SUNRISE ASSISTED LIVING INC, 424B1, 1996-10-25

SUNRISE ASSISTED LIVING INC
424B1, 1996-10-25
NURSING & PERSONAL CARE FACILITIES

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<PAGE> 1

PROSPECTUS

OCTOBER 24, 1996
5,000,000 SHARES

[SUNRISE ASSISTED LIVING LOGO]

COMMON STOCK

Of the 5,000,000 shares of common stock, $0.01 par value per share (the
"Common Stock"), offered hereby (the "Offering"), 4,000,000 shares are being
sold by Sunrise Assisted Living, Inc. ("Sunrise" or the "Company") and 1,000,000
shares are being sold by certain Selling Stockholders. See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of shares by such Selling Stockholders.

The Common Stock is traded on the Nasdaq National Market under the symbol
"SNRZ." On October 24, 1996, the last sale price of the Common Stock on the
Nasdaq National Market was $24 1/2 per share. See "Price Range of Common Stock
and Dividend Policy."

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------

THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

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

<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(2)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Per Share....................... $24.00 $1.20 $22.80 $22.80
Total(3)........................ $120,000,000 $6,000,000 $91,200,000 $22,800,000
</TABLE>

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

(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933.

(2) Before deducting expenses payable by the Company estimated at $600,000.

(3) The Company and certain Selling Stockholders have granted the Underwriters
an option, exercisable within 30 days hereof, to purchase up to an aggregate
of 750,000 additional shares of Common Stock at the price to the public less
underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to the Public, Underwriting Discounts and Commissions,
Proceeds to the Company and Proceeds to the Selling Stockholders will be
$138,000,000, $6,900,000, $103,664,008, and $27,435,992, respectively. See
"Underwriting."

The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain prior conditions including the right of the Underwriters to
reject orders in whole or in part. It is expected that delivery of such shares
will be made in New York, New York, on or about October 30, 1996.

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

ALEX. BROWN & SONS
INCORPORATED

NATWEST SECURITIES LIMITED

J.C. BRADFORD & CO.
<PAGE> 2

Sunrise Assisted Living Logo

Sunrise Mission Statement

To serve with kindness, love and professionalism, while
demonstrating our commitment to the following principles:

<TABLE>
<S> <C> <C>
[Resident [Resident
Photo] Photo]
Nurturing the Spirit Personalizing Services
[Resident
Photo] [Resident
Enabling Freedom of Photo]
Choice (Facility Photo) Protecting Privacy
[Resident
[Resident Photo]
Photo] Encouraging
Fostering Individuality Independence
[Resident
[Resident Photo]
Photo] Involving Family and
Preserving Dignity Sunrise of Bluemont Park, VA (owned) Friends
</TABLE>

For United Kingdom Purchasers: The shares of Common Stock offered hereby may
not be offered or sold in the United Kingdom other than to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing of
investments, whether as principal or agent (except in circumstances that do not
constitute an offer to the public within the meaning of the Public Offers of
Securities Regulations 1995 or the Financial Services Act 1986) and this
Prospectus may only be issued or passed on to any person in the United Kingdom
if that person is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1995.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. SEE "UNDERWRITING."

2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and consolidated and combined financial statements, including the
notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains
certain forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in "Risk Factors" and elsewhere in this Prospectus. Unless the context
suggests otherwise, references in this Prospectus to the "Company" or "Sunrise"
mean Sunrise Assisted Living, Inc. and its subsidiaries and predecessor
entities. Unless otherwise indicated, information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option.

THE COMPANY

Sunrise Assisted Living, Inc. ("Sunrise" or the "Company") is a leading
provider of assisted living services to the elderly. The Company currently
operates 32 facilities in 11 states with a capacity of approximately 2,800
residents, including 21 facilities wholly owned by the Company, seven facilities
in which it has ownership interests and four facilities managed for third
parties. The Company had revenues of $37.3 million in 1995 and $21.0 million for
the six months ended June 30, 1996, and incurred net losses of $10.1 million and
$4.1 million, respectively, for these periods. Approximately 99% of these
revenues were derived from private pay sources.

The Company's three-year growth objective is to develop and own at least 55
new Sunrise assisted living facilities with a capacity of approximately 4,950
residents. To date, the Company has obtained zoning approval for 25 new
facilities with a total resident capacity of 2,215, including 16 facilities
currently under construction. The Company has also entered into contracts to
purchase 15 additional sites and to lease two additional sites, and is
negotiating purchase terms for 11 additional identified sites. Since the first
Sunrise facility opened in 1981, the Company has developed 24 facilities, 16 of
which it currently owns, and has completed all but one of the facilities for
which it obtained zoning approval. In addition to its construction and
development plans, the Company plans to acquire up to 10 additional facilities
over the next three years.

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

The Company's objective is to capitalize on its 15-year history as a
pioneer and leading provider in the assisted living industry and on the growing
demand for assisted living as the preferred setting for elderly care. The
Company's strategy is to: (i) provide high-quality personalized resident care
and services; (ii) provide a full range of assisted living services; (iii)
rapidly develop the Sunrise model in targeted markets; (iv) maintain the depth
and quality of its management team; (v) pursue acquisitions and contract
management opportunities; (vi) achieve the benefits of regional density by
clustering facilities; and (vii) develop strategic alliances with integrated
health care delivery systems.

3
<PAGE> 4

RECENT DEVELOPMENTS

ACQUISITION OF SOUTHEAST PROPERTIES

On October 8, 1996, the Company completed its acquisition from Laing
Properties & Subsidiaries, Inc. of five facilities located in the southeast
United States (the "Southeast Properties") for an aggregate purchase price of
$34.0 million in cash with no debt assumed. The Southeast Properties consist of
498 total units providing primarily independent and assisted living services.
One of the facilities also has a 26-bed skilled nursing floor. These facilities
had combined revenues of $9.9 million in 1995 and $5.4 million for the six
months ended June 30, 1996, and had combined net (losses) income of ($32,000)
and $195,000, respectively, for these periods. After giving effect to the
acquisition of the Southeast Properties at the beginning of the respective
periods, the Company had a pro forma net loss of $8.5 million and $3.1 million
for 1995 and for the first six months of 1996, respectively. See "Recent
Developments," "Selected Financial, Operating and Pro Forma Data" and "Unaudited
Pro Forma Consolidated Financial Statements."

AFFILIATION AGREEMENT WITH JEFFERSON HEALTH SYSTEM

CREDIT FACILITY

On October 3, 1996, a subsidiary of the Company received from GMAC
Commercial Mortgage Corporation a commitment for a $51.0 million revolving
construction credit facility. The credit facility provides for construction and
interim loans to finance the development of up to seven assisted living
facilities. The Company has agreed to guarantee the repayment of all amounts
outstanding under this credit facility. The credit facility is for a term of
five years and is secured by cross-collateralized first mortgages on the real
property and liens on receivables. Advances under the credit facility bear
interest at rates ranging from LIBOR plus 2.25% to 2.60%. See "Recent
Developments."

CONTINGENT ACQUISITION OF CALIFORNIA PROPERTIES

On October 8, 1996, the Company entered into a purchase and sale agreement
subject to certain conditions, including satisfactory completion by the Company
of financial, accounting, regulatory and property due diligence over the next 60
days, to acquire two facilities located in Southern California (the "California
Properties") for $30.8 million in cash. The two facilities consist of 258 total
units providing independent and assisted living services. Assuming the Company
elects to proceed with the transaction following the completion of its due
diligence review, the closing of the transaction would likely take place in the
first quarter of 1997. Given the contingent nature of the purchase and sale
agreement, there can be no assurance that the acquisition will be consummated.
See "Recent Developments."

INITIAL PUBLIC OFFERING

On June 5, 1996, the Company completed its initial public offering selling
5,700,000 shares of Common Stock at $20.00 per share. The net proceeds to the
Company from the offering were approximately $104.3 million. The net proceeds
have been used as follows: $16.6 million in partial payment of the Company's
long-term debt; $10.2 million to redeem the outstanding shares of Series B
Exchangeable Preferred Stock; $34.0 million to acquire the Southeast Properties;
and the balance to fund continued development of Sunrise facilities, as well as
for working capital and general corporate purposes.

4
<PAGE> 5

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company................ 4,000,000 shares(1)
Common Stock offered by the Selling Stockholders... 1,000,000 shares
Common Stock to be outstanding after the
Offering......................................... 18,259,693 shares(1)(2)
Use of Proceeds.................................... To finance the development and
acquisition of additional assisted
living facilities and for working
capital and other general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol...................... SNRZ
</TABLE>

- ---------------
(1) Excludes 750,000 shares of Common Stock (including up to 203,333 shares
subject to options held by certain officers that will be exercised and the
underlying shares sold if the Underwriters exercise their over-allotment
option) that may be issued by the Company pursuant to the Underwriters'
over-allotment option. See "Underwriting."

(2) Does not include (i) 1,625,657 shares of Common Stock subject to outstanding
options at October 24, 1996 at a weighted average exercise price of $11.01
per share, (ii) outstanding warrants for 50,000 shares of Common Stock at an
exercise price per share of $17.00, and (iii) shares having a fair market
value of $200,000 which the Company intends to issue in a private placement
in satisfaction of a $200,000 non-interest bearing loan made to one of the
Company's predecessor entities. Under the treasury stock method of
computation based on the price to the public of $24 per share, outstanding
options and warrants represent 894,745 common stock equivalents. See
"Management -- 1996 Directors' Stock Option Plan," "-- 1995 Stock Option
Plan," "-- 1996 Stock Option Plan" and "-- Non-Plan Stock Option Grant" and
"Description of Capital Stock -- Warrants."

5
<PAGE> 6

SUMMARY FINANCIAL, OPERATING AND PRO FORMA DATA

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------------ ---------------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(8) 1995 1996 1996(8)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1):
Operating revenue:
Resident fees......... $10,358 $15,801 $23,994 $32,139 $ 34,752 $ 44,696 $17,075 $ 19,458 $ 24,839
Management services
income.............. 605 1,078 1,604 1,830 2,506 2,506 1,212 1,542 1,542
------- ------- ------- ------- --------- --------- ------- --------- ---------
10,963 16,879 25,598 33,969 37,258 47,202 18,287 21,000 26,381
Operating expenses:
Facility operating
expenses............ 8,386 11,824 17,761 17,983 21,010 28,359 10,269 12,608 16,500
Facility development
and pre-opening
expenses............ 189 231 474 263 1,172 1,172 433 650 650
General and
administrative...... 993 1,655 2,034 4,183 6,875 6,875 2,719 4,413 4,413
Depreciation and
amortization........ 618 1,355 2,799 3,160 3,009 3,999 1,479 1,803 2,298
------- ------- ------- ------- --------- --------- ------- --------- ---------
Income from
operations............ 777 1,814 2,530 8,380 5,192 6,797 3,387 1,526 2,520
Interest income....... 267 350 317 566 1,229 1,229 606 700 700
GECC mortgage interest
expense(2).......... -- -- -- (5,529) (15,295) (15,295) (4,971) (4,807) (4,807)
Other interest
expense............. (1,115) (2,212) (3,808) (3,060) (1,261) (1,261) (556) (615) (615)
Equity in (losses)
earnings on
investments in
unconsolidated
partnerships.......... (754) (299) (104) 33 (9) (9) 48 6 6
Minority interest...... 87 176 428 172 7 7 (19) 83 83
Unusual charge(3)...... -- -- -- -- -- -- -- (981) (981)
------- ------- ------- ------- --------- --------- ------- --------- ---------
(Loss) income before
extraordinary item.... (738) (171) (637) 562 (10,137) (8,532) (1,505) (4,088) (3,094)
Extraordinary item..... -- -- -- 850 -- -- -- --
------- ------- ------- ------- --------- --------- ------- --------- ---------
Net (loss) income...... $ (738) $ (171) $ (637) $ 1,412 $ (10,137) $ (8,532) $(1,505) $ (4,088) $ (3,094)
======= ======= ======= ======= ========= ========= ======= ========= =========
NET LOSS PER SHARE
DATA(4):
Net loss per common
equivalent shares..... $ (0.97) $ (0.69) $ (0.35)
========= ========= =========
Weighted average number
of common and common
equivalent shares
outstanding........... 8,826,127 7,625,366 9,720,604
========= ========= =========
OPERATING AND OTHER
DATA:
Facilities (at end of
period):
Owned(5).............. 9 14 16 19 20 25 20 23 28
Managed............... 2 5 7 9 8 8 8 7 7
------- ------- ------- ------- --------- --------- ------- --------- ---------
Total............... 11 19 23 28 28 33 28 30 35
======= ======= ======= ======= ========= ========= ======= ========= =========
Resident capacity (at
end of period):
Owned(5).............. 575 1,067 1,289 1,473 1,557 2,019 1,557 1,873 2,371
Managed............... 143 549 652 772 712 712 596 712 712
------- ------- ------- ------- --------- --------- ------- --------- ---------
Total............... 718 1,616 1,941 2,245 2,269 2,731 2,153 2,585 3,083
======= ======= ======= ======= ========= ========= ======= ========= =========
Occupancy rate(6)...... -- -- 94.0% 94.8% 91.7% -- 91.8% 92.5% --
</TABLE>

<TABLE>
<CAPTION>
AT JUNE 30, 1996
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(8) AS ADJUSTED(9)
(IN THOUSANDS) --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments(7)............................................... $ 72,713 $ 38,261 $128,861
Working capital.................................................................. 66,360 31,909 122,509
Total assets..................................................................... 223,968 223,968 314,568
Total debt....................................................................... 120,712 120,712 120,712
Total stockholders' equity....................................................... 92,883 92,883 183,483
</TABLE>

- ---------------
(1) The historical financial data for years prior to 1995 represent combined
historical financial data for the Company's predecessor entities. See Note 1
of Notes to Consolidated and Combined Financial Statements.
(2) See Note 8 of Notes to Consolidated and Combined Financial Statements.
(3) In June 1996, the Company made a $1.0 million cash payment to the
third-party limited partner in two facilities in exchange for the transfer
to the Company by the third-party of additional 1% partnership interests in
each facility (with a total book value of $18,700) and the elimination of
any requirement under the management contracts for these facilities for Paul
J. Klaassen, the Company's Chairman of the Board, President, Chief Executive
Officer and co-founder, and Teresa M. Klaassen, the Company's Executive Vice
President and co-founder (collectively, the "Founders"), to maintain a
specified ownership interest in the Company.
(4) See Notes 3 and 18 of Notes to Consolidated and Combined Financial
Statements.
(5) Includes all facilities wholly owned by the Company or in which the Company
owns interests. Prior to 1994, several of the owned facilities were leased
from predecessor entities.
(6) Based on monthly occupancy for owned facilities operated for at least 12
months, excluding facilities with temporary vacancies due to renovations or
resident relocation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Government
Regulation."
(7) Includes $50.0 million of short-term securities consisting of high-quality
commercial paper with maturities not greater than 180 days.
(8) Gives effect to the acquisition of the Southeast Properties as if the
transaction occurred on January 1, 1995. The Southeast Properties were
acquired in October 1996 for $34.0 million in cash. No liabilities were
assumed as part of the acquisition. Accordingly, no debt or related interest
costs have been included in the pro forma financial information.
(9) Gives effect to the acquisition of the Southeast Properties and receipt and
application of an estimated $90.6 million of net proceeds from the Offering.

6
<PAGE> 7

RISK FACTORS

Prospective investors should carefully consider the risk factors set forth
below, as well as the other information contained in this Prospectus, in
evaluating an investment in the Common Stock offered hereby. This Prospectus
contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth below and elsewhere in this Prospectus.

RECENT NET LOSSES AND ANTICIPATED NET LOSS

The Company incurred a net loss of $10.1 million in 1995, compared to net
income (after a $0.9 million extraordinary gain) of $1.4 million in 1994 and a
net loss of $0.6 million in 1993. The Company incurred a net loss of $4.1
million for the six months ended June 30, 1996, compared to a net loss of $1.5
million for the six months ended June 30, 1995. As a result of expenses incurred
to support its growth strategy, the Company anticipates that it will incur a net
loss in 1996 and may continue to do so thereafter if the Company does not
achieve its development objectives, a significant number of newly developed
assisted living facilities do not achieve break-even operating results within
the time expected or development, construction or operating expenses exceed
expectations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

DEVELOPMENT AND CONSTRUCTION RISKS

During the next three years, the Company plans to develop at least 55 new
Sunrise assisted living facilities with a capacity of approximately 4,950
residents. The Company's ability to achieve its development plans will depend
upon a variety of factors, many of which are beyond the Company's control. There
can be no assurance that the Company will not suffer delays in its development
program, which could slow the Company's growth. The successful development of
additional assisted living facilities will involve a number of risks, including
the possibility that the Company may be unable to locate suitable sites at
acceptable prices or may be unable to obtain, or may experience delays in
obtaining, necessary zoning, land use, building, occupancy, licensing and other
required governmental permits and authorizations. The Company may also incur
construction costs that exceed original estimates, may not complete construction
projects on schedule and may experience competition in the search for suitable
development sites. The Company relies on third-party general contractors to
construct its new assisted living facilities. There can be no assurance that the
Company will not experience difficulties in working with general contractors and
subcontractors, which could result in increased construction costs and delays.
Further, facility development is subject to a number of contingencies over which
the Company will have little control and that may adversely affect project cost
and completion time, including shortages of, or the inability to obtain, labor
or materials, the inability of the general contractor or subcontractors to
perform under their contracts, strikes, adverse weather conditions and changes
in applicable laws or regulations or in the method of applying such laws and
regulations. Accordingly, if the Company is unable to achieve its development
plans, its business, financial condition and results of operations could be
adversely affected. See "Business -- The Sunrise Strategy" and "-- Facility
Development."

ACQUISITION RISKS; DIFFICULTIES OF INTEGRATION

In addition to developing additional assisted living facilities, over the
next three years the Company currently plans to acquire, in addition to the five
Southeast Properties, up to 10 additional assisted living facilities or other
properties that can be repositioned as Sunrise assisted living facilities. The
Company is actively pursuing acquisition opportunities and has had discussions
with a number of potential sellers regarding potential acquisition transactions.
Possible acquisition transactions are in the early stage of review by the
Company. With the exception of the contingent purchase and sale agreement for
the California Properties, the Company has not entered into any agreements with
respect to any material acquisitions. There can be no assurance that the
Company's acquisition of assisted living facilities will be completed at the
rate currently expected, if at all. The success of the Company's acquisitions
will be determined by numerous factors, including the Company's ability to
identify suitable acquisition candidates, competition for such acquisitions,

7
<PAGE> 8

the purchase price, the financial performance of the facilities after
acquisition and the ability of the Company to integrate effectively the
operations of acquired facilities. Any failure by the Company to integrate or
operate acquired facilities effectively may have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- The Sunrise Strategy" and "-- Facility Acquisitions."

NEED FOR ADDITIONAL FINANCING

To achieve its growth objectives, the Company will need to obtain
sufficient financial resources to fund its development, construction and
acquisition activities. The estimated cost to complete and lease up the 55 new
Sunrise model facilities targeted for completion over the next three years is
between $410 million and $550 million, which substantially exceeds the net
proceeds of the Offering. Accordingly, the Company's future growth will depend
on its ability to obtain additional financing on acceptable terms. The Company
currently estimates that the net proceeds to the Company from the Offering,
together with existing working capital and financing commitments and financing
expected to be available, will be sufficient to fund its development and
acquisition programs for at least the next 18 months. The Company will from time
to time seek additional funding through public or private financing sources,
including equity or debt financing. If additional funds are raised by issuing
equity securities, the Company's stockholders may experience dilution. There can
be no assurance that adequate funding will be available as needed or on terms
acceptable to the Company. A lack of funds may require the Company to delay or
eliminate all or some of its development projects and acquisition plans. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

ADVERSE CONSEQUENCES OF INDEBTEDNESS AND OTHER OBLIGATIONS OF THE COMPANY

LEVERAGE. The Company was subject to mortgage, construction and other
indebtedness in an aggregate principal amount of approximately $119.1 million
(excluding notes payable to affiliates) at June 30, 1996. The Company intends to
continue financing its properties through mortgage financing and possibly
operating leases or other financing vehicles, including lines of credit. The
amount of mortgage indebtedness and other debt and debt related payments is
expected to increase substantially as the Company pursues its growth strategy.
As a result, an increasing portion of the Company's cash flow will be devoted to
debt service and related payments and the Company will continue to be subject to
risks normally associated with leverage. The consequences of such leverage
include, but are not limited to, compliance with financial covenants and other
restrictions that (i) require the Company to meet certain financial tests and
maintain certain escrows of funds, (ii) require that the Company's founders,
Paul Klaassen and Teresa Klaassen (the "Founders"), maintain ownership of at
least 25% of the Common Stock and that one of them serve as Chairman of the
Board and President of the Company, (iii) require consent for changes in
management or control of the Company, (iv) limit, among other things, the
ability of the Company and certain Company subsidiaries to borrow additional
funds, dispose of assets and engage in mergers or other business combinations,
and (v) prohibit the Company from operating competing facilities within certain
distances from mortgaged facilities. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 8 of Notes to Consolidated and Combined Financial
Statements.

RISK OF RISING INTEREST RATES. At June 30, 1996, approximately $41.3
million in principal amount of the Company's indebtedness bore interest at
floating rates. In addition, indebtedness that the Company may incur in the
future may also bear interest at a floating rate. Therefore, increases in
prevailing interest rates could increase the Company's interest payment
obligations and could have an adverse effect on the Company's business,
financial condition and results of operations. For example, a one-eighth of one
percent increase in interest rates would increase the Company's annual interest
expense by approximately $52,000.

CONSEQUENCES OF DEFAULT. There can be no assurance that the Company will
generate sufficient cash flow from operations to cover required interest,
principal and any operating lease payments. Any payment or other default could
cause the lender to foreclose upon the facilities securing such indebtedness or,
in the case of an operating lease, could terminate the lease, with a consequent
loss of income and asset value to the Company. In certain cases, indebtedness
secured by a facility is also secured by a pledge of the Company's interests in
the facility. In the event of a default with respect to any such indebtedness,
the lender could avoid

8
<PAGE> 9

the 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 of cross-default and cross-collateralization provisions in
certain of the Company's mortgages, a default by the Company on one of its
payment obligations could adversely affect a significant number of the Company's
other properties.

BOND FINANCING. Two facilities have been financed by bonds. In order to
continue to qualify for favorable tax treatment of the interest payable on these
bonds, the facilities must comply with certain federal income tax requirements,
principally pertaining to the maximum income level of a specified portion of the
residents. Failure to satisfy these requirements constitutes an event of default
under the bonds, thereby accelerating their maturity.

COMPETITION

The long-term care industry is highly competitive and the Company believes
that the assisted living segment, in particular, will become even more
competitive in the future. The Company will be competing with numerous other
companies providing similar long-term care alternatives such as home health care
agencies, facility-based service programs, retirement communities and
convalescent centers. In general, regulatory and other barriers to competitive
entry in the assisted living industry are not substantial. In pursuing its
growth strategy, the Company expects to face competition in its efforts to
develop and acquire assisted living facilities. Some of the Company's present
and potential competitors are significantly larger and have, or may obtain,
greater financial resources than the Company. Consequently, there can be no
assurance that the Company will not encounter increased competition that could
limit its ability to attract residents or expand its business and that could
have a material adverse effect on its business, financial condition and results
of operations. Moreover, if the development of new assisted living facilities
outpaces demand for those facilities in certain markets, such markets may become
saturated. Such an oversupply of facilities could cause the Company to
experience decreased occupancy, depressed margins and lower operating results.
See "Business -- Competition."

DIFFICULTIES OF MANAGING RAPID GROWTH

The Company expects that the number of owned and operated facilities will
increase substantially as it pursues its development and acquisition programs
for new assisted living facilities. This rapid growth will place significant
demands on the Company's management resources. The Company's ability to manage
its growth effectively will require it to continue to expand its operational,
financial and management information systems and to continue to attract, train,
motivate, manage and retain key employees. If the Company is unable to manage
its growth effectively, its business, financial condition and results of
operations could be adversely affected. See "Business -- The Sunrise Strategy"
and "-- Facility Development" and "Management."

DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL

The Company depends on the services of Paul J. Klaassen, its Chairman of
the Board, President, Chief Executive Officer and co-founder; Teresa M.
Klaassen, its Executive Vice President and co-founder; and David W. Faeder, its
Executive Vice President and Chief Financial Officer. The loss of the services
of any such officers could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company also
depends on its ability to continue to attract and retain management personnel
who will be responsible for the day-to-day operations of its assisted living
facilities. If the Company is unable to hire qualified management personnel to
operate its assisted living facilities, the Company's business, financial
condition and results of operations could be adversely affected. See
"Management."

STAFFING AND LABOR COSTS

The Company competes with various health care services providers, including
other elderly care providers, in attracting and retaining qualified or skilled
personnel. A shortage of nurses or other trained personnel or general
inflationary pressures may require the Company to enhance its wage and benefits
package to compete effectively for personnel. In anticipation of the Company's
growth plans, the Company's general

9
<PAGE> 10

and administrative expenses (which consist primarily of staffing and labor
expenses, including hiring additional staff and increasing the salary and
benefits of existing staff) have increased from 7.9% of operating revenue for
1993 to 12.3% of operating revenue for 1994 and 18.5% of operating revenue for
1995. General and administrative expenses were 21.0% of operating revenue for
the six months ended June 30, 1996. There can be no assurance that the Company's
labor costs will not continue to increase as a percentage of operating revenue.
Any significant failure by the Company to attract and retain qualified
employees, to control its labor costs or to match increases in its labor
expenses with corresponding increases in revenues could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

GOVERNMENT REGULATION

The Company's facilities are subject to regulation and licensing by state
and local health and social service agencies and other regulatory authorities,
although requirements vary from state to state. In general, these requirements
address, among other things: personnel education, training, and records;
facility services, including administration of medication, assistance with
self-administration of medication, and limited nursing services; monitoring of
resident wellness; physical plant specifications; furnishing of resident units;
food and housekeeping services; emergency evacuation plans; and resident rights
and responsibilities, including in some states the right to receive certain
health care services from providers of a resident's choice. Certain of the
Company's facilities are also licensed to provide independent living services
which generally involve lower levels of resident assistance. In several states
in which the Company operates or intends to operate, assisted living facilities
also require a certificate of need before the facility can be opened. In most
states, assisted living facilities also are subject to state or local building
code, fire code and food service licensure or certification requirements. Like
other health care facilities, assisted living facilities are subject to periodic
survey or inspection by governmental authorities. From time to time in the
ordinary course of business, the Company receives deficiency reports. The
Company reviews such reports and seeks to take appropriate corrective action.
Although most inspection deficiencies are resolved through a plan of correction,
the reviewing agency typically is authorized to take action against a licensed
facility where deficiencies are noted in the inspection process. Such action may
include imposition of fines, imposition of a provisional or conditional license
or suspension or revocation of a license or other sanctions. In March 1996,
Maryland state officials imposed a $3,000 civil money fine against the Company
for survey deficiencies at three Kensington, Maryland facilities formerly
managed by the Company. The Company appealed such fine and in August 1996 paid
$2,000 in settlement of such fine. In May 1996, one of the Pennsylvania nursing
home facilities managed by the Company received notice from the Pennsylvania
Department of Health of a survey report stating that the facility was not in
compliance with the requirements of participation for the Medicare and Medicaid
programs. Therefore, the Pennsylvania agency survey report stated that a civil
monetary penalty of $50 to $3,000 per day would be imposed for the period
beginning March 12, 1996, the date the facility was first alleged to be out of
compliance, until the date the alleged deficiencies were corrected. The owner of
the facility appealed such fine and in October 1996, paid the Health Care
Financing Administration approximately $18,000 in settlement of such fine. Any
failure by the Company to comply with applicable requirements could have a
material and adverse effect on the Company's business, financial condition and
results of operations. Regulation of the assisted living industry is evolving
and the Company's operations could also be adversely affected by, among other
things, future regulatory developments such as mandatory increases in scope and
quality of care to be afforded residents and revisions to licensing and
certification standards. Increased regulatory requirements could increase costs
of compliance with such requirements.

10
<PAGE> 11

Company-owned facility in Virginia whose license prohibits non-ambulatory
residents. In 1995, a local Maryland housing agency, citing a number of factors,
including a desire to seek competitive pricing bids, consideration of other uses
for the property and past survey results, advised the Company that it intended
to put the management contract for the Kensington facilities out for bid when
the existing management contract with the Company expired. The management
contract has been awarded to a third party effective September 1, 1996.

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

DISCRETIONARY USE OF PROCEEDS

The Company expects to use the net proceeds to the Company from the
Offering (estimated to be $90.6 million) to fund the development and acquisition
of additional assisted living facilities and for working capital and general
corporate purposes. The Company's management will, therefore, retain broad
discretion in allocating a significant portion of the net proceeds of the
Offering. See "Use of Proceeds."

ENVIRONMENTAL RISKS

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

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<PAGE> 12

LIABILITY AND INSURANCE

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

SHARES ELIGIBLE FOR FUTURE SALE

After completion of the Offering, the Company will have 18,259,693 shares
of Common Stock outstanding (19,009,693 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, approximately
11,598,274 shares, including the 5,000,000 shares offered hereby (5,750,000
shares if the Underwriters' over-allotment option is exercised in full), will be
freely tradable without restriction or limitation under the Securities Act of
1933, as amended (the "Securities Act"), except for any shares purchased by
"affiliates" of the Company, as such term in defined in Rule 144 promulgated
under the Securities Act. The remaining 6,661,419 shares are "restricted
securities" within the meaning of Rule 144. Subject to certain exceptions, the
Company, its directors and executive officers and certain stockholders of the
Company, who upon completion of the Offering, will beneficially own in the
aggregate approximately 7,309,000 shares of Common Stock (including up to
203,333 shares that will be sold if the Underwriters' over-allotment option is
exercised), have agreed with the Underwriters not to sell or otherwise dispose
of any shares of Common Stock, any options to purchase Common Stock or any
securities convertible into or exchangeable for shares of Common Stock for a
period of 90 days after the date of this Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), except
as to shares held by affiliates of DLJ, which require the prior written consent
of the Underwriters other than DLJ. Thereafter, up to 6,661,419 shares may be
sold, subject to the limitations of Rule 144. After expiration of the lock-up
period, the holders of restricted securities will be entitled to certain demand
and/or incidental registration rights with respect to such shares. If such
holders, by exercising their demand registration rights, cause a large number of
shares to be registered and sold in the public market, such sales could have an
adverse effect on the market price for the Common Stock. In addition to the
outstanding shares of Common Stock, the Company has reserved for issuance
3,248,065 shares of Common Stock pursuant to the Company's stock option
programs, under which options to purchase 1,625,657 shares were outstanding at
October 24, 1996, of which options for 684,044 shares (of which up to 203,333
shares will be sold in the Offering if the Underwriters' over-allotment option
is exercised) are exercisable within 60 days of the date of this Prospectus. In
addition, warrants to purchase 50,000 shares of Common Stock are outstanding.
Sales of substantial amounts of shares of Common Stock in the public market
after the Offering or the perception that such sales could occur could adversely
affect the market price of the Common Stock and the Company's ability to raise
equity. See "Shares Eligible

12
<PAGE> 13

for Future Sale," "Management -- 1996 Directors' Stock Option Plan", "-- 1995
Stock Option Plan," "-- 1996 Stock Option Plan" and "-- Non-Plan Stock Option
Grant" and "Underwriting."

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the Common Stock could be subject to significant
fluctuations in response to various factors and events, including the liquidity
of the market for the shares of Common Stock, variations in the Company's
operating results, changes in earnings estimates by securities analysts or the
Company's ability to meet those estimates, publicity regarding the industry or
the Company and the adoption of new statutes or regulations (or changes in the
interpretation of existing statutes or regulations) affecting the health care
industry in general or the assisted living industry in particular. In addition,
the stock market in recent years has experienced broad price and volume
fluctuations that often have been unrelated to the operating performance of
particular companies. These market fluctuations may adversely affect the market
price of the shares of Common Stock.

CONTROL BY EXISTING STOCKHOLDERS AND MANAGEMENT

The Founders will beneficially own an aggregate of approximately 28.3% of
the outstanding Common Stock after completion of the Offering (27.2%, if the
Underwriters' over-allotment option is exercised in full). Executive officers
and directors as a group (including the Founders) will beneficially own
approximately 38.8% of the outstanding Common Stock after the Offering (36.6%,
if the Underwriters' over-allotment option is exercised in full). As a result,
the Founders and the Company's other executive officers and directors will have
significant influence over all matters requiring approval by the Company's
stockholders, including business combinations and the election of directors. See
"Principal and Selling Stockholders."

ANTI-TAKEOVER PROVISIONS

The Company's Restated Certificate of Incorporation (the "Certificate") and
the Company's Amended and Restated Bylaws (the "Bylaws"), as well as Delaware
corporate law, contain certain provisions that could have the effect of making
it more difficult for a third party to acquire, or discouraging a third party
from attempting to acquire, control of the Company. These provisions could limit
the price that certain investors might be willing to pay in the future for
shares of Common Stock. Certain of these provisions allow the Company to issue,
without stockholder approval, preferred stock having rights senior to those of
the Common Stock. Other provisions impose various procedural and other
requirements, including advance notice and super-majority voting provisions,
that could make it more difficult for stockholders to effect certain corporate
actions. In addition, the Company's Board of Directors is divided into three
classes, each of which serves for a staggered three-year term, which may make it
more difficult for a third party to gain control of the Board of Directors. As a
Delaware corporation, the Company is subject to Section 203 of the Delaware
General Corporation Law which, in general, prevents an "interested stockholder"
(defined generally as a person owning 15% or more of a corporation's outstanding
voting stock) from engaging in a "business combination" (as defined) for three
years following the date such person became an interested stockholder unless
certain conditions are satisfied. Pursuant to a Board resolution adopted at the
time of formation of the Company, the Section 203 limits do not apply to any
"business combination" between the Company and the Founders, their respective
"affiliates" or their respective estates. The Company also has adopted a
Stockholder Rights Agreement. See "Description of Capital Stock -- Stockholder
Rights Agreement."

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<PAGE> 14

THE COMPANY AND ITS PREDECESSORS

The Company's predecessor was founded in 1981, and Sunrise Assisted Living,
Inc. was incorporated in Delaware on December 14, 1994. In January 1995, in
order to combine various activities relating to the development, ownership and
operation of the Sunrise assisted living facilities, the Founders contributed
all of their interests in various predecessor entities to the Company in
exchange for 100% of the Common Stock of the Company (the "Contribution
Transaction"). The predecessor entities consisted of a management company, a
development company, and various entities that held 100% ownership interests in
15 facilities, 50% ownership interests in five facilities and minority ownership
interests in two facilities (collectively, the "Sunrise Entities"). The net
assets contributed by the Founders in the Contribution Transaction had a
negative book value of $17.6 million after giving effect to: (i) the historical
cost, less depreciation, of the assets contributed; (ii) the GECC Mortgage (as
defined below); (iii) cash distributions totaling $9.6 million made in 1995 by
the Sunrise Entities to the Founders, a portion of which is expected to be used
to satisfy certain tax liabilities incurred by the Founders in the Contribution
Transaction; and (iv) $1.4 million of indebtedness (representing the discounted
value of $2.1 million of interest-free indebtedness) of the Founders assumed by
the Company as part of the Contribution Transaction. Immediately prior to the
Contribution Transaction in 1994, Sunrise Entities made distributions totaling
$5.9 million to the Founders. In addition, in January 1995, the Company issued
2,444,444 shares of Series A Convertible Preferred Stock in a private placement
to certain institutional investors for which the Company received net proceeds
of $20.2 million. These shares were converted automatically into an equal number
of shares of Common Stock upon completion of the Company's initial public
offering on June 5, 1996. See "Certain Transactions."

Prior to June 1994, 15 assisted living facilities now owned by the Company
were held in separate limited partnerships and other entities partially owned by
other parties. In June 1994, proceeds from the GECC Mortgage were used to
refinance $71.5 million of existing mortgages and to finance the $5.5 million
cash portion of the $48.3 million aggregate purchase price for all minority
ownership interests in these 15 facilities. After the minority ownership
interests in such facilities were acquired, the facilities were transferred to a
newly formed limited partnership, Sunrise Assisted Living Limited Partnership
("SALLP"), in exchange for limited partnership interests in that entity. The
carrying value of the net operating assets of the 15 facilities was stepped-up
by $12.1 million to reflect the excess of the purchase price over the original
book basis of $36.2 million of the interests acquired. The transfer of the
Founders' interests in the 15 facilities was recorded using their historical
book value. The Founders' interests in SALLP were contributed to the Company in
the Contribution Transaction. See "Certain Transactions."

Through SALLP, the Company currently has a $87.0 million principal amount
term loan (the "GECC Mortgage") in place with General Electric Capital
Corporation ("GECC"). The GECC Mortgage is evidenced by a single mortgage note
that has two portions, a $65.0 million fixed rate portion (the "Fixed Rate
Portion") and a $22.0 million floating rate portion (the "Floating Rate
Portion"). Repayment of the GECC Mortgage is secured by mortgages on the 15
facilities owned by SALLP (the "SALLP Properties") and by assignments of all of
SALLP's interest in the leases and rents at each of such mortgaged properties.
Each mortgage is cross-collateralized and cross-defaulted allowing GECC to
declare a default under any or all of the mortgages if SALLP fails to make any
payment of principal, interest, premium or any other sum due under the GECC
Mortgage.

