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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Commission file number: 1-16499

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

7902 Westpark Drive
McLean, Virginia 22102
(Address of principal executive offices)

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

As of July 31, 2003, there were 21,198,969 shares of the Registrant’s Common Stock outstanding.

SUNRISE SENIOR LIVING, INC.

Form 10-Q

June 30, 2003

INDEX

2

SUNRISE SENIOR LIVING, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

See accompanying notes.

3

SUNRISE SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)

See accompanying notes.

4

SUNRISE SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

See accompanying notes.

5

SUNRISE SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

     The accompanying consolidated financial statements of Sunrise Senior Living, Inc. and subsidiaries (“Sunrise”) are unaudited and include all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the three- and six-month periods ended June 30, 2003 and 2002 pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read together with Sunrise’s consolidated financial statements and the notes thereto for the year ended December 31, 2002 included in Sunrise’s 2002 Annual Report on Form 10-K. Operating results for the three- and six-month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2003.

     Certain 2002 balances have been reclassified to conform to the 2003 presentation.

     Net cash provided by operating activities and net cash used in investing activities in the Consolidated Statements of Cash Flows for the six months ended June 30, 2002 were reclassified from the amounts previously reported. In arriving at net cash provided by operating activities, net income is adjusted by non-cash items. In the previously reported cash flows from operating activities, the Company adjusted net cash from operating activities by the deferred income recognized during that period from property sales that occurred during that period and prior periods. However, cash flows from operating activities should have been adjusted for deferred income recognized from property sales that occurred only during prior periods because deferred income recognized in the current period from properties sales that occurred in the current period is an operating cash item. In addition, overstating the deferred income recognized during that period from property sales in adjusting net cash from operating activities had the corresponding effect of understating the increase in property and equipment in adjusting net cash from investing activities because cash that should have been attributed to gain from property sales was instead attributed to the sale of property and equipment. Consequently, the Company’s prior period presentation had the effect of understating the Company’s net cash provided by operating activities for the six months ended June 30, 2002 and correspondingly understating the Company’s net cash used in investing activities for the six months ended June 30, 2002 (but did not affect the net increase in cash flows for this period, the Company’s Consolidated Balance Sheets or the Company’s Consolidated Statements of Income). The six months ended June 30, 2002 presentation has been reclassified to conform to the

6

SUNRISE SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

2003 presentation. A reconciliation of the previously reported amounts to the reclassified amounts for the six months ended June 30, 2002 is presented below (in thousands).

2. Significant Accounting Policies

Stock-Based Compensation

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

     Pro forma information regarding net income and earnings per share is required by SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS 148, and has been determined as if Sunrise had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option-pricing model.

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

7

SUNRISE SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

     For purposes of pro forma disclosures below, the estimated fair value of the options is amortized to expense, net of taxes, over the options’ vesting period. Sunrise’s pro forma information follows (in thousands, except per share amounts):

Impact of Recently Issued Accounting Standards

     On January 1, 2003, Sunrise adopted Statement of Financial Accounting Standards (SFAS) No. 145, Recission of FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 requires companies to no longer report gains and losses associated with the extinguishment of debt as a component of extraordinary gains and losses, net of tax. These gains and losses are required to be presented within the statement of income in appropriate segregated line items. As required by SFAS 145, the extraordinary loss recognized in the six months ended June 30, 2002 of approximately $4 million ($2 million net of tax) for fees associated with the $92 million term loan and premium paid for the early redemption of the convertible notes has been reclassified to interest expense.

     On February 1, 2003, Sunrise adopted FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). Under this new Interpretation, companies are required to determine if they are the primary beneficiary of a variable interest entity. If they are the primary beneficiary, the variable interest entity must be consolidated. All companies with variable interests in variable interest entities created after January 31, 2003 must apply the provisions of the Interpretation immediately. Public companies with a variable interest in a variable interest entity created before February 1, 2003 must apply the provisions of the Interpretation to that entity no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003.

     Based on Sunrise’s review of FIN 46, Sunrise has preliminarily determined that there are two joint ventures in which Sunrise has an interest that would be variable interest entities under FIN 46. One of the variable interest entities is a development joint venture, which was established in 1999 and contains five operating senior living communities. Sunrise is considered the primary beneficiary for this joint venture. Upon consolidation beginning July 1, 2003, Sunrise will

8

SUNRISE SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

consolidate approximately $60 million in assets and $47 million in liabilities. There will be no ongoing impact to Sunrise’s consolidated statement of income from the consolidation of this joint venture as the income or loss attributed to the other partner in this joint venture will be reflected in the minority interest line item of the income statement. The other variable interest entity is an operating joint venture in which Sunrise is not considered the primary beneficiary and therefore will continue to account for this investment under the equity method of accounting. Sunrise’s remaining joint venture interests are not variable interest entities under FIN 46 as, among other factors, there is adequate equity in the joint ventures to support expected operations, there is sufficient third-party capital and no guarantees of returns or capital, and Sunrise would not be deemed the primary beneficiary in these ventures.

