SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549

                                  FORM 10-K


(Mark One)

    [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
              SECURITIES AND EXCHANGE ACT OF 1934 [FEE REQUIRED]
                 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
                                      OR
    [ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                SECURITIES AND EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
                  FOR THE TRANSITION PERIOD FROM     TO
                       COMMISSION FILE NUMBER 000-21263


                     INTEGRATED LIVING COMMUNITIES, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


            Delaware                               52-1967027
(State or other jurisdiction of        (I.R.S. Employer Identification Number)
incorporation or organization)
     24850 Old 41 Road Suite 10     
        Bonita Springs, FL                            34135
(Address of principal executive offices)           (Zip Code)



       Registrant's telephone number, including area code: 941-947-7200
         Securities registered pursuant to Section 12 (b) of the Act:


                                     None

         Securities registered pursuant to Section 12(g) of the Act:
                   Common Stock, par value $0.01 per share

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


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

Aggregate market value of Registrant's  Common Stock held by  non-affiliates  at
March 14, 1997  (based on the closing  sale price for such shares as reported by
Nasdaq: $32,025,000

       Common Shares outstanding as of March 14, 1997: 6,697,900 shares

                     Documents Incorporated by Reference:


Portions of the Registrant's Definitive Proxy Statement for its 1997 annual
                         meeting of stockholders are
            incorporated by reference into Part III of this report




<PAGE>
                                    PART I

ITEM 1. BUSINESS

GENERAL OVERVIEW


   Integrated  Living  Communities,  Inc.  (the  "Company"  or  "ILC")  provides
assisted living and related services to the private pay elderly market. Assisted
living facilities combine housing,  personalized support and healthcare services
in  a  cost-effective,   non-institutional   setting  designed  to  address  the
individual  needs of the elderly who need regular  assistance with activities of
daily living, such as eating, bathing, dressing and personal hygiene, but who do
not require the level of healthcare provided in a skilled nursing facility.  The
Company  currently   operates  23  assisted  living  and  other  senior  housing
facilities  containing  2,466  beds in 10  states.  The  Company  is  pursuing a
strategy of rapid growth  through  development  and  acquisition  and intends to
acquire, develop or obtain agreements to manage approximately 60 assisted living
facilities  per year in each of the next three years.  As part of this strategy,
ILC is currently  developing 29 new assisted living facilities,  of which 20 are
scheduled to open in 1997.


INDUSTRY BACKGROUND

   Assisted  living has emerged as an important  component  in the  continuum of
care within the healthcare  delivery  system and can be viewed as falling in the
middle of the elder care continuum,  with home-based care on one end and skilled
nursing facilities and acute care hospitals on the other. It is a cost-effective
setting for the elderly  who do not  require  the higher  level of medical  care
provided by skilled nursing facilities but cannot live independently  because of
physical frailties or cognitive impairments.  Assisted living facilities combine
housing,  personalized  support  services and healthcare in a  non-institutional
setting designed to address the individual needs of the elderly who need regular
assistance with certain activities of daily living.


   The  assisted  living  industry is highly  fragmented  and  characterized  by
numerous small  operators  whose scope of services vary widely from small "board
and  care"  facilities  (generally  12 or fewer  residents)  with  little  or no
services to large facilities offering a full array of personal care services. In
comparison  to the nursing home and other  healthcare  industries,  the assisted
living  industry  is  currently  subject to little  government  regulation.  The
Company expects  government  regulation to increase,  however,  as more assisted
living  facilities  begin to expand the type and amount of  healthcare  services
they offer and states continue to expand Medicaid  funding of assisted living as
a cost-effective alternative to skilled nursing facilities. The Company believes
that  because  of  increased   governmental   regulation  of  the  industry,   a
transformation  of the industry  from housing and personal care services to more
healthcare-oriented   services,  cost  containment  pressures,   the  growth  of
healthcare  networks and the inexperience and limited capital  resources of many
operators,  the  highly-fragmented  assisted living industry will consolidate in
the near future.  According to the U.S.  Health Care  Financing  Administration,
annual   expenditures   for  assisted  living  services  were  estimated  to  be
approximately  $10 to $12 billion in 1995.  Private pay services account for the
majority of payments;  however, in some states, Medicaid funds are available for
assisted  living,  although no funding is currently  available  from the federal
Medicare program.


   The Company  believes  that  assisted  living is one of the  fastest  growing
segments of elder care, benefiting from the following significant trends:

   Aging Population.  The Company's target market,  comprised of seniors aged 75
and  older,  is one of the  fastest  growing  segments  of the U.S.  population.
According  to the U.S.  Bureau of the  Census,  this  population  is expected to
increase 28% from  approximately  13 million in 1990 to approximately 17 million
by 2000, as compared to the total U.S. population, which is expected to increase
by  approximately  11% during the same  period.  According  to the U.S.  General
Accounting  Office,  in 1993  more  than 7  million  people  in the U.S.  needed
assistance  with  activities  of daily  living,  and this  number is expected to
double by 2020. It is further estimated that approximately 57% of the population
of seniors over the age of 85 need  assistance  with  activities of daily living
and more than  one-half of such  seniors  develop  Alzheimer's  disease or other
forms of dementia.

                                2




<PAGE>
   Increasing Financial Net Worth. As the ratio of elderly in need of assistance
has increased,  so too has the number of elderly able to afford assisted living.
According to U.S. Bureau of the Census data, the median net worth of families in
which the head of the family is age 75 or older has  increased  from  $55,178 in
1984 to $61,491 in 1988 to $76,541 in 1991.

   Changing Family Role. Historically,  the family has been the primary provider
of care to the  elderly.  The  Company  believes,  however,  that the  increased
percentage of women in the workforce,  the growing number of two income families
and the  increased  mobility of society are reducing  the  family's  role as the
traditional caregiver for the elderly,  which will make it necessary for many of
the elderly to look outside the family for assistance as they age.

   Consumer   Preference.   The  Company   believes  that  assisted   living  is
increasingly  becoming the setting preferred by prospective  residents and their
families in which to care for the  elderly.  Assisted  living  offers  residents
greater independence and allows them to "age in place" in a residential setting,
which  the  Company  believes  results  in a higher  quality  of life  than that
experienced in more institutional or clinical settings,  such as skilled nursing
facilities.

   Cost-Containment  Pressures.  In response to rapidly rising healthcare costs,
both governmental and private-pay sources have adopted cost-containment measures
that  have  reduced  admissions  and  encouraged  reduced  lengths  of  stays in
hospitals and skilled nursing facilities. As a result, hospitals are discharging
patients earlier and referring  seniors to skilled nursing  facilities where the
cost of providing care is lower, and skilled nursing facility operators continue
to focus on  expanding  services to higher  acuity  patients.  As a result,  the
supply of skilled nursing facility beds is increasingly being filled by patients
with higher acuity needs paying higher fees,  leaving little excess capacity for
seniors  needing a lower  level of care.  The Company  believes  that this trend
creates a significant opportunity for assisted living facilities,  as states, as
well as long-term  care  insurance  companies  and managed care  companies,  are
increasingly  focusing on assisted  living as a  cost-effective  alternative  to
skilled  nursing  facilities.  Based on  industry  data,  the  average  cost for
assisted living  facilities is approximately  $24,000 per year as compared to an
average cost of approximately $35,000 per year for skilled nursing facilities.

COMPANY STRATEGY

   The  Company's  objective  is to expand  its  operations  to become a leading
provider of high-quality,  affordable assisted living services.  Key elements of
the Company's strategy to achieve this goal are to:

   Provide High-Quality,  Healthcare-Oriented Services. In addition to providing
a broad range of  assistance  with the  activities  of daily living and offering
special care programs to residents  suffering from Alzheimer's  disease or other
forms of dementia,  the Company  focuses on meeting the healthcare  needs of its
residents to the maximum extent permitted by law, thereby enabling its residents
to age in place.  As a result,  residents  are  generally  able to remain at ILC
facilities until they develop medical  conditions  requiring  institutional care
available only in a skilled  nursing  facility or an acute care hospital.  Where
allowed by law, the Company's assisted living facilities offer care to residents
who are incontinent, mild to moderately confused,  convalescing,  nonambulatory,
diabetic, oxygen dependent or similarly dependent. All of the Company's assisted
living facilities  (excluding its senior housing and congregate care facilities)
employ  licensed  nurses.  The  Company  ensures  that  all its  facilities  are
appropriately  staffed to provide its residents with  high-quality  personalized
care and services.


   Grow Rapidly Through  Development,  Acquisition and Facility  Expansion.  The
Company intends to pursue rapid growth over the next three years to benefit from
the  anticipated  increased  market demand for assisted  living services and the
expected  industry  consolidation.  The Company  intends to acquire,  develop or
obtain agreements to manage approximately 60 assisted living facilities per year
in each of the next three years. The Company is currently developing 29 assisted
living  facilities.  Management has extensive contacts in the senior housing and
healthcare   industries,   and  the  Company  is   frequently   presented   with
opportunities  to acquire,  develop or manage  assisted living  facilities.  The
Company  expects that  industry  consolidation  will result in increased  future
acquisition  opportunities.  In  addition,  as demand  increases in its existing
markets,  the  Company  plans to grow by  expanding  the  capacity  of  existing
buildings. 

                                3




<PAGE>

   Utilize Flexible,  Cost-Effective  Development Approach. The Company believes
that its  development  approach  will allow it to quickly  and  cost-effectively
develop new assisted living facilities. The Company intends to rely primarily on
a  limited  number of  third-party  developers,  rather  than  maintain  a large
internal  development staff, to develop assisted living facilities.  The Company
has developed, in conjunction with three developers with which the Company has a
relationship,  three flexible and expandable  prototype  building designs:  a 35
unit/40 bed pure assisted  living  facility,  a 40 unit/40 bed pure  Alzheimer's
facility and an 80 unit/92 bed combination assisted living/Alzheimer's facility.
Flexibility,  which will allow the  Company to respond to  changing  utilization
patterns and service needs, and  expandability,  which will allow the Company to
cost-effectively  respond to increased  market  demand,  are key features of the
prototype designs. The Company believes the use of prototype designs and a small
number of  developers  will offer many  advantages to the  development  process,
including  better   construction   quality  control,   lower  architectural  and
engineering fees, bulk purchasing of materials and fixtures at a lower cost, and
faster development and construction schedules. 

   Target Broad Segment of Private-Pay Population.  The Company's target markets
are generally second or third tier cities or suburbs of major cities. The target
population  in these  markets  is  private-pay  seniors  over the age of 75 with
annual  incomes of at least  $25,000.  This  mass-market  approach  enables  the
Company to evaluate a multitude of markets and be  selective  in  acquiring  and
developing properties. The Company believes this approach allows it to appeal to
the largest segment of the elderly population, the middle to upper-middle income
group. The Company believes that by targeting this population  segment,  it will
be well-positioned to achieve and sustain high occupancy rates.

DEVELOPMENT AND ACQUISITIONS; MANAGEMENT SERVICES

   The  Company  targets  areas  where  there  is a  need  for  assisted  living
facilities  based on demographics  and market studies.  In selecting  geographic
markets for potential expansion,  the Company utilizes individual market studies
which consider such factors as population,  income levels,  economic climate and
competitive  environment.  The Company generally seeks to select assisted-living
facility  locations that (a) are second or third tier cities or suburbs of major
cities,  (b) have residents who generally  enjoy mid-level  incomes  compared to
incomes generally realized in the region, (c) have a regulatory climate that the
Company  considers  favorable  toward  development  and (d) are  established and
economically  stable compared to newer,  faster-growing  areas.  The Company has
found that  locations  with these  characteristics  generally  have a  receptive
population  of seniors  who desire  and can afford the  services  offered in the
Company's assisted living facilities.


   Development.  The  Company  intends to  develop  assisted  living  facilities
generally  ranging in size from 35 to 80 units,  consisting  of an  aggregate of
approximately 23,000 to 54,000 square feet, which are located on sites typically
ranging  from 2.5 to 5 acres.  Unit size is  expected  to range  from 325 to 500
square feet.  The Company  estimates  that the  development  cost of most of its
assisted living  facilities will generally range from  approximately  $68,000 to
$83,000 per unit,  depending on local variations in land and construction costs,
with an overall average development cost of approximately  $72,000 per unit. The
Company estimates that it will require approximately six months from the date of
land acquisition to develop its 40 unit facilities and approximately nine months
from the date of land acquisition to develop its 80 unit facilities. The Company
intends to rely primarily on a limited number of third-party developers,  rather
than maintain a large internal  development  staff,  to develop  assisted living
facilities,  and currently has relationships  with four developers.  The Company
maintains control over the entire development process by retaining authority for
site  selection,   prototype  design,  pricing,   development  and  construction
schedules, and quality of workmanship.

   The Company is currently  pursuing the  development of 29 new assisted living
facilities, 20 of which are scheduled to open in 1997, and expects to develop 20
new facilities in each of 1998 and 1999. However, project development is subject
to a number of contingencies over which the Company will have little control and
that may adversely affect project cost and completion time,  including shortages
of, or the inability to obtain, labor or materials, the inability of the general
contractor or subcontractors to perform under their contracts,  strikes, adverse
weather  conditions  and changes in  applicable  laws or  regulations  or in the
method of applying such laws and regulations. If the Company's development 

                                4




<PAGE>

schedule is delayed,  the Company's  business,  operating  results and financial
condition could be adversely affected.  In addition,  the Company estimates that
it will take  approximately  six to 12  months  for a newly  developed  assisted
living facilities to achieve a stabilized level of occupancy (i.e., an occupancy
level in excess of 90%) and that each new facility  will incur  start-up  losses
for at least eight months after  commencing  operations.  Because,  however,  of
uncertainties   associated  with  development  of  assisted  living  facilities,
including zoning and other governmental  limitations,  not all of the facilities
currently  under  development  may in fact be  developed,  and  there  can be no
assurance that the Company will be successful in meeting scheduled opening dates
for the facilities which are developed.