The Fixed Rate Portion bears interest at 8.56%, matures May 31, 2001 and
requires periodic payments of interest only. The Floating Rate Portion bears
interest at 3.75% in excess of LIBOR (London interbank offered rate), matures
May 31, 2001 and requires periodic payments of interest only though June 1997,
after which time principal and interest payments are due using a 20-year
amortization schedule. If the debt service coverage ratio falls below 1.25:1 for
six consecutive months after September 30, 1996, principal payments accelerate
to the lesser of monthly net cash flow or amortization of the GECC Mortgage over
a 20-year period. The GECC Mortgage documents contain various representations,
affirmative and negative covenants and events of default, including a
requirement that the Founders maintain ownership of 25% of the Common Stock
outstanding from time to time and that one of the Founders serve as Chairman of
the Board and President of the Company. See "Risk Factors -- Adverse
Consequences of Indebtedness and Other Obligations of the Company."

14
<PAGE> 15

In May 1996, the Company entered into a Loan Modification Agreement
regarding the GECC Mortgage whereby, upon consummation of the Company's initial
public offering on June 5, 1996, the Company paid GECC $8.6 million as payment
in full of a 25% participating interest in cash flow and appreciation in the
value of the SALLP Properties. In addition, the Company prepaid $8.0 million of
the Floating Rate Portion. The interest rate applicable to the remaining balance
of the Floating Rate Portion was reduced from LIBOR plus 5.75% to LIBOR plus
3.75%. Had the Company modified the GECC loan documents effective January 1,
1995, GECC Mortgage interest expense for 1995 would have been approximately $7.8
million as compared to $15.3 million.

The Company's executive offices are located at 9401 Lee Highway, Suite 300,
Fairfax, Virginia 22031, and its telephone number is (703) 273-7500.

15
<PAGE> 16

RECENT DEVELOPMENTS

ACQUISITION OF SOUTHEAST PROPERTIES

On October 8, 1996, the Company completed its acquisition from Laing
Properties & Subsidiaries, Inc. of five facilities located in the southeast
United States (the "Southeast Properties") for an aggregate purchase price of
$34.0 million in cash with no debt assumed. The five facilities consist of 498
total units providing primarily independent and assisted living services. One of
the facilities also has a 26-bed skilled nursing floor. These facilities had
combined revenues of $9.9 million in 1995 and $5.4 million for the six months
ended June 30, 1996, and had combined net (losses) income of $(32,000) and
$195,000, respectively, for these periods. After giving effect to the
acquisition of the Southeast Properties at the beginning of the respective
periods, the Company had a pro forma net loss of $8.5 million and $3.1 million
for 1995 and for the first six months of 1996, respectively. See "Selected
Financial, Operating and Pro Forma Data" and "Unaudited Pro Forma Consolidated
Financial Statements."

AFFILIATION AGREEMENT WITH JEFFERSON HEALTH SYSTEM

On October 8, 1996, the Company entered into an affiliation agreement with
Jefferson Health System ("JHS"), an integrated health care system located in
Philadelphia, Pennsylvania, pursuant to which JHS has agreed to provide
residents of Sunrise facilities located in the Philadelphia metropolitan region,
on a preferred (but non-exclusive) basis, with access to certain health care
services offered by JHS. Such health care services may include hospital
services, physician services, rehabilitation services, home health services and
products and mental health services. The initial term of the affiliation
agreement is five years, after which either party may extend the agreement for
an additional five-year period. After the expiration of the first year of the
term of the affiliation agreement, it is contemplated that the parties would
enter into a more detailed agreement in place of the existing agreement for the
remainder of the term. Either party has the right to terminate the existing
agreement after expiration of the first year of the term and before a
replacement agreement is executed.

CREDIT FACILITY

CONTINGENT ACQUISITION OF CALIFORNIA PROPERTIES

On October 8, 1996, the Company entered into a purchase and sale agreement
subject to certain conditions, including satisfactory completion by the Company
of financial, accounting, regulatory and property due diligence over the next 60
days, to acquire two facilities located in Southern California for $30.8 million
in cash. The California Properties consist of 258 total units providing
independent and assisted living services. Assuming the Company elects to proceed
with the transaction following the completion of its due diligence review, the
closing of the transaction would likely take place in the first quarter of 1997.
Given the contingent nature of the purchase and sale agreement, there can be no
assurance that the acquisition will be consummated.

INITIAL PUBLIC OFFERING

On June 5, 1996, the Company completed its initial public offering selling
5,700,000 shares of Common Stock at $20.00 per share. The net proceeds to the
Company from the offering were approximately $104.3 million. The net proceeds
were used as follows: $16.6 million in partial payment of the Company's
long-term debt; $10.2 million to redeem the outstanding shares of Series B
Exchangeable Preferred Stock; $34.0 million to acquire the Southeast Properties;
and the balance to fund continued development of Sunrise facilities, as well as
for working capital and general corporate purposes.

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<PAGE> 17

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered hereby are estimated to be approximately $90.6 million,
after deducting the estimated underwriting discounts and commissions and
offering expenses payable by the Company. The Company expects to use such net
proceeds to finance development and acquisition of additional assisted living
facilities and for working capital and general corporate purposes. Pending such
uses, the Company intends to invest its net proceeds in short-term,
investment-grade, interest-bearing securities or certificates of deposit. The
Company will not receive any proceeds from the sale of the 1,000,000 shares of
Common Stock by the Selling Stockholders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business -- The Sunrise Strategy."

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Company completed its initial public offering of Common Stock on June
5, 1996 at a price of $20.00 per share. Since May 31, 1996, the Common Stock has
traded on the Nasdaq National Market under the symbol "SNRZ." The following
table sets forth for the periods indicated the high and low sales prices per
share of the Common Stock as reported by the Nasdaq National Market:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, 1996 HIGH LOW
<S> <C> <C>
Second Quarter (from May 31, 1996)............................ $25 3/4 $23
Third Quarter................................................. 30 21 1/2
Fourth Quarter (through October 24, 1996)..................... 28 3/4 24 1/2
</TABLE>

On October 24, 1996, the last reported sale price of the Common Stock on
the Nasdaq National Market was $24 1/2 per share. At October 24, 1996, there
were 28 holders of record of the Common Stock.

The Company has never declared or paid any cash dividends on its Common
Stock and currently plans to retain future earnings, if any, to finance the
growth of the Company's business rather than to pay cash dividends. Payments of
any cash dividends in the future will depend on the financial condition, results
of operations and capital requirements of the Company as well as other factors
deemed to be relevant by the Board of Directors. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

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<PAGE> 18

CAPITALIZATION

The following table sets forth at June 30, 1996 (i) the actual
capitalization of the Company, (ii) pro forma capitalization of the Company
giving effect to the acquisition of the Southeast Properties, and (iii) pro
forma capitalization giving effect to the acquisition of the Southeast
Properties as adjusted to reflect the receipt and application of the estimated
net proceeds to the Company from the Offering (after deducting the estimated
underwriting discounts and commissions and offering expenses payable by the
Company). The table should be read in conjunction with the Consolidated and
Combined Financial Statements and the related notes thereto contained elsewhere
in this Prospectus.

<TABLE>
<CAPTION>
AT JUNE 30, 1996
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and short-term investments(1)........................... $ 72,713 $ 38,261 $ 128,861
======== ======== ========
Long-term debt (including current portion)(2)................ 119,091 119,091 119,091
Minority interests........................................... 372 372 372
Stockholders' equity:
Preferred Stock, par value $.01 per share, 10,000,000
shares
authorized; none issued and outstanding................. -- -- --
Common Stock, $.01 par value, 60,000,000 shares authorized;
14,244,562 shares issued and outstanding, actual and pro
forma; 18,244,562 shares issued and outstanding, pro
forma as adjusted(3).................................... 142 142 182
Additional paid-in capital................................. 107,703 107,703 198,263
Accumulated deficit........................................ (14,962) (14,962) (14,962)
-------- -------- --------
Total stockholders' equity.............................. 92,883 92,883 183,483
-------- -------- --------
Total capitalization............................... $212,346 $ 212,346 $ 302,946
======== ======== ========
</TABLE>

- ---------------
(1) Includes $50.0 million of short-term securities consisting of high-quality
commercial paper with maturities not greater than 180 days.

(2) Excludes notes payable to affiliates.

(3) Does not include (i) 1,625,657 shares of Common Stock subject to outstanding
options at October 24, 1996 at a weighted average exercise price of $11.01
per share, (ii) outstanding warrants for 50,000 shares of Common Stock at an
exercise price per share of $17.00, and (iii) shares having a fair market
value of $200,000 which the Company intends to issue in a pro rata placement
in satisfaction of a $200,000 non-interest bearing loan made to one of the
Company's predecessor entities. Under the treasury stock method of
computation based on the price to the public of $24 per share, outstanding
options and warrants represent 894,745 common stock equivalents. See
"Management -- 1996 Directors' Stock Option Plan," "-- 1995 Stock Option
Plan," "-- 1996 Stock Option Plan," and "-- Non-Plan Stock Option Grant" and
"Description of Capital Stock -- Warrants."

18
<PAGE> 19

SELECTED FINANCIAL, OPERATING AND PRO FORMA DATA

The following table sets forth selected financial, operating and pro forma
data of the Company. The selected financial and operating data for the six-month
periods ended June 30, 1995 and 1996 and for the year ended December 31, 1995
are derived from consolidated financial statements of the Company. The selected
financial and operating data for the four years ended December 31, 1994 are
derived from the combined financial statements of Sunrise Entities. The
consolidated financial statements of the Company for the year ended December 31,
1995 and the combined financial statements of Sunrise Entities for the year
ended December 31, 1994 have been audited by Ernst & Young LLP, independent
auditors. The financial statements of Sunrise Entities for the year ended
December 31, 1993 have been audited by Hoffman, Morrison & Fitzgerald P.C.,
independent auditors. The selected financial and operating data for the years
ended December 31, 1991 and 1992 are derived from unaudited combined financial
statements of Sunrise Entities. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods.

The pro forma data for the year ended December 31, 1995 and as of and for
the six months ended June 30, 1996 assume the conversion of the Series A
Preferred Stock and the acquisition of the Southeast Properties as if each had
occurred at January 1, 1995. Pro forma adjustments are based upon available
information and certain assumptions that management believes to be reasonable.
The unaudited pro forma financial data set forth below is not necessarily
indicative of the Company's financial position or the results of operations that
actually would have occurred if the transactions had been consummated on such
dates. In addition, the pro forma data are not intended to be a projection of
results of operations that may be obtained in the future. The data should be
read in conjunction with the Consolidated and Combined Financial Statements and
Unaudited Pro Forma Consolidated Financial Statements and related notes thereto
included elsewhere in this Prospectus.

NET LOSS PER SHARE
DATA(5):
Net loss per common
equivalent shares..... $ (0.97) $ (0.69) $ (0.35)
======= ========= =======
Weighted average number
of common and common
equivalent shares
outstanding........... 8,826,127 7,625,366 9,720,604
======= ========= =======
</TABLE>
19
<PAGE> 20

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------ ---------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(11) 1995 1996 1996(11)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING AND OTHER DATA(6):
Facilities (at end of period):
Owned(7)............................. 9 14 16 19 20 25 20 23 28
Managed.............................. 2 5 7 9 8 8 8 7 7
--- ----- ----- ----- ----- ----- ----- ----- -----
Total.............................. 11 19 23 28 28 33 28 30 35
=== ===== ===== ===== ===== ===== ===== ===== =====
Resident capacity (at end of period):
Owned(7)............................. 575 1,067 1,289 1,473 1,557 2,019 1,557 1,873 2,371
Managed.............................. 143 549 652 772 712 712 596 712 712
--- ----- ----- ----- ----- ----- ----- ----- -----
Total.............................. 718 1,616 1,941 2,245 2,269 2,731 2,153 2,585 3,083
=== ===== ===== ===== ===== ===== ===== ===== =====
Occupancy rate(8)...................... -- -- 94.0% 94.8% 91.7% -- 91.8% 92.5% --
</TABLE>

<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30, 1996
----------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 ACTUAL PRO FORMA(11)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash and short-term investments(9)....... $ 640 $ 2,499 $ 3,268 $ 8,089 $ 6,252 $ 72,713 $ 38,261
Working capital (deficit)(10)............ (468) 741 1,288 (7,305) 2,050 66,360 31,909
Total assets............................. 18,146 50,866 61,159 109,003 123,321 223,968 223,968
Total debt............................... 13,997 45,405 55,207 110,029 122,290 120,712 120,712
Series A convertible preferred stock..... -- -- -- -- 23,963 -- --
Total common stockholders' equity
(deficit).............................. (513) (1,716) (2,925) (16,391) (31,774) 92,883 92,883
</TABLE>

- ---------------
(1) The historical financial data for years prior to 1995 represent combined
historical financial data for Sunrise Entities. See Note 1 of Notes to
Consolidated and Combined Financial Statements.

(2) The 1995 GECC Mortgage interest expense includes $0.5 million of debt
discount amortization, $5.4 million of expense related to the 25% GECC
participating interest in cash flow and appreciation in the value of the
SALLP Properties and $9.4 million of additional interest expense related to
the GECC Mortgage. In June 1996, the Company paid GECC approximately $8.6
million to prepay GECC's 25% participating interest. Also in June 1996, the
Company paid $8.0 million of the floating rate portion of the GECC Mortgage
and the interest rate was reduced on the floating rate portion from LIBOR
plus 5.75% to 3.75%. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Six Months Ended June 30, 1996
Compared to the Six Months Ended June 30, 1995."

(3) In June 1996, the Company made a $1.0 million cash payment to the
third-party limited partner in two facilities in exchange for the transfer
to the Company by the third-party of additional 1% partnership interests in
each facility (with a total book value of $18,700) and the elimination of
any requirement for the Founders to maintain a specified ownership interest
in the Company.

(4) Sunrise Entities comprised partnerships, limited liability companies or
corporations that elected to be treated as S Corporations under Section
1362 of the Internal Revenue Code of 1986, as amended. Therefore, no
provision or benefit for income taxes was included in their financial
statements because taxable income or loss passed through pro rata to the
owners. Pro forma tax provision is not provided for the years 1991-1994
because it is assumed that accumulated losses from 1991, 1992, and 1993
were utilized to offset any tax expense attributed to 1994 net income.

(5) See Notes 3 and 18 of Notes to Consolidated and Combined Financial
Statements.

(6) Operating and other data for 1994 reflect the purchase of all outside
interests in six previously leased and managed facilities and all minority
interests in seven consolidated facilities.

(7) Includes all facilities wholly owned by the Company or in which the Company
owns interests. Prior to 1994, several of the owned facilities were leased
from Sunrise Entities.

(8) Based on monthly occupancy for owned facilities operated for at least 12
months, excluding facilities with temporary vacancies due to renovations or
resident relocation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Government
Regulation."

(9) Includes $50.0 million of short-term securities consisting of high-quality
commercial paper with maturities not greater than 180 days.

(10) Working capital (deficit) at December 31, 1994 included a liability for
distributions made in connection with the formation of the Company. See
"Certain Transactions."

(11) The Southeast Properties were acquired in October 1996 for $34.0 million in
cash. No liabilities were assumed as part of the acquisition. Accordingly,
no debt or related interest costs have been included in the pro forma
financial information.

20
<PAGE> 21

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the information
contained in the Consolidated and Combined Financial Statements, including the
related notes thereto, and the other financial information appearing elsewhere
in this Prospectus.

OVERVIEW

The Company is a leading provider of assisted living services to the
elderly. The Company currently operates 32 facilities in 11 states with a
capacity of approximately 2,800 residents, including 28 facilities owned by the
Company or in which it has ownership interests and four facilities managed for
third parties. The Company also operates two skilled nursing facilities owned by
a third party. As a leading provider of assisted living services, the Company
provides assistance with the activities of daily living and other personalized
support services ("Basic Care") in a residential setting for elderly residents
who cannot live independently but who do not need the level of medical care
provided in a skilled nursing facility. The Company also provides additional
specialized care and services to residents with certain low acuity medical needs
("Extended Care") and residents with Alzheimer's disease or other forms of
dementia ("Alzheimer's Care"). By offering this full range of services, the
Company is able to accommodate the changing needs of residents as they age
within a facility and develop further physical or cognitive frailties.

The Company's Founders opened the first Sunrise assisted living facility in
1981. In January 1995, the Founders contributed all of their interests in the
Sunrise Entities to the Company in exchange for 100% of the Common Stock and
simultaneously raised $32.0 million in a private placement of Preferred Stock
($22.0 million funded at closing and $10.0 million subject to a call exercised
by the Company in January 1996). Of such shares of Preferred Stock, all of the
outstanding Series A Convertible Preferred Stock was converted automatically
into an equal number of shares of Common Stock upon completion of the Company's
initial public offering in June 1996 and all of the outstanding shares of Series
B Exchangeable Preferred Stock were redeemed using a portion of the net proceeds
of the initial public offering. See "The Company and its Predecessors" and
"Certain Transactions."

During the next three years, the Company plans to develop at least 55 of
its model facilities in major metropolitan and suburban markets throughout the
United States. The estimated cost to complete and lease up the 55 new Sunrise
model facilities is between $410 million and $550 million. The Company
anticipates that it will use a combination of net proceeds to the Company from
the Offering, existing working capital and construction lines of credit, equity
and debt financing and cash generated from operations to fund this development
activity. During the next three years, the Company also plans to acquire up to
10 additional assisted living facilities or other properties that can be
repositioned as Sunrise assisted living facilities, which are in addition to the
five Southeast Properties. Since 1993, the total capitalized cost to develop,
construct and open a Sunrise model facility, including land acquisition and
construction costs, has ranged from approximately $5.5 million to $9.2 million.
The cost of any particular facility may vary considerably based on a variety of
site-specific factors. In order to achieve its growth plans, the Company will be
required to obtain a substantial amount of additional financing. The Company
currently estimates that the net proceeds to the Company of the Offering,
together with existing working capital, financing commitments and financing
expected to be available, will be sufficient to fund its development and
acquisition programs for at least the next 18 months. See "-- Liquidity and
Capital Resources" and "Risk Factors -- Need for Additional Financing."

The Company derives its revenues from two primary sources: (i) resident
fees for the delivery of assisted living services and (ii) management services
income for management of facilities owned by third parties. Historically, most
of the Company's operating revenue has come from resident fees, which in 1995
and for the six months ended June 30, 1996 comprised 93.3% and 92.7%,
respectively, of total operating revenues. Resident fees typically are paid
monthly by residents, their families or other responsible parties. In 1995 and
for the six months ended June 30, 1996, approximately 99% of the Company's
revenue was derived from private pay sources. Resident fees include revenue
derived from Basic Care, community fees, Extended Care,

21
<PAGE> 22

Alzheimer's Care and other sources. Community fees are one-time fees generally
payable by a resident upon admission, and Extended Care and Alzheimer's Care
fees are paid by residents who require personal care in excess of services
provided under the Basic Care program. Management services income, which in 1995
and for the six months ended June 30, 1996 accounted for the remaining 6.7% and
7.3%, respectively, of revenues, consists of management fees which are generally
in the range of 4% to 6% of a managed facility's total operating revenues.
Resident fees (excluding community fees) and management fees are recognized as
revenues when services are provided. Community fees (generally equal to 60 times
the daily resident fee) are recognized ratably over a three-month period.

The Company classifies its operating expenses into the following
categories: (i) facility operating expenses, which include labor, food,
marketing and other direct facility expenses; (ii) facility development and
pre-opening expenses, which include non-capitalized development expenses and
pre-opening labor and marketing expenses; (iii) general and administrative
expenses, which primarily include headquarters and regional staff expenses and
other overhead costs; and (iv) depreciation and amortization. In anticipation of
its growth plans, the Company made significant investments in its infrastructure
in 1994 and, to a greater extent, in 1995 and the six months ended June 30, 1996
through the addition of headquarters and regional staff.

RESULTS OF OPERATIONS

The following table sets forth certain data from the respective
consolidated or combined statements of operations expressed as a percentage of
operating revenue:

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenue................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Facility operating expenses..................... 69.4(1) 52.9 56.4 56.2 60.0
Facility development and pre-opening expenses... 1.9 0.8 3.1 2.4 3.1
General and administrative...................... 7.9 12.3 18.5 14.9 21.0
Depreciation and amortization................... 10.9 9.3 8.1 8.1 8.6
----- ----- ----- ----- -----
Income from operations............................ 9.9 24.7 13.9 18.5 7.3
Other income (expense):
Interest income................................. 1.2 1.7 3.3 3.3 3.3
Interest expense:
GECC mortgage interest expense............... -- (16.3) (41.1) (27.2) (22.9)
Other interest expense....................... (14.9) (9.0) (3.4) (3.0) (2.9)
----- ----- ----- ----- -----
Total interest expense.......................... (14.9) (25.3) (44.5) (30.2) (25.8)
Equity in (losses) earnings on investments in
unconsolidated partnerships.................. (0.4) 0.1 -- 0.3 0.0
Minority interest............................... 1.7 0.5 -- (0.1) 0.4
Unusual charge.................................. -- -- -- -- (4.7)
----- ----- ----- ----- -----
(Loss) income before extraordinary item........... (2.5) 1.7 (27.2) (8.2) (19.5)
Extraordinary item.............................. -- 2.5 -- -- --
----- ----- ----- ----- -----
Net (loss) income................................. (2.5)% 4.2% (27.2)% (8.2)% (19.5)%
===== ===== ===== ===== =====
</TABLE>

- ---------------
(1) Includes $2.7 million of rent expense related to six facilities leased in
1993 that were acquired in 1994. Excluding such rent expense, facility
operating expenses as a percentage of operating revenue would have been
58.9%.

22
<PAGE> 23

SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995

Operating Revenue. Operating revenue for the six months ended June 30,
1996 increased 14.8% to $21.0 million from $18.3 million in the six months ended
June 30, 1995 due primarily to the growth in resident fees. Resident fees
(including community fees and fees for Basic Care, Extended Care, Alzheimer's
Care and other services) for the six months ended June 30, 1996 increased 14.0%
to $19.5 million from $17.1 million in the six months ended June 30, 1995. This
increase was due primarily to the inclusion of the Raleigh and Chanate Lodge
facilities ($1.5 million) and an increase in the average daily resident fee
($0.8 million). Resident occupancy was 92.5% for the six months ended June 30,
1996 for owned facilities operated by the Company for at least 12 months,
excluding facilities with temporary vacancies due to renovations or resident
relocations ("Same Facilities"), compared to 91.8% for the six months ended June
30, 1995. Resident occupancy, including vacancies attributable to renovations at
two facilities in order to meet requirements for accepting non-ambulatory
residents and the relocation of non-ambulatory residents at a third facility,
remained virtually unchanged at 90.0% for the six months ended June 30, 1996
compared to 90.1% for the six months ended June 30, 1995.

The average daily resident fee (excluding community fees) for Same
Facilities increased to $83 in the six months ended June 30, 1996 from $79 in
the six months ended June 30, 1995 primarily due to an increase in the Basic
Care rate and an increase in the number of residents receiving Extended Care and
Alzheimer's Care services.

Management services income for the six months ended June 30, 1996 increased
by $0.3 million, or 27.2%, to $1.5 million from $1.2 million in the six months
ended June 30, 1995 due to an increase in management fees and one-time
consulting fees.

Operating Expenses. Operating expenses for the six months ended June 30,
1996 increased 30.7% to $19.5 million from $14.9 million in the six months ended
June 30, 1995. The increase in operating expenses in the six months ended June
30, 1996 is attributable primarily to growth in facility operating and general
and administrative expenses.

Facility operating expenses for the six months ended June 30, 1996
increased 22.8% to $12.6 million from $10.3 million in the six months ended June
30, 1995. As a percentage of operating revenue, facility operating expenses in
the six months ended June 30, 1996 increased to 60.0% from 56.2% in the six
months ended June 30, 1995. Of the $2.3 million increase in facility operating
expenses in the six months ended June 30, 1996, $1.2 million is attributable to
the opening of the Raleigh facility and the acquisition of the Chanate Lodge.
Increased staffing, benefits, salaries and training at existing facilities
accounted for $0.7 million. The balance of the increase, $0.4 million, was
comprised of an increase in other general expenses.

Facility development and pre-opening expenses for the six months ended June
30, 1996 increased $0.2 million to $0.6 million from $0.4 million in the six
months ended June 30, 1995. This increase was primarily due to increased labor
costs resulting from increased development efforts.

General and administrative expenses in the six months ended June 30, 1996
increased 62.3% to $4.4 million from $2.7 million in the six months ended June
30, 1995. As a percentage of operating revenue, general and administrative
expenses in the six months ended June 30, 1996 increased to 21.0% from 14.9% in
the six months ended June 30, 1995. Of the $1.7 million increase in general and
administrative expenses in the six months ended June 30, 1996, approximately
55.7% was related to labor costs, including a $0.7 million increase in salary
and benefits expenses relating to the hiring of additional headquarters and
regional office management staff in anticipation of the Company's growth plans,
and $0.2 million related to salary increases and benefits for existing staff.
The remaining $0.8 million increase is attributable to accounting, marketing,
consulting, public relations, telephone, and other general expenses.

Depreciation and amortization in the six months ended June 30, 1996
increased 21.9% to $1.8 million from $1.5 million in the six months ended June
30, 1995 primarily due to the opening of the Raleigh facility and acquisition of
the Chanate Lodge facility and amortization of capitalized pre-opening costs
over twelve months.

23
<PAGE> 24

Other income (expense). Interest income for the six months ended June 30,
1996 increased 15.6% to $0.7 million from $0.6 million in the six months ended
June 30, 1995 primarily due to interest earned on $5.0 million of revenue bonds
purchased in March 1995 (the Company has an option to purchase the facility
subject to the revenue bonds, at any time, for fair market value). Interest
expense for the six months ended June 30, 1996 decreased 1.9% to $5.4 million
from $5.5 in the six months ended June 30, 1995 as a result of a decrease in
GECC Mortgage interest. In June 1996, the Company paid approximately $8.6
million to GECC as payment in full of all participation interest due and payable
pursuant to the GECC Mortgage. In addition, the Company paid GECC $8.0 million
to be applied to prepay a portion of the variable rate indebtedness. GECC
reduced the interest rate applicable to the outstanding portion of variable rate
indebtedness from LIBOR plus 5.75% to LIBOR plus 3.75%.

Unusual Charge. In order to avoid a possible change in the Company's
ability to continue to manage the Annapolis and Pikesville facilities resulting
from the reduction in the Founders' ownership interest in the Company following
completion of the Company's initial public offering in June 1996, the Company
made a $1.0 million cash payment to the third-party limited partner in these two
facilities in exchange for the transfer to the Company by the third party of
additional 1% partnership interests in each facility (with a total book value of
$18,700) and the elimination of any requirement for the Founders to maintain a
specified ownership interest in the Company. This was reflected as an unusual
charge during the six months ended June 30, 1996.

Net loss. The Company incurred a net loss of $4.1 million for the six
months ended June 30, 1996, including the $1.0 million unusual charge, compared
to a net loss of $1.5 million in the six months ended June 30, 1995. The net
loss for the six months ended June 30, 1996 resulted primarily from a $4.6
million increase in operating expenses and the $1.0 million unusual charge
described above offset, in part, by a $2.7 million increase in operating
revenue. The Company did not recognize any Federal income tax expense in the six
months ended June 30, 1996 because of such net loss.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994

Operating Revenue. Operating revenue for 1995 increased 9.7% to $37.3
million from $34.0 million in 1994 due primarily to the growth in resident fees.
Resident fees (including community fees and fees for Basic Care, Extended Care,
Alzheimer's Care and other services) for 1995 increased 8.1% to $34.8 million
from $32.1 million in 1994. This increase was due primarily to $1.9 million of
additional revenue generated by an increase in the Basic Care rate and the
inclusion of a full year of resident fees of $1.4 million for the Gardner Park
facility (opened in September 1994), and was offset partially by $0.8 million
due to a decline in average resident occupancy. Resident occupancy fell from
94.8% to 91.7% in 1995 for Same Facilities. Resident occupancy was 89.6% in 1995
including vacancies attributable to renovating two facilities in order to meet
requirements for accepting non-ambulatory residents and relocating
non-ambulatory residents at a third facility. Same Facility resident occupancy
declined in 1995 largely as a result of a decline in resident occupancy at two
facilities. At these two facilities, the Company has made management changes and
instituted new marketing programs. In addition, the Company strengthened its
senior management team by hiring a new chief operating officer. See
"Management."

The average daily resident fee (excluding community fees) for Same
Facilities increased 6.7% to $80 in 1995 from $75 in 1994 primarily due to a
4.4% increase in the average Basic Care rate from $68 in 1994 to $71 in 1995 and
an increase in the number of residents receiving Extended Care and Alzheimer's
Care services.

Management services income for 1995 increased by $0.7 million, or 37.0%, to
$2.5 million from $1.8 million in 1994 due to a $0.4 million, or 26.8%, increase
in management fees related to a full year of income from four management
contracts entered into in 1994, and from ancillary services totaling $0.3
million.

Operating Expenses. Operating expenses for 1995 increased 25.3% to $32.0
million from $25.6 million in 1994. The increase in operating expenses in 1995
is attributable primarily to growth in facility operating expenses, facility
development and pre-opening expenses and general and administrative expenditures
related to building the Company's infrastructure in connection with its growth
plans.

24
<PAGE> 25

Facility operating expenses for 1995 increased 16.8% to $21.0 million from
$18.0 million in 1994. As a percentage of operating revenue, facility operating
expenses in 1995 increased to 56.4% from 52.9% in 1994. Of the $3.0 million
increase in facility operating expenses in 1995, $1.2 million was attributable
to combination of salary increases for existing staff, increased facility-based
staffing required to handle the increased number of residents receiving Extended
Care or Alzheimer's Care and training of facility-based personnel. The balance
of the increase, $1.8 million, was due to the inclusion of a full year of
operations at the Gardner Park facility, other facility expenses such as food,
marketing, and legal, the renovation and opening of a portion of the Village
House facility providing assisted living services.

Facility development and pre-opening expenses for 1995 increased $0.9
million to $1.2 million from $0.3 million in 1994. The increase was due to an
increase in development activities. Labor costs increased $0.4 million,
unrecoverable direct costs increased $0.6 million, and pre-opening expenses
increased $0.1 million. These increases were offset by an increase in
capitalized development expenses of $0.4 million.

General and administrative expenses in 1995 increased 64.4% to $6.9 million
from $4.2 million in 1994. As a percentage of operating revenue, general and
administrative expenses in 1995 increased to 18.5% from 12.3% in 1994. Of the
$2.7 million increase in general and administrative expenses in 1995,
approximately 70.8% was related to labor costs including a $1.0 million increase
in salary and benefits expenses relating to the hiring in 1995 of 33 additional
headquarters and regional office management staff in anticipation of the
Company's growth plans, and $0.9 million related to salary increases and
benefits for existing staff. The remaining $0.8 million increase is attributable
to marketing, consulting, and public relations and other general expenses.

The provision for bad debts was $0.2 million and $0.1 million in 1995 and
1994, respectively. Receivable balances are reviewed on a monthly basis and a
provision for bad debts is established as needed for those balances that in the
judgment of management are uncollectible. During 1994, the Company also accrued
$0.3 million to recognize anticipated losses on one of its management contracts.
Also in 1994, the Company accrued $0.1 million in anticipation of actions taken
by Virginia state and local authorities regarding licensure and state building
code violations. No loss accruals were recorded in 1995. See "Risk
Factors -- Government Regulation."

Depreciation and amortization in 1995 decreased 4.8% to $3.0 million from
$3.2 million in 1994. In 1994, certain predecessor limited partnerships wrote
off $0.2 million of deferred financing costs. These costs were expensed prior to
June 8, 1994 when the Company acquired all minority ownership interests in the
SALLP Properties utilizing a new debt facility.

Other income (expense). Interest income for 1995 increased 117.3% to $1.2
million from $0.6 million in 1994 primarily due to a $0.4 million increase
related to the purchase in 1995, for $5.0 million, of revenue bonds secured by a
Company-managed facility and a $0.2 million increase due to higher cash balances
related to the January 1995 private placement of Series A Convertible Preferred
Stock. Interest expense for 1995 increased 92.8% to $16.6 million from $8.6
million in 1994. The increase in interest expense primarily was attributable to
the GECC Mortgage. The GECC Mortgage interest expense increased by $4.2 million,
or 79.4%, in 1995 reflecting the inclusion of an additional five months of
interest compared to 1994. Interest expense for 1994 and 1995 includes $0.3
million and $0.5 million, respectively, of amortization expense, which relates
to a $3.2 million loan discount recorded on the GECC Mortgage. Such discount is
being amortized over the term of the GECC Mortgage. GECC Mortgage interest
expense for 1995, totaling $5.4 million, represents accrual of interest expense
relating to the 25% participation interest and is based upon an increase during
1995 in the estimated market value of facilities securing the GECC Mortgage.

A Loan Modification Agreement with GECC was entered into in May 1996.
Pursuant to the agreement, upon consummation of the Company's initial public
offering on June 5, 1996, the Company paid GECC approximately $8.6 million as
payment in full of all participation interest due and payable pursuant to the
GECC Mortgage. In addition, the Company paid GECC $8.0 million to be applied to
prepay a portion of the variable rate indebtedness. GECC reduced the interest
rate applicable to the outstanding portion of variable rate indebtedness from
LIBOR plus 5.75% to LIBOR plus 3.75%. Had the Company modified the GECC

25
<PAGE> 26

loan documents effective January 1, 1995, GECC Mortgage interest expense for
1995 would have been approximately $7.8 million as compared to $15.6 million.

Interest expense related to other debt for 1995 decreased 58.8% to $1.3
million from $3.1 million in 1994, due to the repayment of $71.5 million of debt
with a portion of the proceeds from the GECC Mortgage.

Net (loss) income. The Company incurred a net loss of $10.1 million in
1995, compared to net income of $1.4 million (after a $0.9 million extraordinary
item) in 1994. The net loss in 1995 resulted primarily from the $6.1 million of
expense recorded in 1995 relating to the GECC Mortgage loan discount and
participation interest and the $6.5 million increase in operating expenses,
which were offset, in part, by the $3.3 million increase in operating revenue.
The Company did not recognize any Federal income tax expense in 1995 because of
such net loss. At December 31, 1995, the Company had net operating loss
carryforwards for income tax purposes of approximately $3.9 million which expire
in 2010. See Note 9 of Notes to Consolidated and Combined Financial Statements.

YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, 1993

Operating Revenue. Operating revenue for 1994 increased 32.7% to $34.0
million from $25.6 million in 1993 due primarily to the growth in resident fees.
Resident fees for 1994 increased 33.9% to $32.1 million from $24.0 million in
1993. This increase was primarily due to the inclusion of a full year of
resident fees from the Falls Church and Village House facilities, and the
acquisition of the majority ownership interest in the Mercer Island facility
which contributed $2.5 million and $1.9 million, respectively, to this increase.
The remaining increase was a result of higher average resident occupancy. The
average daily resident fee (excluding community fees) and the average Basic Care
rate for Same Facilities of $75 and $68, respectively, was unchanged from 1993.

Management services income for 1994 increased 14.0% to $1.8 million from
$1.6 million in 1993 due to an increase in the number of facilities managed by
the Company to 11 in 1994 from seven in 1993.

Operating Expenses. Operating expenses for 1994 increased 10.9% to $25.6
million from $23.1 million in 1993. The increase in operating expenses in 1994
was primarily attributable to growth in general and administrative expenses and
depreciation and amortization. Facility-based expenses were essentially flat in
1994 compared to 1993.

Facility operating expenses for 1994 were $18.0 million compared to $17.8
million in 1993. Facility operating expenses for 1993 included $2.7 million of
rental expense related to six facilities leased by the Company in 1993 that were
acquired in 1994. Excluding such rent expense, facility operating expenses would
have been $15.0 million in 1993, or 58.9% of operating revenue for that year
compared to 52.9% for 1994. Before such rent expense in 1993, the facility
operating expenses increased 19.4% to $18.0 million from $15.0 million in 1993.
Of such increase, approximately $1.1 million was attributable to the inclusion
of a full year of operations of the Falls Church and Village House facilities,
$1.1 million was attributable to the acquisition of the Mercer Island facility
that was managed by the Company in 1993 and $0.3 million was attributable to the
opening of the Gardner Park facility in 1994. The remaining balance consists of
a $0.9 million increase in labor costs offset, in part, by a $0.4 million
decline in other operating expenses such as professional fees, advertising,
taxes and utilities.

Facility development and pre-opening expenses for 1994 decreased to $0.3
million from $0.5 million. This decrease was attributable to a $0.5 million
increase in development labor costs offset by an increase of $0.7 million in
capitalized costs. There were no capitalized costs in 1993 because there was
limited internal development activity.

General and administrative expenses in 1994 increased 105.6% to $4.2
million from $2.0 million in 1993 primarily due to an increase in salary and
benefits expenses. As a percentage of operating revenue, general and
administrative expenses in 1994 increased to 12.3% from 7.9% in 1993. Of the
increase in general and administrative expenses in 1994, approximately 40.1% was
related to salary and benefits expenses relating to salary increases and hiring
of additional headquarters and regional office management staff. The additional
increase was related to $0.4 million of bad debt and legal expense accruals, a
$0.1 million increase in training

26
<PAGE> 27

and consulting fees, and increases in other general and corporate expenses such
as marketing, telephone and rent.

Depreciation and amortization for 1994 increased by 12.9% to $3.2 million
from $2.8 million in 1993. The majority of this increase was related to $1.0
million of depreciation expense on the six facilities leased by the Company in
1993 that were acquired in 1994. In 1994, the Sunrise Entities increased the
estimated useful life of property and equipment, which had the effect of
reducing depreciation expense by $0.4 million.

Other income (expense). Interest income for 1994 increased by $0.3 million
to $0.6 million from $0.3 million in 1993. The increase in interest income is
primarily attributable to higher cash balances from funds received as a result
of the creation of a new debt facility in June 1994. Interest expense for 1994
increased by 125.5% to $8.6 million from $3.8 million in 1993, and is primarily
attributable to seven months of interest expense on the GECC Mortgage. Interest
expense on other debt declined 19.7% to $3.1 million from $3.8 million in 1993,
primarily due to the repayment of $71.5 million of debt with a portion of the
proceeds from the GECC Mortgage.