     Sunrise’s joint ventures fall into one of three categories. First, Sunrise enters into development joint ventures whereby a third-party investor and Sunrise capitalize a joint venture to develop and operate senior living communities. Second, Sunrise and a third-party investor capitalize a joint venture to acquire an existing senior living property. Finally, as a part of Sunrise’s sale long-term manage back program, Sunrise sells owned properties into a joint venture in which Sunrise holds a minority interest that is then capitalized by a third-party investor. These partnerships obtain non-recourse third-party debt. Sunrise does not have future requirements to contribute additional capital over and above the original capital commitments. All three types of joint ventures are established as real estate partnerships to own the underlying property. Sunrise will then enter into a long-term management contract to operate the property on behalf of the joint venture. Sunrise’s total investment in these joint ventures is comprised of Sunrise’s direct capital investment in these joint ventures and, when agreed to, subordinated debt provided and other short-term advances. As of June 30, 2003, this total investment was $204 million, not including any guarantees provided to these joint ventures as described in Note 3. The realization of this investment is dependent upon the ongoing operations of the joint ventures. See Note 5 for operating results of the joint ventures.

3. Commitments

     Sunrise has entered into contracts to purchase properties for development of additional senior living properties through joint venture arrangements or on a consolidated basis. Total contracted purchase price of these sites amounts to $86 million. Sunrise is pursuing additional development opportunities and also plans to acquire additional properties as market conditions warrant.

     As a part of Sunrise’s operating strategy, Sunrise has provided limited debt guarantees to certain of its business ventures, guaranteed that properties will be completed at budgeted costs approved by all partners in the joint venture and provided operating deficit guarantees as a part of certain management contracts. In addition to the guarantees disclosed in its 2002 Annual Report on Form 10-K, during the six months ended June 30, 2003, Sunrise’s guarantee of $3 million of debt for an international joint venture was terminated and Sunrise acquired certain guarantees associated with the acquisition of Marriott Senior Living Services (see Note 11). Two subsidiaries of CNL Retirement Properties, Inc., which purchased two continuing care retirement communities (CCRC) from a subsidiary of Marriott Senior Living Services prior to the closing of Sunrise’s transaction with Marriott International, agreed to assume the obligations to repay $83 million of life care endowment obligations issued by Marriott Senior Living Services with respect to such properties.

9

SUNRISE SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

CNL Retirement Properties, Inc. has guaranteed the assumption of these obligations by its subsidiaries. To the extent CNL fails to satisfy this obligation, Sunrise would be required to repay this obligation, the majority of which is expected to be refinanced with proceeds from the issuance of new endowment obligations as new residents enter the communities. Additionally, Sunrise assumed the obligation to provide approximately $4 million of financing under existing revolving credit facilities with respect to five properties and $2 million of guarantees under operating agreements with respect to two other properties.

4. Net Income Per Common Share

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

     Certain shares issuable upon the exercise of stock options or convertible notes have been excluded from the computation because the effect of their inclusion would be anti-dilutive.

10

SUNRISE SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

5. Transactions with Unconsolidated Entities

     Included in prepaid expenses and other current assets are net receivables from related unconsolidated partnerships or limited liability companies of $12 million as of June 30, 2003 and $19 million as of December 31, 2002. Included in other current liabilities are net payables to unconsolidated partnerships or limited liability companies of $4 million as of June 30, 2003 and $1 million as of December 31, 2002. Net receivables from unconsolidated partnerships or limited liability companies relate primarily to management activities.

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

     The prior year net loss amounts have been adjusted to conform to the current year presentation for the exclusion of net loss of certain entities for which Sunrise provides accounting support but does not have an ownership interest. No other disclosure balances were affected by this adjustment. The previously reported net loss for the three and six-month periods ended June 30, 2002 were ($6,216) and ($12,712), respectively.

     Total management and contract services revenue from related unconsolidated entities was $61 million and $39 million for the three months ended June 30, 2003 and 2002, respectively, and $122 million and $66 million for the six months ended June 30, 2003 and 2002, respectively.

6. Information about Sunrise’s Segments

     With the completion of the Marriott Senior Living Services acquisition (see Note 11) and the continued transformation into a management services organization, Sunrise operates within one defined business segment with activities related to management, development, acquisition and disposition of senior living services both domestically and internationally. Management and

11

SUNRISE SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

contract services revenues from operations internationally were $1 million and $1 million for the three months ended June 30, 2003 and June 30, 2002, respectively, and $1 million and $2 million for the six months ended June 30, 2003 and June 30, 2002, respectively. International expenses from operations were $2 million and $1 million for the three months ended June 30, 2003 and 2002, respectively, and $3 million and $1 million for the six months ended June 30, 2003 and 2002, respectively.

