<PAGE>

                            KARRINGTON HEALTH, INC.


                                PUTTING MORE

                                    LIFE

                                 IN ASSISTED

                                    LIVING

[PHOTO: Male resident with two young children.]
[PHOTO: Female resident with caregiver.]
[PHOTO: Karrington of South Hills residence.]




                               1996 ANNUAL REPORT


<PAGE>
------------------------------------------------------------------------------
     TABLE OF CONTENTS

9  Management's Discussion and                  17 Consolidated Statements
   Analysis of Financial Condition                 of Cash Flows
   and Results of Operations
                                                18 Notes to Consolidated
13 Management's Statement of                       Financial Statements
   Financial Responsibility
                                                26 Selected Consolidated
13 Report of Independent                           Financial Data
   Auditors
                                                27 Common Share Information
14 Consolidated Balance Sheets
                                                27 Shareholder Information
15 Consolidated Statements of Operations
                                                28 Directors & Officers
16 Consolidated Statements
   of Equity                                    29 Karrington Market Areas


   REVENUES
     (Thousands
     of dollars)


               [GRAPH: Karrington's 1994, 1995 and 1996 revenues.]


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

CORPORATE PROFILE


     Founded in 1989, Columbus, Ohio-based Karrington
Health, Inc. develops, owns and operates private-pay
assisted living residences for physically frail and
cognitively impaired seniors, as well as dedicated
Karrington Place residences for individuals with Alzheimer's
Disease and related disorders.
     At residences across the country, Karrington provides
high quality programs and services for seniors who need
assistance with activities of daily living, such as eating,
bathing and personal hygiene, dressing and grooming, and
walking.
     At year-end 1996, Karrington had nine residences open
and 17 under construction.  Karrington's network includes
residences owned solely by the Company and joint
ventures with a major national health care system, Catholic
Health Initiatives, a $4 billion, 61-hospital operation.
     Karrington expects to expand its residence network and
relationships with major health care systems in 1997 with
the purchase of Kensington Management Group, Inc., a multi-state
operator of assisted living Alzheimer's care residences with
ties to the Mayo Clinic.
     Plans for 1997 call for opening 19 more residences--11
Karrington-owned, 3 joint
ventures, and 5 Kensington Alzheimer's care residences.  In
1998, the Company expects to open 27 new Karrington, joint
venture, and Kensington residences--3 of which are now under
construction.  By December 1999, the goal is 89
residences--77 owned by Karrington and 12 with joint venture
partners.
     Karrington founders and principals Richard R. Slager
and Alan B. Satterwhite in 1991 entered into a partnership
with JMAC, Inc., an investment company owned by John H.
McConnell and John P. McConnell of Worthington Industries,
Inc. The objective of the partnership:  position Karrington for
aggressive growth in the rapidly expanding $15 billion
assisted living industry.
     Since opening its first residence in 1992, Karrington
has more than quadrupled its annual revenues, generating
approximately $12 million in 1996 from its network of
Karrington-operated residences and joint ventures.
     In July 1996, Karrington became a public company,
raising approximately $28.4 million from the sale of 2.4
million common shares. The Company's access to capital in
a very capital-intensive industry supports Karrington's growth
goals.
     Committed to providing a supportive
residential environment, enabling residents to age-in-place,
Company management, employees, and directors embody
Karrington'S  MISSION STATEMENT:  DEDICATED TO EXCELLENCE IN
PRESERVING AND ENHANCING PERSONAL DIGNITY, INDIVIDUALITY,
INDEPENDENCE AND QUALITY OF LIFE.


The forward-looking statements in this report are subject to
certain risks and uncertainties that could cause actual
results to differ materially from expectations.  These
include without limitation licensing, permitting,
construction delays, cost increases on new developments,
business conditions, adverse changes in general economic
conditions, meeting all closing requirements, including
licensure, and the availability of financing for these
developments.  These and other risks are set forth in the
reports filed by the Company with the Securities & Exchange
Commission.

-------------------------------------------------------------------------------
                             KARRINGTON HEALTH INC.

<PAGE>

                             1996 ANNUAL REPORT

-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS

                                                      YEAR ENDED DECEMBER 31,
                                   ----------------------------------------------------------
                                         1996                1995                  1994
                                   ----------------    ----------------      ----------------
<S>                                 <C>                 <C>                    <C>
Total revenues                         $9,596,000          $6,744,000            $5,264,000

Residences (end of year) (1):
     Open.........................              9                   5                     4
     Under construction...........             17                   5                     1
     Under contract...............             10                   8                     2

Number of units (end of year) (1)
     Open.........................            454                 272                   213
     Under construction...........          1,010                 243                    59
     Under contract...............            742                 509                   128

Occupancy rate (1)................           94.3%               96.4%                 98.9%
Resident days (1).................        111,165              86,557                58,400

---------------------------------------
(1)  Includes residences jointly-owned by the Company and CHI.  Occupancy rate includes
     residences open for more than one year at the beginning of the year presented.

------------------------------------------------------------------------------------------------------
</TABLE>


LETTER FROM THE CHAIRMAN

     The year ended December 31, 1996 was one of tremendous
growth and strategic transition for your Company, as we
successfully completed our initial public offering of 3
million shares on July 18.  Since then, Karrington has
experienced strong growth in revenues, while filling our
development and construction pipeline to meet projected
growth.
     For the full year 1996, revenues rose 42% to $9.6
million from $6.7 million in 1995.  Excluding a one-time tax
charge of $.17 per share, the 1996 net loss was $1.7
million, or $.31 per share, compared to a loss of $1.9
million, or $.45 per share in 1995.  System-wide
revenues, including jointly owned residences, increased 40%
to $12 million in 1996, from $8.6 million in 1995.  Per
share results were at break-even for the final quarter of
the year, the same period in which construction started on
11 new residences.  Our operating model and growth strategy
are supported by the positive financial results of the
entire year and the fourth quarter of 1996.
      Revenues for stabilized residences increased 4% in
1996, reflecting our ability to improve same-residence
results by capturing incremental services revenue through
our "aging-in-place" approach to assisted living.  Your
Company's philosophy of operating a higher-acuity, customer-
focused, aging-in-place model results in a longer length of
stay, with the potential for increased per-resident revenues
as health care needs increase.
     Thanks to state-of-the-art quality assurance programs,
expanded in 1996, your Company regularly receives deficiency-
free reviews from state licensing authorities, while
maintaining 95% occupancy rates in our stabilized
residences.  This--along with the above-mentioned
strategies--improved the Company's operating income margin
for stabilized residences to 35% in 1996 from 32% in 1995,
excluding depreciation and amortization.
     System revenue growth resulted from a full year of
operations for residences opened in 1995, as well as the
1996 opening of new residences in Pittsburgh,
Pennsylvania; Columbus, Ohio; and Albuquerque, New Mexico.
Operating results include costs associated with corporate
staff additions to manage Karrington's
steadily growing operating base.
     At year end, Karrington had investment-grade, short-
term securities totaling $12.3 million; $32.8 million of
long-term debt; more than $300 million in available
project financing; and shareholders' equity of $30.7
million.
     Today, your Company has 17 new Karrington assisted
living residences under construction in six  states, with 14
openings scheduled for 1997.  The Company has 14 sites
under contract and has


                               1
<PAGE>
-------------------------------------------------------------------------------
[PHOTO: Richard R. Slager, Chairman and CEO.]

identified and is negotiating the acquisition of more than 20
additional sites.  More than half of those are in existing markets,
reflecting our strategy of achieving economies of scale and improving
operating efficiencies through regionalization.
     Your Company's joint venture with Catholic Health Initiatives (CHI),
a $4 billion acute-care operator of 61 hospitals in 20 states, continues to
expand. Karrington and CHI plan a total of 12 residences in 10 markets.
Three residences are in operation, three are under construction, and two
sites are under contract.
     Our planned acquisition of Kensington Management Group, Inc. is expected
to close in April 1997. Kensington has 12 residences open or under
construction, totaling 406 beds in three states.  A specialty Alzheimer's
care company, headed by industry pioneer Jon Rappaport, Kensington will add
to Karrington's high-acuity niche, while providing your Company with a
smaller model, ideal for many new markets. We anticipate Kensington will
develop 15 new residences, or cottages, to serve more than 420 seniors over
the next three years.
     The Kensington acquisition brings us additional benefits.  Given its
established relationship with the Mayo Clinic in Rochester, Minnesota,
Kensington enhances your Company's strategic ventures with internationally
recognized acute-care health systems.  It also opens the door for potential
development opportunities to continue Alzheimer's research with the Mayo
Clinic in Florida and Arizona.
     As an extension of Karrington's services, your Company in 1996
instituted a neighborhood outreach program, providing meals, transportation
and other assisted living services to community residents who are not quite
ready to move to Karrington.  We believe this program will add to the
Company's earnings in the years ahead, through fee-for-service revenues and
market referrals.  Karrington is also in the process of implementing an adult
day care program which will expand its outreach to the community while adding
to each residences' bottom line.
     1996 also saw the introduction of Karrington Advisory Services (KAS),
the Company's newly formed consulting arm. KAS is poised to profit from
management and consulting opportunities your Company encounters as a leader
in assisted living development, construction, marketing, financing, and
operations.  Our people, development strategy, construction expertise,
operational experience and consulting know-how are respected and valued in
the industry.
     On a personal note, we welcome new associates and shareholders to the
Karrington family.  A true blending of talents, friendships, and experiences,
your Company remains committed to achieving the Karrington Mission:
          DEDICATED TO EXCELLENCE IN
          PRESERVING AND ENHANCING
          PERSONAL DIGNITY, INDIVIDUALITY
          INDEPENDENCE AND QUALITY OF LIFE
      Ours is a Mission founded on the principles of dignity, respect, love
and service.  A Mission intended to enrich the lives of our residents and
their loved ones.  A Mission rooted in the family. A Mission that values our
customers, employees and shareholders.
     We greatly appreciate your confidence in and support of the Karrington
family.

Sincerely,


/s/ RICHARD R SLAGER

RICHARD R SLAGER
Chairman and CEO

                                       2

[PHOTO: Six senior officers of Karrington Health, Inc. including Stephen Lewis,
Anthony DiBlasi, Richard R. Slager, Robin V. Holderman, Alan B. Satterwhite
and Mark N. Mace.]
-------------------------------------------------------------------------------
                             KARRINGTON HEALTH INC.

<PAGE>


                              1996 ANNUAL REPORT

        The American family is reinventing itself...
and the way it cares for its elderly.  Americans are
living longer--and have greater financial
stability--than at any time in history.


     The elderly are the nation's fastest growing population segment, with
the number of individuals age 85-plus expected to reach 4.3 million by the
turn of the century.  Adults over 65 currently number 30 million, a figure
the U.S. Census Bureau expects will double by the year 2030.

