to attract and retain qualified and
skilled personnel, our business and operating results could be harmed. Employee
compensation, including salary increases and the hiring of additional personnel
to support our growth initiatives, have previously had a negative impact on
operating margins and may again do so in the foreseeable future.



| |  |  | The need to comply with government regulation of senior living
facilities may increase our costs of doing business and increase our

operating costs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

Senior living 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 and facility to facility, in
general, these requirements include:



| |  |  | personnel education, training, and records;             
| | - |  | --------------------------------------------------------
|
| |  |  | facility services, including:                           
|
| |   |  |  administration of medication;                         
|
| |   |  |  assistance with self-administration of medication; and
|
| |   |  |  the provision of limited nursing services;            
|
| |  |  | monitoring of resident wellness;                        
|
| |  |  | physical plant specifications;                          
|
| |  |  | furnishing of resident units;                           
|
| |  |  | food and housekeeping services;                         
|
| |  |  | emergency evacuation plans; and                         

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| |  |  | resident rights and responsibilities, including in some states the
right to receive health care services from providers of a residents
choice.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------

Some of our communities are licensed to provide skilled nursing services,
which generally involve significantly higher levels of resident assistance.
Communities which are licensed, or will be licensed, to provide skilled nursing
services may participate in federal health care programs, including the
Medicare and Medicaid programs. Such communities must meet certain federal
requirements regarding their operations, including requirements related to
physical environment, resident rights, and the provision of health care
services. Communities which participate in federal health care programs are
entitled to receive reimbursement from such programs for care furnished to
program beneficiaries. In several of the states in which we operate or intend
to operate, senior living communities also require a certificate of need before
the community can be opened. In most states, senior living communities also are
subject to state or local building code, fire code and food service licensing
or certification requirements. Like other health care communities, senior
living communities are subject to periodic survey or inspection by governmental
authorities to assess and assure compliance with regulatory requirements.
Surveys occur on a regular (often annual or bi-annual) schedule, and special
surveys may result from a specific complaint filed by a resident, a family
member, or a Sunrise competitor.

From time to time in the ordinary course of business, we receive
deficiency reports, which we review to take appropriate corrective action. Most
inspection deficiencies are resolved through a plan of corrective action.
However, the reviewing agency typically has the authority to take action
against a licensed facility where deficiencies are noted. This action may
include imposition of fines, imposition of a provisional or conditional license
or suspension or revocation of a license, loss of certification as a provider
under federal health care programs or other sanctions. If we fail to comply
with applicable requirements, our business and revenues could be materially and
adversely affected. To date, none of the deficiency reports received by us has
resulted in a suspension, fine or other disposition that has had a material
adverse effect on our revenues.

Regulation of the senior living industry is evolving. Our operations could
suffer if future regulatory developments, such as mandatory increases in scope
and quality of care given to residents or consumer protection regulations are
enacted, licensing and certification standards are revised or a determination
is made that the care provided by one or more of our facilities exceeds the
level of care for which the community is licensed. If regulatory requirements
increase, whether through enactment of new laws or regulations or changes in
the application of existing rules, our operations could be adversely affected.
Furthermore, there have been numerous
initiatives on the federal and state levels in recent years for reform
affecting payment for health care services. Some aspects of these initiatives
could adversely affect Sunrise, such as, following

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the closing of Sunrises
acquisition of Marriott Senior Living Services, reductions in Medicare or
Medicaid program funding. For example, the Balanced Budget Act of 1997 (BBA)
established a Prospective Payment System for Medicare skilled nursing
facilities under which facilities are paid a federal per diem rate for most
covered nursing facility services. Under this system, skilled nursing
facilities are no longer assured of receiving Medicare reimbursement adequate
to cover the costs of operating the facilities. The BBA also repealed rules
which required state Medicaid payments to nursing facilities to be reasonable
and adequate to cover the costs of efficiently and economically operated
facilities.

We also are subject to certain federal and state anti-remuneration laws,
such as the federal health care programs anti-kickback law, which governs
various types of financial arrangements among health care providers and others
who may be in a position to refer or recommend patients to these providers.
This law prohibits direct and indirect remuneration that is intended to induce
the referral of patients to, the arranging of services by, or the recommending
of, a particular provider of health care items or services. The federal health
care program anti-kickback law has been interpreted to apply to some
contractual relationships between health care providers and sources of patient
referral. Additionally, in five states, we operate facilities for which bills
are submitted to federal and/or state health care programs, including state
Medicaid waiver programs for senior living facilities, the Medicare skilled
nursing facility benefit program, the Medicaid nursing facility benefit program
or some other federal or state health care program. Consequently, we are
subject to federal and state laws which prohibit anyone from presenting, or
causing to be presented, claims for reimbursement which are false, fraudulent,
or are for items or services that were not provided as claimed. Violation of
any of these laws can result in loss of licensure, civil or criminal penalties,
and exclusion of health care providers or suppliers from furnishing covered
items or services to beneficiaries of the federal health care program. Similar
state laws vary from state to state, are sometimes vague and have rarely been
interpreted by courts or regulatory agencies. We cannot be sure that these laws
will be interpreted consistently with our practices.

Sunrise is also subject to federal and state laws designed to protect the
confidentiality of patient health information. The U.S. Department of Health
and Human Services (HHS) has issued rules pursuant to the Health Insurance
Portability and Accountability Act of 1996 (HIPAA) relating to the privacy of
such information. Although many of the announced standards have not yet become
effective, they will govern Sunrises use and disclosure of health information
at some communities. Sunrise is in the process of evaluating the effect of the
HIPAA rules on these communities. Although the new health information
standards may have a significant effect on the manner in which Sunrise handles
health data and communicates with payors, Sunrise believes that the cost of
compliance will not have a material adverse effect on our business, financial
condition or results of operations.

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Item 2. Properties

Sunrise leases its corporate offices, regional operations and development
offices, and warehouse space under various leases. The leases have terms of
five to twelve years. The corporate headquarters lease commenced upon
completion of the building in July 1999 and expires in July 2011. The lease
has an initial annual base rent of $1 million. The base rent escalates
approximately 2.5% per year in accordance with a base rent schedule. In
September 1999, Sunrise amended another corporate lease to increase the amount
of leased premises and extend the maturity date to October 2004. The initial
annual lease payments of the business office leases amount to $462,000, 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, subject to annual
increases of 3%. Also required are an amortization rent of $88,000 and a
portion of operating expenses. Various other leases expire during 2003 and
2004.

Sunrise has also entered into operating leases for five communities and
seven long-term ground leases related to other communities. The operating
lease terms vary from 15-20 years, with two ten-year extension options, and
ground leases have terms of 15 to 99 years. For information regarding these
leases, see Note 15 to Sunrises consolidated financial statements. For
information regarding communities owned by Sunrise or in which it holds
interests, see  Item 1. Business.

Item 3. Legal Proceedings

Sunrise is involved in various lawsuits and claims arising in the normal
course of business. In the opinion of Sunrises management, although the
outcomes of these suits and claims are uncertain, in the aggregate they should
not have a material adverse effect on Sunrise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

Sunrises common stock is traded on the New York Stock Exchange under the
symbol SRZ. Trading of Sunrises common stock commenced on May 31, 1996.
Our common stock began trading on the New York Stock Exchange on May 23, 2001
under the symbol ''SRZ.
Prior to that date, our common stock was traded on The Nasdaq National Market
under the symbol ''SNRZ. As of March 14, 2003, there were 263 stockholders of
record. No cash

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dividends have been paid in the past. The following table
sets forth, for the quarterly periods indicated, the high and low sales prices
of our common stock:

Quarterly Market Price Range of Common Stock

|                   |  |      |        |     |  |   |        | 
|------------------ |  | ---- | ------ | --- |  | - | ------ | 
|Quarter Ended      |  | High |        | Low
|                   |  |      |        |    
|March 31, 2001     |  | $    | 25.625 |     |  | $ | 18.125 | 
|June 30, 2001      |  | $    | 27.50  |     |  | $ | 18.375 | 
|September 30, 2001 |  | $    | 32.00  |     |  | $ | 22.50  | 
|December 31, 2001  |  | $    | 31.81  |     |  | $ | 23.65  | 

|                   |  |      |       |     |  |   |       | 
|------------------ |  | ---- | ----- | --- |  | - | ----- | 
|Quarter Ended      |  | High |       | Low
|                   |  |      |       |    
|March 31, 2002     |  | $    | 32.70 |     |  | $ | 20.60 | 
|June 30, 2002      |  | $    | 30.15 |     |  | $ | 25.36 | 
|September 30, 2002 |  | $    | 27.50 |     |  | $ | 21.00 | 
|December 31, 2002  |  | $    | 29.00 |     |  | $ | 19.60 | 

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Item 6. Selected Financial Data

The selected consolidated financial data set forth below should be read in conjunction with
Sunrises Consolidated Financial Statements and notes thereto included elsewhere herein.

|                                                       |                           |       |          |                                                  |        |      |         |           |        |         |         |           |        |   |          |           |        |   |          |         |       | 
|------------------------------------------------------ | ------------------------- | ----- | -------- | ------------------------------------------------ | ------ | ---- | ------- | --------- | ------ | ------- | ------- | --------- | ------ | - | -------- | --------- | ------ | - | -------- | ------- | ----- | 
|                                                       |                           |       |          | December 31,                                    
|                                                       |                           |       |          |                                                 
|                                                       |                           |       |          | 2002                                             |        | 2001 |         | 2000      |        | 1999(1) |         | 1998     
|                                                       |                           |       |          |                                                  |        |      |         |           |        |         |         |          
|                                                       |                           |       |          | (dollars in thousands, except per share amounts)
|STATEMENT OF OPERATIONS DATA:                          |                           |       |          |                                                  |        |      |         |           |        |         |         |           |        |   |          |           |        |   |          |        
|Operating revenue                                      |                           | $     | 505,912  |                                                  |        | $    | 428,219 |           |        | $       | 344,786 |           |        | $ | 255,219  |           |        | $ | 170,712  |        
|Facility and management contract operating expenses    |                           |       | 312,101  |                                                  |        |      | 243,387 |           |        |         | 185,897 |           |        |   | 137,494  |           |        |   | 89,929   |        
|Facility development and pre-rental expenses           |                           |       | 11,504   |                                                  |        |      | 7,949   |           |        |         | 6,226   |           |        |   | 7,184    |           |        |   | 5,197    |        
|General and administrative expenses                    |                           |       | 36,944   |                                                  |        |      | 32,809  |           |        |         | 27,418  |           |        |   | 20,715   |           |        |   | 12,726   |        
|Depreciation and amortization expenses                 |                           |       | 25,317   |                                                  |        |      | 28,475  |           |        |         | 33,902  |           |        |   | 25,448   |           |        |   | 21,650   |        
|Interest expense, net                                  |                           |       | 19,980   |                                                  |        |      | 26,176  |           |        |         | 37,566  |           |        |   | 21,750   |           |        |   | 15,430   |        
|Net income (2)                                         |                           |       | 54,661   |                                                  |        |      | 49,101  |           |        |         | 24,278  |           |        |   | 20,213   |           |        |   | 22,312   |        
|Net income per common share:                           |                           |       |          |                                                  |        |      |         |           |        |         |         |           |        |   |          |           |        |   |          |        
|                                                       | Basic                     |       |          | 2.44                                             |        |      |         | 2.25      |        |         |         | 1.12      |        |   |          | 0.96      |        |   |          | 1.16    |      
|                                                       | Diluted                   |       |          | 2.23                                             |        |      |         | 2.08      |        |         |         | 1.10      |        |   |          | 0.94      |        |   |          | 1.11    |      
|BALANCE SHEET DATA (at end of period):                 |                           |       |          |                                                  |        |      |         |           |        |         |         |           |        |   |          |           |        |   |          |        
|                                                       | Cash and cash equivalents |       | $        | 173,119                                          |        |      | $       | 50,275    |        |         | $       | 42,874    |        |   | $        | 53,540    |        |   | $        | 54,197  |      
|                                                       | Working capital (deficit) |       |          | 139,639                                          |        |      |         | 38,803    |        |         |         | (34,063   | )      |   |          | 95,480    |        |   |          | 69,573  |      
|                                                       | Total assets              |       |          | 1,116,151                                        |        |      |         | 1,177,615 |        |         |         | 1,129,361 |        |   |          | 1,101,413 |        |   |          | 683,411 |      
|                                                       | Total debt                |       |          | 456,969                                          |        |      |         | 630,756   |        |         |         | 674,703   |        |   |          | 700,943   |        |   |          | 428,326 |      
|                                                       | Stockholders equity      |       |          | 465,818                                          |        |      |         | 410,701   |        |         |         | 354,045   |        |   |          | 335,124   |        |   |          | 227,655 |      
|OPERATING AND OTHER DATA:                              |                           |       |          |                                                  |        |      |         |           |        |         |         |           |        |   |          |           |        |   |          |        
|Ratio of earnings to fixed charges (3)                 |                           |       | 2.71x    |                                                  |        |      | 2.48x   |           |        |         | 1.57x   |           |        |   | 1.52x    |           |        |   | 1.61x    |        
|EBITDA (excluding non-recurring items and charges) (4) |                           | $     | 135,033  |                                                  |        | $    | 132,838 |           |        | $       | 111,268 |           |        | $ | 80,308   |           |        | $ | 59,392   |        
|Net cash provided by operating activities              |                           |       | 98,817   |                                                  |        |      | 101,485 |           |        |         | 62,477  |           |        |   | 42,787   |           |        |   | 27,138   |        
|Net cash (used in) provided by investing activities    |                           |       | 211,935  |                                                  |        |      | (52,518 | )         |        |         | (34,258 | )         |        |   | (235,065 | )         |        |   | (146,471 | )      
|Net cash (used in) provided by financing activities    |                           |       | (187,908 | )                                                |        |      | (41,566 | )         |        |         | (38,885 | )         |        |   | 191,621  |           |        |   | 90,887   |        
|Properties (at end of period):                         |                           |       |          |                                                  |        |      |         |           |        |         |         |           |        |   |          |           |        |   |          |        
|                                                       | Owned                     |       |          | 181                                              |        |      |         | 162       |        |         |         | 147       |        |   |          | 126       |        |   |          | 66      |      
|                                                       | Managed                   |       |          | 28                                               |        |      |         | 24        |        |         |         | 17        |        |   |          | 14        |        |   |          | 11      |      
|                                                       |                           |       |          |                                                  |        |      |         |           |        |         |         |           |        |   |          |           |        |   |          |        
|                                                       |                           | Total |          |                                                  | 209    |      |         |           | 186    |         |         |           | 164    |   |          |           | 140    |   |          |         | 77    | 
|Resident capacity:                                     |                           |       |          |                                                  |        |      |         |           |        |         |         |           |        |   |          |           |        |   |          |        
|                                                       | Owned                     |       |          | 14,278                                           |        |      |         | 12,607    |        |         |         | 11,380    |        |   |          | 9,756     |        |   |          | 5,617   |      
|                                                       | Managed                   |       |          | 2,322                                            |        |      |         | 2,190     |        |         |         | 1,503     |        |   |          | 1,289     |        |   |          | 1,010   |      
|                                                       |                           |       |          |                                                  |        |      |         |           |        |         |         |           |        |   |          |           |        |   |          |        
|                                                       |                           | Total |          |                                                  | 16,600 |      |         |           | 14,797 |         |         |           | 12,883 |   |          |           | 11,045 |   |          |         | 6,627 | 
|Number of stabilized consolidated properties           |                           |       | 79       |                                                  |        |      | 83      |           |        |         | 68      |           |        |   | 49       |           |        |   | 32       |        
|Occupancy rate (5)                                     |                           |       | 90       | %                                                |        |      | 91      | %         |        |         | 94      | %         |        |   | 96       | %         |        |   | 94       | %      



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|(1) |  | On May 14, 1999, we completed our acquisition of Karrington through a tax-free, stock-for-stock transaction in which we issued
2.3 million shares of our common stock in exchange for all outstanding shares of Karrington and Karrington became a wholly owned subsidiary of Sunrise.
The common stock issued in the transaction, together with related merger costs, had a value of $85 million. The transaction was accounted for using the
purchase method of accounting and, accordingly, the results of operations of Karrington since the acquisition are included in our financial information for 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Net income for the year ended December 31, 2002 included an extraordinary loss of approximately $4 million ($2 million net of tax) for fees
associated with the $92 million term loan and the premium paid for early redemption of the convertible notes.
Net income for the year ended December 31, 2001 included a $2 million non-recurring item ($1 million after tax), which consisted of a $9 million
cash payment, net of expenses, received by us in connection with a settlement of a lawsuit filed by Karrington prior to our acquisition of Karrington, and $7 million
of non-recurring charges associated with writing down project costs as a result of our decision not to proceed with our planned development of five sites. Net
income for the year ended December 31, 1999 included $5 million of non-recurring charges ($4 million after tax), of which $4 million related to the consolidation
and integration of the acquired operations and development pipeline of Karrington and $1 million related to the termination of a property acquisition agreement.
Of these non-recurring charges, $4 million were non-cash transactions.
|   
|(3) |  | Computed by dividing earnings by total fixed charges. Earnings consist of earnings from continuing operations excluding unusual charges or
extraordinary items, plus fixed charges, reduced by the amount of unamortized interest capitalized. Fixed charges consist of interest on debt,
including amortization of debt issuance costs, and a portion of rent expense estimated by management to be the interest component of such rentals.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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|(4) |  | EBITDA (excluding non-recurring items and charges) are presented because we believe this data is used by some investors to evaluate our ability
to meet debt service requirements. We consider EBITDA to be an indicative measure of our operating performance due to the significance of our
long-lived assets and because this data can be used to measure our ability to service debt, fund capital expenditures and expand our business.
However, this data should not be considered as an alternative to net income, operating profit, cash flows from operations or any other operating
or liquidity performance measure prescribed by generally accepted accounting principles. In addition, our calculation of EBITDA may not be
comparable to similarly titled measures reported by other companies. Interest, taxes, depreciation and amortization, which are not
reflected in our presentation of EBITDA, have been, and will be incurred by us. Investors are cautioned that these excluded items are significant
components in understanding and assessing our financial performance. We calculate EBITDA as follows:
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                            |                                    |   |                         |        |      |   |         |        |      |   |         |        |  |   |        |        |  |   |        |        | 
|----------------------------------------------------------------------------------------------------------- | ---------------------------------- | - | ----------------------- | ------ | ---- | - | ------- | ------ | ---- | - | ------- | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                                                                                            |                                    |   | Year Ended December 31,
|                                                                                                            |                                    |   |                        
|                                                                                                            |                                    |   | 2002                    |        | 2001 |   | 2000    |        | 1999 |   | 1998   
|                                                                                                            |                                    |   |                         |        |      |   |         |        |      |   |        
|                                                                                                            | Net income (loss)                  |   | $                       | 54,661 |      |   | $       | 49,101 |      |   | $       | 24,278 |  |   | $      | 20,213 |  |   | $      | 22,312 | 
|                                                                                                            | Plus interest expense, net         |   |                         | 19,980 |      |   |         | 26,176 |      |   |         | 37,566 |  |   |        | 21,750 |  |   |        | 15,430 | 
|                                                                                                            | Plus taxes                         |   |                         | 35,075 |      |   |         | 31,393 |      |   |         | 15,522 |  |   |        | 7,828  |  |   |        |       | 
|                                                                                                            | Plus depreciation and amortization |   |                         | 25,317 |      |   |         | 28,475 |      |   |         | 33,902 |  |   |        | 25,448 |  |   |        | 21,650 | 
|                                                                                                            | Less non-recurring items           |   |                         |       |      |   |         | (2,307 | )    |   |         |       |  |   |        |       |  |   |        |       | 
|                                                                                                            | Plus non-recurring charges         |   |                         |       |      |   |         |       |      |   |         |       |  |   |        | 5,069  |  |   |        |       | 
|                                                                                                            |                                    |   |                         |        |      |   |         |        |      |   |         |        |  |   |        |        |  |   |        |        | 
|Earnings before interest, taxes, depreciation and
amortization (excluding non-recurring items and charges): |                                    | $ | 135,033                 |        |      | $ | 132,838 |        |      | $ | 111,268 |        |  | $ | 80,308 |        |  | $ | 59,392 |       
|                                                                                                            |                                    |   |                         |        |      |   |         |        |      |   |         |        |  |   |        |        |  |   |        |        | 



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|(5) |  | Based on occupancy for owned properties, opened or operated for at least 12 months, or that have achieved occupancy percentages of 95% or above at the
beginning of the year. The occupancy rate excludes resident capacity affected by temporary vacancies and resident relocations generally of between three to six months
due to renovations. Stabilized occupancy levels for 2001 and 2002 were negatively impacted by the inclusion of the Karrington portfolio, the impact of the sale of
mature Sunrise properties under the sale/long-term manage back program and the addition of newly developed properties through our
development program. Although the financial performance of stabilized Karrington properties has improved, they generally exhibit lower occupancy levels compared to
Sunrise prototype properties.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read together with the information
contained in our consolidated financial statements, including the related
notes, and other financial information appearing elsewhere herein. This
managements discussion and analysis contains certain forward-looking
statements that involve risks and uncertainties. Although we believe the
expectations reflected in such forward looking statements are based on
reasonable assumptions, there can be no assurance that our expectations will be
realized. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including, but
not limited to, development and construction risks, acquisition risks,
licensing risks, business conditions, competition, changes in interest rates,
our ability to execute on our sale/manage back program, market factors that
could affect the value of our properties, the risks of downturns in economic
conditions generally, success in integrating Marriott Senior Livings
operations, satisfaction of closing conditions and availability of financing
for development and acquisitions. Some of these factors are discussed
elsewhere herein. We assume no obligation to update or supplement
forward-looking statements that become untrue because of subsequent events.
Unless the context suggests otherwise, references herein to we, us and
our mean Sunrise Assisted Living, Inc. and its consolidated subsidiaries.

Overview

We are a provider of senior living services in the United States, Canada
and the United Kingdom. Founded in 1981, we began with a simple but innovative
vision  to create an alternative senior living option that would emphasize
quality of life and quality of care. As of December 31, 2002, we operated 200
communities in the United States, seven communities in Canada and two
communities in the United Kingdom, with a total resident capacity of more than
16,000, including 181 communities owned by us or in which we have an ownership
interest and 28 communities managed for third parties. We have traditionally
served as an operator of assisted living communities but have also offered
independent living services and skilled nursing services at some communities.
In addition to operating senior living communities, we also develop senior
living communities for ourselves and for joint ventures in which we retain an
ownership interest.

Our long-range strategic objective is to transform ourselves into a senior
living management services company. We believe this transformation will result
in our revenue and earnings becoming increasingly based on long-term management
contracts resulting in more stable and predictable revenue and earnings
streams. Through the execution of our business plan, we have made significant
progress toward this goal. We expect that our progress in this area will be
accelerated primarily by (1) the closing of our acquisition and subsequent
integration of Marriott Senior Living (see Recent Developments below), (2)
the development of new communities primarily through joint ventures and (3) the
continuation of our sale/long-term manage back program.

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Recent Developments

In December 2002, we signed a definitive purchase agreement with Marriott
International, Inc. to acquire all of the outstanding stock of Marriotts
wholly owned subsidiary, Marriott Senior Living Services, Inc., which owns and
operates senior independent full-service and assisted living communities. Upon
the closing of this transaction, which is currently expected to occur in late
March 2003, we expect to assume management of an additional 126 operating
properties with a total resident capacity of 23,157. These properties are
expected to consist of 110 management contracts and 16 operating leases.
Through our acquisition of all of Marriott Senior Livings outstanding stock,
we will also acquire 12 land parcels as well as certain other assets of
Marriott Senior Living. At closing, Marriott Senior Livings approximately
15,000 employees are expected to remain employed by Marriott Senior Living,
which is expected to be renamed Sunrise Senior Living Services. The closing of
this transaction is subject to the receipt of required regulatory approvals and
other closing conditions.

We will pay approximately $88 million in cash, subject to various
adjustments set forth in the purchase agreement, to acquire all of the
outstanding stock of Marriott Senior Living. We will also assume approximately
$38 million of working capital liabilities and other funding obligations,
including credit enhancements, and approximately $23 million of life care
endowment obligations, the majority of which are expected to be refinanced with
proceeds from the issuance of new endowment obligations as new residents enter
the communities. In addition, pursuant to the terms of the purchase agreement,
Sunrise expects to pay Marriott approximately $10 million in connection with
Marriott Senior Livings expected acquisition of certain real property prior to
the closing of the transaction. We will use cash on hand, including proceeds
from our recently completed sale/long-term manage back transactions, and
capacity under our various credit facilities to fund the purchase price.

The Marriott Senior Living portfolio currently includes 126 properties
located in 29 states with a resident capacity of 23,157. The majority of the
properties are clustered in major metropolitan markets, which is consistent
with Sunrises operating strategy. Based on data provided to us by Marriott
International, approximately 50 percent of the resident capacity of the
portfolio is assisted living, 34 percent is independent living and 16 percent
is skilled nursing. At closing, the properties are expected to be owned by six
major owner groups with the two largest owners comprising 66 percent of the
portfolio. Based on data provided to us by Marriott International, the two
largest owners are CNL Retirement Properties, Inc. (38 properties) and Senior
Housing Properties Trust (45 properties). We are aware of pending litigation
between Senior Housing Properties Trust and Marriott. The definitive purchase
agreement between Sunrise and Marriott provides protection for us regarding
certain management contracts, including the contracts for the Senior Housing
Properties Trust properties.

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Critical Accounting Policies

Development of Properties

We undertake to develop a number of wholly owned senior living properties
each year. We also develop senior living properties in partnership with
others. We believe we have maintained a disciplined approach to site selection
and refinement of our operating model, first introduced over 20 years ago, and
are constantly searching for ways to improve our properties.

At December 31, 2002, we had seven wholly owned properties under
construction with a resident capacity of over 500 residents. With respect to
these development properties, we are required to fund the construction of the
property not otherwise financed by construction loans, capitalize the property
development costs associated with construction, recognize initial operating
losses from the property during the initial one to two years prior to the
property achieving occupancy stabilization and recognize ongoing depreciation
expense associated with owning the real estate. We are committed to this
investment in costs and expenses because we have historically been able to
create significant value through the successful development and operation of
wholly owned prototype properties. In 2002, start-up losses for 100% owned
properties that have not reached stabilized occupancy were $6 million and
depreciation expense for our owned properties was $20 million.

We also enter into development joint ventures in order to reduce our
initial capital requirements, while enabling us to enter into long-term
management agreements that are intended to provide us with a stream of revenue.
Additionally, these development joint ventures allow us to reduce the risk of
our international expansion, which we conduct through joint ventures, with the
assistance of knowledgeable international partners. When development is
undertaken in partnership with others, our joint venture partners provide
significant cash equity investments, and we take a minority interest in such
ventures. Additionally, non-recourse third-party construction debt is obtained
to provide the majority of funds necessary to complete development. At
December 31, 2002, these joint ventures have developed or are developing 51
properties (14 of which are under construction) with approximately $547 million
of third-party debt and approximately $144 million of third-party equity.

As a part of our operating strategy, we may provide limited debt
guarantees to certain of our development joint ventures. Unless otherwise
stated, we would be required to perform under a debt guarantee if the business
venture failed to perform under the debt agreement and the bank pursued our
guarantee. We currently guaranty $34 million of debt four our development
joint ventures. Of the $34 million, $18 million are last dollar debt
guarantees on international development. Last dollar guarantee means the
third-party debt would have to default, the bank would have to enforce any
remedies against the venture, including foreclosure, after which we would have
to provide any required funds to make up any difference between the loan amount
and the amount recovered from such enforcement. Of the $34 million in debt
guarantees to development joint ventures, $21 million are removed upon
stabilization of the underlying properties. The remaining $13 million will
remain in place throughout the term of the loan. We receive a fee in all
situations where we have provided a debt guarantee. These fees are

39



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recognized over the period covered by the respective debt guarantee. To date,
we have not been required to fund any debt guarantees due to the positive performance of
the underlying properties. At December 31, 2002, we do not believe that we
will be required to fund under our current outstanding debt guarantees and
therefore no liabilities are reflected in our financial statements for these
debt guarantees. If we were required to fund a debt guarantee, we would loan
the joint venture the required funds at the prevailing market interest rate.
If circumstances were to suggest that any amounts with respect to these loans
would be uncollectible, we would establish a reserve to write-down the loan to
its collectible value.

For all of our development joint ventures, we earn pre-opening fees for
site selection, zoning, construction supervision, employee selection,
licensing, training and marketing efforts. These fees are included in the
Management and contract services line item on our consolidated income
statement. As we are minority owners in these joint ventures, we only record
the fee revenue associated with the third-party ownership percentage of the
joint venture. For example, when our joint venture partner has a 75% ownership
interest in the joint venture, we only record 75% of the fee revenue.

As part of our fee-development for joint ventures, we typically guarantee
that properties will be completed at budgeted costs approved by all partners in
the joint venture. Budgeted costs typically include significant contingency
reserves for unforeseen costs and potential overruns. We would be required to
fund these guarantees if the actual costs of development exceeded the approved
budgeted costs. At December 31, 2002, thirteen properties are under
construction and subject to completion guarantees. We have over 20 years
experience in the development and construction of senior living properties.
Our construction contractors are experienced in building our prototype and
assume much of the risk of on-time and on-budget completion by executing
fixed-price contracts. Typically, the terms of these guarantees provide for no
limitation to the maximum potential future payments under the guarantee. In
certain agreements, if amounts are required to be funded by us, they would
become loans to the venture and earn interest. We closely monitor these
projects and do not expect to fund any amounts under these development
completion guarantees during 2003. Therefore, no liabilities are reflected in
our financial statements for these guarantees. If we were required to provide
funds under a development completion guarantee, we could provide additional
capital contributions to the joint venture to meet our obligation, if provided
in the joint venture and guarantee agreement, or we would expense amounts
provided under the development completion guarantee.

In addition to the third-party debt, we may provide financing necessary to
complete the construction of the properties within these joint ventures. These
loans are presented on our consolidated balance sheet in the Notes receivable
line item and were $77 million at December 31, 2002. This financing is
provided at negotiated prevailing market interest rates. We monitor the
collectibility of these notes based on the current performance of the open
properties, the budgets and projections for future performance and the
estimated fair value that has been created by the successful completion and
operation of these properties. To date, we have not recorded any reserves
against these notes based on our analysis of the preceding factors and, at
December 31, 2002, expect that repayment of these notes will be made. If
circumstances were to suggest that any amounts with respect to these notes
would be uncollectible, we would establish a reserve to write-down the note to
its collectible value.

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In addition to the foregoing, we may provide limited debt guarantees to
certain of our joint ventures. Unless otherwise stated, we would be required
to perform under a debt guarantee if the business venture failed to perform
under the debt agreement and the bank pursued our guarantee. At December 31,
2002, we have guaranteed $16 million of debt for our business ventures which
represents our maximum exposure under our debt guarantees. Of the $16 million,
$2 million of guarantees are for our sale long-term manage back partnerships.
These guarantees are removed upon reaching certain occupancy and debt service
coverage targets within the partnership. Of the $16 million, $4 million
represents a debt guarantee to a joint venture that was acquired in the
Karrington acquisition. This debt guarantee remains in place throughout the
term of the loan. Sunrise has provided $10 million of debt guarantees to
hospital partnerships that remain in place throughout the term of the loan. To
date we have not been required to fund any debt guarantees.

Management of Properties

We manage and operate properties wholly owned by us, owned by joint
ventures in which we have a minority ownership interest and owned completely by
third parties. For the properties that we manage for third parties, we
typically are paid a management fee of approximately 5% to 8% of the propertys
revenue. In addition, in certain management contracts, we have the opportunity
to earn incentive management fees based on monthly or yearly operating or cash
flow results. Management fee revenue is included in the Management and
contract services line item on our consolidated income statement.