Extraordinary item. In 1994, $3.4 million of second-trust mortgages
related to two predecessor limited partnerships were pre-paid in full for $2.5
million. The prepayment at a discount was reflected as a $0.9 million
extraordinary gain.

Net (loss) income. The Company had net income (after the $0.9 million
extraordinary item) of $1.4 million in 1994 compared to a net loss of $0.6
million in 1993. The improvement in operating results for 1994 resulted
primarily from the $0.9 million gain recorded on the prepayment at a discount of
the two second-trust mortgages and an $8.4 million increase in operating
revenue, which were offset, in part, by $4.8 million of additional interest
expense. For 1994 and prior periods, Sunrise Entities consisted of partnerships,
limited liability companies or corporations that elected to be treated as S
Corporations under the Internal Revenue Code of 1986, as amended. Accordingly,
no provision or benefit for income taxes was made because taxable income or loss
passed through to the owners of those entities.

LIQUIDITY AND CAPITAL RESOURCES

To date, the Company has financed its operations from long-term borrowings,
equity placements and offerings and cash generated from operations. In June
1994, the Company obtained the GECC Mortgage and used the proceeds to
consolidate $71.5 million of debt on 15 facilities, as well as to finance the
acquisition of all other interests in the limited partnerships and other
entities that previously held such facilities. At June 30, 1996, the Company had
$119.1 million of outstanding debt (excluding notes payable to affiliates) at a
weighted average interest rate of 8.4%. Of such amount, the Company had $79.9
million of fixed-rate debt (excluding a $2.1 million loan discount on the GECC
Mortgage) at a weighted average interest rate of 8.3%, $41.3 million of
variable-rate debt at a weighted average interest rate of 8.7%. The GECC
Mortgage includes a requirement that the Founders continue to own at least 25%
of the outstanding shares of Common Stock and that one of the Founders serve as
Chairman of the Board and President of the Company. See Note 8 of Notes to
Consolidated and Combined Financial Statements. In January 1995, the Company
issued and sold 2,444,444 shares of Series A Convertible Preferred Stock in a
private placement for which the Company received gross proceeds of $22.0
million. In January 1996, the Company issued and sold 1,000,000 shares of Series
B Exchangeable Preferred Stock, receiving $10.0 million in net proceeds. On June
5, 1996, the Company completed its initial public offering. Upon completion of
the initial public offering, the outstanding shares of Series A Convertible
Preferred Stock converted automatically into an equal number of shares of Common
Stock. The net proceeds to the Company from the initial public offering were
approximately $104.3 million. As of June 30, 1996, uses of the net proceeds
included $16.6 million in partial payment of the Company's long-term debt, the
redemption of all of the outstanding shares of Series B Exchangeable Preferred
Stock for $10.2 million and the development of additional Sunrise assisted
living facilities. Working capital increased to $66.4 million at June 30, 1996,
compared to $2.1 million as of December 31, 1995, primarily from the net
proceeds received from the initial public offering. After giving effect to the
acquisition of the Southeast Properties, working capital, on a pro forma basis,
at June 30, 1996 totaled $31.9 million.

27
<PAGE> 28

Cash provided by operating activities was $0.9 million for 1995, as
compared to $2.7 million for 1994 and $3.1 million for 1993. Cash used for
operating activities was $0.2 million for the six months ended June 30, 1996,
including a $1.0 million payment to a third-party limited partner which was
charged to earnings. Without the $1.0 million payment, operating activities
would have provided $0.8 million for the six months ended June 30, 1996.
Unrestricted cash balances were $6.3 million, $8.1 million and $3.3 million at
December 31, 1995, 1994 and 1993, respectively. At June 30, 1996, the
unrestricted cash balance was $22.7 million.

Net cash used in investing activities totaled $17.9 million, $17.0 million
and $4.2 million in 1995, 1994 and 1993, respectively. Net cash used in
investing activities was $84.2 million for the six months ended June 30, 1996.
The Company's investing activities included $12.8 million, $10.7 million and
$3.2 million in 1995, 1994 and 1993, respectively, and $33.9 million for the six
months ended June 30, 1996, related to the Company's development activities.
Investing activities in 1995 included the purchase of $5.4 million carrying
value of tax exempt mortgage revenue bonds. Investing activities in 1994
included the purchase of minority interests in 15 facilities using net proceeds
of $5.5 million from the GECC Mortgage. See Note 4 of Notes to Consolidated and
Combined Financial Statements.

During 1995, the Company's financing activities provided net cash of $15.1
million compared to $19.1 million and $1.9 million provided in 1994 and 1993,
respectively. Financing activities provided net cash of $100.8 million for the
six months ended June 30, 1996. Cash was provided by the Company's initial
public offering, described above, as well as $14.9 million provided by
additional borrowings. In June 1996, the Company paid GECC $8.6 million as
payment in full of GECC's 25% participating interest in cash flow and
appreciation in the value of certain properties. In addition, the Company
prepaid $8.0 million of its variable rate debt, paid $0.3 million in dividends
to holders of Series B Exchangeable Preferred Stock, and $0.8 million in various
financing costs. All shares of Series B Exchangeable Preferred Stock have been
redeemed. In 1995, $16.8 million was provided by additional borrowings relating
primarily to the construction of facilities, and $20.2 million in net proceeds
was provided by the issuance of Series A Convertible Preferred Stock. In
addition, $9.6 million in cash distributions were made in 1995. During 1994, the
Company consolidated its permanent financing on 15 facilities. Net cash provided
by additional borrowings amounted to $25.1 million. The Company received cash
contributions of $3.6 million and paid out dividends and distributions during
1994 totaling $10.5 million. In 1993, amortization of principal amounts
outstanding exceeded new borrowings by $0.7 million. See Note 6 of Notes to
Consolidated and Combined Financial Statements.

The Company's growth strategy contemplates the development during the next
three years of at least 55 of its model facilities with a capacity of
approximately 4,950 residents. To date, the Company has obtained zoning approval
for 25 new facilities with a resident capacity of 2,215 residents, including 16
facilities under construction, and has entered into contracts to purchase 15
additional sites and to lease two additional sites, and is negotiating purchase
terms for 11 additional sites. During the next three years the Company also
plans to acquire up to 10 assisted living facilities or other properties that
can be repositioned as Sunrise assisted living facilities. In March 1996, the
Company obtained a $13.0 million unsecured credit facility to be used for
development and acquisitions and working capital needs. The credit facility is
for a term of five years. Advances under the facility bear interest at a rate
per annum, fluctuating daily, equal to one and one-half of one percent plus the
greater of (i) the lender's prime lending rate and (ii) the Federal funds rate
plus one-half of one percent. The Company has issued the lender a warrant for
50,000 shares at an exercise price of $17.00 per share.

The Company also has obtained a commitment (subject to certain conditions
including syndication) from a financial institution for an $80.0 million line of
credit for construction and interim loans to finance the development of up to 10
assisted living facilities by a wholly owned subsidiary of the Company. To date,
of this total line of credit, the Company has closed $58.0 million. The Company
guaranteed the repayment of all amounts outstanding under this line of credit.
The line of credit is for a term of five years and is secured by
cross-collateralized first mortgages on the real property and improvements and
first liens on all other assets of the subsidiary. Advances under the facility
bear interest at rates from LIBOR plus 1.7% to 2.9%. As part of this line, the
Company has entered into a swap transaction whereby effective during the period
June 18, 1998 through June 18, 2001, outstanding advances of up to $19.0 million
under this line of credit, or other LIBOR

28
<PAGE> 29

floating rate debt, bear interest at a fixed rate based on a fixed LIBOR base
rate of 7.3%. Construction of all 10 facilities to be financed by the lines of
credit must be commenced within 18 months of the closing of the line of credit.
There were no borrowings on these lines of credit at June 30, 1996.

The Company's financing documents contain financial covenants and other
restrictions that (i) require the Company to meet certain financial tests and
maintain certain escrows of funds, (ii) require that the Founders maintain
ownership of at least 25% of the Common Stock and that one of them serve as
Chairman of the Board and President of the Company, (iii) require consent for
changes in management or control of the Company, (iv) limit, among other things,
the ability of the Company and certain of its subsidiaries to borrow additional
funds, dispose of assets and engage in mergers or other business combinations,
and (v) prohibit the Company from operating competing facilities within certain
distances from mortgaged facilities. See "Risk Factors -- Adverse Consequences
of Indebtedness and Other Obligations of the Company."

The estimated cost to complete and lease up the 55 new Sunrise model
facilities targeted for completion over the next three years is between $410
million and $550 million, which substantially exceeds the net proceeds of the
Offering and existing working capital and financing arrangements. The Company
currently estimates that the net proceeds of the Offering, together with
existing working capital and financing commitments and financing expected to be
available, will be sufficient to fund its development and acquisition programs
for at least the next 18 months. Substantial additional financing will be
required to complete the Company's growth plans and to refinance existing
indebtedness if cash flows from operations do not increase as a result of
planned growth. There can be no assurance that such financing will be available
on acceptable terms. See "Risk Factors -- Need for Additional Financing."

At June 30, 1996, the Company had stockholders' equity of $92.9 million
compared to a stockholders' deficit of $31.8 million at December 31, 1995. The
change resulted primarily from (i) adding the receipt of net proceeds from the
Company's initial public offering of $104.3 million, conversion of Series A
Convertible Preferred Stock to an equal number of common shares for $24.0
million, $1.1 million from other common shares issued including the exercise of
stock options granted, and $0.1 million from the issuance of common stock
warrants, and (ii) subtracting $0.7 million relating to dividends and other
distributions paid and a net loss for the six months ended June 30, 1996 of $4.1
million.

SUBSEQUENT EVENTS

ACQUISITION OF SOUTHEAST PROPERTIES. On October 8, 1996, the Company
completed its acquisition from Laing Properties & Subsidiaries, Inc. of five
facilities located in the southeast United States (the "Southeast Properties")
for an aggregate purchase price of $34.0 million in cash with no debt assumed.
The five facilities consist of 498 total units providing primarily independent
and assisted living services. One of the facilities also has a 26-bed skilled
nursing floor. These facilities had combined revenues of $9.9 million in 1995
and $5.4 million for the six months ended June 30, 1996, and had combined net
income (losses) of $(32,000) and $195,000, respectively, for these periods.
After giving effect to the acquisition of the Southeast Properties at the
beginning of the respective periods, the Company had a pro forma net loss of
$8.5 million and $3.1 million for 1995 and for the first six months of 1996,
respectively. See "Recent Developments," "Selected Financial, Operating and Pro
Forma Data" and "Unaudited Pro Forma Consolidated Financial Statements."

AFFILIATION AGREEMENT WITH JEFFERSON HEALTH SYSTEM. On October 8, 1996,
the Company entered into an affiliation agreement with Jefferson Health System
("JHS"), an integrated health care system located in Philadelphia, Pennsylvania,
pursuant to which JHS has agreed to provide residents of Sunrise facilities
located in the Philadelphia metropolitan region, on a preferred (but
non-exclusive) basis, with access to certain health care services offered by
JHS. Such health care services may include hospital services, physician
services, rehabilitation services, home health services and products and mental
health services. See "Recent Developments."

CREDIT FACILITY. On October 3, 1996, a subsidiary of the Company received
from GMAC Commercial Mortgage Corporation a commitment for a $51.0 million
revolving construction credit facility. The credit facility provides for
construction and interim loans to finance the development of up to seven
assisted living facilities. The Company has agreed to guarantee the repayment of
all amounts outstanding under this credit

29
<PAGE> 30

facility. The credit facility is for a term of five years and is secured by
cross-collateralized first mortgages on the real property and liens on
receivables. Advances under the credit facility bear interest at rates ranging
from LIBOR plus 2.25% to 2.60%. See "Recent Developments."

CONTINGENT ACQUISITION OF CALIFORNIA PROPERTIES. On October 8, 1996, the
Company entered into a purchase and sale agreement subject to certain
conditions, including satisfactory completion by the Company of financial,
accounting, regulatory and property due diligence over the next 60 days, to
acquire two facilities located in Southern California for $30.8 million in cash.
The California Properties consist of 258 total units providing independent and
assisted living services. Assuming the Company elects to proceed with the
transaction following the completion of its due diligence review, the closing of
the transaction would likely take place in the first quarter of 1997. Given the
contingent nature of the purchase and sale agreement, there can be no assurance
that the acquisition will be consummated. See "Recent Developments."

IMPACT OF CERTAIN ACCOUNTING STANDARDS

In March 1995, the Company purchased all of the outstanding mortgage
revenue bonds used to finance a facility managed by the Company. At June 30,
1996, these bonds had an aggregate carrying value of $5.6 million and are
classified as available for sale in accordance with Financial Accounting
Standards Board Statement No. 115, Accounting for Certain Investments in Debt
and Equity Securities. At June 30, 1996, the Company also had $50.0 million of
short-term investments classified as available for sale. As a result of such
classifications, unrealized holding gains or losses, net of the related tax
effect, is recorded as a separate component of stockholders' (deficit) equity.
At June 30, 1996, the net carrying cost of the bonds and short-term investments
approximated market value and, accordingly, there were no unrealized holding
gains or losses, net of the related tax effect, on these bonds and investments
at that date. See Note 5 of Notes to Consolidated and Combined Financial
Statements.

In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation, which provides an alternative
to APB Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
for stock-based compensation issued to employees. The Statement allows for a
fair value based method of accounting for employee stock options and similar
equity instruments. However, for companies that continue to account for
stock-based compensation arrangements under Opinion No. 25, Statement No. 123
requires disclosure of the pro forma effect on net income and earnings per share
of its fair value based accounting for those arrangements. These disclosure
requirements are effective for fiscal years beginning after December 15, 1995,
or upon initial adoption of the statement, if earlier. The Company adopted
Statement No. 123 in the first quarter of 1996 and elected to continue to
account for stock-based compensation arrangements under APB Opinion No. 25.

IMPACT OF INFLATION

Resident fees from Company-owned assisted living facilities and management
services income from facilities operated by the Company for third parties are
the primary sources of revenue for the Company. These revenues are affected by
daily resident fee rates and facility occupancy rates. The rates charged for the
delivery of assisted living services are highly dependent upon local market
conditions and the competitive environment in which the facilities 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 the Company's growth plans, has recently
had a negative impact on operating margins and may continue to do so in the
foreseeable future.

Substantially all of the Company's resident agreements are for terms of one
year and allow, at the time of renewal, for adjustments in the daily fees
payable thereunder, and thus may enable the Company to seek increases in daily
fees due to inflation or other factors. Any such increase would be subject to
market and competitive conditions and could result in a decrease in occupancy of
the Company's facilities. The Company believes, however, that the short-term
nature of its resident agreements generally serves to reduce the risk to the
Company of the adverse effect of inflation. There can be no assurance that
resident fees will increase or that costs will not continue to increase due to
inflation or other causes.

30
<PAGE> 31

BUSINESS

OVERVIEW

Sunrise is a leading provider of assisted living services to the elderly.
The Company currently operates 32 facilities in 11 states with a capacity of
approximately 2,800 residents, including 28 facilities owned by the Company or
in which it has ownership interests and four facilities managed for third
parties. The Company had revenues of $37.3 million in 1995 and $21.0 million for
the six months ended June 30, 1996, and incurred net losses of $10.1 million and
$4.1 million, respectively, for these periods. Approximately 99% of these
revenues were derived from private pay sources.

The Company's three-year growth objective is to develop at least 55 new
Sunrise assisted living facilities with a capacity of approximately 4,950
residents. To date, the Company has obtained zoning approval for 25 new
facilities with a resident capacity of 2,215, including 16 facilities currently
under construction. The Company has also entered into contracts to purchase 15
additional sites and to lease two additional sites, and is negotiating purchase
terms for 11 additional identified sites. Since the first Sunrise facility
opened in 1981, the Company has developed 24 facilities, 16 of which it
currently owns, and has completed all but one of the facilities for which it
obtained zoning approval. In addition to its construction and development plans,
the Company plans to acquire up to 10 additional facilities over the next three
years.

The Company's objective is to capitalize on its 15-year history as a
pioneer and leading provider in the assisted living industry and on the growing
demand for assisted living as the preferred setting for elderly care. The
Company's strategy is to (i) provide high-quality personalized resident care and
services, (ii) provide a full range of assisted living services, (iii) rapidly
develop the Sunrise model in targeted markets, (iv) maintain the depth and
quality of its management team, (v) pursue acquisitions and contract management
opportunities, (vi) achieve the benefits of regional density by clustering
facilities, and (vii) develop strategic alliances with integrated health care
delivery systems.

THE ASSISTED LIVING INDUSTRY

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

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

The Company believes that assisted living is one of the fastest growing
segments of elder care and will continue to experience significant growth due to
the following:

CONSUMER PREFERENCE. The Company believes that assisted living is
increasingly becoming the setting preferred by prospective residents and their
families in which to care for the frail elderly. Assisted living offers
residents greater independence and allows them to age in place in a residential
setting, which the Company

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<PAGE> 32

believes results in a higher quality of life than that experienced in more
institutional or clinical settings, such as skilled nursing facilities.

FAVORABLE DEMOGRAPHIC TRENDS. As illustrated below, the number of seniors
85 years and older is estimated to increase by approximately 42% during the
1990s from 3.1 million seniors in 1990 to approximately 4.3 million seniors in
2000. It is estimated that total U.S. population will increase by approximately
11% during the same period. It is further estimated that approximately 35% of
the population of seniors over age 85 need assistance with ADLs and more than
one-half of such seniors develop Alzheimer's disease or other forms of dementia.
In addition, the growing affluence of the elderly has made assisted living more
affordable.

<TABLE>
<CAPTION>
85 YEARS AND OVER
FASTEST GROWING POPULATION IN U.S.

1990 2000
---- ----
<S> <C> <C>
85 YEARS AND OVER 0% 42%

TOTAL POPULATION 0% 11%
</TABLE>

Source: U.S. Bureau of Census

SUPPLY/DEMAND IMBALANCE. As illustrated below, the supply of skilled
nursing home beds per 1,000 persons 85 years of age and older is declining. This
decline may be attributed to several factors, including the aging of the
population and the implementation of moratoriums on the granting of certificates
of need for new skilled nursing facilities. In addition, many skilled nursing
facilities are focusing on higher acuity patients with higher reimbursement
profiles. As a result, fewer skilled nursing beds are available for the
increasing number of elderly who need assistance with ADLs but do not require
significant medical attention. The Company believes that the supply of assisted
living beds has increased substantially since 1980 to satisfy a portion of this
demand.

DECLINE IN NURSING BEDS PER THOUSAND
FOR INDIVIDUALS 85 YEARS OR OLDER

<TABLE>
<CAPTION>
1967 1976 1980 1986 1990 2000E
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
BEDS PER THOUSAND 540 690 650 540 500 350
</TABLE>

Source: U.S. Bureau of Census

<PAGE> 33

COST ADVANTAGES. Studies show that the annual cost per patient for skilled
nursing care averaged approximately $35,000 in 1993. This average includes both
government and private payors. In contrast, the annual per patient cost for
assisted living care averaged approximately $24,000 in 1993. Because rates paid
by private pay patients in skilled nursing facilities are much higher than
government reimbursement rates, the comparable cost advantage of assisted living
over a private pay skilled nursing facility rate is even greater. The Company
also believes that the cost of assisted living compares favorably with home
health care, particularly when the costs associated with housing and meal
preparation are added to the costs of home health care.

CHANGING FAMILY DYNAMICS. As a result of the growing number of two-income
families, many children are not able to care for elderly parents in their own
homes. Two-income families are, however, better able to provide financial
support for elderly parents. In addition, other factors, such as the growth in
the divorce rate and single-parent households, as well as the increasing
geographic dispersion of families, have contributed to the growing inability of
children to care for aging parents in the home.

THE SUNRISE OPERATING PHILOSOPHY

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

THE SUNRISE STRATEGY

The principal elements of the Company's strategy are as follows:

PROVIDE HIGH-QUALITY PERSONALIZED RESIDENT CARE AND SERVICES. The Company
strives to provide its residents with the highest quality personalized care and
services. During the admission process, the Company develops a care plan for
each resident based on a professional assessment and family consultation. The
care plan is updated periodically by the Company, the resident and family
members based upon the individual needs of the resident. The Company also has an
extensive quality assurance program directed by regional- and facility-based
nurses and other staff who periodically review performance of Care Managers, as
well as other staff, and conduct monthly facility inspections.

PROVIDE A FULL RANGE OF ASSISTED LIVING SERVICES. The Company provides a
full range of assisted living services, which enables its residents to age in
place. The Company also offers special care programs for those residents who
suffer from Alzheimer's disease or other forms of dementia. As a result,
residents are able to continue living in a Sunrise facility unless they develop
medical conditions requiring institutional care available only in a skilled
nursing facility or acute care hospital.

RAPIDLY DEVELOP THE SUNRISE MODEL IN TARGETED MARKETS. During the next
three years, the Company plans to develop at least 55 of its "Victorian" model
facilities in major metropolitan areas and surrounding suburban markets
throughout the United States. To date, the Company has obtained zoning approval
for 25 new facilities, including 16 facilities currently under construction, and
has entered into contracts to purchase 15 additional sites and to lease two
additional sites, and is negotiating purchase terms for 11 additional identified
sites. Since the first Sunrise facility opened in 1981, the Company has
developed 24 facilities, 16 of which it currently owns, and completed all but
one of the facilities for which it obtained zoning approval. The Company
believes it is well-positioned to achieve its growth plans based on its
reputation as a high-quality provider of assisted living services, as well as
its proven model facility and its experienced development team.

33
<PAGE> 34

MAINTAIN DEPTH AND QUALITY OF MANAGEMENT TEAM. In anticipation of its
rapid development plans, the Company has made a significant investment in
actively recruiting and developing a management team with extensive experience
in the long-term care and assisted living industries. The Company believes that
the depth and experience of its over 90-person headquarters and regional
management team is unmatched in the assisted living industry and positions the
Company to effectively manage its growth plans. The Company's 12 most senior
operations managers have an average of 12 years experience in the assisted
living industry. The Company has also created formal training programs for its
management personnel, Administrators and Care Managers.

PURSUE ACQUISITIONS AND MANAGEMENT CONTRACT OPPORTUNITIES. During the next
three years, the Company plans to acquire up to 10 additional assisted living
facilities or other properties (excluding the five Southeast Properties) that
can be repositioned as Sunrise assisted living facilities. The Company
anticipates that the majority of these acquisitions will be targeted at new
markets as a method of entering the market more quickly than the development
process would otherwise permit. In other cases, the Company may enter into
facility management contracts to establish or expand its market presence. The
Company is actively pursuing acquisition opportunities and has had discussions
with a number of potential sellers regarding potential acquisition transactions.
Possible acquisition transactions are in the early stage of review by the
Company. Except for the purchase and sale agreement for the California
Properties, the Company has not entered into any agreements with respect to any
additional material acquisitions.

ACHIEVE THE BENEFITS OF REGIONAL DENSITY BY CLUSTERING FACILITIES. The
Company's development and acquisition strategies focus on clustering facilities
to achieve maximum regional density. This allows the Company to achieve
operational and management efficiencies while delivering high-quality care and
services within its target markets. Regional density also allows the Company to
benefit from community familiarity with assisted living generally and the
Sunrise model in particular.

DEVELOP STRATEGIC ALLIANCES WITH INTEGRATED HEALTH CARE DELIVERY
SYSTEMS. The Company is developing alliances with hospital systems to
strategically position itself within evolving integrated health care delivery
systems in its markets. Such alliances will facilitate residents' access to an
expanded range of health care services. The Company believes its assisted living
programs can serve these evolving health care systems by offering the frail
elderly high quality care in a cost effective setting.

SERVICES

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

The average daily resident fee for Same Facilities was approximately $83
for the six months ended June 30, 1996, $80 for 1995 and $75 for each of 1994
and 1993. The average daily Basic Care rate for Same Facilities was
approximately $73 for the six months ended June 30, 1996, $71 for 1995 and $68
for each of 1994 and 1993.

BASIC CARE

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

34
<PAGE> 35

coordination of physician care, physical therapy and other medical services;
health promotion and related programs; personal laundry services; housekeeping
services; and social and recreational activities.

EXTENDED CARE

Through the Company's Extended Care program, residents who require more
frequent or intensive assistance or increased care or supervision due to
incontinence or wandering are provided extra care and supervision. The Company
charges an additional daily fee based on additional staff hours of care and
services provided. The Extended Care program allows the Company, through
consultation with the resident, the resident's family and the resident's
personal physician, to create an individualized care and supervision program for
residents who might otherwise have to move to a more medically intensive
facility. At June 30, 1996, approximately 51% of the Company's assisted living
residents participated in the Extended Care program.

MEDICATION MANAGEMENT

Many of the Company's residents also require assistance with medications.
To the extent permitted by state law, the Medication Management program includes
the storage of medications, the distribution of medications as directed by the
resident's physician and compliance monitoring. The Company charges an
additional fixed daily fee for this service. At June 30, 1996, approximately 54%
of the Company's assisted living residents participated in the Medication
Management program.

ALZHEIMER'S CARE

The Company believes its Alzheimer's Care program distinguishes it from
many other assisted living providers who do not provide such specialized care.
The Alzheimer's Care program provides the attention, care programs and services
needed to help cognitively impaired residents maintain a higher quality of life.
Specially trained staff provide Basic Care and other specifically designed care
and services to cognitively impaired residents in separate areas of facilities.
The Company charges each cognitively impaired resident a daily fee that includes
one hour of additional staff time per day. Cognitively impaired residents who
require additional care and services pay a higher daily rate based on additional
staff hours of care and services provided. At June 30, 1996, approximately 23%
of the Company's assisted living residents participated in the Alzheimer's Care
program.

THE SUNRISE "VICTORIAN" MODEL FACILITY

The Company's signature Victorian model facility, first designed in 1985,
is a freestanding, residential-style facility with a capacity of 80 to 120
residents. The building ranges in size from approximately 40,000 to 60,000
square feet and is built generally on sites ranging from two to five acres.
Approximately 40% of the building is devoted to common areas and amenities,
including reading rooms, family or living rooms and other areas (such as bistros
and ice cream parlors) designed to promote interaction among residents. The
Company has four basic building plan designs, which provide it with flexibility
in adapting the model to a particular site. The building is usually two or three
stories and of steel frame construction built to institutional health care
standards but strongly residential in appearance. The interior layout is
designed to promote a home-like environment, efficient delivery of resident care
and resident independence.

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

The architectural and interior design concepts incorporate the Sunrise
operating philosophy of protecting resident privacy, enabling freedom of choice,
encouraging independence and fostering individuality in a home-

35
<PAGE> 36

like setting. The Company believes its model facility meets the desire of many
individuals to move to a new residence at least as comfortable as their former
home. The Company believes that its residential environments also accomplish
several other objectives, including: (i) lessening the trauma of change for
elderly residents and their families; (ii) achieving operational efficiencies
through proven designs; (iii) facilitating resident mobility and ease of access
by care givers; and (iv) differentiating the Company from other assisted living
and long-term care operators.

OWNED FACILITIES

The table below sets forth certain information regarding owned facilities
or facilities in which Sunrise has an ownership interest:

<TABLE>
<CAPTION>
YEAR DEVELOPED SUNRISE
OPENED BY OR MODEL RESIDENT OWNERSHIP
FACILITY LOCATION SUNRISE ACQUIRED FACILITY CAPACITY PERCENTAGE(1)
<S> <C> <C> <C> <C> <C> <C>
Sunrise of Oakton Oakton, VA 1981 Acquired(2) 51 100.0%
Sunrise of Leesburg Leesburg, VA 1984 Acquired(2) 35 100.0
Sunrise of Warrenton Warrenton, VA 1986 Acquired(2) 37 100.0
Sunrise of Arlington Arlington, VA 1988 Developed 'X' 58 100.0
Sunrise of Bluemont Park Arlington, VA 1990 100.0
Potomac Developed 'X' 59
Shenandoah Developed 'X' 77
James Developed 'X' 59
Sunrise of Mercer Island Seattle, WA 1990 Developed 'X' 59 100.0
Sunrise of Fairfax Fairfax, VA 1990 Developed 'X' 59 100.0(3)
Sunrise of Queen Anne Seattle, WA 1991 Acquired 136 33.3(4)
Sunrise of Frederick Frederick, MD 1992 Developed 'X' 86 100.0
Sunrise of Countryside Sterling, VA 1992 100.0
East Building Developed(5) 'X' 66
West Building Developed(5) 'X' 64
Sunrise of Gunston Lorton, VA 1992 Developed(5) 'X' 67 100.0
Sunrise of Atrium Boca Raton, FL 1992 Acquired 210 100.0
Sunrise of Falls Church Falls Church, VA 1993 Developed 'X' 66 100.0
Sunrise of Village House Gaithersburg, MD 1993 Acquired 155(6) 80.0
Sunrise of Towson Towson, MD 1994 Developed 'X' 66 13.9(7)
Sunrise of Gardner Park Peabody, MA 1994 Developed 'X' 59 50.0(7)(8)
Sunrise of Annapolis Annapolis, MD 1995 Developed 'X' 88 51.0(8)(9)
Chanate Lodge Santa Rosa, CA 1996 Acquired 120 100.0
Sunrise of Raleigh Raleigh, NC 1996 Developed 'X' 93 50.0(8)(10)
Sunrise of Pikesville Pikesville, MD 1996 Developed 'X' 103 51.0(8)(9)
Huntcliff Summitt Atlanta, GA 1996 Acquired 235 100.0(11)(12)
Sunrise of Northshore St. Petersburg, FL 1996 Acquired 162 100.0(11)(13)
Sunrise of Augusta Augusta, GA 1996 Acquired 39 100.0(11)
Sunrise of Columbus Columbus, GA 1996 Acquired 26 100.0(11)
Sunrise of Greenville Greenville, SC 1996 Acquired 36 100.0(11)
--------
Total 2,371
========
</TABLE>

- ---------------
(1) Fifteen of the wholly owned facilities (Oakton, Leesburg, Warrenton,
Arlington, Bluemont Park (three facilities), Mercer Island, Fairfax,
Frederick, Countryside (two facilities), Gunston, Atrium and Falls Church)
serve as collateral for the GECC Mortgage. Eight other owned facilities are
subject to one or more mortgages or deeds of trust that mature between 1998
and 2033 and bear interest at rates ranging from 6.875% to 8.75% annually
as of June 30, 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
Note 8 of Notes to Consolidated and Combined Financial Statements. All
facilities that are wholly owned by the Company are consolidated in the
Consolidated and Combined Financial Statements. The Village House, Gardner
Park and Raleigh facilities are held by limited liability companies or
limited partnerships in which the Company holds the ownership interests
indicated in the table. The Company is the general partner or managing
member of such entities and through the partnership or operating agreements
and the management agreements for the facilities the Company controls their
ordinary course business operations.

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<PAGE> 37

Therefore, the Village House, Gardner Park and Raleigh facilities are also
consolidated in the Consolidated and Combined Financial Statements. The
ordinary course business operations of the Queen Anne, Towson, Annapolis
and Pikesville facilities are not currently controlled by the Company and,
therefore, are accounted for under the equity method of accounting.

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

(3) Subject to long-term ground lease. See "Certain Transactions."

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

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

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

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

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

(9) Commencing on June 1, 1998, the third-party owner of the remaining
interests in the limited partnership that owns this facility ("the
Partnership") has the right to require the Company to buy the facility from
the Partnership for 112 1/2% of its "appraised fair market value" as
mutually agreed upon by the parties or, if they cannot agree, as determined
by an appraiser mutually selected by the parties. Commencing three years
after the date that the certificate of occupancy is received for the
facility (November 1998 for Annapolis and April 1999 for Pikesville) and
continuing for two years thereafter, the Company has the right to give
written notice to such third-party owner that it desires to buy the
facility from the Partnership for 112 1/2% of its appraised fair market
value. If the Company has not given such notice during such two-year
period, then the Company will be deemed to have given such notice. Such
third-party owner will then give notice either that it consents to such a
sale of the facility or that it does not consent. If the third-party does
not consent to such sale, the management agreement for the facility with
the Company would be extended for an additional seven-year period. After
the expiration of such seven-year period, the third-party would have the
right to require the Company to purchase, and the Company would have the
right to purchase, the facility from the Partnership at 115% of appraised
fair market value. If any person or entity acquires ownership of more than
50% of the outstanding voting stock of the Company (other than the Company,
any subsidiary of the Company, the Founders or any affiliate, associate or
the estate of either Founder), then the put rights held by the third party
owner become immediately exercisable.

(10) On the earlier of the date that this facility has maintained an occupancy
of 84 residents for 30 consecutive days or August 22, 1998, the Company has
the option to purchase all or any part of the third-party interests in the
limited liability company that owns this facility. If the Company's
purchase option is exercised prior to July 28, 1999, the price will be the
greater of (i) $0.8 million, if purchased before July 28, 1997, $1.2
million, if purchased between July 28, 1997 and July 28, 1998, and $1.5
million, if purchased between July 28, 1998 and July 27, 1999; or (ii) the
third party's 50% interest multiplied by the net value of the limited
liability company's business as determined by applying a 12.5%
capitalization rate to the net operating income of the limited liability
company, and subtracting limited liability company liabilities, all as
determined by the accountant regularly employed by the limited liability
company. If Sunrise elects to exercise its option on or after July 28,
1999, the purchase price of the third-party interest shall be determined by
an appraiser mutually agreeable to the parties.

(11) The Company intends to use these facilities as collateral for financing.

(12) This facility is licensed for 24 assisted living residents. The remainder
of the resident capacity is for independent living residents. Excludes 13
units owned by the occupants thereof. The occupants can require the Company
to repurchase the units for their original purchase prices (aggregating
approximately $2.0 million) under certain circumstances. The Company has a
right to purchase the units at fair market value upon the happening of
certain events and has a right of first refusal on sales of the units.

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

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<PAGE> 38

MANAGED FACILITIES

The Company also manages facilities for third-party owners. The following
table sets forth certain information regarding facilities currently being
managed by the Company or for which the Company has entered into development
contracts which provide that the Company will manage the facility following
completion of construction:

<TABLE>
<CAPTION>
SUNRISE CONTRACT
MODEL RESIDENT INITIAL EXPIRATION
FACILITY LOCATION FACILITY CAPACITY CONTRACT DATE DATE
<S> <C> <C> <C> <C> <C>
Woodbury Lake Deptford, NJ 'X' 87 March 1993 June 2001(1)
Mill Run(2) Bristol, PA 186 April 1992 April 1997
Lincolnia(3) Fairfax, VA 84 June 1989 June 1997
John Bertram House Salem, MA 32 June 1994 Oct. 1998
Mount Laurel Mount Laurel, NJ 'X' 90 May 1994(4) July 2021
Boston Boston, MA 139 July 1995(5) Jan. 2002
---
Total 618
======
</TABLE>

- ---------------
(1) This contract is subject to two five-year renewals. Pursuant to the
management agreement, the Company has a right of first refusal to purchase
this facility if the owner receives a bona fide offer to purchase the
facility during the term of the management agreement.

(2) The Company owns $5.4 million carrying value of tax exempt mortgage bonds on
this facility. See Note 5 of Notes to Consolidated and Combined Financial
Statements.

(3) The Company does not provide financial or accounting services for this
facility.

(4) This facility is currently under construction. The Company has entered into
a development contract for this facility which provides that the Company
will begin managing Mt. Laurel for a 25-year period following completion of
construction.

(5) This facility is currently under construction. The Company anticipates this
facility will begin operations on or about December 1997. The Company has
entered into a development contract for this facility which provides that
the Company will begin managing the facility for a three-year period
following completion of construction. This facility is licensed for 139
continuing care retirement community residents.

The Company also manages two skilled nursing facilities, Pembrook and
Prospect Park, located in West Chester and Prospect Park, Pennsylvania. The
Pembrook facility has 240 beds and the Prospect Park facility has 180 beds. Both
of these facilities are owned by a single unaffiliated nonprofit corporation.
The management contracts for these facilities were initially entered into in May
1994 and expire in April 1999. The owner of these facilities has the option to
terminate the management agreements in May 1997. The Company does not provide
financial or accounting services for these facilities.

FACILITY DEVELOPMENT

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

The Company has developed 24 of its Victorian model facilities, 16 of which
it currently owns. During the next three years, the Company plans to develop at
least 55 additional Victorian model facilities with an aggregate capacity of
over 4,950 residents. To date, the Company has obtained zoning approval for 25
new facilities, including 16 facilities currently under construction, and has
contracts to purchase 15 additional sites and to lease two additional sites, and
is currently negotiating purchase terms for 11 additional identified sites.
Historically, the Company has completed all but one of the facilities for which
it has obtained zoning approval. The Company bases its development upon its
"Victorian" model facility that it has developed and refined

38
<PAGE> 39

since the first model facility was designed in 1985. Use of a standard model
allows the Company to control development costs, maintain facility consistency
and improve operational efficiency. Use of the Sunrise model also creates
"brand" awareness in the Company's markets. See "Risk Factors -- Development and
Construction Risks" and "-- Need for Additional Financing."

The primary milestones in the development process are (i) site selection
and contract signing, (ii) zoning and site plan approval and (iii) completion of
construction. Once a market has been identified, site selection and contract
signing typically take approximately one to three months. Zoning and site plan
approval generally take 10 to 12 months and are typically the most difficult
steps in the development process due to the Company's selection of sites in
established communities which usually require site rezoning. Facility
construction normally takes 12 months. The Company believes its extensive
development experience gives it an advantage relative to certain of its
competitors in obtaining necessary governmental approvals and completing
construction in a timely manner. After a facility receives a certificate of
occupancy, residents usually begin to move in immediately. Since 1993, the total
capitalized cost to develop, construct and open a Sunrise model facility,
including land acquisition and construction costs, has ranged from approximately
$5.5 million to $9.2 million. The cost of any particular facility may vary
considerably based on a variety of site-specific factors.