[PHOTO: Female resident with medical staff RN taking blood pressure.]

     Changing demographics, coupled with the fact that the elderly often are
incapable of independent living, have created tremendous opportunities for
Karrington Health, Inc. and the entire assisted living industry.  The Census
Bureau reports that 50% of people over age 85 need help with at least one
activity of daily living (ADL), such as eating, bathing and personal hygiene,
dressing and grooming, and walking.  Another 7 million individuals over age
65 need ADL assistance, and this number will double by 2020.
     In the past, assistance usually was provided by a female family member.
But with the percentage of women working outside the home up from 38% in 1960
to 57% today, their availability to fill the traditional caregiver role has
declined. Single parents, growing numbers of Americans living alone and our
transient society have further reduced the number of adult children able to
care for elderly parents and relatives.  Consequently, the number of seniors
living alone has more than quadrupled since 1960, growing from 7% to 30% of
the population.
     Fortunately, when living alone is no longer an option, most older
Americans can afford to move to an assisted living residence.  According to
the demographics firm Claritas, Inc., more than 53% of seniors over age 80
have incomes of $15,000 or more, with 35% reporting at least $25,000.  In
addition, the U.S. Bureau of Labor and Statistics puts the median net worth
of the age-75-and-older family at $87,000.
     The Assisted Living Federation of America (ALFA) predicts that, with the
over-85 population doubling to more than 5.6 million by the year 2010, there
could be a demand for more than 50,000 new assisted living units annually.
Couple that with the U.S. Department of Health and Human Services' estimate
that about half a million of the nation's 1.6 million nursing home residents
are viable assisted living candidates, and it is no surprise that the $15
billion assisted living industry is expected to grow to $30 billion by the
year 2000.
     Wall Street has taken notice of the rapidly expanding market for
assisted living as the number of publicly traded assisted living companies
has increased more than six-fold--from two to 13--between 1994 and year-end
1996. The challenge facing the elderly and their families, as well as
shareholders and the investment community, is to identify well-managed,
professional assisted living providers--such as Karrington--that are positioned
to survive inevitable industry consolidation and thrive in the new century.

THE KARRINGTON
ADVANTAGE:  CAPITAL,
CARE AND CREDIBILITY

   Karrington became a public company in July 1996, raising approximately
$28.4 million from the sale of 2.4 million common shares. Karrington's access
to capital in a very capital-intensive industry supports the Company's growth
goals.

                                    3

<PAGE>
[PHOTO: Male resident with residence staff member.]

                                     LIFE

In addition to having the wherewithal for on-going development and potential
acquisitions, what differentiates Karrington from other assisted living
companies--public and private--are its unique competitive advantages:

HIGH-ACUITY PRODUCTS AND SERVICES:  At the heart of Karrington are the
skilled and caring people, unique products and services, and dignified
environments that enable Karrington residents to age-in-place gracefully.
Among the high-acuity services the Company offers are Alzheimer's and related
special care programs, including dedicated Karrington Place residences,
opened in 1996.  Unique product and service offerings--designed to enhance
quality of life and respect individuality--include personalized wellness
assessment programs and restaurant-style menus.  Innovative community service
activities introduced by Karrington over the past 12 months include the
Neighbors Program and Adult Day Respite care, which are designed to relieve
caregivers, while building relationships with area seniors who may someday
need assisted living.

PROTOTYPE MANSION-STYLE RESIDENCES:  Karrington residents age-in-place in
mansion-style communities, housing 60 to 80 seniors who need assistance with
several activities of daily living, but do not require nursing home care.
Karrington offers a flexible, price-sensitive rate and service structure,
charging residents only for the care they need and the size of residential
suite and roommate options they choose.  Each residence is managed by an
administrator and four-person supervisory team, overseeing approximately 28
full-time employees.  All resident services are provided by licensed nurses
(RNs and LPNs) and trained resident assistants.  Karrington was among the
first assisted living companies to have full-time nurses on staff 24 hours,
to meet the health care needs of physically frail and cognitively impaired
residents.

STRATEGIC PARTNERSHIPS:  Karrington's development partnership with the $4
billion, 61-hospital Catholic Health Initiatives (CHI) brings Karrington the
benefits of capital, credibility, and customer referral.  Karrington's
planned acquisition of Kensington Management Group, Inc., with ties to the
world-renown Mayo Clinic, will enhance the Company's participation in
Alzheimer's research, while creating new development opportunities.
Management plans to continue expansion of relationships with nationally
respected acute health care systems to further broaden Karrington's position
as an industry leader.

DEVELOPMENT STRENGTH:  Karrington's 16-member development team has extensive
real estate acquisition, design, engineering, zoning, general construction
and project management experience.  Responsible for all development to
date--nine open Karrington residences and 17 under construction--the department
in 1996 entered into outsourcing agreements to facilitate site selection and
ease entry into new markets, including additional states and major
metropolitan areas. These developers are working with Karrington to identify
assisted living sites in California, New York, Connecticut, the Chicago area
and the Mid-South. These development partnerships, coupled with over $300
million in project financing, led by the $100 million financing package
Karrington secured from Meditrust in 1996, will assist

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

                          KARRINGTON HEALTH, INC.

                                       4
<PAGE>


                              1996 ANNUAL REPORT

the Company in meeting its development goals through 1999 and beyond.

PEOPLE:  Karrington's management team and employees embody the Company's
mission statement.  The Company has a thoroughly trained staff of 430
administrative, health, and residential care professionals--a number that is
expected to more than triple in 1997, as new residences open. Karrington's
experienced management team includes senior executives who helped pioneer the
industry's national trade association, ALFA. Management is supported by what
is arguably the strongest board of directors in the assisted living industry.
With the 1996 formation of the Karrington Advisory Services consultation and
management services division, the Company is making its expertise available
to others in the assisted living industry.

THE KARRINGTON MODEL FOR STRATEGIC GROWTH

     In 1996, Karrington opened four new residences, bringing to nine the
total number of residences the Company has open.  Two of the four residences
opened last year were part of a joint development with Catholic Health
Initiatives, one of the nation's leading health care providers.  CHI offers
tremendous benefits to Karrington, including community and industry-wide name
recognition; credibility; capital; access to prime locations; and referral of
prospective residents.

     Karrington/CHI's 1996 residences are located in Albuquerque, New Mexico,
a new market for the Company.  They include a 61-unit assisted living
residence and an adjacent 28-suite specialty Alzheimer's and cognitive
disorders residence.
     Plans for 1997 call for the opening of 19 additional residences--11
Karrington-owned, three joint ventures, and five Kensington Alzheimer's care
residences. Management's goal for year-end 1998 is to open 27 new Karrington,
joint venture, and Kensington residences, three of which are currently under
construction.  By December 31, 1999, the goal is 89 residences--77 owned by
Karrington and 12 with joint venture partners.  Projected growth in the
Karrington residence network will result in substantial increases in annual
revenues, strengthening the Company's position as an industry leader.
      Karrington takes a location-sensitive approach to
development--identifying, acquiring, and developing the best site in each
market. While competitors may build more buildings quicker, Karrington's goal
is always to out-position other assisted living providers.  The fact that
residents and their families appreciate the combination of individualized
care and quality staffing and services, coupled with the convenient
locations, quality construction, and functional beauty of Karrington homes,
is reflected in the over 90% occupancy rate consistently achieved within a
new residence's first year.
     Over the next 12 months, the Company will continue its aggressive
exploration of additional markets, with 1997 construction planned for the San
Francisco Bay region; Chicago area; Memphis, Knoxville, and Nashville,
Tennessee; Upstate New York; Connecticut; and Washington, D.C.
     To help reach its 1999 goals, the Company will apply its standard
portfolio of residence prototypes, while

[PHOTO: Female resident being helped down stairs by caregiver.]

            Karrington is dedicated to Excellence in Preserving and Enhancing
            Personal Dignity, Individuality, Independence, and Quality of Life
            for its Residents.


                                       5
<PAGE>
                                    LIVING

establishing regional relationships with architects, engineers and
contractors. The objective is to take advantage of suppliers' learned
knowledge of Karrington's unique models to construct high-quality residences
faster, reducing management time and cost, and reflecting the architecture of
each community.

AGING-IN-PLACE:
HIGH-QUALITY HEALTH CARE
PLUS HANDS-ON HOSPITALITY

     Few assisted living operators provide the comprehensive range of
care--such as Alzheimer's programs and other special care services--that
Karrington delivers. Karrington is committed to helping its residents--75% of
whom are women with an average age of 83--live the balance of their lives with
personal dignity, individuality, independence and quality of life.
     Most Karrington residents have age-related disabilities and need
assistance with three or more activities of daily living.  Unlike assisted
living operators that discharge to nursing homes high-acuity residents, such
as individuals who are  incontinent, utilize a wheelchair or walker or have
Alzheimer's Disease, Karrington has the people and services in place to
provide residents with the extra care they need as they age.  Karrington's
goal is to allow each resident to age-in-place at Karrington, ideally making
Karrington his or her final home.

[PHOTO: Female resident in wheelchair with a visitor.]

     Fifty percent of people over age 85 suffer from some stage of
Alzheimer's Disease.  Karrington has developed products to allow the Company
to care for most residents with cognitive disorders until the end of their
lives, often precluding the need for hospitalization or nursing care.
     Since its inception, Karrington has provided a residential
alternative--the Company's special care program--to care for individuals who
suffer from dementia.  In the past, these individuals would have been
institutionalized in a hospital or nursing facility.  In addition, all
employees are cross-trained and undergo in-depth, special care training to
assist them in identifying, monitoring and serving residents, beginning with
the earliest signs of dementia.
     Over the past 12 months, the Company opened two Karrington Place
assisted living residences, dedicated solely to serving the special needs of
residents with Alzheimer's Disease and related disorders.  Karrington Place
is a unique, safe, and inviting residence that looks and feels like a
hometown neighborhood, complete with cheerful common areas and secure outdoor
walking paths. Karrington Place caregivers are specially trained to assist
residents facing the challenges of communication, nutrition, wandering and
sleep. Setting a new standard for the long-term care of residents with
dementia, Karrington Place enhances dignity, promotes individuality and
encourages independence.  Additional Karrington Place residences are planned
for 1997 and beyond.
     Karrington's scope of Alzheimer's care will expand in 1997 as the
Company completes its acquisition of Kensington Management Group, Inc., a
provider of multi-state assisted living Alzheimer's care residences.  With a
letter of intent signed in November 1996, management targets April 1997 for

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

                          KARRINGTON HEALTH, INC.