As a part of some third party management contracts, we may provide an
operating deficit guarantee. This means that if a property has depleted all of
its operating reserves and does not generate enough cash flow during a month to
cover its expenses, we would provide a loan to the property to cover the cash
shortfall. These guarantees are generally included within our joint venture
development portfolios and usually are provided for a limited period of time,
generally until the property reaches stabilization. Typically, the terms of
these operating deficit guarantees provide for no limitation to the maximum
potential future payments under the guarantee. Currently, 26 operating
properties are subject to a Sunrise operating deficit guarantee and 13
additional properties will be subject to a guarantee upon opening. Sunrise
funded $300,000 under these guarantees in 2002 related to four properties in
the international joint ventures and expects to fund approximately $200,000 in
2003 under these guarantees. The amounts funded in 2002 were recorded as loans
to the ventures.

Sale/Long-Term Manage Back Program

In 2000, we announced our intention to sell selected owned properties as a
normal part of our operations and retain long-term management contracts and, in
many cases, minority equity interests in the properties. We believe that this
strategy of selling selected properties as part of our normal operations has
and will continue to enable us to reduce our debt, re-deploy our capital into
new development projects and realize cash gains on appreciated real estate.
Under our sale/long-term manage back program, we sell wholly owned properties
that we previously

41



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developed. This approach requires that we reflect in our
income statement many expenses
associated with these properties prior to their sale, including certain
development expenses, start-up losses and depreciation.

We have performed under our sale/long-term manage back program by selling
some properties 100% to third-parties and retaining a long-term management
contract and selling some properties to joint ventures in which we have a
minority ownership interest, generally ranging from 20% to 25%. If we sell
100% of a property to a third-party owner, we recognize as a gain from the sale
the difference between the purchase price and the book value of the property,
less the costs to sell. Generally accepted accounting principles require that
we remove the book value of the property from the Property and equipment line
item on our consolidated balance sheet and remove from liabilities any debt
paid off or assumed by the new owner in the transaction.

If we sell a property to a joint venture in which we have a minority
ownership interest, we will recognize as a gain from the sale the difference
between the purchase price and the book value of the property, less the costs
to sell, adjusted to reflect only the gain associated with the third-party
ownership in the joint venture. Generally accepted accounting principles
require that we not record a gain on the portion of the sale associated with
our remaining ownership in the joint venture. Generally accepted accounting
principles also require that we record, at historical cost basis, our remaining
ownership of the property sold and debt assumed by the joint venture as an
investment. This investment is included in the Investment in unconsolidated
senior living properties line item on the balance sheet. Further, as is the
case with the sale of a 100% interest in a property, generally accepted
accounting principles require that we remove the book value of the property
from the Property and equipment line on our consolidated balance sheet and
remove from liabilities any debt assumed by the new owner in the transaction.
We generally do not provide seller financing in these transactions.

The recognition of the gain from these sales, as calculated above, in our
consolidated income statement, which is recorded in the Income from property
sales line item, is determined by the terms of the purchase and sale
agreement. Often, the purchasers in these transactions require that the
properties perform at a certain operating level for up to one-year following
the sale transaction. The operating contingencies placed in these agreements
require us, in accordance with generally accepted accounting principles, to
defer a portion of the gains until such operating contingencies have been met.
If the operating contingencies are not met for an identified period, we would
be required to repay a portion of the cash proceeds related to the specific
contingency and would not be able to recognize the portion of the gain
associated with that contingency. There have been sale transactions in this
sale/long-term manage back program that have not required such operating
contingencies. In these instances, we would record the gain in the period in
which the sale occurred. The balance of the unrecognized gains on properties
sold in prior periods is included in the Deferred revenue line of our
consolidated balance sheet.

For financial statement purposes, we record a provision for income taxes
on all gains we recognize on the sale of properties at the applicable statutory
rate. For federal income tax purposes, many of our sales are treated as
tax-free exchanges.

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Results of Operations

We derive our consolidated revenues from three primary sources: (1)
resident fees for the delivery of senior living services, (2) management and
contract services income for management and contract services provided to
properties owned by unconsolidated joint ventures and other third parties and
(3) income from property sales. Historically, most of our operating revenues
have come from resident fees and management and contract services. In 2002,
2001, and 2000, resident fees and management and contract services comprised
85%, 85% and 91% of total operating revenues, respectively. The balance of our
total operating revenues was derived from income from property sales.

Residents, their families or other responsible parties typically pay
resident fees monthly. In each of 2002, 2001 and 2000, approximately 99% of
our resident fee revenue was derived from private pay sources. Resident fees
include revenue derived from basic care, community fees, plus care,
Reminiscenceand other resident related services. Plus care and Reminiscence
fees are paid by residents who require personal care in excess of services
provided under the basic care program.

Management and contract services income represents fees from long-term
contracts for properties owned by unconsolidated joint ventures and other third
party owners. Reimbursable expenses paid by us for the unconsolidated joint
ventures are also reflected as revenues in the income statement, as required by
contract accounting, and are offset by a corresponding amount reflected in the
Management and contract services expense line item. Management and contract
services income includes management fees for operating properties, which are
generally in the range of 5% to 8% of a managed propertys total operating
revenue for properties in operation, and pre-opening service fees for site
selection, zoning, property design, construction management, hiring, training,
licensing and marketing services.

Income from property sales represents the gain recognized from the sale of
senior living properties. Generally, upon sale of a property, we will enter
into a long-term management agreement to manage the property.

We classify our operating expenses into the following categories: (1)
facility operating, which includes labor, food, marketing and other direct
facility expenses; (2) management and contract services, which includes
operating expenses reimbursable to us; (3) facility development and pre-rental,
which includes non-capitalized development expenses and pre-rental labor and
marketing expenses; (4) general and administrative, which primarily includes
headquarters and regional staff expenses and other overhead costs; (5)
depreciation and amortization; and (6) facility lease, which represents rental
expenses for properties not owned by us.

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Consolidated

Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001

We continued to experience growth in operations in the year ended
December 31, 2002 and continued to capitalize on our brand awareness by
accepting additional third-party management and development contracts. During
2002, we began operating 21 additional properties in which we have an
ownership interest and managing 7 additional properties for independent third
parties, partially offset by four third party management contract terminations
and the 100% sale of a wholly owned property in Iowa.

Total operating revenue increased 18% to $506 million for the year ended
December 31, 2002 from $428 million for the year ended December 31, 2001. Net
income increased 11% to $55 million for the year ended December 31, 2002
(including an after tax extraordinary loss of $3 million), or $2.23 per share
(diluted), from $49 million for the year ended December 31, 2001 (including an
after tax extraordinary gain of $500,000 and non-recurring items of $1
million), or $2.08 per share (diluted). The increase in net income between
the years ended December 31, 2002 and December 31, 2001 was mainly due to our
sale/long-term manage back program which resulted in higher income, reduced
interest expense as a result of a $174 million reduction in debt and lower
depreciation and amortization expense.

Year Ended December 31, 2001 Compared to the Year Ended December 31,
2000

During 2001, we began operating 17 additional properties in which we
have an ownership interest and managing 5 additional properties for
independent third parties.

Total operating revenue increased 24% to $428 million for the year ended
December 31, 2001 from $345 million for the year ended December 31, 2000. Net
income increased by $25 million to $49 million for the year ended December 31,
2001 (including an after tax extraordinary gain of $500,000 and non-recurring
items of $1 million), or $2.08 per share (diluted), from $24 million for the
year ended December 31, 2000, or $1.10 per share (diluted). The increase in
net income between the years ended December 31, 2001 and December 31, 2000 was
mainly due to an increase in income from property sales.

We have two business segments: Sunrise Management Services and Sunrise
Properties.

Sunrise Management Services

Sunrise Management Services provides full-service senior living management
services, both in the United States and internationally, for all properties
that are owned or managed by us. In addition, the Sunrise Management Services
division provides management and pre-opening services to third parties and
joint ventures on market and site selection, pre-opening sales and marketing,
start-up training, and management services for properties under development and
construction.

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The following table sets forth the components of Sunrise Management
Services net income (in thousands):

|                                       |                                  |                          |         |                         |         |      |         |         |         |   |        |         |         | 
|-------------------------------------- | -------------------------------- | ------------------------ | ------- | ----------------------- | ------- | ---- | ------- | ------- | ------- | - | ------ | ------- | ------- | 
|                                       |                                  |                          |         | Year Ended December 31,
|                                       |                                  |                          |         |                        
|                                       |                                  |                          |         | 2002                    |         | 2001 |         | 2000   
|                                       |                                  |                          |         |                         |         |      |         |        
|Operating revenue:                     |                                  |                          |         |                         |         |      |         |         |         |   |        |        
|                                       | Management and contract services |                          | $       | 371,064                 |         |      | $       | 295,459 |         |   | $      | 227,278 |        
|Operating expenses:                    |                                  |                          |         |                         |         |      |         |         |         |   |        |        
|                                       | Management and contract services |                          |         | 312,101                 |         |      |         | 243,016 |         |   |        | 186,095 |        
|                                       | General and administrative       |                          |         | 24,419                  |         |      |         | 21,797  |         |   |        | 18,470  |        
|                                       | Depreciation and amortization    |                          |         | 1,777                   |         |      |         | 1,543   |         |   |        | 1,495   |        
|                                       |                                  |                          |         |                         |         |      |         |         |         |   |        |         |        
|                                       |                                  | Total operating expenses |         |                         | 338,297 |      |         |         | 266,356 |   |        |         | 206,060 | 
|                                       |                                  |                          |         |                         |         |      |         |         |         |   |        |        
|Operating income                       |                                  |                          | 32,767  |                         |         |      | 29,103  |         |         |   | 21,218 |        
|Provision
for income taxes             |                                  |                          | (12,452 | )                       |         |      | (11,350 | )       |         |   | (8,275 | )      
|                                       |                                  |                          |         |                         |         |      |         |         |         |   |        |        
|Sunrise Management Services net income |                                  | $                        | 20,315  |                         |         | $    | 17,753  |         |         | $ | 12,943 |        
|                                       |                                  |                          |         |                         |         |      |         |         |         |   |        |        

Note: Management and contract services revenue includes intercompany
revenue from Sunrise Properties in the amounts of $191,414, $193,025 and
$195,302 for the years ended December 31, 2002, 2001 and 2000,
respectively, that is eliminated in the consolidated financial statements.
Management and contract services expense includes intercompany facility
operating expenses of Sunrise Properties for properties managed by Sunrise
Management Services for Sunrise Properties in amounts totaling $167,354,
$168,602 and $169,966 for the years ended December 31, 2002, 2001 and 2000,
respectively, which is also eliminated in the consolidated financial
statements.

Year Ended December 31, 2002 Compared to the Year Ended December 31,
2001

Operating Revenue. Sunrise Management Services revenues include
management and contract services revenues from unconsolidated joint ventures
and third-party owners and internal management services revenues for services
provided to Sunrise Properties. Internal fees reflect estimated market-based
fees for the management services provided to Sunrise Properties and are
eliminated in the consolidated financial statements. Total revenues for
Sunrise Management Services increased 26% to $371 million for the year ended
December 31, 2002 from $295 million for the year ended December 31, 2001. This
increase was primarily due to the growth in the number of properties operated
or managed by Sunrise Management Services or in the pre-opening phase. The
total number of properties operated or managed increased 12% to 209 properties
at December 31, 2002, up from 186 properties at December 31, 2001. This growth
resulted from the completion and opening of 17 additional properties and the
addition of seven managed properties and four minority owned properties,
partially offset by four management contract terminations and the 100% sale of
a wholly owned property in Iowa. Additionally, there was a 61% increase in the
number of properties in unconsolidated joint ventures (100 versus 62), many of
which are accounted for under contract accounting which requires the
presentation of reimbursable expenses as revenues in the income statement.
These revenues are offset by a corresponding amount reflected in the management
and contract services expense line item.

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Operating Expenses. Sunrise Management Services operating expenses
include all operating expenses of properties managed for unconsolidated joint
ventures and third-party owners and Sunrise Properties. Total operating
expenses for the year ended December 31, 2002
increased 27% to $338 million from $266 million for the year ended
December 31, 2001. Management and contract services expenses for the year
ended December 31, 2002 increased $69 million, or 28%, to $312 million from
$243 million for the year ended December 31, 2001. This increase is consistent
with the corresponding increase in revenue. General and administrative
expenses increased $2 million to $24 million for the year ended December 31,
2002 from $22 million for the year ended December 31, 2001. The general and
administrative expenses for Sunrise Management Services continue to increase
due to the substantial growth in the number of properties operated during the
last twelve months.

Year Ended December 31, 2001 Compared to the Year Ended December 31,
2000

Operating Revenue. Total revenues for Sunrise Management Services
increased 30% to $295 million for the year ended December 31, 2001 from $227
million for the year ended December 31, 2000. This increase was primarily due
to the growth in the number of properties operated or managed by Sunrise
Management Services. The total number of properties operated or managed
increased 13% to 186 at December 31, 2001, up from 164 properties at December
31, 2000. This growth resulted from the completion and opening of 17
additional properties and the addition of five managed properties.
Additionally, there was a 51% increase in the number of properties in
unconsolidated joint ventures (62 versus 41), many of which were accounted for
under contract accounting which reflects reimbursable expenses as revenues to
us.

Operating Expenses. Total operating expenses for the year ended December
31, 2001 increased 29% to $266 million from $206 million for the year ended
December 31, 2000. Management and contract services expenses for the year
ended December 31, 2001 increased $57 million, or 31%, to $243 million from
$186 million for the year ended December 31, 2000. This increase was directly
related to the increase in the number of properties operated by Sunrise
Management Services. General and administrative expenses increased $4 million
to $22 million for the year ended December 31, 2001 from $18 million for the
year ended December 31, 2000. The general and administrative expenses for
Sunrise Management Services increased due to the substantial growth in the
number of properties operated or managed during 2001 compared to 2000.

Sunrise Properties

Sunrise Properties is responsible for all our real estate operations,
including development, construction, project and permanent financing and
property sales. As of December 31, 2002, Sunrise Properties wholly owned 77
properties compared to 97 properties wholly owned as of December 31, 2001. In
addition, Sunrise Properties has majority ownership interests in four
properties and minority ownership interests in another 100 properties.

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The following table sets forth the components of Sunrise Properties net
income (in thousands):

|                                                                       |                                     |                          |         |         |         |      |         |         |         |   |         |         |         | 
|---------------------------------------------------------------------- | ----------------------------------- | ------------------------ | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                       |                                     |                          |         | 2002    |         | 2001 |         | 2000   
|                                                                       |                                     |                          |         |         |         |      |         |        
|Operating revenue:                                                     |                                     |                          |         |         |         |      |         |         |         |   |         |        
|                                                                       | Resident fees                       |                          | $       | 248,098 |         |      | $       | 260,524 |         |   | $       | 274,236 |        
|                                                                       | Management and contract services    |                          |         | 3,953   |         |      |         | 3,107   |         |   |         | 6,453   |        
|                                                                       | Income from property sales          |                          |         | 74,211  |         |      |         | 62,154  |         |   |         | 32,121  |        
|                                                                       |                                     |                          |         |         |         |      |         |         |         |   |         |        
|                                                                       |                                     | Total operating revenue  |         |         | 326,262 |      |         |         | 325,785 |   |         |         | 312,810 | 
|Operating expenses:                                                    |                                     |                          |         |         |         |      |         |         |         |   |         |        
|                                                                       | Facility operating                  |                          |         | 167,354 |         |      |         | 168,602 |         |   |         | 169,966 |        
|                                                                       | Management and contract services    |                          |         | 24,060  |         |      |         | 24,794  |         |   |         | 25,138  |        
|                                                                       | Facility development and pre-rental |                          |         | 11,504  |         |      |         | 7,949   |         |   |         | 6,226   |        
|                                                                       | General and administrative          |                          |         | 3,155   |         |      |         | 3,200   |         |   |         | 2,772   |        
|                                                                       | Depreciation and amortization       |                          |         | 22,807  |         |      |         | 25,779  |         |   |         | 30,102  |        
|                                                                       | Facility lease                      |                          |         | 8,298   |         |      |         | 10,159  |         |   |         | 10,833  |        
|                                                                       |                                     |                          |         |         |         |      |         |         |         |   |         |         |        
|                                                                       |                                     | Total operating expenses |         |         | 237,178 |      |         |         | 240,483 |   |         |         | 245,037 | 
|                                                                       |                                     |                          |         |         |         |      |         |         |         |   |         |        
|Non-recurring items                                                    |                                     |                          |        |         |         |      | 2,307   |         |         |   |        |        
|                                                                       |                                     |                          |         |         |         |      |         |         |         |   |         |        
|Operating income                                                       |                                     |                          | 89,084  |         |         |      | 87,609  |         |         |   | 67,773  |        
|Interest expense, net                                                  |                                     |                          | (19,942 | )       |         |      | (26,101 | )       |         |   | (37,566 | )      
|Equity in earnings (losses) of
unconsolidated senior living
properties |                                     |                          | 695     |         |         |      | (1,169  | )       |         |   | (2,941  | )      
|Minority interest                                                      |                                     |                          | (160    | )       |         |      | (769    | )       |         |   | (203    | )      
|Provision for income taxes                                             |                                     |                          | (26,477 | )       |         |      | (23,232 | )       |         |   | (10,555 | )      
|                                                                       |                                     |                          |         |         |         |      |         |         |         |   |         |         |        
|Sunrise Properties net income before
extraordinary loss                |                                     |                          | 43,200  |         |         |      | 36,338  |         |         |   | 16,508  |        
|                                                                       |                                     |                          |         |         |         |      |         |         |         |   |         |        
|Extraordinary loss, tax effected                                       |                                     |                          | (77     | )       |         |      | (77     | )       |         |   |        |        
|                                                                       |                                     |                          |         |         |         |      |         |         |         |   |         |        
|Sunrise Properties net income                                          |                                     | $                        | 43,123  |         |         | $    | 36,261  |         |         | $ | 16,508  |        
|                                                                       |                                     |                          |         |         |         |      |         |         |         |   |         |        

Note: Management and contract services expense includes an intercompany
management fee for properties owned by Sunrise Properties and managed by
Sunrise Management Services in amounts totaling $24,060, $24,794 and
$25,138 for the years ended December 31, 2002, 2001 and 2000, respectively,
that is eliminated in the consolidated financial statements.

Income from property sales has resulted from the following transactions:

In December 2002, we completed the sale/long-term manage back of 11 senior
living properties to a real estate joint venture in which we own a 20%
interest. We will realize up to $36 million in gain over four quarters,
subject to meeting certain operating contingencies, of which $9 million was
recognized in 2002. We will continue to operate the properties under a
long-term management agreement.

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In September 2002, we completed the sale/long-term manage back of two
senior living properties to a real estate joint venture in which we own a 20%
interest. We will realize up to $8
million in gain over four quarters, subject to meeting certain operating
contingencies, of which $4 million was recognized in 2002. We will continue to
operate the properties under a long-term management agreement.

In August 2002, we completed the sale/long-term manage back of one senior
living property to a real estate joint venture in which we own a 20% interest.
We will realize up to $6 million in gain over four quarters, subject to meeting
certain operating contingencies, of which $3 million was recognized in 2002.
We will continue to operate the property under a long-term management
agreement.

In June 2002, Sunrise completed the sale/long-term manage back of two
senior living properties to a real estate joint venture in which we own a 20%
interest. We will realize up to $9 million in gain over four quarters, subject
to meeting certain operating contingencies, of which $7 million was recognized
in 2002. We will continue to operate the properties under long-term management
agreements.

In March 2002, we completed the sale/long-term manage back of 12 senior
living properties to a real estate investment entity in which we own a 20%
interest. We realized $43 million in gain, subject to meeting certain
operating contingencies being met, of which $43 million was recognized during
2002. We will continue to operate the properties under long-term management
agreements.

On December 28, 2001, one of our joint venture partners exercised an
option to acquire an additional 25% interest in one property. As a result of
the transaction, our ownership in the property was reduced to 25% from 50%. We
will continue to operate the property under a long-term management agreement.
We realized up to $1 million in gain, subject to certain contingencies being
met, of which $700,000 and $200,000 was recognized in 2002 and 2001,
respectively.

On December 20, 2001, we completed a sale/long-term manage back
transaction of a 75% interest in one property. The property was valued at $16
million. The transaction resulted in up to $2 million in gain, subject to
certain contingencies being met, of which $1 million and $500,000 was
recognized in 2002 and 2001, respectively. In 2002, we also recognized an
additional $2 million in incentive purchase price based on 2002 operating
performance.

On December 18, 2001, we completed the 100% sale of one of our two
existing Florida properties for total consideration of $8 million. The buyer
assumed management of the property after a 90-day transition period. The
transaction resulted in a gain of $1 million that was recognized in the fourth
quarter of 2001.

On October 30, 2001, we completed a sale/long-term manage back transaction
for one property with a real estate venture company in which we own a 25%
interest for an aggregate sale price of $17 million. The transaction resulted
in up to $3 million in gain, subject to certain

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contingencies being met, of
which $2 million and $1 million was recognized in 2002 and 2001, respectively.

On February 23, 2001, we closed the sale of nine senior living properties
for approximately $131 million. We will continue to operate the properties
under long-term management agreements and retain a 25% ownership interest in
the limited partnership. The transaction resulted in a $40 million gain, all
of which was recognized in 2001.

On December 28, 2000, we completed the sale of two properties for an
aggregate sales price of $28 million. Following the sale, we continue to
operate the properties under a long-term operating agreement. The transaction
resulted in up to $8 million in gain, subject to certain contingencies being
met, of which $5 million and $2 million was recognized during 2001 and 2000,
respectively.

On June 29, 2000, we entered into a definitive agreement for the sale of
11 senior living properties to a real estate venture company (venture
company) in which we own a 25% interest. Also, on June 29, 2000, the venture
company closed on three of the 11 properties, for an aggregate sales price of
$44 million. The transaction resulted in a $13 million gain, of which $2
million and $11 million was recognized during 2001 and 2000, respectively. On
September 29, 2000, the venture company closed on the remaining eight
properties for an aggregate sales price of $111 million. The venture company
assumed approximately $75 million of debt secured by the eight properties. The
transaction resulted in a $26 million gain, of which $13 million and $13
million was recognized during 2001 and 2000, respectively. We continue to
provide day-to-day management of the properties under long-term operating
agreements.

In June 1999, we completed the sale of two senior living properties for an
aggregate sales price of $28 million. The transaction resulted in the
realization of $11 million in gain, subject to certain contingencies being met,
of which $6 million and $5 million was recognized during 2000 and 1999,
respectively. Previously, in September 1998, we completed the sale of two
senior living properties for an aggregate sales price of $29 million that will
result in the realization of up to a $6 million gain. We recognized a gain of
$2 million and $2 million on the sale in 1999 and 1998, respectively. The
remaining gain is deferred, the recognition of which is contingent upon future
events. We continue to operate these properties under long-term operating
agreements.

Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001

Operating Revenue. Sunrise Properties revenues include resident fees from
our owned properties, management and contract service revenues from pre-opening
services contracts with third parties, and income from the sales of properties.
Sunrise Properties revenues remained constant at $326 million for the years
ended December 31, 2002 and December 31, 2001, primarily due to an increase in
income from property sales offset by a decrease in resident fees. Resident
fees, including community fees, for the year ended December 31, 2002 decreased
$13 million, or 5%, to $248 million from $261 million for the year ended
December 31, 2001. This decrease was due primarily to the sale of 12
properties in 2001 resulting in a $18 million decrease and the sale of 17
properties in the first nine months 2002 resulting in a $32 million

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decrease in
resident fee revenue in 2002. These decreases were partially offset by a $15
million increase from the remaining stabilized properties and a $22 million
increase from the lease-up properties.

Average resident occupancy for our 79 stabilized properties during 2002
was 90% compared to 91% for our 83 stabilized properties during 2001. We
attribute the stabilized occupancy decrease to the change in composition of the
stabilized portfolio. Our sale/long-term manage back program has the effect of
removing seasoned properties from the stabilized portfolio as less mature
properties are added. Due in part to the larger size of our developments and
the general increase in competition, the lease-up period (period of time from
opening to stabilization) is now typically taking 12 to 15 months. Although
the lease-up period is taking longer, we have not changed our definition of
what we consider a stabilized property. Comparing the 68 stabilized properties
owned and operated by us for both 2002 and 2001, average resident occupancy
remained constant at 92% and operating margins remained constant at 33%. We
define stabilized properties as those that we have owned and operated for at
least 12 months or those that have achieved occupancy percentages of 95% or
above at the beginning of the measurement period.

Average daily rate for stabilized properties during 2002 was $109 compared
to $104 during 2001. The increase is due to the inclusion of additional
prototype properties that have higher rates and a general increase in the basic
care rates. For the 68 stabilized properties owned and operated by us for both
2002 and 2001, average daily rate increased from $101 to $106.

Management and contract services revenue increased $1 million to $4
million for the year ended December 31, 2002 from $3 million for the year ended
December 31, 2001. This increase is due to an increase in the number of
third-party pre-opening services contracts in place during each of the
respective periods, and the stage of completion on each contract. There were
23 pre-opening services contracts in place during 2002 compared to 16 contracts
for 2001.

Operating Expenses. Sunrise Properties operating expenses for the year
ended December 31, 2002 decreased 1% to $237 million from $240 million for the
year ended December 31, 2001. Facility operating expenses for the year ended
December 31, 2002 decreased $2 million to $167 million from $169 million for
the year ended December 31, 2001. This decrease was due primarily to the sale
of 12 properties in 2001 resulting in a $11 million decrease and the sale of 17
properties in the first nine months 2002 resulting in a $17 million decrease in
facility operating expenses in 2002. These decreases were substantially offset
by a $9 million increase from the remaining stabilized properties and $17
million increase from the lease-up properties.

Management and contract services expense represents intercompany expense
amounts attributed to Sunrise Properties for the management by Sunrise
Management Services of Sunrise Properties wholly owned and majority owned
properties. Management and contract services expense decreased to $24 million
for the year ended December 31, 2002 from $25 million for the year ended
December 31, 2001. These amounts are eliminated in the consolidated financial
statements. At December 31, 2002, Sunrise Properties consolidated 81
properties compared to 100 properties at December 31, 2001.

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Facility development and pre-rental expense represents non-capitalizable
cost associated with the development and construction of properties and costs
incurred to initially lease the properties. These costs will vary depending on
the number of properties in development and the
stage that each property is within development. Additionally, the number
of properties in the initial stages of lease-up will impact these costs.

Depreciation and amortization for the year ended December 31, 2002
decreased 12%, to $23 million from $26 million for the year ended December 31,
2001. This decrease was primarily due to the cessation of amortization of
goodwill in accordance with new accounting guidance (see Note 2 of the
consolidated financial statements), the timing of property sales and opening of
new properties.

Facility lease expense decreased for the year ended December 31, 2002
primarily due to the termination of four operating leases in January 2002. We
terminated these leases and acquired the four properties on balance sheet.

Net Interest Expense.Net interest expense decreased $6 million, or 24%
for the year ended December 31, 2002 to $20 million from $26 million for the
year ended December 31, 2001. Of this $6 million decrease, $4 million was due
to repayments and a decrease in the variable interest rate under Sunrises $265
million credit facility. The remaining decrease is due to an overall decrease
in average balance of debt outstanding, as well as a decline in the interest
rate that we pay on our variable rate debt for 2002 compared to 2001. Debt
decreased 28% from $631 million to $457 million. The weighted-average interest
rate on our variable rate debt for 2002 was 3.87% compared to 4.36% for 2001.

Non-recurring items.During 2001, Karrington Health Inc., one of our
wholly owned subsidiaries, received a cash payment in the amount of $10 million
to settle a lawsuit filed by Karrington prior to its acquisition by us.
Karrington brought the suit alleging that Omega Healthcare Investors, Inc. had
breached a financing commitment it had made to Karrington. Expenses incurred
to settle the lawsuit have been netted against the settlement.

In 2001, given the industry environment and the increasing number of
opportunities to acquire properties and management contracts, we determined
that the costs to develop five specific sites outweighed the costs of acquiring
properties and/or management contracts in those areas. Accordingly, we elected
not to proceed with our planned development for these five sites and wrote down
associated project costs by $7 million to their estimated net realizable value.

Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000

Operating Revenue. Sunrise Properties revenues increased 4% to $326
million for the year ended December 31, 2001 from $313 million for the year
ended December 31, 2000. Resident fees, including community fees, for the year
ended December 31, 2001 decreased $13 million, or 5%, to $261 million from $274
million for the year ended December 31, 2000. This decrease was due primarily
to the sale of 13 properties in the second half of 2000 resulting in a

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$34 million decrease and the sale of nine properties at the beginning of 2001
resulting in a $33 million decrease in resident fee revenue in 2001. These
decreases were partially offset by a $6 million increase due to the inclusion
of the Karrington properties previously held for sale for a full year in 2001
and a $46 million increase primarily due to an increase in the average daily
rate for properties that were owned and operated by us during both periods.

Average resident occupancy for our 83 stabilized properties during 2001
was 91% compared to 94% for our 68 stabilized properties during 2000.
Stabilized occupancy levels for 2001 were negatively impacted by the inclusion
of the Karrington portfolio (28 properties), the impact of the sale of mature
properties under our sale/long-term manage back program (21 properties) and the
addition of newly developed properties (eight properties) through our
development program. Although the financial performance of stabilized
Karrington properties has improved, they generally exhibit lower occupancy
levels compared to our prototype properties. Comparing the 46 stabilized
properties owned and operated by us for both 2001 and 2000 (which excludes the
Karrington properties that are now stabilized), average resident occupancy
decreased from 94% to 92%. We define stabilized facilities as those that we
have owned and operated for at least 12 months or those that have achieved
occupancy percentages of 95% or above at the beginning of the measurement
period.

Average daily rate for stabilized properties during 2001 was $104 compared
to $106 during 2000. The 2001 results reflect the inclusion of 28 Karrington
properties that are not included in the 2000 results. For the 46 stabilized
properties owned and operated by us for both 2001 and 2000 (which excludes the
Karrington properties that are now stabilized), average daily rate increased
from $98 to $102. The increase is due to the inclusion of additional
prototype facilities that have higher basic care rates and a general increase
in the basic care rate.

Management and contract services revenue decreased $3 million to $3
million for the year ended December 31, 2001 from $6 million for the year ended
December 31, 2000. This decrease is due to a reduction in the number of
third-party pre-opening services contracts in place during each of the
respective periods, and the stage of completion on each contract. There were
16 pre-opening services contracts in place during 2001 compared to 25 contracts
for 2000.

Operating Expenses. Sunrise Properties operating expenses for the year
ended December 31, 2001 decreased 2% to $240 million from $245 million for the
year ended December 31, 2000. Facility operating expenses for the year ended
December 31, 2001 decreased 0.6% to $169 million from $170 million for the year
ended December 31, 2000. This decrease was due primarily to the sale of the 13
properties in the second half of 2000 and the sale of nine properties at the
beginning of 2001 resulting in a total decrease of $34 million. This decrease
was partially offset by a $5 million increase due to the inclusion of the
Karrington properties previously held for sale for a full year in 2001 and a
$28 million increase due to an increase in labor and other expenses at
properties that were operational for a full year in both periods.

Management and contract services expense represents intercompany expense
amounts attributed to Sunrise Properties for the management by Sunrise
Management Services of Sunrise Properties wholly owned and majority owned
properties, and is eliminated in the consolidated

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financial statements.
Management and contract services expense stayed constant at $25 million for the
years ended December 31, 2001 and December 31, 2000. At December 31, 2001,
Sunrise Properties consolidated 100 properties compared to 106 properties at
December 31, 2000.

Depreciation and amortization for the year ended December 31, 2001
decreased $4 million, or 13%, to $26 million from $30 million for the year
ended December 31, 2000. This decrease was primarily due to the timing of
property sales and opening of new properties.