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

39
<PAGE> 40

The following table sets forth certain information regarding Sunrise model
facilities that either are owned and under construction or are subject to
purchase contracts and zoned:

<TABLE>
<CAPTION>
ESTIMATED
DEVELOPMENT COMPLETION RESIDENT OWNERSHIP
FACILITY LOCATION PHASE(1) DATE(2) CAPACITY PERCENTAGE
<S> <C> <C> <C> <C> <C>
Sunrise of Blue Bell Philadelphia, PA Construction 4th Q 1996 97 100.0%
metro region
Sunrise of Columbia Columbia, MD Construction 4th Q 1996 96 100.0
Sunrise of Hunter Mill Hunter Mill, VA Construction 1st Q 1997 96 100.0
Sunrise of Petaluma Petaluma, CA Construction 1st Q 1997 84 100.0(3)(5)
Sunrise of Abington Philadelphia, PA Construction 2nd Q 1997 97 100.0
Building I metro region
Sunrise of Abington Philadelphia, PA Construction 2nd Q 1997 71 100.0
Building II metro region
Sunrise of Granite Run Philadelphia, PA Construction 2nd Q 1997 95 100.0
metro region
Sunrise of Severna Park Severna Park, MD Construction 2nd Q 1997 99 50.0(4)(5)
Building I
Sunrise of Severna Park Severna Park, MD Construction 2nd Q 1997 74 50.0(4)(5)
Building II
Sunrise of Franconia Franconia, VA Construction 2nd Q 1997 98 100.0
Sunrise of Rockville Rockville, MD Construction 3rd Q 1997 86 100.0
Sunrise of Alexandria Alexandria, VA Construction 3rd Q 1997 92 100.0(6)
Sunrise of Old Tappan Old Tappan, NJ Construction 3rd Q 1997 95 100.0
Sunrise of Morris Plains Morris Plains, NJ Construction 3rd Q 1997 95 100.0
Sunrise of Wayne Wayne, NJ Construction 4th Q 1997 90 100.0
Sunrise of Westfield Westfield, NJ Construction 4th Q 1997 95 100.0
Sunrise of Norwood Boston, MA Zoned 2nd half 1997 90 100.0
metro region
Sunrise of North Fulton Atlanta, GA Zoned 2nd half 1997 97 100.0
metro region
Sunrise of Fresno Fresno, CA Zoned 2nd half 1997 84 100.0(3)(5)
Sunrise of Wayland Boston, MA Zoned 2nd half 1997 68 100.0
metro region
Sunrise of East Cobb Atlanta, GA Zoned 2nd half 1997 96 100.0
metro region
Sunrise of Decatur Decatur, GA Zoned 2nd half 1997 96 100.0
Sunrise of Haverford Haverford, PA Zoned 1st half 1998 73 100.0
Sunrise of Glen Cove Glen Cove, NY Zoned 1st half 1998 80 100.0
Sunrise of Cohasset Cohasset, MA Zoned 1st half 1998 71 100.0
-----
Total 2,215
=====
</TABLE>

- ---------------
(1) The Columbia, Blue Bell, Hunter Mill, Alexandria and Rockville facilities
under construction are subject to one or more mortgages or deeds of trust
that mature between April 2001 and April 2003 and bear interest at rates
currently averaging approximately 7.9%. The Abington, Granite Run,
Franconia, Old Tappan, Morris Plains, and Wayne facilities are financed
under one of the Company's credit facilities and are subject to one or more
mortgages or deeds of trust that mature June 2001 and currently bear
interest at a rate of approximately 8.3%.

(2) There can be no assurance that construction delays will not be experienced.
See "Risk Factors -- Development and Construction Risks."

(3) Not a Sunrise model facility. Sunrise has entered into an operating lease
with a third-party owner/developer who will complete the facility under a
design reviewed and approved by Sunrise.

(4) The remaining ownership interests are owned by unaffiliated third parties.
Sunrise is the general partner or managing member of the limited partnership
or limited liability company, respectively, that will lease the facility.

(5) Will be operated under a 15-year operating lease, with two 10-year extension
options.

(6) Subject to a long-term ground lease.

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<PAGE> 41

The Company has entered into purchase contracts for 15 additional sites and
leases for two additional sites in Maryland, Pennsylvania, New Jersey,
Connecticut, New York, Georgia, Colorado, California and Washington. The Company
has completed preliminary feasibility studies and submitted rezoning requests on
14 of such sites and is conducting preliminary feasibility studies on the
remaining sites. The Company's development team is negotiating purchase terms on
11 additional sites identified for development.

FACILITY ACQUISITIONS

The Company and its predecessors have completed 12 acquisitions, including
the five Southeast Properties, five acquisitions of long-term care facilities
which have been repositioned to provide Sunrise assisted living services and two
acquisitions of Sunrise model facilities initially developed for third parties.
During the next three years, the Company plans to acquire up to 10 additional
assisted living facilities or other properties that can be repositioned as
Sunrise assisted living facilities. In evaluating possible acquisitions, the
Company considers, among other factors, (i) location, construction quality,
condition and design of the facility, (ii) current and projected facility cash
flow, (iii) the ability to increase revenue, occupancy and cash flow by
providing a full range of assisted living services, (iv) costs of facility
repositioning (including renovations, if any) and (v) the extent to which the
acquisition will complement the Company's development plans.

COMPANY OPERATIONS

OPERATING STRUCTURE

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

The Company is currently organized into four regions (Mid-Atlantic,
Pennsylvania/New Jersey, New England and Western). Each of the regions is headed
by a Regional Senior Vice President with extensive experience in the long-term
care and assisted living industries. The regional staff typically consists of a
Marketing Specialist, a Resident Care Specialist and a Human Resources
Specialist. The Company's two largest regions also have separate Marketing
Specialists for existing facilities and those in development, an Activities
Specialist, a Regulatory Specialist, a Dietary Specialist and a Maintenance
Specialist. The Company expects that all regions will create similar staff
positions as the number of facilities in those regions increases.

FACILITY STAFFING

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

41
<PAGE> 42

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

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

STAFF EDUCATION AND TRAINING

The Company has attracted, and continues to seek, highly dedicated,
experienced personnel. The Company has adopted formal training procedures and
review and evaluation procedures to help ensure quality care for its residents.
The Company believes that education, training and development enhance the
effectiveness of its employees. All employees are required to complete the
Company's training program, which centers around its proprietary "Five-Star
Educational Program." This program includes a core curriculum consisting of care
basics, Alzheimer's care, resident care procedures and communication skills. For
Care Managers who desire to advance into facility management, the Five-Star
Education Program provides additional training in medical awareness and
management skills. There are also leadership certifications in areas such as
community relations, facility management, recruiting, staffing, human resources
and regulations. Sunrise also has developed an "Administrator-in-Training
("AIT") Program" that places an Administrator trainee in an existing facility to
learn the position based on hands-on experience and direct supervision from a
current Administrator. This program has trained over 30 Administrators since
1985. The AIT Program is intended to ensure that enough Sunrise-trained
professionals will be available to manage acquired and newly developed
facilities.

QUALITY ASSURANCE

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

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

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

Third-Party Reviews. To further evaluate customer service, the Company
engages an independent service evaluation company to "mystery shop" the
Company's facilities. These professionals assess the

42
<PAGE> 43

Company's performance from the perspective of a customer, without the inherent
biases of a Company employee. Each facility is "shopped" at least three times
per year in person, as well as one or more times per month by telephone. To
evaluate medication management, third-party pharmacists conduct periodic reviews
of on-site handling and storage of medications, record-keeping and coordination
of medications.

MARKETING AND SALES

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

Approximately six months prior to opening a facility, the Company opens its
pre-leasing center and begins marketing to referral sources. At that time, the
Company's staff also begins to accept deposits from prospective residents. Since
1993, the Company's new development facilities have been at least 45% preleased
when opened, and such facilities have achieved, on average, 90% occupancy within
10 months or less after opening.

THIRD-PARTY RESIDENT SERVICES

While the Company serves the vast majority of a resident's needs with its
own staff, certain services, such as physician care, infusion therapy, physical
and speech therapy and other home health care services, may be provided to
residents at Sunrise facilities by third parties. Company staff assist residents
in locating qualified providers for such health care services. On October 8,
1996, the Company entered into an affiliation agreement with Jefferson Health
System ("JHS"), an integrated health care system located in Philadelphia,
Pennsylvania, pursuant to which JHS has agreed to provide residents of Sunrise
facilities located in the Philadelphia metropolitan region, on a preferred (but
non-exclusive) basis, with access to certain health care services offered by
JHS. Such health care services may include hospital services, physician
services, rehabilitation services, home health services and products and mental
health services. See "Recent Developments."

COMPETITION

Providers of assisted living and related services compete for residents
primarily on the basis of quality of care, price, reputation, physical
appearance of the facilities, services offered, family and physician preferences
and location. As assisted living receives increased attention, the Company
believes that competition will grow from new local and regional companies that
operate, manage and develop assisted living facilities within the same
geographic areas as the Company. Some of the Company's existing and potential
competitors have significantly greater resources than does the Company. See
"Risk Factors -- Competition."

GOVERNMENT REGULATION

43
<PAGE> 44

levels of resident assistance. In several states in which the Company operates
or intends to operate, assisted living facilities also require a certificate of
need before the facility can be opened. In most states, assisted living
facilities also are subject to state or local building code, fire code and food
service licensure or certification requirements. Like other health care
facilities, assisted living facilities are subject to periodic survey or
inspection by governmental authorities. From time to time in the ordinary course
of business, the Company receives deficiency reports. The Company reviews such
reports and seeks to take appropriate corrective action. Although most
inspection deficiencies are resolved through a plan of correction, the reviewing
agency typically is authorized to take action against a licensed facility where
deficiencies are noted in the inspection process. Such action may include
imposition of fines, imposition of a provisional or conditional license or
suspension or revocation of a license or other sanctions. In March 1996,
Maryland state officials imposed a $3,000 civil money fine against the Company
for survey deficiencies at three Kensington, Maryland facilities formerly
managed by the Company. The Company appealed such fine and in August 1996 paid
$2,000 in settlement of such fine. In May 1996, one of the Pennsylvania nursing
home facilities managed by the Company received notice from the Pennsylvania
Department of Health of a survey report stating that the facility was not in
compliance with the requirements of participation for the Medicare and Medicaid
programs. Therefore, the Pennsylvania agency survey report stated that a civil
monetary penalty of $50 to $3,000 per day would be imposed for the period
beginning March 12, 1996, the date the facility was first alleged to be out of
compliance, until the date the alleged deficiencies were corrected. The owner of
the facility appealed such fine and in October 1996, paid the Health Care
Financing Administration approximately $18,000 in settlement of such fine. Any
failure by the Company to comply with applicable requirements could have a
material and adverse effect on the Company's business, financial condition and
results of operations. Regulation of the assisted living industry is evolving
and the Company's operations could also be adversely affected by, among other
things, future regulatory developments such as mandatory increases in scope and
quality of care to be afforded residents and revisions to licensing and
certification standards. Increased regulatory requirements could increase costs
of compliance with such requirements.

Virginia state and local authorities initiated actions in 1995 alleging
that the Company permitted non-ambulatory residents to reside at the Company's
Gunston and Countryside facilities in violation of state licensure requirements
and the state building code. The Company entered into consent decrees, pursuant
to which it agreed to permit only ambulatory residents to reside at the
facilities until the buildings had been upgraded to meet more stringent fire
code requirements for non-ambulatory residents. During 1995, the Company made
capital improvements to these two facilities at an aggregate cost of
approximately $1.1 million. The Company is awaiting the issuance of new licenses
that would enable non-ambulatory residents to reside at these facilities. During
1995, the Company also relocated non-ambulatory residents from another
Company-owned facility in Virginia whose license prohibits non-ambulatory
residents. In 1995, a local Maryland housing agency, citing a number of factors,
including a desire to seek competitive pricing bids, consideration of other uses
for the property and past survey results, advised the Company that it intended
to put the management contract for the Kensington facilities out for bid when
the existing management contract with the Company expired. The management
contract has been awarded to a third party effective September 1, 1996.

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

44
<PAGE> 45

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

EMPLOYEES

At June 30, 1996, the Company had 1,877 employees, including 1,208
full-time employees, of which 86 were employed at the Company's headquarters.
The Company believes employee relations are very good.

LEGAL PROCEEDINGS

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

45
<PAGE> 46

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information concerning each of the
Company's directors and executive officers:

<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
<S> <C> <C>
Paul J. Klaassen(1)......................... 39 Chairman of the Board of Directors, President
and Chief Executive Officer
Teresa M. Klaassen(1)....................... 41 Executive Vice President, Secretary and
Director
David W. Faeder(1).......................... 40 Executive Vice President, Chief Financial
Officer and Director
Timothy S. Smick............................ 45 Executive Vice President, Chief Operating
Officer and Director
Thomas B. Newell............................ 39 Executive Vice President and General Counsel
of the Company and President of Sunrise
Development, Inc.
Brian C. Swinton............................ 51 Executive Vice President, Sales and Marketing
Ronald V. Aprahamian(2)(3)(4)............... 50 Director
Thomas J. Donohue(2)(3)(4).................. 57 Director
Richard A. Doppelt(4)....................... 41 Director
Scott F. Meadow(2)(3)....................... 42 Director
Darcy J. Moore.............................. 39 Director
</TABLE>

- ---------------
(1) Member of the Executive Committee.

(2) Member of the Stock Option Committee.

(3) Member of the Compensation Committee.

(4) Member of the Audit Committee.

Messrs. Doppelt and Meadow and Ms. Moore have been designated as Series A
directors, Messrs. Aprahamian and Donohue have been designated as non-management
directors and Messrs. Klaassen and Faeder and Ms. Klaassen have been designated
as management directors, pursuant to the Stockholders' Agreement dated as of
January 4, 1995 among the Company, Paul J. Klaassen, Teresa M. Klaassen and the
Series A Investors (the "Stockholders' Agreement"). The Stockholders' Agreement
terminated upon completion of the Company's initial public offering.

Paul J. Klaassen, a co-founder of the Company, has served as Chairman of
the Board, President and Chief Executive Officer since 1981. Mr. Klaassen is the
founding Chairman of the Assisted Living Facilities Association of America
("ALFAA"), the largest assisted living industry trade association. Mr. Klaassen
also serves on the editorial advisory boards of Contemporary Long Term Care,
Retirement Housing Report, Assisted Living Today and Assisted Living Briefing
magazines.

Teresa M. Klaassen, a co-founder of the Company, has served as a director
and Executive Vice President and Secretary since 1981. Ms. Klaassen is a
founding member of ALFAA and currently serves on the boards of directors of
several long-term care organizations.

David W. Faeder has served as a director, Executive Vice President and
Chief Financial Officer since 1993. From 1991 to 1993, Mr. Faeder was a Vice
President of CS First Boston Corporation, serving in both the investment banking
and fixed income departments. From 1984 to 1991, Mr. Faeder served as a Vice
President of Morgan Stanley, where he worked in the Real Estate Capital Markets
Group.

Timothy S. Smick has served as Executive Vice President and Chief Operating
Officer of the Company since February 1996 and was appointed as a director of
the Company in October 1996. From 1994 to 1996, Mr. Smick was a senior housing
consultant to LaSalle Advisory, Ltd., a pension fund advisory company. From

46
<PAGE> 47

1984 to 1994, Mr. Smick was the Chairman and Chief Executive Officer of
PersonaCare, Inc., a company which he co-founded and which provided subacute,
skilled nursing and assisted living care. From 1979 to 1981, Mr. Smick was the
Regional Operations Director for Manor Healthcare, a division of ManorCare,
Inc., a long-term care company.

Thomas B. Newell has served as Executive Vice President and General Counsel
of the Company and President of Sunrise Development, Inc. since January 1996.
From 1989 to January 1996, Mr. Newell was a partner with the law firm of Watt
Tieder & Hoffar, where his practice concentrated on all aspects of commercial
and real estate development transactions and where he represented the Company
for more than five years.

Brian C. Swinton joined the Company as Executive Vice President, Sales and
Marketing, on May 31, 1996. From January 1994 to April 1996, Mr. Swinton was a
Senior Vice President of Forum Group, Inc., a developer and operator of
retirement communities and assisted living facilities, where his
responsibilities included marketing, sales and product development. From 1986 to
1994, Mr. Swinton served as Vice President, Sales, Marketing and Product
Development at Marriott International, where he was responsible for designing,
developing, marketing and the initial operations of the Brighton Gardens
assisted living concept.

Ronald V. Aprahamian has been a director of the Company since February
1995. Mr. Aprahamian has been Chairman of the Board of The Compucare Company, a
health care information technology company, since 1988. He served as Chief
Executive Officer of Compucare from 1988 until 1996. Mr. Aprahamian also is a
director of Metrocall, Inc., a paging company.

Thomas J. Donohue has been a director of the Company since February 1995.
Mr. Donohue has been the President and Chief Executive Officer of the American
Trucking Association, the national trade organization of the trucking industry
since 1984. Mr. Donohue is a director of: the National Football League Alumni
Association; IPAC, an international consulting firm; Newmyer Associates, a
Washington, D.C. firm that tracks and analyzes public policy; and the Hudson
Institute. In addition, Mr. Donohue served on the President's Commission on
Intermodal Transportation.

Richard A. Doppelt has been a director of the Company since January 1995.
Mr. Doppelt is Venture Group Manager of Allstate Venture Capital, a division of
Allstate Insurance Company. He has been a member of Allstate Venture Capital
since 1987. Prior to joining Allstate, he practiced as a corporate attorney with
the law firm of Morrison & Foerster. Mr. Doppelt is a director of several
privately held companies.

Scott F. Meadow has been a director of the Company since February 1996. Mr.
Meadow also served as a director of the Company from December 1994 to August
1995. Mr. Meadow has been a Vice President of The Sprout Group, the venture
capital division of DLJ Capital Corporation, since February 1996. From 1992 to
1995, Mr. Meadow was a General Partner of Frontenac Company, a venture capital
firm. From 1982 to 1992, he was a general partner of William Blair Venture
Partners, a venture capital firm. Mr. Meadow is a director of several privately
held companies.

Darcy J. Moore has been a director of the Company since February 1996. Ms.
Moore has been a General Partner of Frontenac Company, a venture capital firm,
since 1992. From 1990 to 1992, Ms. Moore served as an Associate of the venture
capital firm of William Blair Venture Partners. Ms. Moore is a director of:
Healthcare Resource Management, Inc., a radiology services company; EMC Squared,
a health care demand management company; and ElderHealth, Inc., an elder care
company.

The Board of Directors is divided into three classes, each consisting of
approximately one-third of the total number of directors. There are currently
nine directors. Class I directors, consisting of Messrs. Klaassen, Doppelt and
Smick, will hold office until the 1998 annual meeting of stockholders; Class II
directors, consisting of Ms. Klaassen, Ms. Moore and Mr. Aprahamian, will hold
office until the 1999 annual meeting of stockholders; and Class III directors,
consisting of Messrs. Faeder, Meadow and Donohue will hold office until the 1997
annual meeting of stockholders. Paul J. Klaassen and Teresa M. Klaassen are
husband and wife. No other family relationship exists among the Company's
directors and officers.

47
<PAGE> 48

COMMITTEES OF THE BOARD OF DIRECTORS

Executive Committee. The members of the Executive Committee are Messrs.
Klaassen and Faeder and Ms. Klaassen. The Executive Committee has been delegated
all of the powers of the Board of Directors to the extent permitted under the
Delaware General Corporation Law.

Audit Committee. The members of the Audit Committee are Messrs.
Aprahamian, Donohue and Doppelt, all of whom are non-employee directors. The
Audit Committee, among other things, makes recommendations concerning the
engagement of independent auditors, reviews the results and scope of the annual
audit and other services provided by the Company's independent auditors and
reviews the adequacy of the Company's internal accounting controls.

Compensation Committee. The members of the Compensation Committee are
Messrs. Donohue, Aprahamian and Meadow, all of whom are non-employee directors.
The Compensation Committee makes recommendations to the full Board of Directors
concerning salary and bonus compensation and benefits for executive officers of
the Company.

Stock Option Committee. The members of the Stock Option Committee are
Messrs. Aprahamian, Meadow and Donohue, all of whom are non-employee directors.
The Stock Option Committee has the power and authority to take all actions and
make all determinations under the Company's 1995 and 1996 Stock Option Plans,
including the grant of options thereunder.

COMPENSATION OF DIRECTORS

Non-employee directors are reimbursed for expenses actually incurred in
connection with attending meetings of the Board of Directors. In 1995, Messrs.
Aprahamian and Donohue each received a grant of a ten-year non-incentive stock
option for 6,666 shares of Common Stock at an exercise price of $3.00 per share,
which vested upon completion of the Company's initial public offering. In 1996,
they each received grants of ten-year non-incentive stock options for 3,334
shares of Common Stock at an exercise price of $10.50 per share, which also
vested upon completion of the Company's initial public offering, and 15,000
shares of Common Stock at an exercise price of $20.00 per share, which will vest
one-third on each anniversary date thereof.

1996 DIRECTORS' STOCK OPTION PLAN

Any director who is a member of the Board of Directors who is not an
officer or employee of the Company or any of its subsidiaries (other than a
Series A director) is eligible to receive options under the Company's 1996
Directors' Stock Option Plan (the "Director Plan"). An aggregate of 50,000
shares of Common Stock are reserved for issuance to participants under the
Director Plan. Each non-employee director whose commencement of service is after
April 25, 1996, the effective date of the Director Plan, and before termination
of the Plan shall be granted an initial option, as of the date of the director's
commencement of service, to purchase 10,000 shares of Common Stock. An
additional option to purchase 5,000 shares of Common Stock will be granted
immediately after each subsequent annual meeting of the Company's stockholders
(commencing with the 1997 annual meeting) occurring before the Director Plan
terminates to each non-employee director who is then serving on the Board. In
the event of any changes in the Common Stock by reason of stock dividends,
split-ups, recapitalizations, mergers, consolidations, combinations or other
exchanges of shares and the like, appropriate adjustments will be made by the
Board of Directors to the number of shares of Common Stock available for
issuance under the Director Plan, the number of shares subject to outstanding
options and/or the exercise price per share of outstanding options.

Options granted under the Director Plan give the option holder the right to
purchase Common Stock at a price fixed in the stock option agreement executed by
the option holder and the Company at the time of grant. The option exercise
price will not be less than the fair market value of a share of Common Stock on
the date the option is granted. "Fair market value" for purposes of the Director
Plan generally will be equal to the closing price for the Common Stock on the
day prior to the date of grant. The period for exercising an option begins six
months after the option is granted and generally ends ten years from the date
the option is granted.

48
<PAGE> 49

Options granted under the Director Plan vest immediately. All options to be
granted under the Director Plan will be non-incentive stock options.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During fiscal 1995, Messrs. Aprahamian, Donohue and Meadow served on the
Compensation Committee. In 1993, Mr. Donohue, jointly with his wife, made a
capital contribution of $500,000 in exchange for a 30% membership interest in
Sunrise Village House LLC, a limited liability company (the "LLC") that owns the
Village House facility. At that time, the Company owned a 50% membership
interest in, and was the managing member of, the LLC, and managed the facility
pursuant to a management contract that expires in 2003. Distributions made by
the LLC to the Donohues in 1993, 1994 and 1995 aggregated $18,700, $35,616 and
$40,295, respectively. On May 28, 1996, the Company purchased the Donohues' 30%
interest in the LLC in exchange for 52,500 shares of Common Stock. The purchase
price was determined based on a valuation of the facility prepared by the
Company based primarily upon a capitalization of net operating income from the
facility. The Donohues have incidental registration rights with respect to their
shares. On January 4, 1995 and on January 14, 1996, DLJ Capital Corporation and
Sprout Growth II, L.P. (entities affiliated with Mr. Meadow) purchased an
aggregate of 733,333 shares of Series A Convertible Preferred Stock at $9.00 per
share and an aggregate of 300,000 shares of Series B Exchangeable Preferred
Stock at $10.00 per share, respectively. The Series A Convertible Preferred
Stock converted into an equal number of shares of Common Stock upon completion
of the Company's initial public offering and the Series B Preferred Stock was
redeemed by the Company for $10.00 per share (plus any accrued but unpaid
dividends) with a portion of the net proceeds of the initial public offering.

The Company has entered into a Registration Agreement with the Series A
Investors. For a description of the terms of the Registration Agreement, see
"Description of Capital Stock -- Registration Rights."

Scott F. Meadow, a director of the Company, is an executive officer of The
Sprout Group, the venture capital division of DLJ Capital Corporation. DLJ
Capital Corporation, a Selling Stockholder in the Offering, is an affiliate of
DLJ, the lead managing underwriter of the Offering. See "Underwriting."

49
<PAGE> 50

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth certain summary information concerning the
compensation paid to the Company's Chief Executive Officer and each of the other
two most highly compensated executive officers whose salary exceeded $100,000 in
1995 for services rendered in all capacities to the Company for fiscal 1995. The
table also sets forth certain summary information concerning the compensation
rate for three other individuals who became executive officers subsequent to
fiscal 1995. All of the executive officers named below are referred to herein as
the "named executive officers."

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION/
AWARD
------------
SHARES OF
ANNUAL COMPENSATION COMMON STOCK
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) SALARY OPTIONS(1) COMPENSATION(2)
<S> <C> <C> <C>
Paul J. Klaassen........................... $ 200,000 -- $ 2,310
Chairman of the Board, President and
Chief Executive Officer
Teresa M. Klaassen......................... 100,000 -- 1,818
Executive Vice President and Secretary
David W. Faeder............................ 175,000 491,667 2,310
Executive Vice President and Chief
Financial Officer
Timothy S. Smick(3)........................ 175,000 166,667 --
Executive Vice President and Chief
Operating Officer
Thomas B. Newell(4)........................ 175,000 155,002 --
Executive Vice President and General
Counsel of the Company and President of
Sunrise Development, Inc.
Brian C. Swinton(5)........................ 165,000 120,000 --
Executive Vice President, Sales and
Marketing
</TABLE>

- ---------------
(1) Includes options granted through May 1996.

(2) Represents matching contributions made by the Company under its 401(k) plan.

(3) Mr. Smick joined the Company in February 1996. Salary information shown for
Mr. Smick is for 1996.

(4) Mr. Newell joined the Company in January 1996. Salary information shown for
Mr. Newell is for 1996.

(5) Mr. Swinton joined the Company in May 1996. Salary information shown for Mr.
Swinton is for 1996.

50
<PAGE> 51

OPTION GRANTS

The following table sets forth certain information concerning the grant of
options to purchase Common Stock to each of the named executive officers.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POTENTIAL REALIZABLE
SHARES OF TOTAL VALUE AT ASSUMED
COMMON OPTIONS ANNUAL RATES OF STOCK
STOCK GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION ------------------------
NAME AND PRINCIPAL POSITION(S) GRANTED(1) YEAR ($/SH) DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
David W. Faeder................. 450,000(2) 26.3% $ 8.00 01/04/05 $2,264,021 $5,737,473
Executive Vice President and 16,666(3) 1.0 10.50 02/15/06 110,052 278,898
Chief Financial Officer 25,000(4) 1.5 20.00 05/30/06 314,445 796,870
Timothy S. Smick................ 141,666(3) 8.3 10.50 02/15/06 935,476 2,370,681
Executive Vice President and 25,000(4) 1.5 20.00 05/30/06 314,445 796,870
Chief Operating Officer
Thomas B. Newell................ 3,333 0.2 3.00 05/15/05 6,288 15,936
Executive Vice President and 63,333 3.7 7.50 11/19/05 298,723 757,024
General Counsel of the 63,333(3) 3.7 10.50 02/15/06 418,212 1,059,833
Company and President of 25,000(4) 1.5 20.00 05/30/06 314,445 796,870
Sunrise Development, Inc.
Brian C. Swinton................ 120,000(5) 7.0 20.00 05/30/06 1,509,338 3,824,976
Executive Vice President,
Sales
and Marketing
</TABLE>

- ---------------
(1) All options included in this table vested 25% on June 5, 1996 and 25% on
each of the next three anniversary dates thereof, except as otherwise
indicated. The vesting of Mr. Newell's options accelerate in the event of
involuntary termination of employment (other than for cause).

(2) See "-- Non-Plan Stock Option Grant" for the terms of 450,000 of Mr.
Faeder's options.

(3) Granted in February 1996.

(4) Granted in May 1996, 100% of which are vested.

(5) Granted in May 1996.

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<PAGE> 52

FISCAL YEAR-END VALUES OF STOCK OPTIONS

The following table sets forth certain information concerning the fiscal
year-end value of unexercised stock options held by the named executive
officers. None of the named executive officers exercised any options during
fiscal 1995.

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS(1) IN-THE-MONEY OPTIONS(2)
-------------------------------- -----------------------------
NAME EXERCISABLE(3) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
David W. Faeder........................ 404,166 87,501 $ 6,156,241 $ 1,368,764
Timothy S. Smick....................... 60,416 106,251 578,116 1,434,389
Thomas B. Newell....................... 57,499 97,503 592,483 1,477,551
Brian C. Swinton....................... 30,000 90,000 120,000 360,000
</TABLE>

- ---------------
(1) Includes options granted in February and May 1996.

(2) There was no public trading market for the Common Stock at December 31,
1995. These values have been calculated on the basis of the price to the
public of $24 per share, less the applicable exercise price, multiplied by
the number of shares underlying such options.

(3) If the Underwriters' over-allotment option is exercised, Messrs. Faeder,
Smick and Newell will sell up to 150,000 shares, 33,333 shares, and 20,000
shares, respectively, in the Offering. See "Principal and Selling
Stockholders."

FEBRUARY 1996 OPTION GRANTS

On February 15, 1996 and February 29, 1996, the Company granted a total of
327,000 stock options at an exercise price of $10.50 per share. The Company
believes that these options were granted at no less than fair market value.
Accordingly, no compensation expense was recorded for these options. Subsequent
to the date of the grants, the Company negotiated a loan modification with GECC,
pursuant to which GECC agreed to accept a prepayment, payable upon consummation
of the Company's initial public offering, of $8.6 million for its 25%
participation interest in the cash flow and increase in value of the SALLP
Properties. GECC also agreed to a reduction in the interest rate on the floating
rate portion of the GECC Mortgage from LIBOR plus 5.75% to LIBOR plus 3.75%, in
exchange for an $8.0 million prepayment of the variable rate portion of the GECC
Mortgage payable upon consummation of the Company's initial public offering. Had
the Company entered into the GECC loan modification effective January 1, 1995,
GECC mortgage interest expense for 1995 would have been approximately $7.8
million compared to $15.6 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Company believes that the
fair market value of its Common Stock significantly increased as a result of the
loan modification completed on May 1, 1996 because it eliminated the uncertainty
and the financial impact of GECC's 25% participation interest in cash flow and
property appreciation. In addition, the market price for publicly traded
assisted living companies increased significantly following the February 1996
grant dates. Due to these factors, if the February 1996 options had been granted
at an exercise price of $10.50 per share subsequent to the GECC loan
modification and the increase in the market prices of comparable publicly traded
companies, they would have been deemed compensatory in an amount reflecting the
difference between the mid-point of the initial public offering price range,
discounted by approximately 25%, and the exercise price of the options. The
Company believes that approximately a 25% discount to the mid-point of the range
would be appropriate given the Company's status as a private company until
completion of the Company's initial public offering and, among other factors:
(i) the Founders' continued ownership of 100% of the Common Stock; (ii) the
mandatory redemption features, dividend preferences and other rights of the
Series A investors which continued until completion of the Company's initial
public offering; (iii) illiquidity of the Common Stock subject to the options;
(iv) option vesting and exercise conditions; (v) risk associated with completion
of the Company's initial public offering; and (vi) market pricing uncertainties.

52
<PAGE> 53

1995 STOCK OPTION PLAN

The Sunrise Assisted Living, Inc. 1995 Stock Option Plan, as amended (the
"1995 Stock Option Plan"), provides for the granting of options to acquire
Common Stock, which may be either incentive stock options (an "ISO") or
nonqualified stock options (an "NSO"). The 1995 Stock Option Plan is
administered by the Stock Option Committee of the Board of Directors, and all
full-time employees or any other individual (including non-employee directors
of, or consultants or advisors providing bona fide services to, the Company)
whose participation in the 1995 Stock Option Plan is determined by the 1995
Stock Option Committee to be in the best interests of the Company are eligible
to receive option grants thereunder. The 1995 Stock Option Plan does not have a
termination date, but a grant of an ISO may not occur 10 years after the
effective date of the 1995 Stock Option Plan. Receipt of option grants under the
1995 Stock Option Plan is contingent upon the execution by each prospective
option holder of an agreement in such form as the Stock Option Committee will
from time to time determine.

The 1995 Stock Option Plan provides for the grant of options to purchase up
to 1,298,065 shares of Common Stock. The purchase price per share of Common
Stock subject to an Option is fixed by the Stock Option Committee when the
option is granted. Options to purchase no more than 250,000 shares of Common
Stock may be granted to any one eligible individual during the first 10 years
after the effective date of the 1995 Stock Option Plan and 50,000 shares per
year thereafter. The terms of options granted under the 1995 Stock Option Plan,
including the vesting provisions of such options, are established at the time of
grant. No person may receive any ISO if, at the time of grant, such person owns
directly or indirectly more than 10% of the total combined voting power of the
Company unless the option price is at least 110% of the fair market value of the
Common Stock and the exercise period of such ISO is by its terms limited to five
years. There is also a $100,000 limit on the value of Common Stock (determined
at the time of grant) covered by ISOs that first become exercisable by an
optionee in any calendar year. No option granted to a reporting person under
Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act") may be
exercisable during the first six months after the date of grant.

Payment for shares purchased under the 1995 Stock Option Plan may be made:
(i) in cash or in cash equivalents; (ii) if permitted by the option agreement,
by exchanging shares of Common Stock with a fair market value equal to or less
than the total option price plus cash for any difference; (iii) if permitted by
the option agreement, by delivery of a promissory note of the person exercising
the option; (iv) if permitted by the option agreement, by causing the Company to
withhold shares of Common Stock otherwise issuable pursuant to the exercise of
an option equal in value to the exercise price; or (v) by a combination of the
foregoing. Payment in full of the option price need not accompany the written
notice of exercise provided the notice directs that the stock certificate for
the shares for which the option is exercised be delivered to a licensed broker
acceptable to the Company as the agent for the individual exercising the option
and, at the time such stock certificate is delivered, the broker tenders to the
Company cash (or cash equivalents acceptable to the Company) equal to the option
price.

In the event of stock splits, stock dividends, recapitalizations,
combinations of shares or certain other events, the 1995 Stock Option Plan
provides for adjustment of: (i) the number of shares available for option
grants, including the maximum number of shares that may be granted to any one
individual, and (ii) the number of shares and the per share exercise price for
shares subject to unexercised options. Upon any dissolution or liquidation of
the Company, the sale of substantially all of the Company's assets, a merger,
reorganization or consolidation in which the Company is not the surviving
corporation or any other transaction (including, without limitation, a merger or
reorganization in which the Company is the surviving corporation) approved by
the Board which results in any person or entity owning 80% or more of the total
combined voting power of all classes of stock of the Company, the Stock Option
Plan and the options issued thereunder will terminate, unless provision is made
in connection with such transaction for the continuation of the plans and/or the
assumption of the options or for the substitution for such options of new
options covering the stock of a successor corporation or a parent or subsidiary
thereof, with appropriate adjustment as to the number and kinds of shares and
the per share exercise price.

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<PAGE> 54

Options granted under the Stock Option Plan are non-transferable except by
will or by the laws of descent and distribution upon the death of the option
holder, with the exception (other than, unless permissible under Rule 16b-3, an
optionee who is, or during the preceding six months has been, a reporting person
under Section 16 of the Exchange Act) of certain allowable transfers to such
holder's family members or to a trust established and maintained for the benefit
of such holder or such holder's family members.

Options granted to date under the 1995 Stock Option Plan generally
terminate: (i) upon termination of employment for any reason (to the extent the
option has not vested); (ii) upon termination of employment for cause (whether
or not the option has vested); (iii) one year after termination of employment
due to death or disability (to the extent the option has vested); and (iv) three
months after the optionee's termination of employment other than for cause,
death or disability (to the extent the option has vested). The Board of
Directors may terminate or amend the 1995 Stock Option Plan at any time;
provided, however, that any amendment by the Board which, if not approved by the
Company's stockholders in accordance with applicable requirements of Rule 16b-3,
would cause the Plan to not comply with Rule 16b-3 (or any successor rule or
other regulatory requirements) or the Internal Revenue Code of 1986, as amended,
shall not be effective unless approved by the affirmative vote of stockholders
who hold more than 50% of the combined voting power of the outstanding shares of
voting stock of the Company present or represented, and entitled to vote thereon
at a duly constituted stockholders' meeting.

1996 STOCK OPTION PLAN

In October 1996, the Board of Directors adopted The Sunrise Assisted
Living, Inc. 1996 Stock Option Plan, as amended (the "1996 Stock Option Plan"),
subject to stockholder approval at the 1997 annual meeting of stockholders. The
1996 Stock Option Plan provides for the grant of options to purchase up to
1,500,000 shares of Common Stock. The purchase price per share of Common Stock
subject to an option is fixed by the Stock Option Committee when the option is
granted. Options to purchase no more than 250,000 shares of Common Stock may be
granted to any one eligible individual during the first 10 years after the
effective date of the 1996 Stock Option Plan and 50,000 shares per year
thereafter. Other terms and provisions of the 1996 Stock Option Plan are
substantially the same as the 1995 Stock Option Plan.

