<PAGE>   1
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549
                                   FORM 10-K
                      ____________________________________

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
                                       OR
[ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
            FOR THE TRANSITION PERIOD FROM __________ TO __________

                         COMMISSION FILE NUMBER 1-11999
                   _________________________________________
                       ALTERNATIVE LIVING SERVICES, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

          DELAWARE                                        39-1771281
    (STATE OF INCORPORATION)                  (IRS EMPLOYER IDENTIFICATION NO.)
450 N. SUNNYSLOPE ROAD, SUITE 300
         BROOKFIELD, WI                                      53005
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                  (ZIP CODE)


       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (414) 789-9565
                             ______________________

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:


   TITLE OF EACH CLASS                      NAME OF EXCHANGE ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.01                       AMERICAN STOCK EXCHANGE



          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                      NONE
                                (TITLE OF CLASS)

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

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

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant is $156,741,747 as of March 24, 1997.  The number of outstanding
shares of the Registrant's Common Stock is 12,996,496 shares as of March 24,
1997
                         _____________________________



-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
<PAGE>   2
                                    PART I

The statements in this annual report on Form 10-K relating to matters that are
not historical facts, including, but not limited to, statements found in Item
1. "Business" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations", are forward looking statements that are
subject to certain risks and uncertainties that could cause actual results to
differ materially from expectations. These include, without limitation,
securing necessary licensing and permits, construction delays, cost increases
on new developments, business conditions, adverse changes in general economic
conditions, meeting all closing requirements, and availability of financing for
these developments. These and other risks are set forth in the reports filed by
the Company with the Securities and Exchange Commission.


ITEM 1.     BUSINESS

OVERVIEW

     Alternative Living Services, Inc. is a national assisted living company
operating 77 residences with an aggregate capacity of 3,215 residents at
December 31, 1996.  Of these total residences, the Company owns 27, leases 35,
holds equity interests in and operates eight and manages an additional seven.
The Company provides a full range of assisted living services in its residences
for the frail elderly and free-standing specialty care residences for
individuals with Alzheimer's disease and other dementias.  The Company and its
predecessor have operated assisted living residences since 1981 including
specialty dementia care residences since 1985.  Unless the context otherwise
requires, references made to the "Company" or "ALS" shall mean Alternative
Living Services, Inc., its "Predecessor," as described in Note 1 to Selected
Consolidated Financial Data, and its subsidiaries.

     The Company provides a broad continuum of personal care (such as
assistance with bathing, toileting, dressing, eating and ambulation), support
services (such as housekeeping, laundry and transportation) and health care
(such as medication administration and health monitoring) to its residents.  In
addition, the Company offers a wide range of specialized services, including
behavior management and environmental adaptation programs, to residents who
suffer from Alzheimer's disease and other dementias.  All of these services are
provided on a 24-hour basis in "home-like" settings which emphasize privacy,
individual choice and independence.  The Company operates four distinct
assisted living product lines (Clare Bridge, Wynwood, Crossings and
WovenHearts), serving the private pay elderly population.  Each assisted living
product line is designed to permit residents to age in place by meeting their
personal and health care needs across a range of pricing options.  See
"Assisted Living Product Lines."

     Since 1993 the Company has experienced significant growth through its
aggressive development program and several strategic acquisitions.  During this
period the Company has developed or acquired 70 residences with an aggregate
capacity of approximately 3,152 residents, The Company intends to continue its
development strategy and  intends to develop over 50 residences in each of 1997
and 1998.  The Company has approximately 70 residences under construction and
development (i.e., the site is under control and development activities such as
site permitting, preparation of surveys and architectural plans and negotiation
of construction contracts have commenced).   The Company also intends to
continue to pursue strategic acquisitions of assisted living operations.  In
keeping with its acquisition strategy, in May 1996 the Company acquired New
Crossings International Corporation ("Crossings"), an assisted living company
which operated 15 residences with a capacity of approximately 1,420 residents
throughout the Western United States.  This strategic merger provides the
Company with access to several new geographic markets and complements its
existing assisted living product lines with the addition of apartment-style
assisted living residences. In January 1996, the Company acquired Heartland
Retirement Services, Inc. ("Heartland"), an assisted living company which
operated 20 WovenHearts residences throughout Wisconsin.  As a result of this
transaction, the Company has broadened its assisted living product lines to
serve frail elderly individuals in moderate income markets and rural
communities.

ASSISTED LIVING PRODUCT LINES

     The Company operates four distinct assisted living product lines (Clare
Bridge, Wynwood, Crossings, and WovenHearts) designed to meet the increasing
personal and health care needs of the private pay elderly population.  Product
lines are defined as consisting of various housing models offering a
predetermined selection of services within a defined price range.  Together,
these product lines encompass a full range of assisted living services ranging
from basic support services to specialized care for residents with Alzheimer's
disease and other dementias.  Each of the Company's product lines targets a
distinct segment of the elderly population through site selection, building
design, staffing, service and care plans, as well as pricing structures based
on the needs and characteristics of each targeted segment.  All of the
Company's residences incorporate its philosophy of preserving residents'
privacy, encouraging individual choice and fostering independence in a
"home-like" setting.

     Clare Bridge.  These specially designed, free-standing residences serve
the programmatic needs of individuals with Alzheimer's disease and other
dementias.  Clare Bridge residents typically require higher levels of care and
services

                                      2
<PAGE>   3




as a result of their progressive decline in cognitive abilities including
impaired memory, thinking and behavior.  As a result, these residences have a
staffing pattern which includes a full-time nurse and a care giver to resident
ratio of approximately 1 to 6. Due to the generally high level of care
required by residents, a single-tier pricing structure is used.  The Company
generally charges monthly rates per resident ranging from $2,800 for a shared
room to $3,400 for a private room.

     Wynwood.  These multi-story residences are designed to serve primarily
upper-income frail elderly individuals in metropolitan and suburban markets.
Wynwood residents are generally 75 years of age or older, require assistance
with at least two of the five basic activities of daily living (so-called
"ADLs" (i.e., bathing, toileting, dressing, eating and ambulation)) and need
services due primarily to physical limitations rather than cognitive
impairment.  The Wynwood residences typically range in size from 35,000 to
45,000 square feet and accommodate 50 to 72 residents.  To achieve a more
residential environment the buildings contain six to eight "neighborhoods"
scaled to a single-family home and include a living room, dining room, patio or
enclosed porch, laundry room and resident assistance center.  Residents are
offered a choice of private or shared, fully-furnished  accommodations with
ongoing health assessments by a nurse, 24-hour assistance with ADLs, three
meals a day plus snacks, organized social activities, housekeeping and personal
laundry service.  The Company maintains a minimum care giver to resident ratio
of approximately 1 to 10 at each of these residences and increases staffing
levels to a ratio as high as 1 to 6 to accommodate the care needs of the
resident population.  All residents are assessed at admission to determine the
level of care and service required and placed in one of four levels ranging
from basic care to three different levels of advanced care.  The Company
customarily charges monthly base service rates per resident ranging from $1,800
to $2,700 for a shared room and from $2,500 to $3,100 for a private room.

     Crossings.  These apartment-style residences serve the needs of elderly
individuals who may require support services and personal care and are
generally located in metropolitan markets.  Apartment-style residences are
favored in certain markets in the United States, particularly throughout
Western states and are required in certain states to meet licensing
requirements.  The Company believes this product line enables it to capture a
broader segment of the assisted living market.  These multi-story residences
range in size from 45,000 to 65,000 square feet and accommodate 60 to 80
residents, who choose among studio, one-bedroom and two-bedroom apartments.
These apartments typically include a bedroom, a kitchenette, a full bathroom
and a living/dining area and range in size from 280 to 700 square feet.  Common
space is dispersed throughout the buildings and includes a central dining room,
a library, various activity rooms, laundry rooms and a beauty shop.  The
Company maintains care staff to resident ratios ranging from 1 to 12 to 1 to
16, depending upon the care needs of the residents.  Crossings residences
generally offer a three-tier pricing structure ranging from a basic care
package to more advanced care levels.  The Company customarily charges monthly
rates per resident ranging from $1,500 to $3,300.  Additional fees ranging from
$100 to $450 per month may be charged for more advanced care levels, including
its RISE and ESP ancillary support programs.  See "Assisted Living Care and
Service Programs".

     WovenHearts.  These residences are designed to meet the needs of elderly
individuals who have primarily physical limitations or who may be experiencing
the early stages of dementia disease.  These smaller residences serve
moderate-income frail elderly individuals and are typically located in smaller
markets.  WovenHearts residences range in size from 7,000 to 12,000 square
feet, accommodate 20 residents and are being expanded to accommodate 26
residents.  These single-story residences resemble, and can generally be
constructed on a site suitable for, a single family home.  These residences
have multiple common areas that are easily accessible from any resident room
and include a living room, a den, an entertainment  room, several personal care
areas as well as a large kitchen area which opens into an adjoining dining
room.   Most of the resident units are private and fully furnished, though
shared accommodations are also available.  The Company generally maintains a
minimum care giver to resident ratio of approximately 1 to 12 at its
WovenHearts residences.  In addition, the Company is able to offer high quality
and cost-effective care and service in a smaller residential setting by using a
centralized professional staff (i.e., registered nurses and marketing
specialists) that performs functions for several WovenHearts residences.  All
residents are assessed at admission to determine the level of care and service
required and placed in one of four levels ranging from basic care to three
different levels of advanced care.  The Company customarily charges monthly
base service rates per resident ranging from $1,700 to $2,150.


                                      3

<PAGE>   4


ASSISTED LIVING CARE AND SERVICE PROGRAMS

     The Company offers a full range of assisted living care and services
based upon individual resident needs.  Prior to admission, all residents are
assessed by the Company's professional staff to determine the appropriate
residence model and level of care and services required by such residents.
Subsequently, individual care plans are developed by residence staff in
conjunction with the residents, their families and their physicians.  These
plans are  reviewed regularly, typically  when a change in medical or cognitive
status  occurs.  Each of the Company's assisted living product lines is
designed to  accommodate residents as they age in place and require increasing
levels of  care.  To oversee the delivery of care and services, the Company
maintains a  licensed nurse for each of its assisted living residences.  The
Company  believes that this level of attention to the health care needs of its
residents enables them to remain in the Company's residences, in many cases,
for the rest of their lives.  The Company's care levels include a basic care
program, several advanced care programs as well as additional ancillary
service programs as further described below.

     Basic Care.  At this level, residents are provided with a variety of
services, including 24 hour assistance with ADLs, ongoing health assessments by
a professional  nurse, three meals per day and snacks, coordination of special
diets planned by a registered dietitian, assistance with coordination of
physician care, physical therapy and other medical services, social and
recreational activities, housekeeping and personal laundry services.

     Advanced Care.  The Company also offers higher levels of personal and
health care services to residents who require more frequent or intensive
physical assistance or increased care and supervision due to cognitive
impairments.  The Company offers three advanced care levels which provide
residents with increasing levels of care and services dependent on the
residents' changing needs.  Each level is generally priced at about $300 per
month.

     Alzheimer's Care.  The Company believes it is one of the leading providers
of care to residents with cognitive impairments including Alzheimer's and other
dementias in its free-standing Clare Bridge residences.  The Company's programs
provide the attention, care and services needed to help cognitively impaired
residents maintain a higher quality of life.  Specialized services include
assistance with ADLs, behavior management and a life-skills based activities
program, the goal of which is to provide an environment that supports residents'
remaining functional abilities.  Whenever possible, residents participate in
all facets of daily life at the residence, such as assisting with meals,
laundry and housekeeping.

     RISE (Restoring Independence, Strength and Energy).  Crossings residences
offer RISE, an exercise and training program designed to help residents regain
their independence and become healthier, and stronger by improving flexibility,
balance, strength and endurance.

     ESP (Extended Support Program).  ESP, also offered at Crossings
residences, is a program designed to provide additional structure and personal
attention to residents with early stages of dementia.  The daily group program
helps residents build self-esteem and decrease anxiety related to confusion and
disorientation.

     Access to Specialized Medical Services.  The Company assists its residents
with the coordination of access to medical services from third parties
including home health care, rehabilitation therapy, pharmacy services and
hospice care.  These providers are often reimbursed directly by the resident or
a third party payor, such as Medicare.

JOINT VENTURES AND STRATEGIC ALLIANCES

     Joint Venture with Continuing Care Concepts, Inc.
     -------------------------------------------------

     In 1994, the Company established a joint venture with Continuing Care
Concepts, Inc. ("CCC"') to develop, own and operate assisted living residences
in target market areas throughout Pennsylvania, Delaware and New Jersey (the
"ALS-East Territory"). CCC is a corporation owned and controlled by DeLuca
Enterprises, Inc., an eastern Pennsylvania-based commercial real estate
development and construction company.   The joint venture arrangement between
ALS and CCC contemplates the joint development of residences in the ALS-East
Territory, and CCC will have a right of first refusal to provide 20% of the
equity for any future residences developed by ALS in the ALS-East Territory.
Losses from the operation of residences jointly owned by ALS and CCC are
disproportionately allocated to CCC to the extent of its capital account. Upon
the six month anniversary of the opening of a residence jointly owned

                                      4

<PAGE>   5


by ALS and CCC, CCC shall have the right to require the Company to purchase
CCC's interest in such residence (put option) and the Company shall have an
option to acquire (call option) CCC's interest in such residence at a purchase
price based upon the appraised fair market value of the residence.

     Joint Venture with Days Development Company
     -------------------------------------------

     The Company has established a joint venture (the "ALS-Carolina J.V.") with
Days Development Company, L.C.  a Roanoke, Virginia-based commercial real
estate development and construction company ("Days") to develop, own and
operate assisted living residences in target market areas throughout North and
South Carolina (the "ALS-Carolina Territory").  The joint venture arrangement
between ALS and Days contemplates the joint development of residences in the
ALS-Carolina Territory through November 2000.  Days or its affiliates will
serve as ALS's exclusive general contractor in the ALS-Carolina Territory, and
Days will have a right of first refusal to provide 20% of the equity  for any
future residences developed by ALS in the ALS-Carolina Territory.  Losses from
the operation of residences jointly owned by ALS and Days are
disproportionately  allocated to Days to the extent of its capital account.
Upon the six month anniversary of the opening of a residence jointly owned by
ALS and Days, Days shall have the right to require the Company to purchase
Days' interest in such residence (put option) and the Company shall have an
option to acquire (call option) Days' interest in such residence at a purchase
price based upon the appraised fair market value of the residence.

     Joint Venture with Pioneer Development Company
     ----------------------------------------------

     The Company has entered into a joint venture relationship (the
"ALS-Northwest J.V.") with Pioneer Development  Company, a Syracuse, New
York-based commercial real estate development and construction company
("Pioneer"), to develop, own and operate assisted living residences in targeted
market areas throughout New York, Massachusetts, Connecticut and Rhode Island
(the "ALS-Northeast Territory").  Pioneer and the Company agreed to capitalize
and form separate project entities during a five-year development term
commencing in September 1996 to develop, construct, open and operate residences
in the ALS-Northeast Territory, with the Company and Pioneer owning and funding
a 51% and 49% equity interest, respectively, in such project entities.  During
such development term, the Company and Pioneer have agreed not to independently
engage in other competitive activities in the ALS-Northeast Territory, subject
to certain limited exceptions.  Pioneer will provide development and
construction management services to the ALS Northeast J.V. and ALS will manage
the ALS- Northeast residences, all pursuant to agreed upon arrangements.

     With respect to each ALS Northeast Territory residence, upon the first to
occur (i) such residence achieving a 75% occupancy or (ii) the second
anniversary of the opening of such residence, Pioneer shall have the right to
require the Company to purchase Pioneer's interest in the residence (put
option) and the Company shall have an option to acquire (call option) Pioneer's
interest in such ALS-Northeast residence.  The purchase price payable upon
exercise of the put and call options are based on the appraised fair market
value of the residence and shall be payable in cash and/or shares of Common
Stock.

     The Company and Pioneer have agreed to amend their ongoing joint venture
relationship in certain respects effective upon consummation of the pending
purchase by ALS from affiliates of Pioneer of 100% of an assisted living
residence in Manilus, New York and 51% equity interests in two assisted living
residences located in Kenmore and Niskayuna, New York.  See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."

     Fee Development Relationship with The Damone Group
     --------------------------------------------------

     The Company and The Damone Group, Inc. ("Damone"), a Troy, Michigan-based
commercial real estate development and construction firm that has developed and
constructed the Company's Michigan residences and certain of the Company's
Florida residences, have agreed to an exclusive fee development and
construction arrangement with respect to future residences to be developed and
constructed by the Company in Michigan and Florida during a 36 month period
commencing in May 1996.

                                      5
<PAGE>   6

     The Company has also granted to Damone a right to invest in the next two
Wynwood or Clare Bridge residences developed and constructed by the Company in
Michigan.  Under this investment right, Damone is entitled to acquire an
interest in the limited partnerships to be formed to own such residences, which
limited partnership interest may represent up to a 49% equity interest in each
of such residences, subject, however, to the prior right of Margolick Financial
Group Limited Partnership described below.  If Damone elects to invest in an
any such residence, the Company will have the right to acquire the Damone
interest (call option) in such residence, and Damone shall have the right to
require the Company to acquire Damone's interest (put option) in such
residence, commencing six months following the opening of such residence.  The
purchase price payable by the Company under such put and call options is a
formula price based on the fair market value of the residence.

     The Company granted a similar right to invest in the next three Wynwood
and Clare Bridge residences to be developed and constructed by the Company in
Michigan to Margolick Financial Group Limited Partnership of Farmington Hills,
Michigan ("MFG"), which served as placement agent for the private placement of
limited partnership interests in partnerships formed to develop and operate
certain of the Company's Michigan residences.  Two of the Company's Michigan
residences are owned by limited partnerships in which investors identified by
MFG own a minority interest.  MFG has the right to provide 49% of the equity
capital for the next three Wynwood or Clare Bridge residences constructed by
the Company in Michigan prior to December 1998.  If MFG or its designees elect
to make any such investment, the limited partnership interest acquired by MFG
or its designees will be subject to put and call options substantially
identical to those described above with respect to the investment right granted
to Damone.  The Company has also agreed to pay MFG a fee for all WovenHearts
residences developed and constructed by the Company in Michigan prior to
December 1998 equal to one percent (1%) of the capital project cost of the next
fifteen (15) such residences and one half of one percent ( 1/2%) of the capital
project cost of any such residences in excess of fifteen.  The Company
estimates that it will construct in excess of 15 WovenHearts residences in
Michigan during this time period, which would result in amounts in excess of
$150,000 being payable to MFG.