Net Interest Expense.Net interest expense decreased for the year ended
December 31, 2001 to $26 million from $38 million for the year ended December
31, 2000. Of this $12 million decrease, $2 million was due to repayments and a
decrease in the variable interest rate under our $300 million credit facility.
The remaining decrease is due to an overall decrease in average borrowings
during 2001 compared to 2000, which was due to funds provided by property
sales, and a decrease to 6.13% in the weighted-average interest rate on our
fixed and variable rate debt for 2001 compared to 7.61% for 2000, reflecting
the lower interest rate environment in 2001.

Non-recurring items.During 2001, Karrington Health Inc., one of our
wholly owned subsidiaries, received a cash payment in the amount of $10 million
to settle a lawsuit filed by Karrington prior to its acquisition by us.
Karrington brought the suit alleging that Omega Healthcare Investors, Inc. had
breached a financing commitment it had made to Karrington. Expenses incurred
to settle the lawsuit have been netted against the settlement.

In 2001, given the industry environment and the increasing number of
opportunities to acquire properties and management contracts, we determined, in
the third quarter, that the costs to develop five specific sites outweighed the
costs of acquiring properties and/or management contracts in those areas.
Accordingly, we elected not to proceed with our planned development for these
five sites and wrote down associated project costs by $7 million to their
estimated net realizable value.

Corporate Expenses

Operating Expenses.Parent company operating expenses were $10 million,
$9 million and $8 million for the years ended December 31, 2002, 2001 and 2000,
respectively. These increases were primarily attributable to the addition of
personnel and other infrastructure in anticipation of our continuing growth and
transformation to a management services company structure.

Provision for Income Taxes.The provision for income taxes for us was $35
million, $31 million and $16 million for the years ended December 31, 2002,
2001 and 2000, respectively. The increase was due primarily to an increase in
pre-tax income which was slightly offset by the use of an effective tax rate of
38% for 2002 compared to 39% for 2001 and 2000. The decrease in the effective
tax rate is due to a decrease in our state effective tax rate.

Extraordinary Gain (Loss).In 2002, we recognized an extraordinary loss,
net of tax, of $2 million for fees associated with our $92 million term loan
and the premium paid for the early

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redemption of our 5 1/2% convertible
notes. In 2001, we recognized an extraordinary gain, net of tax, of $500,000
in connection with the early extinguishment of $42 million of the outstanding
51/2% convertible notes.

Realization of the deferred tax asset of $16 million at December 31, 2002
is dependent on generating sufficient taxable income prior to the expiration of
the loss carryforwards. We expect to fully utilize the loss carryforwards
prior to expiration.

Liquidity and Capital Resources

At December 31, 2002, we had approximately $173 million in unrestricted
cash and cash equivalents, $304 million available under credit facilities and
$140 million in working capital.

Working capital increased to $140 million from $39 million at December 31,
2001 primarily due to increases in cash and cash equivalents, short-term notes
receivable and prepaid expenses and other current assets, partially offset by
an increase in deferred revenue from property sales, accrued expenses, current
maturities of long-term debt and the repurchase of approximately $15 million of
our common stock.

We have accumulated cash through our sale/long-term manage back program in
order to be prepared to close the Marriott Senior Living Services acquisition.
Through that acquisition, we will need approximately $88 million (which amount
is subject to increase or decrease depending on the effects of certain possible
purchase price adjustments in the purchase agreement) in cash to close and
additional funds for transaction and transition costs. We will use cash on
hand, including proceeds from our previously completed sale/long-term manage
back transactions, and capacity under our various credit facilities to fund
this purchase price.

Net cash provided by operating activities for 2002 and 2001 was
approximately $99 million and $101 million, respectively. Net cash provided by
operating activities for 2002 reflects the corresponding decrease in the number
of consolidated properties operated by us from 100 properties at December 31,
2001 to 81 properties at December 31, 2002.

Net cash provided by investing activities was $212 million for 2002 and
net cash used in investing activities was $53 million for 2001. Cash proceeds
from the sale of 28 senior living properties in 2002 amounted to $128 million
compared to $52 million from the sale of 12 senior living properties in 2001.
Investing activities included investment in property and equipment related to
the construction of senior living properties that were exceeded by property
sales in the amount of $99 million in 2002 and while investments in property
and equipment exceeded property sales by $98 million in 2001.

Net cash used in financing activities was $188 million and $42 million for
2002 and 2001, respectively. Financing activities in 2002 and 2001 included
additional borrowings of $393 million and $401 million, respectively, offset by
debt repayments of $569 million and $444 million, respectively. The increased
levels of repayments are partially a result of our sale/long-term manage back
program. The additional borrowings under our credit facility during 2002 and

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2001 were used to fund our continued development of senior living properties.
Additionally, during 2002, we purchased approximately $15 million of our common
stock.

To date, we have financed our operations primarily with cash generated
from operations, both short-term and long-term borrowings and proceeds from the
sale of properties pursuant to our sale/long-term manage back program. As of
December 31, 2002, we had $457 million of outstanding debt at a weighted
average interest rate of 6.02%. Of the amount of outstanding debt, we had $343
million of fixed-rate debt at a weighted average interest rate of 6.73% and
$114 million of variable rate debt at a weighted average interest rate of
3.87%. See Note 7, Long-Term Debt, and Note 15, Commitments, for a discussion
of our outstanding debt and obligations and the maturity schedule of that
outstanding debt and obligations.

In connection with the Marriott Senior Living transaction, we will assume
approximately $38 million of working capital liabilities and other funding
obligations and approximately $23 million of life care endowment obligations
relating to four CCRC communities, the majority of which are expected to be
refinanced with proceeds from the issuance of new endowment obligations as new
residents enter the communities. CNL Retirement Communities, Inc., which will
purchase two other CCRC communities from a subsidiary of Marriott Senior Living
prior to the closing of our transaction with Marriott International, has agreed
to assume the obligations to repay $83 million of life care endowment
obligations issued by Marriott Senior Living with respect to such communities.
To the extent CNL fails to satisfy this obligation, Sunrise would be required
to repay this obligation, the majority of which is expected to be refinanced
with proceeds from the issuance of new endowment obligations as new residents
enter the communities. Of the $38 million, approximately $32 million relates
to working capital, approximately $4 million relates to the assumption of
obligations to provide financing under existing revolving credit facilities
with respect to five communities and $2 million relates to the guarantees of
payments under operating agreements with respect to two other communities.
In addition to assumption of the $38 million of
working capital and other funding obligations and the life care endowment
obligations, we will guarantee approximately $32 million of lease payments
under 14 Marriott Senior Livings operating leases, which are currently
guaranteed by Marriott International. These leases mature in 2013. We also
have agreed to provide Marriott International with a guarantee with respect to
the assumed financing obligations, payment guarantees and the 14 lease
guarantees to the extent Marriott International remains obligated under its
guarantees of these agreements after the transaction closes.

On January 11, 2002, we entered into a $92 million secured term facility
with Fleet National Bank, Credit Suisse First Boston Corporation and First
Union National Bank in order to provide us with a committed source of funds to
enable us to redeem our outstanding 5 1/2% convertible subordinated notes due
June 15, 2002. In February 2002, we used $92 million drawn under our new term
loan and approximately $18 million of our cash to redeem all of the outstanding
5 1/2% convertible notes due 2002 at a redemption price of 101.1% of the
principal amount, plus accrued and unpaid interest. The term loan was
collateralized by 14 properties, accrued interest at LIBOR plus 6% and matured
in May 2004, subject to a six-month extension option. The $92 million drawn
under the term loan was repaid within the same day from the proceeds of a
convertible notes offering that closed in January 2002, as described below. We

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recorded extraordinary expense of approximately $4 million during the first
quarter of 2002 for fees associated with the term loan and the premium paid for
the early redemption of the convertible notes.

In January 2002, we issued and sold $125 million aggregate principal
amount of 5 1/4% convertible subordinated notes due February 2009. The
convertible notes bear interest at 5 1/4% per annum payable semiannually on
February 1 and August 1 each year beginning on August 1, 2002. These notes are
convertible into shares of our common stock at the conversion price of $35.84,
which is equivalent to a conversion rate of 27.9018 shares per $1,000 principal
amount
of the convertible notes. The notes, which are subordinated to our
existing and future senior indebtedness, are redeemable at our option
commencing February 5, 2006. In addition, the holders of the convertible notes
may require us to repurchase the notes upon a change of control as defined in
the convertible notes.

As of December 31, 2002, we had $29 million of debt that is due within the
next twelve months. Of this amount, $26 million relates to three wholly owned
properties. This debt is mortgage financing that will be refinanced or
extended during 2003.

In December 2002, Sunrise entered into an $18 million revolving credit
facility. The revolving credit facility matures in January 2005, accrues
interest at LIBOR plus 2.50% (3.88% at December 31, 2002) and is collateralized
by senior living properties. At December 31, 2002, the collateral of the
revolving credit facility consisted of eight properties and $11 million was
outstanding.

In December 2002, Sunrise received a commitment for a $50 million
revolving unsecured credit facility. The revolving credit facility matures 364
days from closing, accrues interest at LIBOR plus 2.50% (3.88% at December 31,
2002). Sunrise pays commitment fees of 0.10% on the unused portion of the
credit facility. Closing on the revolving unsecured credit facility is
conditioned on the closing of Sunrises acquisition of Marriott Senior Living
Services (See Note 13).

In December 2002, Sunrise received a commitment for a $17 million credit
facility. The credit facility matures 2 years from closing which is expected
in February 2003, subject to a one-year extension, accrues interest at LIBOR
plus 3.25% (4.63% at December 31, 2002) subject to a minimum of 5.75% and is
collateralized by three senior living properties.

In December 2002, Sunrise received a commitment for a $20 million
revolving credit facility. The revolving credit facility closed in January
2003, matures in January 2005, is subject to a one-year extension, accrues
interest at Prime subject to a minimum of 5% and is collateralized by five
senior living properties.

In June 2001, we refinanced our syndicated revolving credit facility,
which was secured by cross-collateralized first mortgages on the real property
and improvements and first liens on all assets of the borrowing subsidiaries,
and reduced the commitment amount to up to $300 million. The maturity date was
extended from July 2002 to June 2004 and the interest rate

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increased from LIBOR
plus 1.75% to LIBOR plus 2.00%, which, as of December 31, 2002, amounted to
3.38%. We are required to pay commitment fees of 0.25% on the unused portion
of the credit facility. In December 2002, we reduced our syndicated revolving
credit facility to $265 million. There were $109 million of advances
outstanding under this credit facility as of December 31, 2002. As of December
31, 2002, we had $156 million available for borrowing under this credit
facility. We continue to expect to use this credit facility for general
corporate purposes, including the continued construction and development of
senior living properties.

In 2001, we entered into five interest rate swap agreements whereby $125
million of advances outstanding on our variable LIBOR based revolving
construction credit facility bear
interest at a fixed rate. In December 2002, we paid $400,000 to terminate
one of our five interest rate swap agreements. We recorded interest expense,
net of tax, of $2 million in 2002 for swap transactions. The fair value of the
swaps was negative $2 million as of December 31, 2002. Since December 31,
2002, we paid $3 million to terminate our remaining four interest rate swap
agreements. The fair value of the swaps were adjusted quarterly.

Our debt instruments contain various financial covenants and other
restrictions, including provisions which:



| |  |  | require us to meet specified financial tests. For example,
our $265 million construction line of credit requires us to have a
consolidated tangible net worth of at least $284 million and to
maintain a consolidated minimum cash liquidity balance of at least
$25 million and to meet other financial ratios. These tests are
administered on a monthly or quarterly basis depending on the
covenant;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | require consent for changes in management or control of us.
For example, our $265 million construction credit facility requires
the lenders consent for any merger where Paul Klaassen or Teresa
Klaassen does not remain chairman of the board and chief executive
officer;                                                                                                                           
|
| |  |  | restrict the ability of our subsidiaries to borrow additional
funds, dispose of assets or engage in mergers or other business
combinations without lender consent; and                                                                                                                                                                                                                                  
|
| |  |  | require that we maintain minimum occupancy levels at our
properties. For example, our $265 million construction credit
facility requires that 85% occupancy be achieved after 15 months for
newly opened properties with 77 units or less and 18 months for 78
units or more and, following this 15 month and 18 month period, be
maintained at or above that level.                                    

If we fail to comply with any of these requirements, then the related
indebtedness could become due and payable before its stated due date. At
December 31, 2002, we were in compliance with the financial covenants contained
in our debt instruments. Our construction line of credit also contains a
cross-default provision pursuant to which a default by us or by any of our
consolidated subsidiaries under the construction line of credit could result in
the ability of the lenders to declare a default under and accelerate the
indebtedness due under the construction line of credit.

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We currently estimate that the existing credit facilities, together with
existing working capital, cash flows from operations, proceeds from sales of
selected real estate properties as a normal part of our operations, financing
commitments and financing expected to be available, will be sufficient to fund
propertys short term liquidity needs, including properties currently under
construction. Additional financing will, however, be required to complete
additional development and to refinance existing indebtedness. We estimate
that it will cost approximately $54 million to complete the properties we
currently have under construction. We have entered into contracts to purchase
and lease additional sites. The total contracted purchase price of these sites
is $92 million. We estimate that it will cost approximately $445 million to
develop these properties. We expect that the cash flow from operations,
together with borrowings under existing credit facilities and proceeds from the
sale of selected real estate properties will be sufficient to fund the
development and construction for these additional properties for at least the
next twelve months. We expect from time to time to seek additional
funding through public or private financing sources, including equity or debt
financing. We can provide no assurance that such financing and refinancing
will be available on acceptable terms.

Stock Repurchase Program

On July 23, 2002, we announced that our Board of Directors authorized us
to repurchase outstanding shares of our common stock up to an aggregate
purchase price of $50 million over the next 12 months. In the second half of
2002, we repurchased 581,400 shares at an average price of $25.57 per share
through open-market purchases

Joint Venture Arrangements

For summary financial information for unconsolidated entities in which we
have made investments, see Note 6 to our consolidated financial statements.
For information regarding commitments and contingencies to our joint ventures,
see Overview above and Notes 4 and 15 to our consolidated financial
statements.

As discussed in Note 17 to our consolidated financial statements, a
director of Sunrise, Craig Callen, is a managing director of Credit Suisse
First Boston (CSFB) LLC. The parent of CSFB LLC controls through funds
sponsored by an affiliate or subsidiary investments, which from time to time
have included investments in our joint ventures. We are providing management
and pre-opening services to the joint ventures on a contract fee basis with
rights to acquire the assets in the future.

We may allow minority equity ownership interests in joint ventures for our
officers as a means of incentive. Currently, two of our executive vice
presidents, Christian Slavin and Tiffany Tomasso, have minority ownership
interests (less than 1% combined on a fully diluted basis) in one of our
international joint ventures. Brian Swinton, another of our executive vice
presidents, has a 0.05% minority ownership interest computed on a fully diluted
basis in our at-home senior living joint venture.

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Market Risk

We are exposed to market risks related to fluctuations in interest rates
on our notes receivable, investments and debt. The purpose of the following
analyses is to provide a framework to understand our sensitivity to
hypothetical changes in interest rates as of December 31, 2002.

We have investments in notes receivable and bonds. Investments in notes
receivable are primarily with joint venture arrangements in which we have a
minority equity ownership interest ranging from 7% to 50%. We have 29
properties in which we own less than 10%, 57 properties in which we own between
10% and 20%, 26 properties in which we own between 21% and 30% and six
properties in which we own more than 30%. Investments in bonds are secured by
the operating properties subject to the debt and are with properties that are
managed by us. The majority of the investments have fixed rates. One of the
notes has an adjustable rate.

We utilize a combination of debt and equity financing to fund our
development, construction and acquisition activities. We seek the financing at
the most favorable terms available at the time. When seeking debt financing,
we use a combination of variable and fixed rate debt, whichever is more
favorable in our judgment at the time of financing. We have used interest rate
swaps to manage the interest rates on some of our long-term borrowings. As of
December 31, 2002, we had four interest rate swap agreements that effectively
convert $100 million of floating-rate debt to fixed-rate debt. The maturity
dates of the swap agreements range from June 2003 to June 2004 and have an
effective weighted-average fixed interest rate of 6.59%. Since December 31,
2002, we paid $3 million to terminate these four interest rate swap agreements.
We do not utilize forward or option contracts on foreign currencies or
commodities, or other types of derivative financial instruments.

For fixed rate debt, changes in interest rates generally affect the fair
market value of the debt, but not earnings or cash flows. Conversely, for
variable rate debt, changes in interest rates generally do not impact fair
market value of the debt, but do affect the future earnings and cash flows. We
generally cannot prepay fixed rate debt prior to maturity without penalty.
Therefore, interest rate risk and changes in fair market value should not have
a significant impact on the fixed rate debt until we would be required to
refinance such debt. Holding the variable rate debt balance of $114 million at
December 31, 2002 constant, each one-percentage point increase in interest
rates would result in an increase in interest expense for the coming year of
approximately $1 million.

The table below details by category the principal amount, the average
interest rates and the estimated fair market value. Some of the notes
receivable and some items in the various categories of debt, excluding the
convertible notes, require periodic principal payments prior to the final
maturity date. The fair value estimates for the notes receivable are based on
the estimates of management and on rates currently prevailing for comparable
loans. The fair market value estimates for debt securities are based on
discounting future cash flows utilizing current

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rates offered to Sunrise for debt of the same type and remaining maturity. The
fair market value estimate of the convertible notes is based on the market
value at December 31, 2002.

|                            |                   |                       |       |        |      |      |        |               |      |      |   |            |     |       |        |        |     |   |        |        |      |             |        |         |      |   |        |           |   | 
|--------------------------- | ----------------- | --------------------- | ----- | ------ | ---- | ---- | ------ | ------------- | ---- | ---- | - | ---------- | --- | ----- | ------ | ------ | --- | - | ------ | ------ | ---- | ----------- | ------ | ------- | ---- | - | ------ | --------- | - | 
|                            |                   |                       |       |        |      |      |        |               |      |      |   |            |     |       |        |        |     |   |        |        |      |             |        |         |      |   |        | Estimated
|                            |                   |                       |       |        |      |      |        | Maturity Date |      |      |   |            |     |       |        |        |     |   |        |        |      | Fair Market
|(dollars in thousands)      |                   | 2003                  |       | 2004   |      | 2005 |        | 2006          |      | 2007 |   | Thereafter |     | Value
|                            |                   |                       |       |        |      |      |        |               |      |      |   |            |     |      
|Assets                      |                   |                       |       |        |      |      |        |               |      |      |   |            |     |       |        |        |     |   |        |        |      |             |        |         |      |   |        |          
|Notes receivable
Fixed rate |                   | $                     | 6,142 |        |      | $    | 17,861 |               |      |      |  |            |     | $     | 14,459 |        |     | $ | 22,917 |        |      | $           | 18,765 |         |      | $ | 80,144 |          
|                            |                   | Average interest rate |       |        | 11.6 | %    |        |               | 10.0 | %    |   |            |    |       |        |        | 10  | % |        |        | 14.9 | %           |        |         | 12.3 | % |        |           |  | 
|                            | Variable rate     |                       | $     | 4,038  |      |      | $      | 2,717         |      |      |   |           |     |       |        |       |     |   |        |       |      |             | $      | 393     |      |   | $      | 7,148     |  
|                            |                   | Average interest rate |       |        | 4.1  | %    |        |               | 6.0  | %    |   |            |    |       |        |        |    |   |        |        |     |             |        |         | 6.2  | % |        |           |  | 
|Investments                 |                   |                       |       |        |      |      |        |               |      |      |   |            |     |       |        |        |     |   |        |        |      |             |        |         |      |   |        |          
|                            | Bonds             |                       |       |       |      |      |        |              |      |      |   |           |     |       |        |       |     |   |        |       |      |             | $      | 5,610   |      |   | $      | 5,610     |  
|                            |                   | Average interest rate |       |        |     |      |        |               |     |      |   |            |    |       |        |        |    |   |        |        |     |             |        |         | 11.0 | % |        |           |  | 
|Liabilities                 |                   |                       |       |        |      |      |        |               |      |      |   |            |     |       |        |        |     |   |        |        |      |             |        |         |      |   |        |          
|Debt                        |                   |                       |       |        |      |      |        |               |      |      |   |            |     |       |        |        |     |   |        |        |      |             |        |         |      |   |        |          
|                            | Fixed rate        |                       | $     | 2,096  |      |      | $      | 178,230       |      |      | $ | 1,017      |     |       | $      | 2,430  |     |   | $      | 22,746 |      |             | $      | 11,760  |      |   | $      | 224,786   |  
|                            |                   | Average interest rate |       |        | 8.6  | %    |        |               | 7.3  | %    |   |            | 9.2 | %     |        |        | 9.4 | % |        |        | 9.7  | %           |        |         | 7.1  | % |        |           |  | 
|                            | Variable rate     |                       | $     | 27,319 |      |      | $      | 16,220        |      |      | $ | 21,822     |     |       | $      | 28,107 |     |   | $      | 16,222 |      |             | $      | 4,000   |      |   | $      | 113,690   |  
|                            |                   | Average interest rate |       |        | 3.8  | %    |        |               | 4.9  | %    |   |            | 4.3 | %     |        |        | 3.0 | % |        |        | 4.2  | %           |        |         | 2.9  | % |        |           |  | 
|                            | Convertible notes |                       |       |       |      |      |        |              |      |      |   |           |     |       |        |       |     |   |        |       |      |             | $      | 125,000 |      |   | $      | 115,469   |  
|                            |                   | Average interest rate |       |        |     |      |        |               |     |      |   |            |    |       |        |        |    |   |        |        |     |             |        |         | 5.3  | % |        |           |  | 

Impact of Changes in Accounting Standards

On January 1, 2002, Sunrise adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. In
accordance with the new rule, goodwill and indefinite lived intangible assets
are no longer amortized but are reviewed annually for impairment. Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives. Sunrise completed its initial test for
goodwill impairment using the two-step process prescribed in SFAS 142. Based
on the results of this test, Sunrise was not required to record an impairment
charge. Diluted net income and diluted earnings per share before extraordinary
items would have been $54 million and $2.09 per share and $25 million and $1.13
per share for 2001 and 2000, respectively, if SFAS No. 142 had been applied to
2001 and 2000.

On January 1, 2002, Sunrise SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 supercedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed ofand
APB Opinion No. 30, Reporting the Results of OperationsReporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for segments of a business to
be disposed of. SFAS No. 144 retains the requirements of SFAS 121 relating to
recognition and measurement of an impairment loss and resolves certain
implementation issues resulting from SFAS 121. Long-lived assets are reviewed
for impairment whenever events or circumstances indicate that the assets
undiscounted expected cash flows are not sufficient to recover its carrying
amount. Sunrise measures an impairment loss by comparing the fair value of the
asset to its carrying amount. Fair value of an asset is calculated as the
present value of

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expected future cash flows. The adoption of SFAS 144 did not
have a material impact on the consolidated financial position or results of
operation of Sunrise.

In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, Recission of FASB Statements 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections.SFAS No. 145 requires companies to no
longer report gains and losses associated with the extinguishment of debt as a
component of extraordinary gains and losses, net of tax. These gains and
losses will now be required to be presented within the statement of income in
appropriate segregated line items. SFAS 145 is effective for fiscal years
beginning after December 15, 2002. Upon adoption, Sunrise will reclassify
prior years amounts to reflect SFAS 145.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires companies to
initially record at fair value guarantees meeting the characteristics described
in this interpretation, which is different from the general current practice of
recording a liability only when a loss is probable and reasonably estimable, as
defined by FASB Statement No. 5, Accounting for Contingencies. The
Interpretation also requires a guarantor to provide new disclosures for
guarantees even if the likelihood of the guarantors having to make payments
under the guarantee is remote. The Interpretations disclosure requirements
are effective for financial statements of interim or annual periods ending
after December 15, 2002. The Interpretations initial recognition and initial
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of the guarantors
fiscal year-end. The impact of this Interpretation will depend upon the types
and terms of guarantees issued by Sunrise after January 1, 2003.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS No. 148 amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition to SFAS No. 123s fair value method of accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting,
to require disclosure in the summary of significant accounting policies of the
effects of an entitys accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and
interim financial statements. The disclosure provisions of SFAS No. 148 are
applicable to all companies with stock-based employee compensation, regardless
of whether they account for that compensation using the fair value method of
SFAS No. 123 or the intrinsic value method of Opinion 25. SFAS 148 is
effective for fiscal years beginning after December 15, 2002. The disclosure
requirements are effective immediately.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities(FIN 46). Under this new Interpretation,
companies will be required to determine if they are the primary beneficiary of
a variable interest entity. If they are the primary beneficiary, the variable
interest entity must be consolidated. All companies with variable interests in
variable interest entities created after January 31, 2003 must apply the
provisions of

61



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##### 



the Interpretation immediately. Public companies with a variable
interest in a variable interest entity created before February 1, 2003 must
apply the provisions of the Interpretation to that entity no later than the
beginning of the first interim or annual reporting period beginning after June
15, 2003. If it is reasonably possible that a company will consolidate
or disclose information about a variable interest entity when this
interpretation becomes effective, certain disclosures are required in all
financial statements issued after January 31, 2003.

We are currently evaluating the impact of FIN 46 on our financials. Based
on our preliminary review of FIN 46, we believe that our joint ventures will be
considered variable interest entities and are currently evaluating
whether we are the primary beneficiary. See Note 6 Transactions with
Unconsolidated Entities. Our joint ventures fall into one of three categories.
First, we enter into development joint ventures whereby a third-party investor
and we capitalize a joint venture to develop and operate senior living
properties. Second, we and a third-party investor capitalize a joint venture
to acquire an existing senior living property. Finally, as a part of our sale
long-term manage back program, we sell wholly owned properties into a joint
venture structure that is capitalized by a third-party investor and in which we
hold a minority interest. These partnerships obtain non-recourse third-party
debt. We do not have future requirements to contribute additional capital over
and above the original capital commitments. All three types of joint ventures
are established as real estate partnerships to own the underlying property. We
will then enter into a long-term management contract to operate the property on
behalf of the joint venture. Sunrises total investment in these joint
ventures is comprised of our direct capital investment in these joint ventures,
sub-debt provided to the joint ventures and other short-term advances to these
joint ventures (our investment). As of December 31, 2002, this total
investment was $156 million, not including any guarantees provided to these
joint ventures as described in Note 15 to our consolidated financial
statements. The realization of this investment is dependent upon the ongoing
operations of the joint ventures. See Note 6 to our consolidated financial
statements for operating results of the joint ventures.

Impact of Inflation

Resident fees from owned senior living properties and management services
income from properties operated by us for third parties are the primary sources
of revenue. These revenues are affected by daily resident fee rates and
property occupancy rates. The rates charged for the delivery of senior living
services are highly dependent upon local market conditions and the competitive
environment in which the properties operate. In addition, employee compensation
expense is the principal cost element of property operations. Employee
compensation, including salary increases and the hiring of additional staff to
support our growth initiatives, have previously had a negative impact on
operating margins and may again do so in the foreseeable future.

Substantially all of our resident agreements are for terms of one year,
but are terminable by the resident at any time upon 30 days notice, and allow,
at the time of renewal, for adjustments in the daily fees payable, and thus may
enable us to seek increases in daily fees due to inflation or other factors.
Any increase would be subject to market and competitive conditions and could
result in a decrease in occupancy of our properties. We believe, however, that
the short-term nature of our resident agreements generally serves to reduce the
risk to us of the

62



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##### 



adverse effect of inflation. There can be no assurance that
resident fees will increase or that costs will not increase due to inflation or
other causes.

63



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##### 



Item 7A. Quantitative and Qualitative Disclosure About Market Risk

Quantitative and qualitative disclosure about market risk appears in the
liquidity and capital resources, market risk section of item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations.

Item 8. Financial Statements and Supplementary Data

The consolidated financial statements appear on pages F-1 through F-32.

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 contained in the sections Election of Directors 
Information as to Nominees and Other Directors, Other Executive Officers,
and Section 16(a) Beneficial Ownership Reporting Compliance in Sunrises 2003
Annual Meeting Proxy Statement, which Sunrise intends to file within 120 days
after its fiscal year-end, is incorporated by reference herein.

Item 11. Executive Compensation

The information contained in the sections Compensation of Directors and
Executive Compensation and Other Information in Sunrises 2003 Annual Meeting
Proxy Statement, which Sunrise intends to file within 120 days after its fiscal
year-end, is incorporated by reference herein.

Item 12. Securities Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information contained in the sections Stock Owned by Management,
Principal Holders of Voting Securities and Executive Compensation and Option
Information  Equity Compensation Plan Information in Sunrises 2003 Annual
Meeting Proxy Statement, which Sunrise intends to file within 120 days after
its fiscal year-end, is incorporated by reference herein.

64



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##### 



Item 13. Certain Relationships and Related Transactions

The information contained in the sections Compensation Committee
Interlocks and Insider Participation and Certain Transactions in Sunrises
2003 Annual Meeting Proxy Statement, which Sunrise intends to file within 120
days after its fiscal year-end, is incorporated by reference herein.

Item 14. Controls and Procedures

Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of Sunrises disclosure controls and
procedures as defined in Exchange Act Rule 13a-14. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic SEC filings.
There were no significant changes in our internal controls or in other factors
that could significantly affect these internal controls subsequent to the date
of our most recent evaluation.

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

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



|                                                                                                                |  |  |      | 
|--------------------------------------------------------------------------------------------------------------- |  |  | ---- | 
|                                                                                                                |  |  | Page | 
|                                                                                                                |  |  |      | 
|(1)  Financial Statements:                                                                                      |  |  |      | 
|Report of Independent Auditors                                                                                  |  |  | F-1  | 
|Consolidated Balance Sheets  December 31, 2002 and 2001                                                        |  |  | F-2  | 
|Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000                          |  |  | F-3  | 
|Consolidated Statements of Changes in Stockholders Equity
for the years ended December 31, 2002, 2001 and 2000 |  |  | F-4  | 
|Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000                      |  |  | F-5  | 
|Note Consolidated Financial Statements                                                                          |  |  | F-6  | 

65



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##### 





| | (2) |  | Financial Statements Schedules:                                                                                                                                                                                            
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | All schedules for which provision is made in the applicable
accounting regulations of the SEC are not required under the
related instructions or are inapplicable or are included in the
consolidated financial statements.
|
| | (3) |  | Exhibits:                                                                                                                                                                                                                  
|
| |     |  | Sunrise files as part of this Annual Report on Form 10-K the
Exhibits listed in the Index to Exhibits.                                                                                                                     

(b)  Reports on Form 8-K.



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On November 13, 2002, Sunrise filed a Form 8-K with the Securities
and Exchange Commission to update Exhibit 99.1 to be included in its
slideshow presentation.



| |                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On November 13, 2002, Sunrise filed a Form 8-K with the
Securities and Exchange Commission that included a copy of the written
statement of the Chief Executive Officer and Chief Financial Officer
required under Section 906 of the Sarbanes-Oxley Act of 2002 in
connection with the filing of its Form 10-Q for the quarter ended
September 30, 2002.                   
|
| | On December 2, 2002, Sunrise filed a Form 8-K announcing that it
was in discussions with Marriott International, Inc. relating to a
possible cash purchase by Sunrise of all of the outstanding stock of
Marriotts wholly owned subsidiary, Marriott Senior Living Services,
Inc., which owns and operates senior independent full-service and
assisted living communities.

(c)  Exhibits.



| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | Sunrise 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.