7. Comprehensive Income

     Total comprehensive income was $20 million and $11 million for the three months ended June 30, 2003 and 2002, respectively, and $33 million and $20 million for the six months ended June 30, 2003 and 2002, respectively. The difference between net income and total comprehensive income is primarily due to the impact of the fair value accounting of interest rate swaps. In the first quarter of 2003, Sunrise paid $3 million to terminate its remaining four interest rate swap agreements. As of June 30, 2003, Sunrise had a negative $1 million balance in accumulated other comprehensive income related to the terminated swap agreements, which will be amortized as a yield adjustment to interest expense over the remaining term of the terminated interest rate swap agreements through June 2004. Sunrise recognized $1 million and $2 million in interest expense related to the amortization of the swap balance in accumulated other comprehensive income in the three- and six-month periods ended June 30, 2003, respectively. Also, Sunrise wrote off $1 million of the swap balance in accumulated other comprehensive income as debt associated with the swap was repaid or assumed as part of the property sale transactions closed in the second quarter of 2003.

8. Property Sale / Long-Term Manage Back Program

     On June 30, 2003, Sunrise completed the sale of 12 consolidated senior living communities and 11 Sunrise joint venture senior living communities. The communities were sold in two separate transactions to two ventures formed by Macquarie Capital Partners, LLC, on behalf of Crescent Capital Investments, and Sunrise. Crescent Capital Investments has a 90 percent ownership interest in the ventures and Sunrise has a 10 percent ownership interest in the ventures. The aggregate purchase price for the 12 consolidated senior living communities was $167 million and $144 million for the 11 Sunrise joint venture senior living communities. Sunrise will continue to operate all 23 communities under long-term management contracts.

     Based on the sale of a 90 percent interest in the 12 consolidated senior living communities, transaction costs and deferred financing costs, Sunrise expects to recognize total income of approximately $30 million, which will be recognized over five quarters beginning in the second quarter of 2003, subject to meeting certain operating and financing contingencies. The sale of the 11 Sunrise joint venture communities from the original joint venture investor to the new joint venture investor did not result in any income statement impact to Sunrise, however, it did provide for the repayment to Sunrise of all outstanding notes receivable and advances from the existing joint ventures, which approximated $46 million. At closing, Sunrise provided approximately $79 million

12

SUNRISE SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

of senior bridge-financing which it expects to be repaid during the third quarter of 2003 from the proceeds of first mortgage financing.

9. Properties Held for Sale

     Based on a high level of interest from institutional real estate buyers and Sunrise’s plans to continue its transformation to a senior living management services company, Sunrise management is actively marketing 23 operating properties that it believes the sale is probable within the next 6 months. Sunrise intends to maintain long-term management of these communities.

     On June 30, 2003, Sunrise announced that it expected five of these properties to close in the third quarter of 2003 with the Macquarie-advised investors. The remaining 18 properties are expected to close with another buyer in the fourth quarter of 2003.

10. Acquisitions

     On March 28, 2003, Sunrise completed its acquisition of all the outstanding stock of Marriott International, Inc.’s wholly owned subsidiary, Marriott Senior Living Services, Inc. (“MSLS”), which owns and operates senior independent full-service and assisted living properties. Sunrise paid approximately $92 million in cash to acquire all of the outstanding stock of MSLS. Sunrise also assumed approximately $33 million of working capital liabilities and other obligations as well as approximately $25 million of life care endowment obligations, the majority of which are expected to be refinanced with proceeds from the issuance of new endowment obligations as new residents enter the communities.

     The acquisition was accounted for using the purchase method of accounting and the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The initial purchase price has been allocated to assets acquired, including separately identifiable intangible assets, and liabilities assumed based on current estimates of working capital and valuations of assets and liabilities. The working capital amounts are subject to certain contractual true-up provisions subsequent to closing. Additionally, certain valuations are subject to adjustment as contingencies are resolved and additional information on certain estimates becomes available. Land, net working capital deficit, costs in excess of assets acquired and transaction costs were all adjusted by approximately $1 million each during the second quarter of 2003 as additional information was obtained or true-ups of working capital balances were complete. The purchase price values assigned to the major assets and liabilities are as follows:

13

SUNRISE SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

     The portion of the purchase price allocated to management contracts and leases will be amortized into expense over the specific term of each individual management contract and lease acquired ranging from two to 29 years. Sunrise also assumed certain guarantees of MSLS and Marriott International, Inc. in the acquisition. See Note 3 for a description of those guarantees. The three months ended June 30, 2003 includes $4 million in transition expenses related to this acquisition.

     The following unaudited pro forma information presents the results of operations of Sunrise for the six months ended June 30, 2003 and 2002, respectively, as if the acquisition of MSLS had taken place as of January 1, 2002.

     On June 30, 2003, Sunrise acquired the remaining majority interest, ranging from 50 to 81 percent, in seven senior living properties in which it previously maintained a minority ownership interest. The majority interest holder was Catholic Health Initiatives, ET AL. (“CHI”), a not-for-profit entity. In order to acquire the remaining ownership interest, Sunrise assumed approximately $21 million in debt and paid approximately $2 million in cash. These properties were previously accounted for using the equity method of accounting. The acquisition was accounted for using the purchase method of accounting. Sunrise allocated its current investment carrying value and purchase price to the assets acquired and liabilities assumed. The initial purchase price values assigned to the major assets and liabilities are $35 million for property, $5 million for land, $3 million for furniture, fixtures and equipment, $21 million for debt and $1 million for resident agreements. Certain valuations are subject to adjustment, as additional information on estimates becomes available. Because this acquisition occurred on June 30, 2003, Sunrise’s income statement for the three- and six-month periods ended June 30, 2003 only reflects Sunrise’s minority ownership position in the properties. In subsequent periods, the results of these properties will be reflected in Sunrise’s consolidated financial statements.