   The principal  stages in the  development  process are (i) site selection and
contract  signing,  (ii)  zoning  and site plan  approval,  (iii)  architectural
planning and design and (iv) construction and licensure.  Once a market has been
identified,  site  selection and contract  signing  typically take three months.
Zoning and site plan approval  generally  take one to three months.  The Company
anticipates that facility  construction  will generally take six to nine months.
The Company's use of prototype facilities facilitates architectural planning and
design.  After a facility  receives a certificate  of occupancy and  appropriate
licenses,  residents  usually  begin  to  move  in  immediately.  The  Company's
experience  indicates  that new  facilities  typically  reach a stable  level of
occupancy  of over 90% within six to 12 months of  opening,  but there can be no
assurance  that these  results will be achieved in new  facilities.  The Company
anticipates  that the total  capitalized  cost to develop,  construct and open a
prototype  facility,  including land acquisition and construction costs, will be
approximately  $68,000 to $83,000 per unit,  although the cost of any particular
facility may vary considerably based on a variety of site-specific factors.

   The Company is presented with land sites by independent brokers,  developers,
healthcare organizations and financial institutions.  The third-party developers
with which the Company has  relationships  are also utilized to locate  suitable
sites in selected regions of the country.  If a site meets the Company's general
market  criteria,  then the Company will order a preliminary  market study by an
independent  third party.  If the market study indicates that the site meets its
geographic  selection  criteria,  the Company will then conduct a more  in-depth
analysis of the market,  in conjunction  with  developers,  to ensure there is a
demonstrated  need for assisted living services and that the site is appropriate
in terms of  location,  size and zoning.  If the market and site meet all of the
Company's selection criteria, the property is purchased for development.


   The Company  has,  together  with three of its  developers,  developed  three
flexible  and  expandable  prototype  building  designs:  a 35 unit/40  bed pure
assisted living facility,  a 40 unit/40 bed pure Alzheimer's  facility and an 80
unit/92 bed combination assisted living/Alzheimer's facility. Flexibility, which
will allow the Company to respond to changing  utilization  patterns and service
needs,  and  expandability,  which  will allow the  Company to  cost-effectively
respond to increased  market demand,  are key features of the prototype  design.
The  flexibility  feature  allows the  facility to quickly and cost  effectively
reconfigure  its assisted living and Alzheimer's bed allotment based on changing
market demand.  The expandability  feature allows the prototype  buildings to be
easily and  cost-effectively  expanded  with little or no  disruption to current
operations. Facility expansion is often more cost-effective than constructing or
acquiring a new facility  because of lower  incremental  capital,  operating and
fixed costs.  The Company  believes that the use of a small number of developers
working  with  prototype  designs  will allow the  Company to: (a) save time and
money on architectural  and engineering work,  because only minor  modifications
will be required at each location to site adapt the prototype; (b) ensure better
construction quality control,  because the Company's third-party developers will
gain  experience  by  constructing  the  same  facility  design,  rather  than a
different  facility design,  at each site; and (c) save time and money with bulk
purchasing  of  materials  and fixtures at a lower cost,  because each  facility
will, for example,  utilize the same kitchen equipment and windows. In addition,
once a development site is identified,  the Company will be able to move quickly
to obtain zoning  approvals,  since only limited  architectural  and engineering
work will be required.  All of these  factors  should  contribute  to faster and
cost-effective   development  and  construction   schedules.   See  "--  Company
Strategy." 

   The Company has very limited  experience  in developing  new assisted  living
facilities  and  its  ability  to  achieve  growth  through  development  of new
facilities will be dependent to a great extent upon the experience and abilities
of the third-party developers with which the Company has established relation-

                                5




<PAGE>

ships.  To date,  the Company has opened only one newly  developed  facility and
there can be no assurance that it will be successful in opening more facilities.
There  can be no  assurance  that the  Company  will not  suffer  delays  in its
development  program,  which  could slow the  Company's  growth.  Achieving  the
Company's plan to open 20 newly  developed  facilities in each of the next three
years is dependent on numerous  factors,  many of which the Company is unable to
control or significantly  influence,  which could adversely affect the Company's
growth.  These factors  include,  but are not limited to: (i) locating sites for
facilities  at  acceptable  costs;  (ii)  obtaining  proper  zoning use permits,
development plan approval,  authorization and licensing from governmental  units
in a timely manner;  (iii) obtaining  adequate financing under acceptable terms;
(iv) relying on third-party  architects and contractors and the availability and
costs of labor and construction materials, as well as weather; and (v) obtaining
qualified  staff.  Development of assisted  living  facilities can be delayed or
precluded  by  various  zoning,   healthcare   licensing  and  other  applicable
governmental regulations and restrictions. ILC may also incur construction costs
that exceed  original  estimates,  may experience  competition in the search for
suitable   development  sites  and  may  be  unable  to  arrange  financing  for
development.  The Company intends to rely on third-party developers to construct
new assisted living facilities.  There can be no assurance that the Company will
not  experience  difficulties  in working  with  developers,  project  managers,
general contractors and  subcontractors,  any of which difficulties could result
in increased construction costs and delays.

   Acquisitions.  The Company seeks to acquire  individual or groups of assisted
living facilities from smaller owners and operators in its targeted markets.  In
evaluating  possible  acquisitions,  the  Company  considers  (i) the  location,
construction quality,  condition and design of the facility, (ii) the ability to
expand the facility,  (iii) the current and projected  cash flow of the facility
and the  anticipated  ability to increase  revenue  through  rent and  occupancy
increases  and  additional  assisted  living  services  and (iv) the  ability to
acquire the facility  below  replacement  cost.  The  Company's  management  has
extensive  contacts in the senior  housing and  healthcare  industries,  and the
Company is frequently presented with opportunities to acquire, develop or manage
assisted living facilities. In addition, the Company believes that consolidation
in the assisted living industry will offer substantial  opportunities to acquire
assisted  living  facilities or other  facilities  that can be  repositioned  as
assisted living facilities.

   The  Company's   growth  strategy  depends   significantly   upon  the  rapid
acquisition  (through  purchase,  lease  or  management  contract)  of  existing
assisted  living  facilities  and  other  properties  that  it  believes  it can
efficiently reposition as assisted living facilities.  There can be no assurance
that the Company's  acquisition of assisted living  facilities will occur at the
rate  currently  expected  by the Company or that  future  acquisitions  will be
completed  in a  timely  manner,  if  at  all.  The  success  of  the  Company's
acquisitions  will be  determined  by numbers  factors,  including the Company's
ability  to  identify  suitable  acquisition  candidates,  competition  for such
acquisitions,  the  ability of the  Company to obtain  financing  on  acceptable
terms,  the purchase price,  the financial  performance of the facilities  after
acquisition  and  the  ability  of the  Company  to  integrate  effectively  the
operations  of the  acquired  facilities.  If the  Company  is  unsuccessful  in
operating  newly  acquired  facilities and  integrating  them into the Company's
existing  operations,  the Company's  business,  operating results and financial
condition could be adversely affected.

   Management  Agreements.  Although  the  Company  intends to focus its efforts
primarily on the  development  and  acquisition,  directly or through  long-term
operating leases, of additional  assisted living  facilities,  it may in certain
cases also target additional third-party management contracts as an interim step
to acquisition of facilities. The Company currently manages four assisted living
facilities  with an aggregate of 442 beds.  The Company is  responsible  for all
personnel,  marketing,  nursing, resident care and dietary services,  accounting
and data  processing  reports and services for these  facilities at the facility
owner's expense.  The facility owner is required to pay for all facility capital
expenditures.  The Company  manages  these  facilities in the same manner as the
facilities it owns or leases,  and provides the same assisted living services as
are provided in its owned or leased facilities.

   The Company receives a management fee for its services which generally ranges
from 4% to 5% of the gross  revenue of the  assisted  living  facility.  Certain
management  agreements  also provide the Company with an incentive  fee based on
the  amount of the  facility's  operating  income  that  exceeds  a target.  The
management agreements generally have an initial term of one to three years, with
the right to 

                                6




<PAGE>

renew under certain  circumstances.  The management agreements expire at various
times between October 1997 and July 1999, although all can be terminated earlier
under certain  circumstances.  Certain of the management  agreements provide the
Company  with the right of first  refusal in respect of the sale of each managed
facility.  The Company believes that management  agreements are a cost-effective
way to test new markets  without having to make the capital outlay  necessary to
develop or acquire a facility.


   The  Company  expects the number of  facilities  it  operates  will  increase
substantially  as it pursues its rapid growth  strategy.  The Company's  success
will depend in large part on identifying  suitable  development  and acquisition
opportunities,   and  its  ability  to  pursue  such   opportunities,   complete
developments,  consummate  acquisitions,  create demand for its  facilities  and
effectively  operate its assisted living  facilities.  The Company  competes for
acquisition and expansion  opportunities with companies which have significantly
greater  financial  and  management  resources  than the Company.  The Company's
growth will place a significant burden on the Company's management and operating
personnel  and its  financial  resources.  The  Company's  ability to manage its
growth  effectively  will  require it to  continue  to  improve its operational,
financial and management information systems and to continue to attract,  train,
motivate,  manage and retain key  employees.  There can be no assurance that the
Company  will be able to  implement  its  rapid  growth  strategy  or that  such
strategy will ultimately be profitable. If the Company is unable to implement is
rapid  growth  strategy  or to manage  its  growth  effectively,  its  business,
operating results and financial condition could be adversely affected.

RESIDENT SERVICES

   The  Company's  assisted  living  facilities  offer  residents a  supportive,
"home-like" setting and assistance with activities of daily living. Residents of
the Company's  facilities are typically unable to live alone, but do not require
the 24-hour  nursing  care  provided  in skilled  nursing  facilities.  Services
provided to the Company's  residents are designed to respond to their individual
needs and to improve their quality of life, are available 24 hours a day to meet
resident  needs,  and generally  include three meals per day,  housekeeping  and
groundskeeping  and building  maintenance  services.  Available support services
include  nursing  care and  health-related  services,  social  and  recreational
services,  transportation  and special  services (such as banking and shopping).
Personal  services  include  bathing,  dressing,   personal  hygiene,  grooming,
ambulating  and  eating  assistance.  Health-related  services,  which  are made
available  and provided  according  to the  resident's  individual  needs and in
accordance  with state  regulatory  requirements,  may include  assistance  with
taking medication,  skin care and injections,  as well as healthcare monitoring.
By providing  programs  that are designed to offer  residents a range of service
options as their needs change,  the Company seeks to achieve greater  continuity
of care,  enabling  seniors to age in place and thereby maintain their residency
for a longer time period.

   Clinical  Assessment.  Each resident is clinically assessed upon admission to
determine  his/her  health  status  including  functional  abilities,  need  for
personal  care  services  and  assistance  with the  activities  of daily living
(ADL's) as well as likes and dislikes. The goal of the clinical assessment is to
determine the care needs of residents as well as their lifestyle preferences.  A
current  physician's  report is also  utilized to further  ascertain  the health
status  and needs of the  resident.  From  these  assessments  a plan of care is
developed  for each  resident  to help ensure that all staff who render care and
services meet the specific needs and preferences of each resident. Residents are
reassessed  periodically and when there is a significant  change in a resident's
condition to be sure the care plan reflects their current needs.  The care plan,
as the  document  which  reflects  the needs of the  resident,  is the basis for
determining the monthly charges for care and services.

   Healthcare  Services.   The  Company  fosters  wellness  by  offering  health
screenings  such as blood pressure  checks,  periodic  special  services such as
influenza  inoculations,  chronic disease  management (such as diabetes with its
attendant  blood glucose  monitoring),  dietary and similar  programs as well as
ongoing  exercise  and  fitness   classes.   Classes  are  given  by  healthcare
professionals to keep residents informed about disease management.

   Regulations  differ by state  regarding the type of care that can be rendered
as well as the  personnel  allowed to provide  such care.  The Company  utilizes
licensed nurses,  certified and/or trained staff to meet the healthcare needs of
its  residents.  Staff  administer  or  assist  with  medications,  observe  and
intervene

                                7




<PAGE>
as the health  status of  residents  change and provide  assistance  and care to
enable residents to perform the activities of daily living:  dressing,  bathing,
grooming,  toileting,  ambulating and the like.  Residents who are  incontinent,
mild to  moderately  confused,  convalescing,  nonambulatory,  diabetic,  oxygen
dependent or similarly  dependent  are cared for where  allowed by law.  Hospice
care is offered in many of the  Company's  facilities,  as are special  programs
such  as  post-plastic  surgery  recuperation,  stroke  recovery  and  intensive
rehabilitation.  Dietary programs,  nutritional  support and special  retraining
programs are also offered by the Company.

   The Company's facilities provide rehabilitation services,  including physical
therapy,  speech and language  pathology and  occupational  therapy,  audiology,
pharmacy  and  physician  services,  as well as  podiatry,  dentistry  and other
professional  services.  These  specialized  healthcare  services are  generally
provided to the residents by  third-party  providers,  who are reimbursed by the
resident or a  third-party  payor (such as Medicare or Medicaid)  or, in certain
cases,  by the staff of the facility where permitted by state law. The Company's
facilities  also  provide   transportation   services  for  residents  to  visit
physicians and other professionals in the surrounding areas.