66



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##### 



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

| |        
| | -------
| | 3/25/03
| |        
| | 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.

|    |  |                                                                                                                          |  |               | 
|--- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ------------- | 
|By: |  | /s/ Paul J. Klaassen 
Paul J. Klaassen 
Chairman of the Board and 
Chief Executive Officer
(Principal Executive Officer) |  | 3/25/03 
Date | 
|    |  |                                                                                                                          |  |               | 
|By: |  | /s/ Larry E. Hulse 
Larry E. Hulse 
Chief Financial Officer
(Principal Financial Officer)                                |  | 3/26/03 
Date | 
|    |  |                                                                                                                          |  |               | 
|By: |  | /s/ Carl G. Adams
Carl G. Adams
Chief Accounting Officer 
(Principal Accounting Officer)                                 |  | 3/26/03
Date  | 

67



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##### 



|    |  |                                                                                                 |  |               | 
|--- |  | ----------------------------------------------------------------------------------------------- |  | ------------- | 
|By: |  | David W. Faeder
Vice Chairman of the Board
Director                                             |  | Date          | 
|    |  |                                                                                                 |  |               | 
|By: |  | Ronald V. Aprahamian 
Director                                                                  |  | Date          | 
|    |  |                                                                                                 |  |              
|By: |  | /s/ Craig R. Callen
Craig R. Callen
Director                                                    |  | 3/20/03
Date  | 
|    |  |                                                                                                 |  |               | 
|By: |  | David G. Bradley 
Director                                                                      |  | Date          | 
|    |  |                                                                                                 |  |              
|By: |  | Thomas J. Donohue 
Director                                                                     |  | Date          | 
|    |  |                                                                                                 |  |               | 
|By: |  | /s/ Teresa M. Klaassen     
Teresa M. Klaassen
Executive Vice President,
Secretary and Director |  | 3/25/03
Date  | 
|    |  |                                                                                                 |  |               | 
|By: |  | /s/ Pete A. Klisares 
Pete A. Klisares 
Director                                                |  | 3/20/03
Date  | 
|    |  |                                                                                                 |  |               | 
|By: |  | /s/ J. Douglas Holladay     
J. Douglas Holladay
Director                                       |  | 3/20/03 
Date | 

68



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##### 



CERTIFICATIONS

I, Paul J. Klaassen, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Sunrise Assisted Living,
Inc.;                                                                                                                                                                                                                                       
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                               



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



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



| |  | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

69



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##### 





| |  |  | b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
controls; and
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



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

Date: March 21, 2003

|                                                             
|-------------------------------------------------------------
|/s/ Paul J. Klaassen
Paul J. Klaassen
Chief Executive Officer

I, Larry E. Hulse, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Sunrise Assisted Living,
Inc.;                                                                                                                                                                                                                                       
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-                                                                                                                                             

70



---



##### 





| |                                               
| | ----------------------------------------------
| | 14 and 15d-14) for the registrant and we have:



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



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



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



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

|                      |  |                                                           | 
|--------------------- |  | --------------------------------------------------------- | 
|Date: March  21, 2003 |  |                                                           | 
|                      |  | /s/ Larry E. Hulse
Larry E. Hulse
Chief Financial Officer | 

71



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##### 



INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                                                                                                                          |  |            |  | 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------- |  | 
|        |  |                                                                                                                                                                                                                                                                                                                          |  | Page (by  
|        |  |                                                                                                                                                                                                                                                                                                                          |  | Sequential
|Exhibit |  |                                                                                                                                                                                                                                                                                                                          |  | Numbering 
|Number  |  | Identity of Exhibit                                                                                                                                                                                                                                                                                                      |  | System)   
|        |  |                                                                                                                                                                                                                                                                                                                          |  |           
|2.1     |  | Amended and Restated Operating Agreement of Sunrise
First Assisted Living Holdings, LLC by and between
Sunrise Assisted Living Investments, Inc., as the
Managing Member and US Assisted Living Facilities,
Inc., as the Investor Member dated as of March 22, 2002
(Exhibit 2.1 to Sunrises 2001 Form 10-K).          
|        |  |                                                                                                                                                                                                                                                                                                                         
|2.2     |  | Amended and Restated Transaction Agreement by and
among Sunrise Assisted Living Investments, Inc.,
Sunrise Development, Inc., Sunrise Assisted Living,
Inc. and certain Sunrise property owning entities and
US Assisted Living Facilities, Inc. dated as of January
30, 2002 (Exhibit 2.2 to Sunrises 2001 Form 10-K).
|        |  |                                                                                                                                                                                                                                                                                                                         
|2.3     |  | Stock Purchase Agreement dated as of December 30, 2002
by and among Marriott International, Inc., Marriott
Senior Holding Co., Marriott Magenta Holding Company,
Inc. and Sunrise Assisted Living, Inc.                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                         
|3.1     |  | Restated Certificate of Incorporation of Sunrise
(Exhibit 3.1 to Sunrises Form S-1 Registration
Statement No. 333- 13731).                                                                                                                                                                                             

72



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##### 



|        |  |                                                                                                                                                                                                                                                                                                             |  |            |  | 
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | 
|        |  |                                                                                                                                                                                                                                                                                                             |  | Page (by  
|        |  |                                                                                                                                                                                                                                                                                                             |  | Sequential
|Exhibit |  |                                                                                                                                                                                                                                                                                                             |  | Numbering 
|Number  |  | Identity of Exhibit                                                                                                                                                                                                                                                                                         |  | System)   
|        |  |                                                                                                                                                                                                                                                                                                             |  |           
|3.2     |  | Amended and Restated Bylaws of Sunrise, as amended
(Exhibit 3 to Sunrises Form 10-Q for the quarter ended
September 30, 1997).                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                            
|4.1     |  | Form of common stock certificate (Exhibit 4.1 to
Sunrises Form S-1 Registration Statement No.
333-13731).                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                            
|4.2     |  | Stockholder Rights Agreement (Exhibit 4.2 to Sunrises
Form S-1 Registration Statement No. 333-13731).                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                            
|4.3     |  | Amendment No. 1 to Rights Agreement, dated as of
December 17, 1998, between Sunrise and First Union
National Bank of North Carolina (Exhibit 99(a) to
Sunrises Form 8-K dated December 18, 1998).                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                            
|4.4     |  | Indenture, dated as of January 30, 2002, between
Sunrise and First Union National Bank, as Trustee
(incorporated herein by reference to Exhibit 4.1 to the
Companys Form S-3 Registration Statement (No.
333-85622)).                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                            
|4.5     |  | Registration Rights Agreement, dated as of January 24,
2002, by and among Sunrise and Credit Suisse First
Boston Corporation, Robertson Stephens, Inc. and First
Union Securities, Inc. (incorporated herein by
reference to Exhibit 4.2 to the Companys Form S-3
Registration Statement (No. 333-85622)).
|        |  |                                                                                                                                                                                                                                                                                                            
|10.1    |  | Assignment and Contribution Agreement, effective as of
January 4, 1995, by and between Paul and Teresa
Klaassen and Sunrise (Exhibit 10.1.1 to Sunrise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                                                                                                  

73



---



##### 



|        |  |                                                                                                                                                                                                                                                                                                                                                                                |  |            |  | 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------- |  | 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                |  | Page (by  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                |  | Sequential
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                |  | Numbering 
|Number  |  | Identity of Exhibit                                                                                                                                                                                                                                                                                                                                                            |  | System)   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                |  |           
|        |  | 10.1.2 to
Sunrise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
10.19 to Sunrises Form S-1 Registration Statement No.
33-2852).
|        |  |                                                                                                                                                                                                                                                                                                                                                                               
|10.4    |  | Registration Agreement, dated January 4, 1995, by and
among Sunrise, the Investors (as defined therein) and
Paul and Teresa Klaassen (Exhibit 10.3 to Sunrise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
Sunrise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 Sunrise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 Sunrise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 Sunrises Form S-1
Registration Statement No. 333-2582).                                                                                                                                    

74



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##### 



|        |  |                                                                                                                                                                                                                                                                          |  |            |  | 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------- |  | 
|        |  |                                                                                                                                                                                                                                                                          |  | Page (by  
|        |  |                                                                                                                                                                                                                                                                          |  | Sequential
|Exhibit |  |                                                                                                                                                                                                                                                                          |  | Numbering 
|Number  |  | Identity of Exhibit                                                                                                                                                                                                                                                      |  | System)   
|        |  |                                                                                                                                                                                                                                                                          |  |           
|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 Sunrise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
Sunrises 1996 Form 10-K).                                                                                 
|        |  |                                                                                                                                                                                                                                                                         
|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 (Exhibit 10.11 to Sunrises 1997 Form
10-K).                                                            
|        |  |                                                                                                                                                                                                                                                                         
|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 Sunrise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 Sunrise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 Sunrise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 Sunrises Form S-1
Registration Statement No. 333-2582).                                
|        |  |                                                                                                                                                                                                                                                                         

75



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##### 



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                       |  |            |  | 
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                       |  | Page (by  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                       |  | Sequential
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                       |  | Numbering 
|Number  |  | Identity of Exhibit                                                                                                                                                                                                                                                                                                                                                                                   |  | System)   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                       |  |           
|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 Sunrise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 Sunrise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
Financing Statement, dated as of June 8, 1994
(Frederick) (Exhibit 10.11 to Sunrise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 Sunrises Form S-1
Registration Statement No. 333-2582).                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.20   |  | 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 Sunrises Form S-1 Registration
Statement No. 333-2582).
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.21   |  | 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
Sunrises Form S-1 Registration Statement No.
333-2582).                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                      

76



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|        |  |                                                                                                                                                                                                                                                                                      |  |            |  | 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------- |  | 
|        |  |                                                                                                                                                                                                                                                                                      |  | Page (by  
|        |  |                                                                                                                                                                                                                                                                                      |  | Sequential
|Exhibit |  |                                                                                                                                                                                                                                                                                      |  | Numbering 
|Number  |  | Identity of Exhibit                                                                                                                                                                                                                                                                  |  | System)   
|        |  |                                                                                                                                                                                                                                                                                      |  |           
|10.22   |  | Amended and Restated Agreement of Sublease,
Indemnification and Easements dated February 5, 1995 by
and between Assisted Living Group  Fairfax Associates
and Sunrise Foundation, as amended (Exhibit 10.17 to
Sunrises Form S-1 Registration Statement No.
333-2582).            
|        |  |                                                                                                                                                                                                                                                                                     
|10.23   |  | Indenture, dated as of June 5, 1997, between Sunrise
and First Union National Bank of Virginia, as trustee
(Exhibit 4.1 to Sunrises Form 10-Q for the quarter
ended June 30, 1997).                                                                                                
|        |  |                                                                                                                                                                                                                                                                                     
|10.24   |  | 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 (Exhibit 10.31.1 to Sunrises 1997
Form 10-K).
|        |  |                                                                                                                                                                                                                                                                                     
|10.25   |  | 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 (Exhibit 10.31.2 to Sunrises 1997 Form
10-K).                
|        |  |                                                                                                                                                                                                                                                                                     
|10.26   |  | 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 (Exhibit 10.31.3 to Sunrises 1997 Form
10-K).             
|        |  |                                                                                                                                                                                                                                                                                     
|10.27   |  | 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 (Exhibit
10.31.4 to Sunrises 1997 Form 10-K).                              
|        |  |                                                                                                                                                                                                                                                                                     
|10.28   |  | Amended and Restated Pledge, Assignment and Security
Agreement dated as of December 23, 1997                                                                                                                                                                                        

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##### 



|        |  |                                                                                                                                                                                                                                                                                                                          |  |            |  | 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------- |  | 
|        |  |                                                                                                                                                                                                                                                                                                                          |  | Page (by  
|        |  |                                                                                                                                                                                                                                                                                                                          |  | Sequential
|Exhibit |  |                                                                                                                                                                                                                                                                                                                          |  | Numbering 
|Number  |  | Identity of Exhibit                                                                                                                                                                                                                                                                                                      |  | System)   
|        |  |                                                                                                                                                                                                                                                                                                                          |  |           
|        |  | by and between
NationsBank, N. A. as agent and for certain additional
lenders and Sunrise East Assisted Living Limited
Partnership (Exhibit 10.31.5 to Sunrises 1997 Form
10-K).                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.29   |  | 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 (Exhibit 10.31.6 to
Sunrises 1997 Form 10-K)                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.30   |  | 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 (Exhibit
10.31.7 to Sunrises 1997 Form 10-K).             
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.31   |  | 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
(Exhibit 10.31.8 to Sunrises 1997 Form
10-K).
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.32   |  | 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 (Exhibit 10.31.9 to Sunrises 1997 Form
10-K).                                              
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.33 + |  | Form of Indemnification Agreement (Exhibit 10.24 to
Sunrises Form S-1 Registration Statement No.
333-2582).                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.34 + |  | 1995 Stock Option Plan, as amended (Exhibit 10.20
to Sunrises 1997 Form 10-K).                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                         

78



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##### 



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                 |  |            |  | 
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                 |  | Page (by  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                 |  | Sequential
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                 |  | Numbering 
|Number  |  | Identity of Exhibit                                                                                                                                                                                                                                                                                                                                                                             |  | System)   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                 |  |           
|10.35 + |  | 1996 Directors Stock Option Plan, as amended.
(Exhibit 10.21 to Sunrises 1997 Form 10-K)                                                                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.36 + |  | Stock Option Agreement, entered into, effective as
of January 4, 1995, by and between Sunrise and David W.
Faeder (Exhibit 10.14 to Sunrises Form S-1
Registration Statement No. 333-2582).                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.37 + |  | 1996 Non-Incentive Stock Option Plan, as amended
(Exhibit 10.24 to Sunrises 1997 Form 10-K).                                                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.38 + |  | 1997 Stock Option Plan, as amended (Exhibit 10.25
to Sunrises 1997 Form 10-K).                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.39 + |  | 1998 Stock Option Plan, as amended. (Exhibit 10.41
to Sunrises 1998 Form 10-K)                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.40 + |  | 1999 Stock Option Plan (Exhibit 10.1 to Sunrises
Form 10-Q for the quarter ended March 31, 1999).                                                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.41   |  | Trust Agreement, dated as of December 2, 1998,
between the several holders from time to time parties
thereto, as the holders, and First Security Bank,
National Association, as the Owner Trustee (Sunrise
Trust 1998-1) (Exhibit 2.2 to Sunrises Form 8-K dated
December 17, 1998).                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.42   |  | Credit Agreement, dated as of December 2, 1998, among
First Security Bank, National Association, not
individually, except as expressly stated therein, but
solely as the Owner Trustee under the Sunrise Trust
1998-1, as the Borrower, the several lenders from time
to time parties thereto, and NationsBank, N.A., as the
Agent (Exhibit 2.3 to Sunrises Form 8-K dated December
17, 1998).
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                
|10.43   |  | Participation Agreement, dated as of December 2,
1998, among Sunrise Midwest Leasing, L.L.C., as the
Construction Agent and as the Lessee, Sunrise, as the
Guarantor, First Security Bank, National
Association, not individually, except as
expressly stated therein, but solely as
the Owner Trustee                                                                                         

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##### 



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |            |  | 
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | Page (by  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | Sequential
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | Numbering 
|Number  |  | Identity of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | System)   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |           
|        |  | under the Sunrise Trust
1998-1, the various banks and other
lending institutions which are parties
thereto from time to time, as the holders,
the various banks and other lending
institutions which are parties thereto
from time to time, as the lenders, and
NationsBank, N.A., as the Agent for the
Lenders and respecting the Security
Documents, as the Agent for the Lenders
and the Holders, to the extent of their
interests (Exhibit 2.4 to Sunrises Form
8-K dated December 17, 1998).
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.44   |  | Security Agreement, dated as of December 2, 1998,
between First Security Bank, National Association, not
individually, but solely as the owner trustee under the
Sunrise Trust 1998-1 and NationsBank, N.A., as the
agent for the lenders and the holders and accepted and
agreed to by Sunrise Midwest Leasing, L.L.C. (Exhibit
2.5 to Sunrises Form 8-K dated December 17, 1998).                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.45   |  | Lease Agreement, dated as of December 2, 1998,
between First Security Bank, National Association, not
individually, but solely as the Owner Trustee under the
Sunrise Trust 1998-1, as Lessor and Sunrise Midwest
Leasing, L.L.C., as Lessee (Exhibit 2.6 to Sunrises
Form 8-K dated December 17, 1998).                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.46   |  | Cross-Collateralization, Cross-Default, and Mortgage
Modification Agreement, dated as of May 20, 1999, by
and among Sunrise Borrowers (as defined in the
agreement) and GMAC Commercial Mortgage Corporation
(Exhibit 10.1 to Sunrises Form 10-Q for the quarter
ended June 30, 1999).                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.47   |  | Form of Exceptions to Non-Recourse Guaranty
(Multistate), dated as of May 20, 1999, between Sunrise
Borrower (as defined in the guaranty) and GMAC
Commercial Mortgage Corporation (Exhibit                                                                                                                                                                                                                                                                                                       

80



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##### 



|        |  |                                                                                                                                                                                                                                                                                                                                                    |  |            |  | 
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | 
|        |  |                                                                                                                                                                                                                                                                                                                                                    |  | Page (by  
|        |  |                                                                                                                                                                                                                                                                                                                                                    |  | Sequential
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                    |  | Numbering 
|Number  |  | Identity of Exhibit                                                                                                                                                                                                                                                                                                                                |  | System)   
|        |  |                                                                                                                                                                                                                                                                                                                                                    |  |           
|        |  | 10.2 to
Sunrises Form 10-Q for the quarter ended June 30,
1999).                                                                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                   
|10.48   |  | Second Amended and Restated Financial and Security
Agreement dated as of July 29, 1999 by and between Bank
of America, N.A. (formerly NationsBank, N.A.) as agent
for certain additional lenders and Sunrise East
Assisted Living Limited Partnership and other
subsidiaries of Sunrise (Exhibit 10.48 to Sunrises
1999 Form 10-K)               
|        |  |                                                                                                                                                                                                                                                                                                                                                   
|10.49   |  | Second Amended, Restated and Increased Master
Promissory Note dated as of July 29, 1999 by and
between Bank of America, N.A., (formerly NationsBank,
N.A.) as agent for certain additional
lenders and Sunrise East Assisted Living
Limited Partnership and other subsidiaries
of Sunrise (as amended) (Exhibit 10.49 to
Sunrises 1999 Form 10-K)
|        |  |                                                                                                                                                                                                                                                                                                                                                   
|10.50   |  | Second Amended and Restated Master Guaranty of
Payment Agreement dated as of July 29, 1999 by and
between Bank of America, N.A., (formerly NationsBank,
N.A.) as agent for certain additional lenders and
Sunrise (Exhibit 10.50 to Sunrises 1999 Form 10-K)                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                   
|10.51   |  | Confirmation of and Amendment to Master Guaranty of
Performance dated as of July 29, 1999 by and between
Bank of America, N.A., (formerly NationsBank, N.A.) as
agent for certain additional lenders and Sunrise
(Exhibit 10.51 to Sunrises 1999 Form 10-K)                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                   
|10.52   |  | Omnibus Confirmation of and Amendment to Security
Documents dated July 29, 1999 by Sunrise and certain
subsidiaries, as Assignors, in favor of Bank of
America, N.A., (formerly NationsBank, N.A.) as agent
for certain additional lenders (Exhibit 10.52 to
Sunrises 1999 Form 10-K)                                                            

81



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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |            |  | 
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | Page (by  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | Sequential
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | Numbering 
|Number  |  | Identity of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | System)   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |           
|10.53   |  | Third Amended and Restated Financial and Security
Agreement dated as of March 14, 2000 by and between
Bank of America, N.A. (formerly NationsBank, N.A.) as
agent for certain additional lenders and Sunrise East
Assisted Living Limited Partnership and other
subsidiaries of Sunrise (Exhibit 10.53 to Sunrises
1999 Form 10-K)                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.54   |  | Third Amended and Restated Master Guaranty of Payment
Agreement dated as of March 14, 2000 by and between
Bank of America, N.A., (formerly NationsBank, N.A.) as
agent for certain additional lenders and Sunrise East
Assisted Living Limited Partnership and other
subsidiaries of Sunrise (Exhibit 10.54 to Sunrises
1999 Form 10-K)                                                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.55   |  | Amendment No. 1 to Certain Operative Agreements,
dated as of March 14, 2000, among Sunrise Midwest
Leasing, L.L.C., as the Construction Agent and Lessee,
Sunrise as the Guarantor, First Security Bank, National
Association, not individually but solely as the Owner
Trustee under the Sunrise Trust 1998-1, the various
banks and other lending institutions which are parties
thereto, as Lenders, and Bank of America, N.A., as the
Agent for the Lenders and respecting the Security
Documents, as the agent for the Lenders and Holders, to
the extent of their interests (Exhibit 10.55 to
Sunrises 1999 Form 10-K)
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.56   |  | Form of Multifamily Note (Multistate), dated as of
May 20, 1999, between Sunrise Borrower (as defined in
the note) and GMAC Commercial Mortgage Corporation
(Exhibit 10.3 to Sunrises Form 10-Q for the quarter
ended June 30, 1999).                                                                                                                                                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.57   |  | Form of Multifamily Mortgage, Assignment of Rents and
Security Agreement, dated as of May 20, 1999, between
Sunrise Borrower (as defined in the mortgage) and GMAC
Commercial Mortgage                                                                                                                                                                                                                                                                                                                                                                                                                                       

82



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##### 



|        |  |                                                                                                                                                                                                                                                                                      |  |            |  | 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------- |  | 
|        |  |                                                                                                                                                                                                                                                                                      |  | Page (by  
|        |  |                                                                                                                                                                                                                                                                                      |  | Sequential
|Exhibit |  |                                                                                                                                                                                                                                                                                      |  | Numbering 
|Number  |  | Identity of Exhibit                                                                                                                                                                                                                                                                  |  | System)   
|        |  |                                                                                                                                                                                                                                                                                      |  |           
|        |  | (Exhibit 10.4 to
Sunrises Form 10-Q for the quarter ended
June 30, 1999).                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                     
|10.58   |  | Amendment No. 1 to Stock Option Agreement by and
between Sunrise and David W. Faeder (Exhibit 10.14.1 to
Sunrises Form S-1 Registration Statement No.
333-13731).                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                     
|10.59   |  | Cross-Collateralization Agreement, dated as of March
22, 2000 by and among GMAC Commercial Mortgage
Corporation and Sunrise Borrowers (as defined in the
agreement) (Exhibit 10.1 to Sunrises Form 10-Q for
the quarter ended March 31, 2000)                                      
|        |  |                                                                                                                                                                                                                                                                                     
|10.60   |  | Form of Multifamily Note (Multistate), dated as of
March 22, 2000, by and among GMAC Commercial Mortgage
Corporation and Sunrise Borrowers (as defined in the
note) (Exhibit 10.2 to Sunrises Form 10-Q for the
quarter ended March 31, 2000)                                      
|        |  |                                                                                                                                                                                                                                                                                     
|10.61   |  | Form of Multifamily Mortgage, Assignment of Rents and
Security Agreement, dated as of March 22, 2000 by and
among GMAC Commercial Mortgage Corporation and Sunrise
Borrowers (as defined in the mortgage) (Exhibit 10.3
to Sunrises Form 10-Q for the quarter ended March 31,
2000)
|        |  |                                                                                                                                                                                                                                                                                     
|10.62   |  | Form of Limited Guaranty, dated as of March 22, 2000,
by and among GMAC Commercial Mortgage Corporation and
Sunrise Borrowers (as defined in the guaranty) (Exhibit
10.4 to Sunrises Form 10-Q for the quarter ended March
31, 2000)                                               
|        |  |                                                                                                                                                                                                                                                                                     
|10.63 + |  | Chief Executive Officer Severance Plan
(Exhibit 10.5 to Sunrises Form 10-Q for the quarter ended
March 31, 2000)                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                     
|10.64 + |  | Senior Executive Officer Severance Plan
(Exhibit 10.6 to Sunrises Form 10-Q for the quarter ended
March 31, 2000)                                                                                                                                                                  

83



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##### 



|        |  |                                                                                                                                                                                                                                                      |  |            |  | 
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | 
|        |  |                                                                                                                                                                                                                                                      |  | Page (by  
|        |  |                                                                                                                                                                                                                                                      |  | Sequential
|Exhibit |  |                                                                                                                                                                                                                                                      |  | Numbering 
|Number  |  | Identity of Exhibit                                                                                                                                                                                                                                  |  | System)   
|        |  |                                                                                                                                                                                                                                                      |  |           
|10.65 + |  | 1996 Non-Incentive Stock Option Plan, as
amended (Exhibit 10.8 to Sunrises Form 10-Q for the
quarter ended March 31, 2000).                                                                                                                        
|        |  |                                                                                                                                                                                                                                                     
|10.66   |  | Limited Liability Company Agreement of Metropolitan
Senior Housing, LLC, a Delaware Limited Liability
Company, dated as of June 29, 2000 (Exhibit 10.1 to
Sunrises Form 10-Q for the quarter ended June 30,
2000).                                 
|        |  |                                                                                                                                                                                                                                                     
|10.67   |  | Purchase and Sale Agreement dated as of June 29,
2000, by and between certain Sunrise affiliates and
Metropolitan Senior Housing, LLC for the sale of three
(3) properties (Exhibit 10.2 to Sunrises Form 10-Q for
the quarter ended June 30, 2000)
|        |  |                                                                                                                                                                                                                                                     
|10.68   |  | Purchase and Sale Agreement dated as of June 29,
2000, by and between certain Sunrise affiliates and
Metropolitan Senior Housing, LLC for the sale of eight
(8) properties (Exhibit 10.3 to Sunrises Form 10-Q
for the quarter ended June 30, 2000)
|        |  |                                                                                                                                                                                                                                                     
|10.69 + |  | Employment Agreement, dated as of September
12, 2000, by and between Sunrise Assisted Living, Inc. and
Paul J Klaassen (Exhibit 10.1 to Sunrises Form 10-Q for
the quarter ended September 30, 2000)                                               
|        |  |                                                                                                                                                                                                                                                     
|10.70   |  | Loan and Security Agreement dated as of May 8, 2001
by and among Sunrise Fairfax Assisted Living, L.L.C.
and Chevy Chase Bank, F.S.B. (Exhibit 10.1 to
Sunrises Form 10-Q for the quarter ended June 30,
2001)                                     
|        |  |                                                                                                                                                                                                                                                     
|10.71   |  | Guaranty of Payment dated as of May 8, 2001 by
Sunrise Assisted Living, Inc. in favor of Chevy Chase
Bank, F.S.B. for loan to Sunrise Fairfax Assisted
Living, L.L.C. (Exhibit 10.2 to Sunrises Form 10-Q for
the quarter ended June 30, 2001)     
|        |  |                                                                                                                                                                                                                                                     
|10.72   |  | Financing and Security Agreement (Accomodator
Facility Agreement) dated as of June 13, 2001 by                                                                                                                                                      

84



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##### 



|        |  |                                                                                                                                                                                                                                                                                                                                       |  |            |  | 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | 
|        |  |                                                                                                                                                                                                                                                                                                                                       |  | Page (by  
|        |  |                                                                                                                                                                                                                                                                                                                                       |  | Sequential
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                       |  | Numbering 
|Number  |  | Identity of Exhibit                                                                                                                                                                                                                                                                                                                   |  | System)   
|        |  |                                                                                                                                                                                                                                                                                                                                       |  |           
|        |  | and among East Meadow A.L., LLC and White Oak Assisted
Living L.L.C. and Additional Borrowers and Bank of
America, N.A., as administrative agent for itself and
for certain additional lenders. (Exhibit 10.3 to
Sunrises Form 10-Q for the quarter ended June 30,
2001)                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                      
|10.73   |  | Master Guaranty of Payment Agreement (Accomodator
Credit Facility) dated as of June 13, 2001 by Sunrise
Assisted living, Inc. for the benefit of Bank of
America, N.A., as administrative agent for itself and
for certain additional lenders (Exhibit 10.4 to
Sunrises Form 10-Q for the quarter ended June 30,
2001)              
|        |  |                                                                                                                                                                                                                                                                                                                                      
|10.74   |  | Fourth Amended and Restated Financing and Security
Agreement dated as of June 13, 2001 by and between Bank
of America, N.A., as agent for certain additional
lenders and Sunrise East Assisted Living Limited
Partnership and other subsidiaries of Sunrise (Exhibit
10.5 to Sunrises Form 10-Q for the quarter ended June
30, 2001)
|        |  |                                                                                                                                                                                                                                                                                                                                      
|10.75   |  | Third Amended and Restated Master Promissory Note
dated as of June 13, 2001 by Sunrise East Assisted
Living Limited Partnership and other Subsidiaries of
Sunrise and Bank of America, N.A., as administrative
agent for certain additional lenders (Exhibit 10.6 to
Sunrises Form 10-Q for the quarter ended June 30,
2001)        
|        |  |                                                                                                                                                                                                                                                                                                                                      
|10.76   |  | Fourth Amended and Restated Master Guaranty of
Payment Agreement dated as of June 13, 2001 by and
between Bank of America, N.A. as administrative agent
for certain other lenders and Sunrise (Exhibit 10.7 to
Sunrises Form 10-Q for the quarter ended June 30,
2001)                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                      
|10.77   |  | Financing and Security Agreement dated as of April
30, 2001 by and among certain Sunrise subsidiaries and
Bank of America, N.A. (Exhibit 10.8 to                                                                                                                                                                                     

85



---



##### 



|        |  |                                                                                                                                                                                                                                                        |  |            |  | 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------- |  | 
|        |  |                                                                                                                                                                                                                                                        |  | Page (by  
|        |  |                                                                                                                                                                                                                                                        |  | Sequential
|Exhibit |  |                                                                                                                                                                                                                                                        |  | Numbering 
|Number  |  | Identity of Exhibit                                                                                                                                                                                                                                    |  | System)   
|        |  |                                                                                                                                                                                                                                                        |  |           
|        |  | Sunrises Form
10-Q for the quarter ended June 30, 2001)                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                       
|10.78   |  | Guaranty of Payment Agreement dated as of April 30,
2001 by Sunrise for the benefit of Bank of America,
N.A. (Exhibit 10.9 to Sunrises Form 10-Q for the
quarter ended June 30, 2001)                                                                
|        |  |                                                                                                                                                                                                                                                       
|10.79   |  | Revolving Credit Note dated as of April 30, 2001 by
and among certain Sunrise subsidiaries and Bank of
America, N.A. (Exhibit 10.10 to Sunrises Form 10-Q for
the quarter ended June 30, 2001)                                                       
|        |  |                                                                                                                                                                                                                                                       
|10.80   |  | Second Amended and Restated Promissory Note dated as
of May 7, 2001 by and between Sunrise Assisted Living
Limited Partnership and General Electric Capital
Corporation (Exhibit 10.11 to Sunrises Form 10-Q for
the quarter ended June 30, 2001)    
|        |  |                                                                                                                                                                                                                                                       
|10.81   |  | Fourth Loan Modification Agreement dated as of May 7,
2001 by and between Sunrise Assisted Living Limited
Partnership and General Electric Capital Corporation
(Exhibit 10.12 to Sunrises Form 10-Q for the quarter
ended June 30, 2001)             
|        |  |                                                                                                                                                                                                                                                       
|10.82   |  | Agreement for Purchase and Modification of Loan dated
as of May 7, 2001 by and between General Electric
Capital Corporation and Sunrise Assisted Living Limited
Partnership (Exhibit 10.13 to Sunrises Form 10-Q for
the quarter ended June 30, 2001)
|        |  |                                                                                                                                                                                                                                                       
|10.83 + |  | Executive Deferred Compensation Plan,
effective June 1, 2001 (Exhibit 10.14 to Sunrises Form
10-Q for the quarter ended June 30, 2001)                                                                                                               
|        |  |                                                                                                                                                                                                                                                       
|10.84 + |  | 2001 Stock Option Plan (Exhibit 10.15 to
Sunrises Form 10-Q for the quarter ended June 30, 2001)                                                                                                                                                     