NON-PLAN STOCK OPTION GRANT

The Company has granted 450,000 non-qualified stock options outside of the
1995 Stock Option Plan to David W. Faeder pursuant to a Stock Option Agreement,
as amended, effective as of January 4, 1995 (the "Faeder Option Agreement"). The
exercise price of such non-plan options is $8.00 per share. The fair market
value of the Common Stock on January 4, 1995 was estimated to be $3.00 per
share. Such non-plan options vest as follows: 375,000 shares are currently
exercisable and options for 75,000 shares become exercisable when the Common
Stock price reaches $30.00 per share or there is a merger, consolidation or any
sale of all or substantially all of the assets of the Company that requires the
consent or vote of the holders of Common Stock (a "Fundamental Change") or upon
any liquidation, dissolution or winding up of the Company (a "Liquidation"). All
of such options vest in accordance with the foregoing whether or not Mr. Faeder
is employed by the Company at the time of vesting, subject to forfeiture as
described in the following paragraph; provided, however, with respect to a
Fundamental Change or Liquidation, Mr. Faeder must be employed by the Company on
the date of such Fundamental Change or Liquidation in order for vesting to
occur. In any case, all options become exercisable in approximately five years,
when Mr. Faeder reaches age 45, if he has been continuously providing services
to the Company since the date of the Faeder Option Agreement.

In general, Mr. Faeder's non-plan options expire 10 years after the date of
grant and are non-transferable except in the event of death or disability. If
Mr. Faeder's employment with the Company terminates by reason of death or
permanent and total disability, his non-plan options, whether or not then
exercisable, may be exercised within five years after such death or disability.
If Mr. Faeder's employment is terminated for "cause" (as defined in the Faeder
Option Agreement) by the Company or voluntarily by Mr. Faeder without "good
reason" (as defined in the Faeder Option Agreement), the non-plan options are
forfeited. Termination of Mr. Faeder's employment by the Company without cause
or voluntarily by Mr. Faeder for good reason does not result in forfeiture of
his non-plan options.

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<PAGE> 55

Mr. Faeder's non-plan options contain provisions providing for adjustment
of the number of shares and the per share exercise price for shares subject to
unexercised options in connection with certain changes in the outstanding
shares, such as a recapitalization.

401(K) PLAN

The Company has adopted a contributory retirement plan (the "401(k) Plan")
for its employees age 21 and over with at least one year of service to the
Company. The 401(k) Plan is designed to provide tax-deferred income to the
Company's employees in accordance with the provisions of Section 401(k) of the
Internal Revenue Code of 1986, as amended (the "Code"). The 401(k) Plan provides
that each participant may contribute up to 16% of his or her salary (not to
exceed the annual statutory limit). The Company makes a matching contribution to
each participant's account equal to 25% of such participant's contribution up to
7% of such participant's annual compensation. Matching contributions made by the
Company in 1995 totaled $80,198. Upon death, disability, retirement or other
termination of employment, participants may elect to receive periodic or lump
sum distributions from the 401(k) Plan. Participants also may make withdrawals
from the 401(k) Plan in cases of demonstrated hardship.

55
<PAGE> 56

CERTAIN TRANSACTIONS

The Company leases certain real property on which the Fairfax facility is
located from Teresa M. Klaassen and Paul J. Klaassen pursuant to a 99-year
ground lease dated June 5, 1986 (the "Ground Lease"). The Ground Lease provides
for monthly rent of $21,272, as adjusted annually based on the Consumer Price
Index. Annual rent expense under the ground lease for 1993, 1994 and 1995 was
$241,896, $248,496 and $255,258, respectively. The Company has subleased
approximately 50% of the property subject to the Ground Lease to Sunrise
Foundation, Inc., a not-for-profit organization operated by the Founders
("Sunrise Foundation"), which operates a school and day care center on the
property. The sublease terminates upon expiration of the Ground Lease and
provides for monthly rent equal to 50% of all of the rent payable under the
Ground Lease. Sunrise Foundation also reimburses the Company for use of office
facilities and support services. Reimbursements for the years ended December 31,
1993, 1994 and 1995 were $60,000 for each year. The Company believes that, at
the time entered into, the terms of the lease and sublease were no less
favorable to the Company than those which it could have obtained from an
unaffiliated third party.

The Founders lease certain real property located in Fairfax County,
Virginia for use as a residence pursuant to a 99-year ground lease with the
Company entered into in June 1994. The rent is $1.00 per month. This property is
part of a parcel, which includes the Oakton facility, that was transferred by
the Founders to the Company in connection with obtaining the GECC Mortgage.
Rather than attempting to subdivide the parcel, which would have caused a
significant delay in consummation of that transaction, the Company agreed to
lease the Founders' residence back to them as a condition to the transfer of the
property.

In connection with the Contribution Transaction, in 1995 the Sunrise
Entities made distributions aggregating $9.6 million to, and the Company assumed
$1.4 million of indebtedness (representing the discounted value of $2.1 million
of interest-free indebtedness) of, the Founders. A portion of the cash
distributions is expected to be used to pay tax liabilities incurred by the
Founders in the Contribution Transaction. See Note 1 of Notes to Consolidated
and Combined Financial Statements. In 1996, one of the Sunrise Entities made an
additional $390,000 distribution to the Founders relating to prior period net
income. Immediately prior to the Contribution Transaction in 1994, Sunrise
Entities made distributions totaling $5.9 million to the Founders. See "The
Company and its Predecessors."

Sunrise Terrace, Inc., a wholly owned subsidiary of the Company, made
various advances to the Founders in 1993 and 1994. The largest amount
outstanding in 1993 was $954,000 and in 1994 was $1.2 million. The Founders
repaid such advances in full in 1994.

In 1993, Thomas J. Donohue, a director of the Company, jointly with his
wife, made a capital contribution of $500,000 in exchange for a 30% membership
interest in Sunrise Village House LLC, a limited liability company (the "LLC")
that owns the Village House facility. Distributions made by the LLC to the
Donohues in 1993, 1994 and 1995 aggregated $18,700, $35,616 and $40,295,
respectively. In May 1996, the Company purchased the Donohues' 30% interest in
the LLC in exchange for 52,500 shares of Common Stock. The purchase price was
determined based on a valuation of the facility prepared by the Company based
primarily upon a capitalization of net operating income from the facility. The
Donohues have incidental registration rights with respect to their shares.

The table below sets forth (i) the number of shares of Series A Convertible
Preferred Stock issued by the Company for $9.00 per share on January 4, 1995 and
(ii) the number of shares of Series B Exchangeable Preferred Stock issued by the
Company for $10.00 per share on January 19, 1996, to certain entities affiliated
with directors of the Company (the "Series A Investors"). In June 1996 upon
completion of the Company's

56
<PAGE> 57

initial public offering, the Series A Convertible Preferred Stock converted
automatically into an equal number of shares of Common Stock and the Series B
Exchangeable Preferred Stock was redeemed by the Company for $10.00 per share
(plus accrued but unpaid dividends).

<TABLE>
<CAPTION>
PRIOR TO CONVERSION OF
SERIES A PREFERRED STOCK AND
REDEMPTION OF SERIES B
PREFERRED STOCK
----------------------------
NUMBER OF NUMBER OF REDEMPTION
SHARES OF SHARES OF PRICE PAID TO
SERIES A SERIES B HOLDERS OF
PREFERRED PREFERRED SERIES B
ENTITY/DIRECTOR STOCK(1) STOCK PREFERRED STOCK
<S> <C> <C> <C>
Allstate Insurance Company and affiliated entities/
Richard A. Doppelt................................... 977,778 400,000 $ 4,066,000
DLJ Capital Corporation and Sprout Growth II, L.P./
Scott F. Meadow...................................... 733,333 300,000 3,049,500
Frontenac VI Limited Partnership/
Darcy J. Moore....................................... 733,333 300,000 3,049,500
</TABLE>

- ---------------
(1) See "Principal and Selling Stockholders" for a description of the beneficial
ownership of the shares of Common Stock issued on June 5, 1996 upon
conversion of the Series A Convertible Preferred Stock and the number of
shares being sold by the Series A Investors in the Offering.

The Company has entered into a Registration Agreement with the Series A
Investors and the Founders. For a description of the terms of the Registration
Agreement, see "Description of Capital Stock -- Registration Rights."

Scott F. Meadow, a director of the Company, is an executive officer of The
Sprout Group, a venture capital division of DLJ Capital Corporation. DLJ Capital
Corporation is an affiliate of DLJ, the lead managing underwriter of the
Offering. See "Underwriting."

The Company has adopted a policy that all future transactions between the
Company and its executive officers, directors and other affiliates must be (i)
approved by a majority of the members of the Board of Directors and by a
majority of the disinterested members of the Board of Directors and (ii) on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties.

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<PAGE> 58

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of September 30, 1996 and as
adjusted to reflect the sale of the shares offered hereby, by (i) each person
known by the Company to be the beneficial owner of more than five percent of the
Common Stock; (ii) each director of the Company; (iii) each named executive
officer of the Company; and (iv) all executive officers and directors of the
Company as a group:

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1) AFTER OFFERING(1)
-------------------- NUMBER OF SHARES --------------------
NAME NUMBER PERCENT BEING OFFERED NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
Paul J. Klaassen(2).................... 5,164,475 36.2% -- 5,164,475 28.3%
Teresa M. Klaassen(2).................. 5,164,475 36.2 -- 5,164,475 28.3
David W. Faeder(2)(3).................. 404,166 2.8 -- 404,166 2.2
Timothy S. Smick(2)(4)................. 65,916 * -- 65,916 *
Thomas B. Newell(2)(5)................. 57,499 * -- 57,499 *
Brian C. Swinton(2)(6)................. 30,000 * -- 30,000 *
Ronald V. Aprahamian(7)................ 65,000 * -- 65,000 *
Thomas J. Donohue(8)................... 77,500 * -- 77,500 *
Richard A. Doppelt(9).................. 977,778 6.9 250,000 727,778 4.0
Scott F. Meadow(10).................... 733,333 5.1 375,000 358,333 2.0
Darcy J. Moore(11)..................... 733,333 5.1 375,000 358,333 2.0
Allstate Insurance Company(12)......... 977,778 6.9 250,000 727,778 4.0
DLJ Capital Corporation(13)............ 733,333 5.1 375,000 358,333 2.0
Frontenac VI Limited Partnership(14)... 733,333 5.1 375,000 358,333 2.0
Sprout Growth II, L.P.(15)............. 667,161 4.7 341,162 325,999 1.8
Donaldson, Lufkin & Jenrette,
Inc.(16)............................. 746,030 5.3 375,000 371,036 2.0
Putnam Investments, Inc.(17)........... 1,601,199 11.2 -- 1,601,199 8.8
Executive officers and directors
as a group (11 persons)(18).......... 8,309,000 55.9 1,000,000(19) 7,309,000 38.8
</TABLE>

- ---------------
* Less than one percent.

(1) Pursuant to Rule 13d-3 under the Exchange Act, a person has beneficial
ownership of any securities as to which such person, directly or
indirectly, through any contract, arrangement, undertaking, relationship or
otherwise has or shares voting power and/or investment power and as to
which such person has the right to acquire such voting and/or investment
power within 60 days. Percentage of beneficial ownership as to any person
as of a particular date is calculated by dividing the number of shares
beneficially owned by such person by the sum of the number of shares
outstanding as of such date and the number of shares as to which such
person has the right to acquire voting and/or investment power within 60
days.

(2) The business address of the named person is c/o the Company, 9401 Lee
Highway, Suite 300, Fairfax, VA 22031.

(3) Represents shares issuable upon the exercise of stock options that are
exercisable within 60 days of September 30, 1996. If the Underwriters
exercise their over-allotment option, Mr. Faeder will sell up to 150,000
shares of Common Stock that are subject to currently exercisable stock
options and will beneficially own 254,166 shares (1.3%) of the Common Stock
outstanding after the Offering.

(4) Represents shares issuable upon the exercise of stock options that are
exercisable within 60 days of September 30, 1996 and 5,500 shares held in a
trust for which Mr. Smick serves as trustee. If the Underwriters exercise
their over-allotment option, Mr. Smick will sell up to 33,333 shares of
Common Stock that are subject to currently exercisable stock options and
would beneficially own 32,583 shares (less than 1%) of the Common Stock
outstanding after the Offering.

(5) Represents shares issuable upon the exercise of stock options that are
exercisable within 60 days of September 30, 1996. If the Underwriters
exercise their over-allotment option, Mr. Newell will sell up to

58
<PAGE> 59

20,000 shares of Common Stock that are subject to currently exercisable
stock options and would beneficially own 37,499 shares (less than 1%) of
the Common Stock outstanding after the Offering.

(6) Represents 30,000 shares issuable upon the exercise of options that are
exercisable within 60 days of September 30, 1996.

(7) The business address of the named person is c/o The Compucare Company,
12110 Sunset Hills Drive, Reston, VA 22090. Represents 25,000 shares
issuable upon the exercise of stock options that are exercisable within 60
days of September 30, 1996 and 40,000 shares of Common Stock held directly.

(8) The business address of the named person is c/o American Trucking
Association, 2200 Mill Road, Alexandria, VA 22314. Represents 25,000 shares
issuable upon the exercise of stock options that are exercisable within 60
days of September 30, 1996 and 52,500 shares of Common Stock issued in May
1996 in exchange for a 30% ownership interest in one of the Company's
facilities. See "Certain Transactions."

(9) The business address of the named person is c/o Allstate Insurance Company,
Northbrook, IL 60062. Represents 547,555 shares beneficially owned by
Allstate Insurance Company and 342,222 shares beneficially owned by
Allstate Life Insurance. Also includes shares held in trust for the benefit
of Allstate Retirement Plan (48,889 shares) and Agents Pension Plan (39,112
shares) by CTC Illinois Trust Company, as trustee. Mr. Doppelt is Venture
Group Manager of Allstate Insurance Company, and in such capacity may be
deemed to share beneficial ownership with respect to such shares; however,
he disclaims any beneficial ownership except to the extent of his pecuniary
interest therein.

(10) The business address of the named person is c/o The Sprout Group, 277 Park
Avenue, New York, NY 10172. Represents 667,161 shares beneficially owned by
Sprout Growth II, L.P. ("Sprout") and 66,172 shares beneficially owned by
DLJ Capital Corporation ("DLJ Capital"). Mr. Meadow is a general partner of
DLJ Growth Associates II, L.P., which is a general partner of Sprout, and a
Vice President of The Sprout Group, a division of DLJ Capital. Mr. Meadow
may be deemed to share beneficial ownership with respect to such shares;
however, he disclaims any beneficial ownership, except to the extent of his
pecuniary interest therein.

(11) The business address of the named person is c/o Frontenac Company, 135 S.
LaSalle Street, 38th Floor, Chicago, IL 60603. Represents 733,333 shares
beneficially owned by Frontenac VI Limited Partnership ("Frontenac VI").
Frontenac Company is the general partner of Frontenac VI. Ms. Moore is a
general partner of Frontenac Company. In such capacity, Ms. Moore may be
deemed to share beneficial ownership with respect to such shares; however,
she disclaims beneficial ownership thereof except to the extent of her
pecuniary interest therein.

(12) The business address of Allstate Insurance Company is Northbrook, IL 60062.
Includes shares owned by Allstate Insurance Company (547,555 shares) and
Allstate Life Insurance Company (342,222 shares). These Allstate entities
are affiliates through interrelated ownership and/or control. Also includes
shares held in trust for the benefit of Allstate Retirement Plan (48,889
shares) and Agents Pension Plan (39,112 shares) by CTC Illinois Trust
Company, as trustee, as to which Allstate Insurance Company disclaims
beneficial ownership except to the extent of its pecuniary interest
therein.

(13) The business address of DLJ Capital is 277 Park Avenue, New York, NY 10172.
Includes 66,172 shares owned directly by DLJ Capital and 667,161 shares
beneficially owned by Sprout of which DLJ Capital is the managing general
partner. In such capacity, DLJ Capital may be deemed to share beneficial
ownership with respect to such shares. Sprout is one of a number of funds
associated with The Sprout Group, a division of DLJ Capital. DLJ Capital is
a wholly owned subsidiary of Donaldson, Lufkin & Jenrette, Inc. ("DLJ,
Inc."), a publicly held holding company which is traded on the New York
Stock Exchange. DLJ, the lead managing underwriter, is also a wholly owned
subsidiary of DLJ, Inc.

(14) The business address of Frontenac VI is 135 S. LaSalle Street, 38th Floor,
Chicago, IL 60603.

(15) The business address of Sprout is 277 Park Avenue, New York, NY 10172. For
a description of the affiliation between Sprout and DLJ, see note (13)
above.

(16) The business address of DLJ, Inc. is 277 Park Avenue, New York, New York
10172. Shares shown are reported on a joint Schedule 13D dated June 6, 1996
filed by DLJ, Inc., Sprout, DLJ Capital, DLJ, The Equitable Companies
Incorporated ("Equitable"), AXA, Finaxa, AXA Assurances I.A.R.D. Mutuelle,
AXA Assurances Vie Mutuelle, Uni Europe Assurance Mutuelle, Alpha
Assurances Vie Mutuelle,

59
<PAGE> 60

Alpha Assurances I.A.R.D. Mutuelle, Claude Bebear, AXA Voting Trustee,
Patrick Garnier, AXA Voting Trustee and Henry de Clermont-Tonnerre, AXA
Voting Trustee. According to the Schedule 13D, Sprout has sole voting and
sole dispositive power with respect to 667,161 shares, DLJ Capital has sole
voting and sole dispositive power with respect to 733,333 shares, DLJ has
sole voting and sole dispositive power with respect to 12,697 shares and
the other entities and individuals, including DLJ, Inc., have sole voting
and sole dispositive power with respect to 746,030 shares. For the
affiliation among DLJ, Inc., Sprout, DLJ Capital and DLJ, see note (13)
above. Equitable directly owns 44.1% of DLJ and The Equitable Life
Assurance Society of the United States, a wholly owned subsidiary of
Equitable, indirectly owns 36.1% of DLJ. As of April 30, 1996,
approximately 60.7% of the outstanding common stock as well as certain
convertible preferred stock of Equitable was beneficially owned by AXA. The
voting shares of Equitable beneficially owned by AXA and its subsidiaries
have been placed in the AXA Voting Trust, of which Messrs. Bebear, Garnier
and Clermont-Tonnerre are the trustees. The remaining reporting entities
control, directly or indirectly, approximately 70.0% of the issued shares
(representing approximately 85.8% of the voting power) of AXA.

(17) The business address of Putnam Investments, Inc. is One Post Office Square,
Boston, MA 02109. Shares shown are reported on a joint Schedule 13G dated
September 9, 1996 filed with the Securities and Exchange Commission by
Marsh & McLennan Companies, Inc. ("M&MC"), Putnam Investments, Inc. ("PI"),
Putnam Investment Management Inc. ("PIM"), The Putnam Advisory Company,
Inc. ("PAC") and Putnam New Opportunities Fund ("Fund"). PI and PAC share
voting power with respect to 41,786 shares and the Fund shares voting power
with respect to 1,092,431 shares. PI, PIM, PAC and the Fund share power to
dispose of all 1,601,199 shares that they are deemed to beneficially own.
M&MC and PI disclaim any beneficial ownership of the above-listed shares.

(18) See notes (3), (4), (5), (6), (7), (8), (9), (10) and (11) above. Includes
the 5,164,475 shares jointly owned by Paul J. and Teresa M. Klaassen.

(19) Includes the following shares of Common Stock being sold by the Selling
Stockholders: Allstate Insurance Company (140,000 shares); Allstate Life
Insurance Company (87,500 shares); Agents Pension Plan (10,000 shares);
Allstate Retirement Plan (12,500); DLJ Capital (33,838 shares); Sprout
(341,162 shares); and Frontenac VI (375,000 shares).

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<PAGE> 61

DESCRIPTION OF CAPITAL STOCK

The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the Company's Restated Certificate of
Incorporation (the "Certificate") and by the provisions of applicable law. A
copy of the Certificate is included as an exhibit to the Registration Statement
of which this Prospectus is a part.

The Company's authorized capital stock consists of 60,000,000 shares of
Common Stock, par value $.01 per share (the "Common Stock"), and 10,000,000
shares of Preferred Stock, par value $.01 per share (the "Preferred Stock").
Upon completion of the Offering, the Company will have outstanding 18,259,693
shares of Common Stock (19,009,693 shares if the Underwriters' over-allotment
option is exercised in full) and no shares of Preferred Stock. All of the
currently outstanding shares of Common Stock are validly issued, fully paid and
nonassessable under the Delaware General Corporation Law (the "DGCL"). As of
October 24, 1996, there were 28 record holders of Common Stock.

COMMON STOCK

Each holder of Common Stock is entitled to one vote for each share on all
matters submitted to a vote of stockholders. The Certificate does not provide
for cumulative voting, and accordingly, the holders of a majority of the shares
of Common Stock entitled to vote in any election of directors may elect all of
the directors standing for election. The Certificate provides that whenever
there is paid, or declared and set aside for payment, to the holders of the
outstanding shares of any class of stock having preference over the Common Stock
as to the payment of dividends, the full amount of dividends and of sinking fund
or retirement fund or other retirement payments, if any, to which such holders
are entitled, then dividends may be paid on the Common Stock out of any assets
legally available therefor, but only when and as declared by the Board of
Directors. The Certificate also provides that in the event of any liquidation,
dissolution or winding up of the Company, after there is paid to or set aside
for the holders of any class of stock having preference over the Common Stock
the full amount to which such holders are entitled, then the holders of the
Common Stock, shall be entitled, after payment or provision for payment of all
debts and liabilities of the Company, to receive the remaining assets of the
Company available for distribution, in cash or in kind. The holders of Common
Stock have no preemptive, subscription, redemption or conversion rights. The
rights, preferences and privileges of holders of Common Stock will be subject to
the rights of the holders of any shares of any series of Preferred Stock that
the Company may issue in the future.

PREFERRED STOCK

The Certificate provides that the Board of Directors of the Company is
authorized to issue Preferred Stock in series and to fix and state the voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights of the shares of
each such series and the qualifications, limitations and restrictions thereof.
Such action may be taken by the Board without stockholder approval. Under the
Certificate, each share of each series of Preferred Stock is to have the same
relative rights as, and be identical in all respects with, all other shares of
the same series. While providing flexibility in connection with possible
financings, acquisitions and other corporate purposes, the issuance of Preferred
Stock, among other things, could adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, be used as a means of
discouraging, delaying or preventing a change in control of the Company. The
Company has no present plan to issue shares of its Preferred Stock.

WARRANTS

In March 1996, the Company obtained a $13.0 million unsecured line of
credit. As part of such transaction, the Company issued to the lender warrants
to purchase a total of 50,000 shares of Common Stock. The per share exercise
price of the warrants is $17.00, subject to various anti-dilution adjustments.
The warrants may be exercised at any time through March 19, 2006. The Company
has granted to the lender incidental registration rights with respect to the
shares of Common Stock underlying the warrants. The Company is required to bear
the expenses of any such registrations.

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REGISTRATION RIGHTS

The Founders, as holders of 5,164,475 shares of outstanding Common Stock
(the "Founders' Shares"), the holders of 2,444,444 shares of Common Stock issued
upon conversion of the Series A Convertible Preferred Stock or their respective
transferees and any employee, officer, agent, consultant or director of the
Company or any subsidiary who hereafter owns, directly or indirectly, 1% more of
the outstanding Common Stock (on a fully diluted basis) whom the Company permits
to become a party to the Registration Agreement (defined below) are entitled to
certain rights with respect to the registration of such shares (the "Registrable
Securities") under the Securities Act. These rights are provided under the terms
of the Registration Agreement, dated January 4, 1995, between the Company and
the holders of the Registrable Securities (the "Registration Agreement"). The
following summary of certain provisions of the Registration Agreement does not
purport to be complete and is subject to, and qualified in its entirety by, the
Registration Agreement.

Demand Registration. Pursuant to the terms of the Registration Agreement,
holders of Registrable Securities may request that the Company offer some or all
of such Registrable Securities to the public pursuant to an effective
registration statement under the Securities Act. Registration on Form S-1 may be
demanded by either of the Founders or by the holders of not less than a majority
of the Investors' Shares (defined below), provided that the holders requesting
registration on Form S-1 must be requesting registration of not less than 25% of
the Registrable Securities held by such holders. Registration on Form S-3 may be
demanded by either 25% of the holders of Investors' Shares or by holders of 25%
of the then outstanding Founders' Shares, provided that the aggregate offering
value of the Registrable Securities requested to be included in such
registration must be reasonably expected to equal at least $1 million. The
holders have the right to require the Company to file a registration statement
on Form S-1 two times and on Form S-3 an unlimited number of times. However, the
Company is obligated to pay registration expenses only for the first two
registrations on Form S-3. The Company is also required to give notice of such
requested registration to all holders of all Registrable Securities of the
Company. If a demand registration is an underwritten public offering and the
managing underwriter advises the Company that the number of Registrable
Securities and other securities being registered exceeds the number of
securities which can be sold in such offering without having a material adverse
effect on the offering, the Company may cut back pro rata the number of
Registrable Securities and other securities being registered. "Investors'
Shares" means any shares of Common Stock held of record by stockholders other
than the Founders, including shares issued or issuable upon the conversion of
the Series A Convertible Preferred Stock.

Incidental Registration. In addition, the Registration Agreement provides
that if the Company at any time proposes to register any of its securities under
the Securities Act, on a form other than Form S-4 or S-8, the holders of
Registrable Securities are entitled to have their shares included in such
registration statement on a pro rata basis, subject to certain other terms and
conditions.

The Company has agreed under the Registration Agreement to indemnify the
selling holders of the Registrable Securities against certain liabilities under
the Securities Act.

In addition to the foregoing registration rights, the Company has granted
incidental registration rights to Thomas J. Donohue (52,500 shares) and the
holder of the Company's outstanding warrants (50,000 shares) and intends to
grant incidental registration rights with respect to shares of Common Stock
having an aggregate fair market value of $200,000 which the Company intends to
issue in satisfaction of a $200,000 non-interest bearing loan made to a Company
predecessor.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Limitations of Director Liability. Section 102(b)(7) of the DGCL
authorizes corporations to limit or eliminate the personal liability of
directors to corporations and their stockholders for monetary damages for breach
of directors' fiduciary duty of care. Although Section 102(b)(7) does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The Certificate limits the
liability of directors to the Company or its stockholders to the full extent
permitted by Section 102(b)(7). Specifically, directors of the Company are not
personally liable for monetary damages to the Company or its stockholders for
breach of the director's fiduciary duty as a director, except for liability:

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(i) for any breach of the director's duty of loyalty to the Company or its
stockholders; (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law; (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the DGCL; or (iv) for any transaction from which the director
derived an improper personal benefit.

Indemnification. To the maximum extent permitted by law, the Bylaws
provide for mandatory indemnification of directors and officers of the Company
against an expense, liability and loss to which they may become subject, or
which they may incur as a result of being or having been a director or officer
of the Company. In addition, the Company must advance or reimburse directors and
officers for expenses incurred by them in connection with indemnifiable claims.

The Company has entered into separate indemnification agreements with its
directors and officers. Each indemnification agreement provides for, among other
things: (i) indemnification against any and all expenses, liabilities and losses
(including attorneys' fees, judgments, fines, taxes, penalties and amounts paid
in settlement) of any claim against an indemnified party unless it is
determined, as provided in the indemnification agreement, that indemnification
is not permitted under applicable law and (ii) prompt advancement of expenses to
any indemnified party in connection with his or her defense against any claim.

The Company also maintains directors' and officers' liability insurance.

CERTAIN ANTI-TAKEOVER PROVISIONS

The Certificate and the Bylaws contain, among other things, certain
provisions described below that may reduce the likelihood of a change in the
Board of Directors or voting control of the Company without the consent of the
Board of Directors. These provisions could have the effect of discouraging,
delaying, or preventing tender offers or takeover attempts that some or a
majority of the stockholders might consider to be in the stockholders' best
interest, including offers or attempts that might result in a premium over the
market price for the Common Stock.

Classified Board. The number of directors of the Company shall be such
number as from time to time is fixed by, or in the manner provided in, the
Bylaws within the range of a minimum of two and a maximum of eleven directors
specified in the Certificate. Pursuant to the Bylaws, the number of directors
within the range set forth in the Certificate shall be determined by resolution
of the Board passed by at least two-thirds of the directors then in office.
Directors are divided into three classes, each consisting of approximately
one-third of the total number of directors. The term of office of each class is
three years and expires in successive years at the time of the annual meeting of
stockholders.

Filling of Board Vacancies; Removal. Any vacancy occurring in the Board of
Directors, including any vacancy created by an increase in the number of
directors, shall be filled for the unexpired term by the concurring vote of a
majority of the directors then in office, whether or not a quorum, and any
director so chosen shall hold office for the remainder of the full term of the
class in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified. Directors
may only be removed with cause by the affirmative vote of the holders of at
least a majority of the outstanding shares of capital stock then entitled to
vote at an election of directors.

Other Constituencies. The Board of Directors, when evaluating any offer,
bid, proposal or similar communication of another party to (i) make a tender or
exchange offer for any equity security of the Company, (ii) merge or consolidate
the Company with or into another corporation or corporations, or (iii) purchase
or otherwise acquire all or substantially all of the properties and assets of
the Company, shall, in connection with the exercise of its judgment in
determining what is in the best interests of the Company and its stockholders,
give due consideration to all relevant factors, including, without limitation,
the social, economic and regulatory effects on the Company, on employees,
providers and payors of the Company and its subsidiaries, on residents and
families served by the Company and its subsidiaries, on operations of the
Company's subsidiaries and on the communities in which the Company and its
subsidiaries operate or are located.

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Stockholder Action by Unanimous Written Consent. Any action required or
permitted to be taken by the stockholders must be effected at a duly called
annual or special meeting of such holders and may not be effected by any consent
in writing by such holders, unless such consent is unanimous.

Call of Special Meetings. Special meetings of stockholders may be called
at any time but only by the Chairman of the Board, the President, by a majority
of the directors then in office or by stockholders possessing at least 25% of
the voting power of the issued and outstanding voting stock entitled to vote
generally in the election of directors.

Bylaw Amendments. The stockholders may amend the Bylaws by the affirmative
vote of the holders of at least two-thirds of the outstanding shares of stock of
the Company entitled to vote thereon. Directors may also amend the Bylaws by a
two-thirds vote of the directors then in office.

Certificate Amendments. Except as set forth in the Certificate or as
otherwise specifically required by law, no amendment of any provision of the
Certificate shall be made unless such amendment has been first proposed by the
Board of Directors upon the affirmative vote of at least two-thirds of the
directors then in office and thereafter approved by the affirmative vote of the
holders of at least a majority of the outstanding shares of stock of the Company
entitled to vote thereon; provided however, if such amendment is to the
provisions described above or the provisions in the Certificate relating to the
authorized number of shares of Preferred Stock, Board authority to issue
Preferred Stock or the limitation on directors liability, such amendment must be
approved by the affirmative vote of the holders of at least two-thirds of the
outstanding shares of stock entitled to vote thereon.

Stockholder Nominations and Proposals. With certain exceptions, the
Company's Bylaws require that stockholders intending to present nominations for
directors or other business for consideration at a meeting of stockholders
notify the Company's Secretary by the later of 60 days before the date of the
meeting and 15 days after the date notice of the meeting is mailed or public
notice of the meeting is given.

Certain Statutory Provisions. Section 203 of the DGCL provides, in
general, that a stockholder acquiring more than 15% of the outstanding voting
shares of a corporation subject to the statute (an "Interested Stockholder"),
but less than 85% of such shares, may not engage in certain "Business
Combinations" with the corporation for a period of three years subsequent to the
date on which the stockholder became an Interested Stockholder unless (i) prior
to such date the corporation's board of directors approved either the Business
Combination or the transaction in which the stockholder became in Interested
Stockholder or (ii) the Business Combination is approved by the corporation's
board of directors and authorized by a vote of at least two-thirds of the
outstanding voting stock of the corporation not owned by the Interested
Stockholder.

Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder in which the
Interested Stockholder receives or could receive a benefit on other than a pro
rata basis with other stockholders, including mergers, certain asset sales,
certain issuances of additional shares to the Interested Stockholder,
transactions with the corporation which increase the proportionate interest of
the Interested Stockholder or a transaction in which the Interested Stockholder
receives certain other benefits.

Pursuant to a Board resolution adopted at the time of formation of the
Company, the Section 203 limits do not apply to any "Business Combination"
between the Company and the Founders, their respective "affiliates" or their
respective estates.

STOCKHOLDER RIGHTS AGREEMENT

The Board of Directors has adopted a Stockholder Rights Agreement ("Rights
Agreement") and declared a dividend of one preferred share purchase right (a
"Right") for each outstanding share of Common Stock. All shares of Common Stock
issued by the Company between the date of adoption of the Rights Agreement and
the Distribution Date (as defined below), or the date, if any, on which the
Rights are redeemed will have Rights attached to them. The Rights will expire
ten years after adoption of the Rights Agreement, unless earlier redeemed or
exchanged. Each Right, when exercisable, entitles the holder to

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purchase one one-thousandth of a share of Series C Junior Participating
Preferred Stock ("Preferred Stock") at a price of $85.00 (the "Purchase Price").
Until a Right is exercised, the holder thereof, as such, will have no rights as
a stockholder of the Company, including, without limitation, the right to vote
or to receive dividends.

The Rights Agreement will provide that the Rights initially attach to all
certificates representing shares of Common Stock then outstanding. 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 (i) 10 days
following a public announcement that a person or group of affiliated or
associated persons (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 (ii) 10 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. Notwithstanding the foregoing, neither of the Founders (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." Until the
Distribution Date, the Rights will be evidenced by the Common Stock
certificates, and will be transferred with, and only with, the Common Stock
certificates.

If a Person becomes the beneficial owner of 20% or more of the then
outstanding shares of Common Stock (except pursuant to an offer for all
outstanding shares of Common Stock which the Outside Directors determine to be
fair to and otherwise in the best interests of the Company and its
stockholders), each holder of a Right will, after the end of a redemption
period, have the right to exercise the Right by purchasing Common Stock (or, in
certain circumstances, cash, property or other securities of the Company) having
a value equal to two times such amount.

If at any time following the Stock Acquisition Date, (i) the Company 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 (ii) 50% or more of the Company'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 of the Right.

In general, the Board of Directors of the Company 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. Under certain circumstances, the decision to redeem
the Rights will require the concurrence of a majority of the Continuing
Directors, defined as any member of the Board of Directors who was a member of
the Board of Directors prior to the date of the Rights Agreement, and any person
who is subsequently elected to the Board if such person is recommended or
approved by a majority of the Continuing Directors. The term "Outside Directors"
means "Continuing Directors" who are not officers of the Company.

The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company.
The Rights, however, will not interfere with any merger or other business
combination approved by the Board of Directors since the Board may, at its
option, at any time prior to any person becoming an Acquiring Person, redeem all
rights or amend the Rights Agreement to exempt the person from the Rights
Agreement.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is First Union
National Bank of North Carolina.

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SHARES ELIGIBLE FOR FUTURE SALE

In addition to the outstanding shares of Common Stock, the Company has
reserved for issuance 3,248,065 shares of Common Stock pursuant to the Company's
stock option programs, under which options to purchase 1,625,657 shares will be
outstanding upon completion of the Offering, of which options for 684,044 shares
are exercisable within 60 days of the date of this Prospectus. In addition,
warrants to purchase 50,000 shares of Common Stock are outstanding.

In general, under Rule 144 a person (or persons whose shares are
aggregated), including an affiliate of the Company, who has beneficially owned
restricted securities for at least two years is entitled to sell within any
three-month period a number of shares that does not exceed the greater of the
average weekly trading volume during the four calendar weeks preceding such sale
or 1% of the then outstanding shares of Common Stock, provided certain manner of
sale and notice requirements and requirements as to the availability of current
public information about the Company are satisfied. In addition, affiliates of
the Company must comply with the restrictions and requirements of Rule 144,
other than the two-year holding period, to sell shares of Common Stock. A person
who is deemed not to have been an "affiliate" of the Company at any time during
the 90 days preceding a sale by such person, and who has beneficially owned such
shares for at least three years, would be entitled to sell such shares without
regard to the volume limitations described above.

The Commission has proposed to amend the holding period required by Rule
144 to permit sales of "restricted securities" after one year rather than two
years (and two years rather than three years for "non-affiliates" under Rule
144(k)). If such proposed amendment is adopted, restricted securities would
become freely tradable (subject to any applicable contractual restrictions) at
correspondingly earlier dates.

Subject to certain exceptions, the Company, its directors and executive
officers and certain stockholders of the Company who, upon completion of the
Offering, will beneficially own in the aggregate approximately 7,309,000 shares
of Common Stock (including up to 203,333 shares subject to options held by
certain officers that will be exercised and the underlying shares sold if the
Underwriters' over-allotment option is exercised), have agreed with the
Underwriters not to sell or otherwise dispose of any shares of Common Stock, any
options to purchase Common Stock or any securities convertible into or
exchangeable for shares of Common Stock for a period of 90 days after the date
of this Prospectus without the prior written consent of DLJ, except as to shares
held by affiliates of DLJ which require the prior written consent of the
Underwriters other than DLJ.

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Currently, options and warrants which could be exercised for the purchase
of 692,321 shares of Common Stock will not be subject to the lock-up
restrictions discussed above. Of such 692,321 shares of Common Stock issuable
upon the exercise of such options and warrants, 161,963 options and warrants are
exercisable within 60 days after the date of this Prospectus.

After the Offering, the holders of 6,711,419 shares of Common Stock or
their transferees, as well as the holder of shares of Common Stock having a fair
market value of $200,000 which the Company intends to issue in satisfaction of a
$200,000 non-interest bearing loan made to a Company predecessor, will be
entitled to certain rights with respect to the registration of such shares for
sale under the Securities Act. See "Description of Capital Stock -- Registration
Rights."