     Fee Development Relationship with Western Communities Corporation.  The
Company has entered into a Pre-Construction Coordination Agreement (the "WCC
Agreement"), with Western Communities Corporation, a Tempe, Arizona-based
construction and development firm ("WCC"), pursuant to which WCC is responsible
for (i) locating suitable sites in communities in Arizona designated by the
Company ("Project Areas") for development of the Company's assisted living and
dementia care residences; (ii) assisting the Company in its site selection
process; and (iii) obtaining all required governmental approvals within
specified time period.  WCC is entitled to a project development fee of $50,000
per project site and to reimbursement of 110% of costs and expenses.  If WCC
does not obtain the required approvals within the specified time, it must
refund the development fee (but not costs and expenses) for that project site
to the Company; however, the obligation to refund such fee is limited to the
first four Project Areas designated by the Company in each of 1996 and 1997.
Upon acquisition of a project site, the parties intend to enter into a mutually
satisfactory construction management agreement pursuant to which WCC will
manage the construction of the facility.  The WCC Agreement provides that
during the term of the WCC Agreement, the Company and WCC will not enter into a
similar agreement with any other person and that WCC will not locate or develop
sites for assisted living or dementia care residences in Arizona without first
offering such sites to the Company.

     A Clare Bridge residence under construction in Tempe, Arizona is
designated as the first development project under the WCC Agreement.  The
Company is also obligated to designate at least three additional Project Areas
during the term of the WCC Agreement, which term is two years unless terminated
earlier pursuant to the terms thereof.

GOVERNMENT REGULATION

     Health care is an area of extensive and frequent regulatory change.  The
assisted living industry is relatively new and, accordingly, the manner and
extent to which it is regulated at the Federal and state levels is evolving.

     The Company's assisted living residences are subject to regulation and
licensing by state and local health and social service agencies and other
regulatory authorities.  Although regulatory requirements vary from state to
state, these requirements generally address, among other things: personnel
education, training and records; staffing levels; facility


                                      6
<PAGE>   7


services, including administration and assistance with self-administration of
medication, and limited nursing services; physical residence specifications;
furnishing of residence units; food and housekeeping services; emergency
evacuation plans; and resident rights and responsibilities.  New Jersey also
requires each assisted living residence to obtain a Certificate of Need ("CON")
prior to its opening.  The Company's residences are also subject to various
state or local building codes and other ordinances, including safety codes.
Management anticipates that the states which are establishing regulatory
frameworks for assisted living residences will require licensing of assisted
living residences and will establish varying requirements with respect to such
licensing.

     Like other health care facilities, assisted living residences are subject
to periodic survey or inspection by governmental authorities.  From time to
time in the ordinary course of business, the Company receives deficiency
reports.  The Company reviews such reports and seeks to take appropriate
corrective action.  Although most inspection deficiencies are resolved through
a plan of correction, the reviewing agency typically is authorized to take
action against a licensed facility where deficiencies are noted in the
inspection process.  Such action may include imposition of fines, imposition of
a provisional or conditional license or suspension or revocation of a license
or other sanctions.  Any failure by the Company to comply with applicable
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations.  The Company believes that its
residences are in substantial compliance with all applicable regulatory
requirements.  No actions are currently pending against any of the Company's
residences nor have any of the Company's residences been cited in the past for
any significant non-compliance with regulatory requirements.

COMPETITION

     The long-term care industry is highly competitive and, given the
relatively low barriers to entry and continuing health care cost containment
pressures, the Company expects that the assisted living segment of such
industry will become increasingly competitive in the future.  The Company
competes with other providers of elderly residential care on the basis of the
breadth and quality of its services, the quality of its residences and, with
respect to private pay patients or residents, price.  The Company also competes
with other providers of long-term care in the acquisition and development of
additional residences.  The Company's current and potential competitors include
national, regional and local operators of long-term care residences, acute care
hospitals and rehabilitation hospitals, extended care centers,
assisted/independent living centers, retirement communities, home health
agencies and similar institutions, many of which have significantly greater
financial and other resources than the Company.  In addition, the Company
competes with a number of tax-exempt nonprofit organizations which can finance
capital expenditures on a tax-exempt basis or receive charitable contributions
unavailable to the Company and which are generally exempt from income tax.

TRADEMARKS

     Crossings and WovenHearts are registered service marks of the Company and
the Company claims service mark protection in the marks Wynwood, Hamilton House
and Clare Bridge.  The Company has service mark applications pending at the
U.S. Patent & Trademark office for the Wynwood and Clare Bridge marks.

EMPLOYEES

     At December 31, 1996, the Company employed 1,233 full-time employees and
870 part-time employees.  None of the Company's employees are represented by a
collective bargaining group.

THE COMPANY AND ITS PREDECESSORS

     The Company was organized in December 1993, and was initially capitalized
by Evergreen Healthcare, Inc. ("Evergreen") and Care Living Centers, Inc.
("CLC").  Evergreen, then a NYSE-listed operator of long-term care facilities,
merged with GranCare, Inc. ("GranCare")  in July 1995.  At the time of the
Company's organization, CLC was owned 25% by William F. Lasky, the Company's
President and Chief Executive Officer, and 75% by two other shareholders.
Pursuant to the terms of an acquisition agreement between Evergreen, CLC and
Alternative Living Services, a Wisconsin general partnership owned 50% by Mr.
Lasky and 50% by two other individuals (the "ALS Partnership"), the Company was
initially capitalized with (i) $2.7 million contributed by Evergreen, of which
$330,000 was in cash, $170,000 was in satisfaction of a short-term advance and
$2.2 million was in Common Stock subscribed


                                      7
<PAGE>   8


in exchange for a 51 % interest in the Company and (ii) certain assets and
contractual rights owned by CLC were contributed in exchange for the remaining
49% interest in the Company issued to CLC.  Immediately prior to the
consummation of the transaction (i) Assisted Care, Inc. ("Assisted Care"), a
corporation formed by the shareholders of CLC in 1989 to develop assisted
living facilities outside of the State of Wisconsin, was merged with and into
CLC and (ii) the ALS Partnership conveyed certain of its assets relating to its
assisted living business to CLC.  Assisted Care and the ALS Partnership were
under common control through Mr, Lasky and one other shareholder.

ITEM 2. PROPERTIES

     The table below sets forth certain information with respect to the
Company's residences which are operated by the Company as of December 31, 1996.
The Company owns, leases, holds equity interest in or manages, on behalf of
third parties, these residences.


<TABLE>
<CAPTION>
                                                   OWNERSHIP    RESIDENT    DATE
RESIDENCE MODEL  LOCATION          CARE LEVEL     (% OWNED)(1)  CAPACITY  OPENED(2)
---------------  ----------------  -------------  ------------  --------  ---------
OWNED/LEASED
WISCONSIN
<S>              <C>               <C>            <C>           <C>       <C>
Clare Bridge     Brookfield        Dementia Care   Leased             24     Nov-91
Clare Bridge     Middleton         Dementia Care   Owned              24     Mar-91
Wynwood          Madison           Frail Elderly   Leased             54     Feb-92
Wynwood          Brookfield        Frail Elderly   Leased             61     Mar-94
WovenHearts      Baraboo           Frail Elderly   Owned              20     Sep-96
WovenHearts      Brown Deer        Frail Elderly   Leased             15     Sep-96
WovenHearts(3)   Cambridge         Frail Elderly   Owned(50.0)        15     Jan-96
WovenHearts      Clintonville      Frail Elderly   Owned              18     Jul-95
WovenHearts      Edgerton          Frail Elderly   Owned              16     Oct-95
WovenHearts      Fond du Lac       Frail Elderly   Owned              19     Sep-96
WovenHearts      Janesville        Dementia Care   Owned              16     Oct-95
WovenHearts(3)   Janesville II     Frail Elderly   Owned(50.0)        20     Nov-96
WovenHearts      Jefferson         Frail Elderly   Owned              16     Oct-95
WovenHearts      Jefferson II      Dementia Care   Leased             16     Jan-96
WovenHearts      Kaukauna          Frail Elderly   Owned              16     Jul-95
WovenHearts      Manitowoc         Frail Elderly   Owned              20     Dec-95
WovenHearts      Medford           Frail Elderly   Owned              19     Dec-96
WovenHearts      Menomonie         Frail Elderly   Owned(19.0)        19     Mar-95
WovenHearts      Neenah            Frail Elderly   Owned              20     Apr-96
WovenHearts      New London        Frail Elderly   Owned              18     Jul-95
WovenHearts      New Richmond      Frail Elderly   Owned(19.0)        15     Mar-95
WovenHearts      Onalaska          Frail Elderly   Leased             19     Jun-95
WovenHearts      Oshkosh           Frail Elderly   Owned              20     Aug-96
WovenHearts      Platteville       Frail Elderly   Owned(72.7)        20     Nov-95
WovenHearts      Plover            Frail Elderly   Owned              37     Dec-96
WovenHearts      Plymouth          Frail Elderly   Owned(19.0)        15     Jun-94
WovenHearts      Rice Lake         Frail Elderly   Owned              19     Oct-95
WovenHearts      River Falls       Frail Elderly   Owned              20     Dec-96
WovenHearts      Shawano           Frail Elderly   Owned              15     Jul-95
WovenHearts      Sun Prairie       Frail Elderly   Owned              20     Oct-95
WovenHearts      Sussex            Frail Elderly   Leased             20     Sep-96
WovenHearts      Wausau            Frail Elderly   Owned              40     Dec-96
WovenHearts(3)   Whitewater        Frail Elderly   Owned(50.0)        20     Nov-96
WovenHearts      Wisconsin Rapids  Frail Elderly   Owned              20     Dec-96
WovenHearts      Wisconsin Rapids  Frail Elderly   Owned(19.0)        19     May-95
                                                                --------
                                                                     765
                                                                --------
</TABLE>





                                      8
<PAGE>   9
<TABLE>
<CAPTION>


                                        OWNERSHIP          RESIDENT         DATE
  RESIDENCE MODEL  LOCATION             CARE LEVEL         (% OWNED)(1)  CAPACITY    OPENED(2)
  ---------------  --------             -------------      ------------  --------    ---------
  OWNED/LEASED
  (CONTINUED)
  <S>              <C>                  <C>                <C>           <C>         <C>
  MINNESOTA
  WovenHearts      Austin               Frail Elderly      Owned               20     Dec-96
  WovenHearts      Mankato              Frail Elderly      Owned               20     Oct-96
  WovenHearts      Owatonna             Frail Elderly      Owned               20     Dec-96
                                                                         --------
                                                                               60
                                                                         --------
  OREGON
  Crossings        Albany               Support Services   Leased              74     Aug-90
  Crossings        Albany               Support Services   Leased              63     Jun-89
  Crossings        Forest Grove         Support Services/
                                        Frail Elderly      Leased              88     Sep-90
  Crossings        McMinnville          Support Services/
                                        Frail Elderly      Leased              87     May-91
  Crossings        Tualatin             Fruit Elderly      Leased             112     Feb-89
  Crossings        Gresham              Frail Elderly      Leased              78     Jan-90
  Crossings        Medford              Frail Elderly      Leased              76     Jan-91
                                                                         --------
                                                                              578
                                                                         --------
  MICHIGAN
  Clare Bridge     Ann Arbor            Dementia Care      Leased              36     Jun-95
  Clare Bridge     Farmington Hills     Dementia Care      Leased              28     Jul-94
  Clare Bridge     Farmington Hills II  Dementia Cue       Leased              32     Oct-95
  Clare Bridge     Lansing              Dementia Cue       Leased              36     Jan-96
  Clare Bridge     Utica                Dementia Care      Leased              36     Jan-95
  Wynwood          Northville           Frail Elderly      Owned(76%)          72     Oct-96
  Wynwood          Utica                Frail Elderly      Owned(76%)          72     Dec-96
                                                                         --------
                                                                              312
                                                                         --------
  COLORADO
  Crossings        Aurora               Support Services   Leased             159     Apr-91
  Crossings        Aurora               Frail Elderly      Leased              60     Apr-91
  Crossings        Boulder              Support Services   Leased              82     Aug-88
  Crossings        Boulder              Frail Elderly      Leased              76     Jun-94
                                                                         --------
                                                                              377
  FLORIDA                                                                --------
  Clare Bridge     Bradenton            Dementia Care      Leased              36     Oct-95
  Clare Bridge     Ft. Myers            Dementia Care      Leased              38     Dec-96
  Clare Bridge     Sarasota             Dementia Cue       Leased              38     Dec-95
  Wynwood          Sarasota             Frail Elderly      Owned               86     Jun-90
  Clare Bridge     Tampa                Dementia Care      Leased              38     Oct-96
                                                                         --------
                                                                              236
                                                                         --------
  IDAHO
  Crossings        Boise                Frail Elderly      Leased              80     Jul-92
  Crossings        Boise                Frail Elderly      Leased              78     Nov-96
                                                                         --------
                                                                              158
                                                                         --------
</TABLE>

                                      9

<PAGE>   10



<TABLE>
<CAPTION>
                                                               OWNERSHIP       RESIDENT       DATE
RESIDENCE MODEL      LOCATION              CARE LEVEL          (% OWNED)(1)    CAPACITY       OPENED(2)
---------------      --------              -----------------   ------------    --------       ---------
<S>                  <C>                   <C>                 <C>             <C>            <C>
OWNED/LEASED
(CONTINUED)
WASHINGTON
Crossings            Richland              Support Services/
                                           Frail Elderly           Leased           128          Jul-88
Crossings            Tacoma                Support Services        Leased           119          Jun-87
                                                                               --------
                                                                                    247
                                                                               --------

NORTH CAROLINA
Wynwood              Chapel Hill           Frail Elderly           Owned(51%)        70          Dec-96
                                                                               --------

PENNSYLVANIA
Clare Bridge         Lower Makefield       Dementia Care           Leased            48          Feb-96
Clare Bridge         Montgomery            Dementia Care           Leased            48          Sep-96
Wynwood              Richboro              Frail Elderly/
                                           Dementia                Leased           113          Oct-94
                                                                               --------
                                                                                    209
                                                                               --------
CALIFORNIA
Crossings (4)        Loma Linda            Support Services/
                                           Frail Elderly           Leased           140          Jun-91
                                                                               --------
MANAGED
WISCONSIN
WovenHearts (5)      Lodi                  Frail Elderly          Managed            15              --
Elm Grove House      Elm Grove             Dementia Care          Managed             8              --
Finch House          Greendale             Dementia Cue           Managed             8              --
North Shore House    Fox Point             Dementia Cue           Managed             8              --
Oak Ridge House      Wauwatosa             Dementia Cue           Managed             8              --
Parkway House        Milwaukee             Dementia Cue           Managed             8
Ridgefield House     Madison               Dementia Cue           Managed             8
                                                                                     63
                                                                               --------
   Total                                                                          3,215
                                                                               ========
</TABLE>

(1)  Substantially all of the residences identified as being owned by the
     Company are subject to one or more mortgages or deeds of trust that
     typically mature within the next three to 20 years.
(2)  The dates in this table represent the dates the residences were
     originally opened by either ALS or an acquired company.
(3)  ALS shares management responsibility with its joint venture partner,
     Memorial Community Hospital Association, Inc. of Edgerton, Wisconsin.
(4)  This residence is leased under a lease that expires upon the first to
     occur of (i) December 1998 or (ii) the achievement of a 95% occupancy
     rate.
(5)  The Company holds a 2.5% equity interest in, and has a right of first
     refusal to purchase, this residence.

     The Company occupies executive offices located in Brookfield, Wisconsin
under a lease expiring in January 2000.  The Company also leases office space in
Nokomis, Florida; Chapel Hill, North Carolina; Yardley, Pennsylvania; Tacoma,
Washington; and Madison, Wisconsin.



                                      10
<PAGE>   11


ITEM 3. LEGAL PROCEEDINGS

     Other than routine litigation incidental to its business, the Company is
not currently a party to any material litigation.


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

     The Company did not submit any matters to a vote of security holders
during the fourth quarter of its fiscal year ended December 31, 1996.



                                      11
<PAGE>   12


                                   PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
        MATTERS

     The Company's Common Stock is listed and traded on the American Stock
Exchange (AMEX) under the symbol "ALI".  The Common Stock has been listed on
the AMEX since August 6, 1996, the date of the Company's initial public
offering.  The number of holders of record of the Company's Common Stock as of
March 18, 1997 was approximately 1,580.

     The following table sets forth, for the periods indicated, the high and
low closing prices for the Common Stock as reported on AMEX.


<TABLE>
<CAPTION>

                 1996                               HIGH    LOW
                 ---------------------------------  ------  ------
                 <S>                                <C>     <C>
                 Third Quarter (commencing 8/6/96)  15 1/8  12 7/8
                 Fourth Quarter                     15 1/4  10 7/8
</TABLE>


     The Company has never paid or declared cash dividends and currently
intends to retain any future earnings for the operation and expansion of its
business.  Any determination to pay cash dividends in the future will be at the
discretion of the Board of Directors and will be dependent on the Company's
financial condition, results of operations, contractual restrictions, capital
requirements, business prospects and such other factors as the Board of
Directors deems relevant.


ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The selected consolidated historical financial data of the Company
presented below as of and for the three years ended December 31, 1996, 1995 and
1994 are derived from the Company's audited consolidated financial statements
appearing elsewhere in this report and should be read in conjunction with those
financial statements and related notes.  The selected consolidated historical
financial data of the Predecessor presented below for the years ended
December 31, 1993 and 1992 are derived from the unaudited consolidated
financial statements of the Company's predecessor for those years.  The
selected consolidated financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and notes
thereto included in the report (in thousands, except per share and other
operating data).