                                      6
<PAGE>


                              1996 ANNUAL REPORT

completion of the transaction.  At the time of the acquisition, Kensington's
annualized revenues will approximate $10 million, and it will have 12
residences open or under construction, with 406 licensed beds in three
states.  Development is in progress for the establishment of new campus
communities in Jacksonville, Florida and Phoenix, Arizona.  Kensington
operates Alzheimer's care communities under the name Kensington Cottages, and
intends to further develop its Alzheimer's care programs using medical
directors with geriatric and dementia specialties similar to its relationship
with the Mayo Clinic in Rochester, Minnesota.
     An innovative, nonresidential program Karrington is marketing is its
Neighbors Program, started in 1996 and targeted for expansion in 1997.  The
Neighbors Program takes Karrington's personnel and programs out into the
communities in which it operates residences.  Through the Neighbors Program,
Karrington makes select services-including transportation, meal preparation
and delivery, light cleaning and laundry service, prescription and grocery
delivery, and companionship-available for a fee to elderly individuals.  The
Neighbors Program gives caregivers a needed break, and grants Karrington the
opportunity to introduce staff and services to seniors who may someday choose
assisted living.

[PHOTO: Male resident with two young children.]

     Plans for 1997 include the rollout of an Adult Day Respite program to
enable seniors to spend part of a day and/or a night at a Karrington
residence.  In addition, management over the next year will continue to
develop hospice programs--the final phase of aging-in-place.  As Karrington
and the elderly population grow, the Company will keep looking to the
community, residents and caregivers for programming needs and solutions.

KARRINGTON
PROFESSIONALS:
HEALTH CARE EXPERTISE
WITH BUSINESS SAVVY

     Karrington's ability to provide innovative assisted living products is
directly linked to the Company's skilled staff, experienced management and
strong board of directors.
     Karrington deeply values employee education.  All residence staff
undergo an extensive and innovative training program, covering all aspects of
Karrington's operation and philosophy.  Mentoring with a registered nurse--to
help staff identify and monitor residents' health care needs, including the
early stages of dementia--is followed by on-going, year-round education.
     "Karrington Kollege," established in 1996, is a week-long, intensive
training program, which is held at the home office and is mandatory for
administrators and department supervisors.  Operations are reviewed, and the
Karrington corporate philosophy toward its residents is stressed:  The
residents' needs are the Company's number-one priority.  If it benefits the
residents, no job is too small for a Karrington associate.
     Under the direction of Operations Senior Vice President John Knutson--a
former ALFA director and well-known industry expert who joined Karrington in
1996--the Company has established a comprehensive quality assurance (QA)
program to monitor and maintain established standards of care.  Karrington's
QA team works with residence management to ensure staff is trained, clinical
policies and procedures are followed, and state and federal licensing
requirements are met.
     Karrington's staff is supported by senior executives who helped pioneer
the assisted living industry. Chairman and Chief Executive Officer Richard R.
Slager is co-founder of the Company and immediate past-chairman of ALFA.
Chief Financial Officer Alan B. Satterwhite, co-founder of Karrington,
chaired the 1996 ALFA Overview Task Force Committee.  A testament to
Karrington's management strength is the Company's board of directors.
Recognized by the assisted living industry and the investment community as
probably the strongest board in the industry, the Karrington board is an
unusually influential group for a young, growing company.
     Combining health care know-how with acquisition expertise and experience
growing public companies into national industry leaders, Karrington's
11-person board of directors works with senior management to position the
Company as a leader in the burgeoning assisted living industry.
     Outside directors include John S. Christie, President of JMAC, Inc., an
investment company and principal Karrington shareholder; Dr. Bernadine P.
Healy, Dean of The Ohio State University

                                        7

<PAGE>

                                   KARRINGTON

Medical School and former director of the National Institutes of Health;
David H. Hoag, Chairman and CEO of LTV Corp.; John H. McConnell, founder and
Chairman Emeritus of Worthington Industries; Charles H. McCreary, partner of
the law firm Bricker & Eckler; James V. Pickett, Chairman of Pickett Realty
Advisors and Managing Director of the real estate investment group of Banc
One Capital Corporation; Harold A. Poling, retired Chairman of Ford;  Michael
H. Thomas,

[PHOTO: Female resident being served coffee by a caregiver.]

Executive Vice President and Treasurer of JMAC, Inc.; and Robert D. Walter,
Chairman and CEO of Cardinal Health.
     Given Karrington's talent pool and depth of management experience, it is
no surprise that organizations considering entry into the assisted living
industry look to Karrington for counsel.  In 1996, in response to growing
requests for consulting services, the Company formed the Karrington Advisory
Services division.  Located in Cleveland, Ohio, KAS is Karrington's
full-service consulting arm.  KAS' target market includes organizations, such
as hospitals, apartment developers, nursing home operators and health care
systems, seeking expertise in the assisted living industry. Management
expects KAS to experience steady growth throughout 1997 and beyond.

KARRINGTON:
Positioned For Leadership
In The Next Century

     Since opening its first residence in 1992, Karrington has more than
quadrupled its annual revenues, generating approximately $12 million in 1996
from the Company's network of Karrington-operated residences and joint
ventures.  Over the past four years, the number of residences open, under
construction, or in contract to the Company has grown from five to 36, with
residential suites increasing from 160 in 1992 to 454 at year-end 1996.
     Karrington's future growth will come from developing, opening and
operating residences in current markets, new communities and

[PHOTO: Female resident with young child.]

additional states; expanding joint venture relationships with major U.S.
health care systems; continuing to provide broad-based services that allow
high-acuity residents to age-in-place; and strategically acquiring residences
for conversion to the Karrington model.
     The Company made significant capital investments--time and money--in 1996,
building what it believes is the finest, most experienced management team and
staff in the assisted living industry.  In addition, much of the Company's
focus over the past 12 months has been on standardizing internal operations,
such as employee training, resident assessment, quality assurance and
outsourcing relationships.
     BY STREAMLINING PROCESSES, STANDARDIZING PROCEDURES AND
ENSURING QUALITY, THE COMPANY HAS SUCCEEDED IN POSITIONING
KARRINGTON AS THE ASSISTED LIVING PROVIDER OF CHOICE FOR
PHYSICALLY FRAIL AND COGNITIVELY CHALLENGED AMERICANS.

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

                          KARRINGTON HEALTH, INC.

                                       8


<PAGE>

                              1996 ANNUAL REPORT
-------------------------------------------------------------------------------

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

OVERVIEW

     The Company derives its revenues from two primary sources: (i) resident
fees for the delivery of assisted living services and (ii) development fees
and management services income for development and management of residences
in which the Company does not own a controlling interest. The Company's
revenue is derived principally from resident fees, which in 1996 comprised
93% of total revenues (92% in 1995 and 95% in 1994).  Resident fees are paid
monthly by residents, their families or other responsible parties and
historically have been derived 100% from private pay sources. Resident fees
include revenue from basic assisted living care, community fees, extended and
special needs  care, Alzheimer's care and other sources. Community fees are
one-time fees generally payable by a resident upon admission, and extended
care and Alzheimer's care fees are paid by residents who require personal
care in excess of services provided under the basic care program.
Development fees and management services income, which accounts for the
remaining percentage of revenues, consists of development fees recognized
over the development and construction period and management fees which are a
percentage of a managed residence's total operating revenues and are
recognized as services are performed.

     The Company categorizes its operating expenses as follows: (i) residence
operations, which includes labor, food, media advertising and promotion and
other direct general operating expenses; (ii) general and administrative
expenses, consisting of corporate and support functions such as marketing,
accounting and other administrative expenses; and (iii) depreciation and
amortization. In anticipation of its growth plans, the Company made
significant investments in the number of management and staff at its
headquarters in 1996 and 1995.

RESULTS OF OPERATIONS

     The following table sets forth certain data from the respective
consolidated statements of operations as a percentage of total revenues:

<TABLE>

                                                YEAR ENDED DECEMBER 31,
                                           ------------------------------------
                                             1996          1995          1994
                                           --------      --------      --------
<S>                                        <C>           <C>           <C>
Total revenues ..........................     100.0%        100.0%        100.0%
Expenses:
Residence operations ....................      68.5          65.0          65.6
General and administrative ..............      28.9          25.3          12.0
Depreciation and amortization ...........      14.4          14.5          16.1
Write-off of intangible asset ...........         -           7.3             -
                                           --------      --------      --------
Total expenses ..........................     111.8         112.1          93.7
                                           --------      --------      --------
Operating income (loss) .................     (11.8)%       (12.1)%         6.3%
                                           ========      ========      ========
Resident days (2) .......................    87,974        67,256        57,213
Average occupancy percentage (1) ........      93.4%         96.4%         98.9%
End of year (2):
Number of residences open ...............         6             4             3
Number of units .........................       312           219           160

</TABLE>

(1) Average occupancy percentage represents the average occupancy of the
    Company-owned residences open for one year or more at the beginning of the
    year presented.

(2) Excludes residences jointly-owned by the Company and CHI accounted for by
    the equity method.

                                       9

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

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

YEAR ENDED DECEMBER 31, 1996
COMPARED TO YEAR ENDED
DECEMBER 31, 1995

     Total revenue increased $2.9 million, or 42.3%, to $9.6 million in 1996
from $6.7 million in 1995, primarily due to the growth in resident revenues.
Resident revenues increased $2.7 million, or 43.9%, primarily due to the
opening of two new residences during 1996 and a full year of operations for
1995 residence openings (total of $2.4 million) and to the increase in the
average daily resident rate. The average daily resident rate increased 7.1%
to $93.05 in 1996 compared to $86.90 in 1995, primarily due to an increase in
the average daily basic care rate of $7.12.

     Development and project management fees increased $118,000, or 22.6%, to
$643,000 in 1996 from $524,000 in 1995, primarily due to development and
management fees associated with the increased number of projects open or in
development under the relationship with CHI.

     Residence operations expenses increased $2.2 million, or 50.1%, to $6.6
million in 1996 from $4.4 million in 1995. As a percentage of total
revenues, residence operations expenses increased from 65.0% in 1995 to 68.5%
in 1996. This increase is primarily attributable to the opening of a new
residence in October 1995 and two residences in 1996, as operations expenses
are historically higher as a percent of total revenues during the first year
of operation of a residence. Excluding these three residences, operations
expenses were 60.7% of total revenues in 1996 compared to 63.2% in 1995.

     General and administrative expenses increased $1.1 million, or 62.7%, to
$2.8 million in 1996 from $1.7 million in 1995, primarily due to increased
compensation, payroll taxes and related benefits of $800,000 as a result of
hiring additional management and staff at the Company's headquarters in
anticipation of the Company's growth plans and the addition of a
manager-in-training program initiated in the Spring of 1995. The Company
expects the rate of increase in its general and administrative expenses will
decrease as new personnel needs have been reduced by recent hires. In
addition, the Company expects its general and administrative expenses will
decrease as a percentage of its total operating revenues due to anticipated
economies of scale resulting from the Company's development program.