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UNDERWRITING

Subject to the terms and certain conditions contained in the Underwriting
Agreement, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), Alex.
Brown & Sons Incorporated, NatWest Securities Limited and J.C. Bradford & Co.
(collectively, the "Underwriters") have severally agreed to purchase from the
Company and certain Selling Stockholders an aggregate of 5,000,000 shares of
Common Stock. The number of shares of Common Stock that each Underwriter has
agreed to purchase is set forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.............. 1,250,000
Alex. Brown & Sons Incorporated.................................. 1,250,000
NatWest Securities Limited....................................... 1,250,000
J.C. Bradford & Co. ............................................. 1,250,000
---------
Total.................................................. 5,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by counsel and
to certain other conditions. The Underwriters are obligated to take and pay for
all the shares of Common Stock offered hereby (other than the shares of the
Common Stock covered by the over-allotment option described below) if any are
taken.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.

The Underwriters have advised the Company that they propose to offer the
shares of Common Stock to the public initially at the price to the public set
forth on the cover page of this Prospectus and to certain dealers (who may
include the Underwriters) at such price less a concession not to exceed $0.72
per share. The Underwriters may allow, and such dealers may reallow, discounts
not in excess of $0.10 per share to any other Underwriter and certain other
dealers.

The Company and certain Selling Stockholders have granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an aggregate of 750,000 additional shares of
Common Stock at the public offering price less underwriting discounts and
commissions, solely to cover over-allotments. Of such shares subject to the
over-allotment option, the first 203,333 shares exercised will be sold by
certain Selling Stockholders and the remaining 546,667 shares covered by the
over-allotment option, to the extent exercised, will be issued and sold by the
Company. To the extent that the Underwriters exercise such option, each of the
Underwriters will be committed, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite such Underwriter's name in the preceding table bears
to the total number of shares offered.

NatWest Securities Limited, a United Kingdom broker-dealer and a member of
the Securities and Futures Authority Limited, has agreed that, as part of the
distribution of the Common Stock offered hereby and subject to certain
exceptions, it will not offer any Common Stock within the United States, its
territories or possessions, or to persons who are citizens thereof or residents
therein. The Underwriting Agreement does not limit sale of the Common Stock
offered hereby outside of the United States.

NatWest Securities Limited has further represented and agreed that (a) it
has not offered or sold and will not offer or sell any shares of Common Stock to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments
(whether as principal or agent) for the purposes of their businesses or
otherwise in circumstances that have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995 or the Financial Services Act 1986 (the
"Act"); (b) it has complied and will comply with all applicable provisions of
the Act with respect to anything done by it in relation to the shares of

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Common Stock in, from, or otherwise involving the United Kingdom; and (c) it has
only issued or passed on and will only issue or pass on, in the United Kingdom,
any document that consists of or any part of listing particulars, supplementary
listing particulars, or any other document required or permitted to be published
by listing rules under Part IV of the Act, to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995 or is a person to whom the document may
otherwise lawfully be issued or passed on.

Pursuant to the Stockholders' Agreement entered into in connection with the
issuance of the Series A Convertible Preferred Stock, Sprout and DLJ Capital,
both affiliates of DLJ, had the right to designate one member of the Board of
Directors. Their current designee is Scott F. Meadow. Mr. Meadow is a general
partner of DLJ Growth Associates II, L.P., which is a general partner of Sprout,
and a Senior Vice President of The Sprout Group, a division of DLJ Capital. DLJ
Capital is a wholly owned subsidiary of DLJ, Inc. DLJ, the lead managing
underwriter, is also a wholly owned subsidiary of DLJ, Inc. The Stockholders'
Agreement terminated upon completion of the Company's initial public offering.
Sprout and DLJ Capital beneficially own an aggregate of 733,333 shares of Common
Stock, of which 375,000 shares will be sold in the Offering.

The Underwriters do not intend to confirm sales of shares of Common Stock
to any accounts over which they exercise discretionary authority.

In connection with the Offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in passive market making
on the Nasdaq National Market in accordance with Rule 10b-6A under the
Securities Exchange Act of 1934, as amended, during the two business day period
before commencement of offers of the Common Stock. Any passive market making
transactions must comply with applicable volume and price limits and be
identified as such. In general, a passive market maker may display its bid at a
price not in excess of the highest independent bid for such security. However,
if all independent bids are lowered before the passive market maker's bid, then
such bid must then be lowered when certain purchase limits are exceeded.

Subject to certain exceptions, the Company and certain of its existing
stockholders and directors and executive officers have agreed not to offer,
sell, contract to sell, or otherwise dispose of any shares of Common Stock or
any securities convertible or exchangeable into any shares of Common Stock prior
to the expiration of 90 days from the date of this Prospectus, without the prior
written consent of DLJ, except as to shares held by affiliates of DLJ which
require the prior written consent of the Underwriters other than DLJ. See
"Shares Eligible for Future Sale."

LEGAL MATTERS

The validity of the shares offered hereby will be passed upon for the
Company by Hogan & Hartson L.L.P., Washington, D.C. Alston & Bird, Atlanta,
Georgia, is acting as counsel for the Underwriters in connection with certain
legal matters relating to the sale of Common Stock offered hereby.

EXPERTS

The consolidated financial statements of Sunrise Assisted Living, Inc. as
of December 31, 1995, and for the year then ended, and the combined financial
statements of Sunrise Entities as of December 31, 1994 and for the year then
ended, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing. The
combined financial statements of Sunrise Entities for the year ended December
31, 1993 and the combined financial statements of Acquired Entities of Sunrise
as of December 31, 1993 and for the year then ended, have been audited by
Hoffman, Morrison & Fitzgerald P.C., independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of the firm as experts in accounting and
auditing.

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The combined financial statements of Laing Retirement Properties as of
December 31, 1995 and for the three years then ended appearing in this
Prospectus and Registration Statement have been audited by KPMG Peat Marwick
LLP, independent auditors, as indicated in their report with respect thereto,
and are included herein in reliance upon the authority of such firm as experts
in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. As used herein, the term "Registration Statement" means
the initial Registration Statement and any and all amendments thereto. This
Prospectus omits certain information contained in the Registration Statement as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits thereto.
Statements herein concerning the contents of any contract or other document are
not necessarily complete and in each instance reference is made to such contract
or other document filed with the Commission as an exhibit to the Registration
Statement, each such statement being qualified by and subject to such reference
in all respects.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports and
other information with the Commission. Reports, registration statements, proxy
statements, and other information filed by the Company with the Commission can
be inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the Commission's Regional Offices: 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York
10048. Copies of such materials can be obtained at prescribed rates from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. The Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, registrations statements,
proxy statements, and other information regarding registrants that file
electronically with the Commission.

The Company intends to furnish holders of the Common Stock with annual
reports containing among other information, audited financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed financial information for the first three
quarters of each fiscal year. The Company also intends to furnish such other
reports as it may determine or as may be required by law.

70
<PAGE> 71

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUNRISE ASSISTED LIVING, INC. AND SUNRISE ENTITIES
Report of Independent Auditors....................................................... F-2
Report of Independent Auditors....................................................... F-3
Consolidated Balance Sheets as of June 30, 1996 (unaudited) and as of December 31,
1995 of the Company and Combined Balance Sheets as of December 31, 1994 of Sunrise
Entities........................................................................... F-4
Consolidated Statements of Operations of the Company for the six months ended June
30, 1996 and 1995 (unaudited) and for the year ended December 31, 1995 and Combined
Statements of Operations of Sunrise Entities for each of the two years ended
December 31, 1994.................................................................. F-5
Consolidated Statement of Changes in Stockholders' (Deficit) Equity of the Company
and Combined Statement of Owners' Deficit of Sunrise Entities...................... F-6
Consolidated Statements of Cash Flows of the Company for the six months ended June
30, 1996 and 1995 (unaudited) and for the year ended December 31, 1995 and Combined
Statements of Cash Flows of Sunrise Entities for each of the two years ended
December 31, 1994.................................................................. F-7
Notes to Consolidated and Combined Financial Statements.............................. F-8
ACQUIRED ENTITIES OF SUNRISE
Independent Auditors' Report......................................................... F-28
Combined Balance Sheet as of December 31, 1993....................................... F-29
Combined Statement of Operations and Partners' Deficit for the year ended December
31, 1993........................................................................... F-30
Combined Statement of Cash Flows for the year ended December 31, 1993................ F-31
Notes to Combined Financial Statements............................................... F-32
LAING RETIREMENT PROPERTIES (SOUTHEAST PROPERTIES)
Report of Independent Auditors....................................................... F-36
Combined Balance Sheets as of June 30, 1996 (unaudited) and as of December 31, 1995
and 1994 of Laing Retirement Properties............................................ F-37
Combined Statements of Operations of Laing Retirement Properties for the six months
ended June 30 1996 and 1995 (unaudited) and for each of the three years ended
December 31, 1995.................................................................. F-38
Combined Statements of Changes in Stockholders' Equity of Laing Retirement
Properties......................................................................... F-39
Combined Statements of Cash Flows of Laing Retirement Properties for the six months
ended June 30 1996 and 1995 (unaudited) and for each of the three years ended
December 31, 1995.................................................................. F-40
Notes to Combined Financial Statements............................................... F-41
SUNRISE ASSISTED LIVING, INC.
Unaudited Pro Forma Consolidated Financial Statements................................ F-44
Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1996................... F-45
Unaudited Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1995.................................................................. F-46
Unaudited Pro Forma Consolidated Statement of Operations for the six months ended
June 30, 1996...................................................................... F-47
Notes to Unaudited Pro Forma Consolidated Financial Statements....................... F-48
</TABLE>

F-1
<PAGE> 72

REPORT OF INDEPENDENT AUDITORS

Stockholders and Board of Directors
Sunrise Assisted Living, Inc.

We have audited the accompanying consolidated balance sheet of Sunrise
Assisted Living, Inc. (the "Company") as of December 31, 1995, and the related
consolidated statements of operations, changes in stockholders' deficit, and
cash flows for the year then ended. We also have audited the combined balance
sheet of Sunrise Entities (the predecessor to the Company, see Note 1) as of
December 31, 1994, and the related combined statements of operations, owners'
deficit, and cash flows for the year then ended. 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 generally accepted auditing
standards. 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, 1995, and the consolidated results of
its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles. Further, in our opinion, the financial
statements referred to above present fairly, in all material respects, the
combined financial position of Sunrise Entities as of December 31, 1994, and the
combined results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP
Washington, D.C.
February 15, 1996
except for Notes 10 and
Note 16, as to which the date is June 5, 1996

F-2
<PAGE> 73

INDEPENDENT AUDITORS' REPORT

To the Partners and Stockholders
Sunrise Entities

We have audited the accompanying combined statements of operations and
partners'/stockholders' deficits and cash flows of Sunrise Entities
(collectively, the "Company") for the year ended December 31, 1993. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined 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 audit provides a reasonable basis
for our opinion.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Sunrise Entities for the year ended December 31, 1993, in conformity with
generally accepted accounting principles.

Hoffman, Morrison & Fitzgerald P.C.
Vienna, Virginia
March 13, 1996

F-3
<PAGE> 74

CONSOLIDATED BALANCE SHEET OF SUNRISE ASSISTED LIVING, INC.
AS OF JUNE 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995
AND THE COMBINED BALANCE SHEET OF SUNRISE ENTITIES
AS OF DECEMBER 31, 1994

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996
---------------------------- -------------------
1994 1995 (UNAUDITED-NOTE 18)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 8,088,655 $ 6,252,449 $ 22,712,621
Accounts receivable, less allowance of
$50,000, $235,000 and $502,000..................... 1,097,886 1,319,429 1,572,441
Short-term securities................................ -- -- 50,000,000
Prepaid and other current assets..................... 2,090,644 2,328,571 1,726,548
------------ ------------ ----------------
Total current assets.......................... 11,277,185 9,900,449 76,011,610
Property and equipment, net............................ 94,296,103 104,317,117 137,470,595
Investment............................................. -- 5,375,404 5,645,785
Restricted cash and cash equivalents................... 1,175,410 1,260,470 1,333,542
Other assets........................................... 2,254,629 2,467,421 3,505,966
------------ ------------ ----------------
Total assets.................................. $109,003,327 $123,320,861 $ 223,967,498
============= ============= ================
LIABILITIES AND OWNERS'/STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable and accrued expenses................ $ 3,008,239 $ 6,547,122 $ 7,207,813
Distribution payable................................. 9,646,167 -- --
Deferred revenue..................................... 950,789 903,711 971,245
Other current liabilities............................ 760,740 130,669 1,077,430
Current portion of long-term debt.................... 4,216,667 268,576 394,935
------------ ------------ ----------------
Total current liabilities..................... 18,582,602 7,850,078 9,651,423
Notes payable to affiliated entities................... 1,610,231 1,735,138 1,620,838
Interests in unconsolidated partnerships............... 322,221 620,014 744,863
Long-term debt, less current maturities................ 104,202,457 120,285,996 118,695,915
------------ ------------ ----------------
Total liabilities............................. 124,717,511 130,491,226 130,713,039
Minority interests..................................... 676,944 639,895 371,457
Preferred stock, $0.01 par value, 10,000,000 shares
authorized:
Series A convertible preferred stock, convertible and
redeemable; $9 stated value and liquidation value
of $9; plus 9% preferred return; 2,444,444 shares
issued and outstanding............................. -- 23,963,496 --
Owners'/Stockholders' (deficit) equity:
Common stock of predecessor.......................... 10,501 -- --
Additional paid-in capital of predecessor............ 852,020 -- --
Accumulated deficit of predecessor................... (17,253,649) -- --
Common stock, $0.01 par value, 60,000,000 shares
authorized, 6,019,475 and 14,244,562 shares issued
and outstanding 1995 and 1996...................... -- 60,195 142,446
Contributed capital (deficiency)..................... -- (19,733,287) 107,702,674
Accumulated deficit.................................. -- (12,100,664) (14,962,118)
------------ ------------ ----------------
Total owners'/stockholders' (deficit)
equity...................................... (16,391,128) (31,773,756) 92,883,002
------------ ------------ ----------------
Total liabilities and owners'/stockholders'
(deficit) equity............................ $109,003,327 $123,320,861 $ 223,967,498
============= ============= ================
</TABLE>

See accompanying notes.

F-4
<PAGE> 75

CONSOLIDATED STATEMENTS OF OPERATIONS OF SUNRISE ASSISTED LIVING, INC.
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (UNAUDITED)
AND FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE COMBINED STATEMENTS OF OPERATIONS OF SUNRISE ENTITIES
FOR EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------ --------------------------
1993 1994 1995 1995 1996
(UNAUDITED- (UNAUDITED-
NOTE 18) NOTE 18)
<S> <C> <C> <C> <C> <C>
Operating revenue:
Resident fees...................... $23,993,737 $32,138,979 $ 34,752,023 $17,075,543 $19,458,479
Management services income......... 1,604,367 1,829,707 2,505,903 1,211,692 1,541,500
----------- ----------- ------------ ----------- -----------
25,598,104 33,968,686 37,257,926 18,287,235 20,999,979
Operating expenses:
Facility operating expenses........ 17,760,450 17,983,070 21,010,486 10,268,363 12,607,649
Facility development and
pre-opening expenses............. 474,206 262,825 1,171,843 433,326 649,661
General and administrative......... 2,034,340 4,182,777 6,875,006 2,718,929 4,413,204
Depreciation and amortization...... 2,798,581 3,159,764 3,008,639 1,479,259 1,803,481
----------- ----------- ------------ ----------- -----------
23,067,577 25,588,436 32,065,974 14,899,877 19,473,995
----------- ----------- ------------ ----------- -----------
Income from operations............... 2,530,527 8,380,250 5,191,952 3,387,358 1,525,984
Other income (expense):
Interest income.................... 317,144 565,449 1,228,789 605,935 700,258
Interest expense:
GECC mortgage interest........... -- (5,528,789) (15,295,287) (4,970,796) (4,807,319)
Other debt....................... (3,808,093) (3,059,777) (1,260,292) (557,445) (614,740)
----------- ----------- ------------ ----------- -----------
Total interest expense............. (3,808,093) (8,588,566) (16,555,579) (5,528,241) (5,422,059)
Equity in (losses) earnings on
investments in
unconsolidated/non-combined
partnerships....................... (104,382) 33,024 (9,081) 48,135 6,675
Minority interest.................... 427,798 171,870 6,755 (18,587) 82,704
Unusual charge....................... -- -- -- -- (981,300)
----------- ----------- ------------ ----------- -----------
(Loss) income before extraordinary
item............................... (637,006) 562,027 (10,137,164) (1,505,400) (4,087,738)
Extraordinary item................... -- 850,000 -- -- --
----------- ----------- ------------ ----------- -----------
Net (loss) income.................... $ (637,006) $ 1,412,027 $(10,137,164) $(1,505,400) $(4,087,738)
=========== =========== ============ =========== ===========
Net loss per share data (Unaudited --
Note 18):
Net loss per common equivalent
shares........................... $ (0.69)
===========
Weighted average number of common
and common equivalent shares
outstanding...................... 7,625,366
===========
Pro forma net loss per share data:
(Unaudited -- Notes 3 and 18):
Net loss per common and common
equivalent shares................ $ (0.97) $ (0.35)
============ ===========
Weighted average number of common
and common equivalent shares
outstanding...................... 8,826,127 9,720,604
============ ===========
</TABLE>

See accompanying notes.

F-5
<PAGE> 76

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY OF THE
COMPANY AND
COMBINED STATEMENT OF OWNERS' DEFICIT OF THE SUNRISE ENTITIES

<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED
COMMON PAID-IN- OWNERS'
STOCK OF CAPITAL OF DEFICIT OF SHARES OF COMMON CONTRIBUTED
SUNRISE SUNRISE SUNRISE COMMON STOCK CAPITAL ACCUMULATED
ENTITIES ENTITIES ENTITIES STOCK AMOUNT (DEFICIENCY) DEFICIT TOTAL
-------- ---------- ------------ ---------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1992.......... $ 10,500 $ 822,568 $ (4,370,189) $ 1,600,729 $ (1,936,392)
Contribution of
partnership
capital....... 33,022 33,022
Distributions... (457,814) (29,354) (487,168)
Net loss........ (1,707,434) 1,070,428 (637,006)
-------- ---------- ------------ ---------- -------- ------------ ------------ ------------
Balance at
December 31,
1993.......... 10,500 822,568 (6,502,415) 2,641,803 (3,027,544)
Acquisition of
interests not
previously
owned by
principal
shareholders... 3,846,815 3,846,815
Contribution of
partnership
capital....... 3,550,336 3,550,336
Other capital
contributions... 29,353 29,353
Dividends....... (3,750,000) (3,750,000)
Cash
distributions... (16,432,652) (16,432,652)
Other
distributions... (2,019,563) (2,019,563)
Net income...... 494,801 917,226 1,412,027
Initial
capitalization
of Sunrise
Assisted
Living,
Inc. ......... 100 $ 1 $ 99 $ 100
-------- ---------- ------------ ---------- -------- ------------ ------------ ------------
Combined balance
at December
31, 1994...... 10,500 851,921 (17,062,678) 100 1 99 (190,971) (16,391,128)
Issuance of
common stock
for net assets
of Sunrise
Entities...... (10,500) (851,921) 17,062,678 6,019,375 60,194 (16,451,422) 190,971 --
Liability of
Stockholder
assumed at
formation..... (1,447,561) (1,447,561)
Cost of issuance
of Series A
convertible
preferred
stock......... (1,834,403) (1,834,403)
Net loss........ (10,137,164) (10,137,164)
Preferred return
on Series A
convertible
preferred
stock......... (1,963,500) (1,963,500)
-------- ---------- ------------ ---------- -------- ------------ ------------ ------------
Balance at
December 31,
1995.......... -- -- -- 6,019,475 60,195 (19,733,287) (12,100,664) (31,773,756)
Issuance of
common stock
warrants...... 135,000 135,000
Preferred return
on Series A
convertible
preferred
stock......... (858,000) (858,000)
Issuance of
common
stock......... 5,700,000 57,000 104,282,950 104,339,950
Conversion of
Series A
convertible
preferred
stock to
common
stock......... 2,444,444 24,444 24,797,052 24,821,496
Forfeiture of
preferred
return on
Series A
convertible
preferred
stock......... (2,821,500) 2,821,500
Dividends
payable on
Series B
exchangeable
preferred
stock......... (347,500) (347,500)
Issuance of
common stock
to acquire
interest in
facility...... 52,500 525 944,475 945,000
Exercise of
employee stock
options for
common
stock......... 28,143 282 97,984 98,266
Distributions to
stockholders... (389,716) (389,716)
Net loss........ (4,087,738) (4,087,738)
-------- ---------- ------------ ---------- -------- ------------ ------------ ------------
Balance June 30,
1996
(Unaudited --
Note 18)...... $ -- $ -- $ -- 14,244,562 $142,446 $107,702,674 $(14,962,118) $ 92,883,002
======== ========= ============ ========== ======== ============ ============ ============
</TABLE>

See accompanying notes.

F-6
<PAGE> 77

CONSOLIDATED STATEMENT OF CASH FLOWS OF SUNRISE ASSISTED LIVING, INC.
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
AND YEAR ENDED DECEMBER 31, 1995 AND THE
COMBINED STATEMENT OF CASH FLOWS OF SUNRISE ENTITIES
FOR EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993

<TABLE>
<CAPTION>
DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------- ---------------------------
1993 1994 1995 1995 (UNAUDITED)1996
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income.................................. $ (637,006) $ 1,412,027 $(10,137,164) $(1,505,400) $ (4,087,738)
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Equity in losses (earnings) on investment in
unconsolidated/non-combined partnerships..... 104,382 (33,024) 9,081 (48,134) (6,675)
Minority interest.............................. (427,798) (171,870) (6,755) 18,587 (82,704)
Provision for bad debts........................ -- 123,368 185,257 64,043 266,802
Provision for loss accrual..................... -- 350,000 -- -- --
Extraordinary gain on extinguishment of debt... -- (850,000) -- -- --
Depreciation and amortization.................. 2,798,581 3,159,764 3,008,639 1,479,259 1,803,481
Amortization of discount on long-term debt..... -- 267,000 457,000 228,500 416,900
Accrual of participation mortgage interest..... -- -- 5,400,000 -- --
Interest included in convertible obligations... 105,658 -- -- -- --
Conversion of accrued interest into note
payable...................................... 222,098 -- -- -- --
Changes in assets and liabilities:
(Increase) decrease:
Accounts receivable........................ (256,350) (299,820) (406,799) (1,410,616) (519,814)
Prepaid and other current assets........... (89,766) (595,799) (237,927) 217,886 602,023
Other assets............................... -- 36,309 (854,429) 95,533 (225,776)
Increase (decrease):
Accounts payable and accrued expenses...... 1,341,388 (362,950) 3,538,883 1,541,425 660,690
Deferred revenue........................... 6,242 (298,909) (47,078) 204,547 67,534
Other liabilities.......................... (97,069) -- 35,726 42,748 946,762
----------- ------------ ------------ ----------- ------------
Net cash provided by (used in) operating
activities....................................... 3,070,360 2,736,096 944,434 928,378 (158,515)
INVESTING ACTIVITIES
Increase in restricted cash and cash equivalents... 118,700 (552,631) (85,060) (471,997) (73,072)
Acquisition of interests in facilities............. (1,055,412) (5,458,707) 195,936 -- (18,700)
Purchases of property and equipment................ (3,218,190) (10,652,172) (12,765,570) (2,655,832) (33,941,627)
Disposition of property and equipment.............. -- -- 24,586 22,889 --
Purchase of investment and short term
investments...................................... -- -- (5,375,404) (5,214,093) (50,270,381)
Distribution from investment in unconsolidated
partnership...................................... -- (374,419) 97,876 83,983 150,224
----------- ------------ ------------ ----------- ------------
Net cash used in investing activities.............. (4,154,902) (17,037,929) (17,907,636) (8,235,050) (84,153,556)
FINANCING ACTIVITIES
Organization costs paid............................ -- (61,475) (264) -- (112,993)
Net proceeds from sale of Series A convertible
preferred stock.................................. -- 100 20,165,593 20,165,593 --
Net proceeds from sale of Series B exchangeable
preferred stock.................................. -- -- -- -- 10,000,000
Redemption of series B exchangeable preferred
stock............................................ -- -- -- (10,000,000)
Net proceeds from exercised options................ -- -- -- -- 99,036
Dividends paid on Series B exchangeable preferred
stock............................................ -- -- -- -- (347,500)
Net proceeds from initial public offering of common
stock............................................ -- -- -- -- 104,339,950
Contributions from partners........................ 28,022 3,550,336 -- 5,100 --
Distributions to partners.......................... (2,397) (6,786,485) (9,646,167) (9,645,461) (390,486)
Additional net investment of minority interests.... 2,581,497 1,024,090 (35,394) (10,294) (40,582)
Additional borrowings under long-term debt......... 923,538 101,976,095 9,326,357 1,333,483 14,916,267
Additional borrowings from related parties......... -- 10,100 -- -- --
Financing costs paid............................... (54,674) -- (312,564) (162,750) (780,258)
Repayment of long-term debt........................ (1,622,028) (76,840,388) (4,295,472) (102,764) (16,796,891)
Dividends.......................................... -- (3,750,000) -- -- --
Repayment of related party note payable............ -- -- (75,093) (141,750) (114,300)
----------- ------------ ------------ ----------- ------------
Net cash provided by financing activities.......... 1,853,958 19,122,373 15,126,996 11,441,157 100,772,243
----------- ------------ ------------ ----------- ------------
Net increase (decrease) in cash and cash
equivalents...................................... 769,416 4,820,540 (1,836,206) 4,134,485 16,460,172
Cash and cash equivalents at beginning of year..... 2,498,699 3,268,115 8,088,655 8,088,655 6,252,449
----------- ------------ ------------ ----------- ------------
Cash and cash equivalents at end of year........... $ 3,268,115 $ 8,088,655 $ 6,252,449 $12,223,140 $ 22,712,621
=========== ============ ============ =========== ============
</TABLE>

See accompanying notes.

F-7
<PAGE> 78

SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

1. ORGANIZATION AND PRESENTATION

Sunrise Assisted Living, Inc. (the "Company") does business in the assisted
living segment of providing elder care services. The Company operates, manages
and develops assisted living facilities. The facilities provide a residence,
meals and non-medical assistance to elderly residents for a monthly fee.
Agreements with residents are for a term of one year and are cancelable by
residents with thirty days notice. The Company's services are generally not
covered by health insurance and so the monthly fees are generally payable by the
residents, their family, or another responsible party.

The consolidated financial statements include the Company's wholly owned
subsidiaries that manage (Sunrise Terrace, Inc.), own (Sunrise Assisted Living
Limited Partnership), and develop (Sunrise Development, Inc.) assisted living
facilities, and also include one limited partnership which owns a facility
(Gardner Park) in which the Company owns a 50% partnership interest and controls
the limited partnership through its status as the manager of the facility and as
the sole general partner with the unilateral ability under the partnership
agreement to conduct the ordinary course of business of the partnership, and two
limited liability companies which own facilities (Village House and Raleigh).
For the limited liability company which owns the Village House facility, the
Company owns a 50% membership interest and has entered into an agreement to
acquire an additional 30% membership interest, acts as the sole manager of the
limited liability company and the manager of the facility, and has the ability
under the operating agreement to unilaterally conduct the ordinary course of
business of the limited liability company. For the limited liability company
which owns the Raleigh facility, the Company owns a 50% membership interest, has
the right on 45 days notice to acquire the remaining interests for a price
specified in the operating agreement, acts as the sole manager of the limited
liability company and the manager of the facility, and under the terms of the
operating agreement has the unilateral right to conduct the ordinary course of
business of the limited liability company. All significant intercompany
transactions and accounts have been eliminated. The Company accounts for other
significant partnership investments in which it is the general partner and/or
manager on the equity method, including Sunrise Homes of Towson, L.P. (13.9%
ownership interest) and Sunrise of Queen Anne (33% tenancy-in-common ownership
interest) because the Company is able to significantly influence both the
operating and financial decisions of these facilities. The Company also has
accounted under the equity method for its partnership investment in the limited
partnerships which own the Annapolis and Pikesville facilities. In those
partnerships, the Company is the sole general partner, has a 50% ownership
interest and has entered into an agreement to acquire an additional 1% ownership
interest. The Company's ability to conduct the ordinary course of business of
the partnership is currently limited by certain limited partner approval
requirements.

The Company was incorporated in Delaware on December 14, 1994. On January
4, 1995, the Company issued 6,019,375 shares of Common Stock to the majority
stockholders in exchange for all of the equity interests in Sunrise Entities.
The equity interests were recorded at the historical cost of the majority
stockholders (i.e., a reorganization of entities under common control).
Simultaneously, the Company sold 2,444,444 shares of Series A Convertible
Preferred Stock at $9.00 per share net of issuance costs of $1,834,403 to seven
institutional investors. In addition, the Company assumed notes payable of
$2,090,000 at January 4, 1995 (see Note 8). Concurrent with the January 4, 1995
transaction, Sunrise Entities distributed an aggregate $9,606,000 in cash to the
majority stockholders, which was recognized as a distribution payable in Sunrise
Entities' December 31, 1994 combined financial statements.

The historical financial statements for the years ended December 31, 1994
and 1993 represent the combined historical results of operations and financial
condition of Sunrise Entities. Sunrise Entities recorded their interests in the
Acquired Entities of Sunrise under the equity method prior to June 8, 1994.
Sunrise Entities, which prior to January 4, 1995 developed, managed and owned
assisted living facilities, consist of a

F-8
<PAGE> 79

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND PRESENTATION (CONTINUED)

management company, a development company, interests in limited partnerships and
limited liability companies that owned assisted living facilities and other
limited partnerships used to hold equity in operating assisted living facilities
or development projects. All of the operations and equity interests of Sunrise
Entities were held by the majority stockholder of the Company and were
transferred to the Company on January 4, 1995, in exchange for Common Stock of
the Company. All significant intercompany transactions and accounts have been
eliminated in the combined financial statements.

Prior to June 8, 1994, 15 of the assisted living facilities now owned by
the Company were held in separate limited partnerships partially owned by other
parties. Four of the facilities were not previously controlled by the Sunrise
Entities. The Sunrise Entities owned 47%, 48%, 29% and 25%, respectively of
these facilities. The combined net assets of the 15 facilities consisted of
$75,492,931 of total assets, including $263,008 of cash and $77,645,513 of
liabilities. On June 8, 1994, a new debt facility (see Note 8) was used to
finance the acquisition of all outside interests and refinance approximately
$71,500,000 of existing long-term debt of the facilities. The aggregate purchase
price of the outside interests was $48,319,245. At the acquisition date the
carrying value of the net operating assets of the facilities was stepped up by
$12,094,910 to reflect the excess of the purchase price over the book basis of
the interests acquired (i.e., the acquisition of an interest not previously
earned) that was not previously owned by the Company's principal stockholders.

Disclosures made herein with respect to the years ended December 31, 1993
and 1994 are to be read as disclosures of Sunrise Entities. All disclosures made
in reference to periods subsequent to December 31, 1994, except those
specifically identified as relating to transactions prior to the formation of
the Company, are disclosures of the Company.

2. SIGNIFICANT ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally
accepted accounting principles 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.

REVENUE RECOGNITION

Resident fee revenue is recognized when services are rendered and consists
of daily resident fees, resident community fees and other ancillary services.
Generally, resident community fees approximating sixty times the daily residence
fee are received from potential residents upon occupancy. Resident community
fees are ratably refundable if the prospective resident does not move into the
facility or moves out of the facility within ninety days. Community fees
received are recognized as income over the first ninety days of the resident's
stay. Revenue from management contracts is recognized in the month in which it
is earned in accordance with the terms of the management contract.

F-9
<PAGE> 80

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ALLOWANCES FOR DOUBTFUL ACCOUNTS

Details of the allowance for doubtful accounts receivable are as follows:

<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Beginning balance.................................... $ -- $ -- $ 50,000
Bad debt expense..................................... -- 123,000 185,000
Accounts written off................................. -- (73,000) --
--------- --------- --------
Ending balance....................................... $ -- $ 50,000 $235,000
========= ========= ========
</TABLE>

PROVISION FOR LOSS ACCRUALS

During 1994, the Company recorded a loss accrual amounting to $250,000 to
recognize anticipated losses on one of its management contracts. Also in 1994,
the Company accrued $100,000 in anticipation of actions taken by Virginia state
and local authorities regarding licensure and state building code violations. No
loss accruals were recorded in 1995.

PRE-RENTAL COSTS

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

Pre-rental costs and accumulated amortization are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
<S> <C> <C>
Pre-rental costs................................................. $42,725 $253,557
Accumulated amortization......................................... (1,965) (11,393)
------- --------
$40,760 $242,164
======= ========
</TABLE>

PROPERTY AND EQUIPMENT

Property and equipment are recorded at the lower of cost or net realizable
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 facilities. Maintenance
and repairs are charged to expense as incurred. Depreciation is computed using
the straight-line method at rates intended to amortize the cost of the related
assets over their estimated useful lives.

During 1994, Sunrise Entities changed the estimated useful life of
furniture and equipment from seven to ten years and of buildings from 31.5 to 40
years. The changes had the effect of reducing depreciation expense by $402,069
in 1994.

DEFERRED FINANCING COSTS

Costs incurred in connection with obtaining permanent financing for
Company-owned facilities have been deferred and are amortized over the term of
the financing using the effective interest method.

F-10
<PAGE> 81

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Deferred financing fees and accumulated amortization are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
<S> <C> <C>
Deferred financing........................................... $2,233,750 $2,546,319
Accumulated amortization..................................... (162,393) (438,385)
---------- ----------
$2,071,357 $2,107,934
========== ==========
</TABLE>

ORGANIZATION COSTS

Costs incurred in connection with the organization of the Company have been
capitalized and are being amortized ratably over five years.

INCOME TAXES

Income taxes are provided using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis (temporary differences).

All of Sunrise Entities were partnerships, limited liability corporations
or were corporations that elected to be treated as an S Corporation under
Section 1362 of the Internal Revenue Code. Therefore, no provision or benefit
for income taxes was included in the Predecessor's financial statements because
taxable income or loss passed through pro rata to the owners of the Predecessor.

CASH AND CASH EQUIVALENTS

The Company 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.

NON-CASH TRANSACTION

In 1993 the Company assumed a note payable of $8,550,000 as the primary
consideration for the acquisition of the Village House facility.

STOCK-BASED COMPENSATION

The Company 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. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees and accordingly
recognizes no compensation expense for the stock option grants.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows

F-11
<PAGE> 82

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

estimated to be generated by those assets are less than the assets' carrying
amount. Statement 121 also addresses the accounting for long-lived assets that
are expected to be disposed of. The Company adopted Statement 121 in the first
quarter of 1996 and the effect is not material to the Company's operations or
financial position taken as a whole. Under SFAS No. 121, property and equipment
of the Company 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. The Company 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.

In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation, which provides an alternative to APB Opinion No. 25,
Accounting for Stock Issued to Employees, in accounting for stock-based
compensation issued to employees. The Statement allows for a fair value-based
method of accounting for employee stock options and similar equity instruments.
However, for companies that continue to account for stock-based compensation
arrangements under Opinion No. 25, Statement No. 123 requires disclosure of the
pro forma effect on net income and earnings per share of its fair value-based
accounting for those arrangements. These disclosure requirements are effective
for fiscal years beginning after December 15, 1995, or upon initial adoption of
the statement, if earlier. The Company adopted Statement No. 123 in the first
quarter of 1996 and has elected to continue to account for stock-based
compensation arrangements under APB Opinion No. 25.

OTHER

The Company's interest in accumulated losses of unconsolidated
partnership's distributions are recorded below the Company's cost basis, which
reflects the Company's obligations as the general partner. The Company has no
liability for any other material commitments or contingencies of partnerships in
which it is a general partner.

RECLASSIFICATIONS

Certain 1993 and 1994 balances have been reclassified to conform with the
1995 presentation.

3. PRO FORMA NET LOSS PER COMMON SHARE

The Company's net loss per share calculations are based upon the weighted
average number of shares of Common Stock outstanding. Pursuant to the
requirements of the Securities and Exchange Commission (SEC) staff accounting
bulletin No. 83, options to purchase Common Stock issued at prices below the
initial public offering price during the twelve months immediately preceding the
initial filing of the registration statement relating to the initial public
offering ("IPO"), have been included in the computation of net loss per share as
if they were outstanding for all periods presented (using the treasury method
assuming repurchase of common stock at the estimated IPO price). Other shares
issuable upon the exercise of stock options or conversion of redeemable
convertible preferred stock have been excluded from the computation because the
effect of their inclusion would be anti-dilutive. Subsequent to the Company's
IPO, options under the treasury stock method will be included to the extent they
are dilutive. The Company's pro forma loss per share reflects the conversion of
Series A Convertible Preferred Stock and the acquisition of the Southeast
Properties as if they occurred on January 1, 1995.

F-12
<PAGE> 83

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

3. NET LOSS PER COMMON SHARE (CONTINUED)

The following table summarizes the computations of share amounts used and
the computation of pro forma net loss per common share presented in the
accompanying statements of operations:

<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, 1995
(UNAUDITED)
<S> <C>
Common and common equivalent shares:
Weighted average number of shares of common stock outstanding
during the period................................................ 6,019,475
Assumed conversion of Series A Convertible Preferred Stock......... 2,444,444
Options to purchase common stock issued within one year of
registration statement using the treasury stock method........... 362,208
------------
Total common and common equivalent shares of stock considered
outstanding during the year...................................... 8,826,127
============
Net loss........................................................... $(10,137,164)
Net loss per common and common equivalent shares................... (1.15)
Pro forma adjustment to reflect acquisition of Southeast Properties
(Note 18)........................................................ 1,605,000
------------
Pro forma net loss................................................. $ (8,532,164)
============
Net loss per common and common equivalent shares................... $ (0.97)
</TABLE>

4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
ASSET LIVES 1994 1995
<S> <C> <C> <C>
Land and land improvements..................... 10 yrs. $ 11,638,789 $ 13,071,971
Building and building improvements............. 40 yrs. 82,033,939 83,012,889
Furniture and equipment........................ 10 yrs. 8,960,081 10,403,810
------------
102,632,809 106,488,670
Less accumulated depreciation and
amortization................................. (12,539,785) (15,184,945)
------------
90,093,024 91,303,725
Construction in progress....................... 4,203,079 13,013,392
------------
$ 94,296,103 $104,317,117
============
</TABLE>

Interest capitalized during 1994 and 1995 was $137,896 and $166,960,
respectively.