14

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

     The following discussion should be read together with the information contained in the consolidated financial statements, including the related notes, and other financial information appearing elsewhere herein. This management’s discussion and analysis contains certain forward-looking statements that involve risks and uncertainties. Although we believe the expectations reflected in such forward looking statements are based on reasonable assumptions, there can be no assurance that our expectations will be realized. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, development and construction risks, acquisition risks, licensing risks, business conditions, competition, changes in interest rates, our ability to execute on our sale/manage back program, market factors that could affect the value of our properties, the risks of downturns in economic conditions generally, success in integrating Marriott Senior Living’s operations, satisfaction of closing conditions and availability of financing for development and acquisitions. Some of these factors are discussed elsewhere herein and in our 2002 Annual Report on Form 10-K. We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. Unless the context suggests otherwise, references herein to “we”, “us” and “our” mean Sunrise Senior Living, Inc. and its consolidated subsidiaries.

Overview

     We are a provider of senior living services in the United States, Canada and the United Kingdom. Founded in 1981, we began with a simple but innovative vision — to create an alternative senior living option that would emphasize quality of life and quality of care. As of June 30, 2003, we operated 336 communities in the United States, seven communities in Canada and three communities in the United Kingdom, with a total resident capacity of more than 40,000, including 199 communities owned by us or in which we have an ownership interest and 147 communities managed for third parties. We have traditionally served as an operator of assisted living communities but have also offered independent living services and skilled nursing services at some communities. In addition to operating senior living communities, we also develop senior living properties for ourselves and for joint ventures in which we retain an ownership interest.

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

     Refer to our 2002 Annual Report on Form 10-K for a discussion of our critical accounting policies, which include the development of properties, management of communities and the sale/long-term manage back program. As a part of our operating strategy, we have provided limited debt guarantees to certain of our development joint ventures, guaranteed that properties will be completed at budgeted costs approved by all partners in the joint venture and provided operating deficit guarantees as a part of certain management contracts. In addition to the guarantees disclosed

15

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

in our 2002 Annual Report on Form 10-K, during the six months ended June 30, 2003, our guarantee of $3 million of debt for an international joint venture was terminated and Sunrise acquired certain guarantees associated with the acquisition of MSLS. Two subsidiaries of CNL Retirement Properties, Inc., which purchased two CCRC properties from a subsidiary of MSLS prior to the closing of our transaction with Marriott International, agreed to assume the obligations to repay $83 million of life care endowment obligations issued by MSLS with respect to such properties. CNL Retirement Properties, Inc. has guaranteed the assumption of these obligations by its subsidiaries. To the extent CNL fails to satisfy this obligation, we would be required to repay this obligation, the majority of which is expected to be refinanced with proceeds from the issuance of new endowment obligations as new residents enter the communities. Additionally, we assumed the obligation to provide approximately $4 million of financing under existing revolving credit facilities with respect to five properties and $2 million of guarantees under operating agreements with respect to two other properties.

Recent Developments

     On June 30, 2003, we completed the sale of 12 consolidated senior living communities and 11 of our joint venture senior living communities. The communities were sold in two separate transactions to two ventures formed by Macquarie Capital Partners, LLC, on behalf of Crescent Capital Investments, and us. Crescent Capital Investments has a 90 percent ownership interest in the ventures and we have a 10 percent ownership interest in the ventures. The aggregate purchase price for the 12 consolidated senior living communities was $167 million and $144 million for our 11 joint venture senior living communities. We will continue to operate all 23 communities under long-term management contracts.

     Based on the sale of a 90 percent interest in the 12 consolidated senior living communities, transaction costs and deferred financing costs, we expect to recognize total income of approximately $30 million, which will be recognized over five quarters beginning in the second quarter of 2003, subject to meeting certain operating and financing contingencies. The sale of our 11 joint venture communities from the original joint venture investor to the new joint venture investor did not result in any income statement impact to us, however, it did provide for the repayment to us of all outstanding notes receivable from the existing joint ventures, which approximated $46 million. At closing, we provided approximately $79 million of senior bridge-financing which we expect to be repaid during the third quarter of 2003 from the proceeds of first mortgage financing.

     On June 30, 2003, we acquired the remaining majority interest in seven senior living properties in which we previously maintained a minority ownership interest. The majority interest holder was Catholic Health Initiatives, ET AL. (“CHI”), a not-for-profit entity. In order to acquire the remaining ownership interest, we assumed approximately $21 million in debt and paid approximately $2 million in cash. Because this acquisition occurred on June 30, 2003, our income statement for the three- and six-month periods ended June 30, 2003 only reflects our minority ownership position in the properties. In subsequent periods, the results of these properties will be reflected in Sunrise’s consolidated financial statements.