86



---



##### 



|        |  |                                                                                                                                                                                                                                                                                                |  |            |  | 
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | 
|        |  |                                                                                                                                                                                                                                                                                                |  | Page (by  
|        |  |                                                                                                                                                                                                                                                                                                |  | Sequential
|Exhibit |  |                                                                                                                                                                                                                                                                                                |  | Numbering 
|Number  |  | Identity of Exhibit                                                                                                                                                                                                                                                                            |  | System)   
|        |  |                                                                                                                                                                                                                                                                                                |  |           
|10.85 + |  | Sunrise employee stock purchase plan (Exhibit
10.16 to Sunrises Form 10-Q for the quarter ended June 30,
2001)                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                               
|10.86 + |  | Consulting Agreement effective as of April 1,
2000 by and between Sunrise and David W. Faeder, as
amended, effective May 31, 2001 (Exhibit 10.87 to Sunrises
2001 Form 10-K)                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                               
|10.87 + |  | Form of Sunrise At-Home Senior Living, Inc.
Restricted Stock Agreement (Exhibit 10.88 to Sunrises 2001
Form 10-K)                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                               
|10.88 + |  | Form of Sunrise Assisted Living Holdings, L.P.
Class A Limited Partner Unit Agreement (Exhibit 10.89 to
Sunrises 2001 Form 10-K)                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                               
|10.89   |  | Credit Agreement dated as of January 11, 2002
among Sunrise Assisted Living, Inc., as Borrower, Fleet
National Bank, as Administrative Agent, and certain lenders
from time to time parties to the Credit Agreement (Exhibit
10.1 to Sunrises Form 10-Q for the quarter ended March 31,
2002)
|        |  |                                                                                                                                                                                                                                                                                               
|10.90   |  | Term Note dated January 11, 2002 by and between
Sunrise Assisted Living, Inc., the Borrower and Fleet
National Bank, the Lender in the principal amount of $52
million (Exhibit 10.2 to Sunrises Form 10-Q for the
quarter ended March 31, 2002)                                             
|        |  |                                                                                                                                                                                                                                                                                               
|10.91   |  | Term Note dated January 11, 2002 by and between
Sunrise Assisted Living, Inc., the Borrower and First Union
National Bank, as a Lender in the principal amount of $15
million (Exhibit 10.3 to Sunrises Form 10-Q for the
quarter ended March 31, 2002)                                      
|        |  |                                                                                                                                                                                                                                                                                               
|10.92   |  | Term Note dated January 11, 2002 by and between
Sunrise Assisted Living, Inc., the Borrower and Credit
Suisse First Boston, Cayman Island Branch, as a Lender in
the principal amount of $25 million                                                                                          

87



---



##### 



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                         |  |            |  | 
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                         |  | Page (by  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                         |  | Sequential
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                         |  | Numbering 
|Number  |  | Identity of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                     |  | System)   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                         |  |           
|        |  | (Exhibit 10.4 to
Sunrises Form 10-Q for the quarter ended March 31, 2002)                                                                                                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.93   |  | Guaranty dated January 11, 2002 by and between
certain subsidiaries of Sunrise Assisted Living
Investments, Inc., Sunrise Assisted Living Investments,
Inc., (jointly and severally, the Guarantors) for the
benefit of Fleet National Bank, as administrative agent for
the Lenders (Exhibit 10.5 to Sunrises Form 10-Q for the
quarter ended March 31, 2002)                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.94   |  | Master Credit Facility Agreement by and between
Sunrise Riverside Assisted Living, L.P., Sunrise Parma
Assisted Living, L.L.C., Sunrise Wilton Assisted Living,
L.L.C., Sunrise Wall Assisted Living, L.L.C., Sunrise
Weston Assisted Living, Limited Partnership and Glaser
Financial Group, Inc. dated as of November 29, 2001, as
amended (Exhibit 10.6 to Sunrises Form 10-Q for the
quarter ended March 31, 2002)
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.95+  |  | 2002 Stock Option and Restricted Stock Plan
(Exhibit 10.1 to Sunrises Form 10-Q for the quarter ended
June 30, 2002).                                                                                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.96   |  | Transaction Agreement by and among Sunrise
Assisted Living Investments, Inc., Sunrise Second Assisted
Living Holdings, LLC and the Other Parties Named Therein
dated as of September 30, 2002 (Exhibit 2.1 to Sunrises
Form 10-Q for the quarter ended September 30, 2002)                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.97+  |  | Sunrise Assisted Living, Inc. Long Term
Incentive Cash Bonus Plan effective August 23, 2002
(Exhibit 10.1 to Sunrises Form 10-Q for the quarter ended
September 30, 2002)                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.98   |  | Limited Liability Agreement of AL U.S. Development
Venture, LLC dated as of December 23, 2002 by and
between Sunrise Assisted Living                                                                                                                                                                                                                                                                                   

88



---



##### 



|         |  |                                                                                                                                                                                                                                             |  |            |  | 
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | 
|         |  |                                                                                                                                                                                                                                             |  | Page (by  
|         |  |                                                                                                                                                                                                                                             |  | Sequential
|Exhibit  |  |                                                                                                                                                                                                                                             |  | Numbering 
|Number   |  | Identity of Exhibit                                                                                                                                                                                                                         |  | System)   
|         |  |                                                                                                                                                                                                                                             |  |           
|         |  | Investments, Inc. and
AEW Senior Housing Company, LLC                                                                                                                                                                                      
|         |  |                                                                                                                                                                                                                                            
|10.99    |  | ROFO Agreement dated as of December 23, 2002 by and
between AEW Capital Management, L.P., Sunrise Assisted
Living, Inc., Sunrise Assisted Living Investments,
Inc., Sunrise Assisted Living Management, Inc., and
Sunrise Development, Inc.
|         |  |                                                                                                                                                                                                                                            
|10.100   |  | Second Amended and Restated Operating Agreement of
Sunrise Second Assisted Living Holdings, LLC dated as
of December 20, 2002 by and between Sunrise Assisted
Living Investments, Inc. and US Assisted Living
Facilities II, Inc.          
|         |  |                                                                                                                                                                                                                                            
|10.101   |  | Revolving Credit Agreement dated as of December 23,
2002 by and between AL U.S. Development Venture, LLC, as Borrower and Sunrise
Assisted Living, Inc. as Lender                                                                          
|         |  |                                                                                                                                                                                                                                            
|10.102   |  | Development Agreement dated as of December 23, 2002
by and between Sunrise Development, Inc. and certain
Sunrise affiliates                                                                                                                
|         |  |                                                                                                                                                                                                                                            
|10.103   |  | Amended and Restated Master Owner/Manager Agreement
dated as of December 20, 2002 by and between Sunrise
Second Assisted Living Holdings, LLC, together with its
subsidiaries, and Sunrise Assisted Living Management,
Inc.                
|         |  |                                                                                                                                                                                                                                            
|10.104   |  | Operating Deficit Loan Agreement dated as of December
23, 2002 by and between Sunrise Assisted Living
Management, Inc. and certain Sunrise affiliates                                                                                      
|         |  |                                                                                                                                                                                                                                            
|10.105   |  | Pre-Opening Services and Management Agreement dated
as of December 23, 2002 by and between Sunrise Assisted
Living Management, Inc. and certain Sunrise affiliates                                                                         
|         |  |                                                                                                                                                                                                                                            
|10.106 + |  | Amendment to the Consulting Agreement effective as
of April 1, 2000 by and between Sunrise and                                                                                                                                             

89



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##### 



|        |  |                                                       |  |            |  | 
|------- |  | ----------------------------------------------------- |  | ---------- |  | 
|        |  |                                                       |  | Page (by  
|        |  |                                                       |  | Sequential
|Exhibit |  |                                                       |  | Numbering 
|Number  |  | Identity of Exhibit                                   |  | System)   
|        |  |                                                       |  |           
|        |  | David W.
Faeder, as amended, effective April 1, 2002.
|        |  |                                                      
|12      |  | Statements Regarding Computation of Ratios           
|        |  |                                                      
|21      |  | Subsidiaries of the Registrant                       
|        |  |                                                      
|23      |  | Consent of Ernst & Young LLP, Independent Auditors   



| |  | + Represents management contract or compensatory plan or
arrangement.
| |  | ---------------------------------------------------------------------

90



---



##### 



Report of Independent Auditors

Stockholders and Board of Directors
Sunrise Assisted Living, Inc.

We have audited the accompanying consolidated balance sheets of Sunrise
Assisted Living, Inc. as of December 31, 2002 and 2001, and the related
consolidated statements of income, changes in stockholders equity, and cash
flows for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sunrise
Assisted Living, Inc. as of December 31, 2002 and 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States.

As discussed in Note 2 to the Consolidated Financial Statements, in 2002
the Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.

|                  |  |                      
|----------------- |  | ---------------------
|McLean, Virginia  |  |                      
|February 24, 2003 |  | /s/ Ernst & Young LLP

F-1



---



##### 



SUNRISE ASSISTED LIVING, INC.

CONSOLIDATED BALANCE SHEETS
(dollars in thousands)


|                                     |                                                                                                                                                     |                                                |                                            |                   |         |              |         |         |        |           |         | 
|------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------------------------ | ----------------- | ------- | ------------ | ------- | ------- | ------ | --------- | ------- | 
|                                     |                                                                                                                                                     |                                                |                                            |                   |         | December 31,
|                                     |                                                                                                                                                     |                                                |                                            |                   |         |             
|                                     |                                                                                                                                                     |                                                |                                            |                   |         | 2002         |         | 2001   
|                                     |                                                                                                                                                     |                                                |                                            |                   |         |              |         |        
|ASSETS                               |                                                                                                                                                     |                                                |                                            |                   |         |              |         |        
|                                     | Current Assets:                                                                                                                                     |                                                |                                            |                   |         |              |         |         |       
|                                     |                                                                                                                                                     | Cash and cash equivalents                      |                                            | $                 | 173,119 |              |         | $       | 50,275 |          
|                                     |                                                                                                                                                     | Accounts receivable, net                       |                                            |                   | 21,648  |              |         |         | 23,252 |          
|                                     |                                                                                                                                                     | Notes receivable  affiliates                  |                                            |                   | 10,180  |              |         |         | 1,294  |          
|                                     |                                                                                                                                                     | Deferred income taxes                          |                                            |                   | 15,873  |              |         |         | 21,736 |          
|                                     |                                                                                                                                                     | Prepaid expenses and other current assets      |                                            |                   | 33,566  |              |         |         | 20,920 |          
|                                     |                                                                                                                                                     |                                                |                                            |                   |         |              |         |        
|                                     |                                                                                                                                                     |                                                | Total current assets                       |                   |         | 254,386      |         |         |        | 117,477   |        
|                                     | Property and equipment, net                                                                                                                         |                                                |                                            | 636,916           |         |              |         | 841,414 |       
|                                     | Notes receivable  affiliates                                                                                                                       |                                                |                                            | 77,112            |         |              |         | 94,305  |       
|                                     | Management contracts and leaseholds, net                                                                                                            |                                                |                                            | 12,140            |         |              |         | 22,999  |       
|                                     | Costs in excess of assets acquired, net                                                                                                             |                                                |                                            | 32,749            |         |              |         | 32,749  |       
|                                     | Investments in unconsolidated senior living properties                                                                                              |                                                |                                            | 64,375            |         |              |         | 36,589  |       
|                                     | Investments                                                                                                                                         |                                                |                                            | 5,610             |         |              |         | 5,750   |       
|                                     | Other assets                                                                                                                                        |                                                |                                            | 32,863            |         |              |         | 26,332  |       
|                                     |                                                                                                                                                     |                                                |                                            |                   |         |              |         |        
|                                     |                                                                                                                                                     |                                                | Total assets                               |                   | $       | 1,116,151    |         |         | $      | 1,177,615 |        
|                                     |                                                                                                                                                     |                                                |                                            |                   |         |              |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                     |                                                |                                            |                   |         |              |         |        
|                                     | Current Liabilities:                                                                                                                                |                                                |                                            |                   |         |              |         |         |       
|                                     |                                                                                                                                                     | Accounts payable                               |                                            | $                 | 5,082   |              |         | $       | 12,164 |          
|                                     |                                                                                                                                                     | Accrued expenses and other current liabilities |                                            |                   | 42,934  |              |         |         | 32,117 |          
|                                     |                                                                                                                                                     | Deferred revenue                               |                                            |                   | 37,316  |              |         |         | 7,468  |          
|                                     |                                                                                                                                                     | Current maturities of long-term debt           |                                            |                   | 29,415  |              |         |         | 26,925 |          
|                                     |                                                                                                                                                     |                                                |                                            |                   |         |              |         |        
|                                     |                                                                                                                                                     |                                                | Total current liabilities                  |                   |         | 114,747      |         |         |        | 78,674    |        
|                                     | Long-term debt, less current maturities                                                                                                             |                                                |                                            | 427,554           |         |              |         | 603,831 |       
|                                     | Investments in unconsolidated senior living properties                                                                                              |                                                |                                            | 2,901             |         |              |         | 2,284   |       
|                                     | Deferred income taxes                                                                                                                               |                                                |                                            | 96,112            |         |              |         | 72,016  |       
|                                     | Other long-term liabilities                                                                                                                         |                                                |                                            | 7,158             |         |              |         | 7,658   |       
|                                     |                                                                                                                                                     |                                                |                                            |                   |         |              |         |        
|                                     |                                                                                                                                                     |                                                |                                            | Total liabilities |         |              | 648,472 |         |        |           | 764,463 | 
|                                     | Minority interests                                                                                                                                  |                                                |                                            | 1,861             |         |              |         | 2,451   |       
|                                     | Preferred stock, $0.01 par value, 10,000,000 shares authorized,
no shares issued and outstanding                                                    |                                                |                                            |                  |         |              |         |        |       
|                                     | Common stock, $0.01 par value, 60,000,000 shares authorized,
22,343,815 and 22,166,402 shares issued and outstanding
in 2002 and 2001, respectively |                                                |                                            | 223               |         |              |         | 222     |       
|                                     | Additional paid-in capital                                                                                                                          |                                                |                                            | 312,952           |         |              |         | 310,423 |       
|                                     | Retained earnings                                                                                                                                   |                                                |                                            | 158,931           |         |              |         | 104,270 |       
|                                     | Deferred compensation  restricted stock                                                                                                            |                                                |                                            | (3,333            | )       |              |         |        |       
|                                     | Accumulated other comprehensive loss                                                                                                                |                                                |                                            | (2,955            | )       |              |         | (4,214  | )     
|                                     |                                                                                                                                                     |                                                |                                            |                   |         |              |         |        
|                                     |                                                                                                                                                     |                                                | Total stockholders equity                 |                   |         | 465,818      |         |         |        | 410,701   |        
|                                     |                                                                                                                                                     |                                                |                                            |                   |         |              |         |        
|                                     |                                                                                                                                                     |                                                | Total liabilities and stockholders equity |                   | $       | 1,116,151    |         |         | $      | 1,177,615 |        
|                                     |                                                                                                                                                     |                                                |                                            |                   |         |              |         |        

See accompanying notes.

F-2



---



##### 



SUNRISE ASSISTED LIVING, INC.

CONSOLIDATED STATEMENTS OF INCOME
(in thounds, except per share amounts)


|                                                                       |                                     |                                             |         |                         |         |      |         |         |         |   |         |         |         |  
|---------------------------------------------------------------------- | ----------------------------------- | ------------------------------------------- | ------- | ----------------------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                                       |                                     |                                             |         | Year Ended December 31,
|                                                                       |                                     |                                             |         |                        
|                                                                       |                                     |                                             |         | 2002                    |         | 2001 |         | 2000   
|                                                                       |                                     |                                             |         |                         |         |      |         |        
|Operating revenue:                                                     |                                     |                                             |         |                         |         |      |         |         |         |   |         |        
|                                                                       | Resident fees                       |                                             | $       | 248,098                 |         |      | $       | 260,524 |         |   | $       | 274,236 |        
|                                                                       | Management and contract services    |                                             |         | 183,603                 |         |      |         | 105,541 |         |   |         | 38,429  |        
|                                                                       | Income from property sales          |                                             |         | 74,211                  |         |      |         | 62,154  |         |   |         | 32,121  |        
|                                                                       |                                     |                                             |         |                         |         |      |         |         |         |   |         |        
|                                                                       |                                     | Total operating revenue                     |         |                         | 505,912 |      |         |         | 428,219 |   |         |         | 344,786 |  
|                                                                       |                                     |                                             |         |                         |         |      |         |         |         |   |         |        
|Operating expenses:                                                    |                                     |                                             |         |                         |         |      |         |         |         |   |         |        
|                                                                       | Facility operating                  |                                             |         | 167,354                 |         |      |         | 168,602 |         |   |         | 169,966 |        
|                                                                       | Management and contract services    |                                             |         | 144,747                 |         |      |         | 74,785  |         |   |         | 15,931  |        
|                                                                       | Facility development and pre-rental |                                             |         | 11,504                  |         |      |         | 7,949   |         |   |         | 6,226   |        
|                                                                       | General and administrative          |                                             |         | 36,944                  |         |      |         | 32,809  |         |   |         | 27,418  |        
|                                                                       | Depreciation and amortization       |                                             |         | 25,317                  |         |      |         | 28,475  |         |   |         | 33,902  |        
|                                                                       | Facility lease                      |                                             |         | 8,298                   |         |      |         | 10,159  |         |   |         | 10,833  |        
|                                                                       |                                     |                                             |         |                         |         |      |         |         |         |   |         |        
|                                                                       |                                     | Total operating expenses                    |         |                         | 394,164 |      |         |         | 322,779 |   |         |         | 264,276 |  
|                                                                       |                                     |                                             |         |                         |         |      |         |         |         |   |         |        
|Non-recurring items                                                    |                                     |                                             |        |                         |         |      | 2,307   |         |         |   |        |        
|                                                                       |                                     |                                             |         |                         |         |      |         |         |         |   |         |        
|Income from operations                                                 |                                     |                                             | 111,748 |                         |         |      | 107,747 |         |         |   | 80,510  |        
|Interest income (expense):                                             |                                     |                                             |         |                         |         |      |         |         |         |   |         |        
|                                                                       | Interest income                     |                                             |         | 11,338                  |         |      |         | 12,307  |         |   |         | 12,412  |        
|                                                                       | Interest expense                    |                                             |         | (31,318                 | )       |      |         | (38,483 | )       |   |         | (49,978 | )      
|                                                                       |                                     |                                             |         |                         |         |      |         |         |         |   |         |        
|                                                                       |                                     | Total interest expense                      |         |                         | (19,980 | )    |         |         | (26,176 | ) |         |         | (37,566 | )
|Equity in earnings (losses) of unconsolidated senior
living properties |                                     |                                             | 695     |                         |         |      | (1,169  | )       |         |   | (2,941  | )      
|Minority interests                                                     |                                     |                                             | (160    | )                       |         |      | (769    | )       |         |   | (203    | )      
|                                                                       |                                     |                                             |         |                         |         |      |         |         |         |   |         |        
|Income before income taxes                                             |                                     |                                             | 92,303  |                         |         |      | 79,633  |         |         |   | 39,800  |        
|Provision for income taxes                                             |                                     |                                             | (35,075 | )                       |         |      | (31,057 | )       |         |   | (15,522 | )      
|                                                                       |                                     |                                             |         |                         |         |      |         |         |         |   |         |        
|Net income before extraordinary (loss) gain                            |                                     |                                             | 57,228  |                         |         |      | 48,576  |         |         |   | 24,278  |        
|                                                                       |                                     |                                             |         |                         |         |      |         |         |         |   |         |        
|Extraordinary (loss) gain, net of tax                                  |                                     |                                             | (2,567  | )                       |         |      | 525     |         |         |   |        |        
|                                                                       |                                     |                                             |         |                         |         |      |         |         |         |   |         |        
|Net income                                                             |                                     | $                                           | 54,661  |                         |         | $    | 49,101  |         |         | $ | 24,278  |        
|                                                                       |                                     |                                             |         |                         |         |      |         |         |         |   |         |        
|Net income per common share:                                           |                                     |                                             |         |                         |         |      |         |         |         |   |         |        
|                                                                       | Basic:                              |                                             |         |                         |         |      |         |         |         |   |         |         |        
|                                                                       |                                     | Net income before extraordinary (loss) gain |         | $                       | 2.56    |      |         | $       | 2.23    |   |         | $       | 1.12    |  
|                                                                       |                                     | Extraordinary (loss) gain                   |         |                         | (0.12   | )    |         |         | 0.02    |   |         |         |        |  
|                                                                       |                                     |                                             |         |                         |         |      |         |         |         |   |         |        
|                                                                       |                                     | Basic net income per common share           |         | $                       | 2.44    |      |         | $       | 2.25    |   |         | $       | 1.12    |  
|                                                                       |                                     |                                             |         |                         |         |      |         |         |         |   |         |        
|                                                                       | Diluted:                            |                                             |         |                         |         |      |         |         |         |   |         |         |        
|                                                                       |                                     | Net income before extraordinary (loss) gain |         | $                       | 2.33    |      |         | $       | 2.06    |   |         | $       | 1.10    |  
|                                                                       |                                     | Extraordinary (loss) gain                   |         |                         | (0.10   | )    |         |         | 0.02    |   |         |         |        |  
|                                                                       |                                     |                                             |         |                         |         |      |         |         |         |   |         |        
|                                                                       |                                     | Diluted net income per common share         |         | $                       | 2.23    |      |         | $       | 2.08    |   |         | $       | 1.10    |  
|                                                                       |                                     |                                             |         |                         |         |      |         |         |         |   |         |        

F-3



---



##### 



See accompanying notes.

SUNRISE ASSISTED LIVING, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in thousands)


|                                                             |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   |         |  
|------------------------------------------------------------ |  | --------- | ------ | ------ |  | ---------- | --- | ---------------- |  | -------- | ------- | ------------- |  | ----- | ------ | - |  | ----- | ------- |  |  | ----------- | ------ | - |  | - | ------- | -
|                                                             |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  | Accumulated |        |   |  |  
|                                                             |  | Shares of |        | Common |  |            |     |                  |  |          |         |               |  |       |        |   |  | Other |         |  |  |            
|                                                             |  | Common    |        | Stock  |  | Additional |     | Deferred         |  | Retained |         | Comprehensive |  |       |        |  
|                                                             |  | Stock     |        | Amount |  | Paid-in    |     | CapiCompensation |  | Earnings |         | Loss          |  | Total
|                                                             |  |           |        |        |  |            |     |                  |  |          |         |               |  |      
|Balance at December 31, 1999                                 |  |           | 21,939 |        |  | $          | 219 |                  |  | $        | 304,014 |               |  |       |       |   |  | $     | 30,891  |  |  |             |       |   |  | $ | 335,124 |  
|Net income                                                   |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       | 24,278  |  |  |             |        |   |  |   | 24,278  |  
|                                                             |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   |         |  
|Total comprehensive income                                   |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   | 24,278  |  
|                                                             |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   |         |  
|Issuance of common stock
to employees                        |  |           | 242    |        |  |            | 3   |                  |  |          | 3,233   |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   | 3,236   |  
|Repurchase of common stock                                   |  |           | (585   | )      |  |            | (6  | )                |  |          | (9,641  | )             |  |       |        |   |  |       |         |  |  |             |        |   |  |   | (9,647  | )
|Tax effect from the exercise of non-
qualified stock options |  |           |        |        |  |            |     |                  |  |          | 1,054   |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   | 1,054   |  
|                                                             |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   |         |  
|Balance at December 31, 2000                                 |  |           | 21,596 |        |  |            | 216 |                  |  |          | 298,660 |               |  |       |       |   |  |       | 55,169  |  |  |             |       |   |  |   | 354,045 |  
|Net income                                                   |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       | 49,101  |  |  |             |        |   |  |   | 49,101  |  
|Interest rate swaps, net of tax                              |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  | $           | (3,121 | ) |  |   | (3,121  | )
|Foreign currency translation, net of tax                     |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  |             | (1,093 | ) |  |   | (1,093  | )
|                                                             |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   |         |  
|Total comprehensive income                                   |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   | 44,887  |  
|                                                             |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   |         |  
|Issuance of common stock
to employees                        |  |           | 570    |        |  |            | 6   |                  |  |          | 9,110   |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   | 9,116   |  
|Tax effect from the exercise of non-
qualified stock options |  |           |        |        |  |            |     |                  |  |          | 2,653   |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   | 2,653   |  
|                                                             |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   |         |  
|Balance at December 31, 2001                                 |  |           | 22,166 |        |  |            | 222 |                  |  |          | 310,423 |               |  |       |       |   |  |       | 104,270 |  |  |             | (4,214 | ) |  |   | 410,701 |  
|Net income                                                   |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       | 54,661  |  |  |             |        |   |  |   | 54,661  |  
|Interest rate swaps, net of tax                              |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  |             | 610    |   |  |   | 610     |  
|Foreign currency translation, net of tax                     |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  |             | 649    |   |  |   | 649     |  
|                                                             |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   |         |  
|Total comprehensive income                                   |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   | 55,920  |  
|                                                             |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   |         |  
|Issuance of common stock
to employees                        |  |           | 611    |        |  |            | 6   |                  |  |          | 11,028  |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   | 11,034  |  
|Repurchase of common stock                                   |  |           | (581   | )      |  |            | (6  | )                |  |          | (14,892 | )             |  |       |        |   |  |       |         |  |  |             |        |   |  |   | (14,898 | )
|Issuance of restricted stock                                 |  |           | 148    |        |  |            | 1   |                  |  |          | 4,020   |               |  | $     | (4,021 | ) |  |       |         |  |  |             |        |   |  |   |        |  
|Amortization of restricted stock                             |  |           |        |        |  |            |     |                  |  |          |         |               |  |       | 688    |   |  |       |         |  |  |             |        |   |  |   | 688     |  
|Tax effect from the exercise of non-
qualified stock options |  |           |        |        |  |            |     |                  |  |          | 2,373   |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   | 2,373   |  
|                                                             |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   |         |  
|Balance at December 31, 2002                                 |  |           | 22,344 |        |  | $          | 223 |                  |  | $        | 312,952 |               |  | $     | (3,333 | ) |  | $     | 158,931 |  |  | $           | (2,955 | ) |  | $ | 465,818 |  
|                                                             |  |           |        |        |  |            |     |                  |  |          |         |               |  |       |        |   |  |       |         |  |  |             |        |   |  |   |         |  

See accompanying notes.

F-4



---



##### 



SUNRISE ASSISTED LIVING, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)


|                                                                                  |                                                     |                                                                        |                      |                                           |        |                         |          |         |         |      |          |         |        |   |        |  
|--------------------------------------------------------------------------------- | --------------------------------------------------- | ---------------------------------------------------------------------- | -------------------- | ----------------------------------------- | ------ | ----------------------- | -------- | ------- | ------- | ---- | -------- | ------- | ------ | - | ------ | -
|                                                                                  |                                                     |                                                                        |                      |                                           |        | Year Ended December 31,
|                                                                                  |                                                     |                                                                        |                      |                                           |        | 2002                    |          | 2001    |         | 2000
|                                                                                  |                                                     |                                                                        |                      |                                           |        |                         |          |         |         |     
|Operating activities                                                              |                                                     |                                                                        |                      |                                           |        |                         |          |         |         |      |          |        
|Net income                                                                        |                                                     | $                                                                      | 54,661               |                                           |        | $                       | 49,101   |         |         | $    | 24,278   |        
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                     |                                                                        |                      |                                           |        |                         |          |         |         |      |          |        
|                                                                                  |                                                     | Deferred income from property sales                                    |                      |                                           | (6,011 | )                       |          |         | (20,210 | )    |          |         | (6,055 | )
|                                                                                  |                                                     | Equity in (earnings) losses of unconsolidated senior living properties |                      |                                           | (695   | )                       |          |         | 1,169   |      |          |         | 2,941  |  
|                                                                                  |                                                     | Minority interests                                                     |                      |                                           | 160    |                         |          |         | 769     |      |          |         | 203    |  
|                                                                                  |                                                     | Provision for bad debts                                                |                      |                                           | 850    |                         |          |         | 1,320   |      |          |         | 1,250  |  
|                                                                                  |                                                     | Provision for deferred income taxes                                    |                      |                                           | 28,559 |                         |          |         | 26,226  |      |          |         | 11,267 |  
|                                                                                  |                                                     | Depreciation and amortization                                          |                      |                                           | 25,317 |                         |          |         | 28,475  |      |          |         | 33,902 |  
|                                                                                  |                                                     | Amortization of financing costs and discount on long-term debt         |                      |                                           | 5,292  |                         |          |         | 3,488   |      |          |         | 3,754  |  
|                                                                                  |                                                     | Amortization of deferred compensation                                  |                      |                                           | 688    |                         |          |         |        |      |          |         |       |  
|                                                                                  |                                                     | Extraordinary loss (gain), net of tax                                  |                      |                                           | 2,567  |                         |          |         | (525    | )    |          |         |       |  
|                                                                                  |                                                     | Changes in operating assets and liabilities:                           |                      |                                           |        |                         |          |         |         |      |          |         |        |  
|                                                                                  |                                                     |                                                                        | (Increase) decrease: |                                           |        |                         |          |         |         |      |          |         |        |   |       
|                                                                                  |                                                     |                                                                        |                      | Accounts receivable                       |        |                         | (1,194   | )       |         |      | (4,576   | )       |        |   | (9,871 | )
|                                                                                  |                                                     |                                                                        |                      | Prepaid expenses and other current assets |        |                         | (15,325  | )       |         |      | (2,304   | )       |        |   | 1,008  |  
|                                                                                  |                                                     |                                                                        |                      | Other assets                              |        |                         | 1,381    |         |         |      | (2,523   | )       |        |   | 218    |  
|                                                                                  |                                                     |                                                                        | Increase (decrease): |                                           |        |                         |          |         |         |      |          |         |        |   |       
|                                                                                  |                                                     |                                                                        |                      | Accounts payable and accrued expenses     |        |                         | 1,574    |         |         |      | 18,991   |         |        |   | 807    |  
|                                                                                  |                                                     |                                                                        |                      | Deferred revenue                          |        |                         | (174     | )       |         |      | 354      |         |        |   | (929   | )
|                                                                                  |                                                     |                                                                        |                      | Other liabilities                         |        |                         | 1,167    |         |         |      | 1,730    |         |        |   | (296   | )
|                                                                                  |                                                     |                                                                        |                      |                                           |        |                         |          |         |         |      |          |        
|                                                                                  | Net cash provided by operating activities           |                                                                        |                      | 98,817                                    |        |                         |          | 101,485 |         |      |          | 62,477  |       
|                                                                                  |                                                     |                                                                        |                      |                                           |        |                         |          |         |         |      |          |        
|Investing activities                                                              |                                                     |                                                                        |                      |                                           |        |                         |          |         |         |      |          |        
|Proceeds from sale of properties                                                  |                                                     |                                                                        | 128,001              |                                           |        |                         | 52,008   |         |         |      | 45,704   |        
|Sale (acquisition) of interests in properties                                     |                                                     |                                                                        |                     |                                           |        |                         | 450      |         |         |      | (1,098   | )      
|Decrease (increase) in property and equipment, net                                |                                                     |                                                                        | 99,453               |                                           |        |                         | (98,046  | )       |         |      | (57,113  | )      
|Increase in investments and notes receivable                                      |                                                     |                                                                        | (52,169              | )                                         |        |                         | (123,950 | )       |         |      | (152,809 | )      
|Proceeds from investments and notes receivable                                    |                                                     |                                                                        | 64,678               |                                           |        |                         | 130,222  |         |         |      | 142,422  |        
|Increase in restricted cash and cash equivalents                                  |                                                     |                                                                        | (6,065               | )                                         |        |                         | (6,196   | )       |         |      | (830     | )      
|Contributions to investments in unconsolidated
senior living properties           |                                                     |                                                                        | (21,963              | )                                         |        |                         | (7,006   | )       |         |      | (10,534  | )      
|                                                                                  |                                                     |                                                                        |                      |                                           |        |                         |          |         |         |      |          |        
|                                                                                  | Net cash provided by (used in) investing activities |                                                                        |                      | 211,935                                   |        |                         |          | (52,518 | )       |      |          | (34,258 | )     
|                                                                                  |                                                     |                                                                        |                      |                                           |        |                         |          |         |         |      |          |        
|Financing activities                                                              |                                                     |                                                                        |                      |                                           |        |                         |          |         |         |      |          |        
|Net proceeds from exercised options                                               |                                                     |                                                                        | 11,034               |                                           |        |                         | 9,116    |         |         |      | 3,235    |        
|Additional borrowings under long-term debt                                        |                                                     |                                                                        | 392,731              |                                           |        |                         | 400,735  |         |         |      | 187,302  |        
|Repayment of long-term debt                                                       |                                                     |                                                                        | (569,167             | )                                         |        |                         | (444,440 | )       |         |      | (215,569 | )      
|Net investment in minority interest                                               |                                                     |                                                                        | (750                 | )                                         |        |                         |         |         |         |      | (1,088   | )      
|Financing costs paid                                                              |                                                     |                                                                        | (6,858               | )                                         |        |                         | (6,977   | )       |         |      | (3,118   | )      
|Repurchase of stock                                                               |                                                     |                                                                        | (14,898              | )                                         |        |                         |         |         |         |      | (9,647   | )      
|                                                                                  |                                                     |                                                                        |                      |                                           |        |                         |          |         |         |      |          |        
|                                                                                  | Net cash used in financing activities               |                                                                        |                      | (187,908                                  | )      |                         |          | (41,566 | )       |      |          | (38,885 | )     
|                                                                                  |                                                     |                                                                        |                      |                                           |        |                         |          |         |         |      |          |        
|Net increase (decrease) in cash and cash equivalents                              |                                                     |                                                                        | 122,844              |                                           |        |                         | 7,401    |         |         |      | (10,666  | )      
|Cash and cash equivalents at beginning of period                                  |                                                     |                                                                        | 50,275               |                                           |        |                         | 42,874   |         |         |      | 53,540   |        
|                                                                                  |                                                     |                                                                        |                      |                                           |        |                         |          |         |         |      |          |        
|Cash and cash equivalents at end of period                                        |                                                     | $                                                                      | 173,119              |                                           |        | $                       | 50,275   |         |         | $    | 42,874   |        
|                                                                                  |                                                     |                                                                        |                      |                                           |        |                         |          |         |         |      |          |        

See accompanying notes.