                                      12
<PAGE>   13



<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                    --------------------------------------------------------
                                                                 THE COMPANY                  PREDECESSOR
                                                    --------------------------------------  ----------------
                                                        1996      1995      1994   1993(1)  1993(1)  1992(1)
                                                    --------  --------  --------  --------  -------  -------
<S>                                                 <C>       <C>       <C>       <C>       <C>      <C>
STATEMENT OF OPERATIONS DATA (000'S):
Revenue:
  Resident service fees ..........................   $38,634    $9,684    $4,506      $130   $2,636   $2,537
  Other revenue ..................................       965       780       451        17        5        7
                                                    --------  --------  --------  --------  -------  -------
    Operating revenue ............................    39,599    10,464     4,957       147    2,641    2,544
                                                    --------  --------  --------  --------  -------  -------
Operating expenses:
  Residence operations ...........................    25,710     7,207     2,934        87    1,672    1,596
  Lease expense ..................................     6,053       890       697        19      563      547
  General and administrative .....................     7,933     2,599     1,458        41      423      421
  Depreciation and amortization ..................     2,994       814       258         6      101       83
  Non-recurring charge ...........................       976        --        --        --       --       --
                                                    --------  --------  --------  --------  -------  -------
    Total operating expenses .....................    43,666    11,510     5,347       153    2,759    2.647
    Operating loss ...............................   (4,067)   (1,046)     (390)       (6)    (118)    (103)
                                                    --------  --------  --------  --------  -------  -------
Other income (expense):
  Interest expense, net ..........................   (3,740)     (813)     (301)       (8)     (48)     (27)
  Equity in losses of unconsolidated affiliates ..      (52)     (438)       (1)        --       --       --
  Minority interest in loss of consolidated
    subsidiaries .................................        76       112        49        --       --       --
  Other, net .....................................      (28)       439        --        --       --       --
                                                    --------  --------  --------  --------  -------  -------
    Total other expenses, net ....................   (3,744)     (700)     (253)       (8)     (48)     (27)
                                                    --------  --------  --------  --------  -------  -------
Net loss .........................................  $(7,811)  $(1,746)    $(643)     $(14)   $(166)   $(130)
                                                    ========  ========  ========  ========  =======  =======

Net loss per share ...............................   $(0.79)   $(0.30)   $(0.22)
                                                    ========  ========  ========

Weighted average shares outstanding ..............     9,889     5,863     2,959
                                                    ========  ========  ========
</TABLE>




<TABLE>
<CAPTION>
                                                                  YEARS ENDED AS OF DECEMBER 31,
                                                         ---------------------------------------------------
                                                                 THE COMPANY               PREDECESSOR
                                                         -----------------------------   -------------------
                                                           1996    1995    1994    1993(1)  1993(1)  1992(1)
                                                         -------  ------  -------  -------  -------  -------
<S>                                                      <C>      <C>     <C>      <C>      <C>      <C>
BALANCE SHEET DATA (000'S):
Cash and cash equivalents .............................  $25,796  $2,998     $311     $196      $--       $2
Working capital (deficit) .............................  13,180   1,207   (1,212)    (338)    (369)    (152)
Total assets ..........................................  126,536  39,357   14,424    2,543      759      525
Long-term obligations .................................   28,649  17,101    6,356       57      134       --
Stockholders' equity ..................................   65,894  19,343    4,559      325      349      300
</TABLE>


(1)  The Company was organized in December 1993.  In connection with the
     initial capitalization of the Company, substantially all of the tangible
     assets of two operating companies were contributed to the Company
     (collectively, referred herein as the "Predecessor").  Statement of
     Operations data for periods prior to December 14, 1993 reflect the results
     of operations of the Predecessor.  Statement of Operations data for the
     Company for 1993 are for the period from December 14, 1993 (inception)
     through December 31, 1993.  Per share amounts for the Predecessor, for
     periods prior to the inception of the Company, are not presented as they
     would not provide comparable or meaningful information.

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

OVERVIEW

     The Company operated 77 assisted living residences with an aggregate
capacity of 3,215 residents as of December 31, 1996.  Of these total
residences, the Company owns 27, leases 35, holds interests in eight and
manages

                                      13
<PAGE>   14


an additional seven on behalf of third parties.   The Company's rapid growth
since 1993 has had a significant impact on the Company's results of operations
and accounts for most of the changes in results between the years ended 1996,
1995, 1994 and 1993.  As of December 31, 1996, 1995, 1994 and 1993, the Company
operated 77, 19, 13 and 12 residences, respectively.

     Since its organization in December 1993, the Company has achieved
significant growth in operating revenue resulting from its aggressive
development program and several strategic acquisitions, but to date has not
realized operating income or net income. For the year ended December 31, 1996,
the Company generated operating revenue of $39.6 million and incurred an
operating loss of $4.1 million and a net loss of $7.8 million.  For the year
ended December 31, 1995, the Company generated operating revenue of $10.5
million and incurred an operating loss of $ 1.0 million and a net loss of $1.7
million.

     In 1996, the Company completed the Heartland and Crossings acquisitions,
acquired remaining interests not already owned by the Company in eight
residences, completed an initial public offering of stock and completed $45
million of sale/leaseback financing under a $250 million letter of intent from
a major health care REIT.  The Company opened 21 newly constructed residences
and finished the year with approximately 70 residences in construction and
development.

     The following discussion and analysis should be read in conjunction with
the information under "Selected Consolidated Financial Data" and the
consolidated financial statements and related notes thereto, which appear
elsewhere in this report.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

     Operating Revenue.  Resident service fees for the year ended December 31,
1996 were $38.6 million, representing an increase of $29.0 million, or 299%,
from $9.7 million for 1995, due to the increased number of residences operated
during 1996.  Substantially all of this increase resulted from new residences,
acquisitions and new construction.

     Residence Operations.  Residence operating expenses for the year ended
December 31, 1996 were $25.7 million representing an increase of $18.5 million,
or 257%, from $7.2 million for the comparable 1995 period, due to the increased
number of residences operated during the 1996 period.  As a percentage of total
operating revenue, residence operating expenses decreased to 65% for the year
ended December 31, 1996 from 68.9% for the comparable period in 1995.

     Lease Expense.  Lease expense for the year ended December 31, 1996 was
$6.1 million, representing an increase of $5.2 million, or 580%, from $890,000
for the comparable period in 1995.  Such increase is primarily attributable to
the sale/leaseback in January 1996 of two Florida residences, the acquisition
of WovenHearts in January, 1996, three facilities of which are leased, and the
acquisition of 15 Crossings residences in May 1996, substantially all of
which residences are financed under sale/leaseback arrangements.

     General and Administrative.  General and administrative expenses for year
ended December 31, 1996 were $7.9 million, representing an increase of $5.3
million, or 204%, from $2.6 million for the comparable period in 1995.  The
increase in expenses was primarily attributable to salaries, related payroll
taxes and employee benefits relating to additional corporate personnel retained
to support the Company's actual and anticipated growth strategy. The Company
expects that its general and administrative expenses will decrease as a
percentage of operating revenue as the company grows and achieves certain
economies of scale.

     Depreciation and Amortization.  Depreciation and amortization for the year
ended December 31, 1996 was $3.0 million, representing an increase of $2.2
million, or 268%, from $815,000 for the comparable period in 1995.  This
increase resulted primarily from the addition of Heartland's residences,  the
acquisition of 100% of the remaining equity interests not owned by the Company
in eight residences and the opening of 21 new residences in 1996.

     Non-Recurring Charge.  The Company recorded a non-recurring charge of
$976,000 in 1996 related to the acquisitions of Heartland and Crossings.  The
charge relates to the costs associated with the physical downsizing of the


                                      14
<PAGE>   15


Crossings corporate office and employee separation costs at Crossings and
Heartland.  In 1996 the Company recorded costs of $166,000 against this reserve
primarily related to employee separation costs.  The Company believes that the
provisions for the non-recurring charge continue to be adequate and will not
require material adjustment in future periods.

     Interest Expense.  Interest expense, net, for the year ended December 31,
1996, was $3.7 million representing an increase of $2.9 million, or 355%, from
$813,000 for the same period in 1995.  The increased interest expense was
primarily the result of the bridge financing associated with the Heartland
acquisition of $8.7 million, an increase in mortgage financing on existing
residences, and additional financing for residences that had been under
construction of approximately $16.3 million.

     Equity in Losses of Unconsolidated Affiliates.  Equity in net losses from
investments in unconsolidated  affiliates was $52,000 for the year ended
December 31, 1996, representing a decrease of $386,000, or 88%, from equity in
losses of unconsolidated affiliates of $438,000 for the comparable period in
1995.   These losses were primarily attributable to the Company's investment in
five Michigan residences. During 1996 the Company acquired the remaining equity
interests it did not own in these residences and therefore ceased to record an
equity in net losses with regard to these residences.  These residences were in
lease-up in 1995.

     Net Loss.  As a result of the foregoing, the net loss for 1996 was $7.8
million compared to $1.7 million for 1995, an increase of $6.1 million.

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

     Operating Revenue.  Resident service fees for the year ended December 31,
1995 were $9.7 million, representing an increase of $5.2 million , or 115%,
from $4.5 million for 1994 due to the increased number of residences operated
during 1995.  Of this increase, $3.5 million resulted from the full year of
operation of two residences, including one which was opened in March 1994 and
one which was acquired in November 1994, and $1.2 million from the acquisition
of one residence in April 1995.

     Residence Operations.  Residence operating expenses for the year ended
December 31, 1995 were $7.2 million representing an increase of $4.3 million,
or 146%, from $2.9 million for 1994, due to the incurrence of lease-up expenses
related to residences acquired and opened in 1995.  Specifically, $2.7 million
of such increase resulted from a full year of operations of two residences, one
of which was acquired in September 1994 and the other of which was opened in
March 1994 and $1.0 million resulted from the residence acquired in April 1995.

     Lease Expense.  Lease expense for the year ended December 31, 1995 was
$890,000, representing an increase of $192,000, or 28% from $697,000 for 1994.
Such increase is primarily attributable to the full year of lease expense in
1995 for the residence that opened in March 1994 and the increase in lease
expense associated with the residence expansion discussed above.

     General and Administrative.  General and administrative expenses for year
ended December 31, 1995 were $2.6 million, representing an increase of $1.1
million, or 78%, from $1.5 million for 1994.  The increase in expenses was
primarily attributable to salaries, related payroll taxes and employee benefits
relating to additional corporate personnel retained to support the Company's
actual and anticipated growth strategy.

     Depreciation and Amortization.  Depreciation and amortization for the year
ended December 31, 1995 was $815,000, representing an increase of $556,000, or
215%, from $258,000 for 1994.  This increase resulted primarily form the full
year of operations of the residence that opened in September 1994 and the
residence acquired in April 1995.

     Interest Expense.  Interest expense for 1995 was $1.0 million,
representing an increase of $725,000, or 225%, from $322,000 for 1994.  The
increased interest expense was primarily the result of a full year of interest
expense associated with indebtedness of $1.1 million on the residence that
opened in March 1994 and the incurrence of indebtedness in the amount of $4.2
million related to the acquisition of one residence in April 1995.




                                      15
<PAGE>   16


     Gain on Sale of Land.  Two parcels of land adjacent to one of the
Company's residences were sold in the last quarter of 1995 resulting in a gain
of $439,000.  Since the Company has not engaged in other land sales, a similar
gain does not appear in other periods in the financial statements.

     Equity in Losses of Unconsolidated Affiliates.  Equity in net losses from
investments in unconsolidated affiliates was $438,000 for 1995.  These losses
were attributable to the start-up losses incurred by several of the ALS-Midwest
residences during the year.  The Company did not have any significant
investments in unconsolidated affiliates in 1994.

     Minority Interest in Losses of Consolidated Subsidiaries.  Minority
interest in losses of consolidated subsidiaries for the year ended December 31,
1995 was $112,000, representing an increase of $64,000, or 131%, from $49,000
for the comparable 1994 period.  The increase was attributable to the losses
allocated to the minority interest in two residences and the costs associated
with identifying development opportunities in the Eastern United States.

     Net Loss.  As a result of the foregoing, the net loss for 1995 was
$1,746,000 compared to $643,000, an increase of $1,103,000.

LIQUIDITY AND CAPITAL RESOURCES

     For the year ended December 31, 1996 and 1995 cash flow from operations
was $(5.2) million and $(1.1) million, respectively. These cash flow deficits
are primarily a result of the Company's residence lease-up activities as well
as the incurrence of expenses to establish its corporate infrastructure to
support future planned growth. During the year ended December 31, 1996, the
Company obtained approximately $126 million of equity, debt and sale/leaseback
financing and repaid $39 million of short and long-term debt. A private
placement of Common Stock raised $2.2 million; the initial public offering in
August, 1996 raised a net $40.0 million for the Company; $52.0 million was
received during the year from the sale/leaseback of fourteen residences; $8.7
million was obtained as bridge financing from an affiliate in January 1996 for
the Heartland acquisition, which loan was repaid with proceeds from the
initial public offering; and $8.5 million was obtained as bridge financing from
a REIT in July, 1996 for construction loan repayment and other working capital
needs which was also repaid. The Company also incurred approximately $4.3
million of additional indebtedness related to the purchase of equity interests
not already owned by the Company in certain residences, $1.3 million of which
was repaid in the third quarter with the remainder paid in January 1997. In
conjunction with the development of its residences, the Company constructed
property and equipment totaling $56 million. As a result, during 1996 the
Company increased its cash position by approximately $23 million. At December
31, 1996, the Company had working capital of approximately $13.2 million,
compared to working capital of $1.2 million at December 31, 1995. See Note 4 to
Consolidated Financial Statements.

     To achieve its growth objectives, the Company will need to obtain
sufficient financing to fund its development, construction and acquisition
activities. The Company has plans to develop approximately $150 million of
residences in both 1997 and 1998. In February 1997, the Company announced its
intention to purchase three residences in upstate New York. The Company intends
to purchase 100% of one residence and majority interests in the other two. The
acquisition will represent an approximate $21.5 million investment by the
Company and will be funded with REIT sale/leaseback financing, assumption of
debt and approximately $3 million of cash to be funded through bridge
financing. Historically the Company has financed its development program and
acquisitions through a combination of various forms of real estate financing
(mortgage and sale/leaseback financing), capital contributions from joint
venture partners and private placements of equity. The Company has executed
non-binding letters of intent with a health care REIT for financing commitments
aggregating approximately $250 million, $45 million of which was taken down in
December 1996. The Company believes that this financing combined with existing
joint venture development partnerships currently in place will be sufficient to
fund its growth strategy for the next 18 months. The Company is also currently
negotiating with several large regional/national banks for credit lines to
cover multiple property developments with joint venture development partners.
The Company will from time to time seek additional funding through public or
private financing, including debt or equity financing. In addition the company
will require sufficient financial resources to meet its operating and working
capital needs. There can be no assurance that the Company will not be required
to seek additional capital earlier or that sale/leaseback or mortgage financing
will be available on terms acceptable to the Company. In addition, the Company
may require additional financing to enable it to acquire additional residences,
to respond to changing economic conditions, to effect further expansion of the
Company's development program or to account for changes in assumptions related
to its development program.

    In addition within the next 18 months, the Company will become subject to
purchase obligations with respect to equity interests held by joint venture
partners, at their election, in certain of the Company's residences. At such
times the Company may also elect to exercise its rights to purchase such
interests.  Based on a number of assumptions, including assumptions as to the
number of residences to be developed with joint venture partners, the timing of
such development, the time at which such options will be exercised and the fair
market value of such residences at the date such purchases are exercised, the
Company estimates that it may require approximately $10 million to $13 million
to satisfy these purchase obligations. See "Business -- joint Ventures and
Strategic Alliances."

IMPACT OF INFLATION

     To date, inflation has not had a significant impact on the Company.
Inflation could, however, affect the Company's future revenues and results of
operations due to the Company's dependence on its senior resident population,
most of whom rely on relatively fixed incomes to pay for the Company's
services.  As a result, the Company may not


                                      16
<PAGE>   17


be able to increase resident service fees to account fully for increased
operating expenses.  In structuring its fees, the Company attempts to
anticipate inflation levels, but there can be no assurance that the Company
will be able to anticipate fully or otherwise respond to any future
inflationary pressures.  In addition, given the significant amount of
development the Company anticipates, inflationary pressures could affect the
Company's cost of financing.  There can be no assurances that the cost of
financing will be available on terms acceptable to the Company.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                              Page
                                                                                              ----
<S>                                                                                           <C>
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES:
   Independent Auditors' Report ............................................................  18
   Consolidated Balance Sheets, as of December 31, 1996 and 1995 ...........................  19
   Consolidated Statements of Operations for years ended December 31, 1996, 1995 and 1994 ..  20
   Consolidated Statements of Changes in Stockholders' Equity for years ended December 31,
       1996, 1995 and 1994 .................................................................  21
   Consolidated Statements of Cash Flows for years ended December 31, 1996, 1995 and 1994 ..  22
   Notes to Consolidated Financial Statements ..............................................  23
</TABLE>






                                      17

<PAGE>   18


                         INDEPENDENT AUDITORS' REPORT

The Board of Directors
Alternative Living Services, Inc.:

     We have audited the accompanying consolidated balance sheets of
Alternative Living Services, Inc. and subsidiaries (the Company) as of December
31, 1996 and 1995, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1996.  These consolidated financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these consolidated 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 consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1996 in conformity with generally accepted accounting principles.