16

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations

     We derive our consolidated revenues from three primary sources: (1) management and contract services income for management and contract services provided to communities owned by unconsolidated joint ventures and other third parties, (2) resident fees for the delivery of senior living services and (3) income from property sales. Historically, most of our operating revenues have come from management and contract services and resident fees. Management contract services and resident fees comprised 93% and 87% of total operating revenues for the three months ended June 30, 2003 and 2002, respectively, and 91% and 88% of total operating revenues for the six months ended June 30, 2003 and 2002, respectively. The balance of our total operating revenues was derived from income from property sales.

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

     Residents, their families, other responsible parties and Medicare / Medicaid typically pay resident fees monthly. For the three months ended June 30, 2003 and 2002, approximately 93% and 99%, respectively, of our resident fee revenue was derived from private pay sources. As a result of the MSLS acquisition, approximately six percent of our resident fee revenue for the three months ended June 30, 2003 was derived from Medicare / Medicaid. Resident fees from residents in our assisted living communities include revenue derived from basic care, skilled nursing care, community fees, plus care, Reminiscence™ and other resident related services. Plus care and Reminiscence™ fees are paid by residents who require personal care in excess of services provided under the basic care program.

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

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

17

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Three Months Ended June 30, 2003 Compared to the Three Months Ended June 30, 2002

     We continue to experience growth in operations. Over the 12 months ended June 30, 2003, we continued to capitalize on our brand awareness by accepting additional third-party management and development contracts. During this period, we began operating 32 additional properties in which we have an ownership interest and managing 109 additional properties for independent third parties. These additions include our MSLS acquisition on March 28, 2003.

     Our senior living services operations include full-service senior living management services, pre-opening services to third parties and joint ventures on market and site selection, pre-opening sales and marketing, start-up training, development and construction of senior living properties, project and permanent financing for senior living properties and our sale/long-term manage back of senior living properties. We operate within one defined business segment providing senior living services.

     Operating Revenue

     Management and contract services revenues include management and contract services revenues from unconsolidated joint ventures and third-party owners. Management and contract services revenues increased by $161 million to $206 million for the three months ended June 30, 2003 from $45 million for the three months ended June 30, 2002. This increase was primarily due to the growth in the number of communities operated or managed by Sunrise or in the pre-opening phase. The total number of communities operated or managed increased 69% to 346 communities at June 30, 2003, up from 205 communities at June 30, 2002. Excluding the 129 properties acquired on March 28, 2003 from MSLS, the portfolio increased 6%. This growth resulted primarily through the opening of four consolidated properties, five unconsolidated joint venture properties, one managed property and the addition of two unconsolidated joint venture properties. In addition, there was a 31% increase in the number of communities in unconsolidated joint ventures (110 versus 84), many of which are accounted for under contract accounting, which requires the presentation of reimbursable expenses as revenues in the income statement. These revenues are offset by a corresponding amount reflected in the management and contract services expense line item.

     Resident fees represent revenues earned from residents in our consolidated communities. Resident fees increased $46 million, or 77%, to $106 million for the three months ended June 30, 2003 from $60 million for the three months ended June 30, 2002. This increase includes $54 million due to the acquisition of MSLS communities with operating leases. In addition, there was an increase of $7 million in resident fees from other consolidated communities. Offsetting this increase, in part, was a decrease of $15 million as a result of the sale of 16 properties in the last three quarters of 2002.

     Average resident occupancy for the 139 stabilized communities that we operated in both the three months ended June 30, 2003 and 2002 and in which we have an ownership interest was 89.59% compared to 88.93%, respectively. We attribute the slight increase in stabilized occupancy to improved performance of our current stabilized portfolio. Due in part to the larger size of our

18

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

developments and the general increase in competition, the lease-up period (period of time from opening to stabilization) is now typically taking 12 to 15 months. Although the lease-up period is taking longer, we have not changed our definition of what we consider a stabilized community. We define stabilized communities as those we have an ownership interest in and have operated for at least 12 months or those that have achieved occupancy percentages of 95% or above at the beginning of the measurement period.

     Average daily rate for the 139 stabilized communities that we operated in both the three months ended June 30, 2003 and 2002 and in which we have an ownership interest was $126 compared to $120, respectively. The 5% increase is primarily due to a general increase in the basic care rate.

     Income from property sales will fluctuate depending on the timing of property sale transactions and the satisfaction of certain required operating contingencies in the sales transactions. During the second quarter of 2003, we recognized $12 million of gains previously deferred on asset sales completed during 2002 as a result of certain operating contingencies being met in the second quarter of 2003. Also, as previously described, we recognized $11 million of gains from our sale/long-term manage back transactions completed in the second quarter of 2003.

     Operating Expenses

     Management and contract services expenses increased $148 million, to $184 million for the three months ended June 30, 2003 from the $36 million for the three months ended June 31, 2002. This increase is consistent with the increase in management and contract services revenues and is dictated by the number of communities accounted for under contract accounting. Contract accounting requires us to reflect the operating expenses of those managed communities as expenses of Sunrise. An offsetting revenue reimbursement is reflected in the management and contract services revenue line item.