F-5



---



##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements

1. Organization and Presentation

Sunrise Assisted Living, Inc. (Sunrise or the Company) is a provider
of senior living services. Senior living services includes providing a

residence, meals and non-medical assistance to elderly residents for a monthly
fee. Sunrises services are generally not covered by health insurance and,
therefore, monthly fees are payable by the residents, their family, or another
responsible party.

Sunrise was incorporated in Delaware on December 14, 1994. The
consolidated financial statements include Sunrises wholly owned subsidiaries
that manage, own and develop senior living properties. In addition, the
consolidated financial statements include three non-wholly owned limited
liability companies. Sunrise controls the three limited liability companies
through its status as the manager of the properties and as sole managing member
of the limited liability companies with unilateral ability under the operating
agreements to conduct the ordinary course of business of the companies. It is
Sunrises policy to consolidate non-wholly owned interests when, through its
managing partnership or operating agreements, status as manager of the property
and sole general partner or managing member, Sunrise holds the unilateral
ability to conduct the ordinary course of business of the property.

2. Significant Accounting Policies

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

Cash and Cash Equivalents

Sunrise considers cash and cash equivalents to include currency on hand,
demand deposits, and all highly liquid investments with a maturity of three
months or less at the date of purchase.

Allowance for Doubtful Accounts

Sunrise provides an allowance for doubtful accounts on its outstanding
receivables based on its collection history. Details of the allowance for
doubtful accounts receivable are as follows (in thousands):

|                        |  |              |        |      |  |      |       |   |  |   |        |  
|----------------------- |  | ------------ | ------ | ---- |  | ---- | ----- | - |  | - | ------ | -
|                        |  | December 31,
|                        |  |             
|                        |  | 2002         |        | 2001 |  | 2000
|                        |  |              |        |      |  |     
|Beginning balance       |  | $            | 4,188  |      |  | $    | 3,655 |   |  | $ | 3,716  |  
|Provision for bad debts |  |              | 850    |      |  |      | 1,320 |   |  |   | 1,250  |  
|Accounts written off    |  |              | (1,058 | )    |  |      | (787  | ) |  |   | (1,311 | )
|                        |  |              |        |      |  |      |       |   |  |   |        |  
|Ending balance          |  | $            | 3,980  |      |  | $    | 4,188 |   |  | $ | 3,655  |  
|                        |  |              |        |      |  |      |       |   |  |   |        |  

Property and Equipment

Property and equipment are recorded at the lower of cost or fair value and
include interest and property taxes capitalized on long-term construction
projects during the construction period, as well as other costs directly
related to the development and construction of properties. Maintenance and
repairs are charged to expense as incurred. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
Property and equipment are reviewed for impairment whenever events or
circumstances indicate that the assets undiscounted expected cash flows are
not sufficient to recover its carrying amount. Sunrise measures an impairment
loss by comparing the fair value of the asset to its carrying amount. Fair
value of an asset is calculated as the present value of expected future cash
flows.

F-6



---



##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

Construction in progress includes pre-acquisition costs and other direct
costs related to acquisition, development and construction of properties,
including certain direct and indirect costs of Sunrises development
subsidiary. If a project is abandoned, any costs previously capitalized are
expensed.

Intangible Assets

Intangible assets relate primarily to the acquisition of Karrington
Health, Inc. and are comprised of management contracts, leaseholds and costs in
excess of assets acquired. Costs in excess of assets acquired represent costs
of business acquisitions in excess of the fair value of identifiable net assets
acquired. The accounting for costs in excess of assets acquired changed
effective January 1, 2002. See Impact of Changes in Accounting Standards.
Management contracts and leaseholds are also amortized using the straight-line
method over periods ranging from 11 to 40 years.

The carrying amounts of identifiable intangible assets are reviewed for
impairment when indicators of impairment are identified. If the review
indicates that the intangible assets are not expected to be recoverable based
on the undiscounted cash flows of the acquired assets over the remaining
amortization periods, the carrying value of the intangible assets will be
adjusted. The carrying amount of goodwill is reviewed for impairment on an
annual basis. See Impact of Changes in Accounting Standards.

Pre-Rental Costs

Costs incurred to initially rent properties are capitalized and amortized
over 12 months. All other pre-rental costs are expensed as incurred.

Deferred Financing Costs

Costs incurred in connection with obtaining permanent financing for
Company-owned properties are deferred and amortized over the term of the
financing on a straight-line basis, which approximates the effective interest
method.

Investments in Unconsolidated Senior Living Properties

At December 31, 2002, Sunrise owned non-controlling interests in 118
senior living properties, 18 of which were under development. Sunrises
interests, through limited liability companies and partnerships, generally
range from 7% to 50%. Sunrise has 29 properties in which it owns less than
10%, 57 properties in which it owns between 10% and 20%, 26 properties in which
it owns between 21% and 30% and six properties in which it owns more than 30%.
Sunrise does not control these entities, as major business decisions require
approval by the other partners or members. Accordingly, these investments are
accounted for under the equity method. As such, the investments are recorded
at cost and subsequently are adjusted for equity in net income (losses) and
cash contributions and distributions. Sunrise eliminates profits on sales of
services to ventures to the extent of its ownership interest. Sunrise
recognizes interest income to the extent of the outside partners interest on
loans advanced to the ventures. Differences between the carrying value of
investments and the underlying equity in net assets of the investee, excluding
goodwill, are amortized on a straight line basis over the estimated useful life
of the underlying properties. Sunrises interests in accumulated losses of
unconsolidated senior living properties are recorded below Sunrises cost basis
to the extent of other notes and advances to those unconsolidated senior living
properties. For information on commitments or contingencies of partnerships or
limited liability companies in which Sunrise is a general partner or managing
member, see Note 15.

As of December 31, 2002, Sunrises underlying equity in net assets of the
investees exceeded the carrying value of investments in the net assets of
unconsolidated senior living properties by $36 million.

F-7



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

Derivatives and Hedging Activities

Sunrise recognizes all of its derivative instruments as either assets or
liabilities in the consolidated balance sheet at fair value. The accounting
for changes in the fair value of a derivative instrument depends on whether it
has been designated and qualifies as part of a hedging relationship and
further, on the type of hedging relationship. For those derivative instruments
that are designated and qualify as hedging instruments, Sunrise must designate
the hedging instrument, based upon the exposure being hedged, as either a fair
value hedge, cash flow hedge or a hedge of a net investment in a foreign
operation.

For derivative instruments that are designated and qualify as a cash flow
hedge (i.e., hedging the exposure to variability in expected future cash flows
that is attributable to a particular risk), the effective portion of the gain
or loss on the derivative instrument is reported on the balance sheet and
reclassified into earnings in the same period or periods during which the
hedged transaction affects earnings. The remaining gain or loss on the
derivative instrument in excess of the cumulative change in the present value
of future cash flows of the hedged item, if any, is recognized in current
earnings during the period of change.

Revenue Recognition

Operating revenue consists of resident fee revenue, including resident
community fees, management services revenue, facility contract services revenue
and realized gain upon sale of senior living properties. Resident fee revenue
is recognized when services are rendered. Agreements with residents are for a
term of one year and are cancelable by residents with thirty days notice.
Management and contract services revenue is comprised of revenue from
management contracts, development contracts and facility contracts. Revenue
from management contracts is recognized in the month in which it is earned in
accordance with the terms of the management contract. Revenue from development
contracts is recognized over the term of the respective development contracts
using the percentage-of-completion method. Revenue from facility contract
services is comprised of fees plus reimbursable expenses of properties operated
with Sunrises employees under long-term operating agreements and is recognized
when services are rendered. Income from property sales is recognized upon
consummation of the sale of properties unless a portion of the sale is
contingent upon future events or performance. Deferred gains are then
recognized upon performance or resolution of the contingency.

Income Taxes

Sunrise accounts for income taxes under the asset and liability approach
which requires recognition of deferred tax assets and liabilities for the
differences between the financial reporting and tax bases of assets and
liabilities. A valuation allowance reduces deferred tax assets when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.

Stock-Based Compensation

Sunrise grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. Sunrise accounts for stock option grants using the intrinsic value
method in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees,and accordingly recognizes no compensation expense for the stock
option grants. Pro forma information regarding net income and diluted earnings
per share is required by SFAS No. 148, Accounting for Stock-Based Compensation
 Transition and Disclosure,and has been determined as if Sunrise had
accounted for its employee stock options under the fair value method (see
Impact of Changes in Accounting Standards).

F-8



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and SFAS 148, Accounting for Stock-Based Compensation,
and has been determined as if Sunrise had accounted for its employee stock
options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for 2002, 2001
and 2000: risk-free interest rate of 3.6% to 6.4%; dividend yield of 0%;
expected lives of 10 years; and volatility of 53.19% to 57.54%.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Sunrises employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in managements opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures below, the estimated fair value of
the options is amortized to expense, net of taxes, over the options vesting
period. Pro forma net income and pro forma diluted earnings per share for 2001
and 2000 have been restated from prior years financial statements disclosures
to adjust for the tax impact on the estimated fair value of the options
amortized to expense for the respective periods. Sunrises pro forma
information follows (in thousands, except per share amounts):

|                              |                                                                                                                             |             |   |                         |      |      |   |          |      |  |   |          |      | 
|----------------------------- | --------------------------------------------------------------------------------------------------------------------------- | ----------- | - | ----------------------- | ---- | ---- | - | -------- | ---- |  | - | -------- | ---- | 
|                              |                                                                                                                             |             |   | Year ended December 31,
|                              |                                                                                                                             |             |   |                        
|                              |                                                                                                                             |             |   | 2002                    |      | 2001 |   | 2000    
|                              |                                                                                                                             |             |   |                         |      |      |   |         
|Net income:                   |                                                                                                                             |             |   |                         |      |      |   |          |      |  |   |         
|                              | As reported                                                                                                                 |             | $ | 54,661                  |      |      | $ | 49,101   |      |  | $ | 24,278   |     
|                              | Less: Total stock-based employee compensation
expense determined under fair-value
method for all awards, net of tax effects |             |   | ($14,076                | )    |      |   | ($12,642 | )    |  |   | ($10,651 | )   
|                              | Pro forma                                                                                                                   |             | $ | 40,585                  |      |      | $ | 36,459   |      |  | $ | 13,627   |     
|Basic net income per share:   |                                                                                                                             |             |   |                         |      |      |   |          |      |  |   |         
|                              |                                                                                                                             | As reported |   | $                       | 2.44 |      |   | $        | 2.25 |  |   | $        | 1.12 | 
|                              |                                                                                                                             | Pro forma   |   | $                       | 1.82 |      |   | $        | 1.67 |  |   | $        | 0.63 | 
|Diluted net income per share: |                                                                                                                             |             |   |                         |      |      |   |          |      |  |   |         
|                              | As reported                                                                                                                 |             | $ | 2.23                    |      |      | $ | 2.08     |      |  | $ | 1.10     |     
|                              | Pro forma                                                                                                                   |             | $ | 1.70                    |      |      | $ | 1.59     |      |  | $ | 0.62     |     

Impact of Changes in Accounting Standards

On January 1, 2002, Sunrise adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. In
accordance with the new rule, goodwill and indefinite lived intangible assets
are no longer amortized but are reviewed annually for impairment. Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives. Sunrise completed its initial test for
goodwill impairment using the two-step process prescribed in SFAS No. 142.
Based on the results of this test, Sunrise was not required to record an
impairment charge. Diluted net income and diluted earnings per share before
extraordinary items would have been $54 million and $2.09 per share and $25
million and $1.13 per share for 2001 and 2000, respectively, if SFAS No. 142
had been applied to 2001 and 2000.

F-9



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

On January 1, 2002, Sunrise SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 supercedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed ofand APB Opinion No. 30, Reporting the Results of
OperationsReporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
segments of a business to be disposed of. SFAS No. 144 retains the
requirements of SFAS No. 121 relating to recognition and measurement of an
impairment loss and resolves certain implementation issues resulting from SFAS
No. 121. Long-lived assets are reviewed for impairment whenever events or
circumstances indicate that the assets undiscounted expected cash flows are
not sufficient to recover its carrying amount. Sunrise measures an impairment
loss by comparing the fair value of the asset to its carrying amount. Fair
value of an asset is calculated as the present value of expected future cash
flows. The adoption of SFAS No. 144 did not have a material impact on the
consolidated financial position or results of operation of Sunrise.

In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, Recission of FASB Statements 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections.SFAS No. 145 requires companies to no
longer report gains and losses associated with the extinguishment of debt as a
component of extraordinary gains and losses, net of tax. These gains and
losses will now be required to be presented within the statement of income in
appropriate segregated line items. SFAS No. 145 is effective for fiscal years
beginning after December 15, 2002. Upon adoption, Sunrise will reclassify
prior years amounts to reflect SFAS No. 145.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires companies to
initially record at fair value guarantees meeting the characteristics described
in this interpretation, which is different from the general current practice of
recording a liability only when a loss is probable and reasonably estimable, as
defined by FASB Statement No. 5, Accounting for Contingencies. The
Interpretation also requires a guarantor to provide new disclosures for
guarantees even if the likelihood of the guarantors having to make payments
under the guarantee is remote. The Interpretations disclosure requirements
are effective for financial statements of interim or annual periods ending
after December 15, 2002, which are included in Note 15. The Interpretations
initial recognition and initial measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantors fiscal year-end. The impact of this
Interpretation will depend upon the types and terms of guarantees issued by
Sunrise after January 1, 2003.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS No. 148 amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition to SFAS No. 123s fair value method of accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting,
to require disclosure in the summary of significant accounting policies of the
effects of an entitys accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and
interim financial statements. The disclosure provisions of SFAS No. 148 are
applicable to all companies with stock-based employee compensation, regardless
of whether they account for that compensation using the fair value method of
SFAS No. 123 or the intrinsic value method of Opinion 25. SFAS No. 148 is
effective for fiscal years beginning after December 15, 2002. The disclosure
requirements are effective immediately and are included herein.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities(FIN 46). Under this new Interpretation,
companies will be required to determine if they are the primary beneficiary of
a variable interest entity. If they are the primary beneficiary, the variable
interest entity must be consolidated. All companies with variable interests in
variable interest entities created after January 31, 2003 must apply the
provisions of the Interpretation immediately. Public companies with a variable
interest in a variable interest entity created before February 1, 2003 must
apply the provisions of the Interpretation to that entity no later than the
beginning of the first interim or annual reporting period beginning after June
15, 2003. If it is reasonably possible that a company will consolidate or
disclose

F-10



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

information about a variable interest entity when this interpretation
becomes effective, certain disclosures are required in all financial statements
issued after January 31, 2003.

Sunrise is currently evaluating the impact of FIN 46 on its financials.
Based on Sunrises preliminary review of FIN 46, Sunrise believes that its
joint ventures will be considered variable interest entities and is
currently evaluating whether Sunrise is the primary beneficiary. See Note 6 -
Transactions with Unconsolidated Entities. Sunrises joint ventures fall into
one of three categories. First, Sunrise enters into development joint ventures
whereby a third-party investor and Sunrise capitalize a joint venture to
develop and operate senior living properties. Second, Sunrise and a
third-party investor capitalize a joint venture to acquire an existing senior
living property. Finally, as a part of Sunrises sale long-term manage back
program, Sunrise sells wholly owned properties into a joint venture structure
that is capitalized by a third-party investor in which Sunrise holds a minority
interest. These partnerships obtain non-recourse third-party debt. Sunrise
does not have future requirements to contribute additional capital over and
above the original capital commitments. All three types of joint ventures are
established as real estate partnerships to own the underlying property.
Sunrise will then enter into a long-term management contract to operate the
property on behalf of the joint venture. Sunrises total investment in these
joint ventures is comprised of Sunrises direct capital investment in these
joint ventures, sub-debt provided to the joint ventures and other short-term
advances to these joint ventures (Sunrises investment). As of December 31,
2002, this total investment was $156 million, not including any guarantees
provided to these joint ventures as described in Note 15. The realization of
this investment is dependent upon the ongoing operations of the joint ventures.
See Note 6 for operating results of the joint ventures.

Reclassifications

Certain 2001 and 2000 balances have been reclassified to conform to the
2002 presentation.

3. Property and Equipment

Property and equipment consist of the following (in thousands):

|                                               |  |             |  |   |         |              |         |   |         |   |         |  
|---------------------------------------------- |  | ----------- |  | - | ------- | ------------ | ------- | - | ------- | - | ------- | -
|                                               |  |             |  |   |         | December 31,
|                                               |  |             |  |   |         |             
|                                               |  | Asset Lives |  |   | 2002    |              | 2001   
|                                               |  |             |  |   |         |             
|Land and land improvements                     |  | 10-15 yrs   |  | $ | 92,938  |              |         | $ | 122,267 |  
|Building and building
Improvements             |  | 40 yrs      |  |   | 461,487 |              |         |   | 559,094 |  
|Furniture and equipment                        |  | 3-10 yrs    |  |   | 71,598  |              |         |   | 81,766  |  
|                                               |  |             |  |   |         |              |         |   |         |   |         |  
|                                               |  |             |  |   |         |              | 626,023 |   |         |   | 763,127 |  
|Less accumulated depreciation
and amortization |  |             |  |   |         |              | (78,007 | ) |         |   | (83,133 | )
|                                               |  |             |  |   |         |              |         |   |         |   |         |  
|                                               |  |             |  |   |         |              | 548,016 |   |         |   | 679,994 |  
|Construction in progress                       |  |             |  |   |         |              | 88,900  |   |         |   | 161,420 |  
|                                               |  |             |  |   |         |              |         |   |         |   |         |  
|                                               |  |             |  |   |         | $            | 636,916 |   |         | $ | 841,414 |  
|                                               |  |             |  |   |         |              |         |   |         |   |         |  

Depreciation expense was $20 million, $22 million and $25 million for the
years ended December 31, 2002, 2001 and 2000, respectively.

F-11



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

4. Notes Receivable  Affiliates

Notes receivable plus accrued interest consist of the following (in
thousands):

|                                                                                                     |                    |   |              |         |      |   |        |        |  
|---------------------------------------------------------------------------------------------------- | ------------------ | - | ------------ | ------- | ---- | - | ------ | ------ | -
|                                                                                                     |                    |   | December 31,
|                                                                                                     |                    |   |             
|                                                                                                     |                    |   | 2002         |         | 2001
|                                                                                                     |                    |   |              |         |     
|LLC Note II, interest accrues at 10.0%                                                               |                    | $ |             |         |      | $ | 9,269  |       
|LLC Note III, interest accrues at 10.0%                                                              |                    |   | 17,861       |         |      |   | 19,686 |       
|LLC Note IV, interest accrues at 10.0%                                                               |                    |   | 14,322       |         |      |   | 19,343 |       
|LLC Note V, interest accrues at 15.0%                                                                |                    |   | 22,350       |         |      |   | 19,711 |       
|Note I with international joint venture, variable
interest (6.01% as of December 31, 2002)           |                    |   | 5,025        |         |      |   | 4,437  |       
|Note II with international joint venture, interest
accrues at 12.5%                                  |                    |   | 17,195       |         |      |   | 16,357 |       
|Note III with international joint venture, interest
accrues at 12.5%                                 |                    |   | 407          |         |      |   |       |       
|ADG Note, interest accrues at 10.0%                                                                  |                    |   | 593          |         |      |   | 543    |       
|AMB Note, interest accrued at 8.0%                                                                   |                    |   | 570          |         |      |   | 530    |       
|Credit facility, interest accrues at LIBOR plus 3.5%
(4.88% as of December 31, 2002)                 |                    |   | 1,075        |         |      |   | 898    |       
|Promissory Note I, interest accrues at 10.0%                                                         |                    |   | 306          |         |      |   | 438    |       
|Promissory Note II, interest accrues at LIBOR plus
2.75% (4.13% at December 31, 2002)                |                    |   | 3,992        |         |      |   | 4,060  |       
|Promissory Note III, interest accrues at 8.0%                                                        |                    |   | 260          |         |      |   |       |       
|Promissory Note IV, interest accrues at higher of
6% or LIBOR plus 3.0% (4.38% at December 31, 2002) |                    |   | 2,717        |         |      |   |       |       
|Other notes receivable                                                                               |                    |   | 619          |         |      |   | 327    |       
|                                                                                                     |                    |   |              |         |      |   |        |       
|                                                                                                     |                    |   | 87,292       |         |      |   | 95,599 |       
|                                                                                                     | Current maturities |   |              | (10,180 | )    |   |        | (1,294 | )
|                                                                                                     |                    |   |              |         |      |   |        |       
|                                                                                                     |                    | $ | 77,112       |         |      | $ | 94,305 |       
|                                                                                                     |                    |   |              |         |      |   |        |       

In January 1999, Sunrise jointly formed a limited liability company (LLC
II) in which Sunrise owned a 9% minority interest. The purpose of LLC II was
to develop, construct and own senior living properties. Sunrise loaned LLC II
$7 million (the LLC Note II) to partially finance the initial development and
construction of four properties. All four properties are completed and open at
December 31, 2002. The LLC Note II was secured by the properties and
subordinated to other lenders of LLC II. The principal amount of the loan and
accrued interest was due on the earlier of March 30, 2006 or termination of the
management agreement between the parties. The LLC Note II, including accrued
interest, was repaid in August 2002 when the joint venture partners interest
was acquired by a third party. In connection with this transaction, Sunrise
increased its ownership in the venture to 20%.

In March 1999, Sunrise jointly formed a limited liability company (LLC
III) in which Sunrise owns a 9% minority interest. The purpose of LLC III is
to develop, construct and own senior living properties. unrise loaned LLC III $16 million (the LLC Note III) to partially
finance the initial development and construction of five properties. All five
properties are completed and open at December 31, 2002. The LLC Note III is
secured by the properties and is subordinated to other lenders of LLC III. The
principal amount of the loan and accrued interest were due on July 1, 2002.
Sunrise extended the maturity date of this note to June 2004 for any amounts
outstanding at July 1, 2002. During 2002, Sunrise received payments of $3
million. See Note 17 Related-Party Transactions, Joint Ventures.

In March 1999, Sunrise jointly formed a limited liability company (LLC
IV) in which Sunrise owns a 9% minority interest. The purpose of LLC IV is to
develop, construct and own senior living properties.

F-12



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

Sunrise loaned LLC IV $6
million (the LLC Note IV) to partially finance the initial development and
construction of six properties. In December 1999, Sunrise and LLC IV amended
the LLC Note IV to increase the loan by $10 million. All six properties are
completed and open at December 31, 2002. The LLC Note IV is secured by the
properties and is subordinated to other lenders of LLC IV. The principal
amount of the loan and accrued interest are due on the earlier of December 31,
2006 or termination of the management agreement between the parties. During
2002, Sunrise received payments of $7 million. See Note 17 Related-Party
Transactions, Joint Ventures.

In December 2000, Sunrise jointly formed a limited liability company (LLC
V) with an unrelated third party in which Sunrise owns a 9% minority interest.
The purpose of LLC V is to develop, construct and own senior living
properties. Sunrise has loaned LLC V $17 million (the LLC Note V) to
partially finance the initial development and construction of five properties.
All five properties are completed and open at December 31, 2002. The LLC Note
V is secured by the properties and is subordinated to other lenders of LLC V.
The principal amount of the loan and accrued interest are due on December 16,
2007.

In 1998, Sunrise jointly formed a limited liability company
(International LLC) with an unrelated third party in which Sunrise owns a 7%
minority interest. The purpose of International LLC is to develop, construct
and own ten senior living properties in the United Kingdom and Canada. Nine of
these properties are completed and open at December 31, 2002. Sunrise agreed
to make available up to approximately $4 million (Note I) to International
LLC under a revolving credit arrangement to partially finance the development
of a property in the United Kingdom. Interest on the first $3 million of
advances made under Note I accrues at 12.0%. Interest on an additional $1
million of advances accrues at a variable rate (6.01% at December 31, 2002).
In 2001, Sunrise received payments of $1 million. The outstanding principal
and unpaid accrued interest were due in November 2001. However, Note I was
subordinated to a $17 million mortgage loan on the United Kingdom property that
restricted the repayment of Note I until October 1, 2002. After that date,
International LLC could repay Note I as long as it has met certain debt service
criteria. International LLC has met the debt service criteria and plans to
repay the principal balance plus accrued and unpaid interest in 2003. See Note
17 Related-Party Transactions, Joint Ventures.

In 2001, Sunrise agreed to make funds available (Note II) to
International LLC to partially finance the initial development and construction
of properties in the United Kingdom and Canada. Interest on amounts
outstanding under Note II accrues at 12.5%. The Note II to Sunrise is
subordinated to other lenders of the joint venture. Principal and interest
become due as each property is sold by the joint venture. See Note 17
Related-Party Transactions, Joint Ventures.

In 2001, Sunrise jointly formed a limited liability partnership
(International LLC II) with the majority owner of International LLC in which
Sunrise owns a 7% minority interest. The purpose of International LLC is to
develop, construct and own senior living properties in the United Kingdom and
Canada. In 2002, Sunrise agreed to make funds available (Note III) to
International LLC II to partially finance the initial development and
construction of properties in the United Kingdom and Canada. Interest on
amounts outstanding under Note III accrues at 12.5%. The Note III to Sunrise
is subordinated to other lenders of the joint venture. Principal and interest
become due as each property is sold by the joint venture. See Note 17
Related-Party Transactions, Joint Ventures.

In January 1999, a property, in which Sunrise has a controlling interest,
accepted a $500,000 promissory note (ADG Note) from its minority owner. The
ADG Note accrues interest at 10% per annum
and is due annually beginning February 22, 2000. The principal balance
plus accrued and unpaid interest are due on February 22, 2009.

In 2001, a property, in which Sunrise has a controlling interest, accepted
a $500,000 promissory note (AMB Note) from its minority owner. The AMB Note
accrues interest at 8% per annum and is due annually beginning March 2002. The
principal balance plus accrued and unpaid interest are due in March 2010.

F-13



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

In 2001, Sunrise agreed to make available up to approximately $3 million
(Credit Facility) to the owner of a property that Sunrise manages under a
management contract. Interest accrues at LIBOR plus 3.5% per annum.
Principal and accrued and unpaid interest are due at the earlier date of the
third partys full repayment of its mortgage or September 2003.

In December 2001, Sunrise accepted a promissory note in the amount of
$400,000 (Promissory Note I) from a joint venture partner to finance a
portion of the acquisition of one-half of Sunrises ownership interest in a
property. Interest accrues at 10% per annum. Principal and interest are due
monthly until the promissory note is paid in full in January 2007.

In May 2001, Sunrise accepted a promissory note in the amount of $4
million (Promissory Note II) from Sunrise Assisted Living Foundation, Inc.
(SALF), a not-for-profit organization that operates two schools. The
Promissory Note II pertains to a school operated on an undivided parcel on
which Sunrise operates an assisted living property and is secured by an
interest in the whole parcel. Interest accrues at LIBOR plus 2.75% per annum.
Principal and interest payments are made monthly based on a twenty-five year
amortization schedule at the rate of 6.689%. The unpaid principal balance plus
accrued and unpaid interest were due in January 2003. Sunrise extended the
maturity date of this note to April 2003. See Note 17, Related Party
Transactions, Sunrise Assisted Living Foundation.

In February 2002, Sunrise accepted a secured promissory note in the amount
of $250,000 (Promissory Note III) from a third party. The Promissory Note
III pertains to a development and management rights agreement for properties in
Georgia and Missouri. Interest accrues at 8% per annum. Principal and accrued
interest are due March 2007.

In March 2002, Sunrise accepted a promissory note in the amount of $3
million (Promissory Note IV) from a limited partnership in which Sunrise has a
20% ownership interest. The Promissory Note IV is subordinated to other
lenders of the limited partnership. Interest accrues at the higher of 6% or
LIBOR plus 3% per annum. Monthly interest payments start on June 1, 2002 and
continue through March 1, 2003. Monthly principal and interest payments start
on April 1, 2003 and continue through April 1, 2004. Any unpaid principal
balance plus accrued and unpaid interest are due on April 1, 2004.

Sunrise believes the net carrying amount of the notes receivable
approximates market value at December 31, 2002 and 2001.

Sunrise recorded interest income on these notes from related parties of
$9 million, $9 million and $7 million during 2002, 2001 and 2000, respectively.

5. Intangibles and Other Assets

Intangible assets consist of the following (dollars in thousands):

|                                                                                       |  |              |        |           |  |             |        |  |  |             |  | 
|-------------------------------------------------------------------------------------- |  | ------------ | ------ | --------- |  | ----------- | ------ |  |  | ----------- |  | 
|                                                                                       |  | December 31, |        |          
|                                                                                       |  |              |        | Estimated
|                                                                                       |  | 2002         |        | 2001      |  | Useful life
|                                                                                       |  |              |        |           |  |            
|Management
contracts, less
accumulated
amortization of
$1,630 and $1,169               |  | $            | 5,759  |           |  | $           | 6,219  |  |  | 11-20 years
|Leaseholds, less
accumulated
amortization of
$1,503 and $1,801                         |  |              | 6,381  |           |  |             | 16,780 |  |  | 18-40 years
|                                                                                       |  |              |        |           |  |             |        |  |  |             |  | 
|                                                                                       |  | $            | 12,140 |           |  | $           | 22,999 |  |  |             |  | 
|                                                                                       |  |              |        |           |  |             |        |  |  |             |  | 
|Costs in excess of
assets acquired,
less accumulated
amortization of
$2,179 and $2,179 |  | $            | 32,749 |           |  | $           | 32,749 |  |  |             |  | 
|                                                                                       |  |              |        |           |  |             |        |  |  |             |  | 

F-14



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

In accordance with Statement 142 (see Impact of Changes in Accounting
Standards, Note 2), goodwill is no longer amortized but is reviewed annually
for impairment. Sunrise has identified two reporting units for the purposes of
Statement 142. The reporting units are Sunrise Management Services and Sunrise
Properties. Sunrises $33 million goodwill balance at December 31, 2001 has
been allocated to Sunrise Management Services and Sunrise Properties.
Amortization expense was $5 million, $7 million and $9 million for the years
ended December 31, 2002, 2001 and 2000. Amortization expense is expected to be
approximately $5 million in each of the next five years.