Construction in progress includes pre-acquisition costs and other direct
costs related to acquisition, development and construction of facilities
including certain direct costs of the Company's development subsidiary, Sunrise
Development, Inc. If a project is abandoned, any costs previously capitalized
are expensed.

5. INVESTMENT

On March 1, 1995, the Company purchased all of the outstanding mortgage
revenue bonds used to finance a facility managed by the Company. The 10% Bucks
County Industrial Development Authority, First

F-13
<PAGE> 84

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

5. INVESTMENT (CONTINUED)

Mortgage Revenue Bonds, July 1, 2019, having a face value of $12.5 million, were
purchased for $5,000,000. The bonds were in financial default when purchased.

On June 30, 1995, the bonds were restructured, at no gain or loss to the
Company, to reduce their face amount to $5,750,000 (Series A and C) and provide
the facility managed by the Company additional funding for renovations (Series
B). The renovation bond allows for draws up to $750,000 as construction
continues at the facility. Interest only is payable until maturity. The balances
outstanding at December 31, 1995 are as follows:

<TABLE>
<CAPTION>
DESCRIPTION FACE AMOUNT INTEREST RATE MATURITY DATE
<S> <C> <C> <C>
Series A............................. $5,000,000 11% July 1, 2025
Series B............................. 375,404 11% July 1, 2015
Series C............................. 750,000 20% subject to available cash July 1, 2010
Bond discount........................ (750,000)
----------
$5,375,404
==========
</TABLE>

Subsequent to June 30, 1995 all interest payments on these bonds are
current. The Company recognized $443,069 in interest income during 1995 on this
investment. The bond discount ($750,000 at December 31, 1995) will be recognized
as income over the life of the loan. These bonds are classified as
available-for-sale in accordance with SFAS 115. Management believes the net
carrying cost of the bonds approximates market value at December 31, 1995.

6. RELATED-PARTY TRANSACTIONS

SUNRISE FOUNDATION, INC.

The majority stockholders operate a school and a day care center through a
not-for-profit organization, Sunrise Foundation, Inc. ("SFI"). SFI reimburses
the Company monthly for use of office facilities and support services.
Reimbursements were $60,000 per year in 1993, 1994 and 1995. Such amounts are
included in management services income.

GROUND LEASE

The Company has a ninety-nine year ground lease with a stockholder and the
stockholder's relative. The ground lease expires in May 2085. The basic monthly
rent is adjusted annually based on the CPI. Rent expense under this lease was
$241,896, $248,496 and $255,258 for the years ended December 31, 1993, 1994 and
1995, respectively. The Company subleases one-half of this ground lease to SFI.
The sublease expires in May 2085 and requires payments equal to 50% of all
payments made by the Company under the ground lease. Sublease rental income was
$120,948, $124,248 and $127,629 for the years ended December 31, 1993, 1994 and
1995 respectively. Rent expense, included in facility operating expenses, is
recorded net of the sublease income.

OTHER

The majority stockholders lease certain real property located in Fairfax
County, Virginia for use as a residence pursuant to a ninety-nine year ground
lease with the Company dated June 7, 1994. The rent is $1.00

F-14
<PAGE> 85

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

6. RELATED PARTY TRANSACTIONS (CONTINUED)

per month. This property is part of a parcel, which includes a facility, that
was transferred to the Company on June 8, 1994.

A director of the Company made a capital contribution of $500,000 in
exchange for a 30% membership interest in a limited liability company which
operates one of the Company's facilities. The Company owns a 50% membership
interest, is the managing member and manages the facility pursuant to a
management contract that expires in 2003. Distributions made by the Company to
the director in 1993, 1994 and 1995 aggregated $18,700, $35,616 and $40,295,
respectively. The operating agreement of the facility requires the facility to
repurchase the minority interests at the lessor of (i) the facility's fair
market value or (ii) return of the investor's contributed capital assuming on 8%
return net of distributions. The repurchase right is exercisable beginning in
2000.

7. RECEIVABLES AND PAYABLES FROM AFFILIATES

Included in prepaid and other current assets are net receivables from
unconsolidated partnership investments of $1,073,242 and $1,359,164, as of
December 31, 1994 and 1995, respectively. Included in other assets are notes
receivable from officers of the Company amounting to $43,401 and $109,348 as of
December 31, 1994 and 1995, respectively.

Included in other current liabilities is $714,295 and $102,601 payable to
affiliates as of December 31, 1994 and 1995, respectively. Also included in
other liabilities in 1994 is $671,000 payable to minority owners, which pertains
to advances for construction activities prior to obtaining a construction loan.

Notes payable to affiliated entities consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
<S> <C> <C>
Notes to related limited partnerships, principal and interest
due December 31, 1999. Interest accrues at 8% annually. ... $1,510,231 $1,435,138
Two notes due to an employee and an entity related to that
employee of $60,000 and $40,000, respectively. Interest
accrues at $1,890 annually, principal due June 5, 1999. ... 100,000 100,000
Note payable assumed upon formation of the Company due
December 31, 1999 bearing no interest. .................... -- 200,000
---------- ----------
$1,610,231 $1,735,138
========== ==========
</TABLE>

F-15
<PAGE> 86

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

8. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
<S> <C> <C>
Multi-Property/Participating Blanket First Mortgage (the "GECC
Mortgage")..................................................... $ 95,000,000 $ 95,000,000
Accrued participation interest on the GECC Mortgage.............. 3,200,000 8,600,000
Outstanding draws on construction notes payable.................. 358,874 9,685,336
Mortgage notes payable to Housing Opportunities Commission of
Montgomery County, Maryland (HOC).............................. 8,600,308 8,530,059
Notes payable dated June 6, 1994 to three individual parties..... -- 1,170,544
Other notes and capital leases................................... 92,942 44,633
Line of credit................................................... 4,100,000 --
Discount on the GECC Mortgage long-term debt less amortization of
$724,000....................................................... (2,933,000) (2,476,000)
------------ ------------
108,419,124 120,554,572
Less current portion........................................ (4,216,667) (268,576)
------------ ------------
$104,202,457 $120,285,996
============ ============
</TABLE>

The GECC Mortgage is collateralized by a blanket first mortgage on all
assets of a subsidiary of the Company. Such assets had a book value of
approximately $80 million at December 31, 1995. The GECC Mortgage consists of
two separate debt classes. Class (A) in the amount of $65,000,000 bears a fixed
interest rate of 8.56% and is interest only until the maturity date of May 31,
2001. Class (B) in the amount of $30,000,000 bears a variable interest rate of
one month LIBOR rate plus 5.75% (11.75% at December 31, 1995). Class (B) is
interest only until July 1, 1997 at which time principal and interest payments
are due using a twenty-year amortization schedule. Effective September 30, 1996,
Sunrise Assisted Living Limited Partnership is required to meet a minimum debt
service coverage ratio or principal payments accelerate to the lesser of monthly
net cash flow or amortization of the loan over a twenty-year period. Each month,
the lender can receive additional interest based on 25% of net cash flows as
specified in the loan documents, which amounted to $347,000 in 1995 and $370,000
in 1994 and has a 25% participation interest payable at maturity computed at
either the date of maturity, initial public offering of securities by Sunrise
Assisted Living Limited Partnership or one of its affiliates, or sale of the
operating assets. The terms of the loan contain certain covenants and prepayment
restrictions. Additionally, the current majority stockholders must maintain a
25% interest in the Company.

The GECC Mortgage requires Sunrise Assisted Living Limited Partnership to
maintain certain restricted cash balances. These restricted cash and cash
equivalent balances consist of escrows for an operating reserve of fifteen days
of total Sunrise Assisted Living Limited Partnership expenses, a capital reserve
of 3% of monthly revenues of Sunrise Assisted Living Limited Partnership and a
real estate tax escrow.

A participation interest of $3,200,000 payable in connection with the GECC
Mortgage was recorded at the loan date. A corresponding amount was recorded as
loan discount that will be amortized over the life of the loan. Amortization of
the discount of $267,000 and $457,000 has been included as interest expense in
1994 and 1995, respectively. During 1995, the Company revised its estimate of
the market value of the properties financed by the GECC Mortgage. Additional
participation interest on the GECC Mortgage of $5.4 million

F-16
<PAGE> 87

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

8. LONG-TERM DEBT (CONTINUED)

was accrued and expensed through December 31, 1995 based on the increase in the
properties' estimated market value during 1995.

The construction notes have total available borrowings of $14,934,000. The
notes bear interest based on various published interest rate indices. At
December 31, 1995, interest rates on the notes ranged from 7.8% to 11%,
remaining maturities ranged from four to seven years, and the notes were secured
by four facilities under construction.

The mortgage notes payable to HOC have monthly payments of $56,714,
including interest at 7.25%, due monthly through June 2033. Additional payments
of approximately $21,070 are also made monthly for taxes, insurance and
replacement reserves. The notes are insured by the Maryland Housing Fund for
which the Company pays an annual fee of .5% of the outstanding note balance and
are collateralized by a deed of trust on the applicable facility and an
assignment of rents from that facility. One of the notes, totaling $200,000, is
also guaranteed by certain stockholders. The notes payable to individuals were
part of the $2,090,000 and liabilities assumed upon the formation of the Company
(see Note 1). The Notes are interest free and are recorded net of imputed
interest at 8.56% (fixed rate of the GECC Mortgage). The principal amount is
payable in 132 equal consecutive monthly installments beginning July 1, 1994.
The notes are due in full on June 1, 2005.

The HOC mortgage notes also place certain restrictions on operations
including maintenance of escrow accounts for real estate taxes and property
replacement reserves.

The line of credit was due May 31, 1995. Interest accrued at a rate equal
to two hundred basis points over the thirty-day LIBOR rate. Borrowing on the
line was used to purchase an assisted living facility.

Principal maturities of long-term debt as of December 31, 1995 are as
follows:

<TABLE>
<S> <C>
1996.................................................................. $ 268,576
1997.................................................................. 605,250
1998.................................................................. 4,959,563
1999.................................................................. 5,087,653
2000.................................................................. 912,351
Thereafter............................................................ 108,721,179
------------
$120,554,572
============
</TABLE>

Interest expense paid totaled $3,241,778, $6,220,886 and $10,231,941, in
1993, 1994 and 1995, respectively, of which $0, $17,288 and $18,000 in 1993,
1994 and 1995, respectively, is related to notes payable to related parties.

Substantially all of the Company's property and equipment is subject to
mortgages or other pledges.

Restricted cash and cash equivalents at December 31 consists of the
following:

<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Under the GECC Mortgage, real estate tax escrows, operating
and capital reserves....................................... $ 991,382 $1,104,665
Under HOC mortgage, real estate tax escrows and resident
security deposits.......................................... 184,028 155,805
---------- ----------
$1,175,410 $1,260,470
========== ==========
</TABLE>

F-17
<PAGE> 88

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

9. 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. Prior to formation of the
Company on January 4, 1995 (see Note 1) Sunrise Entities were held in
partnerships, limited liability companies, and subchapter S corporations, all of
which passed through tax liabilities and benefits to the owners. The transfer of
assets at the formation of the Company was taxable, in part to the owners.
Accordingly, the tax basis of a majority of the property and equipment of the
Company exceeds its respective book basis for financial reporting purposes. The
tax effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities recognized as of the date
of formation of the Company and at December 31, 1995 are presented below:

<TABLE>
<CAPTION>
JANUARY 4, DECEMBER 31,
1995 1995
<S> <C> <C>
Deferred tax assets:
Property and equipment.................................. $ 6,598,370 $ 6,664,396
Participating interest.................................. -- 2,480,220
Operating loss carryforward............................. -- 1,562,860
Deferred revenue........................................ 349,269 363,442
Bad debt allowance...................................... 20,250 95,175
----------- ------------
Total gross deferred tax assets........................... 6,967,889 11,166,093
Less valuation allowance.................................. (6,967,889) (11,166,093)
Deferred tax liabilities.................................. -- --
----------- ------------
Net deferred tax amount................................... $ -- $ --
=========== ============
</TABLE>

At December 31, 1995, the Company had net operating loss carryforwards for
income tax purposes of approximately $3,860,000 which expire in 2010. A
valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company is
in a cumulative pretax loss for the latest three years for financial reporting
purposes. Recognition of deferred tax assets will require generation of future
taxable income. There can be no assurance that the Company will generate any
earnings or any specific level of earnings in future years. Therefore, the
Company established a valuation allowance on deferred tax assets of
approximately $11.2 million as of December 31, 1995.

Significant components of the provision for income taxes are as follows for
the year ended:

<TABLE>
<CAPTION>
DECEMBER
31, 1995
<S> <C>
Current:
Federal........................................................... $ --
State............................................................. --
-----------
Total current........................................................ --
Deferred:
Federal........................................................... (3,524,418)
State............................................................. (673,786)
Increase in valuation allowance................................... 4,198,204
-----------
Total deferred....................................................... $ --
===========
</TABLE>

F-18
<PAGE> 89

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

9. INCOME TAXES (CONTINUED)

The effective tax rate on income before income taxes varies from the
statutory federal income tax rate for the year ended December 31, 1995 as
follows:

<TABLE>
<S> <C>
Statutory rate........................................................ (34)%
State taxes, net...................................................... (6)
Valuation allowance................................................... 40
----
-
0%
=====
</TABLE>

10. STOCKHOLDERS' (DEFICIT) EQUITY AND STOCK OPTION PLAN

The Company effected a three-for-one stock split of the Company's Common
Stock and increased the number of authorized shares of Common Stock from
20,000,000 to 60,000,000, effective July 11, 1995. Pursuant to the authorization
of the Board of Directors and stockholders, the Company has effected on March
20, 1996 a one-for-three stock split. All share amounts reflected herein reflect
the one-for-three stock split. Authorized shares of Common Stock remain
60,000,000. The Company has a stock option plan providing for the grant of
incentive and nonqualified stock options to employees, directors, consultants
and advisors. Pursuant to the Plan, 998,065 shares of Common Stock have been
reserved for issuance. At December 31, 1995 the following options have been
granted:

<TABLE>
<CAPTION>
DATE OF GRANT NO. OF SHARES GRANTED EXERCISE PRICE
<S> <C> <C>
May 16, 1995.................................. 257,100 $ 3.00
November 17 ,1995............................. 63,333 $ 7.50
December 15, 1995............................. 181,167 $ 7.50
December 15, 1995............................. 6,666 $ 3.75
</TABLE>

No shares have been forfeited. Options expire ten years from date of grant
and will vest 25% each year beginning on the earlier of December 31, 1999 or the
effectiveness of a Registration Statement on Form S-8 following the completion
of the proposed initial public offering by the Company.

The Company also has a stock option agreement with one of its senior
executives who currently is not a stockholder of the Company. The agreement, as
amended, is effective as of January 4, 1995 and covers 450,000 shares of Common
Stock that have been reserved for issuance at an exercise price of $8.00. No
compensation has been attributed to the options. These options expire in ten
years and are exercisable in 2001 or when the "trigger price" or per share
market value of outstanding Common Shares reaches a certain value as follows:

<TABLE>
<CAPTION>
SHARES EXERCISABLE TRIGGER PRICE
<S> <C>
300,000......................................................... $ 15.75
75,000......................................................... $ 25.00
75,000......................................................... $ 30.00
</TABLE>

A total of 3,892,509 shares of Common Stock have been reserved for stock
option plans and conversion of preferred stock (see Note 11).

F-19
<PAGE> 90

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

10. STOCKHOLDERS' (DEFICIT) EQUITY AND STOCK OPTION PLAN (CONTINUED)

Common Stock at December 31, 1994, was comprised of the following:

<TABLE>
<S> <C>
Sunrise Terrace Inc. Common Stock, $1 par value, 10,000 shares authorized
and outstanding.......................................................... $10,000
Sunrise Development Inc. Common Stock, $10.00 par value, 5,000 shares
authorized, 50 outstanding............................................... 500
Sunrise Assisted Living Inc. Common Stock, $.01 par value 60,000,000 shares
authorized, 100 shares outstanding....................................... 1
-------
$10,501
=======
</TABLE>

11. REDEEMABLE PREFERRED STOCK

The Company has authorized 10,000,000 shares of $0.01 par value of
preferred stock, of which 2,444,444 shares have been designated Series A
Convertible Preferred Stock and of which 3,199,995 shares have been designated
Series B Exchangeable Preferred Stock.

The Series A Convertible Preferred Stock (Series A Preferred Stock) has a
9% preferred return, compounded annually, payable, together with the stated
value of $9 per share, upon redemption. The Series A Preferred Stock can be
redeemed at the earlier of 2002, or if a qualified public offering has not
occurred by December 30, 1998, or if a change in ownership of the Company has
occurred by June 15, 1997. The preferred return of $1,963,500 through December
31, 1995 is forfeited upon conversion to shares of Common Stock upon completion
of a qualified public offering. Series A Preferred Stock is currently
convertible to 2,444,444 shares of Common Stock which have been reserved. See
Note 18.

The holders of Series A Preferred Stock shares are entitled to vote on all
matters submitted to a vote of the stockholders of the Company and to have the
number of votes equal to the number of whole shares of Common Stock into which
each share of Series A Preferred Stock is then convertible. Each Series A
stockholder is obligated to purchase, upon call by the Company, its pro rata
portion of 1,000,000 shares of Series B exchangeable preferred stock for $10 per
share, or $10,000,000. On January 19, 1996 the Company exercised the call.

The Series B Exchangeable Preferred Stock (Series B Preferred Stock) has a
9% cumulative dividend payable quarterly and has no conversion rights. Each
share of Series B may be redeemed at the option of the holder beginning in 2002
or earlier under specified circumstances. If the gross proceeds provided in an
initial public offering are greater than $35,000,000, all shares of Series B
Preferred Stock are required to be redeemed at a redemption price of $10.00 per
share plus an amount in cash equal to any accrued but unpaid dividends on the
Series B shares.

Shares of Series B are exchangeable, at the option of the Company, for
subordinated debt bearing interest of 9% per annum. In general, Series B
stockholders are not entitled to vote on any matters submitted to a vote of the
stockholders of the Company.

12. EXTRAORDINARY ITEM

In June 1994, $3,350,000 of second-trust mortgages related to two of the
predecessor limited partnerships, were prepaid for $2,500,000. The gain on
prepayment has been reflected as an $850,000 extraordinary gain in the combined
statements of operations.

F-20
<PAGE> 91

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

13. COMMITMENTS

On June 8, 1994 the Company exchanged a minority interest in an operating
facility for all of the operating assets of three related limited partnerships
(the LPs). The Company does not directly own any interest in the LPs. In
addition, the Company has unconditionally guaranteed that it will fund any
shortfall in cash required by the three LPs, to honor the LPs' commitments in
1996 to 1998, to provide a guaranteed 9% return to the limited partners and to
repurchase the limited partnership interests of the limited partners. The
combined cash shortfall if the repurchase had been completed at December 31,
1995, would have been $2,129,124. The guarantees are considered to be contingent
acquisition costs. The actual amount of cash shortfall of the LPs, if any, will
depend on the cash distributions and residual value of the minority interest
transferred to the LPs. If the Company is required to fund any cash shortfall in
accordance with the guarantees, the carrying value of the net assets required in
the exchange would be increased.

The Company does not have any requirement to fund this or any other cash
shortfall as of December 31, 1995.

The Company leases its corporate office space under various leases that
expire on September 30, 1996 and February 1999. The base rent increases by fixed
amounts and is subject to additional annual increases based on the Consumer
Price Index. The Company is also responsible for its proportionate share of
annual increases in operating expense and property taxes.

Future minimum lease payments under office and equipment leases as of
December 31, 1995 are as follows:

<TABLE>
<S> <C>
1996.............................................................. $202,392
1997.............................................................. 62,934
1998.............................................................. 62,934
1999.............................................................. 20,712
--------
348,972
Less sublease rentals............................................. 4,604
--------
$344,368
========
</TABLE>

Included in general and administrative expenses is rent expense amounting
to $215,688, $227,452 and $183,230 for the years ended December 31, 1993, 1994
and 1995, respectively.

The Company's growth strategy is to develop at least 40 new assisted living
facilities over the next three years. In conjunction with the growth strategy,
at December 31, 1995, the Company had four facilities under construction. Total
project costs for these four facilities is expected to be approximately $36.4
million of which $18.6 million has been incurred. In addition, the Company has
entered into contracts to purchase an additional 12 property sites for future
development. Total contracted purchase price of these sites amounts to $14.4
million.

In accordance with the formation agreements of two consolidated
subsidiaries, the Company is required to repurchase the minority interests in
those subsidiaries. These rights can be exercised beginning 2000 and 2001
respectively for each or the two facilities and would be based upon 110% of the
facilities estimated fair market value or 115% if exercised after twelve years.
The aggregate carrying value of the minority interest for the two consolidated
subsidiaries was $1,104,804 at December 31, 1995.

F-21
<PAGE> 92

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

14. PROFIT-SHARING PLAN

The Company has a profit-sharing plan (the "Plan") under Internal Revenue
Code Section 401(k). All employees of the Company are covered by the Plan. The
Plan contains three elements -- employee salary contributions, matching employer
contributions, and special discretionary employer contributions. All full-time
employees who have twelve months of employment are eligible to participate in
the Plan. Deferred salary contributions are made through pre-tax salary
deferrals of between 1% and 16%.

The Plan provides that the employer will contribute $0.25 for every dollar
the employee contributes, up to 7% of the employee's compensation. Matching
contributions made by the Company and the Predecessor totaled $20,711, $38,594
and $80,198 during 1993, 1994 and 1995, respectively. No discretionary profit-
sharing contributions were made during 1993, 1994 or 1995.

15. 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 the Company 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.
The fair value of the investment is discussed in Note 5.

Cash equivalents, accounts receivable, accounts payable and accrued
expenses, 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 $74,745,000 has an
estimated aggregate fair value of $75,000,000 at December 31, 1995. Estimated
fair value of fixed rate debt is based on interest rates currently available to
the Company for issuance of debt with similar terms and remaining maturities.
The estimated fair value of the Company's variable rate debt is estimated to be
approximately equal to its carrying value of $45,810,000 at December 31, 1995.

Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 1995. Although management
is not aware of any factors that would significantly affect the reasonable fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since December 31, 1995 and current estimates of
fair value may differ from the amounts presented herein.

16. SUBSEQUENT EVENTS

INITIAL PUBLIC OFFERING

On May 28, 1996, the Company purchased an additional 30% interest held by a
director in one of the Company's facilities in exchange for 52,500 shares of
Common Stock. The purchase price of $945,000 was determined based on a valuation
of the facility prepared by the Company based primarily upon a capitalization of
net operating income from the facility.

On June 5, 1996, all of the 2,444,444 outstanding shares of Series A
Convertible Preferred Stock of the Company were converted into an equal number
of shares of Common Stock. Preferred return of $2,821,500 through the conversion
date was forfeited upon conversion. In addition, the Company redeemed all of its
1,000,000 shares of Series B Exchangeable Preferred Stock on June 5, 1996 at a
redemption price of $10 per share plus accrued dividends of $165,000.

F-22
<PAGE> 93

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

16. SUBSEQUENT EVENTS (CONTINUED)

On June 5, 1996, the Company successfully completed an initial public
offering (the "IPO") of its Common Stock. A total of 5,700,000 shares,
representing 40% of the Company's outstanding Common Stock at June 30, 1996,
were sold by the Company in the IPO at a price of $20 per share, for gross
proceeds of $114,000,000. The net proceeds to the Company from the IPO, after
deducting underwriting discount and offering expenses, were approximately
$104,340,000.

ACQUISITION

The Company acquired a 120-unit assisted living facility in February 1996
which will be accounted for using the purchase method. The acquisition price was
$8,480,000 including the assumption of the existing mortgage amounting to
approximately $5,260,000. The total purchase price will be allocated to the
building and other real property. The acquired facility had approximately $2.4
million of operating revenue in 1995.

CREDIT FACILITIES

In March 1996, the Company obtained a $13.0 million unsecured credit
facility to be used for development and acquisitions and working capital needs.
The credit facility is for a term of five years. Advances under the facility
bear interest at a rate per annum, fluctuating daily, equal to one and one-half
of one percent plus the greater of (i) the lender's prime lending rate and (ii)
the Federal funds rate plus one-half of one percent.

MODIFICATION OF GECC MORTGAGE

On May 1, 1996, the Company entered into a Loan Modification Agreement
regarding the GECC Mortgage whereby upon consummation of the Company's initial
public offering, the Company will pay the lender $8.6 million as payment in full
of all participation interest due and payable pursuant to the GECC Mortgage. In
addition, the Company will pay the lender $8 million to be applied to repay a
portion of the Class B debt. The lender will then reduce the interest rate
applicable to the outstanding portion of Class B debt from LIBOR plus 5.75% to
LIBOR plus 3.75%. Had the Company modified the loan documents effective January
1, 1995, GECC Mortgage interest for 1995 would have been approximately $7.8
million instead of $15.6 million.

PENNSYLVANIA SURVEY REPORT

On May 23, 1996, one of the Pennsylvania nursing home facilities managed by
the Company received notice from the Pennsylvania Department of Health of a
survey report stating that the facility was not in compliance with the
requirements of participation for the Medicare and Medicaid programs. Therefore,
the Pennsylvania survey agency report stated that a civil monetary penalty of
$50 to $3,000 per day will be imposed for the period beginning March 12, 1996,
the date the facility was first alleged to be out of compliance, until the date
the alleged deficiencies are corrected. The report also stated that the agency
will recommend a ban on payment for new Medicare/Medicaid admissions if
substantial compliance is not achieved within three months after the last day of
the survey identifying the alleged noncompliance. The facility has not received
confirmation or verification from the Health Care Financing Administration of
whether such remedies will be imposed, or what the amount of any such penalty
would be. The Company has engaged counsel and intends to vigorously contest the
survey report and the imposition of a civil monetary penalty (see Note 18).

F-23
<PAGE> 94

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

17. 1996 STOCK OPTION GRANTS (UNAUDITED)

On February 15, 1996 and February 29, 1996, the Company granted stock
options for a total of 327,000 shares of Common Stock at an exercise price of
$10.50 per share. The Company believes that these options were granted at no
less than fair market value. Accordingly, no compensation expense was recorded
for these options. The Company believes that events subsequent to February 29,
1996 substantially increased the value of its Common Stock. The market price for
publicly traded assisted living companies increased significantly. In addition,
as discussed in Note 16, subsequent to the date of the grants, the Company
commenced and completed negotiations for a loan modification with GECC. The loan
modification eliminated the uncertainty and financial impact of GECC's 25%
participation in cash flow and property appreciation.

The Company believes if the stock option grants had been made after the
events described above at that same exercise price, these option grants would be
deemed compensatory in an amount reflecting the difference between the mid-point
of the initial public offering filing range, discounted by approximately 25%,
and the exercise price of the options. The Company believes that approximately a
25% discount to the mid-point of the range would be appropriate given the
Company's status as a private company until completion of the IPO and, among
other factors: (i) the Founders' continued ownership of 100% of the Common
Stock; (ii) mandatory redemption features, dividend preferences and other rights
of the Series A Investors which continue until completion of the IPO; (iii)
illiquidity of the Common Stock subject to the options; (iv) option vesting and
exercise conditions; (v) risk associated with completion of the IPO; and (vi)
market pricing uncertainties. Since it is the Company's policy to grant stock
options at fair market value, the exercise price per share would have been
substantially higher if the February 1996 stock option grants had been made
subsequent to the events described above.

18. INTERIM FINANCIAL STATEMENTS (UNAUDITED)

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been
prepared by the Company and include all normal recurring adjustments which are,
in the opinion of management, necessary for a fair presentation of the results
for the six-month periods ended June 30, 1996 and 1995 pursuant to the
instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. Operating results for the
six-month period ended June 30, 1996 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1996.
Unless the context indicates otherwise, the Company means Sunrise Assisted
Living, Inc. and its consolidated subsidiaries.

LONG-TERM DEBT

Long-term debt was $119,090,850 at June 30, 1996 compared to $120,554,572
at December 31, 1995. In June 1996, pursuant to a Loan Modification Agreement
relating to a $95.0 million principal amount term loan (the "GECC Mortgage") in
place with General Electric Capital Corporation ("GECC"), the Company paid GECC
$8,633,000 as payment in full of GECC's 25% participating interest in cash flow
and appreciation in the value of certain properties. In addition, the Company
prepaid $8,000,000 of its variable rate debt. The interest rate applicable to
the remaining $22,000,000 balance of the floating rate debt was reduced from
LIBOR plus 5.75% to LIBOR plus 3.75%.

F-24
<PAGE> 95

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

18. INTERIM FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

The Company has obtained a commitment (subject to certain conditions
including syndication) from a financial institution for an $80,000,000 line of
credit for construction and interim loans to finance the development of up to 10
assisted living facilities of a wholly-owned subsidiary of the Company. As of
June 30, 1996, the Company had closed $38,000,000 of the total commitment. The
Company guaranteed the repayment of all amounts outstanding under this line of
credit. The line of credit is for a term of five years and is secured by
cross-collateralized first mortgages on the real property and improvements and
first liens on all other assets of the subsidiary. Advances under the facility
bear interest at rates from LIBOR plus 1.7% to LIBOR plus 2.9%. As part of this
line, the Company has entered into a swap transaction whereby effective during
the period June 18, 1998 through June 18, 2001, outstanding advances of up to
$19,000,000 under this line of credit, or other LIBOR floating rate debt, bear
interest at a fixed rate based on a fixed LIBOR base rate of 7.3%. The Company
also has a $13,000,000 unsecured credit facility to be used for development and
acquisitions and working capital needs. The credit facility is for a term of
five years. Advances under the facility bear interest at a rate per annum,
fluctuating daily, equal to one and one-half of one percent plus the greater of
(i) the lender's prime leading rate and (ii) the Federal funds rate plus
one-half of one percent. In connection with obtaining this credit facility, the
Company issued warrants for 50,000 shares of Common Stock at an exercise price
per share of $17.00. There were no amounts outstanding under either credit
facility at June 30, 1996.

SHORT-TERM SECURITIES

At June 30, 1996, short-term securities consisted of high-quality
commercial paper with maturities not greater than 180 days. These securities are
classified as available-for-sale in accordance with SFAS 115. The carrying
amount of these investments approximates their market value at June 30, 1996.

UNUSUAL CHARGE

To avoid a possible change in the Company's ability to continue to manage
two facilities resulting from the reduction in the ownership interest in the
Company of Paul J. Klaassen, the Company's Chairman of the Board, President,
Chief Executive Officer and co-founder, and Teresa M. Klaassen, the Company's
Executive Vice President and co-founder (collectively, the "Founders") following
the Offering, the Company made a $1,000,000 cash payment to the third-party
limited partner in these two facilities. The payment was made in exchange for
the transfer to the Company by the third party of additional 1% partnership
interests in each facility with a total book value of $18,700 and the
elimination of any requirement for the Founders to maintain a specified
ownership interest in the Company.

NET LOSS PER SHARE

The Company's net loss per share for the six months ended June 30, 1996 is
based upon the weighted average number of shares of Common Stock outstanding.
Pursuant to the requirements of the Securities and Exchange Commission (SEC)
staff accounting bulletin No. 83, options to purchase Common Stock issued at
prices below the IPO price during the twelve months immediately preceding the
initial filing of the registration statement relating to the Offering have been
included in the computation of net loss per share as if they were outstanding
for all periods presented prior to the IPO (using the treasury method assuming
repurchase of common stock at the IPO price). Other shares issuable upon the
exercise of stock options or conversion of redeemable convertible preferred
stock have been excluded from the computation because the effect of their
inclusion would be anti-dilutive. Subsequent to the Company's IPO, options under
the treasury stock method

F-25
<PAGE> 96

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

18. INTERIM FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

are included to the extent they are dilutive. The Company's pro forma loss per
share reflects the conversion of the Series A Convertible Preferred Stock and
the acquisition of the Southeast Properties as if they occurred on January 1,
1995.

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------- -----------
<S> <C> <C>
Net loss per share data:
Common and common equivalent shares:
Weighted average number of shares of common stock
outstanding during the period.................... 7,191,736 7,191,736
Options to purchase common stock issued within one
year of IPO using treasury stock method.......... 433,630 433,630
----------- -----------
Adjustment to reflect conversion of Series A
Convertible Preferred Stock as of January 1,
1995............................................. -- 2,095,238
Total common and common equivalent shares of stock
considered outstanding during the period......... 7,625,366 9,720,604
=========== ===========
Net loss........................................... $(4,087,738) $(4,087,738)
Dividend preference attributable to Series A
Convertible Preferred Stock...................... (858,000) --
Dividends attributable to Series B Exchangeable
Preferred Stock.................................. (347,500) (347,500)
----------- -----------
Net loss attributable to common shares............. $(5,293,238) $(4,434,738)
=========== ===========
Net loss per common equivalent shares.............. $ (0.69)
===========
Pro forma adjustment to reflect acquisition of
Southeast Properties............................. $ 994,000
-----------
Pro forma net loss attributable to common shares... $(3,440,738)
===========
Pro forma net loss per common equivalent shares.... $ (0.35)
===========
</TABLE>

OFFICE LEASE COMMITMENT

On July 8, 1996, the Company entered into an agreement to renew its
corporate office lease. The lease has a term of five years with an option to
terminate after twelve months from October 1, 1996, the lease commencement date.
The initial annual lease payments amount to $252,412. 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 Company is also responsible for its
proportionate share of annual increases in operating expenses and property
taxes.

PENNSYLVANIA SURVEY REPORT

In May 1996, one of the Pennsylvania nursing home facilities managed by the
Company received notice from the Pennsylvania Department of Health of a survey
report stating that the facility was not in compliance with the requirements of
participation for the Medicare and Medicaid programs. Therefore, the
Pennsylvania agency survey report stated that a civil monetary penalty of $50 to
$3,000 per day would be imposed for the period beginning March 12, 1996, the
date the facility was first alleged to be out of compliance, until the date

F-26
<PAGE> 97

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)

18. INTERIM FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

the alleged deficiencies were corrected. The owner of the facility appealed such
fine and in October 1996, paid approximately $18,000 in settlement of such fine.

OTHER MATTERS

The Company received commitments to close two additional $10,000,000
portions, one on July 11, 1996 and one on July 24, 1996, of the $80,000,000 line
of credit commitment from a financial institution (see Note 2 above). The credit
facility is for construction and interim loans to finance the development of up
to 10 assisted living facilities. The Company guaranteed the repayment of all
amounts outstanding under this line of credit. The line of credit is for a term
of five years and is secured by cross-collateralized first mortgages on the real
property and improvements and first liens on all other assets of the borrower.
Advances under the facility bear interest at rates ranging from LIBOR plus 1.7%
to LIBOR plus 2.9%.

On September 20, 1996, the Company closed a $7,400,000 construction loan to
finance the construction of an assisted living facility. The loan will be for a
term of five years at interest rates ranging from 2.25% to 2.75% in excess of
the 30-day LIBOR.

On October 3, 1996 the Company received a commitment for a $51,000,000
revolving construction credit facility. The facility provides for construction
and interim loans to finance the development of up to seven assisted living
facilities. The Company guaranteed the repayment of all amounts outstanding
under this credit facility. The facility is for a term of five years and is
secured by cross-collateralized first mortgages on the real property and liens
on receivables. Advances under the facility bear interest at rates ranging from
LIBOR plus 2.60% to 2.25%.

On September 5, 1996, the Company obtained a $7,556,800 construction loan
to finance the development of an assisted living facility. The loan will be for
a term of five years at interest rates ranging from 2.95% in excess of 30-day
LIBOR or 0.25% above the prime rate during construction and from 2.75% in excess
of LIBOR or the prime rate following completion of construction.

On October 8, 1996, the Company completed its purchase of five facilities
located in the southeast United States for $34.0 million in cash. The Company
intends to finance approximately $25.0 million of the purchase price through
loans from one or more third-party lenders at a future date. The five facilities
consist of 498 total units providing primarily independent and assisted living
services. These facilities provided a combined net resident revenue of $9.9
million for the year ended December 31, 1995 and $5.4 million for the six months
ended June 30, 1996.

F-27
<PAGE> 98

INDEPENDENT AUDITORS' REPORT

To the Partners
Acquired Entities of Sunrise

We have audited the accompanying combined balance sheet of Acquired Entities of
Sunrise as of December 31, 1993 and the related combined statements of
operations and partners' deficit, and cash flows for the year then ended. These
combined financial statements are the responsibility of the Acquired Entities of
Sunrise's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined 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 audit provides a reasonable basis for our
opinion.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Acquired Entities of
Sunrise as of December 31, 1993 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.

Hoffman, Morrison & Fitzgerald P.C.
Vienna, Virginia
March 13, 1996

F-28
<PAGE> 99

COMBINED BALANCE SHEET
ACQUIRED ENTITIES OF SUNRISE

<TABLE>
<CAPTION>
DECEMBER 31,
1993
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 9,960
Other current assets....................................................... 18,782
-----------
Total current assets............................................... 28,742
Property and equipment, net.................................................. 24,188,751
Note receivable from affiliate............................................... 100,417
Organization, leasing costs and deferred financing costs, net of accumulated
amortization of $956,787................................................... 137,844
-----------
Total assets....................................................... $24,455,754
===========
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses...................................... $ 133,054
Current portion of long-term debt.......................................... 317,835
-----------
Total current liabilities.......................................... 450,889
Notes payable to affiliates.................................................. 554,789
Long-term debt............................................................... 29,038,310
-----------
Total liabilities.................................................. 30,043,988
Partners' deficit............................................................ (5,588,234)
-----------
Total liabilities and partners' deficit............................ $24,455,754
===========
</TABLE>

See accompanying notes.