     Depreciation and amortization increased $399,000, or 40.7%, to $1.4
million in 1996 from $1.0 million in 1995, primarily due to the opening of
two new residences in 1996 and a full year of operations for 1995 residence
openings.

     Interest expense increased $249,000, or 24.4%, to $1.3 million in 1996
from $1.0 million in 1995, primarily due to the opening of two new
residences in 1996 and a full year of operations for 1995 residence openings.

     Interest income resulted primarily from the investment of the Company's
net proceeds from its initial public offering in July 1996.

     The increase in deferred income taxes resulted primarily from the
Company's reorganization in July 1996. A deferred tax provision of $938,000
was recorded for the differences in the basis for tax purposes and for
financial accounting purposes of recorded assets and liabilities as of July
18, 1996. This provision was offset by a $255,000 benefit recorded for the
financial reporting loss for the period from July 18, 1996 to December 31,
1996.

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

     Total revenue increased $1.5 million, or 28.1%, to $6.7 million in 1995
from $5.3 million in 1994 primarily due to the growth in resident revenues.
Resident revenues increased $1.2 million, or 25.0%, primarily due to the
increase in resident revenues of $531,000 from the residence which opened in
late December 1993, an increase of $433,000 resulting from higher average
daily resident rates and the opening of a residence in late October 1995. The
average daily resident rate increased 9.5%, to $86.90, in 1995 from $79.33 in
1994, primarily due to an increase in the average daily basic care rate of
$5.32.

     Development and project management fees increased $237,000, or 82.3%, to
$524,000 in 1995 from $287,000 in 1994, primarily due to the increased number
of projects in development under the relationship with CHI.

     Residence operations expenses increased $926,000, or 26.8%, to $4.4
million in 1995 from $3.5 million in 1994, primarily due to a 17.6% increase
in resident days and the Company's adoption of the provisions of AICPA SOP
93-7, the effect of which was an increase in marketing

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

                          KARRINGTON HEALTH, INC.

                                      10



<PAGE>

                               1996 ANNUAL REPORT

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

expenses of $199,000. As a percentage of total revenues, residence operations
expenses decreased from 65.6% in 1994 to 62.0% in 1995 (excluding the effects
of AICPA SOP 93-7). This decrease is primarily attributable to the second
full year of operations at a residence where the average occupancy percentage
increased to 93.7% in 1995 from 63.2% in 1994.

     General and administrative expenses increased $1.1 million, or 169%, to
$1.7 million in 1995 from $634,000 in 1994, primarily due to increased
compensation, payroll taxes and related benefits of $714,000 as a result of
hiring additional management and staff at the Company's headquarters (from 20
at the end of 1994 to 40 at the end of 1995) in anticipation of the Company's
growth plans, including the addition of a manager-in-training program in the
Spring of 1995, increased incentive compensation and compensation increases
for existing staff and management.

     Depreciation and amortization increased $136,000, or 16.0%, to $980,000
in 1995 from $844,000 in 1994 primarily due to a change in estimate relating
to pre-opening costs ($92,000), the opening of a new residence ($48,000), and
the Company's move to its new headquarters in July 1995. These increases were
offset by a decrease of $70,000 as a result of the adoption of AICPA SOP 93-7
described above.

     See Note 3 to Consolidated Financial Statements for discussion on the
write-off of the intangible asset.

     Interest expense decreased $328,000, or 24.2%, to $1.0 million in 1995
from $1.4 million in 1994, primarily due to the subordinated debentures
converted to equity effective January 1, 1995.

LIQUIDITY AND CAPITAL RESOURCES

     The Company financed its initial growth through a combination of
mortgage financing, subordinated borrowings from JMAC, Inc. (JMAC) and its
affiliates and equity contributions. The Company's mortgage and construction
mortgage financings provide for principal repayments in the next three to 14
years, bear interest at various rates (ranging from 8.25% to 10.25% at
December 31, 1996), and are secured by substantially all of the assets of the
Company. The Company expects to refinance such amounts as they mature. In
addition, one of the Company's residences is financed with a residential
rental development revenue bond which provides for annual principal
repayments beginning in 1998 through 2021 and bears interest at a fluctuating
weekly rate (4.4% at December 31, 1996).

     The Company has entered into non-binding financing commitment letters
with Meditrust Mortgage Investments, Inc. ("MMI"), an affiliate of Meditrust
(a large health care REIT). Under the letters, MMI is to provide up to
approximately $100 million in financing for one existing and approximately 13
new residences, subject to various terms and conditions. The financings,
which may be mortgage or lease financings, are to be entered into on a
residence-by-residence basis, and are to be for terms of up to 14 years (with
two additional five-year extension periods for the lease transactions).
Interest during construction is to float at 2% above the prime rate. On
completion of each residence, payments are to be set at an amount equal to
3.25% over the yield at that time on the ten-year U.S. Treasury notes.
Additional interest or lease payments are contingent on increased revenues of
a financed residence during specified periods.  To date, the Company has
completed mortgage agreements for one existing and three new residences
totalling $22 million.

     In December 1995, the Company entered into a loan agreement with JMAC
pursuant to which JMAC agreed to provide up to $8.0 million in loans to the
Company.  Interest on the borrowings accrued at 15% per annum.  The total
amount outstanding of $5,710,000, including accrued interest, was repaid in
July 1996 with proceeds from the public offering at which time the agreement
was terminated.

     Effective January 1, 1995, the partners of Karrington Operating Company
entered into a recapitalization agreement pursuant to which subordinated
debentures and accrued interest totaling $5.3 million were converted to
equity. In addition, JMAC Properties, Inc. invested $5.0 million in equity
during 1995.

     At December 31, 1996, the Company had $33.0 million of outstanding debt
(at a weighted average interest rate of 8.9%).  At that date, the Company had
equity of $30.7 million, which resulted from inception-to-date net capital
contributions of $37.6 million (including $27.5 million in net proceeds from
the July 1996 public

                                      11
<PAGE>
-------------------------------------------------------------------------------

offering) and net operating losses of $6.9 million. Working capital at
December 31, 1996 was $7.8 million.

     During the years ended December 31, 1996, 1995 and 1994, the Company
used $28.8 million, $10.7 million and $2.1 million, respectively, in cash to
acquire property and equipment and other assets, and received $41.1 million,
$10.9 million and $1.5 million, respectively, in cash from financing
activities.

     In 1997 through 1999, the Company plans to open or acquire approximately
71 new Company-owned residences and 9 jointly-owned residences bringing the
total number of residences to 89.  To date, the Company has 17 of the 71
residences open or under construction and is expected to acquire 12
residences in April 1997.  The Company has 14 additional sites under
contract. The Company has been, and will continue to be, dependent on
third-party financing for its acquisition and development program.

     The Company estimates that newly developed residences will generally
range in cost from $6.0 to $7.5 million, with the development cycle taking up
to 24 months from site identification to residence opening. There can be no
assurance that financing for the Company's acquisition and development
program will be available to the Company on acceptable terms, if at all.
Moreover, to the extent the Company acquires properties that do not generate
positive cash flow, the Company may be required to seek additional capital
for working capital and liquidity purposes. Residences typically reach a
stable level of occupancy of over 90% within 12 months and generate
break-even cash flows, after debt service, within approximately seven months.

     In February and March 1997, the Company entered into one year revolving
credit agreements totaling $8,000,000.  Interest is payable monthly and
accrues at either the bank's prime rate, the bank's eurodollar rate or LIBOR
plus 2% if certain financial ratios are met.

     The net proceeds from the Company's initial public offering, together
with existing financing commitments and additional financing the Company
anticipates will be available, will be sufficient to fund its development and
acquisition programs for at least the next 12 months. Additional financing
will be required to complete the Company's growth plans through 1999 and to
refinance certain existing indebtedness.

PENDING BUSINESS ACQUISITION

     The Company's acquisition of Kensington Management Group, Inc.
(Kensington) is scheduled to be completed in April 1997.  At the time of
acquisition, Kensington will have open or under construction 12 residences
with 406 licensed beds in three states. Unaudited revenues in 1996 were
approximately $6,500,000. Kensington operates Alzheimer's care communities
under the name Kensington Cottages. The purchase price is expected to
approximate $28 million. The Company will issue approximately 130,000 common
shares, assume debt of approximately $1.7 million, incur new debt of
approximately $21.7 million and make cash payments of approximately $3.1
million. The Company has entered into a non-binding financing commitment with
a lender for the $21.7 million of new debt plus an amount for four new
cottages to build out a campus setting in Rochester, Minnesota.

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

                          KARRINGTON HEALTH, INC.

                                      12



<PAGE>

                              1996 ANNUAL REPORT

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

MANAGEMENT'S STATEMENT OF
FINANCIAL RESPONSIBILITY

     The management of Karrington Health, Inc. is responsible for the
preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles appropriate in the
circumstances. Management is also responsible for the determination of
estimates and judgments used in the financial statements, and the preparation
of other financial information included in this annual report to
shareholders. The financial statements have been audited by independent
auditors.

     The management of the Company has established and maintains an
accounting system and related internal controls that it believes are
sufficient to provide reasonable assurance that assets are safeguarded
against unauthorized acquisition, use or disposition, that transactions are
executed and recorded in accordance with management's authorization and that
the financial records are reliable for preparing financial statements.  The
concept of reasonable assurance is based on the recognition that the cost of
a system of internal control must be related to the benefits derived and that
the balancing of the factors requires estimates and judgments.  Management
considers the recommendations of the independent certified public accountants
concerning the Company's system of internal control and takes appropriate
actions which are cost effective in the circumstances.

     The Board of Directors has an Audit Committee of Directors who are not
members of management. The Audit Committee meets periodically with the
Company's management and independent certified public accountants to review
matters relating to financial reporting, auditing and internal control. To
ensure auditor independence, the independent certified public accountants
have full and free access to the Audit Committee.


/s/ Richard R. Slager      /s/Alan B. Satterwhite          /s/ Mark N. Mace


Richard R. Slager         Alan B. Satterwhite            Mark N. Mace
Chairman and Chief        Chief Financial Officer        Senior Vice President,
Executive Officer         and Chief Operating Officer    Finance and Treasurer

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

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of Karrington Health, Inc.

     We have audited the accompanying consolidated balance sheets of
Karrington Health, Inc. and its subsidiaries (the "Company"), formerly
Karrington Operating Company (a partnership), as of December 31, 1996 and
1995, and the related consolidated statements of operations, equity, and cash
flows for the years then ended.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to express
an opinion on these financial statements based on our audits.  The financial
statements of Karrington Operating Company for the year ended December 31,
1994, were audited by other auditors whose report dated January 24, 1995,
expressed an unqualified opinion on those statements.