Other assets consist of the following (in thousands):

|                                                                  |  |              |        |      |  |   |        | 
|----------------------------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                                                                  |  | December 31,
|                                                                  |  |             
|                                                                  |  | 2002         |        | 2001
|                                                                  |  |              |        |     
|Restricted cash                                                   |  | $            | 18,326 |      |  | $ | 11,877 | 
|Deferred financing costs less amortization of $14,974
and $12,062 |  |              | 10,367 |      |  |   | 10,414 | 
|Pre-rental costs less amortization of $9,331 and
$16,833          |  |              | 2,793  |      |  |   | 3,258  | 
|Other                                                             |  |              | 1,377  |      |  |   | 783    | 
|                                                                  |  |              |        |      |  |   |        | 
|                                                                  |  | $            | 32,863 |      |  | $ | 26,332 | 
|                                                                  |  |              |        |      |  |   |        | 

Restricted cash consists of real estate tax escrows, operating reserves
and capital reserves related to Sunrises debt agreements and resident
deposits.

6. Transactions with Unconsolidated Entities

Included in prepaid expenses and other current assets are net receivables
from related unconsolidated partnerships or limited liability companies of $19
million and $7 million as of December 31, 2002 and 2001, respectively.
Included in other current liabilities are net payables to unconsolidated
partnerships or limited liability companies of $1 million and $2 million as of
December 31, 2002 and 2001, respectively. Net receivables from unconsolidated
partnerships or limited liability companies relate primarily to management
activities. Also, see Note 4 for a discussion of notes receivable from
affiliates.

Summary financial information for unconsolidated entities (7% to 50%
owned) accounted for by the equity method is as follows (in thousands):

|                                           |  |              |           |      |  |      |         |   |  |   |         |  
|------------------------------------------ |  | ------------ | --------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                           |  | December 31,
|                                           |  |             
|                                           |  | 2002         |           | 2001 |  | 2000
|                                           |  |              |           |      |  |     
|Assets, principally property and
equipment |  | $            | 1,438,034 |      |  | $    | 858,079 |   |  | $ | 574,658 |  
|Liabilities, principally long-term debt    |  |              | 1,003,627 |      |  |      | 640,551 |   |  |   | 494,081 |  
|Equity                                     |  |              | 434,407   |      |  |      | 217,528 |   |  |   | 80,577  |  
|Revenues                                   |  |              | 271,348   |      |  |      | 169,453 |   |  |   | 72,922  |  
|Net loss                                   |  |              | (23,293   | )    |  |      | (11,289 | ) |  |   | (19,941 | )

Total management and contract services revenue from related unconsolidated
entities was $161 million, $85 million and $24 million for the years ended
December 31, 2002, 2001 and 2000, respectively.

F-15



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

7. Long-Term Debt

Long-term debt consists of the following (in thousands):

|                                                |                    |   |              |         |      |   |         |         |  
|----------------------------------------------- | ------------------ | - | ------------ | ------- | ---- | - | ------- | ------- | -
|                                                |                    |   | December 31,
|                                                |                    |   |             
|                                                |                    |   | 2002         |         | 2001
|                                                |                    |   |              |         |     
|5 1/2 % convertible subordinated notes due 2002 |                    | $ |             |         |      | $ | 107,836 |        
|5 1/4 % convertible subordinated notes due 2009 |                    |   | 125,000      |         |      |   |        |        
|Syndicated revolving credit facility            |                    |   | 108,915      |         |      |   | 155,060 |        
|Multi-property blanket first mortgage           |                    |   | 78,354       |         |      |   | 79,418  |        
|Revolving credit facilities                     |                    |   | 34,852       |         |      |   | 27,860  |        
|Other mortgages and notes payable               |                    |   | 109,848      |         |      |   | 260,582 |        
|                                                |                    |   |              |         |      |   |         |        
|                                                |                    |   | 456,969      |         |      |   | 630,756 |        
|                                                | Current maturities |   |              | (29,415 | )    |   |         | (26,925 | )
|                                                |                    |   |              |         |      |   |         |        
|                                                |                    | $ | 427,554      |         |      | $ | 603,831 |        
|                                                |                    |   |              |         |      |   |         |        

On June 6, 1997, Sunrise issued and sold $150 million aggregate principal
amount of 51/2% convertible subordinated notes due 2002. The convertible
notes bore interest at 51/2% per annum payable semiannually on June 15 and
December 15 of each year, beginning on December 15, 1997. The conversion price
was $37.1875 (equivalent to a conversion rate of 26.89 shares per $1,000
principal amount of the convertible notes). The convertible notes were
redeemable at the option of Sunrise commencing June 15, 2000, at specified
premiums. On September 14, 2001, Sunrises Board of Directors authorized the
repurchase of up to an additional $50 million of its outstanding 5.5%
subordinated convertible notes (See Note 8). During 2001, Sunrise repurchased
$42 million face value of the convertible notes, resulting in an extraordinary
gain, after tax, of $500,000.

In February 2002, Sunrise redeemed the remaining $108 million 51/2%
convertible notes at a redemption price of 101.1% of the principal amount, plus
accrued and unpaid interest from the proceeds of a new term loan (see below).
The aggregate redemption price was $110 million. None of the convertible notes
were converted into common stock. As a result of the redemption in 2002 from
proceeds of other long-term borrowings, the convertible notes were classified
as long-term at December 31, 2001.

In January 2002, Sunrise obtained a term loan for $92 million to be used,
in part, to pay off the remaining $108 million of its outstanding 51/2%
subordinated convertible notes. The term loan was collateralized by 14
properties, accrued interest at LIBOR plus 6% and matured in May 2004, subject
to a six-month extension option. In February 2002, Sunrise drew $92 million on
the term loan and repaid it the same day. Sunrise recorded an extraordinary
loss of approximately $4 million, before tax, during the first quarter of 2002
for fees associated with the $92 million term loan and the premium paid for the
early redemption of the convertible notes.

In January 2002, Sunrise issued and sold $125 million aggregate principal
amount of 51/4% convertible subordinated notes due February 1, 2009. The
convertible notes bear interest at 51/4% per annum payable semiannually on
February 1 and August 1 each year beginning on August 1, 2002. The conversion
price is $35.84 (equivalent to a conversion rate of 27.9018 shares per $1,000
principal amount of the convertible notes). The notes are subordinated to
Sunrises existing and future senior indebtedness. The convertible notes are
redeemable at the option of Sunrise commencing February 5, 2006, at specified
premiums. The holders of the convertible notes may require Sunrise to
repurchase the convertible notes upon a change of control of Sunrise as defined
in the convertible notes. In February 2002, $92 million of the net proceeds
from the 51/4% convertible notes were used to pay off the term loan.

F-16



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

A subsidiary of Sunrise has obtained a syndicated revolving credit
facility for $400 million to be used for general corporate purposes, including
the continued construction and development of senior living properties.
Sunrise guarantees the repayment of all amounts outstanding under this credit
facility. The credit facility is secured by cross-collateralized first
mortgages on the real property and improvements and first liens on all assets
of the subsidiary, consisting of 23 properties. In June 2001, Sunrise
refinanced its syndicated revolving credit facility and reduced it from $400
million to up to $300 million. The maturity date was extended from July 2002
to June 2004 and the interest rate increased from LIBOR plus 1.75% to LIBOR
plus 2.00% (3.38% at December 31, 2002). In December 2002, Sunrise reduced its
syndicated revolving credit facility to $265 million. Sunrise pays commitment
fees of 0.25% on the unused balance of the credit facility. There were $109
million of advances outstanding under this credit facility as of December 31,
2002.

In June 1994, Sunrise entered into a multi-property blanket first mortgage
that is collateralized by a blanket first mortgage on all assets of a
subsidiary of Sunrise, consisting of 15 properties. In May 2001, Sunrise
modified its multi-property blanket first mortgage to remove one of the
properties as collateral, thus reducing the principal balance to $79 million,
and to extend the maturity date from May 31, 2001 to May 31, 2004, subject to
optional extensions, at a fixed rate of interest equal to 8.20%. Prior to the
modification, the multi-property blanket first mortgage consisted of two
separate debt classes. Class A in the amount of $65 million had a fixed
interest rate of 8.56% and was interest only until the maturity date of May 31,
2001. Class B in the amount of $20 million had a variable interest rate. Class
B was interest only until July 1, 1997 at which time principal and interest
payments were due using a 20-year amortization schedule. The interest rate
applicable to the floating rate debt was LIBOR plus 1.75% until the
modification in May 2001.

A participation interest of $3 million payable in connection with the
multi-property blanket first mortgage was recorded at the loan date. A
corresponding amount recorded as a loan discount was being amortized over the
life of the loan prior to the modification. Amortization of the discount of
approximately $0, $200,000 and $400,000 has been included as interest expense
in 2002, 2001 and 2000, respectively.

In May 1999, Sunrise entered into a multi-property first mortgage for $88
million secured by nine properties. The loan accrues interest at 7.14% and
matures on June 1, 2009. The nine properties securing the debt were sold on
February 23, 2001 to a joint venture in which Sunrise has a 25% interest. The
joint venture assumed the debt with an outstanding balance of $86 million as of
the date of sale.

In November 2001, Sunrise entered into a $60 million revolving credit
facility, expandable to $100 million. The revolving credit facility matures in
November 2006, subject to a five-year extension, accrues interest at LIBOR plus
1.20% (2.58% at December 31, 2002) and is collateralized by senior living
properties. The revolving credit facility may be converted to a fixed rate
facility at any time during the term. The proceeds were used to reduce the
balance of one of Sunrises credit facilities. Sunrise pays commitment fees of
0.13% on the unused portion of the credit facility. At December 31, 2002, the
collateral of the revolving credit facility consisted of five properties and
$24 million was outstanding.

In December 2002, Sunrise entered into an $18 million revolving credit
facility. The revolving credit facility matures in January 2005, accrues
interest at LIBOR plus 2.50% (3.88% at December 31, 2002) and is collateralized
by senior living properties. At December 31, 2002, the collateral of the
revolving credit facility consisted of eight properties and $11 million was
outstanding.

In December 2002, Sunrise received a commitment for a $50 million
revolving unsecured credit facility. The revolving credit facility matures 364
days from closing, accrues interest at LIBOR plus 2.50% (3.88% at December 31,
2002). Sunrise pays commitment fees of 0.10% on the unused portion of the
credit facility. Closing on the revolving unsecured credit facility is
conditioned on the closing of Sunrises acquisition of Marriott Senior Living
Services (See Note 13).

F-17



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

In December 2002, Sunrise received a commitment for a $17 million credit
facility. The credit facility matures 2 years from closing which is expected
in February 2003, subject to a one-year extension, accrues interest at LIBOR
plus 3.25% (4.63% at December 31, 2002) subject to a minimum of 5.75% and is
collateralized by three senior living properties.

In December 2002, Sunrise received a commitment for a $20 million
revolving credit facility. The revolving credit facility closed in January
2003, matures in January 2005, is subject to a one-year extension, accrues
interest at Prime subject to a minimum of 5% and is collateralized by five
senior living properties.

In December 2002, Sunrise received commitments for mortgages on two senior
living properties for an aggregate amount of $16 million. The mortgages mature
1 year from closing which is expected in February 2003,are subject to a
one-year extension, accrue interest at LIBOR plus 2.50% (3.88% at December 31,
2002) and are cross collateralized by two senior living properties.

The other mortgages and notes payable relate primarily to 18 properties
whereby outstanding balances are collateralized by the total assets of the
respective property. Payments of principal and interest are made monthly.
Interest rates range from 1.65% to 10.0% with remaining maturities ranging from
less than one year to 31 years. These other mortgages and notes payable have
total borrowings of $110 million as of December 31, 2002, and an unused portion
on one of the loans of $2 million.

During 2001, Sunrise entered into five interest rate swap agreements that
effectively converted $125 million of its floating-rate revolving credit
facility to fixed-rate basis for the next two to three years, thus reducing the
impact of interest rate changes on future interest expense. In December 2002,
Sunrise paid $400,000 to terminate one of its five interest rate swap

agreements. The loss reported in accumulated other comprehensive income
through the date of termination will be amortized as a yield adjustment to
interest expense over the remaining term of the hedged revolving credit
facility. At December 31, 2002, $100 million of Sunrises revolving credit
facility was designated as the hedged item to the four remaining interest rate
swap agreements that will mature in the next 6 to 18 months with an effective
weighted-average fixed interest rate of 6.59%. The fair value of the swaps, net
of tax, was negative $2 million as of December 31, 2002 and was recorded in
other long-term liabilities and accumulated other comprehensive income. During
2002, the hedge ineffectiveness was immaterial. Based on the fair value of the
swaps at December 31, 2002, Sunrise would incur approximately $2 million of
interest expense, net of taxes, related to the swaps in 2003. Since December
31, 2002, Sunrise paid $3 million to terminate its remaining four interest rate
swap agreements.

There are various financial covenants and other restrictions in Sunrises
debt instruments, including provisions which: (1) require it to meet certain
financial tests. For example, Sunrises $265 million syndicated revolving
credit facility requires Sunrise to have a consolidated tangible net worth of
at least $284 million and to maintain a consolidated minimum cash liquidity
balance of at least $25 million. These tests are administered on a monthly or
quarterly basis, depending on the covenant; (2) require consent for changes in
management or control of Sunrise. For example, Sunrises $265 million
syndicated revolving credit facility requires the lenders consent for any
merger where Paul Klaassen or Teresa Klaassen does not remain chairman of the
board and chief executive officer of Sunrise; (3) restrict the ability of
Sunrises subsidiaries to borrow additional funds, dispose of assets or engage
in mergers or other business combinations without lender consent; and (4)
require that Sunrise maintain minimum occupancy levels at its properties. For
example, Sunrises $265 million syndicated revolving credit facility requires
that 85% occupancy be achieved after 15 months for newly opened properties with
77 units or less and 18 months for 78 units or more and, following this
15-month and 18-month period, be maintained at or above that level. If this
occupancy covenant is not met, the amount borrowed against that property must
be reduced.

Sunrises syndicated revolving credit facility contains a cross-default
provision pursuant to which a default on other indebtedness by Sunrise or any
of its consolidated subsidiaries under the credit facility could result in the ability of the lenders to declare a default and
accelerate the indebtedness under the credit facility.

F-18



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

As of December 31, 2002, Sunrise was in compliance with all of its debt
covenants.

Principal maturities of long-term debt as of December 31, 2002 are as
follows (in thousands):

|           |  |   |         | 
|---------- |  | - | ------- | 
|2003       |  | $ | 29,415  | 
|2004       |  |   | 194,450 | 
|2005       |  |   | 22,839  | 
|2006       |  |   | 30,537  | 
|2007       |  |   | 38,968  | 
|Thereafter |  |   | 140,760 | 
|           |  |   |         | 
|           |  | $ | 456,969 | 
|           |  |   |         | 

Interest paid totaled $32 million,$42 million and $52 million in 2002,
2001 and 2000, respectively. Interest capitalized was $7 million, $7 million
and $6 million in 2002, 2001 and 2000, respectively.

As of December 31, 2002, Sunrise has $14 million in unused letters of
credit that have been pledged for the benefit of certain lending institutions
and municipalities. The letters of credit expire within two years.

8. Stockholders Equity

In 2000, Sunrises Board of Directors authorized Sunrise to repurchase its
outstanding common stock and/or its outstanding 5 1/2% convertible
subordinated notes up to an aggregate purchase price of $50 million over a
period of 12 months. Under the stock repurchase program, Sunrise was
authorized to repurchase common stock in the open market or in privately
negotiated transactions, subject to market conditions, applicable legal
requirements and other factors. Sunrise repurchased 585,000 shares of common
stock at an average price of $16.66 per share through open-market purchases
during 2000.

In July 2002, Sunrise announced that its Board of Directors authorized it
to repurchase outstanding shares of our common stock up to an aggregate
purchase price of $50 million over the next 12 months. Sunrise repurchased
581,400 shares at an average price of $25.57 per share through open-market
purchases during 2002.

9. Stock Option Plans

Sunrise has stock option plans providing for the grant of incentive and
nonqualified stock options to employees, directors, consultants and advisors.
At December 31, 2002, these plans provided for the grant of options to purchase
up to 9,148,910 shares of common stock. The option exercise price and vesting
provisions of the options are fixed when the option is granted. The options
expire ten years from the date of grant and generally vest over a four-year
period. The option exercise price is not less than the fair market value of a
share of common stock on the date the option is granted.

On April 25, 1996, the Board of Directors adopted the 1996 Directors
Stock Option Plan (the Directors Plan). Any director who was a member of
the Board of Directors but not an officer or employee of Sunrise or any of its
subsidiaries (other than the persons elected as director representatives of the
holders of Series A Preferred Stock) was eligible to receive options under the
Directors Plan. In March 2000, the Directors Plan was terminated. An
aggregate of 75,000 shares of common stock is reserved for issuance under
existing option agreements. The option exercise price is not less than the
fair market value of a share of common stock on the date the option was
granted. The period for exercising an option begins six months after the
option was granted and generally ends ten years from the date the option was
granted. Options granted under the Directors Plan vested immediately. All
options granted under the Directors Plan are non-incentive stock options. As
of December 31, 2002, 75,000 options remained outstanding under the plan.

F-19



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

A summary of Sunrises stock option activity, and related information for
the years ended December 31 are presented below:

|                                                               |  |        |       |          |  |           |       |          |  |        |       |           |  |   |       |  |  |           |       |   |  |   |       | 
|-------------------------------------------------------------- |  | ------ | ----- | -------- |  | --------- | ----- | -------- |  | ------ | ----- | --------- |  | - | ----- |  |  | --------- | ----- | - |  | - | ----- | 
|                                                               |  | 2002   |       | 2001     |  | 2000     
|                                                               |  |        |       |          |  |          
|                                                               |  |        |       |          |  | Weighted- |       |          |  |        |       | Weighted- |  |   |       |  |  | Weighted-
|                                                               |  |        |       |          |  | Average   |       |          |  |        |       | Average   |  |   |       |  |  | Average  
|                                                               |  | Shares |       | Exercise |  | Shares    |       | Exercise |  | Shares |       | Exercise 
|Options                                                        |  | (000)  |       | Price    |  | (000)     |       | Price    |  | (000)  |       | Price    
|                                                               |  |        |       |          |  |           |       |          |  |        |       |          
|Outstanding-beginning of year                                  |  |        | 6,168 |          |  | $         | 21.52 |          |  |        | 5,959 |           |  | $ | 21.33 |  |  |           | 5,250 |   |  | $ | 23.28 | 
|Granted                                                        |  |        | 1,049 |          |  |           | 22.90 |          |  |        | 1,205 |           |  |   | 22.27 |  |  |           | 1,905 |   |  |   | 15.93 | 
|Exercised                                                      |  |        | (568  | )        |  |           | 17.62 |          |  |        | (570  | )         |  |   | 15.73 |  |  |           | (242  | ) |  |   | 13.77 | 
|Canceled                                                       |  |        | (238  | )        |  |           | 22.24 |          |  |        | (426  | )         |  |   | 28.98 |  |  |           | (954  | ) |  |   | 28.57 | 
|                                                               |  |        |       |          |  |           |       |          |  |        |       |           |  |   |       |  |  |           |       |   |  |   |       | 
|Outstanding-end of year                                        |  |        | 6,411 |          |  |           | 22.07 |          |  |        | 6,168 |           |  |   | 21.52 |  |  |           | 5,959 |   |  |   | 21.33 | 
|                                                               |  |        |       |          |  |           |       |          |  |        |       |           |  |   |       |  |  |           |       |   |  |   |       | 
|Options exercisable at year-end                                |  |        | 3,572 |          |  |           |       |          |  |        | 3,030 |           |  |   |       |  |  |           | 2,523 |   |  |   |       | 
|Weighted-average fair value of
options granted during the
year |  | $      | 18.15 |          |  |           |       |          |  | $      | 16.16 |           |  |   |       |  |  | $         | 11.78 |   |  |   |       | 

The following table summarizes information about stock options outstanding
at December 31, 2002:

|                |                 |             |       |                     |  |                     |  |             |                |         |   |           |  |  |       |       |  |  |   |       |  | 
|--------------- | --------------- | ----------- | ----- | ------------------- |  | ------------------- |  | ----------- | -------------- | ------- | - | --------- |  |  | ----- | ----- |  |  | - | ----- |  | 
|                |                 |             |       | Options Outstanding |  | Options Exercisable
|                |                 |             |       |                     |  |                    
|                |                 |             |       |                     |  |                     |  | Weighted-   |                |         |   |           |  |  |       |       |  |  |   |      
|                |                 |             |       | Number              |  | Average             |  | Weighted-   |                | Number  |   | Weighted-
|Range of        |                 | Outstanding |       | Remaining           |  | Average             |  | Exercisable |                | Average
|Exercise Prices |                 | (000)       |       | Contractual Life    |  | Exercise Price      |  | (000)       | Exercise Price
|                |                 |             |       |                     |  |                     |  |             |               
|$               | 3.00 - $  8.00  |             |       | 35                  |  |                     |  | 2.6         |                |         | $ | 3.55      |  |  |       | 35    |  |  | $ | 3.55  | 
|                | 8.01 -   20.00  |             |       | 2,001               |  |                     |  | 7.2         |                |         |   | 15.78     |  |  |       | 941   |  |  |   | 15.83 | 
|                | 20.01 -   25.63 |             |       | 2,719               |  |                     |  | 5.5         |                |         |   | 24.35     |  |  |       | 2,052 |  |  |   | 24.69 | 
|                | 25.64 -   44.56 |             |       | 1,656               |  |                     |  | 8.2         |                |         |   | 28.29     |  |  |       | 544   |  |  |   | 31.18 | 
|                |                 |             |       |                     |  |                     |  |             |                |         |   |           |  |  |       |       |  |  |   |      
|                |                 |             | 6,411 |                     |  |                     |  |             |                |         |   |           |  |  | 3,572 |       |  |  |   |      
|                |                 |             |       |                     |  |                     |  |             |                |         |   |           |  |  |       |       |  |  |   |      

10. Restricted Stock

The Companys stockholders approved the 2002 Stock Option and Restricted
Stock plan at the Companys annual meeting of stockholders held on May 17,
2002. On March 21, 2002, a total of 148,100 shares of restricted stock were
granted to Paul J. Klaassen, Chairman of the Board and Chief Executive Officer,
and Thomas B. Newell, President. These grants vest over three to ten years.
Unvested amounts are reflected in the balance sheet and represent the fair
value of shares at the date of grant, which will be amortized as compensation
expense over the period of vesting. During 2002, Sunrise recognized $0.7
million in compensation expense. As of December 31, 2002, 7,700 of the 148,100
shares of the restricted stock grant were vested.

F-20



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

11. Stockholder Rights Agreement

The Board of Directors adopted a Stockholders Rights Agreement (Rights
Agreement) effective April 25, 1996, as amended. All shares of common stock
issued by Sunrise between the date of adoption of the Rights Agreement and the
Distribution Date (as defined below) have rights attached to them. The rights
expire ten years after adoption of the Rights Agreement. Each right, when
exercisable, entitles the holder to purchase one one-thousandth of a share of
Series C Junior Participating Preferred Stock at a price of $85.00 (the
Purchase Price). Until a right is exercised, the holder thereof will have no
rights as a stockholder of Sunrise.

The rights initially attach to the common stock. The rights will separate
from the common stock and a distribution of rights certificates will occur (a
Distribution Date) upon the earlier to occur of (1) ten days following a
public announcement that a person or group (an Acquiring Person) has
acquired, or obtained the right to acquire, beneficial ownership of 20% or more
of the outstanding shares of common stock (the Stock Acquisition Date) or (2)
ten business days (or such later date as the Board of Directors may determine)
following the commencement of a tender offer or exchange offer, the
consummation of which would result in the beneficial ownership by a person of
20% or more of the outstanding shares of common stock. However, neither Paul
J. Klaassen nor Teresa M. Klaassen (nor their affiliates, associates and
estates), each of whom, as of the date of adoption of the Rights Agreement,
beneficially owned in excess of 20% of the outstanding shares of common stock,
will be deemed an Acquiring Person, unless they acquire an additional 2% of
the common stock which was outstanding at the time of completion of Sunrises
initial public offering.

In general, if a person becomes the beneficial owner of 20% or more of the
then outstanding shares of common stock, each holder of a right may exercise
the right by purchasing common stock having a value equal to two times the
Purchase Price. If at any time following the Stock Acquisition Date (1)
Sunrise is acquired in a merger or other business combination transaction in
which it is not the surviving corporation (other than a merger which follows an
offer described in the preceding paragraph), or (2) 50% or more of Sunrises
assets or earning power is sold or transferred, each holder of a right shall
have the right to receive, upon exercise, common stock of the acquiring company
having a value equal to two times the Purchase Price. The Board of Directors
of Sunrise generally may redeem the rights at a price of $.005 per right at any
time until ten days after an Acquiring Person has been identified as such.

F-21



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

12. Net Income Per Common Share

The following table summarizes the computation of basic and diluted net
income per common share amounts presented in the accompanying consolidated
statements of operations (in thousands, expect per share amounts):

|                                            |                                                                                                      |                                             |   |                         |       |      |   |        |       |  |   |        |      | 
|------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------------- | - | ----------------------- | ----- | ---- | - | ------ | ----- |  | - | ------ | ---- | 
|                                            |                                                                                                      |                                             |   | Year ended December 31,
|                                            |                                                                                                      |                                             |   |                        
|                                            |                                                                                                      |                                             |   | 2002                    |       | 2001 |   | 2000  
|                                            |                                                                                                      |                                             |   |                         |       |      |   |       
|Numerator for basic net income per share:   |                                                                                                      |                                             |   |                         |       |      |   |        |       |  |   |       
|                                            | Net income before extraordinary (loss) gain                                                          |                                             | $ | 57,228                  |       |      | $ | 48,576 |       |  | $ | 24,278 |     
|                                            | Extraordinary (loss) gain, net of tax                                                                |                                             |   | (2,567                  | )     |      |   | 525    |       |  |   |       |     
|                                            |                                                                                                      |                                             |   |                         |       |      |   |        |       |  |   |        |     
|                                            | Net income                                                                                           |                                             | $ | 54,661                  |       |      | $ | 49,101 |       |  | $ | 24,278 |     
|                                            |                                                                                                      |                                             |   |                         |       |      |   |        |       |  |   |       
|Numerator for diluted net income per share: |                                                                                                      |                                             |   |                         |       |      |   |        |       |  |   |       
|                                            | Net income before extraordinary (loss) gain                                                          |                                             | $ | 57,228                  |       |      | $ | 48,576 |       |  | $ | 24,278 |     
|                                            | Assumed conversion of convertible notes, net of tax                                                  |                                             |   | 4,610                   |       |      |   | 4,795  |       |  |   |       |     
|                                            |                                                                                                      |                                             |   |                         |       |      |   |        |       |  |   |       
|                                            | Diluted net income before extraordinary (loss) gain                                                  |                                             |   | 61,838                  |       |      |   | 53,371 |       |  |   | 24,278 |     
|                                            | Extraordinary (loss) gain, net of tax                                                                |                                             |   | (2,567                  | )     |      |   | 525    |       |  |   |       |     
|                                            |                                                                                                      |                                             |   |                         |       |      |   |        |       |  |   |        |     
|                                            | Diluted net income                                                                                   |                                             | $ | 59,271                  |       |      | $ | 53,896 |       |  | $ | 24,278 |     
|                                            |                                                                                                      |                                             |   |                         |       |      |   |        |       |  |   |       
|Denominator:                                |                                                                                                      |                                             |   |                         |       |      |   |        |       |  |   |       
|                                            | Denominator for basic net income per common
share-weighted average shares                            |                                             |   | 22,357                  |       |      |   | 21,825 |       |  |   | 21,654 |     
|                                            | Effect of dilutive securities:                                                                       |                                             |   |                         |       |      |   |        |       |  |   |        |     
|                                            |                                                                                                      | Employee stock awards                       |   |                         | 643   |      |   |        | 651   |  |   |        | 366  | 
|                                            |                                                                                                      | Convertible notes                           |   |                         | 3,552 |      |   |        | 3,476 |  |   |        |     | 
|                                            |                                                                                                      |                                             |   |                         |       |      |   |        |       |  |   |        |     
|                                            | Denominator for diluted net income per common
share-weighted average shares plus assumed
conversions |                                             |   | 26,552                  |       |      |   | 25,952 |       |  |   | 22,020 |     
|                                            |                                                                                                      |                                             |   |                         |       |      |   |        |       |  |   |        |     
|                                            | Basic net income per common share:                                                                   |                                             |   |                         |       |      |   |        |       |  |   |        |     
|                                            |                                                                                                      | Net income before extraordinary (loss) gain |   | $                       | 2.56  |      |   | $      | 2.23  |  |   | $      | 1.12 | 
|                                            |                                                                                                      | Extraordinary (loss) gain, net of tax       |   |                         | (0.12 | )    |   |        | 0.02  |  |   |        |     | 
|                                            |                                                                                                      |                                             |   |                         |       |      |   |        |       |  |   |        |     
|                                            |                                                                                                      | Net income                                  |   | $                       | 2.44  |      |   | $      | 2.25  |  |   | $      | 1.12 | 
|                                            |                                                                                                      |                                             |   |                         |       |      |   |        |       |  |   |       
|                                            | Diluted net income per common share:                                                                 |                                             |   |                         |       |      |   |        |       |  |   |        |     
|                                            |                                                                                                      | Net income before extraordinary (loss) gain |   | $                       | 2.33  |      |   | $      | 2.06  |  |   | $      | 1.10 | 
|                                            |                                                                                                      | Extraordinary (loss) gain, net of tax       |   |                         | (0.10 | )    |   |        | 0.02  |  |   |        |     | 
|                                            |                                                                                                      |                                             |   |                         |       |      |   |        |       |  |   |        |     
|                                            |                                                                                                      | Net income                                  |   | $                       | 2.23  |      |   | $      | 2.08  |  |   | $      | 1.10 | 
|                                            |                                                                                                      |                                             |   |                         |       |      |   |        |       |  |   |       

Certain shares issuble upon the exercise of stock options or convertible
notes have been excluded from the computation because the effect of their
inclusion would be anti-dilutive. Options are included under the treasury
stock method to the extent they are dilutive.

F-22



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

13. Acquisitions and Dispositions

In 2000, Sunrise announced its intention to sell selected owned properties
as a normal part of its operations and retain long-term management contracts
and, in many cases, minority equity interests in the properties. Sunrise has
performed under its sale/long-term manage back program by selling some
properties 100% to third-parties and retaining a long-term management contract
and selling some properties to joint ventures in which it has a minority
ownership interest, generally ranging from 20% to 25%. If Sunrise sells 100%
of a property to a third-party owner, it recognizes a gain from the sale for
the difference between the purchase price and the book value of the property,
less the costs to sell. Sunrise also removes the book value of the property
from the Property and equipment line item on the consolidated balance sheet
and removes from liabilities any debt repaid or assumed by the new owner in the
transaction. If Sunrise sells a property to a joint venture in which it has a
minority ownership interest, Sunrise will recognize as a gain from the sale the
difference between the purchase price and the book value of the property, less
the costs to sell, adjusted to reflect only the gain associated with the
third-party ownership in the joint venture. Sunrise does not record a gain on
the portion of the sale associated with its remaining ownership in the joint
venture. Sunrise also records, at historical cost basis, its remaining
ownership of the property sold and debt assumed by the joint venture as an
investment.

In September 1998, Sunrise completed the sale of two properties for an
aggregate sales price of $29 million. Sunrise will realize up to a $6 million
gain from the transaction. Sunrise recognized a gain of $2 million and $2
million on the sale in 1999 and 1998, respectively. The remaining gain was
deferred at December 31, 2002, the recognition of which is contingent upon
future events. Sunrise operates the two properties under long-term operating
agreements.