                                 KPMG PEAT MARWICK LLP

Chicago, Illinois
February 21, 1997






                                      18
<PAGE>   19


             ALTERNATIVE LIVING SERVICES, INC.  AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995
                                 (IN THOUSANDS)


                                     ASSETS


<TABLE>
<CAPTION>
                                                                1996     1995
                                                                ----     ----
<S>                                                           <C>       <C>
Current assets:
   Cash and cash equivalents ..............................   $25,796   $2,998
   Resident receivables, net ..............................     1,614       55
   Other current assets                                         4,989      283
                                                             --------  -------
       Total current assets ...............................    32,399    3,336
                                                             --------  -------
Property, plant and equipment, net ........................    79,816   28,460
Long-term investments .....................................     1,171    1,183
Investments in and advances to unconsolidated affiliates ..     1,649    4,788
Other assets ..............................................    11,501    1,590
                                                             --------  -------
       Total assets .......................................  $126,536  $39,357
                                                             ========  =======

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Current installments of long-term obligations ......         $769     $163
   Short-term notes payable ...........................        8,335       --
   Accounts payable ...................................        1,985      786
   Accrued expenses ...................................        8,130    1,180
                                                            --------  -------
          Total current liabilities ...................       19,219    2,129
Long-term obligations, less current installments ......       28,649   17,101
Other long-term liabilities ...........................          123      174
Deferred gain on sale .................................        6,763       --
Minority interest .....................................        5,888      610
Stockholders' equity :
   Common Stock and additional paid-in capital ........       76,108   21,746
   Accumulated deficit ................................      (10,214)  (2,403)
                                                            --------  -------
          Total stockholders' equity ..................       65,894   19,343
                                                            --------  -------
          Total liabilities and stockholders' equity ..     $126,536  $39,357
                                                            ========  =======
</TABLE>


          See accompanying notes to consolidated financial statements.



                                      19

<PAGE>   20


             ALTERNATIVE LIVING SERVICES, INC.  AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)



<TABLE>
<CAPTION>
                                                       1996       1995       1994
                                                     --------  -----------  -------
<S>                                                  <C>       <C>          <C>

Revenue:
   Resident service fees ..........................   $38,634       $9,684   $4,506
   Other ..........................................       965          780      451
                                                     --------  -----------  -------
Operating revenue .................................    39,599       10,464    4,957
                                                     --------  -----------  -------
Operating expenses:
   Residence operations ...........................    25,710        7,207    2,934
   Lease expense ..................................     6,053          889      697
   General and administrative .....................     7,933        2,599    1,458
   Depreciation and amortization ..................     2,994          815      258
   Non-recurring charge ...........................       976           --       --
                                                     --------  -----------  -------
      Total operating expenses ....................    43,666       11,510    5,347
                                                     --------  -----------  -------
Operating loss ....................................    (4,067)      (1,046)    (390)
Other income (expense):
   Interest expense, net ..........................    (3,740)        (813)    (301)
   Gain on sale of land ...........................        --          439       --
   Equity in losses of unconsolidated affiliates ..       (52)        (438)      (1)
   Other expense ..................................       (28)          --       --
   Minority interest in losses of consolidated
    subsidiaries ..................................        76          112       49
                                                     --------  -----------  -------
      Total other expense, net ....................    (3,744)        (700)    (253)
                                                     --------  -----------  -------
      Net loss ....................................  $ (7,811) $    (1,746) $  (643)
                                                     ========  ===========  =======
Net loss per share ................................  $  (0.79) $     (0.30) $ (0.22)
                                                     ========  ===========  =======
Weighted average shares outstanding ...............     9,889        5,863    2,959
                                                     ========  ===========  =======
</TABLE>



          See accompanying notes to consolidated financial statements.





                                      20
<PAGE>   21


              ALTERNATIVE LIVING SERVICES, INC.  AND SUBSIDIARIES

          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                            COMMON STOCK
                                                            AND ADDITIONAL
                                                            PAID-IN CAPITAL                       STOCK
                                                        ----------------------   ACCUMULATED   SUBSCRIPTION
                                                          SHARES     AMOUNTS       DEFICIT      RECEIVABLE  TOTAL
                                                        ----------------------    --------      ----------  ------
<S>                                                     <C>            <C>        <C>          <C>         <C>
BALANCES AT DECEMBER 31, 1993 ..................          1,813         $2,539    $    (14)      $(2,200)  $   325
Receipt of stock subscription ..................             --             --          --         2,200     2,200
Contributed capital from majority
    stockholder ................................             --          2,678          --            --     2,678
Net loss .......................................             --             --        (643)           --      (643)
                                                         ------        -------    --------       -------   -------
BALANCES AT DECEMBER 31, 1994 ..................          1,813          5,217        (657)           --     4,560
                                                         ------        -------    --------       -------   -------
Net proceeds from private offering .............          4,303         19,029          --            --    19,029
Retirement of stock held by minority
    stockholder ................................           (381)        (2,500)         --            --    (2,500)
Common Stock issued for contributed
    capital ....................................            917             --          --            --        --
Net loss .......................................             --             --      (1,746)           --    (1,746)
                                                         ------        -------    --------       -------   -------
BALANCES AT DECEMBER 31, 1995 ..................          6,652         21,746      (2,403)           --    19,343
                                                         ------        -------    --------       -------   -------
Proceeds from issuance of Common Stock .........          3,873         41,648          --            --    41,648
Shares issued in connection with acquisitions ..          2,483         12,877          --            --    12.877
Purchase and retirement of Common Stock ........            (12)          (163)         --            --      (163)
Net loss .......................................             --             --      (7,811)           --    (7,811)
                                                         ------        -------    --------       -------   -------
BALANCES AT DECEMBER 31, 1996 ..................         12,996        $76,108    $(10,214)      $    --   $65,894
                                                         ======        =======    ========       =======   =======
</TABLE>


          See accompanying notes to consolidated financial statements.






                                      21
<PAGE>   22


              ALTERNATIVE LIVING SERVICES, INC.  AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                  1996             1995         1994
                                                                               ----------        --------      -------
<S>                                                                            <C>               <C>           <C>
Cash flows from operating activities:
     Net loss ....................................................             $   (7,811)       $ (1,746)     $  (643)
Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization ...............................                  2,994             815          258
     Gain on sale of land ........................................                     --            (439)          --
     Minority interest in losses of consolidated subsidiaries ....                    (76)           (112)         (49)
     (Increase) decrease in net resident receivables .............                 (1,290)             15          (93)
     Increase in other current assets ............................                 (1,742)            (93)        (172)
     Increase (decrease) in accounts payable .....................                   (687)            343           58
     Increase in accrued expenses ................................                  3,452             223          168
                                                                               ----------        --------      -------
Net cash used in operating activities ............................                 (5,160)           (994)        (473)
                                                                               ----------        --------      -------
Cash flows from investing activities:
     Purchase of short-term investments ..........................                     --              --          (50)
     Net proceeds from sale of land ..............................                     --              --          972
     Acquisitions of affiliates and facilities, net of cash ......                 (7,798)           (850)         (67)
     Payments for property, plant and equipment and project
          development costs ......................................                (56,346)        (12,667)      (1,772)
     Investments in and advances to unconsolidated affiliates ....                   (252)         (3,187)      (1,486)
     Increase in long-term investments ...........................                      --             --       (1,183)
     Payments for deferred costs .................................                      --           (208)         (30)
     Changes in other long-term assets and liabilities ...........                   3,836           (102)         116
                                                                                                 --------      -------
Net cash used in investing activities ............................                 (60,560)       (17,225)      (3,289)
                                                                               -----------       --------      -------
Cash flows from financing activities:
     Contributions by minority partner and minority stockholder ..                      --          1,275          745
     Purchase of remaining limited partners ......................                      --             --         (605)
     Payments for financing costs ................................                      --           (221)         (37)
     Repayment of line of credit and short-term note payable .....                  (1,369)        (4,208)          --
     Repayments of long-tem obligations ..........................                 (37,618)        (6,575)      (1,321)
     Proceeds from issuance of long-term obligations .............                  33,863         15,890           --
     Changes in advances from and notes payable to
          unconsolidated affiliates ..............................                      --         (1,834)         217
     Proceeds from sale/leaseback transactions ...................                  51,996             --           --
     Issuance of Common Stock and other capital contributions ....                  41,648         19,029        2,677
     Retirement of stock held by minority stockholder ............                      --             --       (2,500)
     Stock subscription received .................................                      --             --        2,200
                                                                               -----------       --------      -------
Net cash provided by financing activities ........................                  88,520         20,856        3,877
                                                                               -----------       --------      -------
Net increase in cash and cash equivalents ........................                  22,798          2,637          115
Cash and cash equivalents:
     Beginning of period .........................................                   2,998            311          196
                                                                               -----------       --------      -------
     End of period ...............................................             $    25,796       $  2,998      $   311
                                                                               ===========       ========      =======

Supplemental disclosure of cash flow information:
     Cash paid for interest, including amounts capitalized .......             $     4,047       $  1,045      $   142
                                                                               -----------       --------      -------
</TABLE>



          See accompanying notes to consolidated financial statements.



                                      22
<PAGE>   23


             ALTERNATIVE LIVING SERVICES, INC.  AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995


(1) BUSINESS

     Alternative Living Services, Inc. (the Company) was organized in December
1993 and develops, owns, and operates assisted living residences.  As of
December 31, 1996, the Company operated  77 residences totaling 3,215 living
units located in Wisconsin, Michigan, Minnesota, Florida, Pennsylvania, Oregon,
Colorado, California, Washington, Idaho and North Carolina.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      The significant accounting policies of the Company are as follows:

      (A) Principles of Consolidation

           The consolidated financial statements include the accounts of the
      Company and its majority-owned subsidiaries.  Results of operations of
      the majority-owned  subsidiaries are included from the date of
      acquisition.  All significant intercompany balances and transactions with
      such subsidiaries have been eliminated in the consolidation.

     (B) Cash Equivalents

           The Company considers all highly liquid investments with original
      maturities of three months or less to be cash equivalents for purposes of
      the consolidated statements of cash flows.

     (C) Property, Plant and Equipment

           Property, plant and equipment are stated at cost, net of accumulated
      depreciation.  Plant and equipment under capital leases are stated at the
      present value of minimum lease payments.  Depreciation is computed over
      the estimated lives of the assets using the straight-line method.
      Buildings and improvements are depreciated over 20 to 40 years, and
      furniture, fixtures and equipment are depreciated over seven to twelve
      years.  Maintenance and repairs are expensed as incurred.

      (D) Intangible Assets

           Intangible assets, which are included in other assets, are composed
      of organization costs and  deferred financing costs.  Organization costs
      are amortized on a straight-line basis over five years.  Deferred
      financing costs are amortized on the effective-interest method over the
      term of the related debt.

      (E) Goodwill

           Goodwill represents the cost of acquired net assets in excess of
      their fair market values.  Amortization of goodwill is computed using the
      straight-line method over the expected periods to be benefitted,
      generally forty years.  The Company's management periodically evaluates
      goodwill for impairment based upon expectations of nondiscounted
      operating cash flows in relation to the net capital investment in the
      subsidiary.




                                      23
<PAGE>   24


             ALTERNATIVE LIVING SERVICES, INC.  AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


     (F) Revenue

           Revenue, which is recorded primarily when services are rendered,
      consists primarily of resident service fees which are reported at net
      realizable amounts.  Other revenue consists primarily of management and
      development fees from unconsolidated  affiliates.  Management fees are
      recognized as earned in accordance with signed management agreements, and
      reported at net realizable amounts.  Development fees are deferred and
      recognized as earned over the life of the development.

     (G) Income Taxes

           Income taxes are accounted for under the asset and liability method.
      Deferred tax assets and liabilities are recognized for the expected
      future tax consequences attributable to temporary 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 in income in the period that
      includes the enactment date.

     (H) Fair Value of Financial Instruments

           The carrying amounts of cash, cash equivalents and short-term
      investments approximate fair value due to the short-term nature of the
      accounts and due to the accounts earning interest at current market
      rates.  The carrying amount of the Company's debt approximates fair value
      due to the interest rates approximating the current rates available to
      the Company for similar borrowing arrangements.

     (I) Use of Estimates

           The financial statements of the Company have been prepared in
      accordance with generally accepted accounting principles.  The
      preparation of the financial statements in conformity with generally
      accepted accounting principles requires management 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 revenue and expenses
      during the reporting period.  Actual results could differ from those
      estimates.

     (J) Net Loss Per Share

           Net loss per share is based upon the weighted average number of the
      Company's common and common equivalent shares outstanding during each
      period.  Common equivalent shares include stock options, which have been
      included using the treasury stock method only when their effect is
      dilutive.

           In connection with the initial public offering (IPO), which became
      effective on August 9, 1996 and pursuant to the requirements of the
      Securities and Exchange Commission, for purposes of net loss per share,
      Common Stock issued and Common Stock options granted at per share amounts
      less than the IPO price per share subsequent to May 1995 have been
      reflected as outstanding for all periods prior to the effective date of
      the IPO.  Accordingly, weighted average shares outstanding was increased
      by 1,146,928 shares for the effect of such Common Stock and stock
      options.




                                      24
<PAGE>   25
             ALTERNATIVE LIVING SERVICES, INC.  AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


     (K)   Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
           of

           The Company adopted the provisions of SFAS No. 121, Accounting for
      the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
      Disposed Of, on January 1, 1996.  This Statement requires that long-lived
      assets and certain identifiable intangibles be reviewed for impairment
      whenever events or changes in circumstances indicate that the carrying
      amount of an asset may not be recoverable.  Recoverability of assets to
      be held and used is measured by a comparison of the carrying amount of an
      asset to future net cash flows expected to be generated by the asset.  If
      such assets are considered to be impaired, the impairment to be
      recognized is measured by the amount by which the carrying amount of the
      assets exceed the fair value of the assets.  Assets to be disposed of are
      reported at the lower of the carrying amount or fair value less costs to
      sell.  Adoption of this Statement did not have a material impact on the
      Company's financial position, results of operations, or liquidity.

     (L)   Stock Option Plan

           Prior to January 1, 1996 the Company accounted for its stock option
      plan in accordance with the provisions of Accounting Principles Board
      ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
      related interpretations.  As such, compensation expense would be recorded
      on the date of grant only if the current market price of the underlying
      stock exceeded the exercise price.  On January 1, 1996, the Company
      adopted SFAS No. 123, Accounting for Stock-Based Compensation, which
      permits entities to recognize as expense over the vesting period the fair
      value of all stock-based awards on the date of grant.  Alternatively,
      SFAS No. 123 also allows entities to continue to apply the provisions of
      APB Opinion No. 25 and provide pro forma net income and pro forma
      earnings per share disclosures for employee stock option grants made in
      1995 and future years as if the fair-value-based- method defined in SFAS
      No. 123 had been applied.  The Company has elected to continue to apply
      the provisions of APB Opinion No. 25 and provide  the pro forma
      disclosure provisions of SFAS No. 123.

(3)   PROPERTY, PLANT AND EQUIPMENT

      A summary of property, plant and equipment at December 31, follows (in
thousands):


<TABLE>
<CAPTION>
                                                     1996     1995
                                                    -------  -------
            <S>                                     <C>      <C>

            Land .................................   $9,919   $4,592
            Land improvements ....................       86      529
            Buildings ............................   54,343   16,563
            Furniture, fixtures and equipment ....    7,204    3,275
            Construction in progress .............   12,744    5,259
                                                    -------  -------
            Total property, plant and equipment ..   84,296   30,218
            Less accumulated depreciation ........    4,480    1,758
                                                    -------  -------
            Property, plant and equipment, net ...  $79,816  $28,460
                                                    =======  =======
</TABLE>


     At December 31, 1996, property and equipment includes $10,608,402 of
buildings and improvements and $592,000 of fixtures and equipment held under
capital leases and related financing obligations.  Related accumulated
amortization totaled $2,077,929.

     Interest is capitalized in connection with the construction of residences
and is amortized over the estimated useful lives of the residences.  Interest
capitalized in 1996 and 1995 was approximately $490,718 and $62,000,
respectively.


                                      25


<PAGE>   26
              ALTERNATIVE LIVING SERVICES, INC.  AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


     Construction in process at December 31, 1996 consisted principally of
costs related to the construction of  assisted living residences, with
outstanding construction commitments totaling approximately $72.8 million.

(4) ACQUISITIONS

     On March 31, 1995, the Company acquired the Palmer Ranch, an 86-unit
assisted living residence in Sarasota, Florida.  The total purchase cost of
$850,000, including acquisition costs of $52,000, was paid in cash.  This
transaction was accounted for as a purchase.

     On January 26, 1996, the Company acquired Heartland Retirement Services,
Inc. (Heartland) for $5,500,000 cash plus 261,424 shares of the Company's
Common Stock with an estimated market value of $1,749,000.   The acquisition
was effective as of January 1, 1996.  This acquisition was financed by a bridge
loan of approximately $8,700,000 which was obtained from a private financial
management firm whose president is a director of the Company.  As of January 1,
1996, Heartland operated 20 assisted living residences.  This transaction was
accounted for as a purchase.

     On May 24, 1996, the Company acquired New Crossings International
Corporation, a company which operated 15 assisted living facilities as of May,
1996.  The total purchase consideration was 2,007,049 shares of the Company's
Common Stock with an estimated value of $9,281,000.   This transaction was
accounted for as a purchase.

     On May 24, 1996, the Company acquired the limited partnership interest in
five Michigan limited partnerships owned by unrelated investors for aggregate
consideration of 115,024 shares of  Common Stock valued at $1,000,000 for
accounting purposes and promissory notes in the aggregate principal amount of
$2,900,000.  These promissory notes are due and payable on January 31, 1997 and
bear interest at the rate of 8% per annum.    The Company also acquired 100% of
the outstanding stock of ALS-Midwest pursuant to a merger transaction whereby
the shareholders of ALS-Midwest, other than the Company, received, in exchange
for their shares of ALS-Midwest, $300,000 in cash and 57,512 shares of the
Company's  Common Stock valued at $500,000 for accounting purposes.
Contemporaneously with the merger, the Company refunded certain advances made
to the partnership by a cash payment of $700,000 and delivery of a promissory
note in the amount of $1.4 million which was paid in 1996.

     On August 9, 1996, the Company acquired the 40% partnership interests not
already owned by it in three partnerships for an aggregate purchase price of
$3.2 million.  This transaction has been accounted for as a purchase.

     On August 13, 1996, the Company acquired a residence it leased for $1.1
million.  This transaction was accounted for as a purchase.