   Alzheimer's and Dementia Care. Certain of the Company's  facilities contain a
special  unit to  service  the  needs of  residents  with  Alzheimer's  disease,
dementia and other cognitive impairments.  These special needs units are located
in a  separate  area of the  facility  and have  their  own  dining  facilities,
resident lounge areas and specially trained staff.  This physical  separation of
the special needs unit enables  residents to receive the  specialized  care they
require with a minimum of disruption to other residents.  The areas are designed
to allow  residents  the  freedom to ambulate  as they wish while  keeping  them
safely contained  within an alarmed area.  Programming for a minimum of 12 hours
per day keeps these special need residents  channeled into meaningful  activity.
Special  nutritional  programs  are  used  to  help  assure  caloric  intake  is
maintained  in  residents  whose  constant  movement   increases  their  caloric
expenditure.  Family  support  groups meet  regularly with the families of these
residents.

   Adult  Day  Care.  Some of the  Company's  facilities  offer  adult  day care
services for the mentally and/or  physically  frail. The services are offered up
to six  days  per  week,  12  hours  per  day.  Many of the day  care  attendees
eventually become permanent  residents at the facility.  Residents spend the day
engaged in meaningful  activities and socialize with other  residents and staff.
Healthcare needs are monitored by staff and medication  assistance is available.
Assistance  with  activities  of daily living,  as well as meals and  nutritious
snacks,  are also  provided.  Day care offers  families  the ability to continue
employment  despite  caregiving  responsibilities  and also offers  residents an
opportunity to leave their home and interact with their peers.

   Respite  Care.  The  Company's  facilities  accept  residents  for short term
placement  (several  days to  several  months)  to  accommodate  their  or their
family's  need for  placement,  either  while the  family is on  vacation  or is
otherwise  absent or because the resident  cannot stay alone while  convalescing
from  illness  or  injury.  Many  residents  are  frequent  returnees  and often
eventually become permanent residents at the facility.

OPERATIONS

   The  Company  offers  a  broad  range  of  assisted  living  services  and an
environment in which residents can age in place in an effort to retain residents
over longer periods as they become  increasingly  frail. The Company continually
assesses  and  monitors  the  health  needs and  desires  of its  residents  and
periodically  adjusts the level and  frequency of care and services  provided to
such residents to meet their increasing  needs. The Company's  multi-tiered rate
structure  for the  services it  provides is based upon the acuity  level of, or
level of services needed by, each resident.  Specialized healthcare services for
those residents requiring 24-hour supervision or more extensive  assistance with
activities  of  daily  living  is  provided  to  the  residents  by  third-party
providers,  who are  reimbursed by the resident or a third-party  payor (such as
Medicare or Medicaid) or, in certain  cases,  by the staff of the facility where
permitted by state law. In order to meet the evolving  needs of its residents as
they age in place,  the Company expects to continually  expand the range of care
and services offered at its residences.  In the future, the Company may elect to
provide these services  directly using its own skilled  employees.  In the event
that a resident's acuity reaches a level such that the Company is unable to meet
such resident's needs, the Company maintains  relationships with local hospitals
and skilled nursing facilities to facilitate a transfer of the resident.

                                8




<PAGE>
   Marketing.  The  Company's  marketing  strategy is designed to integrate  its
assisted  living  facilities  into the continuum of healthcare  providers in the
geographic  markets in which it operates.  Thus,  the Company seeks to establish
relationships  with local hospitals  (including through joint marketing efforts,
where appropriate) and home healthcare  agencies,  alliances with visiting nurse
associations  and, on a more limited basis,  priority  transfer  agreements with
local skilled nursing  facilities.  The Company believes this marketing strategy
benefits its residents as well as strengthens and expands the Company's  network
of referral sources.

   The Company begins premarketing its facilities up to six months in advance of
opening so that, by the time the facility  opens,  referral  sources,  including
professionals  in  the  community,   hospitals  and  physicians,  will  be  well
familiarized  with the care and  services  provided.  Age and  income  qualified
seniors are recipients of target  marketing  efforts as are their children.  The
Company's goal is to open a new facility with a substantial  number of residents
ready to move in. After opening,  the Company continues its marketing efforts to
attain and then maintain full occupancy.

   The Company seeks to position its facilities as the "senior  resource center"
in each of its markets;  thus when the public thinks of care and/or services for
the elderly they think of the ILC facility.  Each  facility  offers its physical
plant for classes,  meetings,  social events,  etc., to the surrounding  city in
order to foster  interdependence.  The Company  also intends to focus on selling
the care and services  component of its  facilities to those seniors who live in
the surrounding area.

   Staffing.  The Company  ensures  that all its  facilities  are  appropriately
staffed  with   well-trained   professionals   to  provide  its  residents  with
high-quality  personalized care and services.  The day-to-day operations of each
facility,  including quality of care and financial performance,  are overseen by
an Executive Director trained in the Company's  operating  philosophy,  policies
and procedures. A Healthcare Coordinator,  who is a licensed nurse, oversees the
day-to-day  care of residents  and  employees  providing  services to residents.
Other key facility  employees include a Director of Dining Services,  Activities
Director, Maintenance Director and Marketing Director.

   Administration.  The  Company's  corporate  structure  has been  designed  to
provide  appropriate  levels of support  to,  and  oversight  of, the  operating
facilities.  The Company's  philosophy  is to allow the facility  administrators
enough autonomy and flexibility to expeditiously  adjust  operations to meet the
needs of local and  changing  market  conditions  while at the same time holding
them accountable to established quality and financial performance criteria.

   In  anticipation  of its rapid  development  plans,  the  Company  has made a
significant  investment  in  recruiting  and  developing a management  team with
extensive  experience in the post-acute care, sub-acute care, long-term care and
assisted living  industries.  The Company believes that the depth and experience
of its management  team  positions the Company to effectively  manage its growth
plans and the increasing  government  regulation of assisted  living  facilities
which the  Company  anticipates.  Additionally,  the Company is  developing  its
infrastructure to manage its anticipated  growth. Key infrastructure  components
include  standardized  policies and  procedures,  computer  systems,  management
information systems, staff training and education programs and staff recruitment
and retention systems. See "-- Executive Officers of the Company."

   The Company  employs an  integrated  structure of  management  and  financial
systems  and  controls  in  order  to  contain  costs  and  maximize   operating
efficiency.  The Company  provides  management  support  services to each of its
residential   facilities,   including   establishment  of  operating  standards,
recruiting,  training and financial and accounting  services.  In addition,  the
Company believes it can benefit from economies of scale by centralizing  certain
functions  such as purchases of supplies and  equipment,  employee  training and
certain sales and marketing  activities.  The Company has established  reporting
and monitoring  systems which allow early detection of deviations to allow rapid
correction.

SERVICE REVENUE SOURCES

   The  Company  currently  and  for  the  foreseeable  future  expects  to rely
primarily on its residents'  ability to pay the Company's charges from their own
or familial resources. Although care in an assisted living facility is typically
less  expensive  than  in a  skilled  nursing  facility,  the  Company  believes
generally

                                9




<PAGE>
only seniors with income or assets meeting or exceeding the regional median will
be able to  afford to reside in the  Company's  facilities.  Inflation  or other
circumstances that adversely affect seniors' ability to pay for services such as
those  provided by the  Company  could have an adverse  effect on the  Company's
business or operations.  Furthermore,  the federal government does not currently
provide any  reimbursement  for the type of assisted living services provided by
the Company.  Although some states have reimbursement programs in place, in many
cases  the  level  of  reimbursement  is  insufficient  to  cover  the  costs of
delivering the level of care that the Company currently provides.  Approximately
99% of the revenues from the Company's  assisted living  facilities were derived
from private-pay sources in 1996. There can be no assurance,  however,  that the
Company  will  continue  its  private-pay  mix or that it will not in the future
become more dependent on  governmental  reimbursement  programs.  If the Company
encounters  difficulty in attracting  seniors with adequate resources to pay for
its services,  its business,  operating results and financial condition could be
adversely affected.

COMPETITION

   The senior housing and healthcare  industries are highly  competitive and the
Company expects that the assisted living business in particular will become more
competitive  in the  future.  In  general,  regulatory  and  other  barriers  to
competitive   entry  into  the  assisted   living  industry  are  not  presently
substantial.  The Company will continue to face competition from numerous local,
regional and  national  providers of assisted  living and  long-term  care whose
facilities  and  services  are on either end of the senior care  continuum.  The
Company  will  compete  with  such  facilities  primarily  on the bases of cost,
quality of care, array of services provided and physician referrals. The Company
will also compete  with  companies  providing  home based  healthcare,  and even
family  members,  based on those factors as well as the  reputation,  geographic
location, physical appearance of facilities and family preferences.  Some of the
Company's  competitors  operate  on a  not-for-profit  basis  or  as  charitable
organizations,  while others have, or may obtain,  greater  financial  resources
than  those of the  Company.  However,  the  Company  anticipates  that its most
significant  competition will come from other assisted living  facilities within
the  same  geographic  area as the  Company's  facilities  because  management's
experience  indicates  that  senior  citizens  frequently  elect  to  move  into
facilities near their homes.

   Moreover,  in the  implementation  of the Company's  expansion  program,  the
Company  expects to face  competition  for the  acquisition  and  development of
assisted  living  facilities.  Some  of  the  Company's  current  and  potential
competitors are significantly  larger or have, or may obtain,  greater financial
resources  than  those  of  the  Company.   A  significant  number  of  industry
competitors have recently raised financing in the public markets, providing them
with cash to develop and acquire assisted living facilities and making it easier
for  them  to  use  their  equity  and  debt  securities  as  consideration  for
acquisitions.  Consequently, there can be no assurance that the Company will not
encounter  increased  competition in the future which could limit its ability to
attract  residents  or expand its  business  and could  have a material  adverse
effect  on  the  Company's  financial  condition,   results  of  operations  and
prospects.  Further,  if the  development  of  new  assisted  living  facilities
outpaces demand for those  facilities in the markets in which the Company has or
is developing facilities,  such markets may become saturated. Such an oversupply
of  facilities  could  cause the  Company  to  experience  decreased  occupancy,
depressed margins, and lower profitability.

GOVERNMENTAL REGULATION


   The Company's  assisted  living  facilities are subject to varying degrees of
regulation and licensing by local and state health and social  service  agencies
and other regulatory  authorities specific to their location.  While regulations
and licensing  requirements  often vary  significantly from state to state, they
typically  address,  among  other  things:  personnel  education,  training  and
records; facility services,  including administration of medication,  assistance
with  self-administration  of medication and limited nursing services;  physical
plant  specifications;  furnishing  of  resident  units;  food and  housekeeping
services;  emergency evacuation plans; and resident rights and responsibilities.
In several states assisted living  facilities also require a certificate of need
before the facility can be opened.  In most states,  assisted living  facilities
also are subject to state or local building  codes,  fire codes and food service
licensure  or  certification  requirements.  Like other  healthcare  facilities,
assisted living facilities are subject to periodic survey or 

                                10




<PAGE>
inspection by  governmental  authorities.  The Company's  success will depend in
part on its ability to satisfy such  regulations and requirements and to acquire
and maintain any  required  licenses.  The  Company's  operations  could also be
adversely  affected  by, among other  things,  regulatory  developments  such as
mandatory  increases  in the scope and quality of care  afforded  residents  and
revisions in licensing and certification standards.

   Certain  states  provide  for  Medicaid  reimbursement  for  assisted  living
services  pursuant  to  Medicaid  Waiver  Programs   permitted  by  the  Federal
government. In the event the Company elects to provide services in states with a
Medicaid  Waiver  Program,  the Company may then elect to become  certified as a
Medicaid provider in such states.  The Company is subject to certain federal and
state laws that regulate  relationships among providers of healthcare  services.
These laws include the Medicare and  Medicaid  anti-kickback  provisions  of the
Social  Security Act, which prohibit the payment or receipt of any  remuneration
by anyone in return for,  or to induce,  the  referral of patients  for items or
services  that are paid for, in whole or in part,  by Medicare  or  Medicaid.  A
violation  of these  provisions  may result in civil or criminal  penalties  for
individuals or entities and/or exclusion from  participation in the Medicare and
Medicaid  programs.  The  Company  intends to comply with all  applicable  laws,
including  the fraud and abuse laws;  however,  there can be no  assurance  that
administrative  or judicial  interpretation of existing laws or regulations will
not in the future have a material  adverse  impact on the  Company's  results of
operations or financial condition.

   The Company's  failure to comply with such  regulations  could jeopardize its
reimbursement  payments for any affected residents and could result in fines and
the  suspension  or failure to renew the  Company's  operating  licenses.  These
actions  could have a material  adverse  effect on the  Company's  business  and
operating  results and on its ability to develop and acquire  properties  in the
future.  The  Company  believes  that it is  currently  in  compliance  with all
material  applicable  regulations and requirements  with respect to its assisted
living facilities.