In June 1999, Sunrise completed the sale of two properties for an
aggregate sales price of $28 million. Sunrise realized an $11 million gain
from the transaction. Sunrise recognized a gain of $5 million on the sale in
1999 and $6 million in 2000. Sunrise operates the two properties under
long-term operating agreements.

In June 2000, Sunrise completed the sale of three properties for an
aggregate sales price of $44 million to a real estate venture company in which
Sunrise owns a 25% interest. Sunrise realized $13 million in gain, subject to
certain contingencies being met, of which $2 million and $11 million was
recognized in 2001 and 2000, respectively. In September 2000, Sunrise
completed the sale of eight properties for an aggregate sales price of $111
million to the same venture company. The venture company assumed approximately
$75 million of debt secured by the eight properties. Sunrise realized $26
million in gain, subject to certain contingencies being met, of which $13
million and $13 million was recognized in 2001and 2000, respectively. Sunrise
continues to operate the properties under long-term operating agreements.

In December 2000, Sunrise completed the sale of two properties for an
aggregate sales price of $28 million. Sunrise realized $9 million in gain,
subject to certain contingencies being met, of which $0.9 million, $5 million
and $2 million was recognized in 2002, 2001 and 2000, respectively. Sunrise
continues to operate the properties under long-term operating agreements.

In February 2001, Sunrise completed the sale of nine properties for an
aggregate sales price of $131 million to a limited partnership in which Sunrise
owns a 25% interest. Sunrise realized $41 million in gain, subject to certain
contingencies being met, of which $1 million and $40 million was recognized
during 2002 and 2001. Sunrise continues to operate the properties under
long-term operating agreements.

In October 2001, Sunrise completed the sale of one property for an
aggregate sales price of $17 million to a real estate venture company in which
Sunrise owns a 25% interest. Sunrise realized $3 million in gain, subject to
certain contingencies being met, of which $2 million and $1 million was
recognized in 2002 and 2001, respectively. Sunrise continues to operate the
properties under long-term operating agreements.

F-23



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

In December 2001, Sunrise completed the sale of one of our two existing
Florida properties for an aggregate sales price of $8 million. The buyer will
assume management of the property after a 90-day transition period. Sunrise
realized $1 million in gain, which was recognized in 2001.

In December 2001, Sunrise completed the sale of one property for an
aggregate sales price of $16 million to a real estate venture company in which
Sunrise owns a 25% interest. Sunrise realized $2 million in gain, subject to
certain contingencies being met, of which $1 million and $500,000 was
recognized in 2002 and 2001, respectively. In 2002, Sunrise also recognized an
additional $2 million in incentive purchase price based on 2002 operating
performance. Sunrise continues to operate the properties under long-term
operating agreements.

In December 2001, one of Sunrises joint venture partners exercised an
option to acquire an additional 25% interest in one property (Sunrise of
Gardner Park). As a result of the transaction, Sunrises ownership in the
property was reduced to 25% from 50%. Sunrise will continue to operate the
property under a long-term management agreement. Sunrise realized up to $1
million in gain, subject to certain contingencies being met, of which $700,000
and $200,000 was recognized in 2002 and 2001, respectively.

In March 2002, Sunrise completed the sale/long-term manage back of 12
assisted living properties to a real estate investment entity in which Sunrise
owns a 20% interest. Sunrise realized $43 million in gain, subject to certain
operating contingencies being met, of which $43 million was recognized during
2002. Sunrise will continue to operate the properties under long-term
management agreements.

In June 2002, Sunrise completed the sale/long-term manage back of two
assisted living properties to a real estate joint venture in which Sunrise owns
a 20% interest. Sunrise will realize up to $9 million in gain over four
quarters, subject to meeting certain operating contingencies, of which $7
million was recognized in 2002. Sunrise will continue to operate the
properties under long-term management agreements.

In August 2002, Sunrise completed the sale/long-term manage back of one
assisted living property to a real estate joint venture in which Sunrise owns a
20% interest. Sunrise will realize up to $6 million in gain over four
quarters, subject to meeting certain operating contingencies, of which $3
million was recognized in 2002. Sunrise will continue to operate the property
under a long-term management agreement.

In September 2002, Sunrise completed the sale/long-term manage back of two
assisted living properties to a real estate joint venture in which Sunrise owns
a 20% interest. Sunrise will realize up to $8 million in gain over four
quarters, subject to meeting certain operating contingencies, of which $4
million was recognized in 2002. Sunrise will continue to operate the
properties under a long-term management agreement.

In December 2002, Sunrise completed the sale/long-term manage back of 11
assisted living properties to a real estate joint venture in which Sunrise owns
a 20% interest. Sunrise will realize up to $36 million in gain over four
quarters, subject to meeting certain operating contingencies, of which $9
million was recognized in 2002. Sunrise will continue to operate the
properties under a long-term management agreement.

On December 30, 2002, Sunrise announced it has signed a definitive
purchase agreement with Marriott International, Inc. (Marriott) to acquire
all of the outstanding stock of Marriotts wholly owned subsidiary, Marriott
Senior Living Services, Inc., which owns and operates senior living properties.
Sunrise will pay approximately $89 million in cash, subject to various
adjustments set forth in the purchase agreement, to acquire all of the
outstanding stock of Marriott Senior Living. Sunrise will also assume
approximately $38 million of working capital liabilities and other funding
obligations as well as approximately $23 million of life care endowment
obligations, the majority of which will be repaid with proceeds from the
issuance of new endowment obligations as new residents enter the properties.
The stock purchase is currently expected to close late in the first quarter of
2003, subject to receipt of required regulatory approvals and other closing
conditions.

F-24



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

In connection with Sunrises property sale/long-term manage back program,
Sunrise specifically identifies properties that it is actively marketing and
intends to sell within a twelve-month period, and accordingly designates these
properties as held for sale. Management believes that the sales value of these
properties exceeds their book value and therefore no related write-down has
been recorded. Depreciation expense for these properties is included in
Sunrises consolidated depreciation expense up to the point that management
specifically identifies the properties it intends to sell and believes the sale
of the properties is probable. At December 31, 2002, the book value of these
properties of approximately $40 million is reflected in the property and
equipment line item of the balance sheet.

14. Non-Recurring Items

In August 2001, Karrington Health Inc. (Karrington), a wholly owned
subsidiary of Sunrise, received a cash payment in the amount of $10 million to
settle a lawsuit filed by Karrington prior to its acquisition by Sunrise in
1999. Karrington brought the suit alleging that Omega Healthcare Investors,
Inc. had breached a financing commitment it had made to Karrington. Expenses
incurred to settle the lawsuit have been netted against the settlement.

Given the current industry environment and the increasing number of
opportunities to acquire properties and management contracts, Sunrise
determined, in the third quarter of 2001, that the costs to develop five
specific sites outweighed the costs of acquiring properties and/or management
contracts in those areas. Accordingly, management elected not to proceed with
its planned development for these five sites and wrote down associated project
costs by $7 million to their estimated net realizable value.

15. Commitments

Sunrise leases its corporate offices, regional offices, development
offices and warehouse space under various leases. During 1998, Sunrise entered
into an agreement to lease new office space for its corporate headquarters.
The lease commenced upon completion of the building in July 1999 and expires in
July 2011. The lease has an initial annual base rent of $1 million. The base
rent escalates approximately 2.5% per year in accordance with a base rent
schedule. In September 1999, Sunrise amended another corporate lease to
increase the amount of leased premises and extend the maturity date to October
2004. The initial annual lease payments amount to $462,000, 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 warehouse lease has a term of seven
years and expires in May 2004. The initial annual base rent payments amount to
$148,000, subject to annual increases of 3%. In addition, Sunrise is required
to amortize an additional $88,000 of rent related to the straight lining of
rent benefits and a portion of operating expenses. Various other leases expire
between 2003 and 2004.

Sunrise has also entered into operating leases for five properties. Two
properties commenced operations during 1997, two properties commenced
operations in 1998, and the other property commenced operations in 1999. In
May 1999 in connection with the acquisition of Karrington, Sunrise assumed six
operating leases for six senior living properties and a ground lease. The
operating lease terms vary from 15-20 years, with two ten-year extension
options. Sunrise also has six other ground leases related to six properties in
operation. Lease terms range from 15 to 99 years and are subject to annual
increases based on the consumer price index and/or stated increases in the
lease.

In December 1998, a subsidiary of Sunrise entered into a three-year
operating lease for six senior living properties. Sunrise guaranteed the
payment of all obligations of its subsidiary under the lease. There were no
extension options. However, Sunrise had the option, 120 days prior to the
expiration date of the lease, of either purchasing or selling all the leased
properties. If Sunrise exercised its option to sell the properties and the
proceeds from the sale exceeded the obligation under the lease, Sunrise was
entitled to the excess. However, if the proceeds from the sale were less than
the obligation under the lease, Sunrise would be obligated to fund the
difference. Sunrise was responsible for the payment of real estate taxes,
insurance and
other operating expenses. The lease required Sunrise to maintain certain
coverage ratios, liquidity and net worth. These six leased properties were
sublet to Karrington until the acquisition of Karrington in May

F-25



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

1999.     During 2000, Sunrise purchased two of the properties for $18
million. In 2001, Sunrise exercised its option to purchase the remaining
leased properties and closed on the purchase of the remaining four properties
for $29 million in January 2002. The effect of purchasing these six properties
was to record the property and newly financed debt associated with these
properties on Sunrises consolidated balance sheet.

Future minimum lease payments under office, equipment, ground and other
operating leases as of December 31, 2002 are as follows (in thousands):

|           |  |   |         | 
|---------- |  | - | ------- | 
|2003       |  | $ | 10,953  | 
|2004       |  |   | 10,467  | 
|2005       |  |   | 9,747   | 
|2006       |  |   | 9,753   | 
|2007       |  |   | 9,760   | 
|Thereafter |  |   | 106,695 | 
|           |  |   |         | 
|           |  | $ | 153,375 | 
|           |  |   |         | 

Sunrise has entered into contracts to purchase and lease additional sites.
Total contracted purchase price of these sites is $92 million. Sunrise is
pursing additional development opportunities and also plans to acquire
additional properties as market conditions warrant.

As a part of Sunrises operating strategy, Sunrise may provide limited
debt guarantees to certain of its business ventures. Unless otherwise stated,
Sunrise would be required to perform under a debt guarantee if the business
venture failed to perform under the debt agreement and the bank pursued the
Sunrise guarantee. At December 31, 2002, Sunrise has provided $50 million of
debt guarantees to its business ventures which represents Sunrises maximum
exposure under its debt guarantees. Of the $50 million, $2 million of
guarantees are for our sale long-term manage back partnerships. These
guarantees are removed upon reaching certain occupancy and debt service
coverage targets within the partnership. Of the $50 million, $4 million
represents a debt guarantee to a joint venture which was acquired in the
Karrington acquisition. This debt guarantee remains in place throughout the
term of the loan. Sunrise has provided $10 million of debt guarantees to
hospital partnerships that remain in place throughout the term of the loan.
Finally, Sunrise has provided $34 million of debt guarantees to its development
joint ventures. Of the $34 million, $18 million are last dollar debt
guarantees on international development. Last dollar guarantee means the
third-party debt would have to default, the bank would have to enforce any
remedies against the venture, including foreclosure, after which Sunrise would
have to provide any required funds to make up any difference between the loan
amount and the amount recovered from such enforcement. Of the $34 million in
debt guarantees to develop joint ventures, $21 million are removed upon
stabilization of the underlying properties. The remaining $13 million will
remain in place throughout the term of the loan. At December 31, 2002, Sunrise
does not believe that it will be required to fund any debt under its current
outstanding debt guarantees and therefore no liabilities are reflected in the
financial statements of Sunrise for these debt guarantees.

As part of Sunrises fee-development for joint ventures, it typically
guarantees that properties will be completed at budgeted costs approved by all
partners in the joint venture. Budgeted costs typically include significant
contingency reserves for unforeseen costs and potential overruns. Sunrise
would be required to fund these guarantees if the actual costs of development
exceeded the approved budgeted costs. At December 31, 2002, thirteen
properties are under construction and subject to completion guarantees.
Sunrise has over 20 years experience in the development and construction of
senior living properties. Its construction contractors are experienced in
building its prototype and assume much of the risk of on-time and on-budget
completion by executing fixed-price contracts. Typically, the terms of these
guarantees provide for no limitation to the maximum potential future payments
under the guarantee. In certain agreements, if amounts are required to be
funded by Sunrise, they would become loans to the venture and earn interest.
Sunrise closely monitors these projects and does not expect to fund any amounts
under these development completion guarantees during 2003. Therefore, no
liabilities are reflected in the financial statements of Sunrise for these
guarantees.

F-26



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##### 



Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

As a part of certain management contracts, Sunrise may provide an
operating deficit guarantee. This means that if a property has depleted all of
its operating reserves and does not generate enough cash flow during a month to
cover its expenses, Sunrise would provide a loan to the property to cover the
cash shortfall. These guarantees are generally included with our development
joint ventures and usually are provided for a limited period of time, generally
until the property reaches stabilization. Typically, the terms of these
operating deficit guarantees provide for no limitation to the maximum potential
future payments under the guarantee. Currently, 26 operating properties are
subject to a Sunrise operating deficit guarantee and 13 additional properties
will be subject to a guarantee upon opening. Sunrise funded $300,000 under
these guarantees in 2002 related to four properties in the international joint
venture and expects to fund approximately $200,000 in 2003 under these
guarantees. The amounts funded in 2002 were recorded as loans to the ventures.

16. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes.

The primary components of Sunrises net deferred tax asset are as follows
(in thousands):

|                               |                               |   |              |         |      |   |         |         |  
|------------------------------ | ----------------------------- | - | ------------ | ------- | ---- | - | ------- | ------- | -
|                               |                               |   | December 31,
|                               |                               |   |             
|                               |                               |   | 2002         |         | 2001
|                               |                               |   |              |         |     
|Deferred tax assets:           |                               |   |              |         |      |   |         |        
|                               | Operating loss carryforward   |   | $            | 11,108  |      |   | $       | 16,973  |  
|                               | Accrued expenses              |   |              | 3,343   |      |   |         | 2,624   |  
|                               | Other                         |   |              | 1,422   |      |   |         | 2,139   |  
|                               |                               |   |              |         |      |   |         |        
|Total deferred tax assets      |                               | $ | 15,873       |         |      | $ | 21,736  |        
|                               |                               |   |              |         |      |   |         |        
|Deferred tax liabilities:      |                               |   |              |         |      |   |         |        
|                               | Investments in joint
ventures |   | $            | (23,106 | )    |   | $       | (15,868 | )
|                               | Property and equipment        |   |              | (62,511 | )    |   |         | (50,674 | )
|                               | Operating expenditures        |   |              | (10,495 | )    |   |         | (5,474  | )
|                               |                               |   |              |         |      |   |         |        
|Total deferred tax liabilities |                               |   | (96,112      | )       |      |   | (72,016 | )      
|                               |                               |   |              |         |      |   |         |        
|Net deferred tax liability     |                               | $ | (80,239      | )       |      | $ | (50,280 | )      
|                               |                               |   |              |         |      |   |         |        

At December 31, 2002, Sunrise had regular federal net operating loss
carryforwards available to offset future taxable income of approximately $25
million, which expire from 2010 through 2019. This amount includes
approximately $3 million of net operating loss carryforwards acquired from
Karrington, which are subject to certain limitations on utilization. At
December 31, 2002, Sunrise had alternative minimum tax credits of approximately
$1 million and Work-Opportunity tax credits of approximately $900,000 available
to offset future federal tax liabilities. These tax credits do not expire.
Various Sunrise entities have fully utilized their net operating loss
carryforwards for state tax purposes.

Realization of the net deferred tax asset is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards.
Sunrise expects to fully utilize the loss carryforward prior to expiration.

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Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

Significant components of the provision for income taxes are as follows
(in thousands):

|          |                   |         |   |                         |        |      |   |        |        |  |   |        |        | 
|--------- | ----------------- | ------- | - | ----------------------- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|          |                   |         |   | Year Ended December 31,
|          |                   |         |   |                        
|          |                   |         |   | 2002                    |        | 2001 |   | 2000  
|          |                   |         |   |                         |        |      |   |       
|Current:  |                   |         |   |                         |        |      |   |        |        |  |   |       
|          |                   | Federal |   | $                       | 2,495  |      |   | $      | 2,778  |  |   | $      | 1,501  | 
|          |                   | State   |   |                         | 2,448  |      |   |        | 2,389  |  |   |        | 2,754  | 
|          |                   |         |   |                         |        |      |   |        |        |  |   |        |        | 
|          | Total current     |         |   | 4,943                   |        |      |   | 5,167  |        |  |   | 4,255  |       
|Deferred: |                   |         |   |                         |        |      |   |        |        |  |   |       
|          |                   | Federal |   |                         | 25,727 |      |   |        | 23,805 |  |   |        | 11,235 | 
|          |                   | State   |   |                         | 2,832  |      |   |        | 2,421  |  |   |        | 32     | 
|          |                   |         |   |                         |        |      |   |        |        |  |   |        |        | 
|          | Total deferred    |         |   | 28,559                  |        |      |   | 26,226 |        |  |   | 11,267 |       
|          |                   |         |   |                         |        |      |   |        |        |  |   |        |        | 
|          | Total tax expense |         | $ | 33,502                  |        |      | $ | 31,393 |        |  | $ | 15,522 |       
|          |                   |         |   |                         |        |      |   |        |        |  |   |       

In 2002, 2001 and 2000, Sunrise paid federal and state income taxes, net
of refunds of $2 million, $1 million and $3 million, respectively. Current
taxes payable for 2002, 2001 and 2000 have been reduced by approximately $2.5
million, $3 million, and $1 million respectively, reflecting the tax benefit
to Sunrise of employee stock options exercised during the year. The tax
benefit has been recognized as an increase to additional paid-in capital.

The differences between the tax provision calculated at the statutory
federal income tax rate and the actual tax provision recorded for each year are
as follows:

|                    |  |                         |    |      |  |      |    |   |  |  |    |  
|------------------- |  | ----------------------- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                    |  | Year Ended December 31,
|                    |  |                        
|                    |  | 2002                    |    | 2001 |  | 2000
|                    |  |                         |    |      |  |     
|Statutory rate      |  |                         | 35 | %    |  |      | 35 | % |  |  | 35 | %
|State taxes, net    |  |                         | 5  |      |  |      | 6  |   |  |  | 7  |  
|Tax exempt interest |  |                         | (1 | )    |  |      | (1 | ) |  |  | (1 | )
|Other               |  |                         | (1 | )    |  |      | (1 | ) |  |  | (2 | )
|                    |  |                         |    |      |  |      |    |   |  |  |    |  
|                    |  |                         | 38 | %    |  |      | 39 | % |  |  | 39 | %
|                    |  |                         |    |      |  |      |    |   |  |  |    |  

17. Related-Party Transactions

Sunrise Assisted Living Foundation

Sunrise Assisted Living Foundation, Inc. (SALF), a not-for-profit
organization, operates two schools, including day care centers. Paul and
Teresa Klaassen, Sunrises founders, are on the Board of Directors of SALF.
SALF reimbursed Sunrise monthly for use of office facilities and support
services in the amount of $84,000 in 2002, 2001 and 2000. Such amounts are
included in operating revenue. Sunrise has also accepted a promissory note
from SALF during 2001 (see Note 4).

During 1999, a subsidiary of SALF provided certain health care services
to residents of Sunrise properties located in Illinois. The SALF subsidiary
entered into various administrative, accounting and collection service
agreements with Sunrise that terminated at the end of 2001. The service
agreements allow for reimbursement of costs of service plus a management fee.
Sunrise recognized management fees of $400,000 and $200,000 in 2001 and 2000,
respectively. As of December 31, 2002, Sunrise owed SALF $1 million under such
service agreements.

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Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

Ground Lease

Sunrise has a 99 year ground lease with one of Sunrises founders. The
ground lease expires in May 2085. The basic monthly rent is adjusted annually
based on the consumer price index. Rent expense under this lease was $299,000,
$296,000 and $262,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. Sunrise subleases one-half of this ground lease to SALF. The
sublease expires in May 2085 and requires payments equal to 50% of all payments
made by Sunrise under the ground lease. Sublease rental income was $149,500,
$148,000 and $131,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. Lease expense is recorded net of the sublease income.

Joint Ventures

Sunrise has entered into unconsolidated joint venture arrangements with a
third party that is providing up to $66 million of the equity capital to
develop up to 26 projects in the United States, United Kingdom and Canada. A
director of Sunrise, Craig Callen, is a managing director of Credit Suisse
First Boston (CSFB) LLC. The parent of CSFB LLC controls through funds
sponsored by an affiliate or subsidiary investments, which from time to time
have included investments in the joint ventures. Sunrise is providing
management and pre-opening services to the joint ventures on a contract-fee
basis with rights to acquire the assets in the future and has agreed to invest
up to $6 million of equity capital in the joint ventures. Sunrise recognized
management and contract services fees from these joint ventures of $8 million,
$9 million and $12 million, respectively, in 2002, 2001 and 2000. As of
December 31, 2002, 2001 and 2000, the third party had provided approximately
$52 million, $51 million and $42 million, respectively, and Sunrise has
provided $6 million, $8 million and $4 million, respectively, of equity capital
to the joint ventures. For information on committed and funded loans to this
third party, see Note 4.

Sunrise may allow minority equity ownership interests in joint ventures
for its officers as a means of incentive. Currently, two of its executive vice
presidents, Christian Slavin and Tiffany Tomasso, have minority ownership
interests (less than 1% combined on a fully diluted basis) in one of its
international joint ventures. Brian Swinton, another of its executive vice
presidents, has a 0.05% minority ownership interest computed on a fully diluted
basis in its at-home senior living joint venture.

18. Profit-Sharing Plan

Sunrise has a profit-sharing plan (the Plan) under Internal Revenue Code
Section 401(k). All employees of Sunrise are covered by the Plan and are
eligible to participate in the Plan after meeting certain eligibility
requirements. Deferred salary contributions are made through pre-tax salary
deferrals of between 1% and 16%. During 2000, the Plan contained three
elements  employee salary contributions, discretionary matching employer
contributions and special discretionary employer contributions.

Effective January 1, 2001, employees vest in their matching employer
contributions 100% over four years at 25% each year. When an employee reaches
5 years of service, Sunrise will contribute $0.50 for every dollar the employee
contributes up to 7% of the employees annual compensation. If the employee
has less than 5 years of service, the employer contribution will be $0.25 for
every dollar the employee contributes up to 7% of the employees annual
compensation. The Plan has eliminated the discretionary matching
contributions and all employees who earn $85,000 or less annually are eligible
to receive regular matching contributions by Sunrise provided the employee
meets certain eligibility requirements. Matching contributions made by Sunrise
totaled $200,000, $500,000 and $300,000 during 2002, 2001 and 2000,
respectively.

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Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

19. Fair Value of Financial Instruments

The following disclosures of estimated fair value were determined by
management, using available market information and valuation methodologies.
Considerable judgment is necessary to interpret market data and develop
estimated fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts Sunrise could realize on disposition of
the financial instruments. The use of different market assumptions or
estimation methodologies may have an effect on the estimated fair value
amounts.

Cash equivalents, accounts receivable, accounts payable and accrued
expenses, marketable securities, investments and other current assets and
liabilities are carried at amounts which reasonably approximate their fair
values.

Fixed rate debt with an aggregate carrying value of $343 million has an
estimated aggregate fair value of $340 million at December 31, 2002. Estimated
fair value of fixed rate debt is based on interest rates currently available to
Sunrise for issuance of debt with similar terms and remaining maturities. The
estimated fair value of Sunrises variable rate debt is estimated to be
approximately equal to its carrying value of $114 million at December 31, 2002.
The interest rate swaps related to floating rate debt, net of taxes, (see Note
7) has an estimated fair value of negative $2 million at December 31, 2002.

Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 2002. Although
management is not aware of any factors that would significantly affect the
reasonable fair value amounts, these amounts have not been comprehensively
revalued for purposes of these financial statements since December 31, 2002 and
current estimates of fair value may differ from the amounts presented herein.

20. Information about Sunrises Segments

Sunrise reports the results of its operations by its two operating
divisions  Sunrise Management Services and Sunrise Properties. Sunrise
Assisted Living, Inc. is the parent company of each division and develops
Sunrises strategy and overall business plan and coordinates the activities of
all business divisions. The Sunrise Management Services division provides
full-service senior living management services, in the U.S. and
internationally, for all properties owned by Sunrise or managed by Sunrise for
third-parties. The Sunrise Management Services division also provides
consulting services on market and site selection and pre-opening sales and
marketing. The Sunrise Properties division is responsible for all Sunrise
real estate operations, including development, construction, property
management, project and permanent financing, real estate and property sales.

F-30



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Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

Segment information is as follows (in thousands):

|                                |                                                                        |                                       |   |                         |         |      |       |          |         |  |   |          |         | 
|------------------------------- | ---------------------------------------------------------------------- | ------------------------------------- | - | ----------------------- | ------- | ---- | ----- | -------- | ------- |  | - | -------- | ------- | 
|                                |                                                                        |                                       |   | Year ended December 31,
|                                |                                                                        |                                       |   |                        
|                                |                                                                        |                                       |   | 2002                    |         | 2001 |       | 2000    
|                                |                                                                        |                                       |   |                         |         |      |       |         
|Operating Revenue:              |                                                                        |                                       |   |                         |         |      |       |          |         |  |   |         
|                                | Sunrise Management Services                                            |                                       | $ | 371,064                 |         |      | $     | 295,459  |         |  | $ | 227,278  |        
|                                | Sunrise Properties                                                     |                                       |   | 326,262                 |         |      |       | 325,785  |         |  |   | 312,810  |        
|                                | Elimination of intersegment revenue                                    |                                       |   | (191,414                | )       |      |       | (193,025 | )       |  |   | (195,302 | )      
|                                |                                                                        |                                       |   |                         |         |      |       |          |         |  |   |         
|                                |                                                                        | Total consolidated operating revenue  |   |                         | 505,912 |      |       |          | 428,219 |  |   |          | 344,786 | 
|                                |                                                                        |                                       |   |                         |         |      |       |          |         |  |   |         
|Operating Expenses:             |                                                                        |                                       |   |                         |         |      |       |          |         |  |   |         
|                                | Sunrise Management Services                                            |                                       |   | 338,297                 |         |      |       | 266,356  |         |  |   | 206,060  |        
|                                | Sunrise Properties                                                     |                                       |   | 237,178                 |         |      |       | 240,483  |         |  |   | 245,037  |        
|                                | Elimination of intersegment expenses                                   |                                       |   | (191,414                | )       |      |       | (193,025 | )       |  |   | (195,302 | )      
|                                |                                                                        |                                       |   |                         |         |      |       |          |         |  |   |         
|                                |                                                                        | Total consolidated operating expenses |   |                         | 384,061 |      |       |          | 313,814 |  |   |          | 255,795 | 
|                                |                                                                        |                                       |   |                         |         |      |       |          |         |  |   |         
|Properties  nonrecurring items |                                                                        |                                       |  |                         |         |      | 2,307 |          |         |  |  |         
|                                |                                                                        |                                       |   |                         |         |      |       |          |         |  |   |         
|                                |                                                                        | Segment operating income              |   |                         | 121,851 |      |       |          | 116,712 |  |   |          | 88,991  | 
|Reconciliation to net income:   |                                                                        |                                       |   |                         |         |      |       |          |         |  |   |         
|                                | Corporate operating expenses                                           |                                       |   | 10,103                  |         |      |       | 8,965    |         |  |   | 8,481    |        
|                                |                                                                        |                                       |   |                         |         |      |       |          |         |  |   |         
|                                |                                                                        | Income from operations                |   |                         | 111,748 |      |       |          | 107,747 |  |   |          | 80,510  | 
|                                | Interest income (expense), net                                         |                                       |   | (19,980                 | )       |      |       | (26,176  | )       |  |   | (37,566  | )      
|                                | Equity in earnings (losses) of
unconsolidated senior living properties |                                       |   | 695                     |         |      |       | (1,169   | )       |  |   | (2,941   | )      
|                                | Minority interests                                                     |                                       |   | (160                    | )       |      |       | (769     | )       |  |   | (203     | )      
|                                | Provision for income taxes                                             |                                       |   | (35,075                 | )       |      |       | (31,057  | )       |  |   | (15,522  | )      
|                                | Extraordinary gain, net of tax                                         |                                       |   | (2,567                  | )       |      |       | 525      |         |  |   |         |        
|                                |                                                                        |                                       |   |                         |         |      |       |          |         |  |   |         
|                                |                                                                        | Total consolidated net income         |   | $                       | 54,661  |      |       | $        | 49,101  |  |   | $        | 24,278  | 
|                                |                                                                        |                                       |   |                         |         |      |       |          |         |  |   |         

Management services revenue from operations in England were $2 million, $1
million and $1 million for 2002, 2001 and 2000, respectively. Management
services revenue from operations in Canada were $2 million, $3 million and $2
million for 2002, 2001 and 2000, respectively. The remaining revenues and all
long-lived assets are domestic and substantially all assets are held by Sunrise
Properties.

21. Quarterly Result of Operations (Unaudited)

The following is a summary of quarterly results of operations for the
fiscal quarters: (in thousands, except per share amounts):

|                                    |  |             |         |     |  |             |  |  |  |             |         |  |  |             |  |  |  |   |         |  |  |  |  |  |  |   |         | 
|----------------------------------- |  | ----------- | ------- | --- |  | ----------- |  |  |  | ----------- | ------- |  |  | ----------- |  |  |  | - | ------- |  |  |  |  |  |  | - | ------- | 
|                                    |  | 1st Quarter |         |     |  | 2nd Quarter |  |  |  | 3rd Quarter |         |  |  | 4th Quarter
|                                    |  |             |         |     |  |             |  |  |  |             |         |  |  |            
|2002                                |  |             |         |     |  |             |  |  |  |             |         |  |  |             |  |  |  |   |         |  |  |  |  |  |  |   |         | 
|Operating revenue                   |  | $           | 111,117 |     |  |             |  |  |  | $           | 119,888 |  |  |             |  |  |  | $ | 130,057 |  |  |  |  |  |  | $ | 144,850 | 
|Net income                          |  |             | 7,472   | (1) |  |             |  |  |  |             | 11,463  |  |  |             |  |  |  |   | 15,400  |  |  |  |  |  |  |   | 20,326  | 
|Diluted net income per
common share |  | $           | 0.32    |     |  |             |  |  |  | $           | 0.47    |  |  |             |  |  |  | $ | 0.63    |  |  |  |  |  |  | $ | 0.82    | 
|2001                                |  |             |         |     |  |             |  |  |  |             |         |  |  |             |  |  |  |   |         |  |  |  |  |  |  |   |         | 
|Operating revenue                   |  | $           | 104,049 |     |  |             |  |  |  | $           | 103,521 |  |  |             |  |  |  | $ | 108,359 |  |  |  |  |  |  | $ | 112,290 | 
|Net income                          |  |             | 13,191  |     |  |             |  |  |  |             | 13,109  |  |  |             |  |  |  |   | 11,687  |  |  |  |  |  |  |   | 11,114  | 
|Diluted net income per
common share |  | $           | 0.56    |     |  |             |  |  |  | $           | 0.55    |  |  |             |  |  |  | $ | 0.49    |  |  |  |  |  |  | $ | 0.47    | 

F-31



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Sunrise Assisted Living, Inc.
Notes to Consolidated Financial Statements (continued)

The sum of diluted net income per common share for the four quarters in
2002 and 2001 may not equal diluted net income per common share for the year
due to the changes in the number of weighted average shares outstanding and
fluctuations in the market price of Sunrises common stock during the year.

(1)  Includes an extraordinary loss of approximately $4 million ($2 million net
of tax) for fees associated with the $92 million term loan and the premium paid
for the early redemption of the convertible notes.

F-32