     On September 13, 1996, the Company acquired a residence it managed and had
a 0.5% equity interest in for $800,000. This transaction has been accounted for
as a purchase.

     On September 30, 1996, the Company acquired a residence it managed and had
a 2.5% equity interest in for $1.1 million.  This transaction has been
accounted for as a purchase.

     On December 19, 1996, the Company acquired  6 assisted living residences
for $5.5 million.  This transaction has been accounted for as a purchase.

     As of December 31, 1996, the Company had an 80% ownership interest in four
development  projects and a 51% ownership interest in ten development projects.
The 20% and 49% interests in these consolidated affiliates not held by the
Company and the losses therefrom have been reflected as minority interest in
the consolidated balance sheets and as minority interest in losses of
consolidated subsidiaries in the consolidated statements of operations.



                                      26
<PAGE>   27


             ALTERNATIVE LIVING SERVICES, INC.  AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(5) LONG-TERM INVESTMENTS

    Long-term investments are comprised of the following at December 31 (in
    thousands):


<TABLE>
<CAPTION>
                                                                1996    1995
                                                               ------  ------
   <S>                                                         <C>     <C>
   Collateral reserve fund, $1,000,000 certificate of deposit
   required to be maintained until July 10, 2000 ............  $1,005  $1,016
   Debt reserve fund, $112,000 certificate of deposit
   required to be maintained until July 10, 2000 ............     113     114
   Debt reserve fund, $53,000 certificate of deposit
   required to be maintained until August 15, 2002 ..........      53      53
                                                               ------  ------
   Total long-term investments ..............................  $1,171  $1,183
                                                               ======  ======
</TABLE>


(6) INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

    Investments in and advances to unconsolidated affiliates consist of the
    following at December 31, 1995 (in thousands):


<TABLE>
      <S>                                                  <C>     <C>
                                                             1996    1995
                                                           ------  ------
      Investments in unconsolidated affiliates ..........    $285  $1,581
      Advances to unconsolidated affiliates:
         Partnerships ...................................   1,089   2,540
         Notes receivable ...............................     275     383
         Other ..........................................      --     284
                                                           ------  ------
      Total advances to unconsolidated affiliates .......   1,364   3,207
                                                           ------  ------
      Total investments in and advances to unconsolidated
         affiliates .....................................  $1,649  $4,788
                                                           ======  ======
</TABLE>



     Advances to unconsolidated affiliates also includes management fees
pursuant to an agreement with an affiliate, which is 50% owned and controlled
by an officer and a shareholder.  Under the terms of the agreement, this
affiliate is obligated to pay a monthly management fee of 11% of
gross operating revenue.  During 1996 and 1995, the management fees, included
in other revenue, were $175,000 and $252,000 respectively.

     Notes receivable at December 31, 1996 includes $200,000 due from an
officer and a shareholder of the Company which accrues interest at 6% and is
payable in full on December 30, 1999.  Notes receivable at December 31, 1995
included $150,000 due from an officer and a shareholder of the Company, which
was repaid on December 31, 1996.



                                      27
<PAGE>   28


     ALTERNATIVE LIVING SERVICES, INC.  AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(7) OTHER ASSETS

     Other assets are comprised of the following at December 31 (in thousands):


<TABLE>
<CAPTION>
            <S>                                                                      <C>      <C>
                                                                                        1996    1995
                                                                                        ----    ----
            Goodwill, net ....................................................        $5,216    $955
            Organizational and other costs, net ..............................         1,982      89
            Deferred financing costs, net ....................................           948     273
            Deposits and other ...............................................         3,355     273
                                                                                     -------  ------
            Total other assets ...............................................       $11,501  $1,590
                                                                                     =======  ======
</TABLE>


      Accumulated amortization of goodwill was $163,134 and $800 as of December
      31, 1996 and 1995, respectively.

(8) LONG-TERM DEBT, CAPITAL LEASE AND FINANCING OBLIGATIONS

     Long-term debt, capital leases, and financing obligations consist of the
following at December 31 (in thousands):



<TABLE>
<CAPTION>

<S>                                                                                     <C>    <C>
                                                                                        1996    1995
Mortgage payable, due in 25 quarterly installments, the first                           ----    ----
four quarterly installments represent interest only, interest at
8% through June 30, 1996, thereafter interest at the prime rate
plus 1% not to exceed 10% (9.25% at December 31, 1996),
outstanding principal balance due on March 31, 2000.................                     $998  $1,000

Mortgage payable, due in 25 quarterly installments, the first
four quarterly installments represent interest only, interest at
8% through June 30, 1996, thereafter interest at the prime rate
plus 1% not  to exceed 10% (9.25% at December 31, 1996),
outstanding principal balance due on April 2, 2000..................                      391     400

Mortgage payable, due in 60 monthly installments including
interest at 9.21%, outstanding principal balance
due on July 10, 2000................................................                    4,234   4,279

Mortgage payable, due in 83 monthly installments including interest
at 9.985%, outstanding principal balance due on August 15, 2002.....                    1,875   1,914

Mortgages payable, due in 300 monthly installments including
interest at 9.75%...................................................                    2,945      --

Mortgage payable, interest at the prime rate plus 1% (9.25%
at December 31, 1996) 36 interest only payments
with all remaining interest and principal due on
April 1, 1999.......................................................                    3,355      --

</TABLE>





                                      28
<PAGE>   29

ALTERNATIVE LIVING SERVICES, INC.  AND SUBSIDIARIES


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


<TABLE>
<CAPTION>

<S>                                                                             <C>                  <C>
Mortgage payable, interest at the prime rate plus 1% (9.25%
at December 31, 1996) 36 interest only payments
with all remaining interest and principal due on
April 1, 1999 ......................................................              2,636                 --

Mortgage payable, due December 10, 2000, the first 13 of 60
total payments represent interest only, interest at LIBOR
plus applicable LIBOR margin based on debt service coverage
ratio ..............................................................              2,137                 --

Sale/leaseback financing obligation, variable interest
at the 11th District FHLB rate plus 2 3/4% payable in
monthly installments, due 2000 .....................................              5,316                 --

Capital lease obligations, interest at rates between 3.4%
and 23% payable in monthly installments, due
through 2000 .......................................................                114                 --

Mortgage payable, due in 120 monthly installments including interest
at 8.46% through June 30, 2000, thereafter at the five-year
U.S. Treasury rate plus 2.5% .......................................                 --              6,567

Note payable, due November 20, 2020, first twelve monthly payments
represent interest only, interest at the prime rate plus 1% ........                 --              3,104

Debt refinanced long-term through a sale/leaseback
financing transaction:
    Mortgage notes payable, fixed interest rates
         of 8% to 10.9% ............................................              3,290                 --
    Equity participation notes, including contingent
         participation obligations .................................              2,127
                                                                                -------            -------

Total long-term obligations ........................................             29,418             17,264
Less current installments ..........................................                769                163
                                                                                -------            -------
Total long-term obligations less current installments ..............            $28,649            $17,101
                                                                                =======            =======
</TABLE>


     The mortgages payable are secured by security agreements and guarantees by
the Company.  In addition, certain security agreements require the Company to
maintain collateral and debt reserve funds (see Notes 5 and 13).

     Principal payments on long-term debt, capital leases and financing
obligations for the next five years and thereafter are as follows  (in
thousands):


<TABLE>
    <S>                                                                               <C>
    1997 .....................................................................          $   769
    1998 .....................................................................              802
    1999 .....................................................................           12,150
    2000 .....................................................................           13,917
    2001 .....................................................................               30
    Thereafter ...............................................................            1,750
                                                                                        -------
    Total long-term debt, capital leases and financing obligations ...........          $29,418
                                                                                        =======
</TABLE>



                                      29
<PAGE>   30

             ALTERNATIVE LIVING SERVICES, INC.  AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(9) ACCRUED EXPENSES

    Accrued expenses are comprised of the following at December 31  (in
    thousands):


<TABLE>
<CAPTION>
                                                 1996    1995
                                                ------  ------
    <S>                                         <C>     <C>
    Accrued salaries and wages ...........      $2,071  $  332
    Advance rents and deposits ...........       2,754     546
    Other ................................       3,305     302
                                                ------  ------
    Total accrued expenses ...............      $8,130  $1,180
                                                ======  ======
</TABLE>


(10) STOCKHOLDERS' EQUITY

     The Company was organized in December 1993, and was initially capitalized
by Evergreen Healthcare, Inc. ("Evergreen") and Care Living Centers, Inc.
("CLC"), two unrelated companies.

     The Company completed a private placement equity offering on May 26, 1995,
resulting in net proceeds of $19,029,080 for 4,302,994 shares of its Common
Stock.  Simultaneously, the Company issued 917,150 shares of its stock to
Evergreen as consideration for $2,677,342 cash received during 1994, which is
reflected as Common Stock and additional paid-in capital in the accompanying
balance sheet.  Subsequent to the issuance of stock in May 1995 the Company was
no longer a majority-owned subsidiary of Evergreen.

     In August 1996, the Company completed an initial public offering of
6,000,000 shares of Common Stock, of which 3,443,206  shares were sold by the
Company and 2,556,794 shares were sold by existing stockholders.  After
deducting underwriting discounts, commissions and offering expenses, the net
proceeds to the Company were approximately $40 million.

     The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, $.01 par value, and 5,000,000 shares of $.01 par value
preferred stock. At December 31, 1996, there were 13,008,135 shares of Common
Stock issued, of which 12,996,496 were outstanding. 11,639 are held in
treasury.  At December 31, 1995 there were 6,652,059 shares of Common Stock
issued and outstanding.  At December 31, 1996 and 1995 no shares of preferred
stock were issued and outstanding.

(11) STOCK OPTION PLAN

     In 1995, the Company adopted a stock option plan (the "1995 Plan")
pursuant to which the Company's Board of Directors may grant stock options to
officers and key employees.  The Plan authorizes grants of options to purchase
up to 1,425,000  shares of  authorized but unissued Common Stock.  Stock
options are granted with an exercise price equal to the stock's fair market
value at the date of grant.  Generally,  stock options have 10-year terms and
vest 25% per year and become fully exercisable after 4 years from the date of
grant.

     At December 31, 1996, 786,821 additional shares were available for grant
under the 1995 Plan.  The per share weighted-average fair value of stock
options granted during 1996 and 1995 was $3.49 on the date of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions: 1996 - expected dividend yield 0.0%, risk-free interest rate of
6.5% and an expected life of 7 years; 1995 - expected dividend yield 0.0%,
risk-free interest rate of 6.5%, and an expected life of 7 years.


                                      30



<PAGE>   31


              ALTERNATIVE LIVING SERVICES, INC.  AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     The Company applies APB Opinion No. 25 in accounting for its 1995 Plan
and, accordingly, no compensation cost has been recognized for its stock
options in the financial statements.  Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated below, (in thousands, except per
share data):


<TABLE>
<CAPTION>
                                         Net Loss                       Net Loss Per Share
                                    1996            1995               1996             1995
                                   -------         -------            ------            ------
     <S>                           <C>             <C>                <C>               <C>
     As reported                   $(7,811)        $(1,746)           $(0.79)           $(0.30)
     Pro forma                     $(8,406)        $(1,922)           $(0.85)           $(0.33)

</TABLE>

     Stock option activity during the periods indicated is as follows:

<TABLE>
<CAPTION>
                                                                     Number of  Weighted-Average
                                                                     Shares     Exercise Price
                                                                     ---------  ----------------
     <S>                                                              <C>                <C>
     Balance at December 31, 1994                                          --                --
         Granted                                                      430,883            $ 4.67
         Exercised                                                         --                --
         Forfeited                                                         --                --
         Expired                                                           --                --
                                                                      -------            ------

     Balance at December 31, 1995                                     430,883              4.67
         Granted                                                      279,799              9.21
         Exercised                                                         --             (7.22)
         Forfeited                                                     (2,175)            (4.65)
         Expired                                                           --               --
                                                                      -------            ------
     Balance at December 31, 1996                                     708,507            $ 6.31
                                                                      =======            ======
</TABLE>


     At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $2.92 - $13.00 and 8
years, respectively.

     At December 31, 1996 and 1995, the number of options exercisable was
145,922 and 103,483, respectively, and the  weighted-average exercise price of
those options was $4.22 and $5.92, respectively.





                                      31
<PAGE>   32



              ALTERNATIVE LIVING SERVICES, INC.  AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(12) INCOME TAXES

     Deferred tax assets and liabilities consist of the following at December
     31 (in thousands):


<TABLE>
<CAPTION>
                                                            1996   1995
                                                           ------  -----
       <S>                                                 <C>     <C>
       Deferred tax assets:
         Net operating loss carryforwards ...............  $1,928  $ 800
         Investment in unconsolidated affiliates ........     104    105
         Deferred gain sale/leaseback ...................   2,887     --
         Vacation accrual ...............................     198     --
         Tax versus book depreciation ...................     107     --
         Other accruals - Crossings' purchase ...........     270     --
         Investment in consolidated affiliates ..........   1,566     --
         AMT credit carryover ...........................      31
         Other ..........................................     184    104
                                                           ------  -----
       Total deferred tax assets ........................   7,275  1,009
       Less valuation allowance .........................   5,539    917
                                                           ------  -----
       Deferred tax assets, net of valuation allowance ..  $1,736  $  92
                                                           ======  =====
       Deferred tax liabilities:
         Tax versus book depreciation ...................      --     92
         Book versus tax basis (Crossings' purchase) ....   1,736     --
                                                           ------  -----
       Tax deferred tax liabilities .....................  $1,736  $  92
                                                           ======  =====
</TABLE>


     The valuation allowance for deferred tax assets as of January 1, 1996 and
1995 was  $5,538,500  and  $917,500, respectively.   In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.  The  ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible.  Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment.  As a result of acquisitions
during 1996, subsequent recognition of $537,000 of tax benefits relating to the
valuation allowance for deferred tax assets will be allocated to goodwill.

     The Company has approximately $4,881,000 of net operating loss
carryforwards at December 31, 1996.  Unused net operating loss carryforwards of
approximately $3,222,650 will expire commencing in the year 2001 through 2009.
The remaining $1,658,350 of net operating loss carryforwards will begin to
expire, if unused, beginning in the year 2008 through 2010.  The utilization of
net operating loss carryforwards may be further limited as to future use due to
the change in control provisions in the Internal Revenue Code which apply
because of the Crossings purchase in May 1996.  In addition, the Company has
alternative minimum tax credit carryforwards of approximately $31,000 which are
available to reduce future federal regular income taxes, if any, over an
indefinite period.

(13) COMMITMENTS AND CONTINGENCIES

     The Company leases certain properties under noncancelable operating and
capital leases that expire at various dates through the year 2014.



<PAGE>   33


             ALTERNATIVE LIVING SERVICES, INC.  AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

<TABLE>
<CAPTION>

     Future annual minimum operating lease payments and future minimum capital
lease payments as of  December 31, 1996 are as follows (in thousands):

                                                           Capital Operating
   <S>                                                     <C>      <C>
   1997 .................................................  $ 1,359  $ 12,857
   1998 .................................................    1,341    12,924
   1999 .................................................    6,118    12,979
   2000 .................................................    4,922    13,051
   2001 .................................................       --    12,892
   Thereafter ...........................................       --   129,275
                                                           -------  --------
   Total minimum lease payments .........................   13,740  $193,978
   Less amount representing interest ....................    2,894  ========
                                                           -------
   Present value of net minimum capital lease payments ..   10,846
   Less current portion .................................      345
                                                           -------
   Long-term capital lease obligations ..................  $10,501
                                                           =======
</TABLE>


(14) SALE/LEASEBACK TRANSACTIONS

     On January 22, 1996, the Company sold two assisted living residences for
approximately $7,022,000 and leased them back under a ten-year sale and
leaseback agreement.  The transaction produced a gain of approximately
$1,083,000, which was deferred and is being amortized over the lease period.

     On December 31, 1996, the Company sold twelve assisted living residences
for approximately $45.0 million and leased them back under a twelve-year sale
and leaseback agreement.  The transaction produced a gain of approximately $5.7
million which will be deferred and amortized over the lease period.

(15) SUBSEQUENT EVENTS

     On February 12, 1997, the Company entered into an agreement to acquire
interests in three recently constructed assisted living residences in upstate
New York with an aggregate capacity of 313 residents.  The acquisition will
represent an investment by the Company of approximately $21.5 million (cash and
assumed debt).





                                      33
<PAGE>   34



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

    None.


                                    PART III



ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  Set forth below is certain information concerning the executive officers and
directors of the Company.

<TABLE>
<CAPTION>

         NAME                                                      AGE  POSITION
         <S>                                                       <C>  <C>
         William G. Petty, Jr . . . . . . . . . . . . . . . .       50  Chairman of the Board
         William F. Lasky . . . . . . . . . . . . . . . . . .       42  President,
                                                                        Chief Executive Officer and Director
         Richard W. Boehlke . . . . . . . . . . . . . . . . .       48  Vice Chairman of the Board
         Thomas E. Komula . . . . . . . . . . . . . . . . . .       41  Senior Vice President, Chief
                                                                        Financial Officer, Treasurer
                                                                        and Assistant Secretary
         John W. Kneen  . . . . . . . . . . . . . . . . . . .       43  Secretary and Vice President
         G. Faye Godwin . . . . . . . . . . . . . . . . . . .       55  Senior Vice President
         D. Lee Field   . . . . . . . . . . . . . . . . . . .       37  Senior Vice President
         Douglas A. Hennig  . . . . . . . . . . . . . . . . .       39  Senior Vice President
         Gene E. Burleson   . . . . . . . . . . . . . . . . .       54  Director
         Robert Haveman   . . . . . . . . . . . . . . . . . .       48  Director
         Ronald G. Kenny  . . . . . . . . . . . . . . . . . .       40  Director
         Jerry L. Tubergen  . . . . . . . . . . . . . . . . .       43  Director
</TABLE>


     William G. Petty, Jr. has served as Chairman of the Board since December
1993 and served as Chief Executive Officer of the Company from December 1993 to
April 1996.  Mr. Petty has served as the Vice Chairman of GranCare since July
1995.  Mr. Petty also served as the Chairman of the Board, Chief Executive
Officer and President of Evergreen from June 1993 to July 1995 and as Chairman
of the Board, Chief Executive Officer and President of National Heritage, Inc.,
predecessor to Evergreen, from October 1992 to June 1993.  Mr. Petty has been a
Managing Director of Omega Capital, Ltd., a private health care investment fund
("Omega Capital"), since 1986.  Mr. Petty also served as a member of the Board
of Directors of Forum Group, Inc, ("Forum") and as one of three members of
Forum's Executive Committee from June 1993 to November 1994.