   Currently,  the federal government does not provide any reimbursement for the
type of assisted  living services  offered by the Company,  although the federal
government  does  provide  reimbursement  for  services  provided in the skilled
nursing beds located in the Company's  continuing care  retirement  communities.
Although  some  states  have  reimbursement  programs  in  place,  the  level of
reimbursement  is generally  insufficient  to recover the costs of the Company's
assisted  living  services.  Depending  in part on the results of the  Company's
acquisition   and   development   program,   net  revenues   from   governmental
reimbursement  could increase from time to time.  There can be no assurance that
the  Company  or the  facilities  which it  manages  will  continue  to meet the
requirements   for   participating  in  governmental   reimbursement   programs.
Furthermore,  governmental  reimbursement  programs are subject to statutory and
regulatory  changes,  retroactive rate settlements,  administrative  rulings and
governmental funding  restrictions,  some of which could have a material adverse
effect on the future rate of payment to  facilities  operated by the Company.  A
substantial dependence on governmental  reimbursement  programs,  changes in the
funding  levels of such programs or the failure of the  Company's  operations to
qualify  for  governmental  reimbursement  could have an  adverse  effect on the
Company's business, operating results and financial condition.

   Twelve of the  Company's  nursing  beds are  currently  certified  to receive
benefits as a skilled nursing  facility  provider under the Health Insurance for
the  Aged  and  Disabled  Act  (commonly   referred  to  as   "Medicare"),   and
substantially all are also certified under programs  administered by the various
states using federal and state funds to provide medical assistance to qualifying
needy individuals  ("Medicaid").  Both initial and continuing qualification of a
skilled  nursing care facility to participate in such programs  depend upon many
factors  including,  among other things,  accommodations,  equipment,  services,
patient care, safety,  personnel,  physical environment,  and adequate policies,
procedures and controls.


   Under the Medicare program, the federal government pays the reasonable direct
and  indirect  allowable  costs  (including  depreciation  and  interest) of the
services furnished.  Under the various Medicaid programs, the federal government
supplements funds provided by the participating states for medical assistance to
qualifying  needy  individuals.  The programs are administered by the applicable
state welfare or social service  agencies.  Although Medicaid programs vary from
state to state, typically they provide

                                11




<PAGE>
for the payment of certain expenses, up to established limits. Funds received by
the Company under Medicare and Medicaid are subject to audit with respect to the
proper  preparation  of annual cost reports upon which  reimbursement  is based.
Such  audits  can  result in  retroactive  adjustments  of  revenue  from  these
programs,  resulting  in either  amounts due to the  government  agency from the
Company or amounts due the Company from the government agency.


   Both the  Medicare  and  Medicaid  programs  are  subject  to  statutory  and
regulatory   changes,   administrative   rulings,   interpretations  of  policy,
determinations by insurance  companies acting as Medicare fiscal  intermediaries
and governmental funding  restrictions,  all of which may materially increase or
decrease  the rate of program  payments to  healthcare  facilities.  Since 1985,
Congress  has  consistently  attempted  to limit the growth of federal  spending
under the Medicare and Medicaid  programs.  In addition,  a number of healthcare
reform  proposals  have been  introduced in Congress in recent years.  It is not
clear at this time what proposals,  if any, will be adopted or, if adopted, what
effect such proposals would have on the Company's business. The Company can give
no assurance  that  payments  under such programs will in the future remain at a
level  comparable  to the present  level or be sufficient to cover the operating
and fixed costs  allocable to such  patients.  Changes in  reimbursement  levels
under  Medicare or Medicaid and changes in applicable  governmental  regulations
could significantly affect the Company's results of operations.  It is uncertain
at this time  whether  legislation  on  healthcare  reform  will  ultimately  be
implemented or whether other changes in the  administration or interpretation of
governmental  healthcare  programs  will occur.  There can be no assurance  that
future  healthcare  legislation  or  other  changes  in  the  administration  or
interpretation  of  governmental  healthcare  programs  will not have an adverse
effect on the results of operations of the Company.  The Company  cannot at this
time predict whether any healthcare  reform  legislation  will be adopted or, if
adopted and implemented,  what effect, if any, such legislation will have on the
Company. 

   Under the  Americans  with  Disabilities  Act of 1990,  all  places of public
accommodation  are  required to meet  certain  federal  requirements  related to
access and use by disabled persons.  A number of additional  federal,  state and
local laws exist which also may require  modifications  to existing  and planned
properties to create access to the  properties  by disabled  persons.  While the
Company  believes that its  properties  are  substantially  in  compliance  with
present  requirements  or are exempt  therefrom,  if required  changes involve a
greater expenditure than anticipated or must be made on a more accelerated basis
than  anticipated,  additional  costs would be incurred by the Company.  Further
legislation may impose additional burdens or restrictions with respect to access
by disabled persons, the costs of compliance with which could be substantial.

   The  Company  and its  activities  are  subject to zoning and other state and
local government regulations. Zoning variances or use permits are often required
for construction.  Severely restrictive  regulations could impair the ability of
the Company to open additional  residences at desired  locations or could result
in costly delays, which could adversely affect the Company's growth strategy and
results of operations.

EMPLOYEES


   As of February 28, 1997, the Company had  approximately  1,100 employees,  of
which 61 were  employed at the  Company's  headquarters.  None of the  Company's
employees are  currently  represented  by a labor union,  and the Company is not
aware of any union-organizing activity among its employees. The Company believes
that its relationship with its employees is good.


   The Company  competes  with various  healthcare  providers,  including  other
assisted living providers, with respect to attracting and retaining qualified or
skilled  personnel.  The Company  also  depends on the  available  labor pool of
low-wage  employees.  A shortage of nurses or other trained personnel or general
inflationary  pressures may require the Company to enhance its wage and benefits
package in order to compete.  There can be no assurance that the Company's labor
costs  will  not  increase  or,  if  they  do,  that  they  can  be  matched  by
corresponding  increases in revenues.  Any significant failure by the Company to
attract and retain qualified  employees,  to control its labor costs or to match
increases in its labor expenses with  corresponding  increases in revenues could
have a material adverse effect on the Company's business,  operating results and
financial condition. Further, the Company's ability to attract and retain

                                12




<PAGE>
management  personnel for its facilities  will be critical to the success of the
Company's  rapid  growth  strategy.  If the Company is unable to hire  qualified
management to operate its assisted living  facilities,  the Company's  business,
operating results and financial condition could be adversely affected.


COMPANY HISTORY

GENERAL

   The Company  was formed in  November  1995 as a  wholly-owned  subsidiary  of
Integrated  Health  Services,  Inc.  ("IHS") to operate the assisted  living and
other senior housing facilities owned,  leased and managed by IHS. Following the
Company's  formation,  IHS transferred to the Company as a capital  contribution
its ownership  interest in the Waterside and the Homestead at Denton facilities,
sublet to the Company The Shores and Cheyenne  Place  facilities,  and leased to
the Company the assisted living and related portions of the Treemont  Retirement
Community  and  Heron's  Run  facilities.  IHS also  transferred  to the Company
agreements to manage nine facilities (of which four are currently managed).  The
Company's principal executive offices are located at Bernwood Centre,  24850 Old
41 Road,  Suite 10, Bonita Springs,  Florida 34135,  and its telephone number is
941-947-7200.

   The Company completed its initial public offering in October 1996. The effect
of this  offering was to reduce IHS'  ownership of the Company from 100% to 37%.
Robert N. Elkins,  M.D., the Chairman of the Board of the Company,  and Lawrence
P. Cirka,  a director of the  Company,  are the  Chairman of the Board and Chief
Executive  Officer  and  President,  Chief  Operating  Officer  and a  director,
respectively,  of IHS and,  as a  result,  may have  conflicts  of  interest  in
addressing  business  opportunities  and  strategies  with  respect to which the
Company's and IHS'  interests  differ.  The Company and IHS have not adopted any
formal  procedures  designed to assure that conflicts of interest will not occur
or to resolve any such  conflicts.  Dr.  Elkins is also a director and principal
stockholder of Community Care of America, Inc. ("CCA"), which operates long-term
care and  assisted  living  facilities,  and is a director of  Capstone  Capital
Corporation,  a real estate  investment  trust from which the Company expects to
receive financing.  IHS will continue to operate Alzheimer's units in certain of
its skilled nursing facilities, including the skilled nursing facilities located
in the  condominiums in which the Company's  Treemont and Heron's Run facilities
are located.  The Company is prohibited  from including a segregated and secured
Alzheimer's ward in its portion of these  facilities.  In geographic areas where
the Company and either IHS or CCA  operates a  facility,  ILC will be  competing
with these companies for residents for its  facilities.  IHS, Dr. Elkins and Mr.
Cirka  beneficially  own in  aggregate  approximately  40.3%  of  the  Company's
outstanding Common Stock and IHS is the Company's largest stockholder.

ACQUISITION HISTORY

   In January 1989, IHS acquired a leasehold  interest in the Dallas at Treemont
facility, a skilled nursing facility with a 251 bed assisted living, Alzheimer's
and  adult day care  facility,  and IHS  subsequently  purchased  the  Dallas at
Treemont  facility  in June  1994.  The  Company  leased  the  assisted  living,
Alzheimer's  and adult day care portions of this facility from IHS until June 1,
1996,  when the Company and IHS entered  into a  condominium  agreement  for the
Dallas at Treemont facility. In connection with the condominium  agreement,  the
Company received as a capital  contribution from IHS the condominium interest in
the assisted living, Alzheimer's and adult day care portion of the facility.

   In December 1993,  IHS acquired  Central Park Lodges,  Inc.,  which owned the
Heron's Run skilled nursing and assisted living facility and a 60.5% partnership
interest in each of the Waterside and Lakehouse West  continuing care retirement
communities.  Effective  October 31, 1995,  IHS exchanged its 60.5%  partnership
interest in the Lakehouse  West facility for the 39.5%  partnership  interest in
the Waterside  facility which it did not own. The Company received the Waterside
facility  from IHS as a capital  contribution  and  leased the  assisted  living
portion of the  Heron's  Run  facility  from IHS until  June 1,  1996,  when the
Company  and IHS  entered  into a  condominium  agreement  for the  Heron's  Run
facility. In connection with the condominium agreement,  the Company received as
a capital  contribution from IHS the condominium interest in the assisted living
portion of the facility.

                                13





<PAGE>

   In March 1994, IHS acquired the Homestead at Denton, a 50 bed assisted living
and adult day care  facility  for a total cost of  approximately  $1.3  million,
adjusted for certain accrued  liabilities,  prepayments and deposits  assumed by
IHS.  Prior to the  purchase  IHS had managed the  facility  under a  management
agreement with the prior owner. The Company received this facility from IHS as a
capital contribution.

   In August 1994, IHS entered into separate  facility  operating leases for the
311 bed Shores and 95 bed Cheyenne  Place  facilities.  IHS has subleased  these
assisted  living  facilities,  including  the related  equipment,  furniture and
fixtures,  to the Company.  These facilities are part of 43 facilities leased by
IHS from Litchfield  Asset  Management  Corp.  ("LAM").  IHS is required to meet
certain  financial  tests under its agreement with LAM and, to the extent IHS is
unable to meet such tests,  LAM has the right to terminate  IHS' lease of the 43
facilities,  which would result in the termination of the subleases. The loss of
these facilities, which accounted for approximately 27% and 39% of the Company's
revenues,  and approximately  19% and 40% of the Company's  earnings before loss
from impairment of long-lived assets, income taxes, and corporate administrative
and general expense in the years ended December 31, 1996 and 1995, respectively,
could have a  material  adverse  effect on the  Company's  business,  results of
operations and financial  condition.  There can be no assurance that IHS will be
able to meet such tests.

   In December 1995, IHS acquired  Carrington  Pointe, a 172 bed congregate care
and assisted  living  facility.  Prior to the  acquisition,  IHS had managed the
facility  under a  management  agreement  with the prior  owner.  Following  the
acquisition,  IHS  transferred  ownership  of the  facility  to the Company as a
capital contribution.

   In January 1996, IHS acquired  Vintage Health Care Center,  a skilled nursing
and assisted and  independent  living  facility which it had previously  managed
from April 1995. The Company leased the assisted and independent living portions
of the  facility  from IHS until June 1, 1996,  when the Company and IHS entered
into  a  condominium   agreement  for  the  facility.  In  connection  with  the
condominium  agreement,  the Company received as a capital contribution from IHS
the condominium interest in the assisted living portion of the facility.

   In July 1996 the Company  acquired a leasehold  interest in the  Homestead of
Garden  City  and  Homestead  Wichita  facilities  from one of its  third  party
developers.

   In August  1996 the  Company  acquired  the Cabot  Pointe  facility  for $2.8
million with funds  borrowed  from IHS. The Company sold and leased the facility
back from a real estate investment trust in October 1996.

   In October 1996, the Company  acquired the Terrace Gardens facility for $12.2
million with proceeds from its initial public offering.

   In January 1997, the Company  acquired four  facilities in Virginia for $15.8
million with funds borrowed through a bridge loan from NationsBank.  NationsBank
provided this loan in  contemplation  of the completion of a senior secured line
of credit.  See "Item 7.  Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

   In  February  1997,  the Company  acquired a  leasehold  interest in the West
Columbia facility.

   In March 1997, the Company acquired  leasehold  interests in the Brantley and
Jaylene facilities.