F-29
<PAGE> 100

COMBINED STATEMENT OF OPERATIONS AND PARTNERS' DEFICIT
ACQUIRED ENTITIES OF SUNRISE
FOR THE YEAR ENDED DECEMBER 31, 1993

<TABLE>
<CAPTION>
DECEMBER
31,
<S> <C>
Operating revenue:
Resident fees............................................................... $1,709,747
Building rental income...................................................... 2,695,096
-----------
4,404,843
Operating expenses:
Facility operating expenses................................................. 1,161,068
Depreciation and amortization............................................... 1,169,122
-----------
2,330,190
-----------
Income from operations........................................................ 2,074,653
Other income (expense):
Interest income............................................................. 7,226
Interest expense............................................................ (2,164,925)
-----------
Net loss...................................................................... (83,046)
Partners' deficit, beginning of year.......................................... (4,988,647)
Partners' distributions....................................................... (516,541)
-----------
Partners' deficit, end of year................................................ $(5,588,234)
===========
</TABLE>

See accompanying notes.

F-30
<PAGE> 101

COMBINED STATEMENT OF CASH FLOWS
ACQUIRED ENTITIES OF SUNRISE
FOR THE YEAR ENDED DECEMBER 31, 1993

<TABLE>
<CAPTION>
DECEMBER
31,
<S> <C>
OPERATING ACTIVITIES
Net loss....................................................................... $ (83,046)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization................................................ 1,169,122
Increase in other current assets............................................. (345)
Decrease in accounts payable and accrued expenses............................ (4,337)
-----------
Net cash provided by operating activities...................................... 1,081,394
-----------
INVESTING ACTIVITIES
Acquisition of property and equipment.......................................... (23,062)
-----------
Net cash used in investing activities.......................................... (23,062)
-----------
FINANCING ACTIVITIES
Payments on long-term debt..................................................... (603,141)
Borrowings of long-term debt................................................... 114,320
Net advances to affiliates..................................................... (10,477)
Repayment of loans to affiliates............................................... 2,547
Distributions to Founders...................................................... (516,541)
Financing costs paid........................................................... (44,763)
-----------
Net cash used in financing activities.......................................... (1,058,055)
-----------
Net increase in cash and cash equivalents...................................... 277
Cash and cash equivalents at beginning of year................................. 9,683
-----------
Cash and cash equivalents at end of year....................................... $ 9,960
===========
</TABLE>

See accompanying notes.

F-31
<PAGE> 102

ACQUIRED ENTITIES OF SUNRISE
DECEMBER 31, 1993
NOTES TO COMBINED FINANCIAL STATEMENTS

1. ORGANIZATION

Sunrise Assisted Living, Inc. (the "Company") does business in the assisted
living segment of providing elder care services. The Company consists of
entities that manage (Sunrise Terrace, Inc. or "STI"), own (Sunrise Assisted
Living Limited Partnership or "SALLP"), and develop (Sunrise Development, Inc.
or "SDI") assisted living facilities as well as other limited partnerships and
limited liability corporations that own facilities all of which are owned or
controlled by Paul and Teresa Klaassen ("the Founders"). The facilities provide
a residence, meals and nonmedical assistance to elderly residents for a monthly
fee. Agreements with residents are for a term of one year and are cancelable by
residents with thirty days notice. These services are generally not covered by
health insurance, so the monthly fees are generally payable by the residents,
their family or another responsible party.

SALLP was formed in May 1994 and began operations in June 1994. The
Founders contributed their interests in fifteen independent and assisted living
facilities to SALLP. At this time, SALLP used its debt facility (see Note 7) to
finance the acquisition of all outside interests in the facilities. At the
completion of this transaction, SALLP owned 100% of the facilities. The
operating assets of the facilities were recorded at their historical value
adjusted to reflect the excess of the Founders' basis in the partnerships over
the book value of their proportionate interests in the partnerships contributed
and the excess of the purchase price over the book basis of the minority
interest acquired.

In January 1995, a newly formed corporation, Sunrise Assisted Living, Inc.
(the "Company") exchanged 6,019,375 shares of common stock for the equity
interests of the Founders in the various Sunrise entities. Simultaneously the
Company sold 2,444,444 shares of Series A Convertible Preferred stock at $9.00
per share. The Series A Convertible Preferred Stock has a 9% preferred return,
payable if the redemption rights, which commence in 2002, are exercised. The
Series A Preferred Stock contains various requirements based on conversion and
exercising rights.

The accompanying combined financial statements do not include all of the
Sunrise Entities, and therefore, are not intended to reflect the combined
balance sheet and operations of the entire Sunrise organization. These combined
financial statements include entities in which the Founders held a minority,
non-controlling interest in 1993, and which were subsequently acquired by SALLP.

The combined financial statements include the following entities
(collectively referred to as the "Acquired Entities of Sunrise"):

Mercer Sunrise Associates Limited Partnership ("Mercer")
The Wilson Group Limited Partnership ("Wilson")
The Fairfield Group Limited Partnership ("Fairfield")
The Glebe Group Limited Partnership ("Glebe")

2. PRINCIPLES OF COMBINATION

The combined financial statements include the combined balance sheet,
statements of operations and partners' deficit, and cash flows as of and for the
year ended December 31, 1993, of the above entities in which the Founders held a
minority, non-controlling interest ranging from 25% to 47%. Effective June 8,
1994, the Founders acquired most of the equity of these entities (see Note 7).
Receivables, payables, revenues and expenses generated between the Acquired
Entities of Sunrise have been eliminated in the combined financial statements.

F-32
<PAGE> 103

ACQUIRED ENTITIES OF SUNRISE
DECEMBER 31, 1993
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

3. SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION

Resident fee revenue is recognized when services are rendered and consist
of daily resident fees, resident community fees and other ancillary services.
Generally, resident community fees approximating sixty times the daily residence
fee are received from potential residents upon application. Resident community
fees are ratably refundable if the prospective resident does not move into the
facility or moves out of the facility within ninety days. Community fees
received are recognized as income over the first ninety days of the resident's
stay.

PROPERTY AND EQUIPMENT

Property and equipment are stated at the lower of cost or net realizable
value. Depreciation is computed using the straight-line method at rates intended
to amortize the cost of the related assets over their estimated useful lives.
Estimated useful life for furniture and equipment was 5-7 years and for
buildings was 30 years.

ORGANIZATION, LEASING AND DEFERRED FINANCING COSTS

Costs associated with the organization of certain of the entities are
amortized using the straight-line method over sixty months. Deferred financing
costs are amortized using the straight-line method over the related loan term.
Certain leasing costs of the communities are amortized using the straight-line
method over the one year term of the related lease.

INCOME TAXES

All of the entities included in these financial statements are
partnerships. Therefore, no provision for income taxes has been included in the
accompanying combined financial statements since taxable income or loss passes
through pro rata to the owners of the individual entities.

CASH EQUIVALENTS

For purposes of the combined statement of cash flows, unrestricted cash and
all highly liquid debt instruments purchased with a maturity of three months or
less are considered to be cash and cash equivalents.

4. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31, 1993:

<TABLE>
<S> <C>
Land................................................................... $ 2,931,760
Buildings and building improvements.................................... 23,712,471
Furniture and equipment................................................ 2,348,942
-----------
28,993,173
Less accumulated depreciation.......................................... (4,804,422)
-----------
$24,188,751
==========
</TABLE>

5. RELATED-PARTY TRANSACTIONS

MANAGEMENT SERVICES

Mercer is managed by STI under a management agreement. The management
agreement has a term of five years and provides for fees based on a percentage
of the monthly gross receipts and a fixed fee. This

F-33
<PAGE> 104

ACQUIRED ENTITIES OF SUNRISE
DECEMBER 31, 1993
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

5. RELATED-PARTY TRANSACTIONS (CONTINUED)

agreement was terminated in June 1994 when controlling interest of Mercer was
purchased by the Founders. Management fee expense for the year ended December
31, 1993 was $128,077.

LEASE COMMITMENTS

Wilson, Glebe and Fairfield are leased to STI. All of the leases require
rental payments at least equal to the total of the principal and interest
payments on the underlying mortgage debt and expire at varying dates through
April 1995. These leases were terminated in June 1994 when the controlling
interests of the entities were purchased by the Founders.

NOTES RECEIVABLE FROM AFFILIATE

In 1992, Glebe loaned $103,974 at an interest rate of 7% to another Sunrise
controlled entity in Oakton, Virginia. The amount was fully repaid in June 1994.

6. NOTES PAYABLE TO AFFILIATES

Notes payable to affiliates consisted of the following at December 31,
1993:

<TABLE>
<S> <C>
Mercer had two outstanding notes payable to STI at various interest rates
from prime plus 1.5% to 12%, due 1995 through 1999...................... $522,622
Mercer had an outstanding note payable to an affiliate, due on demand..... 32,167
---------
$554,789
=========
</TABLE>

7. LONG-TERM DEBT

In 1994, various mortgages and other notes payable were refinanced in
conjunction with the formation of SALLP (see Note 1) and consolidated into two
separate debt classes, collateralized by a blanket first mortgage on all assets
of SALLP which includes the Acquired Entities of Sunrise. The GECC Mortgage is
collateralized by a blanket first mortgage on all assets of SALLP. The GECC
Mortgage consists of two separate debt classes. Classes (A) of $65,000,000 bears
a fixed interest rate of 8.56% and is interest only until the maturity date of
May 31, 2001. Class (B) of $30,000,000 bears a variable interest rate of one
month LIBOR rate plus 5.75%. Class (B) is interest only until July 1, 1997 at
which time principal and interest payments are due using a twenty-year
amortization schedule. Effective September 30, 1996, Sunrise Assisted Living
Limited Partnership is required to meet a minimum debt service coverage ratio or
principal payments accelerate to the lessor of monthly net cash flow or based on
net cash flows as specified in the loan documents and has a 25% participation
interest payable at maturity computed at either the date of maturity, initial
public offering of securities by Sunrise Assisted Living Limited Partnership or
one of its affiliates, or sale of the operating assets. The terms of the loan
contain certain covenants and prepayment restrictions. Additionally, the current
majority stockholders must maintain a 25% interest in the Company. No contingent
interest applies to 1993.

F-34
<PAGE> 105

ACQUIRED ENTITIES OF SUNRISE
DECEMBER 31, 1993
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

7. LONG-TERM DEBT (CONTINUED)

Principal maturities of long-term debt as of December 31, 1993, after
adjusting for the refinancing, are as follows:

<TABLE>
<S> <C>
1994................................................................... $ 317,835
1995................................................................... 11,673
1996................................................................... --
1997................................................................... --
1998................................................................... --
Thereafter............................................................. 29,026,637
-----------
$29,356,145
===========
</TABLE>

A note payable with a bank was refinanced for $106,000. Interest paid
during 1993 was $2,168,670.

8. PROFIT SHARING PLAN

The employees of Acquired Entities of Sunrise may participate in a profit
sharing plan (the "Plan") under Internal Revenue Code Section 401(k) sponsored
by STI. The Plan contains two elements: a salary reduction arrangement and a
discretionary profit sharing plan. All full-time employees who have twelve
months of employment with an affiliate are eligible to participate in the Plan.
The salary reduction arrangement allows for employees to defer certain amounts
of their compensation.

The Plan provides, among other things, that the employer will contribute
$0.25 for every dollar the employee contributes, up to 7% of their compensation.
Employer matching contributions totaled $3,074 during 1993. No discretionary
profit-sharing contribution was made during 1993.

F-35
<PAGE> 106

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Laing Properties, Inc. and subsidiaries:

We have audited the accompanying combined balance sheets of Laing Retirement
Properties, a wholly owned business segment of Laing Properties, Inc. and
subsidiaries (the "Company") as of December 31, 1994 and 1995, and the related
combined statements of operations, equity, and cash flows for the years ended
December 31, 1993, 1994, and 1995. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Laing Retirement
Properties as of December 31, 1994 and 1995, and the results of their operations
and their cash flows for the years ended December 31, 1993, 1994, and 1995 in
conformity with generally accepted accounting principles.

KPMG PEAT MARWICK LLP

August 9, 1996

F-36
<PAGE> 107

LAING RETIREMENT PROPERTIES
(A WHOLLY OWNED BUSINESS SEGMENT OF LAING PROPERTIES, INC. AND SUBSIDIARIES)

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, JUNE 30, 1996
-------------------------- -------------
1994 1995 (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 204,963 $ 225,864 $ 221,277
Accounts receivable................................. 38,049 37,257 89,299
Inventories......................................... 51,793 59,107 54,022
Prepaid expenses and other current assets........... 105,124 100,068 39,586
Due from Laing Properties, Inc. (note 5)............ 14,209,326 14,309,644 15,220,071
----------- ----------- -------------
Total current assets........................ 14,609,255 14,731,940 15,624,255
----------- ----------- -------------
Property and equipment, at cost:
Land................................................ 3,856,242 3,856,242 3,856,242
Buildings........................................... 25,407,705 27,167,565 27,572,978
Furniture, fixtures, and equipment.................. 2,287,615 2,456,106 2,456,106
----------- ----------- -------------
31,551,562 33,479,913 33,885,326
Less accumulated depreciation....................... 4,436,196 5,494,349 6,029,355
----------- ----------- -------------
27,115,366.. 27,985,564 27,855,971
----------- ----------- -------------
Other assets.......................................... -- 10,918 --
----------- ----------- -------------
$41,724,621 $42,728,422 $ 43,480,226
=========== =========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............... $ 1,719,923 $ 2,867,873 $ 3,483,462
Current installments of long-term debt (note 2)..... 122,520 122,520 122,520
Resident security deposits.......................... 552,831 557,066 565,425
Deferred revenue.................................... 5,155 10,848 5,165
Notes payable to related party (note 3)............. 10,000,347 10,000,347 10,000,347
----------- ----------- -------------
Total current liabilities................... 12,400,776 13,558,654 14,176,919
Long-term debt, excluding current installments (note
2).................................................. 7,277,480 7,154,960 7,093,701
----------- ----------- -------------
Total liabilities..................................... 19,678,256 20,713,614 21,270,620
----------- ----------- -------------
Stockholders' equity:
Common stock -- Laing Northshore, Inc. authorized
and issued 500 shares $1 par value............... 500 500 500
Common stock -- Laing Greenville, Inc. authorized
and issued 500 shares of $1 par value............ 500 500 500
Additional paid-in capital.......................... 3,317,508 3,317,508 3,317,508
Accumulated deficit................................. (1,138,602) (1,599,128) (1,754,138)
----------- ----------- -------------
Total stockholders' equity.................. 2,179,906 1,719,380 1,564,370
Partners' capital..................................... 19,866,459 20,295,428 20,645,236
----------- ----------- -------------
Total equity................................ 22,046,365 22,014,808 22,209,606
Commitments and contingencies (note 6)................
----------- ----------- -------------
$41,724,621 $42,728,422 $ 43,480,226
=========== =========== =============
</TABLE>

See accompanying notes to combined financial statements.

F-37
<PAGE> 108

LAING RETIREMENT PROPERTIES
(A WHOLLY OWNED BUSINESS SEGMENT OF LAING PROPERTIES, INC. AND SUBSIDIARIES)

COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------- ------------------------------
1995 1996
1993 1994 1995 ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental.......................... $7,555,872 $8,507,473 $8,879,107 $ 4,365,268 $ 4,817,599
Resident services............... 926,814 1,010,078 1,002,528 494,557 529,436
Other........................... 61,880 63,935 62,390 26,449 33,501
---------- ---------- ---------- ------------- -------------
Total revenue........... 8,544,566 9,581,486 9,944,025 4,886,274 5,380,536
---------- ---------- ---------- ------------- -------------
Expenses:
Utilities....................... 551,223 567,218 600,803 285,749 321,902
Repairs and maintenance......... 368,113 637,977 738,074 445,454 324,707
Property taxes.................. 381,808 374,505 398,525 209,038 220,334
Insurance....................... 116,369 138,960 133,577 67,545 69,958
Payroll and benefits (note 1)... 3,362,317 3,540,102 3,648,565 1,796,868 2,059,623
Food............................ 604,155 630,243 615,084 296,451 288,744
General and administrative...... 469,071 424,052 524,571 200,662 231,522
Sales and marketing............. 320,296 210,285 187,699 126,690 105,417
Management fees (note 3)........ 426,854 488,248 501,730 247,615 269,310
Depreciation.................... 975,887 991,807 1,058,153 499,852 535,006
---------- ---------- ---------- ------------- -------------
Total expenses.......... 7,576,093 8,003,397 8,406,781 4,175,924 4,426,523
---------- ---------- ---------- ------------- -------------
Income from
operations............ 968,473 1,578,089 1,537,244 710,350 954,013
Interest expense.................. 918,134 886,038 1,568,801 790,998 759,215
---------- ---------- ---------- ------------- -------------
Net income (loss)....... $ 50,339 $ 692,051 $ (31,557) $ (80,648) $ 194,798
========== ========== ========== ============ ============
</TABLE>

See accompanying notes to combined financial statements.

F-38
<PAGE> 109

LAING RETIREMENT PROPERTIES
(A WHOLLY OWNED BUSINESS SEGMENT OF LAING PROPERTIES, INC. AND SUBSIDIARIES)

COMBINED STATEMENTS OF EQUITY

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------- SIX MONTHS ENDED JUNE 30,
1993 1994 1995 --------------------------
1995 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Common stock:
Balance at beginning of
period................... $ 500 $ 500 $ 1,000 $ 1,000 $ 1,000
Issuance of 500 shares...... -- 500 -- -- --
----------- ----------- ----------- ----------- -----------
Balance at end of period.... 500 1,000 1,000 1,000 1,000
----------- ----------- ----------- ----------- -----------
Additional paid-in capital.... 3,317,508 3,317,508 3,317,508 3,317,508 3,317,508
----------- ----------- ----------- ----------- -----------
Accumulated stockholder's
deficit:
Balance at beginning of
period................... (131,957) (739,046) (1,138,602) (1,138,602) (1,599,128)
Net loss.................... (607,089) (399,556) (460,526) (177,602) (155,010)
----------- ----------- ----------- ----------- -----------
Balance at end of period...... (739,046) (1,138,602) (1,599,128) (1,316,204) (1,754,138)
----------- ----------- ----------- ----------- -----------
Partners' capital:
Balance at beginning of
period................... 18,117,424 18,774,852 19,866,459 19,866,459 20,295,428
Net income.................. 657,428 1,091,607 428,969 96,954 349,808
----------- ----------- ----------- ----------- -----------
Balance at end of period...... 18,774,852 19,866,459 20,295,428 19,963,413 20,645,236
----------- ----------- ----------- ----------- -----------
Total equity.................. $21,353,814 $22,046,365 $22,014,808 $21,965,717 $22,209,606
=========== =========== =========== =========== ===========
</TABLE>

See accompanying notes to combined financial statements.

F-39
<PAGE> 110

LAING RETIREMENT PROPERTIES
(A WHOLLY OWNED BUSINESS SEGMENT OF LAING PROPERTIES, INC. AND SUBSIDIARIES)

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------- ---------------------------
1993 1994 1995 1995 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................... $ 50,339 $ 692,051 $ (31,557) $ (80,648) $ 194,798
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................ 975,887 991,807 1,058,153 499,852 535,006
Decrease (increase) in accounts
receivable....................... (20,284) 54,875 792 23,526 (52,042)
Decrease (increase in prepaids and
current other assets............. 210,034 (103,466) 5,056 68,727 19,521
Decrease (increase) in inventory.... (16,978) 1,400 (7,314) (7,962) 46,046
Decrease (increase) in other
assets........................... -- -- (10,918) -- 10,918
Increase in accounts payable and
accrued expenses................. 173,177 516,391 1,147,950 749,953 615,589
Decrease (increase) in escrow
deposits......................... (25,070) 25,070 -- -- --
Increase (decrease) in security
deposits......................... 360,557 26,948 4,235 (7,970) 8,359
Increase (decrease) in deferred
revenue.......................... (9,094) 1,308 5,693 (695) (5,683)
---------- ---------- ---------- ---------- -------------
Net cash provided by operating
activities..................... 1,698,568 2,206,384 2,172,090 1,244,783 1,372,512
---------- ---------- ---------- ---------- -------------
Cash flows from investing activities:
Additions to property and equipment,
net................................... (1,179,468) (370,407) (1,928,351) (603,221) (405,413)
Proceeds from sale of condominium
units................................. 929,000 -- -- -- --
---------- ---------- ---------- ---------- -------------
Net cash used in investing
activities..................... (250,468) (370,407) (1,928,351) (603,221) (405,413)
---------- ---------- ---------- ---------- -------------
Cash flows from financing activities:
Net advances to parent.................. (1,243,810) (9,311,176) (100,318) (603,705) (910,427)
Proceeds of long-term debt.............. -- 7,400,000 -- -- --
Proceeds of note payable to related
party................................. -- 6,659,373 -- -- --
Repayments of long-term debt............ (38,663) (6,657,987) (122,520) -- --
Equity contributions.................... -- 500 -- (61,260) (61,259)
---------- ---------- ---------- ---------- -------------
Net cash used in financing
activities..................... (1,282,473) (1,909,290) (222,838) (664,965) (971,686)
---------- ---------- ---------- ---------- -------------
Net increase (decrease) in
cash........................... 165,627 (73,313) 20,901 (23,403) (4,587)
Cash at beginning of period............... 112,649 278,276 204,963 204,963 225,864
---------- ---------- ---------- ---------- -------------
Cash at end of period..................... $ 278,276 $ 204,963 $ 225,864 $ 181,560 $ 221,277
========== ========== ========== ========== ============
Supplemental disclosure of cash
payments -- for interest................ $ 718,022 $ 442,747 $ 514,365 $ 250,474 $ 244,826
========== ========== ========== ========== ============
</TABLE>

See accompanying notes to combined financial statements.

F-40
<PAGE> 111

LAING RETIREMENT PROPERTIES
(A WHOLLY OWNED BUSINESS SEGMENT OF LAING PROPERTIES, INC. AND SUBSIDIARIES)

NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994, AND 1995

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Description of Business

The accompanying combined financial statements of Laing Retirement
Properties (the "Properties") are a combination of five retirement homes and a
parcel of land wholly owned by Laing Properties, Inc. and its subsidiaries ("the
Company"). The Properties include The Glens of Greenville in Greenville, South
Carolina; Northshore in St. Petersburg, Florida; Huntcliff Summit in Atlanta,
Georgia; Augusta Glen in Augusta, Georgia; and Brookside Glen in Columbus,
Georgia and a parcel of land in Atlanta, Georgia.

(b) Principles of Combination

The combined financial statements of the Properties include Laing
Greenville, Inc. (The Glens of Greenville); Laing Northshore, Inc. (Northshore);
Laing Huntcliff, LLC (Huntcliff Summit); AmCare I Joint Venture (Brookside
Glen); AmCare II Joint Venture (Augusta Glen) and a parcel of land wholly owned
by Laing Properties, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated.

Inventories, which consist of food items and supplies, are stated at the
lower of cost (first-in, first-out) or market.

(d) Property and Equipment

Buildings, furniture, fixtures, and equipment are carried at cost less any
declines in value deemed to be other than temporary. Property and equipment is
depreciated using the straight-line method over the estimated useful lives of
the assets.

(e) Income Taxes

The entities subject to taxation use the asset and liability approach in
accounting for income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized as income or expense.

(f) Payroll and Benefits

The Properties are managed by a subsidiary of Laing Properties, Inc. and
certain direct payroll related costs are reimbursed for services rendered on
behalf of the management company. Personnel are employed by the management
company and not the related property.

(g) Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments. The carrying values of cash,
accounts receivable, advances from parent, accounts payable and accrued expenses
are reasonable estimates of their fair values due to the short-term nature of
the instruments. Based on borrowings currently available to the Properties, the
carrying values of all debt are a reasonable estimation of their fair values.

F-41
<PAGE> 112

LAING RETIREMENT PROPERTIES
(A WHOLLY OWNED BUSINESS SEGMENT OF LAING PROPERTIES, INC. AND SUBSIDIARIES)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

(h) Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

(i) Unaudited Interim Financial Statements

In the opinion of the Company's management, the accompanying unaudited
combined financial statements include all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the combined results of
operations of the Properties for the six-month periods ended June 30, 1996 and
1995. The combined results and operations for this period are not necessarily
indicative of the results to be expected for the full year.

(2) LONG-TERM DEBT

On December 28, 1994, Laing Huntcliff, LLC ("Huntcliff") executed a
mortgage note payable to a financial institution totaling $39,863,000. The note
was allocated to Huntcliff and four other affiliated properties. These four
other affiliated properties are not included in the Laing Retirement Properties.
Each property is jointly liable for the entire balance of the note. Huntcliff's
pro rata share of the balance is $7,400,000 and $7,277,480 as of December 31,
1994 and 1995, respectively. The note bears interest at the rate of LIBOR plus
1.2% and is secured by the land and building of each of the properties. The note
is guaranteed by Laing Properties, Inc. and another affiliated company and
matures on December 28, 1999.

Huntcliff and Laing Properties, Inc. guarantee a $20,137,000 mortgage note
with the same financial institution for an affiliated company. This note payable
and the note payable discussed in the previous paragraph total $60,000,000 and
require combined quarterly principal payments of $250,000 with the remaining
balance due at maturity. The combined balance of the two notes is $60,000,000
and $59,000,000 as of December 31, 1994 and 1995, respectively.

Huntcliff's pro rata share of the maturities are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
<S> <C>
1996.................................................. $ 122,520
1997.................................................. 122,520
1998.................................................. 122,520
1999.................................................. 6,909,920
----------
$7,277,480
==========
</TABLE>

(3) RELATED PARTY TRANSACTIONS

On March 9, 1990, AmCare I Joint Venture and AmCare II Joint Venture
executed mortgage notes with an affiliated company for $1,759,175 and
$1,581,799, respectively. The notes bear interest at prime (8.5% at December 31,
1995), are secured by property and equipment, and had a maturity date of
December 31, 1994. The notes were not repaid at the maturity date and,
therefore, fell under the provisions in the agreement whereby, interest accrues
at the default rate of prime plus 5% (13.5% as of December 31, 1995) until all

F-42
<PAGE> 113

LAING RETIREMENT PROPERTIES
(A WHOLLY OWNED BUSINESS SEGMENT OF LAING PROPERTIES, INC. AND SUBSIDIARIES)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995

(3) RELATED PARTY TRANSACTIONS (CONTINUED)

principal and interest are repaid. Accrued interest on these notes totaled
$1,185,462 and $1,619,788 at December 31, 1994 and 1995, respectively. Interest
expense relating to these notes was $200,459, $220,505, and $434,327 for the
years ended December 31, 1993, 1994, and 1995, respectively.

On July 12, 1994, Laing Northshore, Inc. executed an unsecured $6,659,373
note with an affiliated company. The proceeds were used to repay a mortgage note
with a lending institution. The note bears interest at 9% and is payable on
demand. Accrued interest on the note was $282,430 and $881,774 as of December
31, 1994 and 1995, respectively. Interest expense relating to this note was
$282,430 and $599,344 for the years ended December 31, 1994 and 1995,
respectively.

Each property pays management fees to Laing Properties, Inc. ("LPI") equal
to 5% of gross receipts. Management fees paid accrued to LPI were $426,854,
$488,248, and $501,730 for the years ended December 31, 1993, 1994 and 1995,
respectively.

(4) INCOME TAXES

The entities file consolidated federal tax returns with Laing Properties,
Inc. A sharing agreement exists, whereby net operating losses may be shared
among the entire consolidated group. The group has sufficient net operating
losses to offset future taxable income which may arise. The types of temporary
differences that give rise to significant portions of the deferred tax assets
consist primarily of net operating loss carryforwards, differences in
depreciation, and accrued interest. The deferred tax assets arising from these
temporary differences and the net operating loss carryforwards are entirely
offset by a valuation allowance.

(5) DUE FROM LAING PROPERTIES, INC.

Due from Laing Properties, Inc. consists of advances by the Properties to
LPI in order for LPI to refinance its own debt. Advances are reported net of any
borrowings from LPI.

(6) COMMITMENTS

In previous years, Huntcliff sold 15 condominium units to residents of the
property. Under the terms of an agreement associated with the sales of the
units, the purchasers can require Huntcliff to repurchase the units for the
amount of the original sales price. Additionally, Huntcliff has a first right of
refusal to repurchase the units should the purchasers desire to sell to third
parties. Three such units have been repurchased through December 31, 1995. The
repurchase price for the remaining units totals $1,953,500 under the terms of
the agreements. No gain or loss was recognized on the original sales by
Huntcliff.

F-43
<PAGE> 114

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The "Sunrise Consolidated Pro Forma" column set forth in the unaudited pro forma
consolidated balance sheet of the Company as of June 30, 1996 assumes that the
acquisition of the Southeast Properties has occurred on June 30, 1996. The
"Sunrise Consolidated Pro Forma" column set forth in the unaudited pro forma
consolidated statement of operations for the year ended December 31, 1995 and
the six months ended June 30, 1996 assumes the acquisition of the Southeast
Properties had occurred on January 1, 1995. The pro forma adjustments are based
upon available information and certain assumptions that management believes to
be reasonable. Final purchase adjustments may differ from the pro forma
adjustments herein.

The unaudited pro forma consolidated financial information set forth below is
not necessarily indicative of the Company's consolidated financial position or
the results of operations that actually would have occurred if the transactions
had been consummated on such dates. In addition, they are not intended to be a
projection of results of operations that may be obtained in the Company's
future. The unaudited pro forma consolidated financial information should be
read in conjunction with the financial statements and related notes thereto
included elsewhere in this Prospectus.

F-44
<PAGE> 115

SUNRISE ASSISTED LIVING, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
SUNRISE
HISTORICAL PRO FORMA CONSOLIDATED
SUNRISE(A) ADJUSTMENTS PRO FORMA
---------- ----------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 22,713 $ (34,452)(b) $(11,739)
Accounts receivable................................... 1,572 1,572
Short-term securities................................. 50,000 50,000
Prepaid and other current assets...................... 1,727 1,727
--------- --------- ----------
Total current assets.......................... 76,012 (34,452) 41,560
Property and equipment, net............................. 137,471 34,452(b) 171,923
Investments............................................. 5,646 5,646
Restricted cash and cash equivalents.................... 1,333 1,333
Other assets............................................ 3,506 3,506
--------- --------- ----------
Total assets.................................. $ 223,968 $ -- $223,968
========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................. $ 7,208 $ $ 7,208
Deferred revenue...................................... 971 971
Other current liabilities............................. 1,077 1,077
Current portion of long-term debt..................... 395 395
--------- --------- ----------
Total current liabilities..................... 9,651 9,651
Notes payable to affiliated entities.................... 1,621 1,621
Interests in unconsolidated
partnerships.......................................... 745 745
Long-term debt, less current
maturities............................................ 118,696 118,696
--------- --------- ----------
Total liabilities............................. 130,713 130,713
Minority interests...................................... 372 372
Stockholders' equity:
Preferred stock....................................... --
Common stock.......................................... 142 142
Additional paid-in capital............................ 107,703 107,703
Owners' capital....................................... --
Accumulated deficit................................... (14,962) (14,962)
--------- --------- ----------
Total stockholders' equity.................... 92,883 -- 92,883
--------- --------- ----------
Total liabilities and stockholders' equity.... $ 223,968 $ $223,968
========= ========= ==========
</TABLE>

F-45
<PAGE> 116

SUNRISE ASSISTED LIVING, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
HISTORICAL SUNRISE
HISTORICAL SOUTHEAST PRO FORMA CONSOLIDATED
SUNRISE(a) PROPERTIES(a) ADJUSTMENTS PRO FORMA
---------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Operating revenue:
Resident fees............................. $ 34,752 $ 9,944 $ 44,696
Management services income................ 2,506 2,506
--------- ------- ------- ---------
37,258 9,944 -- 47,202
Operating expenses:
Facility operating expenses............... 21,010 7,349 28,359
Facility development and pre-opening
expenses............................... 1,172 1,172
General and administrative................ 6,875 6,875
Depreciation and amortization............. 3,009 1,058 $ (68)(c) 3,999
--------- ------- ------- ---------
32,066 8,407 (68) 40,405
Income from operations...................... 5,192 1,537 68 6,797
Other income (expense):
Interest income........................... 1,229 1,229
Interest expense:
GECC mortgage interest................. (15,295) (15,295)
Other debt............................. (1,261) (1,569) 1,569(d) (1,261)
--------- ------- ------- ---------
Total interest expense............ (16,556) (1,569) 1,569 (16,556)
Total other expenses................... (15,327) (1,569) 1,569 (15,327)
Equity in (losses) earnings on investments
in unconsolidated partnerships............ (9) (9)
Minority interest........................... 7 7
--------- ------- ------- ---------
Net loss (income)........................... $ (10,137) $ (32) $ 1,637 $ (8,532)
========= ======= ======= =========
Pro forma net loss per share data(e)
Net loss per common and common equivalent
shares................................. $ (0.97)
=========
Weighted average number of common and
common equivalent shares outstanding... 8,826,127
=========
</TABLE>

F-46
<PAGE> 117

SUNRISE ASSISTED LIVING, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
HISTORICAL SUNRISE
HISTORICAL SOUTHEAST PRO FORMA CONSOLIDATED
SUNRISE(a) PROPERTIES(a) ADJUSTMENTS PRO FORMA
---------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Operating revenue:
Resident fees............................. $ 19,458 $ 5,381 $ 24,839
Management services income................ 1,542 1,542
-------- -------- -------- ----------
21,000 5,381 -- 26,381
Operating expenses:
Facility operating expenses............... 12,608 3,892 16,500
Facility development and pre-opening
expenses............................... 650 650
General and administrative................ 4,413 4,413
Depreciation and amortization............. 1,803 535 $ (40)(c) 2,298
-------- -------- -------- ----------
19,474 4,427 (40) 23,861
Income from operations...................... 1,526 954 40 2,520
Other income (expense):
Interest income........................... 700 700
Interest expense:
GECC mortgage interest................. (4,807) (4,807)
Other debt............................. (615) (759) 759(d) (615)
-------- -------- -------- ----------
Total interest expense............ (5,422) (759) 759 (5,422)
Total other expenses................... (4,722) (759) 759 (4,722)
Equity in earnings on investments in
unconsolidated partnerships............... 6 6
Minority interest........................... 83 83
Unusual charge.............................. (981) (981)
-------- -------- -------- ----------
Net loss (income)........................... $ (4,088) $ 195 $ 799 $ (3,094)
======== ======== ======== ==========
Pro forma net loss per share data(e)
Net loss per common and common equivalent
shares................................. $ (0.35)
==========
Weighted average number of common and
common equivalent shares outstanding... 9,720,604
==========
</TABLE>

F-47
<PAGE> 118

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION

On October 8, 1996, the Company completed its acquisition of the real and
personal property and related leases of five facilities with a capacity of 498
residents located in the Southeastern United States (the "Southeast Properties")
for $34.0 million in cash. No liabilities were assumed as part of the
acquisition. Accordingly, no debt or related interest costs have been included
in the unaudited pro forma financial information. The Company intends to include
this property as security for approximately $25.0 million of loans from one or
more third-party lenders. However, commitments for such loans have not been
finalized.

PRO FORMA ADJUSTMENTS

(a) Derived from the financial statements of the Company and Laing
Retirement Properties.

(b) For purposes of these pro forma consolidated financial statements the
allocation of the purchase price of $34.0 million plus related acquisition costs
to acquired assets was based upon the Company's historical experience with
similar properties. The Company is in the process of engaging an independent
appraiser to assist in the allocation of the purchase price.

(c) To record depreciation and amortization for the acquisition as if the
transaction had occurred at January 1, 1995 using estimated useful lives of 40
years for acquired buildings and 5 years for acquired furniture and equipment.
The allocation of the purchase price between land, building, and furniture and
equipment was based upon management's knowledge and experience with similar
projects. The Company intends to engage an independent party to perform the
allocation of the purchase price between the five properties based upon market
values of the respective assets. Differences between the final allocation and
management's current estimated allocation are not expected to be material.

(d) To eliminate interest expense for the acquisition of the Southeast
Properties as if the transaction was consummated at January 1, 1995.

(e) Outstanding shares are based upon the weighted average number of shares
of Common Stock outstanding for the periods presented. Options to purchase
Common Stock issued at prices below the Company's initial public offering
("IPO") price of $20.00 per share during the twelve months immediately prior to
the Company's IPO have been included in the calculation as if they were
outstanding for all periods prior to the IPO, regardless of whether they are
dilutive. The outstanding shares also reflect the conversion of the Series A
Convertible Preferred Stock as if converted on January 1, 1995. In computing net
loss attributable to common shares, dividends attributable to Series B
Exchangeable Preferred Stock are deducted. Such amounts were $347,500 and $0 for
the six months ended June 30, 1996 and the year ended December 31, 1995,
respectively.

F-48
<PAGE> 119

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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK
OFFERED HEREBY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 7
The Company and its Predecessors.......... 14
Recent Developments....................... 16
Use of Proceeds........................... 17
Price Range of Common Stock and Dividend
Policy.................................. 17
Capitalization............................ 18
Selected Financial, Operating and Pro
Forma Data.............................. 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 21
Business.................................. 31
Management................................ 46
Certain Transactions...................... 56
Principal and Selling Stockholders........ 58
Description of Capital Stock.............. 61
Shares Eligible for Future Sale........... 66
Underwriting.............................. 68
Legal Matters............................. 69
Experts................................... 69
Additional Information.................... 70
Index to Financial Statements............. F-1
</TABLE>

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5,000,000 SHARES
[SUNRISE ASSISTED LIVING LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

ALEX. BROWN & SONS
INCORPORATED

NATWEST SECURITIES LIMITED

J.C. BRADFORD & CO.

OCTOBER 24, 1996

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