     William F. Lasky has served as Chief Executive Officer of the Company
since April 1996 and as President of the Company since December 1993.  He
served as the Managing Partner of the ALS Partnership from 1981 to December
1993 and as the President of CLC from 1989 to December 1993.  The ALS
Partnership and CLC developed and operated assisted living residences, six of
which are currently managed by the Company.  Mr. Lasky served as a regional
director of Unicare Health Residences, a national operator of nursing homes,
from 1981 to 1985.  Mr. Lasky is a member of the Board of Directors and the
Chairman of ALFAA and is a licensed nursing home administrator.

     Richard W. Boehlke has served as the Vice Chairman of the Board of the
Company since May 1996.  Mr. Boehlke served as President and Chief Executive
Officer of Crossings, which he founded in 1984, until Crossings merged with the
Company in May 1996.  From 1980 to 1984, Mr. Boehlke was employed by National
Medical Enterprises, Inc, as Vice President - Development responsible for all
new development within its long-term care group of companies.

     Thomas E. Komula has served as a Senior Vice President of the Company
since July 1996.  In August, 1996, he was appointed as Chief Financial Officer
and Assistant Secretary.  Prior to joining the Company, he served as the Chief
Financial Officer of MedRehab, Inc., a privately-held  rehabilitation company,
from March 1994 to April 1996.



                                       34
<PAGE>   35


From September 1993 to March 1994, he was a partner at Arthur Andersen & Co.,
and from September 1991 to September 1993, he was a Senior Manager with Arthur
Andersen & Co. Mr. Komula is a Certified Public Accountant.

     John W. Kneen has served as Vice President and Secretary of the Company
since December 1993.  He served as Chief Financial Officer and Treasurer from
April 1996 through August 1996.  He served as Vice President of Corporate
Development and Assistant Secretary of Evergreen from December 1993 to July
1995, and as Vice President and Chief Financial Officer of Evergreen Housing
Partners, Inc. from 1991 to 1993.  Mr. Kneen served as President of Premier
Lifestyles, Inc., a senior housing management company, from 1989 to 1991.  Mr.
Kneen is a Certified Public Accountant.

     G. Faye Godwin has served as Senior Vice President of the Company since
April 1996.  From May 1995 to April 1996, Ms. Godwin served as the Vice
President of Operations of the Company.  Previously, Ms. Godwin served as the
Chief Operating Officer of Standish Care, Inc., a publicly-held assisted living
company, from February 1994 to May 1995.  From April 1989 to January 1994, Ms.
Godwin was Senior Vice President of Operations at Sunrise Assisted Living, an
assisted living company.

     D. Lee Field has served as Senior Vice President of the Company since May
1996.  Prior to joining the Company, be was employed from 1984 by Crossings,
where he held a succession of executive positions, including Executive Vice
President and Chief Operating Officer from 1993 until the Crossings merger, and
Vice President of Operations from 1989 to 1993.  Mr. Field is a member of the
Board of Directors for the American Senior Housing Association and a member of
the Task Force for Assisted Living of the American Health Care Association.

     Douglas A. Hennig has served as Senior Vice President of the Company since
January 1996.  From January 1993 to January 1996, Mr. Hennig served as the
President of Heartland.  From 1991 to 1993, he was President of Hennig &
Associates, a consulting firm in Madison, Wisconsin involved in retirement
housing consulting and the development and management of assisted living
residences.  From 1986 to 1991, he was Vice President of the Meridian Group in
Madison, Wisconsin, a market research company, with responsibility for market
research, marketing, operations management and development consulting for
retirement housing and assisted living.

     Gene E. Burleson has served as a director of the Company since July 1995.
He became Chairman of the Board of GranCare in January 1994 and has served as
Chief Executive Officer of GranCare since December 1990.  Previously, Mr.
Burleson served as President of American Medical International, Inc., a
provider of health care services, where from early 1988 to March 1989 he served
as President while continuing his role as Chief Operating Officer, a position
he assumed in 1986.  Prior to serving as President of the parent company, Mr.
Burleson served for nine years as President and Chief Executive Officer of
American Medical International - European Operations.  Mr. Burleson currently
serves on the board of directors of Deckers Outdoor Corporation and Integrated
Voice Solutions, Inc.

     Robert Haveman has served as a director of the Company since May 1995.  He
has served as the Secretary/Treasurer of the Prince Corporation, an automotive
interior trim manufacturer, since 1987 and served as a director of Evergreen
from June 1993 to July 1995.

     Ronald G. Kenny has served as a director of the Company since May 1995.
He has served as Executive Vice President of Huizenga Capital Management, a
privately held investment management company, since 1990.  Mr. Kenny has served
as a director of GranCare since July 1995.  Mr. Kenny also served as a director
of Evergreen from June 1993 to July 1995 and as director of National Heritage,
Inc. from October 1992 to June 1993.

     Jerry L. Tubergen has served as a director of the Company since May 1995.
He has served as President and Chief Executive Officer of RDV Corporation, a
private financial management firm, since its formation in 1991.  Mr. Tubergen
served as Managing Partner of Deloitte & Touche in Grand Rapids, Michigan from
1987 to 1991.  Mr. Tubergen also serves as a director of the Orlando Magic,
Ltd., a NBA franchise, and Genmar Holdings, Inc., a manufacturer and marketer
of motorized pleasure boats.

     There are no family relationships  among any of the executive officers or
directors of the Company.  Pursuant to the merger agreement entered into by the
Company and Crossings in connection with the Crossings Merger, Mr. Boehlke was
elected to the Board of Directors as its Vice Chairman and Messrs.  Field and
Boitano were elected as



                                       35
<PAGE>   36


executive officers of the Company. Subject to the terms of employment
agreements, executive officers of the Company are elected or appointed by the
Board of Directors and hold office until their successors are elected or until
their death, resignation or removal.

ITEM 11. EXECUTIVE COMPENSATION

     Compensation of Directors.  Directors of the Company who are not parties
to services agreements with the Company and are not employees of the Company
are entitled to an annual retainer of $12,000, payable in quarterly
installments.  In lieu of their retainer for the twelve month period commencing
June 1, 1995, each of Messrs.  Burleson, Haveman, Kenny and Tubergen were
granted a non-qualified stock option pursuant to the 1995 Plan to purchase up
to 7,740 shares of the Common Stock at an exercise price of $4.65 per share,
such options becoming exercisable on June 1, 1996 and expiring on June 1, 2005.
In lieu of their annual retainer for the 36 month period commencing June 1,
1996, each of Messrs.  Burleson, Haveman, Kenny and Tubergen were granted a
non-qualified stock option pursuant to the 1995 Plan to purchase up to 12,420
shares of the Common Stock at an exercise price of $8.69 per share, such
options vesting one-third on June 1, 1997, one-third on June 1, 1998 and
one-third on June 1, 1999, and expiring on May 8, 2006.  Directors are also
entitled to reimbursement of reasonable out-of-pocket expenses incurred by them
in attending meetings of the Board of Directors.  See also "Employment and
Services Agreement."

     Summary of Compensation of Executive Officers.  The following table sets
forth information as to all compensation paid or accrued during the last year
to the Company's chief executive officer and to each other executive officer of
the Company whose total salary and bonus exceeded $100,000 (the "Named
Executive Officers").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                           LONG TERM
                                              ANNUAL COMPENSATION        COMPENSATION
                                            ----------------------         SECURITIES
                                                            OTHER ANNUAL  UNDERLYING
NAME AND PRINCIPAL POSITION   YEAR    SALARY      BONUS      COMPENSATION  OPTIONS (#)(4)
----------------------------  ----  ----------  ----------  ------------  --------------
<S>                           <C>    <C>        <C>         <C>            <C>
William G. Petty, Jr          1996         $--         $--           $--              --
   Chairman of the Board (l)  1995         $--         $--       $48,650          90,628
                              1994         $--         $--            --              --

William F. Lasky              1996    $231,459     $70,000            --              --
   President and Director(2)  1995    $166,600     $30,000            --         128,691
                              1994    $115,000     $60,000            --          54,377

Thomas E. Komula(3)           1996     $82,306     $21,250            --          29,423
   Chief Financial Officer    1995         $--         $--            --              --
                              1994         $--         $--            --              --

G. Faye Godwin                1996    $135,895     $35,000            --          28,475
   Senior Vice President      1995     $70,894         $--            --          17,763
                              1994         $--         $--            --              --

Douglas A. Hennig             1996    $136,776     $26,000            --          22,421
   Senior Vice President      1995         $--         $--            --          10,404
                              1994         $--         $--            --              --
</TABLE>


(1)  Mr. Petty is not an employee and was not an employee of the Company
     during 1996.  Mr. Petty served as the Company's Chief Executive Officer
     until May 1996.  Other Annual Compensation represent amounts paid to
     Petty, Kneen & Company pursuant to the terms of a services agreement
     pursuant to which Mr. Petty provides certain services to the Company.  See
     also -  "Employment and Services Agreement - Service Agreement with Petty
     Kneen & Company."






                                       36
<PAGE>   37


(2)  Mr. Lasky became the Company's Chief Executive Officer in May 1996.

(3)  Mr. Komula joined the Company as an executive officer in July 1996.

(4)  Represents options under the Company's 1995 Stock Option
     Plan (the "1995 Plan").  Generally, one-fourth of the options become
     exercisable on each of the first through fourth anniversaries of the
     grant date.

     Stock Options Granted During Year Ended December 31, 1996.  The following
table sets forth information regarding the grant of stock options to each of
the Named Executive Officers.  None of the Named Executive Officers received
SARs.

                              STOCK OPTION GRANTS


<TABLE>
<CAPTION>
                        NUMBER OF
                        SECURITIES
                        UNDERLYING                    EXERCISE OR
                         OPTIONS    PERCENT OF TOTAL  BASE PRICE   EXPIRATION     GRANT DATE
NAME                     GRANTED    OPTIONS GRANTED    ($/SHARE)      DATE     PRESENT VALUE(1)
--------------------    ----------  ----------------  -----------  ----------  ----------------
<S>                   <C>         <C>               <C>          <C>         <C>

William Petty ......          --                --           --     --                     --

William E. Lasky ...          --                --           --     --                     --

Thomas E. Komula ...      29,423             10.5%        13.00  8/4/2006             210,289

G. Faye Godwin .....      28,475             10.2%         8.69  5/8/2006             136,042

Douglas A. Hennig ..      22,421              8.0%         8.69  5/8/2006             107,119
</TABLE>


(1)  The Grant Date Present Values were determined using the Black-Scholes
     option pricing model.  Estimated values under the model are based on
     assumptions as to variables such as option term, interest rates, stock
     price volatility and dividend yield.  The actual value, if any, the option
     holder may realize will depend on the excess of the market price of the
     stock over the exercise price on the date the option is exercised.  The
     Grant Date Present Value calculation is presented in accordance with SEC
     disclosure requirements, and the Company has no way to determine
     whether the Black-Scholes model can properly determine the value of an
     option.  There is no assurance that the value that may be realized by the
     option holder will be at or near the value estimated by the Black-Scholes
     model.  The model assumes: (a) an option term of 10 years which represents
     the length of time between the grant date of options under the Company's
     plan and the latest possible exercise date by the named executive
     officers; (b) an interest rate that represents the interest rate on a U.S.
     Treasury Bond with a maturity date corresponding to that of the option's
     term(c) stock price volatility calculated using weekly stock prices since
     the Company's Common Stock became publicly traded; and (d) no dividends
     will be paid in the foreseeable future.

STOCK OPTION YEAR-END VALUES

     The following table sets forth certain information with respect to options
held as of the end of the last year for each of the Named Executive Officers.
None of the Named Executive Officers exercised any options during the last
fiscal year.




                                      37
<PAGE>   38

                        VALUE OF OPTIONS AT END OF 1996


<TABLE>
<CAPTION>
                               NUMBER OF SECURITIES         VALUE OF UNEXERCISED
                              UNDERLYING UNEXERCISED        IN-THE-MONEY OPTIONS
                              OPTIONS AT YEAR-END (#)        AT YEAR-END ($)(1)
                            EXERCISABLE   UNEXERCISABLE  EXERCISABLE  UNEXERCISABLE
                            ------------  -------------  -----------  -------------
<S>                       <C>           <C>            <C>          <C>

William G. Petty, Jr. ..        22,657         67,971     $223,171       $669,514

William F. Lasky .......        59,362        123,706      631,744      1,265,548

Thomas E. Komula .......            --         29,423           --         44,135

G. Faye Godwin .........         4,441         41,797       43,741        296,664

Douglas A. Hennig ......            --         32,825           --        206,007
</TABLE>


(1)  Calculated on the basis of the fair market value of the underlying
     securities on December 31, 1996 ($14.50 per share) minus the exercise
     price.

EMPLOYMENT AND SERVICES AGREEMENTS

     Services Agreement with Petty, Kneen &Company.  The Company has entered
into a services agreement with Petty, Kneen & Company ("PK & Co."), a limited
liability company controlled by Messrs.  Petty and Kneen.  Pursuant to the
services agreement, PK & Co. has agreed to provide management, financial and
strategic planning services to the Company on a fee basis, including without
limitation, the services of Mr. Petty as Chairman and the services of Mr. Kneen
as Chief Financial Officer of the Company.  The Company has agreed to pay an
annual fee of $320,000 to PK & Co. for such services; provided, however, such
fee shall be reduced to $200,000 if Mr. Kneen is not called upon to serve as
Chief Financial Officer of the Company.  The fee was reduced to $200,000 upon
the appointment of Mr. Komula as Chief Financial Officer in August 1996.
Pursuant to the services agreement, the Company also has agreed to reimburse PK
& Co. for certain out of pocket expenses.  In consideration of this service
agreement, each of Messrs.  Petty and Kneen have agreed to provide the Company
with a right of first refusal with respect to certain acquisition opportunities
relating to assisted living residences or operations which come to their
attention during the term of the services agreement.  This services agreement
expires on April 30, 1998 and may be extended on a quarter to quarter basis
thereafter, subject to earlier termination at the election of the Company upon
30 days notice.  In consideration of this services agreement, PK & Co.
purchased 107,575 shares of Common Stock in May 1996 at a price per share of
$4.65.

     Services Agreement with Richard W. Boehlke.  As a condition of and
effective upon the Crossings merger, the Company entered into a services
agreement with Mr. Boehlke, formerly Crossings' President and Chief Executive
Officer, pursuant to which he has agreed to provide general, policy-making
services to the Company and to undertake special projects designated from time
to time by the Board of Directors for the three year period ending May 1999.
In consideration of these services, the Company has agreed to pay Mr. Boehlke
$200,000 per year and has agreed to provide Mr. Boehlke certain other benefits,
including use of a company car and life and medical insurance coverage similar
to that provided to the Company's executive officers.  During the term of the
agreement, the Company has agreed to nominate Mr. Boehlke to serve as a
director of the Company.

     Employment Agreement with William F. Lasky.  The Company has entered into
an employment agreement with Mr. Lasky with a term that expires on May 31,
1997, unless earlier terminated pursuant to the terms thereof.  The agreement
is automatically renewed for additional consecutive one-year terms unless
timely notice of nonrenewal is given by either the Company or Mr. Lasky.  The
employment agreement provides that Mr. Lasky shall receive a base salary in an
amount determined by the Company's Board of Directors; provided, however, that
in no event may such base salary be less than $200,000.  In addition, the
employment agreement provides that Mr. Lasky is entitled to receive incentive
bonuses of up to 35% of his base salary if the Company's earnings before
interest, taxes and depreciation are within ten percent of the earnings
targeted in the Company's annual business plan approved by the Board of
Directors.  The employment agreement also provides for the granting of certain
stock options described above and certain other benefits



                                      38
<PAGE>   39


typical in employment agreements with a senior executive officer.  Finally, the
employment agreement provides that Mr. Lasky will not disclose certain
proprietary information belonging to the Company or otherwise compete with the
Company for a period of eighteen months following his termination of employment
except where such termination is by the Company without "cause."

     Employment Agreements with G. Faye Godwin, Douglas A. Hennig and Thomas E.
Komula.  The Company has entered into employment agreements with each of Ms.
Godwin and Messrs.  Hennig and Komula.  These employment agreements are annual
agreements that automatically renew for consecutive one year terms unless
timely notice of nonrenewal is given either by the Company or the applicable
officer.  These agreements provide that these officers shall receive a base
salary in an amount determined by the Company's Board of Directors, provided,
however, that in no event may such base salary be less than $110,000 in the
case of Ms. Godwin, $130,000 in the case of Mr. Hennig and $170,000 in the case
of Mr. Komula.  Pursuant to these agreements, Ms. Godwin and Messrs.  Hennig
and Komula are entitled to receive incentive bonuses payable, at the sole
discretion of the Board of Directors, if certain target earnings are achieved.
These employment agreements also provide for the granting of certain stock
options and certain other benefits typical in employment agreements with senior
executive officers.  Pursuant to these employment agreements, each of Ms.
Godwin and Messrs.  Hennig and Komula have agreed not to disclose certain
proprietary information belonging to the Company or otherwise to compete with
the Company for a period of 12 months in the cases of Ms. Godwin and Mr. Komula
and 18 months in the case of Mr. Hennig following their respective termination
of employment, except where such termination is by the Company without "cause."