EXECUTIVE OFFICERS OF THE COMPANY


   The  following  table  sets forth  certain  information  with  respect to the
executive officers of the Company:


NAME                   AGE   POSITION
----                   ---   --------
Robert N. Elkins,
M.D..................  54    Chairman of the Board of Directors
Edward J. Komp.......  42    President, Chief Executive Officer and Director
Kayda A. Johnson ....  48    Senior Vice President--Chief Operating Officer
John B. Poole........  45    Senior Vice President--Chief Financial Officer 
Dan Hirschfield......  39    Senior Vice President--Acquisitions and Development


                                14




<PAGE>

   Robert N.  Elkins,  M.D.  became the  Chairman of the Board of the Company in
June 1996.  Dr.  Elkins has been the  Chairman of the Board and Chief  Executive
Officer of IHS, the sole stockholder of the Company prior to October 1996, since
March 1986 and he served as President of IHS from March 1986 to July 1994.  From
1980  until  co-founding  IHS in 1985,  Dr.  Elkins  was a  co-founder  and Vice
President of Continental Care Centers,  Inc., an owner and operator of long-term
healthcare  facilities.  From 1976  through  1980,  Dr.  Elkins was a practicing
physician. Dr. Elkins is a graduate of the University of Pennsylvania,  received
his M.D. degree from the Upstate Medical Center,  State  University of New York,
and completed his residency at Harvard  University Medical Center. Dr. Elkins is
a director of Capstone Capital Corporation,  Community Care of America, Inc. and
UroHealth Systems, Inc.

   Edward J. Komp has served as  President  and Chief  Executive  Officer of the
Company since March 1996 and as a director of the Company since June 1996. Prior
to  joining  the  Company,  he served as  Executive  Vice  President  -Corporate
Operations of IHS from November 1995 to March 1996 and as Senior Vice  President
-- Managed  Operations of IHS from October 1993 to November  1995,  where he had
operational  responsibility  for over 100  assisted  living and  long-term  care
facilities with approximately 13,000 beds nationwide.  From 1979 until he joined
IHS, Mr. Komp served in various senior operational and financial capacities with
National Medical Enterprises, Inc., now Tenet Healthcare Corp.


   Kayda A.  Johnson  has served as Senior  Vice  President  -- Chief  Operating
Officer of the  Company  since March 1996.  Prior to joining  the  Company,  she
served as Senior Vice  President for  Operations of IHS'  Retirement  Management
Services  division  from March 1991.  Prior to joining  IHS, she was Director of
Operations  for Forum  Group from 1990,  and from 1982 to 1990 she was  regional
Vice President of Operations for Retirement  Corporation of America. Ms. Johnson
is a licensed  Nursing Home  Administrator  and Registered  Nurse. She is also a
licensed Preceptor for Nursing Home  Administrators and a Certified  Residential
Care Administrator.  She has served on the faculty of the University of Redlands
for the past 15 years,  teaching business and management  courses to MBA and BBA
students.  She is a member of the Board of Directors of the National Association
for the Senior Living  Industries  ("NASLI") and serves as NASLI's  Commissioner
for Health Care as well as on the  Executive  Committee.  She is a member of the
Board of Directors  of the Assisted  Living  Facilities  Association  of America
("ALFAA");  serves on the  Residential  Services  Committee  for the  California
Association of Homes and Services for the Aged ("CAHSA"); and is a member of the
advisory committee of the American Seniors Housing Association.  She also serves
on the Assisted Living  Advisory Board of the American  Health Care  Association
("AHCA"), the Assisted Living Advisory Board -- Contemporary Long Term Care, and
the Advisory Group for the NIC. 

   John B. Poole has served as Chief  Financial  Officer  of the  Company  since
March  1996.  From  November  1995  until he joined  the  Company,  he was as an
independent  consultant to the long-term care  industry.  From July 1994 through
October 1995 he served as Chief Financial  Officer of American Care Communities,
Inc.,  an owner and  operator of  assisted  living  residences.  From March 1993
through  June 1994 he served as Chief  Financial  Officer of Medifit of America,
Inc., an owner and operator of outpatient physical therapy centers and corporate
fitness centers. From October 1990 to February 1993 he served as Chief Financial
Officer of Frankwood  Holdings,  Ltd.,  an owner and  operator of a  third-party
administrator  of health  claims.  From 1979 to August 1990 he served in various
positions  at Beverly  Enterprises,  Inc.,  an owner and  operator of  long-term
health care  facilities,  including  Senior Vice President and Chief  Accounting
Officer,  where he had responsibility for all accounting and data processing for
the entire company.


   Daniel A. Hirschfeld has served as Senior Vice President -- Acquisitions  and
Development  of the Company  since  February  1997.  From  January  1995 through
February   1997,  he  held  the  position  of  Vice  President  --  Health  Care
Acquisitions  for Manor Care  Inc.,  a New York Stock  Exchange  listed  company
involved in ownership,  operation and development of assisted living,  long term
care and  hospitality  facilities.  From April 1994 through  January  1995,  Mr.
Hirschfeld  was employed as President  and Chief  Operating  Officer  -Essential
Services Division for Mariner Health Care, Inc., a NASDAQ listed company,  which
is engaged in providing  post acute services for long term care  residents.  Mr.
Hirschfeld was responsible for the operation of all non-facility  based services
including  home health,  pharmacy,  therapies  and medical  supplies.  From 1985
through 1994, Mr. Hirschfeld was employed by Meridian 

                                15




<PAGE>

Health Care, Inc.,  (which was acquired by Genesis Health Ventures,  Inc., a New
York Stock Exchange listed  company,  in October 1994), an owner and operator of
long term care facilities.  Mr. Hirschfeld served in various positions including
Vice President -- Development and Planning,  Vice President -- Pharmacy Services
and Chief  Operating  Officer for Staff  Replacement  Services.  From 1979 until
1985,  he was  employed  by Crown  Central  Petroleum,  Inc.  and  Constellation
Services, Inc., a subsidiary of Baltimore Gas and Electric, Inc. (both companies
are  listed  on the New York  Stock  Exchange).  His  responsibilities  included
treasury functions,  strategic planning, financial analysis,  acquisitions,  and
accounting.


                                16




<PAGE>
ITEM 2. PROPERTIES


   The Company  currently  operates 23 assisted living  facilities in 10 states,
containing 2,466 beds.  Eleven of the facilities are owned, 8 are leased and the
remaining 4 are managed.  The Company's existing  facilities consist of assisted
living  facilities,  continuing  care  retirement  communities,  congregate care
facilities  and  senior  housing.  Several  of  the  Company's  facilities  have
specially  designed wings for residents with  Alzheimer's  disease,  and several
offer  adult  day  care  services.   The  Company  believes  that  the  physical
configuration of its facilities, combined with its level of service, contributes
to resident satisfaction and allows seniors residing at the Company's facilities
to maintain an appropriate level of autonomy.


   The following  table  presents  certain  information  regarding the Company's
owned and leased facilities as of March 14, 1997.

<TABLE>
<CAPTION>
                                   DATE
FACILITY/LOCATION              ACQUIRED(1)  BEDS    OWNERSHIP
-----------------------------  ----------- ------ ------------
<S>                             <C>         <C>    <C>
Brantley
 Milledgeville, Georgia  .....   3/97        48       Leased    
Cabot Pointe                                                    
 Bradenton, Florida ..........   8/96        76       Leased    
Carrington Pointe                                               
 Fresno, California ..........  12/95       172       Owned     
Cheyenne Place                                                  
 Colorado Springs, Colorado  .   9/94        95       Sub-lease 
Churchland House                                                
 Porstmouth, Virginia ........   2/97        48       Owned     
Garden City Homestead                                           
 Garden City, Kansas .........   7/96        46       Leased    
Ghent Arms                                                      
 Norfolk, Virginia ...........   2/97        48       Owned     
Gloucester House                                                
 Gloucester, Virginia ........   2/97        48       Owned     
Heron's Run(2)                                                  
 West Palm Beach, Florida  ...  12/93        34       Owned     
Homestead of Denton                                             
 Denton, Maryland ............   3/94        50       Owned     
King's Grant House                                              
 Virginia Beach, Virginia  ...   2/97        54       Owned     
Jaylene                                                         
 St. Petersburg, Florida  ....   3/97        55       Leased    
The Shores                                                      
 Bradenton, Florida ..........   9/94       311       Sub-lease 
Terrace Gardens                                                 
 Wichita, Kansas .............  10/96       317       Owned     
Treemont(2)                                                     
 Dallas, Texas ...............   2/89       251       Owned     
The Vintage(2)                                                  
 Denton, Texas ...............   1/96       106       Owned     
Waterside Retirement Estates                                    
 Sarasota, Florida ...........  12/93       164       Owned     
West Columbia                                                   
West Columbia, South                                            
 Carolina.....................   2/97        55       Leased    
Wichita Homestead                                               
 Wichita, Kansas .............   7/96        46       Leased    
                                                      
</TABLE>
----------

   (1) Represents date operations commenced by IHS for facilities operated
prior to November 1995. See "Item 1. Business -- Company History."

   (2) The  Company  owns a  condominium  interest  in the  assisted  living and
related services portion of this facility; the remaining condominium interest in
the facility, which consists of a skilled nursing facility, is owned by IHS. The
Company is prohibited from including a segregated and secured  Alzheimer's  ward
in its  portion of these  facilities.  IHS  provides  certain  services to these
facilities.  The Company cannot  transfer its condominium  interest  without the
prior consent of IHS. The IHS facility in which the Treemont facility is located
is  subject to a  mortgage.  Should IHS  default  on its  obligations  under the
mortgage,  the lender could  foreclose on the mortgage,  which could  materially
adversely  affect the Company's  business,  results of operations  and financial
condition. 

                                17




<PAGE>

   A significant number of the 52 properties  currently  operated,  managed,  or
under  development  are located in  California,  Louisiana and Texas (7,8 and 11
facilities  respectively).  The market value of these  properties and the income
generated from  properties  managed or leased by the Company could be negatively
affected by changes in local and  regional  economic  conditions  and by acts of
nature. In addition,  the Company  anticipates that a substantial portion of its
business and operations will ultimately be concentrated in several states in the
southern, midwestern and western portion of the United States, and that economic
conditions in such states may adversely affect the Company's  business,  results
of operations and financial condition.


ITEM 3. LEGAL PROCEEDINGS

   The Company is involved in various legal  proceedings  that are incidental to
the  conduct of its  business.  The  Company is not  involved  in any pending or
threatened  legal  proceedings  which the Company  believes could  reasonably be
expected to have a material adverse effect on the Company's financial condition,
liquidity or results of operations.

   The  Company's  business  entails an inherent  risk of  liability.  In recent
years, participants in the long-term care industry,  including the Company, have
become  subject to an  increasing  number of lawsuits  alleging  malpractice  or
related legal theories, many of which involve large claims and significant legal
costs.  The  Company  expects  that from time to time it will be subject to such
suits as a result of the nature of its business. The Company currently maintains
insurance policies in amounts and with such coverage and deductibles as it deems
appropriate,  based  on  the  nature  and  risks  of  its  business,  historical
experience  and industry  standards.  There can be no assurance,  however,  that
claims in excess of the  Company's  insurance  coverage or claims not covered by
the Company's  insurance coverage will not arise. A successful claim against the
Company not covered by, or in excess of, the  Company's  insurance  could have a
material  adverse  effect  on the  Company's  operating  results  and  financial
condition.  Claims  against the Company,  regardless  of their merit or eventual
outcome,  may also have a material  adverse  effect on the Company's  ability to
attract residents or expand its business and would require  management to devote
time to  matters  unrelated  to the  operation  of the  Company's  business.  In
addition,  the Company's insurance policies must be renewed annually,  and there
can be no assurance that the Company will be able to obtain liability  insurance
coverage  in the  future  or,  if  available,  that  such  coverage  will  be on
acceptable terms.

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

   None.

                                18




<PAGE>
                                   PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

                         PRICE RANGE OF COMMON STOCK

   The Common  Stock is quoted on the Nasdaq  National  Market  under the symbol
"ILCC".  The Common Stock was initially offered to the public on October 3, 1996
at $8.00 per share. The following table sets forth for the periods indicated the
high and low last  reported  sale prices for the Common Stock as reported by the
Nasdaq National Market.

        CALENDAR YEAR 1996                                HIGH      LOW
                                                        --------  -------
Fourth Quarter (beginning October 3).................   $  8 1/2   4 3/4



   As of March 14, 1997 there were 10 record holders of the Common Stock.


   The  Company  has never  declared  or paid any cash  dividends  on its Common
Stock.  The payment of any future  dividends  will be at the  discretion  of the
Company's  Board of Directors and will depend upon,  among other things,  future
earnings,  operations,  capital requirements, the general financial condition of
the Company, contractual restrictions and general business conditions.

                                19




<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA


   The following tables summarize certain selected consolidated  financial data,
which should be read in conjunction  with the Company's  Consolidated  Financial
Statements  and  related  Notes and  "Management's  Discussion  and  Analysis of
Financial  Condition and Results of Operations"  included  elsewhere herein. The
selected data presented below under the captions  "Statement of Operations Data"
and "Balance Sheet Data" as of December 31, 1994,  1995 and 1996 and for each of
the years in the  four-year  period  ended  December  31, 1996 are derived  from
consolidated financial statements of the Company which have been audited by KPMG
Peat  Marwick  LLP,  independent  certified  public  accountants.  The  selected
consolidated  financial  data as of December  31, 1992 and 1993 and for the year
ended  December  31,  1992 are derived  from  unaudited  consolidated  financial
statements of the Company. The consolidated  financial statements as of December
31,  1995 and 1996 and for each of the  years in the  three  year  period  ended
December 31, 1996 and the report thereon, are included elsewhere herein. 