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

     In our opinion, the 1996 and 1995 consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Karrington Health, Inc. and its subsidiaries as of December 31,
1996 and 1995, and the results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles.


                                                        /s/ Ernst & Young LLP


Columbus, Ohio
February 14, 1997


                                      13

<PAGE>
-------------------------------------------------------------------------------
                                       KARRINGTON HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS
                                                            DECEMBER 31,
                                                    --------------------------
                                                       1996            1995
                                                    -----------    -----------
Current assets:
     Cash and cash equivalents ..................   $12,283,185    $   144,833
     Accounts receivable.........................       105,315        243,914
     Amounts due from affiliates.................       678,893        523,278
     Prepaid expenses............................       170,254         98,821
                                                    -----------    -----------
           Total current assets..................    13,237,647      1,010,846
Property and equipment - net (Note 2)............    52,011,748     24,879,363
Other assets - net (Note 3)......................     4,300,546        786,233
                                                    -----------    -----------
           Total assets..........................   $69,549,941    $26,676,442
                                                    -----------    -----------
                                                    -----------    -----------

LIABILITIES AND EQUITY

Current liabilities:
     Accounts payable and accrued liabilities....   $   788,981    $   614,713
     Construction payables.......................     3,181,560        810,334
     Payroll and related taxes...................       735,337        410,590
     Unearned resident fees......................       325,111        414,821
     Interest payable............................       158,103        129,699
     Current portion of long-term obligations....       242,211        205,485
                                                    -----------    -----------
           Total current liabilities.............     5,431,303      2,585,642
Long-term obligations (Notes 5 and 6)............    32,758,692     18,249,893
Deferred income taxes............................       683,000              -
Equity (Note 9):
     Common shares, without par value............    31,984,712              -
     Accumulated deficit.........................    (1,307,766)             -
     Partners' equity............................             -      5,840,907
                                                    -----------    -----------
     Total equity................................    30,676,946      5,840,907
                                                    -----------    -----------
     Total liabilities and equity................   $69,549,941    $26,676,442
                                                    -----------    -----------
                                                    -----------    -----------
See accompanying notes.

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

                          KARRINGTON HEALTH, INC.

                                     14

<PAGE>
-------------------------------------------------------------------------------
                                       KARRINGTON HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS
OF OPERATIONS

                                                YEAR ENDED DECEMBER 31,
                                        ---------------------------------------
                                            1996          1995         1994
                                        -----------   -----------   -----------
Revenues:
     Residence operations.............. $ 8,952,759   $ 6,219,465   $ 4,976,787
     Development and project
          management fees..............     642,803       524,391       287,683
                                        -----------   -----------   -----------
            Total revenues.............   9,595,562     6,743,856     5,264,470

Expenses:
Residence operations...................   6,574,958     4,380,312     3,453,690
General and administrative.............   2,772,727     1,704,694       634,016
Depreciation and amortization..........   1,379,060       979,797       844,420
Write-off of intangible asset (Note 3).           -       492,288             -
                                        -----------   -----------   -----------
            Total expenses.............  10,726,745     7,557,091     4,932,126
                                        -----------   -----------   -----------
Operating income (loss)................  (1,131,183)     (813,235)      332,344

Interest expense.......................  (1,271,561)   (1,022,516)   (1,349,827)
Interest income........................     470,065             -             -
Equity in net loss of unconsolidated
     entities (Note 7).................      (7,157)     (105,529)      (17,470)
                                        -----------   -----------   -----------
Loss before income taxes...............  (1,939,836)   (1,941,280)   (1,034,953)
Deferred income taxes..................    (683,000)            -             -
                                        -----------   -----------   -----------
Net loss............................... $(2,622,836)  $(1,941,280)  $(1,034,953)
                                        -----------   -----------   -----------
                                        -----------   -----------   -----------
Proforma (Note 2):
     Net loss per common share......... $      (.48)  $      (.45)
     Weighted average number of
          common shares outstanding....   5,415,800     4,350,000

See accompanying notes.


                                    15


<PAGE>
-------------------------------------------------------------------------------
                                       KARRINGTON HEALTH, INC. AND SUBSIDIARIES

Consolidated Statements
of Equity

<TABLE>
<CAPTION>

                                     COMMON SHARES
                                  ------------------
                                                      ACCUMULATED      PARTNERS'
                                    SHARES    AMOUNT    DEFICIT          EQUITY         TOTAL
                                   -------   -------  -----------       --------       --------
<S>                                <C>        <C>        <C>           <C>              <C>
BALANCE AT DECEMBER 31, 1993.....                                      $  (728,318)     $  (728,318)
     NET LOSS....................                                       (1,034,953)      (1,034,953)
                                                                        -----------      -----------
BALANCE AT DECEMBER 31, 1994.....                                       (1,763,271)      (1,763,271)
     CONVERSION OF LONG-TERM
          OBLIGATIONS AND
          ACCRUED INTEREST TO
          PARTNERS EQUITY........                                        5,330,458        5,330,458
     CASH CAPITAL CONTRIBUTIONS..                                        5,000,000        5,000,000
     CAPITAL DISTRIBUTIONS.......                                         (785,000)        (785,000)
     NET LOSS....................                                       (1,941,280)      (1,941,280)
                                                                        -----------      -----------
BALANCE AT DECEMBER 31, 1995.....                                        5,840,907        5,840,907
     NET LOSS....................                        $(1,307,766)   (1,315,070)      (2,622,836)
     REORGANIZATION
           TRANSACTION (NOTE 9)..  4,350,000  $4,525,837                (4,525,837)               -
     NET PROCEEDS FROM
     PUBLIC OFFERING.............  2,350,000  27,458,875                          -      27,458,875
                                   ---------  ---------- ------------   -----------     -----------
BALANCE AT DECEMBER 31, 1996.....  6,700,000 $31,984,712 $(1,307,766)  $       - 0 -    $30,676,946
                                   ---------  ---------- ------------   -----------     -----------
                                   ---------  ---------- ------------   -----------     -----------
</TABLE>

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

                                 KARRINGTON HEALTH, INC.

                                       16
<PAGE>

<TABLE>
<CAPTION>
                                   1996 ANNUAL REPORT

--------------------------------------------------------------------------------
                                         KARRINGTON HEALTH, INC.AND SUBSIDIARIES

CONSOLIDATED STATEMENTS
OF CASH FLOWS


                                              YEAR ENDED DECEMBER 31,
                                      ------------------------------------------
                                         1996              1995            1994
                                      ------------    -------------  --------------
<S>                                    <C>            <C>               <C>
OPERATING ACTIVITIES
Net loss.............................  $(2,622,836)   $ (1,941,280)     $ (1,034,953)
Adjustments to reconcile net loss to
     net cash provided by (used in)
     operating activities:
     Write-off of intangible assets..            -         587,288                 -
     Depreciation and amortization...    1,379,060         979,797           844,420
     Deferred income taxes...........      683,000               -                 -
     Loss on disposal of assets......       10,060           6,938                 -
     Straight-line rent expense......       16,563          12,520            19,520
     Equity in net loss of
       unconsolidated entities.......        7,157         105,529            17,470
     Change in operating assets
       and liabilities:
            Accounts receivable......      (17,016)       (659,317)          (50,777)
            Prepaid expenses.........      (71,433)         22,197           (36,081)
            Accounts payable and
            accrued liabilities......      174,268         198,573            66,752
            Other liabilities              263,441         451,231           522,018
                                      ------------    -------------  ---------------
     Net cash provided by (used in)
        operating activities.........     (177,736)       (236,524)          348,369
INVESTING ACTIVITIES
Increase in escrow balances..........   (1,146,004)       (239,000)
Purchases of property and equipment..  (25,670,838)    (10,023,395)       (2,043,109)
Equity contributions to
  unconsolidated entities............   (1,347,753)              -                 -
Distributions from unconsolidated
  entity.............................      339,767               -                 -
Proceeds from sale of assets.........      101,202               -                 -
Payments of pre-opening costs........     (639,908)       (314,592)          (27,881)
Payments for organization costs and
  other..............................      (96,571)        (50,320)           16,923
                                      ------------    -------------  ---------------
     Net cash used in investing
             activities..............  (28,460,105)    (10,627,307)       (2,054,067)
FINANCING ACTIVITIES
Net proceeds from public offering....   27,458,875               -                 -
Proceeds from mortgages..............   21,727,827      14,324,119         4,468,654
Repayment of mortgages...............   (7,165,025)     (7,491,258)       (3,813,759)
Proceeds from debentures due partner.    5,501,535          40,855         1,051,000
Repayment of debentures due partner..   (5,535,375)              -                 -
Payments of financing fees...........   (1,211,644)       (217,114)         (158,180)
Proceeds from partners
   capital contribution..............            -       5,000,000                -
Payment of partner distributions.....            -        (785,000)
                                      ------------    -------------  ---------------
     Net cash provided by financing
             activities                 40,776,193      10,871,602         1,547,715
                                      ------------    -------------  ---------------
Increase (decrease) in cash and
     cash equivalents................   12,138,352           7,771          (157,983)
Cash and cash equivalents at
     beginning of year...............      144,833         137,062           295,045
                                      ------------    -------------  ---------------
Cash and cash equivalents at end of
                  year...............  $12,283,185    $    144,833      $    137,062
                                      ------------    -------------  ---------------
                                      ------------    -------------  ---------------
Supplemental disclosure of cash flow
  information
Cash paid for interest...............  $ 2,280,810    $  1,399,347      $    981,412

See accompanying notes.

</TABLE>

                                       17
<PAGE>
-----------------------------------------------------------------------------

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994

1.  DESCRIPTION OF THE BUSINESS
    Karrington Health, Inc. was incorporated in April 1996 to become the
parent of Karrington Operating Company (Karrington Operating) upon the
consummation of the reorganization transactions which occurred immediately
prior to July 18, 1996 (see Note 9). Hereinafter, all references to the
"Company" encompass Karrington Operating and Karrington Health, Inc.
Karrington Operating is an Ohio General Partnership founded in 1991 by
DevelopMed Associates, Inc. (Associates) and JMAC Properties, Inc., a private
investment company, the principal shareholder of which is JMAC, Inc. (JMAC).
The trade name "Karrington Communities," a Registered Trademark, is the
operating name of all residences owned and operated by the Company.