     Facility operating expenses for the three months ended June 30, 2003 increased $37 million, or 90%, to $78 million from $41 million for the three months ended June 30, 2002. This increase includes $40 million due to the acquisition of MSLS communities with operating leases. In addition, there was an increase of $6 million in facility operating expenses from other consolidated communities. Offsetting this increase, in part, was a decrease of $9 million as a result of the sale of 16 properties in the last three quarters of 2002.

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

     Facility lease expenses for the three months ended June 30, 2003 increased $11 million to $13 million from $2 million for the three months ended June 30, 2002. This increase was due to the acquisition of MSLS communities with operating leases.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

     General and administrative expenses increased by $12 million, or 135%, to $21 million for the three months ended June 30, 2003 compared to $9 million for the three months ended June 30, 2002. The increase in general and administrative expenses is primarily due to the substantial growth in the number of communities operated. The three months ended June 30, 2003 includes $4 million in transition expenses related to the acquisition of MSLS.

     Depreciation and amortization expense for the three months ended June 30, 2003 decreased by $3 million, or 44%, to $4 million from $7 million for the three months ended June 30, 2002. This decrease reflects the timing of sales of properties, the opening of new properties and the cessation of depreciation and amortization on properties held for sale (see Note 9).

     Interest

     Net interest expense for the three months ended June 30, 2003 increased to $6 million from $5 million for the three months ended June 30, 2002. Interest income decreased $500,000 due to declining interest rates while interest expense was impacted by the expensing of approximately $1 million of interest rate swap costs.

     Provision for Income Taxes

     The provision for income taxes for us was $9 million for the three months ended June 30, 2003 compared to $7 million for the three months ended June 30, 2002. The increase was primarily due to an increase in pre-tax income which was slightly offset by the use of an effective tax rate of 36% for the three months ended June 30, 2003 compared to 38% for the three months ended June 30, 2002. The decrease in the effective tax rate is due to a decrease in our state and international effective tax rate.

Six Months Ended June 30, 2003 Compared to the Six Months Ended June 30, 2002

     Operating Revenue

     Management and contract services revenues increased by $194 million to $271 million for the six months ended June 30, 2003 from $77 million for the six months ended June 30, 2002. This increase was primarily due to the growth in the number of communities operated or managed by Sunrise or in the pre-opening phase. The total number of communities operated or managed increased 69% to 346 communities at June 30, 2003, up from 205 communities at June 30, 2002. Excluding the 129 properties acquired on March 28, 2003 from MSLS, the portfolio increased 6%. This growth resulted primarily through the opening of four consolidated properties, five unconsolidated joint venture properties, one managed property and the addition of two unconsolidated joint venture properties. In addition, there was a 31% increase in the number of communities in unconsolidated joint ventures (110 versus 84), many of which are accounted for under contract accounting, which requires the presentation of reimbursable expenses as revenues in the income statement. These revenues are offset by a corresponding amount reflected in the management and contract services expense line item.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

     Resident fees represent revenues earned from residents in our consolidated communities. Resident fees increased $31 million, or 24%, to $157 million for the six months ended June 30, 2003 from $126 million for the six months ended June 30, 2002. This increase includes $54 million due to the acquisition of MSLS communities with operating leases. In addition, there was an increase of $19 million in resident fees from other consolidated communities. Offsetting this increase, in part, was a decrease of $39 million as a result of the sale of 28 properties in 2002 and a decrease of $3 million as a result of the sale of 10 properties in the first quarter of 2003.

     Income from property sales will fluctuate depending on the timing of property sale transactions and the satisfaction of certain required operating contingencies in the sales transactions. During the first half of 2003, we recognized $26 million of gains previously deferred on asset sales completed during 2002 as a result of certain operating contingencies being met in the first half of 2003. Also, as previously described, we recognized $17 million of gains from our sale/long-term manage back transactions in the first half of 2003.

     Operating Expenses

     Management and contract services expenses increased $178 million, to $238 million for the six months ended June 30, 2003 from the $60 million for the six months ended June 30, 2002. This increase is consistent with the increase in management and contract services revenues and is dictated by the number of communities accounted for under contract accounting. Contract accounting requires us to reflect the operating expenses of those managed communities as expenses of Sunrise. An offsetting revenue reimbursement is reflected in the management and contract services revenue line item.

     Facility operating expenses for the six months ended June 30, 2003 increased $30 million, or 35%, to $115 million from $85 million for the six months ended June 30, 2002. This increase includes $40 million due to the acquisition of MSLS communities with operating leases. In addition, there was an increase of $14 million in facility operating expenses from other consolidated communities. Offsetting this increase, in part, was a decrease of $22 million as a result of the sale of 28 properties in 2002 and a decrease of $2 million as a result of the sale of 10 properties in the first quarter of 2003.

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

     Facility lease expenses for the six months ended June 30, 2003 increased $11 million to $15 million from $4 million for the six months ended June 30, 2002. This increase was due to the acquisition of MSLS communities with operating leases.