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                     ----------------------------------------------------
                                                        1992      1993      1994       1995       1996
                                                     --------- --------- ---------- ---------- ----------
                                                           (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<S>                                                  <C>       <C>       <C>        <C>        <C>
Statement of Operations Data: (1)
Revenues:
 Monthly service and entrance fees.................  $4,681    $5,010    $10,906    $15,123    $23,047
 Management services and other.....................      48       230        739      1,146      1,182
                                                     --------- --------- ---------- ---------- ----------
  Total revenues...................................   4,729     5,240     11,645     16,269     24,229
                                                     --------- --------- ---------- ---------- ----------

Expenses:
 Community operations..............................   3,020     3,455      8,254     11,243     15,526
 Corporate administrative and general..............     284       315        726      1,005      3,884
 Rent..............................................     821       856      1,466      2,430      2,615
 Depreciation and amortization.....................      --        24        369        415      1,220
 Loss on impairment of long-lived assets (2).......      --        --         --      5,126         --
                                                     --------- --------- ---------- ---------- ----------
  Total expenses...................................   4,125     4,650     10,815     20,219     23,245
                                                     --------- --------- ---------- ---------- ----------
Operating income (loss) ...........................     604       590        830     (3,950)       984
Interest income ...................................      --        --         --         --         92
Interest expense...................................      --        --         --         --       (349)
                                                     --------- --------- ---------- ---------- ----------
Earnings (loss) before income taxes and minority
 interest..........................................     604       590        830     (3,950)       727
Minority interest..................................      --        10        (29)        37         --
                                                     --------- --------- ---------- ---------- ----------
Earnings (loss) before income taxes................     604       580        859     (3,987)       727
Federal and state income taxes.....................     230       226        322       (643)       280
                                                     --------- --------- ---------- ---------- ----------
Net earnings (loss) ...............................  $  374    $  354    $   537    $(3,344)   $   447
                                                     ========= ========= ========== ========== ==========
Earnings (loss) per common share ..................  $ 0.10    $ 0.09    $  0.14    $ (0.86)   $  0.10
                                                     ========= ========= ========== ========== ==========
Weighted average shares outstanding................   3,898     3,898      3,898      3,898      4,541
                                                     ========= ========= ========== ========== ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                     ----------------------------------------------------
                                                        1992      1993      1994       1995       1996
                                                     --------- --------- ---------- ---------- ----------
                                                                        (IN THOUSANDS)
<S>                                                  <C>       <C>       <C>        <C>        <C>
Balance Sheet Data:
Cash and cash
equivalents........................................  $   --    $    1    $   787    $   413    $ 4,475
Working capital
(deficit)..........................................      26       (36)       208       (315)    (1,349)
Total assets.......................................      26    15,834     18,300     25,774     75,575
Long term debt.....................................      --        --         --         --      1,579
Minority interest..................................      --     2,400      2,371         --         --
Stockholders' equity ..............................      26     4,886      6,347     14,773     57,966
</TABLE>

----------
(1)  The Company has grown substantially through acquisitions,  which materially
     affect the comparability of the financial data reflected herein.

(2)  In 1995, the Company  implemented  Financial  Accounting  Standards Board's
     Statement of Financial Accounting Standards No. 121 in connection with IHS'
     implementation   thereof.   Through  evaluation  of  the  recent  financial
     performance and a recent  appraisal of one of its  facilities,  the Company
     estimated the fair value of this facility and determined  that the carrying
     value of certain  long-lived  assets,  including goodwill and buildings and
     improvements,  exceeded  their fair value.  The excess  carrying  value was
     written off and is included in the statement of operations for 1995 as loss
     on impairment of long-lived  assets.  See "Item 7. Management's  Discussion
     and Analysis of Financial Condition and Results of Operations."

                                20




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

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


   Statements  in this  Annual  Report on Form  10-K  concerning  the  Company's
business  outlook or future  economic  performance;  anticipated  profitability,
revenues,  expenses or other financial items; and product line growth,  together
with  other  statements  that are not  historical  facts,  are  "forward-looking
statements"   as  that  term  is  defined   under   Federal   Securities   Laws.
Forward-looking statements are subject to risks, uncertainties and other factors
which could cause actual results to differ  materially from those stated in such
statements.  Such risks,  uncertainties and factors include, but are not limited
to, the Company's rapid growth strategy,  anticipated operating losses,  limited
development  experience,  need for substantial  additional capital,  substantial
debt and lease  obligations,  competition,  government  regulation  and  general
economic  conditions,  as well as other risks detailed in the Company's  filings
with the  Securities  and Exchange  Commission,  including this Annual Report on
Form 10-K.


OVERVIEW

   The Company  currently  operates 23 assisted  living and other senior housing
facilities  containing  2,466  beds in 10  states.  The  Company  is  pursuing a
strategy of rapid growth through  development  and  acquisition,  and intends to
acquire, develop or obtain agreements to manage approximately 60 assisted living
facilities per year in each of the next three years.  Approximately 99% of ILC's
revenues from its owned and leased  facilities in 1996 were derived from private
pay sources.  The Company's historical results of operations are not necessarily
indicative  of  the  Company's  future  financial  performance  because  of  the
Company's prior  operation as a wholly-owned  subsidiary of IHS and its strategy
to significantly expand its operating base over the next three years.


   The  Company's  growth  strategy   focuses  on  the  rapid   acquisition  and
development of assisted living facilities. The Company currently expects to open
20 newly developed assisted living facilities in 1997, all of which are expected
to incur start-up losses for at least eight months after commencing  operations.
The Company  estimates  that it will take  approximately  six to 12 months for a
newly  developed  assisted  living  facility  to achieve a  stabilized  level of
occupancy  (i.e.,  an occupancy level in excess of 90%). As a result the Company
expects to incur  start-up  losses  through 1997 and into 1998.  The Company may
incur  additional  operating  losses  thereafter if it fails to achieve expected
occupancy rates at newly acquired or developed facilities or if expenses related
to the  development,  acquisition  or operation  of newly  acquired or developed
facilities  exceed  expectations.  There  can be no  assurance  as to  when  the
Company's operations will become profitable, if at all. The inability to achieve
profitability at a newly acquired or developed  facility on a timely basis could
have  an  adverse  effect  on the  Company's  business,  operating  results  and
financial  conditions  and the market price of the Common Stock.  The success of
the Company's  future  operations is dependent to a large extent on expansion of
the Company's  operational base. There can be no assurance that the Company will
not experience unforeseen expenses, difficulties, complications and delays which
could  result  in  greater  than  anticipated   operating  losses  or  otherwise
materially  adversely  affect the Company's  business,  financial  condition and
results of operations.

   To achieve its growth objectives,  the Company will need to obtain sufficient
financial  resources  to fund  its  development,  construction  and  acquisition
activities and anticipated operating losses.  Accordingly,  the Company's future
growth will depend on its ability to obtain  additional  financing on acceptable
terms.  The Company  expects  negative  cash flow for at least the next  several
years as it  continues  to  develop  and  acquire  assisted  living  facilities,
primarily as a result of the  development  and opening of 20 new assisted living
facilities in each of the next three years.  There can be no assurance  that any
newly developed  facility will achieve a stabilized  occupancy rate and resident
mix that meets the Company's  expectations or generates  positive cash flow. The
Company currently estimates that the net proceeds of its initial public offering
together with financing  commitments and  sale/leaseback  and mortgage financing
that  it  anticipates  will  be  available,  will  be  sufficient  to  fund  its
acquisition and development program 

                                21




<PAGE>

and its  anticipated  operating  losses  at least  through  the end of the first
quarter of 1998. There can be no assurance, however, that additional capital, if
needed,  will be available at that time or that the Company will not be required
to seek additional capital earlier. 

   The Company expects from time to time to seek additional funds through public
or private financing, including equity financing. If additional funds are raised
by  issuing  equity  securities,   the  Company's  stockholders  may  experience
dilution.  Further,  such equity  securities  may have  rights,  preferences  or
privileges  senior to those of the  Common  Stock.  To the  extent  the  Company
finances its activities through debt or sale/leaseback arrangements, the Company
may become subject to certain  financial and other  covenants which may restrict
its ability to pursue its rapid  growth  strategy  and to pay  dividends  on the
Common  Stock.  There  can  be  no  assurance  that  adequate  equity,  debt  or
sale/leaseback  financing will be available as needed or on terms  acceptable to
the Company.  A lack of available funds may require the Company to delay,  scale
back or eliminate all or some of its development  and  acquisition  projects and
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.


   The  Company  intends to  finance  the  development  and  acquisition  of its
assisted  living  facilities  through  mortgage   financing,   operating  leases
(including  sale/leaseback  financing)  and lines of  credit.  As a result,  the
Company  expects to incur  substantial  indebtedness  and debt related  payments
(including  payments  on  operating  leases) as the  Company  pursues its growth
strategy.  Consequently,  the Company  anticipates that a substantial portion of
the  Company's  cash flow will be devoted to debt  service  and lease  payments.
There can be no assurance  that the Company will generate  sufficient  cash flow
from operations to cover required interest, principal and lease payments. If the
Company were unable to meet interest,  principal or lease  payments,  or satisfy
financial covenants relating to, among other things, cash flow and debt coverage
ratios,  it could be required to seek  renegotiation  of such payments or obtain
additional  equity or debt  financing.  There can be no assurance  that any such
efforts would be  successful  or timely or that the terms of any such  financing
would be acceptable to the Company. Any payment or other default could cause the
lender to foreclose upon the facility securing such indebtedness or, in the case
of an  operating  lease,  could  result  in  termination  of the  lease,  with a
consequent  loss of income and asset value to the Company.  Furthermore,  to the
extent  the   Company's   mortgage   and   sale/leaseback   agreements   contain
cross-default and  cross-collateralization  provisions, a default by the Company
on one of its payment obligations could adversely affect a significant number of
the Company's  properties.  The Company's leverage may also adversely affect the
Company's  ability to respond to changing  business and economic  conditions  or
continue its development and acquisition program.

   The Company derives its revenues from two primary sources:  (i) resident fees
for the delivery of assisted living  services and (ii)  management  services and
other income,  primarily for  management of facilities  owned by third  parties.
Historically,  most of the  Company's  operating  revenue has come from resident
fees,  which in 1996 was 95.1% of total  revenues.  Resident fees  typically are
paid monthly by residents, their families or other responsible parties. Resident
fees include revenue derived from basic care, entrance fees, healthcare services
provided by the Company,  Alzheimer's care and other sources.  Entrance fees are
one-time  fees  generally  payable by a resident upon  admission.  Residents who
require  personal  care in  excess of  services  provided  under the basic  care
program pay additional fees. Management services and other income, which in 1996
accounted for the remaining 4.9% of total revenue,  consists of management  fees
and other services  provided to residents.  Management fees are generally in the
range of four to five percent of a managed facility's total operating  revenues.
Resident fees and  management  fees are recognized as revenues when services are
provided.

   From its  inception in November 1995 through its initial  public  offering in
October  1996,  the  Company  was  operated  as  a  wholly-owned  subsidiary  of
Integrated  Health Services,  Inc.  Through  September 30, 1996 IHS provided all
required financial,  legal, accounting,  human resources and information systems
services to the Company, and satisfied all the Company's capital requirements in
excess of internally  generated  funds. IHS charged the Company a flat fee of 6%
of total revenue for these  services,  except that with respect to the Waterside
facility prior to November 1995, IHS and the minority owner of the facility each
charged ILC a fee of 4.5% of monthly service fee revenue for these services. The
Company  estimates that the cost of obtaining  these services from third parties
would have been significantly higher 

                                22




<PAGE>
than  the fee  charged  by IHS.  In  addition,  IHS  provides  certain  building
maintenance,  housekeeping,  emergency  call and resident  meal  services to the
Company's Treemont, Vintage and West Palm Beach facilities.


   The Company believes that for the foreseeable  future the greatest portion of
its  revenue  growth  will  be  from  the  development  and  acquisition  of new
facilities.  The Company  generated  approximately  99% of its revenues from its
owned and leased  facilities  from  private pay sources  during  1996.  However,
depending in part on the results of future  acquisitions,  this percentage could
change from time to time. The Company believes that, for the foreseeable future,
the level of governmental  reimbursement for its services that will be available
to its residents who receive such  reimbursement  will be  insufficient to cover
the  costs of  delivering  the  level of  service  that  the  Company  currently
provides.  As a result,  the Company  currently and for the  foreseeable  future
expects to rely primarily on its residents' ability to pay the Company's charges
from their own familial financial resources.


RESULTS OF OPERATIONS

   The following table presents selected financial data as a percentage of total
revenues for the periods indicated.

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                            1994      1995     1996
                                                          -------- --------- --------
<S>                                                       <C>      <C>       <C>
Revenues:
 Monthly service and entrance fees......................   93.7 %   93.0 %    95.1%
 Management services and other..........................    6.3      7.0       4.9
                                                          -------- --------- --------
 Total revenue..........................................  100.0    100.0     100.0
                                                          -------- --------- --------
Expenses:
 Community operations...................................   70.9     69.1      64.1
 Corporate administrative and general...................    6.2      6.2      16.0
 Rent...................................................   12.6     14.9      10.8
 Depreciation and amortization..........................    3.2      2.6       5.0
 Loss on impairment of long-lived assets................    0.0     31.5       0.0
                                                          -------- --------- --------
  Total expenses........................................   92.9    124.3      95.9
                                                          -------- --------- --------

Operating Income........................................    7.1    (24.3)      4.1

Interest Income.........................................    0.0      0.0       0.4
Interest Expense........................................    0.0      0.0      (1.4)
                                                          -------- --------- --------
Earnings (loss) before income taxes and minority
 interest...............................................    7.1    (24.3)      3.1
Minority interest.......................................   (0.2)     0.3       0.0
                                                          -------- --------- --------
Earnings (loss) before income taxes.....................    7.3    (24.6)      3.1
Federal and state income taxes..........................    2.7     (4.0)      1.3
                                                          -------- --------- --------
Net earnings (loss).....................................    4.6 %  (20.6)%     1.8%
                                                          ======== ========= ========

</TABLE>

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

   Revenues  increased  from  $16.3  million  in 1995 to $24.2  million in 1996,
representing  a 48.9%  increase.  Substantially  all of the increase in revenues
resulted  from  the  acquisition  of one  facility  in  December  1995  and five
facilities  in  1996.  Average  occupancy  of the  Company's  owned  and  leased
facilities during the years ended December 31, 1996 and 1995 was 91%. Management
services and other revenue  increased  from $1.1 million in 1995 to $1.2 million
in 1996, representing a 3.1% increase.