    The Company is a developer, owner and operator of licensed, assisted
living residences which provides quality, professional, personal and
health-care services, including an emphasis on Alzheimer's care, for
individuals needing assistance with activities of daily living. These
activities include bathing, dressing, meal preparation, housekeeping, taking
medications, transportation and other activities that, because of the
resident's condition, are difficult for residents to accomplish in an
independent living setting. The Company offers its customers a dignified,
residential environment focused on quality of life. The Company also provides
development, support and management services to health-care providers in the
long-term care industry. As of December 31, 1996, the Company, including
joint ventures, had residences open in Ohio, Pennsylvania and New Mexico and
residences under construction in Ohio, Indiana, Michigan, Pennsylvania,
Colorado and North Carolina.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION
    The consolidated financial statements reflect the operations and development
activities of the Company and its wholly-owned subsidiaries.  Significant
intercompany transactions and accounts are eliminated in consolidation.

USE OF ESTIMATES
    The preparation of the consolidated 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, disclosures of contingent assets and liabilities and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from the estimates.

INVESTMENT IN UNCONSOLIDATED ENTITIES
    The Company uses the equity method of accounting for its investments in
Karrington of Oakwood, LLC, a 50%-owned joint venture, Karrington of
Albuquerque, LLC, Karrington of Englewood, LLC, and Karrington of Colorado
Springs, LLC, 19.9%-owned joint ventures, and Karrington of Kenwood, LLC, a
35%-owned joint venture (see Note 7).

REVENUE RECOGNITION
    The Company recognizes assisted living service fee revenue in the period
in which it is earned. Payments received in advance are reflected as unearned
resident fees in the accompanying consolidated financial statements.
Community fees are payments received from residents at move in and may be
refundable ratably over three months from the date of admission if the
resident moves out. Community fees are recognized as revenue when received
less an estimate of the amount that may be refunded. The Company performs
development and project management consulting services for others in the
assisted living industry and recognizes these fees as the services are
provided.

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

                                 KARRINGTON HEALTH, INC.

                                      18
<PAGE>

                               1996 ANNUAL REPORT

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

CASH EQUIVALENTS
    The Company considers all liquid investments purchased with a maturity
of three months or less to be cash equivalents.  At December 31, 1996, the
Company's cash and cash equivalents are invested primarily in AAA rated
insured auction securities, the largest single issue of which is $3 million.
The carrying value of cash equivalents approximates their fair value.

PROPERTY
    Property and equipment are recorded at cost. In connection with the
development of residence projects, the Company has entered into land purchase
contracts, agreements with architects, financing agreements and construction
contracts which are administered by the Company. All costs related to the
development of residences are capitalized during the construction period.
Indirect project development and pre-acquisition costs are also allocated to
projects and capitalized. Depreciation, which includes amortization of
capital leases, is computed when assets are placed in service, using the
straight-line method over the respective useful lives of each class of asset
which generally are as follows:

Land improvements ..................      15 years
Buildings ..........................     40 years
Furnishings and equipment .......... 3 - 10 years

Property and equipment consists of the following:

                                                       DECEMBER 31,
                                              --------------------------------
                                                  1996               1995
                                              ------------       -------------

Land and land improvements ..............     $  2,927,878       $   2,913,731
Buildings ...............................       23,242,775          15,277,629
Furnishings and equipment ...............        3,862,650           2,902,584
Construction-in-progress ................       24,147,397           5,100,340
                                              -------------      -------------
    Total ...............................       54,180,700          26,194,284
Accumulated depreciation
  and amortization ......................       (2,168,952)         (1,314,921)
                                              --------------     -------------
Property and equipment - net                  $ 52,011,748       $  24,879,363
                                              --------------     -------------
                                              --------------     -------------

PRE-OPENING COSTS
    Pre-opening costs include costs to hire and train staff, costs to prepare
the residence for operation and other related costs incurred prior to
opening. Prior to 1995, costs incurred in connection with preparing the
residence for opening and initial occupancy were capitalized and amortized
over three years, commencing with the opening of the residence. In the first
quarter of 1995, the Company changed the amortization period for pre-opening
costs from three years to one to be more consistent with prevailing industry
practice. The effect of this change was to increase amortization expense by
$92,000 in 1995.

DEFERRED FINANCING COSTS
    Financing costs are capitalized and amortized using the interest method
over the term of the related financing.

ORGANIZATION COSTS
    Organization costs are amortized using the straight-line method over five
years.

ADVERTISING EXPENSE
    Prior to 1995, the Company capitalized advertising expenditures as part
of pre-opening costs. In the first quarter of 1995, the Company adopted the
provisions of AICPA SOP 93-7, "Reporting on Advertising Costs," expensing
advertising expenditures as incurred. The effect of this change was to
increase the net loss by $129,000 for 1995. Advertising expenditures were
approximately $424,000, $276,000 and $250,000 for 1996, 1995 and 1994,
respectively. Of these amounts, $16,000 was capitalized in 1994.

INCOME TAXES
    Partnership taxable income and losses were allocated to the partners for
inclusion in their respective income tax returns. Accordingly, no provision
or benefit for income taxes was recorded prior to July 18, 1996 (see Note 8).

PROFORMA NET LOSS PER COMMON SHARE
    Proforma net loss per common share is computed based on the weighted
average number of shares outstanding during the period based on 4,350,000
common shares outstanding following the reorganization (described in Note 9)
and the 2,350,000 common shares issued as a result of the Company's initial
public offering in July 1996.


                                      19
<PAGE>
-------------------------------------------------------------------------------

3.  OTHER ASSETS
    Other assets consist of the following:
                                                        DECEMBER 31,
                                               ------------------------------
                                                   1996              1995
                                               ----------          ----------
Pre-opening costs, less accumulated
  amortization of $180,663 and
  $47,475 at December 31, 1996
  and 1995, respectively.................      $  497,298          $  291,770
Deferred financing costs, less
  accumulated amortization of
  $114,845 and $46,098  at
  December 31, 1996 and 1995,
  respectively..........................        1,430,096             329,199
Organization costs and
  other, less accumulated
  amortization of $169,236 and
  $125,925 at December 31, 1996
  and 1995, respectively...............            46,509              48,264
Escrow balances (see Note 6)...........         1,385,004             239,000
Equity (deficiency) in
 unconsolidated entities
 (see Note 7)..........................           852,503            (122,000)
Deposits and other.....................            89,136                   -
                                               ----------          ----------
                                               $4,300,546          $  786,233
                                               ----------          ----------
                                               ----------          ----------

    In the fourth quarter of 1995 a charge of $492,288 was recorded to
write-off an intangible asset referred to as the Karrington Concept as it was
determined the asset had no future benefit. The Karrington Concept
represented an amount allocated to an intangible asset contributed to the
Company in connection with its organization by Associates. The intangible
asset was being amortized using the straight-line method over a period from
the commencement of construction of each residence to December 2001, with the
intent that the total Karrington Concept cost would be amortized over a
period not to exceed ten years.

4.  CONSULTING AGREEMENT
    The Company had a consulting agreement with a limited partner that
provided for fees based on a percentage of revenues. Under the agreement, the
Company paid $141,000 and $100,000 in such fees in 1995 and 1994,
respectively. In 1995, the Company elected to terminate the agreement
effective March 1996 and a $50,000 termination fee was accrued at December
31, 1995. Effective March 1996, the Company exercised, for the account of
JMAC Properties, Inc., a $45,000 buyout option of the limited partner, which
amount was accrued in accounts payable as a capital distribution at December
31, 1995.

5.  LEASE COMMITMENTS
    Three of the Company's properties are on leased land. The initial lease
terms extend to 2026 and include additional renewal periods up to 50 years.
The Company is responsible for the payment of real estate taxes, site
maintenance and access road maintenance. Future minimum lease payments under
noncancellable operating leases, which primarily relate to the land leases,
are as follows:

1997 ................................................. $   337,157
1998 .................................................     306,904
1999 .................................................     287,301
2000 .................................................     277,825
2001 .................................................     247,466
THEREAFTER ...........................................   8,270,619
                                                       -----------
TOTAL ................................................ $ 9,727,272
                                                       -----------
                                                       -----------

     Total rental expense incurred was $221,000, $104,000 and $93,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.  Of these
amounts, $8,000, $20,000 and $23,000 were capitalized to
construction-in-progress and pre-opening costs in the respective years.

--------------------------------------------------------------------------------
                                 KARRINGTON HEALTH, INC.
                                        20
<PAGE>

                                  1996 ANNUAL REPORT
-------------------------------------------------------------------------------

6. LONG-TERM OBLIGATIONS

Long-term obligations consist of the following:
<TABLE>
<CAPTION>

                                                                                 DECEMBER 31,
                                                                        ------------------------------
                                                                           1996               1995
                                                                        -----------        -----------
<S>                                                                     <C>                <C>
$475,000 mortgage due in monthly principal installments of
  $1,979 plus interest at prime plus .75% (9.0% at
  December 31, 1996). Balance due in 2001.............................. $   435,418        $   457,187
$4,000,000 mortgage due in  monthly principal and  interest
  installments of $33,412 with interest at LIBOR plus 3.73%
  adjusted semi-annually (9.42% at December 31, 1996).
  Balance due in 2001..................................................   3,947,115          3,974,283
$9,400,000 of mortgages due in monthly principal and
  interest installments of $79,128. Interest is accrued
  at 8.9% to 9.1%. Balances are due in 2000............................   9,260,656          9,371,396
$4,724,867 mortgage due in monthly principal and  interest
  installments of $42,636. Interest accrues at 9.91%.
  Balance due in 2006..................................................   4,717,605                 --
$5,800,000 residential rental development revenue bonds due
  in annual principal payments ranging from $100,000 to
  $300,000 beginning in 1998 through 2021. Interest is
  determined weekly (4.4% at  December 31,1996)........................   5,800,000                 --
$19,835,145 construction mortgages. Interest is payable
  monthly at prime to prime plus 2% (8.25% to 10.25%
  at December 31, 1996). Principal converts to term
  loans in 1997........................................................   8,751,835                 --
1995 construction mortgages refinanced in 1996.........................          --          4,449,122
Other long-term obligations............................................      88,274            203,390
                                                                        -----------        -----------
Total long-term obligations............................................  33,000,903         18,455,378
Less current portion...................................................    (242,211)          (205,485)
                                                                        -----------        -----------
Long-term obligations, less current portion............................ $32,758,692        $18,249,893
                                                                        -----------        -----------
                                                                        -----------        -----------
</TABLE>


     The mortgage loans are collateralized by substantially all the assets of
each residence. The Company is required to maintain minimum tangible net worth
and current ratio amounts and debt service coverage ratios with respect to
certain individual residences. Certain lenders also require escrow balances
to be held by the lenders which are included in Other assets in the Company's
consolidated balance sheets.
     The Company entered into non-binding financing commitment letters with
Meditrust Mortgage Investments, Inc. ("MMI"), an affiliate of Meditrust
(a large health care REIT). Under the letters, MMI is to provide up to
approximately $100 million in financing for one existing and approximately 13
new residences, subject to various terms and conditions. The financings, which
may be mortgage or lease financings, are to be entered into on a residence-by-
residence basis, and are to be for terms of up to 14 years (with two additional
five-year extension periods for the lease transactions). Interest during
construction is to float at 2% above the prime rate. On completion of each
residence, payments are to be set at an amount equal to 3.25% over the yield
at that time on the ten-year U.S. Treasury notes. Additional interest or lease
payments are contingent on increased revenues of a financed residence during
specified periods.  To date, the Company has completed mortgage agreements for
one existing and three new residences totalling $22 million.