     The employment agreement with Mr. Hennig was entered in connection with
the acquisition of Heartland (of which Mr. Hennig was the founder and
president) and afforded Mr. Hennig the right to purchase 53,525 shares of
Common Stock at a per share price of $4.65 (the "Hennig Stock').  The Hennig
Stock is nontransferable and is subject to the Company's right to repurchase
such shares at the price paid by Mr. Hennig for the Hennig Stock until such
time as such shares become vested, with vesting occurring 50% on the first
anniversary of Mr. Hennig's employment by the Company, 30% on the second
anniversary and 20% on the third anniversary.  Pursuant to the employment
agreement with Mr. Hennig, Mr. Hennig also had the right to purchase an
additional 41,580 shares of Common Stock at a per share price of $7.22 at any
time during the 30 day period commencing December 1, 1996, which he exercised
in full on December 30, 1996.

     In addition, pursuant to his employment agreement, Mr. Hennig was entitled
to borrow up to $100,000 from the Company during the initial annual term of the
agreement, which loan shall bear interest at the rate of 6% per annum and shall
be repayable on the third anniversary of the date of the loan.  In addition, if
the employment agreement with Mr. Hennig is renewed for a second annual term,
Mr. Hennig was entitled to borrow an additional $100,000 from the Company on
similar terms.  Pursuant to these provisions, Mr. Hennig borrowed $200,000 from
the Company in December 1996.  This loan is secured by Mr. Hennig's pledge of
certain shares of Common Stock owned by Mr. Hennig.

     Employment Agreements with D. Lee Field and David M. Boitano. As a
condition of and effective upon the Crossings Merger, the Company entered into
employment agreements with each of Messrs.  Field and Boitano.  These
agreements provide for a one year term, and are automatically renewed for an
additional one year term unless timely notice of nonrenewal is given by the
Company or the applicable officer.  The employment agreements provide that
Messrs.  Field and Boitano shall receive a base salary in an amount (not less
than $140,000) determined by the Company's Board of Directors or President.
Pursuant to these employment agreements, Messrs.  Field and Boitano (are
entitled to receive incentive bonuses of up to 25% and 20% of their base
salary, respectively, payable at the discretion of the Board of Directors if
certain targeted earnings are achieved.  The employment agreements also provide
for the granting of certain stock options and certain other benefits typical in
employment agreements with senior executive officers.  Finally, pursuant to
these employment agreements, each of Messrs Field and Boitano have agreed not
to disclose certain proprietary information belonging to the Company or
otherwise to compete with the Company for a period of twelve months following
their respective termination of employment, except where such termination is by
the Company without "cause."

1995 INCENTIVE COMPENSATION PLAN

     The 1995 Plan provides key employees (who may also be directors) of the
Company and its subsidiaries performance incentives and also provides a means
of encouraging stock ownership in the Company by such persons.  Under the 1995
Plan, key employees of the Company or its affiliates are eligible to receive
stock options to purchase


                                      39
<PAGE>   40


shares of the Company's Common Stock.  The 1995 Plan allows a maximum number of
shares to be subject to options of 1,425,000.  Options are granted under the
1995 Plan on the basis of the optionee's contribution to the Company, and no
option may exceed a term of ten years.  Options granted under the 1995 Plan may
be either incentive stock options or options that do not qualify as incentive
stock options.  The Company's Compensation Committee is authorized to designate
the recipients of options, the dates of grants, the number of shares subject to
options, the option price, the terms of payment on exercise of the options, and
the time during which the options may be exercised.  The price of incentive
stock options granted under the 1995 Plan cannot be less than the fair market
value of the shares at the time the options are granted.

     At December 31, 1996, options to purchase an aggregate of  708,507 shares
of Common Stock were granted and outstanding at a weighted average exercise
price of $6.31 per share, of which options to purchase 145,922 shares were
exercisable at such date.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     The Company has appointed Messrs.  Boehlke, Kenny, Petty and Tubergen as
members of the Compensation Committee.  The Company has no compensation
committee interlocks.




                                      40
<PAGE>   41


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 24, 1997 by: (i)
each person or entity known to the Company to own more than 5% of the
outstanding shares of the Common Stock; (ii) each of the Company's directors;
(iii) each of the Named Executive Officers; and (iv) all of the Company's
directors and executive officers as a group.  Except as otherwise noted, the
person or entity named has sole voting and investment power over the shares
indicated.


<TABLE>
<CAPTION>
                                                             SHARES OF COMMON
                                                            STOCK BENEFICIALLY
                                                                  OWNED
 NAME AND ADDRESS OF BENEFICIAL OWNER                       NUMBER     PERCENT
 --------------------------------------------------------  ---------  ---------
 <S>                                                       <C>        <C>

 Richard W. Boehlke* ....................................    781,711       6.0%
 1201 Pacific Avenue, Suite 1800
 Tacoma, Washington  98335

 Peter H. Huizenga ......................................    737,818       5.7%
 2215 York Road, Suite 500
 Oakbrook, Illinois 60521

 Jerry L. Tubergen(1)* ..................................    666,586       5.1%

 Robert Haveman(2)* .....................................    556,539       4.3%

 William F. Lasky(3)* ...................................    468,919       3.6%

 William G. Petty, Jr.(4)* ..............................    130,232       1.0%

 Douglas A. Hennig(5)* ..................................    112,664         **

 Ronald G. Kenny(6)* ....................................     32,703         **

 Gene E. Burleson(6)* ...................................     11,880         **

 G. Faye Godwin(7)* .....................................     11,560         **

 Thomas E. Komula* ...................................         4,000         **

 All Officers and Directors as a Group (18 Persons)(8) ..  3,107,364      23.6%
</TABLE>


*    See "Management" for position with the Company.
**   Less than 1%

(1)  Includes (i) 415,532 shares held by trusts for which he serves as trustee
     (the "Trusts") and (ii) options to acquire 11,880 shares exercisable
     within the next 60 days.  The co-trustees of the Trust also serve as
     trustee of a trust holding 59,361 shares.
(2)  Includes (i) 437,082 shares held by two non-profit corporations (the
     "Non-profit Corporation") of which Mr. Haveman serves as an officer and
     (ii) options to acquire 11,830 shares exercisable within the next 60 days.
     Mr. Haveman disclaims beneficial ownership of the shares held by the
     Non-profit Corporation.
(3)  Mr. Lasky's beneficial ownership includes shares held by CLC by virtue of
     his position as an officer and majority shareholder of CLC and options to
     acquire 59,362 shares within the next 60 days.  CLC is a Wisconsin
     corporation owned by Mr. Lasky and David Burr.
(4)  Represents 107,575 shares held by PK&Co., a company owned and controlled
     by Mr. Petty and John W. Kneen, and options to acquire 22,657 shares
     exercisable within the next 60 days.



                                      41
<PAGE>   42

(5)  Includes options to acquire 8,206 shares exercisable within the next 60
     days.
(6)  Represents options to acquire 11,880 shares exercisable within the next
     60 days.
(7)  Represents options to acquire 11,560 shares exercisable within the next
     60 days.
(8)  Includes options to acquire 190,401 shares exercisable within the next 60
     days.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Company manages six dementia care residences in Wisconsin for the
ALS Partnership, which is 50% owned and controlled by Mr. Lasky, the Company's
President and Chief Executive Officer, pursuant to management agreements
providing for a management fee equal to 11% of gross operating revenues.  The
management agreements expire in December 1998, but may be terminated by the
Company upon 90 days notice to the ALS Partnership.  The ALS Partnership was
charged by the Company management fees of  $194,000 in 1996.  The Company also
manages a WovenHearts residence in Lodi, Wisconsin owned by a partnership of
which Douglas A. Hennig, the Company's Senior Vice President, is a 25% general
partner.  The Company  received management fees of  $14,000 from this agreement
in 1996.  The Company leases a Crossings residence (in Tacoma, Washington) from
the 2010 Union L.P., of which Richard W. Boehlke, the Vice Chairman of the
Board of the Company, is the 99% general partner.  Lease payments by the
Company to this partnership following the May 1996 merger with Crossings
were $392,659

     In connection with the Heartland acquisition, the Company borrowed an
aggregate of $8.7 million from RDV Capital Management L.P., a Delaware limited
partnership, the general partner of which is RDV Corporation.  Jerry L.
Tubergen, a director of the Company, is the President and Chief Executive
Officer of RDV Corporation.  See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
and Note 4 to the Consolidated Financial Statements.

     The Company conducted site evaluations and market feasibility studies for
GranCare in 1996.  The Company billed GranCare approximately $63,000 for fees
relating to these services in 1996.

     For certain additional background information regarding transactions
involving the Company and its respective officers, directors and stockholders,
see "Employment and Services Agreements."

     The Company believes that each of the foregoing transactions was on terms
substantially similar to those that it could have obtained from unaffiliated
third parties.  In the case of related party transactions, it is the Company's
policy to enter into such agreements on terms, which in the opinion of the
Company, are substantially similar to those that could otherwise be obtained
from unrelated third parties, and that all such transactions be approved by a
majority of the disinterested members of the Company's Board of Directors.

                                    PART IV

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

(1) The following documents are filed as part of the report:

    (a)     FINANCIAL STATEMENTS.  The following financial statements of
            the Registrant and the Report of Independent Public Accountants
            therein are filed as part of this Report on Form 10-K:


<TABLE>
<CAPTION>
                                                                Page
                                                                ----
            <S>                                                 <C>
            Independent Auditor's Report .....................   18
            Consolidated Balance Sheets ......................   19
            Consolidated Statements of Operations ............   20
            Consolidated Statements of Shareholders' Equity ..   21
            Consolidated Statements of Cash Flows ............   22
            Notes to Consolidated Financial Statements .......   23
</TABLE>


    (b)     SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES.  Valuation and
            Qualifying Accounts on Schedule II.  See Exhibit 11.1 of the
            Report.



                                      42
<PAGE>   43


(c) REPORTS ON FORM 8-K.  The Registrant filed the following reports with the
    Securities and Exchange Commission on Form 8-K during the quarter ended
    December 31, 1996:

    The Company's Current Report on Form 8-K filed with the Securities and
    Exchange Commission on January 14, 1997 reported under Item 2, concerning
    the sale/leaseback financing with a subsidiary of Meditrust, a health care
    real estate investment trust (REIT), as amended on March 17, 1997.

(d) EXHIBITS.  The following exhibits are filed as part of, or incorporated by
    reference into this report on Form 10-K:


  EXHIBIT
    NO.                             DESCRIPTION
    ---                             -----------

    3.1  Restated Certificate of Incorporation of Registrant.  (Incorporated
         by reference to Exhibit 3.1 of the Company's Registration Statement
         on Form S-1 (No. 333-04595) filed on July 29, 1996).

    3.2  Restated Bylaws of Registrant.  (Incorporated by reference to Exhibit
         3.2 of the Company's Registration Statement on Form S-1
         (No. 333-04595) filed on July 29, 1996).

    4.1  See Articles Four, Six, Seven, Eight, Nine, Ten and Eleven of the
         Company's Restated Certificate of Incorporation filed as Exhibit 3.1
         to this Report and Articles 2, 3, 5, 7 and 8 of the Company's
         Restated Bylaws filed as Exhibit 3.2 to this Report.  (Incorporated
         by reference to Exhibit 4.1 of the Company's Registration Statement
         on Form S-1 (No. 333-04595) filed on July 29, 1996).

    4.2  Form of Common Stock certificate.  (Incorporated by reference to
         Exhibit 4.2 of the Company's Registration Statement on Form S-1
         (No. 333-04595) filed on July 29, 1996).

    10.1 Stock Purchase Agreement dated as of May 22, 1996 by and between
         Assisted Living Equity Investors and the Company.  (Incorporated by
         reference to Exhibit 10.1 of the Company's Registration Statement on
         Form S-1 (No. 333-04595) filed on July 29, 1996).

    10.2 Services Agreement effective as of January 1, 1996 by and between
         Petty, Kneen & Company, L.L.C. and the Company.  (Incorporated by
         reference to Exhibit 10.2 of the Company's Registration Statement on
         Form S-1 (No. 333-04595) filed on July 29, 1996).  Represents an
         executive compensation plan or arrangement.

    10.3 Purchase Agreement dated as of May 22, 1996 by and between Petty,
         Kneen & Company, L.L.C. and the Company. (Incorporated by reference
         to Exhibit 10.3 of the Company's Registration Statement on Form S-1
         (No. 333-04595) filed on July 29, 1996).

    10.4 Agreement and Plan of Merger among the Company, ALS Acquisition Corp.,
         Alternative Living Services-Midwest Inc. and the shareholders of
         Alternative Living Services-Midwest Inc. dated as of May 20, 1996.
         (Incorporated by reference to Exhibit 10.4 of the Company's
         Registration Statement on Form S-1 (No. 333-04595) filed on July 29,
         1996).

    10.5 Limited Partner Interest Purchase Agreement by and among the Company,
         Alternative Living Services-Midwest Inc., Lionel S. Margolick and the
         Limited Partners referenced herein dated as of May 20, 1996.
         (Incorporated by reference to Exhibit 10.5 of the Company's
         Registration Statement on Form S-1 (No. 333-04595) filed on July 29,
         1996).




                                      43


<PAGE>   44
   EXHIBIT
     NO.                               DESCRIPTION
   -------                             -----------

    10.6  Agreement and Plan of Merger dated as of May 22, 1996 between the
          Company, New Crossings International Corporation and Capital
          Consultants, Inc.  (Incorporated by reference to Exhibit 10.61 of the
          Company's Registration Statement on Form S-1 (No. 333-04595) filed on
          July 29, 1996).

    10.7  Services Agreement by and between Richard W. Boehlke and the Company
          dated as of May 23, 1996. (Incorporated by reference to Exhibit 10.7
          of the Company's Registration Statement on Form S-1 (No. 333-04595)
          filed on July 29, 1996).  Represents an executive compensation plan
          or arrangement.

    10.8  Employment Agreement by and between D. Lee Field and the Company
          dated as of May 23, 1996.  (Incorporated by reference to Exhibit 10.8
          of the Company's Registration Statement on Form S-1 (No. 333-04595)
          filed on July 29, 1996). Represents an executive compensation plan or
          arrangement.

    10.9  Employment Agreement by and between David M. Boitano and the Company
          dated as of May 23, 1996.  (Incorporated by reference to Exhibit 10.9
          of the Company's Registration Statement on Form S-1 (No. 333-04595)
          filed on July 29,  1996).  Represents an executive compensation plan
          or arrangement.

    10.10 Amended and Restated Alternative Living Services, Inc. 1995
          Incentive Compensation Plan. (Incorporated by reference to Exhibit
          10.10 of the Company's Registration Statement on Form S-1 (No.
          333-04595) filed on July 29, 1996). Represents an executive
          compensation plan or arrangement.

    10.11 Employment Agreement by and between G. Faye Godwin and the Company
          dated as of May 23, 1996. (Incorporated by reference to Exhibit
          10.11 of the Company's Registration Statement on Form S-1 (No.
          333-04595) filed on July 29, 1996).  Represents an executive
          compensation plan or arrangement.

    10.12 Employment Agreement by and between Douglas A. Hennig and the
          Company dated as of January 25, 1996, as amended.  (Incorporated by
          reference to Exhibit 10.12 of the Company's Registration Statement
          on Form S-1 (No. 333-04595) filed on July 29, 1996).  Represents an
          executive compensation plan or arrangement.

    10.13 Employment Agreement by and between William F. Lasky and the Company
          dated as of December 14, 1993, as amended.  (Incorporated by
          reference to Exhibit 10.13 of the Company's Registration Statement on
          Form S-1 (No. 333-04595) filed on July 29, 1996).  Represents an
          executive compensation plan or arrangement.

    10.14 Employment Agreement  dated as of December 30, 1996 by and between
          William F. Lasky and the Company, as amended. Represents an executive
          compensation plan or arrangement.

    10.15 Recapitalization Agreement dated as of May 23, 1995 by and among the
          Company, Evergreen Healthcare, Inc., Care Living Centers, Inc.,
          William F. Lasky, David Burr, Kraig   E. Lorenzen and Alternative
          Living Investors, L.L.C. (Incorporated by reference to Exhibit 10.14
          of the Company's Registration Statement on Form S-1 (No. 333-04595)
          filed on July 29, 1996).





                                      44
<PAGE>   45


    EXHIBIT
      NO.                              DESCRIPTION
    -------                            -----------

    10.16 Stock Purchase Agreement among Heartland Retirement Services, Inc.,
          the shareholders of Heartland Retirement Services, Inc. and the
          Company dated as of January 25, 1996.  (Incorporated by reference to
          Exhibit 10.15 of the Company's Registration Statement on Form S-1
          (No. 333-04595) filed on July 29, 1996).

    10.17 Lease Agreement between Healthcare REIT, Inc. and the Company dated
          as of January 22, 1996 (Clare Bridge of Bradenton).  (Incorporated
          by reference to Exhibit 10.17 of the Company's Registration
          Statement on Form S-1 (No. 333-04595) filed on July 29, 1996).

    10.18 Lease Agreement between Healthcare REIT, Inc. and the Company dated
          as of January 22, 1996 (Clare Bridge of Sarasota).  (Incorporated by
          reference to Exhibit 10.18 of the Company's Registration Statement
          on Form S-1 (No. 333-04595) filed on July 29, 1996).

    10.19 Loan Agreement dated as of January 25, 1996 by and among RDV Capital
          Management L.P. and the Company.  (Incorporated by reference to
          Exhibit 10.16 of the Company's Registration Statement on Form S-1
          (No. 333-04595) filed on July 29, 1996).

    10.20 Loan Agreement by and between ALS-Stonefield, Inc. and Healthcare
          Capital Finance, Inc. dated as of August 10, 1995.  (Incorporated by
          reference to Exhibit 10.19 of the Company's Registration Statement
          on Form S-1 (No. 333-04595) filed on July 29, 1996).

    10.21 Loan Agreement by and between SouthTrust Bank of Alabama, National
          Association and the Company dated as of June 19, 1995.  (Incorporated
          by reference to Exhibit 10.20 of the  Company's Registration
          Statement on Form S-1 (No. 333-04595) filed on July 29, 1996).