   Community  operations  expense  increased from $11.2 million in 1995 to $15.5
million  in  1996,  representing  a  38.1%  increase.  Substantially  all of the
increase in community  operations  expense resulted from the addition of the six
facilities during 1995 and 1996. Community operations expense as a percentage of
revenue  decreased  from 69.1% of  revenues in 1995 to 64.1% of revenues in 1996
primarily  due to the improved  operating  results of facilities in operation in
both periods.

                                23


<PAGE>

   Corporate  administrative  and general expense increased from $1.0 million in
1995 to $3.9 million in 1996, representing a 286.3% increase.  Substantially all
of the increase in corporate  administrative  and general expense  resulted from
the opening of the corporate office in Florida. Prior to September 30, 1996, IHS
had  provided  all  of the  corporate  services  for  the  Company  for a fee of
approximately 6% of revenue. This arrangement was terminated in October 1996 and
now the Company provides all of its own corporate resources.

   Rent   increased  from  $2.4  million  in  1995  to  $2.6  million  in  1996,
representing a 7.6% increase.  The increase in rent expense  primarily  resulted
from the  leasing  of three  facilities  during  1996  partially  offset  by the
purchase of two facilities that were previously leased.  Rent as a percentage of
revenues  decreased  from 14.9% in 1995 to 10.8% in 1996 due to the  purchase of
facilities  previously  leased in  addition to the  purchase  of two  facilities
during 1995 and 1996. 

   Depreciation and amortization expense increased from $415,000 in 1995 to $1.2
million in 1996,  representing a 194.4%  increase.  The increase in depreciation
and  amortization  expense  primarily  resulted  from  the  acquisition  of  new
facilities  and  facilities  that were  previously  leased during 1995 and 1996.
Depreciation and amortization  increased as a percentage of revenue from 2.6% to
5.0%  due  to the  acquisition  of  new  facilities  and  facilities  that  were
previously leased during 1995 and 1996.


   Earnings  (loss) before income taxes and minority  interest  increased from a
loss of $3.9 million in 1995 to earnings of $727,000 in 1996.  This increase was
primarily  due to  income  from  1995  and  1996  acquisitions,  the  loss  from
impairment of  long-lived  assets in 1995,  partially  offset by the increase in
corporate administrative and general costs. 

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


   Revenue  increased  from  $11.6  million  in 1994 to $16.3  million  in 1995,
representing  a 39.7%  increase.  Substantially  all of the increase in revenues
resulted from the lease of The Shores and Cheyenne Place  facilities  commencing
August 31, 1994 and the addition of the Homestead at Denton facility on April 1,
1994.  Average occupancy of the Company's owned and leased facilities during the
year ended  December  31,  1995 was 91% as compared to 80% during the year ended
December 31, 1994. Management services and other revenue increased from $739,000
in 1994 to $1.1 million in 1995, representing a 55.1% increase, primarily due to
the addition of three managed  facilities in 1995 and increased other revenue at
its existing owned and leased facilities.

   Community  operations  expense  increased  from $8.3 million in 1994 to $11.2
million  in  1995,  representing  a  36.2%  increase.  Substantially  all of the
increase  in  facility  operations  expense  resulted  from the  addition of the
Cheyenne  Place,  the Homestead at Denton and The Shores  facilities.  Community
operations  expense as a percentage of revenue  decreased from 70.9% of revenues
in 1994 to 69.1% of revenues in 1995 due to the  improved  operating  results in
1995 of the two facilities leased and the one facility acquired in 1994.

   Corporate  administrative and general expense increased from $726,000 in 1994
to $1.0 million in 1995, representing a 38.6% increase. Substantially all of the
increase in  corporate  administrative  and general  expense  resulted  from the
addition  of the  Cheyenne  Place,  the  Homestead  at  Denton  and  The  Shores
facilities.  Corporate  administrative  and general  expenses as a percentage of
revenues remained constant in both periods at 6.2% of revenues.

   Rent   increased  from  $1.5  million  in  1994  to  $2.4  million  in  1995,
representing a 65.8% increase.  The increase in rent expense primarily  resulted
from the two leases  entered  into in 1994.  Rent as a  percentage  of  revenues
increased from 12.6% in 1994 to 14.9% in 1995 due to the lease of The Shores and
Cheyenne Place facilities in 1994.

   Depreciation  and  amortization  expense  increased  from $369,000 in 1994 to
$415,000 in 1995,  representing a 12.4%  increase.  The increase in depreciation
and amortization  expense primarily  resulted from the addition of the Homestead
at  Denton  facility  and  routine  capital   additions  at  other   facilities.
Depreciation and amortization  decreased as a percentage of revenue from 3.2% to
2.6% due to the increase in revenue from the two facilities leased in 1994. 

                                24




<PAGE>

   Loss on Impairment of Long-Lived  Assets.  In 1995,  the Company  implemented
Financial   Accounting  Standards  Board's  Statement  of  Financial  Accounting
Standards  No.  121 in  connection  with IHS'  implementation  thereof.  Through
evaluation of the recent  financial  performance  and a recent  appraisal of its
Waterside  facility,  the Company  estimated the fair value of this facility and
determined  that the  carrying  value of certain  long-lived  assets,  including
goodwill and buildings and  improvements,  exceeded their fair value. The excess
carrying  value of $5.1 million was written off and is included in the statement
of operations for 1995 as a loss on impairment of long-lived assets. See Notes 1
and 11 of Notes to Consolidated Financial Statements.


   Earnings  (loss) before  income taxes and minority  interest  decreased  from
earnings  of $830,000 in 1994 to loss of $3.9  million in 1995,  representing  a
decrease of 575.7%.  This was  primarily  due to improved  operating  results at
facilities in operation in both periods and  facilities  acquired  subsequent to
December 31, 1994 offset by the loss on impairment of long-lived assets.

LIQUIDITY AND CAPITAL RESOURCES


   At December  31,  1996,  the Company  had a net  working  capital  deficit of
$1,349,000 compared to a deficit of $315,000 at December 31, 1995.

   On October 9, 1996, the Company  completed its initial public  offering.  The
Company  issued 2.8 million  shares and Integrated  Health  Services  issued 1.4
million  shares  at  $8  per  share.  The  net  proceeds  to  the  Company  were
approximately  $19.1 million;  the net proceeds to IHS were approximately  $10.4
million. IHS continues to hold 37% of the outstanding shares of the Company. The
Company  used the  proceeds  of the  offering to  purchase  the Terrace  Gardens
facility and to repay certain indebtedness to IHS.

   In October 1996,  the Company  borrowed $3.4 million from IHS. The note bears
interest  at 14% and  will be  repaid  over 24  equal  monthly  installments  of
principal plus interest beginning on December 2, 1996.

   The Company has  obtained a  commitment  (the  "Financing  Commitment")  from
Health Care Property Investors,  Inc. ("HCPI"),  a real estate investment trust,
to make  available to ILC up to $100 million to develop,  construct  and acquire
facilities.  No less than $40 million is to be  invested in existing  facilities
("Existing   Facilities")   through   purchase   and  lease  or   sale/leaseback
transactions.  Remaining  funds  (up to $60  million)  may  be  invested  in new
development  projects  ("New  Facilities").  The Company  will  develop each New
Facility pursuant to a separate  development  agreement with HCPI and will lease
each New  Facility  and  financed  Existing  Facility  from HCPI  pursuant  to a
separate lease agreement.  Each  acquisition,  development,  lease and ancillary
agreement   executed   pursuant  to  the  Financing   Commitment   will  contain
representations   and  warranties,   indemnities,   affirmative   covenants  and
conditions precedent customary for real estate investment trust transactions.  A
$200,000  deposit  (the  "Expense  Deposit"),  to ensure  the  payment of HCPI's
expenses  in the  event  transactions  contemplated  pursuant  to the  Financing
Commitment  are not  completed,  was paid upon the  Company's  execution  of the
Financing Commitment. The Financing Commitment expires on June 30, 1997. 

   Each development agreement executed pursuant to the Financing Commitment will
require the Company,  as  developer,  to arrange,  coordinate  and carry out all
services  necessary to develop each New Facility.  The Maximum Cost (as defined)
based on an appraisal of Fair Market Value (as defined) and a development budget
for each  facility  will be  approved by HCPI and  included  in the  development
agreement.  Total Construction Cost (as defined) will equal land cost plus total
actual  construction  costs,  one percent of Maximum Cost  (accrued as a cost by
HCPI),  all legal costs and fees  (including  in-house legal costs)  incurred in
connection with the project, a construction  administration fee to be accrued as
a cost by HCPI equal to $1,550 per month (subject to reduction) and an allowance
for HCPI's cost of money at 1.5% over the Bank of New York prime rate.  The cost
of overruns, if any, including HCPI's carrying cost on overruns,  are to be paid
by the Company.  HCPI will not be required to pay a Total  Construction  Cost in
excess of Maximum  Cost.  The Company will  guarantee  the  completion  of a New
Facility  within 12 months and will  guarantee to make all payments in excess of
Maximum  Cost to  complete  the  facility.  The Company may include in the Total
Construction Cost the amount of any actual development fee

                                25




<PAGE>
paid to an unrelated  developer,  up to a maximum of 5% of Maximum Cost. IHS has
agreed to guaranty  certain of the Company's  obligations  to HCPI in connection
with the development of facilities,  except that IHS is not required to guaranty
such obligations as long as the Company  maintains  stockholders'  equity or net
worth in excess of $55  million  and the Common  Stock is  publicly  traded on a
national securities exchange or the Nasdaq National Market.


   HCPI will pay fair  market  value,  based on an  appraisal,  to  purchase  an
Existing  Facility.  All leases will be "triple net" (i.e.,  where the lessee is
obligated  to pay, in  addition to rent,  all taxes,  repairs and  insurance  in
respect of the  facility) and HCPI will have the right to a higher lease rate on
facilities  located in states that tax real estate investment trust income.  The
primary term for each lease will be 15 years with two 10 year renewal options at
fair market value lease rates. All leases covering facilities financed under the
Financing Commitment must be renewed together as a group and not individually.

   The base lease rate for Existing Facility leases executed under the Financing
Commitment  will equal 325 basis  points  above the 10-year  Treasury  Note rate
published  in The  Wall  Street  Journal  three  business  days  prior  to lease
commencement.  The base rent  under such  leases  will equal the base lease rate
multiplied by the Existing  Facility purchase price. The base lease rate for New
Facility leases will equal 350 basis points above the 10-year Treasury Note rate
published  in The  Wall  Street  Journal  three  business  days  prior  to lease
commencement.  The base rent under New Facility leases will equal the base lease
rate  multiplied  by the  lesser of Total  Construction  Cost or  Maximum  Cost.
Beginning  in the second year of the lease,  annual rent will be increased by an
amount equal to the annual change in the consumer price index  multiplied by the
prior year's total rent. In no event will the rent increase be less than the sum
of (a) the  additional  rent paid for the  previous  year  plus (b) one  hundred
percent of the facility's  Gross Revenues (as defined) in excess of Base Revenue
(as defined), up to but not exceeding an amount equal to two percent (2%) of the
prior year's total rent. In no event will the rent increase  represent more than
a 5% increase  over the prior year's  total rent.  In addition to the payment of
rent and the  Expense  Deposit,  the  Company is required to provide an annually
renewed  letter of credit for each financed  facility equal to four months total
lease payments to secure  acquisition,  development and lease  obligations.  All
leases   under   the   Financing   Commitment   will  be   cross-defaulted   and
cross-collateralized and all leases between HCPI and a subsidiary of the Company
will be  guaranteed  by the Company.  The Company will be obligated to reimburse
HCPI for certain  costs and expenses  incurred in connection  with  transactions
completed pursuant to the Financing  Commitment.  In addition,  a non-refundable
commitment fee, equal to one percent (1%) of the purchase price of each Existing
Facility,  will be due and  payable at the  closing of the  acquisition  of each
Existing Facility.

   In October 1996 the Company sold the Cabot Pointe  facility to, and leased it
back from, HCPI for $2.7 million under the Financing  Commitment.  In March 1997
the  Company  leased  the  Brantley  facility  from  HCPI  under  the  Financing
Commitment.

   The Company has also obtained a non-binding  term sheet from Capstone Capital
Corporation  ("Capstone")  relating to the  availability of up to $40 million in
financing through sale/leaseback transactions. An expense deposit of $100,000 is
payable by the Company  within one business day of the execution of a commitment
agreement  and a fee  equal to 1% of total  building  cost is  payable  upon the
initial draw on the commitment relating to each facility purchased. As proposed,
leases  executed  with  Capstone will have an initial term of 12 to 15 years and
three separate five year extension options. All leases funded under the proposed
commitment,  however,  will  have the  same  initial  term  and no lease  may be
extended  unless all leases  under the  commitment  are  extended.  Subject to a
minimum rate of 10%,  the initial  lease rate will be 350 basis points in excess
of the yield on U.S. Treasury bills with similar  maturities/terms.  Lease rates
during the first year of each  extended  period  will be based upon fair  market
rental values.  Lease rates will be adjusted annually (except for the first year
of each  renewal  period)  in an  amount  equal to the  positive  change  in the
consumer  price index;  provided,  however,  in no event will the change be less
than 2% or more than 5% of the previous year's lease payment. 