                                       21


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

     Interest costs incurred were $2,309,000, $1,433,000 and $1,426,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.  Of these amounts
$1,038,000, $411,000 and $76,000 were capitalized as construction-in-progress in
the respective periods.  Interest cost incurred includes amounts due under
obligations to JMAC and amounted to $175,000 and $462,000 in 1996 and 1994,
respectively.  No such amounts were incurred for 1995.
     The carrying amounts of long-term obligations approximate fair value as the
interest rates are self-adjusting or are comparable to rates currently
available.
     As of December 31, 1996, the long-term obligations (including capital
leases)mature as follows:

1997..............$   242,211
1998..............    476,035
1999..............    936,591
2000..............  9,420,410
2001..............  4,333,836
Thereafter........ 17,591,820
                  -----------
Total.............$33,000,903
                  -----------
                  -----------
     Effective January 1, 1995, the Company's partners entered into a
recapitalization agreement whereby subordinated debentures and accrued interest
totaling $5,330,458 were converted to partners'equity. In December 1995, the
Company entered into a loan agreement with JMAC to provide up to $8,000,000 in
subordinated loans to the Company.  Interest accrued at 15% per annum.  The
total amount outstanding of $5,710,000, including accrued interest, was repaid
in July 1996 with proceeds from the public offering at which time the agreement
terminated.

7. INVESTMENT IN UNCONSOLIDATED ENTITIES
     The Company and Sisters of Charity Health Care Systems,Inc. of Cincinnati,
Ohio (a founding system of Catholic Health Initiatives ("CHI"), have entered
into five joint venture agreements to develop, own and operate six assisted
living residences in Ohio, New Mexico and Colorado. Each project is owned
jointly by the Company and CHI, with the Company typically owning approximately
20% of the equity of the project.  Construction and permanent debt financing
generally is to be arranged by CHI on behalf of the venture and is to be non-
recourse to the Company.  At December 31, 1996, the Company has guaranteed $1
million of joint venture debt financing.  The Company provides all development
and management services with respect to each residence under a standard
agreement that generally provides for a development fee of $250,000 per project
and a management fee of 5% of revenues.
     Under the agreements with CHI, the Company earned and recorded as revenue
development fees of $464,000,  $363,000 and $175,000 in 1996, 1995 and 1994,
respectively. The Company serves as manager for each of the residences and
receives management fees upon commencement of operations.  Management fees of
$149,000, $112,000 and $34,000 have been recorded as revenues for the years
ended December 31, 1996, 1995 and 1994, respectively.
     As of December 31, 1996, three residences were open, three residences were
under construction, and five other sites were under development. One residence
was open at December 31, 1995.  Summarized financial information of joint
ventures is presented below.
                                                        DECEMBER 31,
                                             --------------------------------
                                                  1996               1995
                                             ------------         -----------
BALANCE SHEETS
Current assets..........                     $  1,386,751         $   526,636
Property................                       20,173,572           4,786,285
Other assets............                          656,715              22,466
                                             ------------         -----------
      Total assets......                     $ 22,217,038         $ 5,335,387
                                             ------------         -----------
                                             ------------         -----------
Current liabilities.....                     $  2,489,313         $   626,587
Long-term obligations...                       15,364,102           4,013,799
Joint venture equity....                        4,363,623             695,001
                                             ------------         -----------
      Total liabilities and joint
       venture equity...                     $ 22,217,038         $ 5,335,387
                                             ------------         -----------
                                             ------------         -----------
STATEMENTS OF OPERATIONS
Residence revenues......                     $  2,347,278         $ 1,868,618
Operating expenses......                        1,809,886           1,333,203
Depreciation and
 amortization expense...                          308,589             281,684
Interest expense........                          436,646             464,788
                                             ------------         -----------
     Total expenses.....                        2,555,121           2,079,675
                                             ------------         -----------
Net loss................                    $    (207,843)        $  (211,057)
                                             ------------         -----------
                                             ------------         -----------

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

                                 KARRINGTON HEALTH, INC.

                                       22

<PAGE>
                                1996 ANNUAL REPORT
-------------------------------------------------------------------------------

     During the first quarter of 1995, the joint venture changed the
amortization period for pre-opening costs from three years to one. The effect
of this change on the joint venture was to increase amortization expense by
$133,000 in 1995.  The Company's equity in net loss of unconsolidated
entities reflects its 50% share of the effect of this change.

8.   INCOME TAXES
     As a partnership, Karrington Operating recorded no provision for income
taxes. Partnership income and losses were allocated to JMAC Properties, Inc.
and Associates for inclusion in their respective income tax returns. As a
result of the reorganization (described in Note 9), the Company applied the
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" subsequent to July 18, 1996.  Deferred income
taxes were provided for differences in the basis for tax purposes and for
financial accounting purposes of recorded assets and liabilities as of July
18, 1996.  Accordingly, a tax provision and a net deferred income tax
liability of $938,000 was recorded in the 1996 statement of operations.
     The Company recorded a deferred tax benefit of $255,000 related to its
financial reporting loss before taxes of $625,000 for the period from July
18, 1996 to December 31, 1996.   A reconciliation of the recorded benefit
based on the Federal statutory income tax rate to the Company's income tax
provision for the period from July 18, 1996 to December 31, 1996 is as
follows:

Benefit at Federal statutory rate. . . . . . . .     (34.0)%
State income taxes, net of Federal benefit . . .      (5.9)
Nondeductible expenses . . . . . . . . . . . . .        .9
Other. . . . . . . . . . . . . . . . . . . . . .      (1.8)
                                                     -------
Effective income tax rate. . . . . . . . . . . .     (40.8)%
                                                     -------
                                                     -------

     Deferred income taxes arise from temporary differences between financial
reporting and tax reporting basis of assets and liabilities, and operating
loss carryforwards for tax purposes. The components of the deferred income
tax assets and liabilities are as follows:
                                                            December 31,
                                                                1996
                                                            ------------
Deferred income tax assets:
     Accrued liabilities. . . . . . . . . . .                 $   38,000
     Asset amortization . . . . . . . . . . .                    216,000
     Net operating loss carryforwards . . . .                    322,000
     Other. . . . . . . . . . . . . . . . . .                     20,000
                                                            ------------
Total deferred income tax assets. . . . . . .                    596,000
Valuation allowance for deferred
     income tax assets. . . . . . . . . . . .                          0
                                                            ------------
Net deferred income tax assets. . . . . . . .                    596,000
                                                            ------------
Deferred income tax liabilities:
      Property related. . . . . . . . . . . .                 (1,262,000)
      Other . . . . . . . . . . . . . . . . .                    (17,000)
                                                            ------------
Total deferred income tax liabilities . . . .                 (1,279,000)
                                                            ------------
Net deferred income tax liabilities . . . . .                 $ (683,000)
                                                            ------------
                                                            ------------

     Deferred tax assets, including the net operating loss carryforward, can
be realized by offset to existing taxable temporary differences that will
reverse in the carryforward period.  Accordingly, no valuation allowance for
deferred tax assets was recorded at December 31, 1996.  The Company's net
operating loss carryforwards expire in 2011.

9. EQUITY
     At December 1996, the Company's authorized capital shares
consisted of (a) 28,000,000 common shares, without par value, of which
6,700,000 were issued and outstanding and (b) 2,000,000 non-voting preferred
shares without par value, none of which have been issued.  The Company's
Board of Directors has the authority to issue preferred shares in one or more
series and to fix the designations, the number of shares in such series,
liquidation preferences, dividend rates, conversion rights and redemption
provisions of the shares constituting any series, without any further vote or
action by the

                                      23

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

Company's shareholders. Any series of preferred shares so issued could have
priority over the common shares with respect to dividend or liquidation
rights or both.
     On July 18, 1996, 3,000,000 of the Company's common shares were sold
pursuant to its initial public offering. Of the total shares sold, 2,350,000
common shares were sold by the Company and 650,000 common shares were sold by
JMAC.  The net proceeds to the Company were approximately $27.5 million of
which $5.7 million was used to repay indebtedness due JMAC.  The balance of
the net proceeds is being used to finance the development and acquisition of
additional assisted living residences and for working capital and general
corporate purposes.
      Immediately prior to July 18, 1996, the share-holders of JMAC
Properties, Inc. and Associates contributed the stock in their respective
companies for stock in the Company.  The shareholder of JMAC Properties, Inc.
received 66 2/3% of the pre-offering outstanding common shares of the Company
while the shareholders of Associates received the remaining 33 1/3% (a total
of 4,350,000 shares).  Following the reorganization, JMAC Properties, Inc.
and Associates became wholly-owned subsidiaries of the Company. As a result,
the Company now owns 100% of the equity interests of Karrington Operating.

10.  INCENTIVE STOCK PLAN
     The Company has adopted the 1996 Incentive Stock Plan (the "Plan"). The
Plan provides for the grant of incentive and non-qualified stock options,
stock appreciation rights, restricted stock, performance shares and
unrestricted common shares. The Plan also provides for the purchase of common
shares through payroll deductions by employees of the Company who have
satisfied certain eligibility requirements. The maximum number of shares
available for issuance under the Plan is 550,000.
     In June 1996, the Company granted non-qualified options to certain
officers, key employees and non-employee directors to acquire 169,000 common
shares. These options became effective July 19, 1996 with an exercise price
equal to the initial public offering price of $13.00 per share. The 115,000
employee options have a ten-year term with 25% of the options vesting on each
of the second through the fifth anniversaries of the date of grant.
Non-employee directors received grants of non-qualified options to purchase
an aggregate of 54,000 common shares which are exercisable beginning six
months after the effective date of grant with a ten-year term.  In addition,
each continuing non-employee director will receive on the day after each
annual meeting of shareholders, a grant of a non-qualified stock option to
purchase 2,000 common shares of the Company at an exercise price equal to the
fair market value of the shares on the date of grant.  No shares were
exercisable as of December 31, 1996.