    10.22 Reimbursement Agreement dated as of March 29, 1995 by and between
          Evergreen Healthcare, Inc. and the Company. (Incorporated by
          reference to Exhibit 10.21 of the Company's Registration Statement
          on Form S-1 (No. 333-04595) filed on July 29, 1996).

    10.23 Joint Venture Agreement dated as of November 15, 1995 by and between
          Days Development Company, LLC and the Company.  (Incorporated by
          reference to Exhibit 10.22 of the Company's Registration Statement
          on Form S-1 (No. 333-04595) filed on July 29,  1996).

    10.24 Acquisition Agreement dated as of September 20, 1994 by and between
          CCCI /Northampton Limited Partnership, Continuing Care Concepts, Inc.
          and the Company, as amended.  (Incorporated by reference to Exhibit
          10.23 of the Company's Registration Statement on Form S-1 (No.
          333-04595) filed on July 29, 1996).

    10.25 Construction Loan and Security Agreement between Clare Bridge of
          Montgomery and Main Line Federal Savings Bank dated as of March 8,
          1996.  (Incorporated by reference to  Exhibit 10.24 of the Company's
          Registration Statement on Form S-1 (No. 333-04595) filed on July 29,
          1996).

    10.26 Loan Agreement dated as of April 30, 1996 by and between North
          Pointe-Utica Limited Partnership and GMAC Commercial Mortgage
          Corporation.  (Incorporated by reference to Exhibit 10.25 of the
          Company's Registration Statement on Form S-1 (No. 333-04595) filed on
          July 29, 1996).



                                      45

<PAGE>   46



EXHIBIT
  NO.                                DESCRIPTION
-------                              -----------


10.27    Loan Agreement dated as of April 30, 1996 by and between
         Six Mile/Abby Limited Partnership and GMAC Commercial Mortgage
         Corporation.  (Incorporated by reference to Exhibit 10.26 of the
         Company's Registration Statement on Form S-1 (No. 333-04595) filed on
         July 29, 1996).

10.28    Lease Agreement by and between Badger II Limited Partnership and the
         Company dated as of December 19, 1994, as amended.  (Incorporated by
         reference to Exhibit 10.28 of the Company's Registration Statement on
         Form S-1 (No. 333-04595) filed on July 29,1996).

10.29    Mortgage and Security Agreement between
         CCCI/Northampton Limited Partnership and Main Line Federal Savings
         Bank dated as of June 30, 1995.  (Incorporated by reference to Exhibit
         10.29 of the Company's Registration Statement on Form S-1 (No.
         333-04595) filed on July 29, 1996).

10.30    Construction Loan and Security Agreement between Clare
         Bridge of Lower Makefield and Main Line Federal Savings Bank dated as
         of November 20, 1995.  (Incorporated by reference to Exhibit 10.27 of
         the Company's Registration Statement on Form S-1 (No. 333-04595) filed
         on July 29, 1996).

10.31    Building Loan Agreement by and between Wynwood of
         Chapel Hill, LLC and Wachovia Bank of North Carolina, N.A. dated as of
         February 29, 1996.  (Incorporated by reference to Exhibit 10.30 of the
         Company's Registration Statement on Form S-1 (No. 333-04595) filed on
         July 29, 1996).

10.32    Lease dated as of February 27, 1996 by and between George
         Gialamas and the Company.  (Incorporated by reference to Exhibit 10.31
         of the Company's Registration Statement on Form S-1 (No. 333-04595)
         filed on July 29, 1996).

10.33    Assisted Living Consultant and Management Services
         Agreement by and between Alternative Living Services and the Company
         dated as of December 14, 1993.  (Incorporated by reference to Exhibit
         10.32 of the Company's Registration Statement on Form S-1 (No.
         333-04595) filed on July 29, 1996).

10.34    Purchase and Sale Agreement dated as of December 15,
         1995 by and between Nationwide Health Properties, Inc. and New
         Crossings International Corporation.  (Incorporated by reference to
         Exhibit 10.33 of the Company's Registration Statement on Form S-1 (No.
         333-04595) filed on July 29, 1996).

10.35    Schedule of Purchase and Sale Agreements substantially
         similar to Exhibit 10.34.  (Incorporated by reference to Exhibit 10.34
         of the Company's Registration Statement on Form S-1 (No. 333-04595)
         filed on July 29, 1996).

10.36    Lease and Security Agreement by and between Nationwide
         Health Properties, Inc. and New Crossings International Corporation
         dated as of December 15, 1995 (the Atrium).  (Incorporated by
         reference to Exhibit 10.35 of the Company's Registration Statement on
         Form S-1 (No. 333-04595) filed on July 29, 1996).

10.37    Schedule of Lease and Security Agreements by and between
         Nationwide Health Properties, Inc. and New Crossings International
         Corporation substantially similar to exhibit 10.36.  (Incorporated by
         reference to Exhibit 10.36 of the Company's Registration Statement on
         Form S-1 (No. 333-04595) filed on July 29, 1996).





                                      46
<PAGE>   47



EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------

10.38    Loan Agreement dated as of October 31, 1988 by and
         between Forest Grove Residential Center Limited Partnership and Oregon
         Housing Agency, State of Oregon, together with Amendment to Loan
         Agreement for Forest Grove Residential Center dated as of August 20,
         1995 by and between Oregon Housing Agency, State of Oregon and New
         Crossings International Corporation.  (Incorporated by reference to
         Exhibit 10.37 of the Company's Registration Statement on Form S-1 (No.
         333-04595) filed on July 29, 1996).

10.39    Purchase and Sale Agreement dated as of December 15,
         1995 by and among Crossing International Corporation, New Crossings
         International Corporation, 2010 Union Limited Partnership and
         Nationwide Health Properties, Inc. (Incorporated by reference to
         Exhibit 10.38 of the Company's Registration Statement on Form S-1 (No.
         333-04595) filed on July 29, 1996).

10.40    Assumption Agreement dated as of July 23, 1990 between
         Albany Residential Center, Beaulieu-Draper Limited, the Oregon Housing
         Agency, State of Oregon and Crossings International Corporation.
         (Incorporated by reference to Exhibit 10.39 of the Company's
         Registration Statement on Form S-1 (No. 333-04595) filed on July 29,
         1996).

10.41    Oregon Housing Agency, State of Oregon, Loan Agreement dated
         as of October 31, 1988, between Forest Grove Residential Center
         Limited Partnership and the State of Oregon.  (Incorporated by
         reference to Exhibit 10.40 of the Company's Registration Statement on
         Form S-1 (No. 333-04595) filed on July 29, 1996).

10.42    Oregon Housing Agency, State of Oregon, Loan Agreement dated
         March 22, 1991, between McMinnville Residential Estates Limited
         Partnership and the State of Oregon, Oregon Housing Authority.
         (Incorporated by reference to Exhibit 10.41 of the Company's
         Registration Statement on Form S-1 (No. 333-04595) filed on July 29,
         1996).

10.43    Loan Agreement by and between Nationwide Health
         Properties, Inc. and 2010 Union Limited Partnership dated as of
         December 15, 1995, as amended.  (Incorporated by reference to Exhibit
         10.42 of the Company's Registration Statement on Form S-1 (No.
         333-04595) filed on July 29, 1996).

10.44    Sublease and Security Agreement by and between 2010
         Union Limited Partnership and New Crossings International Corporation
         dated as of December 15, 1995.  (Incorporated by reference to Exhibit
         10.43 of the Company's Registration Statement on Form S-1 (No.
         333-04595) filed on July 29, 1996).

10.45    Operating Lease dated as of January 1, 1991 by and
         between Capital Consultants, Inc. and Crossings International
         Corporation as amended.  (Incorporated by reference to Exhibit 10.44
         of the Company's Registration Statement on Form S-1 (No. 333-04595)
         filed on July 29, 1996).

10.46    Lease dated as of January 10, 1996 between Capital
         Consultants, Inc. and Crossing International Corporation.
         (Incorporated by reference to Exhibit 10.45 of the Company's
         Registration Statement on Form S-1 (No. 333-04595) filed on July 29,
         1996).

10.47    Loan Agreement dated as of June 13, 1991 as amended by and
         between Capital Consultants, Inc. and Crossings International
         Corporation.  (Incorporated by reference to Exhibit 10.46 of the
         Company's Registration Statement on Form S-1 (No. 333-04595) filed on
         July 29, 1996).




                                      47
<PAGE>   48



EXHIBIT
  NO.                                  DESCRIPTION
-------                                -----------


10.48    Real Estate Purchase and Sale Agreement by and between
         C.J. Case and R.W. Case, II and New Crossings International
         Corporation dated April 2, 1996.  (Incorporated by reference to
         Exhibit 10.47 of the Company's Registration Statement on Form S-1 (No.
         333-04595) filed on July 29, 1996).

10.49    Lease and Security Agreement by and between National Health
         Properties, Inc. and New Crossings International Corporation dated
         March 27, 1996.  (Incorporated by reference to Exhibit 10.48 of the
         Company's Registration Statement on Form S-1 (No. 333-04595) filed on
         July 29, 1996).

10.50    Lease Agreement by and between Wild West Post  No. 91 Veterans
         of Foreign Wars and 2010 Union Limited Partnership dated December 2,
         1985 and amended on April 15, 1993 and December 1995.  (Incorporated
         by reference to Exhibit 10.49 of the Company's Registration Statement
         on Form S-1 (No. 333-04595) filed on July 29, 1996).

10.51    Sublease Agreement between Franciscan Health Services
         Northwest and Crossings International Corporation dated October 1,
         1994.  (Incorporated by reference to Exhibit 10.50 of the Company's
         Registration Statement on Form S-1 (No. 333-04595) filed on July 29,
         1996).

10.52    Assumption Agreement dated August 30, 1990 by  and between
         Forest Grove Residential Center Limited Partnership, Robert Cook and
         Larry Draper, the Oregon Housing Agency and Crossings International
         Corporation.  (Incorporated by reference to Exhibit 10.51 of the
         Company's Registration Statement on Form S-1 (No. 333-04595) filed on
         July 29, 1996).

10.53    Assumption Agreement dated July 29, 1991 by and between
         McMinnville Residential Estates Limited Partnership, the Oregon
         Housing Agency and McMinnville Residential Center Limited Partnership.
         (Incorporated by reference to Exhibit 10.52 of the Company's
         Registration Statement on Form S-1 (No. 333-04595) filed on July 29,
         1996).

10.54    Assumption Agreement dated December 18, 1995 by and
         between Crossings International Corporation, New Crossings
         International Corporation, Oregon Housing Agency and National Health
         Properties, Inc. (Albany Residential).  (Incorporated by reference to
         Exhibit 10.53 of the Company's Registration Statement on Form S-1 (No.
         333-04595) filed on July 29, 1996).

10.55    Schedule of Assumption Agreements substantially
         similar to exhibit 10.54.  (Incorporated by reference to Exhibit 10.53
         of the Company's Registration Statement on Form S-1 (No. 333-04595)
         filed on July 29, 1996).

10.56    Lease Approval Agreement dated December 18, 1995 by and
         between National Health Properties, Inc., New Crossings International
         Corporation and Oregon Housing Agency (Albany Residential).
         (Incorporated by reference to Exhibit 10.55 of the Company's
         Registration Statement on Form S-1 (No. 333-04595) filed on July 29,
         1996).

10.57    Schedule of Lease Approval Agreements substantially
         similar to exhibit 10.56.  (Incorporated by reference to Exhibit 10.56
         of the Company's Registration Statement on Form S-1 (No. 333-04595)
         filed on July 29, 1996).





                                      48

<PAGE>   49



EXHIBIT
  NO.                                  DESCRIPTION
-------                                -----------


10.58    Side Letter Agreement dated December 18, 1995 by Oregon
         Housing Agency accepted and agreed to by National Health Properties,
         Inc. and New Crossings International Corporation (Albany Residential).
         (Incorporated by reference to Exhibit 10.57 of the Company's
         Registration Statement on Form S-1 (No. 333-04595) filed on July 29,
         1996).

10.59    Schedule of Side Letter Agreements substantially similar
         to exhibit 10.58.  (Incorporated by reference to Exhibit 10.58 of the
         Company's Registration Statement on Form S-1 (No. 333-04595) filed on
         July 29, 1996).

10.60    Management Agreement dated August 30, 1990 by and between
         Housing Division, State of Oregon and Crossings International
         Corporation (Albany Residential).  (Incorporated by reference to
         Exhibit 10.59 of the Company's Registration Statement on Form S-1 (No.
         333-04595) filed on July 29, 1996).

10.61    Management Agreement dated July 29, 1991 by and between
         Housing Division, State of Oregon, McMinnville Limited Partnership and
         Crossings International Corporation (McMinnville).  (Incorporated by
         reference to Exhibit 10.60 of the Company's Registration Statement on
         Form S-1 (No. 333-04595) filed on July 29, 1996).

10.62    Consent Agreement dated December 1995 by and among Legacy
         Health Systems, Crossings International Corporation and National
         Health Properties, Inc. (Incorporated by reference to Exhibit 10.61 of
         the Company's Registration Statement on Form S-1 (No. 333-04595) filed
         on July 29, 1996).

10.63    Sublease and Security Agreement by and between
         Nationwide Health Properties, Inc. and New Crossings International
         Corporation dated as of December 15, 1995. (Incorporated by reference
         to Exhibit 10.62 of the Company's Registration Statement on Form S-1
         (No. 333-04595) filed on July 29, 1996).

10.64    Employment Agreement by and between Thomas E. Komula and the
         Company dated as of July 3, 1996. (Incorporated by reference to
         Exhibit 10.63 of the Company's Registration Statement on Form S-1 (No.
         333-04595) filed on July 29, 1996).  Represents and executive
         compensation plan or arrangement.


10.65    Facility Lease dated as of December 30, 1996,  between
         Meditrust Acquisition Corporation III and ALS Leasing, Inc. ("Form of
         Facility Lease").  (Incorporated by reference to Exhibit 99.1 of the
         Company's Form 8-K dated January 14, 1997).

10.66    Schedule of Additional Facility Leases which are
         substantially similar to the Form of Facility Lease attached as
         Exhibit 10.65.  (Incorporated by reference to Exhibit 99.2 of the
         Company's Form 8-K dated January 14, 1997).

10.67    Guaranty by Alternative Living Services, Inc. to
         Meditrust Acquisition Corporation III.  (Incorporated by reference to
         Exhibit 99.3 of the Company's Form 8-K dated January 14, 1997).

10.68    Affiliated Party Subordination Agreement dated December 30,
         1996, by and among ALS  Leasing, Inc., the Company, the parties
         listed on Schedule A thereto, all other Affiliates as defined therein
         and Meditrust Acquisition Corporation III.  (Incorporated by reference
         to Exhibit 99.4 of the Company's Form 8-K dated January 14, 1997).




                                      49
<PAGE>   50



            EXHIBIT
              NO.                     DESCRIPTION
            -------                   -----------


            10.69       Agreement Regarding Related Lease Transactions dated
                        December 30, 1996, by and among ALS Leasing, Inc., the
                        Company and Meditrust Acquisition Corporation III.
                        (Incorporated by reference to Exhibit 99.5 of the
                        Company's Form 8-K dated January 14, 1997).


            11.1        Statement re: Computation of Per Share Earnings.

            21.1        Subsidiaries of the Registrant

            27.1        Financial Data Schedule (for SEC use only).



                                       50





<PAGE>   51

                                  SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Brookfield, State of Wisconsin, on the 28th day of March, 1997.

                                            ALTERNATIVE LIVING SERVICES, INC.


                                           By:   /s/ THOMAS E. KOMULA
                                    -----------------------------------------
                                     Senior Vice President, Treasurer, Chief
                                    Financial Officer and Assistant Secretary
                                          (Principal Financial Officer)

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

    Signatures                     Title                        Date
    ----------                     -----                        ----

/s/ WILLIAM F. LASKY        President, Chief               March 28, 1997
-------------------------   Executive Officer and
William F. Lasky            Director (Principal
                            Executive Officer)


/s/ THOMAS E. KOMULA        Senior Vice President,         March 28, 1997
-------------------------   Treasurer, Chief
Thomas E. Komula            Financial Officer and
                            Assistant Secretary
                            (Principal Financial
                            Officer)


/s/ MARY LOU AUSTIN         Vice President and             March 28, 1997
-------------------------   Controller (Principal
Mary Lou Austin             Accounting Officer)



/s/ WILLIAM G. PETTY, JR.   Chairman of the Board          March 28, 1997
-------------------------   and Director
William G. Petty, Jr.


/s/ RICHARD W. BOEHLKE      Vice Chairman and              March 28, 1997
-------------------------   Director
Richard W. Boehlke




/s/ GENE S. BURLESON        Director                       March 28, 1997
-------------------------
Gene E. Burleson



/s/ ROBERT HAVEMAN          Director                       March 28, 1997
-------------------------
Robert Haveman



/s/ RONALD G. KENNY         Director                       March 28, 1997
-------------------------
Ronald G. Kenny



/s/ JERRY L. TUBERGEN       Director                       March 28, 1997
-------------------------
Jerry L. Tubergen





                                      51



<PAGE>   52


SCHEDULE II.             VALUATION AND QUALIFYING ACCOUNTS
                 FOR THE THREE FISCAL YEARS ENDED DECEMBER 31, 1996
                                 (IN THOUSANDS)



<TABLE>
<CAPTION>
                                       Charges
                             Balance   to Costs    Other                Balance
                            Beginning    and     Additions              End of
                            Of Period  Expenses     (a)     Deductions  Period
                            ---------  --------  ---------  ----------  -------
  <S>                       <C>        <C>       <C>        <C>         <C>

  FISCAL YEAR ENDED:
  December 31, 1996
    Allowance for
       doubtful accounts        $15       $35        $ 9          --      $59

  FISCAL YEAR ENDED:
  December 31, 1995
    Allowance for
       doubtful accounts         15        --         --          --       15

  FISCAL YEAR ENDED:
  December 31, 1994
    Allowance for
       doubtful accounts         --        15         --          --       15
</TABLE>



(a)  Net additions as a result of acquisitions.



                                      52