     General and administrative expenses increased 92% to $33 million for the six months ended June 30, 2003 compared to $17 million for the six months ended June 30, 2002. The $16 million

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

increase in general and administrative expenses is primarily due to the substantial growth in the number of communities operated. The six months ended June 30, 2003 includes $5 million in transition expenses related to the acquisition of MSLS.

     Depreciation and amortization expense for the six months ended June 30, 2003 decreased 51% to $7 million from $14 million for the six months ended June 30, 2002. This decrease reflects the timing of sales of properties, the opening of new properties and the cessation of depreciation and amortization on properties held for sale (see Note 9).

     Interest

     Net interest expense decreased for the six months ended June 30, 2003 to $10 million from $15 million for the six months ended June 30, 2002. In accordance with FASB 145 (see Note 2) the extraordinary loss recognized in the first quarter of 2002 of approximately $4 million ($2 million net of tax) for fees associated with the $92 million term loan and premium paid for the early redemption of our 5 1/2% convertible notes was reclassified to interest expense. Excluding this reclassification, the $1 million decline was primarily due to a decrease in the average balance of debt outstanding, as well as a decline in the interest rate that we pay on both our fixed and variable rate debt. Debt decreased from $511 million to $476 million, or 7%. The weighted-average interest rate on our fixed and variable rate debt at June 30, 2003 was 4.89% compared to 6.06% at June 30, 2002.

     Provision for Income Taxes

     The provision for income taxes for us was $17 million for the six months ended June 30, 2003 compared to $12 million for the six months ended June 30, 2002. The increase was primarily due to an increase in pre-tax income which was slightly offset by the use of an effective tax rate of 36% for the six months ended June 30, 2003 compared to 38% for the six months ended June 30, 2002. The decrease in the effective tax rate is due to a decrease in our state and international effective tax rate.

Liquidity and Capital Resources

     At June 30, 2003, we had approximately $104 million in unrestricted cash and cash equivalents, $323 million available under credit facilities and a working capital deficit of $158 million.

     Working capital decreased $298 million from $140 million at December 31, 2002 primarily due to a net decrease in working capital resulting from the acquisition of MSLS and an increase in current maturities of long-term debt. As of June 30, 2003, we had $213 million of debt maturing in the next 12 months. Approximately $134 million of the maturing debt will be repaid when previously announced sale/long-term manage back transactions close in 2003. We expect to refinance or repay the remaining $79 million of debt as it matures. Additionally, we repurchased approximately $19 million of our common stock during the first half of 2003.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

     Net cash provided by operating activities for the six months ended June 30, 2003 and 2002 was approximately $4 million and $35 million, respectively. Net cash provided by operating activities for the six months ended June 30, 2003 reflects the recognition of income from property sales that occurred during 2002 which is adjusted from net income, as it is a non-cash item. In addition there was a corresponding decrease in the number of consolidated communities operated by us from 93 communities at June 30, 2002 to 68 properties at June 30, 2003, excluding the 21 operating leases acquired through the MSLS acquisition.

     Net cash used in investing activities was $18 million for the six months ended June 30, 2003 and net cash provided by investing activities was $87 million for the six months ended June 30, 2002. We used $92 million for the acquisition of MSLS in the first quarter of 2003 and $2 million for the acquisition of CHI in the second quarter of 2003. Cash proceeds for the six months ended June 30, 2003 consisted of $37 million from the sale of 12 senior living properties in the second quarter compared to $54 million from the sale of 14 senior living properties for the six months ended June 30, 2002. Investments in property and equipment were exceeded by property sales in the amount of $44 million and $41 million for the six months ended June 30, 2003 and 2002, respectively.

     Net cash used in financing activities was $55 million and $119 million for six months ended June 30, 2003 and 2002, respectively. Financing activities for the six months ended June 30, 2003 and 2002 included additional borrowings of $225 million and $273 million, respectively, offset by debt repayments of $262 million and $393 million, respectively. The additional borrowings under our credit facility during the first six months of 2003 and 2002 were used to fund our continued development of senior living properties. Additionally, during the six months ended June 30, 2003, we repurchased approximately $19 million of our common stock.

     To date, we have financed our operations primarily with cash generated from operations, both short-term and long-term borrowings and proceeds from the sale of properties pursuant to our sale/long-term manage back program. As of June 30, 2003, we had $476 million of outstanding debt at a weighted average interest rate of 4.89%. Of the amount of outstanding debt, we had $273 million of fixed-rate debt at a weighted average interest rate of 5.89% and $204 million of variable rate debt at a weighted average interest rate of 3.55%.

     In 2001, we entered into five interest rate swap agreements whereby $125 million of advances outstanding on our variable LIBOR based revolving construction credit facility bear interest at a fixed rate. The maturity dates of the swap agreements range from June 2003 to June 2004. In December 2002, we paid $400,000 to terminate one of our five interest rate swap agreements. In the first quarter of 2003, we paid $3 million to terminate our remaining four interest rate swap agreements. As of June 30, 2003, we have a negative $1 million balance in accumulated other comprehensive income related to the terminated swap agreements, which will be amortized as a yield adjustment to interest expense over the remaining original term of terminated interest rate swap agreements through June 2004. For the six months ended June 30, 2003, we recognized $2 million in interest expense related to the amortization of the swap balance in accumulated other comprehensive income. Also, we wrote off $1 million of the swap balance in accumulated other

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

comprehensive income as debt associated with the swap was repaid or assumed as part of the property sale transactions closed in the second quarter of 2003.