     In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation."  The Statement
allows for a fair value-based method of accounting for employee stock options
and similar equity instruments.  In accordance with the provisions of SFAS
No. 123, the Company has elected to account for options granted under the
Plan in accordance with APB Opinion 25, "Accounting for Stock Issued to
Employees" and related interpretations.  If the Company had elected to
recognize compensation cost based on the fair value of options at the grant
date as prescribed by SFAS No. 123, net loss and proforma net loss per share
would have increased by $291,000 and $.05, respectively. The fair value for
these options was estimated at the date of grant using the Black-Scholes
option pricing model. The assumptions used in the model included an expected
dividend yield of 0%, an expected stock price volatility of .34, a risk-free
interest rate of 6.5% and an expected life of the options of 10 years. The
financial effects of applying SFAS No. 123 are not likely to be
representative of the effects on reported results of operations for future
years.

 11.  COMMITMENTS
     The Company has commitments totaling approximately $9,347,000 at
December 31, 1996 for various land purchase contracts and $54,757,000 for
various construction contracts.


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

                                 KARRINGTON HEALTH, INC.

                                      24
<PAGE>
                                1996 ANNUAL REPORT
-------------------------------------------------------------------------------

12.  SUPPLEMENTAL PROFORMA LOSS PER SHARE
     Supplemental proforma net loss and net loss per share for the year ended
December 31, 1996 would have been $2,535,000 and $.44, respectively, had the
retirement of the JMAC debt taken place at January 1, 1996.  Supplemental net
loss per share was based on the weighted average number of shares of common
stock outstanding during the period plus the estimated number of shares to be
issued to repay the JMAC debt.

13.  SUBSEQUENT EVENTS

KENSINGTON ACQUISITION
     The Company's acquisition of Kensington Management Group, Inc.
(Kensington) is scheduled to be completed in April 1997.  At the time of
acquisition, Kensington will have open or under construction 12 residences
with 406 licensed beds in three states. Unaudited revenues in 1996 were
approximately $6,500,000.  Kensington operates Alzheimer's care communities
under the name Kensington Cottages. The purchase price is expected to
approximate $28 million. The Company will issue approximately 130,000 common
shares, assume debt of $1.7 million, incur new debt of approximately $21.7
million and make cash payments of approximately $3.1 million.

REVOLVING CREDIT AGREEMENT
     In February 1997, the Company entered into a $3,000,000 revolving credit
agreement expiring at March 31, 1998. Interest is payable monthly and accrues
at the bank's prime rate or LIBOR plus 2% if certain financial ratios are
met. The Company is required to pay a commitment fee of .25% on the unused
portion of the total credit allowed under the agreement and is required to
maintain minimum net worth and current ratio amounts.



                                      25
<PAGE>

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

SELECTED CONSOLIDATED
FINANCIAL DATA
(Amounts in thousands, except other operating data and per share data)

<TABLE>
<CAPTION>

                                                                      YEAR ENDED DECEMBER 31,
                                                          ------------------------------------------------

                                                            1996      1995      1994      1993      1992
                                                          --------  --------  --------  --------  --------
<S>                                                       <C>       <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
     Residence operations................................ $  8,953  $  6,220  $  4,977  $  2,288  $    216
     Development and project
         management fees.................................      643       524       287        18         -
                                                          --------  --------  --------  --------  --------
         Total...........................................    9,596     6,744     5,264     2,306       216
Expenses:
     Residence operations................................    6,575     4,380     3,454     1,908       221
     General and administrative..........................    2,773     1,705       634       170        84
     Depreciation and amortization.......................    1,379       980       844       505        95
     Write-off of intangible asset.......................                492
                                                          --------  --------  --------  --------  --------
         Total...........................................   10,727     7,557     4,932     2,583       400
                                                          --------  --------  --------  --------  --------
Operating income (loss)..................................   (1,131)     (813)      332      (277)     (184)

Interest expense.........................................   (1,272)   (1,023)   (1,350)     (707)     (102)
Interest income..........................................      470         -         -         -         -
Equity in net loss of unconsolidated entities............       (7)     (105)      (17)        -         -
                                                          --------  --------  --------  --------  --------
Loss before income taxes.................................   (1,940)   (1,941)   (1,035)     (984)     (286)
Deferred income taxes....................................     (683)        -         -         -         -
                                                          --------  --------  --------  --------  --------
Net loss................................................. $ (2,623) $ (1,941) $ (1,035) $   (984) $   (286)
                                                          --------  --------  --------  --------  --------
                                                          --------  --------  --------  --------  --------

Proforma:
     Net loss per common share........................... $   (.48) $   (.45)
     Weighted average number of common
       shares outstanding................................    5,416     4,350

OTHER OPERATING DATA:
Residences (end of year) (1):
     Open................................................        9         5         4         3         1
     Under construction..................................       17         5         1         1         1
     Under contract......................................       10         8         2         1         1
Number of units (end of year) (1):
     Open................................................      454       272       213       160        53
     Under construction..................................    1,010       243        59        53        53
     Under contract......................................      742       509       128        59        54

BALANCE SHEET DATA:
Working capital (deficit)................................ $  7,806  $ (1,575) $   (911) $   (702) $   (637)
Total assets.............................................   69,550    26,676    16,292    14,883     9,938
Long-term obligations, less current portion..............   32,759    18,250    16,778    14,472     8,753
Equity (deficit).........................................   30,677     5,841    (1,763)     (728)      256

(1) Includes residences jointly-owned by the Company and CHI.

</TABLE>

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

                                 KARRINGTON HEALTH, INC.

                                       26
<PAGE>

                               1996 ANNUAL REPORT

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

COMMON SHARE INFORMATION


     The Company's common shares, without par value, are quoted on the Nasdaq
National Market System under the symbol KARR.  The following table reflects
the range of the reported high and low closing prices of the common shares as
reported on the Nasdaq National Market System, from the effective date of the
IPO (July 18, 1996) to March 14, 1997.
     According to the records of the Company's transfer agent, the Company
had forty-two shareholders of record as of March 13, 1997.  The Company
believes a substantially larger number of beneficial owners hold such shares
in depository or nominee form.
     The Company does not pay dividends on its common shares and does not
anticipate that it will pay dividends in the foreseeable future.  However,
the payment and amount of future dividends remain within the discretion of
the Company's Board of Directors and will depend upon the Company's results
of operations, financial condition, capital requirements, restrictions
imposed by financing arrangements and other relevant factors.

<TABLE>
<CAPTION>

                                                            HIGH       LOW
----------------------------------------------------------------------------
<S>                                                        <C>       <C>

1996:
Quarter Ended
     September 30, 1996 (beginning July 19, 1996)........  $13.50    $12.25
     December 31, 1996...................................   16.00     12.25
----------------------------------------------------------------------------
1997:
     Through March 14, 1997..............................  $12.75    $10.50

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

</TABLE>

SHAREHOLDER INFORMATION

CORPORATE OFFICE
Karrington Health, Inc.
919 Old Henderson Road
Columbus, OH  43220
Phone: (614) 451-5151
http://www.karrington.com

COMMON STOCK
The common stock of
Karrington Health, Inc. is
traded on the Nasdaq
National Market System under
the symbol "KARR".

TRANSFER AGENT & REGISTRAR
Shareholders with inquiries regarding address corrections,
lost certificates, changes in registration, and other
shareholder matters should contact Karrington's stock
transfer agent listed below:

National City Bank
Corporate Trust Division
P.O. Box 94915
Cleveland, OH  44101-4915
(216) 575-2000

INVESTOR RELATIONS CONTACT
Richard R. Slager,
Chairman and CEO
(614) 451-5151

FINANCIAL INFORMATION
Requests for published
information about Karrington Health, Inc. may be sent to the
Company's Corporate Office or telephoned in to the Company's
Investor Relations Contact at (614) 451-5151.

RESEARCH COVERAGE
J. C. Bradford & Co.
Smith Barney Inc.

ANNUAL MEETING
The 1997 Annual Meeting of Shareholders will be held at
11:00 a.m.  (EST) Tuesday, May 13, 1997 at the
Da Vinci Ristorante. Shareholders are cordially invited to attend.

Form 10-K
THE COMPANY'S ANNUAL REPORT ON FORM 10-K WILL BE SENT FREE
OF CHARGE TO SHAREHOLDERS UPON WRITTEN REQUEST TO THE
INVESTOR RELATIONS DEPARTMENT AT KARRINGTON HEALTH, INC.'S
CORPORATE OFFICE.


                                                              FOUNDING MEMBER
                                                                    ALFA
                                                              ASSISTED LIVING
                                                               FOUNDATION OF
                                                                  AMERICA

                                   27
<PAGE>
-------------------------------------------------------------------------------

DIRECTORS AND OFFICERS

<TABLE>
<CAPTION>

BOARD OF DIRECTORS
--------------------------------------------------------------------------------------------------------
<S>                             <C>                                   <C>
JOHN S. CHRISTIE                   DAVID H. HOAG                        BERNADINE P. HEALY, M.D.
President, JMAC, Inc.              Chairman, President and              Dean, College of Medicine,
                                   Chief  Executive Officer,            The Ohio State University
JOHN H. MCCONNELL                  The LTV Corporation
Founder and Chairman                                                    JAMES V. PICKETT
Emeritus, Worthington              CHARLES H. MCCREARY, III             Managing Director,
Industries, Inc.                   Partner, Bricker & Eckler            Banc One Capital Corporation

HAROLD A. POLING                   MICHAEL H. THOMAS                    ROBERT D. WALTER
Retired, former Chairman,          Executive Vice President             Chairman and Chief Executive
Ford Motor Company                 and Treasurer, JMAC, Inc.            Officer, Cardinal Health, Inc.




CORPORATE OFFICERS
--------------------------------------------------------------------------------------------------------
RICHARD R. SLAGER                  ROBIN V. HOLDERMAN                   ANTHONY E. DIBLASI
Chairman, President and Chief      Executive Vice President of          Senior Vice President of
Executive Officer                  Corporate Development                Construction

ALAN B. SATTERWHITE                MARK N. MACE                         STEPHEN LEWIS
Chief Financial Officer,           Senior Vice President of             Senior Vice President of
Chief Operating Officer and        Finance, Treasurer, Principal        Development, General
Director                           Accounting Officer                   Counsel and Assistant
                                                                        Secretary
                                   JOHN K. KNUTSON
                                   Senior Vice President of
                                   Operations


</TABLE>
                                      28
--------------------------------------------------------------------------------

                                 KARRINGTON HEALTH, INC.

<PAGE>


                               1996 ANNUAL REPORT


KARRINGTON MARKET AREAS


[MAP: United States and the State of Ohio showing Karrington locations open
(10 residences), residences under construction (16 residences), sites under
contract (14 sites) and the pending acquisition locations (12 residences).]



<PAGE>









                                     [LOGO]

                             KARRINGTON HEALTH, INC.



                             919 Old Henderson Rd.
                             Columbus, Ohio  43220
                                 614.451.5151
                              Fax:  614.451.5199
                           http://www.karrington.com