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

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

     If we fail to comply with any of these requirements, then the related indebtedness could become due and payable before its stated due date. At June 30, 2003, we were in compliance with the financial covenants contained in our debt instruments. Our construction line of credit also contains a cross-default provision pursuant to which a default by us or by any of our consolidated subsidiaries under the construction line of credit could result in the ability of the lenders to declare a default under and accelerate the indebtedness due under the construction line of credit.

     We have received commitments from a syndicate of banks for a $200 million corporate credit facility with expansion options and expect to close on the facility in the third quarter of 2003. We expect the facility will have an initial term of three years, with an extension option. Proceeds from the line of credit will be used for general corporate purposes, including joint venture investments, acquisitions and the refinance of existing debt. Given our management services transformation and intention for most future developments to be completed with joint ventures, the new line of credit is intended to replace our existing $265 million syndicated revolving credit facility, which is primarily used for construction of wholly owned senior living properties.

     We currently estimate that the existing credit facilities, the committed credit facility, together with existing working capital, cash flows from operations, proceeds from sales of selected real estate properties as a normal part of our operations, financing commitments and financing expected to be available, will be sufficient to fund our short term liquidity needs, including properties currently under construction. Additional financing will, however, be required to complete additional development and to refinance existing indebtedness. We estimate that it will cost

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

approximately $50 million to complete the properties we currently have under construction. We have entered into contracts to purchase and lease additional sites. The total contracted purchase price of these sites is $86 million. We estimate that it will cost approximately $470 million to develop these properties and anticipate that many of these properties will be developed in joint ventures. We expect that the cash flow from operations, together with borrowings under existing credit facilities, the committed credit facility and proceeds from the sale of selected real estate properties will be sufficient to fund the development and construction for these additional properties for at least the next twelve months. We expect from time to time to seek additional funding through public or private financing sources, including equity or debt financing. We can provide no assurance that such financing and refinancing will be available on acceptable terms.

Stock Repurchase Program

     On July 23, 2002, we announced that our Board of Directors authorized us to repurchase outstanding shares of our common stock up to an aggregate purchase price of $50 million over the next 12 months. In 2002, we purchased 581,400 shares at an average price of $25.57 per share through open-market purchases. On May 7, 2003, our Board of Directors expanded our repurchase program to an aggregate of $150 million to repurchase outstanding shares of common stock of Sunrise and/or our outstanding 5 1/4% convertible subordinated notes due 2009. During the first six months of 2003, we purchased another 793,800 shares at an average price of $23.82 bringing the total shares purchased through June 30, 2003 to 1,375,200 shares at an average price of $24.56. As of June 30, 2003, we have completed $34 million of our repurchase program, leaving an additional $116 million of availability.

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

     We are exposed to market risks related to fluctuations in interest rates on our notes receivable, investments and debt. The purpose of the following analyses is to provide a framework to understand our sensitivity to hypothetical changes in interest rates as of June 30, 2003.

     We have investments in notes receivable and bonds. Investments in notes receivable are primarily with joint venture arrangements in which we have a minority equity ownership interest ranging from 7% to 50%. At June 30, 2003, we had minority equity ownership interest in 127 senior living properties, 17 of which are under development. We have 15 properties in which we own less than 10%, 83 properties in which we own between 10% and 20%, 26 properties in which we own between 20% and 30% and three properties in which we own between 30% and 50%. Investments in bonds are secured by the operating properties subject to the debt and are with properties that are managed by us. The majority of the investments have fixed rates. Two of the notes have adjustable rates.

     We utilize a combination of debt and equity financing to fund our development, construction and acquisition activities. We seek the financing at the most favorable terms available at the time. When seeking debt financing, we use a combination of variable and fixed rate debt, whichever is more favorable in our judgment at the time of financing.

     For fixed rate debt, changes in interest rates generally affect the fair market value of the debt, but not earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not impact fair market value of the debt, but do affect the future earnings and cash flows. We generally cannot prepay fixed rate debt prior to maturity without penalty. Therefore, interest rate risk and changes in fair market value should not have a significant impact on the fixed rate debt until we would be required to refinance such debt. Holding the variable rate debt balance of $204 million at June 30, 2003 constant, each one-percentage point increase in interest rates would result in an increase in interest expense for the coming year of approximately $2 million.

     The table below details by category the principal amount, the average interest rates and the estimated fair market value. Some of the notes receivable and some items in the various categories of debt, excluding the convertible notes, require periodic principal payments prior to the final maturity date. The fair value estimates for the notes receivable are based on the estimates of management and on rates currently prevailing for comparable loans. The fair market value estimates for debt securities are based on discounting future cash flows utilizing current rates offered to Sunrise for debt of the same type and remaining maturity. The fair market value estimate of the convertible notes is based on the market value at June 30, 2003.

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