   All leases under the proposed Capstone commitment will be cross-defaulted and
all leases  between  Capstone and a subsidiary of the Company will be guaranteed
by  the  Company.  Each  facility  lease  will  contain  minimum  rent  coverage
requirements and will require the Company to maintain a minimum net

                                26




<PAGE>

worth of $55 million and minimum rent and interest  coverage ratios.  Each lease
will be  "triple-net"  and will  grant the  Company a right of first  refusal to
purchase the facility from Capstone. The Company will reimburse Capstone for all
costs  incurred in connection  with  transactions  completed  under the proposed
commitment and up to $2,000 per year for independent  third-party inspections of
each  facility.  There  can be no  assurance  that the  Company  will  receive a
financing commitment from Capstone on these terms, on different terms or at all.
Dr. Elkins, the Chairman of the Board of Directors of the Company, is a director
of Capstone.

   In  February  and  March of 1997 the  Company  leased  the  Jaylene  and West
Columbia facilities, respectively, from Capstone.

   In February 1997, the Company received  commitment  letters from NationsBank,
AmSouth,  and SouthTrust for a total $50 million senior secured revolving credit
facility.  Under the senior secured  revolving credit facility,  the Company can
borrow up to the lesser of 75% of the appraised value of the facilities  secured
in the  line  or six  times  the  total  EBITDAR  (as  defined)  of the  secured
facilities.  The facility  will bear  interest at a rate between  libor plus 225
basis  points  and libor plus 300 basis  points and have an initial  term of two
years.  Facilities  may be put in and  pulled  out of the line at the  Company's
discretion  as long as the  outstanding  balance  does not exceed the  available
borrowings  (calculated as discussed  above).  The proposed  credit  facility is
subject to completion of definitive documentation, and there can be no assurance
that the Company will obtain this facility on the proposed  terms,  on different
terms, or at all.

   In anticipation of closing the above mentioned facility, NationsBank provided
the Company with a $15.8 million  bridge loan to close the  acquisition  of four
facilities  in  February  1997.  The loan  matures  on April 29,  1997 and bears
interest at a floating rate of libor plus 300 basis points. The Company will pay
interest  only  until  maturity  and  expects  to  refinance  the loan  with the
revolving credit facility discussed above.

   The Company intends to use the NationsBank line to fund future  acquisitions.
However, under the facility, the Company may borrow up to $5 million for working
capital  purposes.  The  NationsBank  line is  intended to enable the Company to
complete  acquisitions  without long financing  delays.  Once the acquisition is
closed,  the Company will seek longer term  financing  for the  facility  either
through a mortgage or lease.  Although  there can be no assurance such long-term
financing will be available on acceptable terms or at all. 

   Net cash provided by operating activities was $4.8 million for the year ended
December 31, 1996 as compared with $2.4 million for the year ended  December 31,
1995. Net cash from operations  increased primarily due to improved cash flow at
existing facilities,  acquisitions  subsequent to January 1, 1994, and increases
in entrance fees received during 1996.

   Net cash  provided by  financing  activities  was $18.8  million for the year
ended  December  31,  1996 as  compared  to ($1.8)  million  for the year  ended
December 31,  1995.  The increase  was  primarily  due to the proceeds  from the
Company's  initial public  offering in October 1996 and net borrowings  from IHS
during 1996.


   Net cash used in investing  activities  was $19.5  million for the year ended
December  31, 1996 as compared to $1.0  million for the year ended  December 31,
1995.  The increase  was  primarily  due to the purchase of the Terrace  Gardens
facility  and  required  cash outlays to  implement  the  Company's  development
program in 1996.

   The Company has agreed to guaranty the indebtedness on two development  sites
for one of its developers. There currently is no balance outstanding relating to
these two sites. However, the maximum amount of the guarantee on these two sites
is $4 million.

   The Company  currently has employment  agreements  with three of its officers
which provide annual base salaries aggregating $665,000.


                                27




<PAGE>
QUARTERLY RESULTS (UNAUDITED)

   Set forth below is certain summary  information with respect to the Company's
operations for the last eight fiscal quarters.

<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED
                                      ----------------------------------------------------------------------------------
                                                        1995                                      1996
                                      ---------------------------------------- -----------------------------------------
                                                           (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                       MAR. 31   JUNE 30   SEPT. 30   DEC. 31   MAR. 31   JUNE 30   SEPT. 30    DEC. 31
                                      --------- --------- ---------- --------- --------- --------- ---------- ----------
<S>                                   <C>       <C>       <C>        <C>       <C>       <C>       <C>        <C>
Revenues:
 Monthly service and entrance fees .  $3,756    $3,715    $3,820     $ 3,833   $5,164    $5,404    $5,534     $ 6,946
 Management services and other .....     166       381       277         321      451       276       293         161
                                      --------- --------- ---------- --------- --------- --------- ---------- ----------
 Total revenues ....................   3,922     4,096     4,097       4,154    5,615     5,680     5,827       7,107
                                                --------- ---------- --------- --------- --------- ---------- ----------
Expenses:
 Community operations ..............   2,759     2,817     2,826       2,841    3,513     3,625     3,790       4,598
 Corporate administrative and
  general ..........................     243       256       256         250      337       341       847       2,359
 Rent ..............................     614       601       608         608      725       584       576         730
 Depreciation and amortization .....     104       102       102         106      248       232       353         387
 Loss on impairment of long-lived
  assets (1) .......................      --        --        --       5,126       --        --        --          --
                                      --------- --------- ---------- --------- --------- --------- ---------- ----------
  Total expenses ...................   3,720     3,776     3,792       8,931    4,823     4,782     5,566       8,074
                                      --------- --------- ---------- --------- --------- --------- ---------- ----------
Operating Income....................     202       320       305      (4,777)     792       898       261        (967)
 Interest Income ...................      --        --        --          --       --        --        --          93
 Interest Expense...................      --        --        --          --       --        --      (203)       (147)
                                      --------- --------- ---------- --------- --------- --------- ---------- ----------
Earnings (loss) before income taxes
 and minority interest .............     202       320       305      (4,777)     792       898        58      (1,021)
Minority interest...................      10        12        10           5       --        --        --          --
                                      --------- --------- ---------- --------- --------- --------- ---------- ----------
Earnings (loss) before income taxes      192       308       295      (4,782)     792       898        58      (1,021)
Federal and state income taxes  ....      74       119       114        (950)     305       346        22        (393)
                                      --------- --------- ---------- --------- --------- --------- ---------- ----------
Net earnings (loss).................     118       189       181      (3,832)     487       552        36        (628)
Earnings (loss) per common share  ..  $ 0.03    $ 0.05    $ 0.05     $ (0.98)  $ 0.12    $ 0.14    $ 0.01     $ (0.10)
                                      ========= ========= ========== ========= ========= ========= ========== ==========
Shares outstanding..................   3,898     3,898     3,898       3,898    3,898     3,898     3,898       6,454
                                      ========= ========= ========== ========= ========= ========= ========== ==========

</TABLE>

----------
(1) See note 11 to financial statements


                                28




<PAGE>

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF INTEGRATED LIVING COMMUNITIES,
INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
<S>                                                                                    <C>
Independent Auditors' Report.........................................................  30
Consolidated Balance Sheets -- December 31, 1995 and 1996 ...........................  31
Consolidated Statements of Operations -- Years ended December 31, 1994, 1995, and
1996 ................................................................................  32
Consolidated Statements of Changes in Stockholders' Equity -- Years ended December
31, 1994, 1995, and 1996 ............................................................  33
Consolidated Statements of Cash Flows -- Years ended December 31, 1994, 1995, and
1996 ................................................................................  34
Notes to Consolidated Financial Statements ..........................................  35
Independent Auditors' Report.........................................................  48
Schedule II -- Valuation and Qualifying Accounts ....................................  49

</TABLE>

   All other schedules for which provision is made in the applicable  accounting
regulations of the Securities and Exchange  Commission have been omitted because
they are not required under the related  instructions,  are  inapplicable or the
information has been provided in the Consolidated  Financial Statements or Notes
thereto.

                                29




<PAGE>
                         INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Integrated Living Communities, Inc.:

We have  audited the  accompanying  consolidated  balance  sheets of  Integrated
Living Communities,  Inc. and subsidiaries (the Company) as of December 31, 1995
and 1996, and the related consolidated  statements of operations,  stockholders'
equity  and cash  flows for each of the  years in the  three-year  period  ended
December  31,   1996.   These   consolidated   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Integrated Living
Communities,  Inc.  and  subsidiaries  as of December  31, 1995 and 1996 and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.


Baltimore, Maryland                                        KPMG PEAT MARWICK LLP
February 21, 1997   
  



                                30




<PAGE>
             INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES

                         CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                         -----------------------------
                                                              1995           1996
                                                         -------------- --------------
<S>                                                      <C>            <C>
Assets
Current assets:
 Cash and cash equivalents.............................  $   413,362    $ 4,474,786
 Accounts receivable, net..............................      525,555        719,212
 Prepaid expenses and other current assets.............      187,294        272,830
                                                         -------------- --------------
  Total current assets.................................    1,126,211      5,466,828
Property, plant, and equipment, net (note 3) ..........   23,751,175     68,560,932
Other assets...........................................      896,376      1,546,909
                                                         -------------- --------------
                                                         $25,773,762    $75,574,669
                                                         ============== ==============

Liabilities and Stockholders' Equity
Current liabilities:
 Accounts payable......................................  $   510,353    $ 1,721,765
 Accrued expenses (note 7).............................      560,610      2,176,863
 Refundable security deposits..........................      370,331      1,194,377
 Current portion of loan payable to affiliate (note 8).           --      1,722,512
                                                         -------------- --------------
  Total current liabilities............................    1,441,294      6,815,517
Loan payable to affiliate (note 8).....................           --      1,578,969
Refundable deposits (note 10)..........................    5,243,332      5,079,837
Unearned entrance fees (note 10).......................    4,316,391      4,134,126
                                                         -------------- --------------
  Total liabilities....................................   11,001,017     17,608,449
                                                         -------------- --------------

Commitments and contingencies (notes 3, 4, 10, 12, and 13)

Stockholders' equity:
 Preferred stock, $0.01 par value. Authorized 5,000,000
  shares; none issued and outstanding .................
 Common stock, $0.01 par value. Authorized 100,000,000
  shares; issued and outstanding 3,897,900 shares in
  1995 and 6,697,900 shares in 1996....................       38,979         66,979

 Additional paid-in capital............................   17,840,414     60,558,963
 Accumulated deficit...................................   (3,106,648)    (2,659,722)
                                                         -------------- --------------
  Net stockholders' equity.............................   14,772,745     57,966,220
                                                         -------------- --------------
                                                         $25,773,762    $75,574,669
                                                         ============== ==============

</TABLE>

         See accompanying notes to consolidated financial statements

                               31




<PAGE>
             INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                      --------------------------------------------
                                                           1994           1995           1996
                                                      -------------- -------------- --------------
<S>                                                   <C>            <C>            <C>
Revenues:
 Monthly service and entrance fees..................  $10,905,925    $15,123,557    $23,047,275
 Management services and other......................      738,558      1,145,734      1,181,345
                                                      -------------- -------------- --------------
  Total revenues....................................   11,644,483     16,269,291     24,228,620
                                                      -------------- -------------- --------------

Expenses:
 Community operations...............................    8,253,851     11,242,938     15,526,292
 Corporate administrative and general (note 6)......      725,497      1,005,372      3,883,898
 Rent...............................................    1,466,243      2,430,397      2,614,652
 Depreciation and amortization......................      368,657        414,401      1,219,911
 Loss on impairment of long-lived assets (note 11)..           --      5,125,838             --
                                                      -------------- -------------- --------------
  Total expenses....................................   10,814,248     20,218,946     23,244,753
                                                      -------------- -------------- --------------
  Operating income (loss)...........................      830,235     (3,949,655)       983,867

Other income (expense):
 Interest income....................................           --             --         92,329
 Interest expense (including interest on loan
  payable to affiliate).............................           --             --       (349,487)
                                                      -------------- -------------- --------------
  Earnings (loss) before income taxes and minority
   interest.........................................      830,235     (3,949,655)       726,709

Minority interest (note 2)..........................      (28,682)        37,497             --
                                                      -------------- -------------- --------------
  Earnings (loss) before income taxes...............      858,917     (3,987,152)       726,709

Federal and state income taxes (note 5).............      322,094       (643,643)       279,783
                                                      -------------- -------------- --------------
  Net earnings (loss)...............................  $   536,823    $(3,343,509)   $   446,926
                                                      ============== ============== ==============

Earnings (loss) per common share....................  $      0.14    $     (0.86)   $      0.10
                                                      ============== ============== ==============

</TABLE>

         See accompanying notes to consolidated financial statements

                               32




<PAGE>
             INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                      ADDITIONAL      RETURNED
                                                           COMMON       PAID-IN       EARNINGS
                                                            STOCK       CAPITAL       (DEFICIT)       TOTAL
                                                         ---------- -------------- -------------- -------------

<S>                                                      <C>        <C>            <C>            <C>
Balance at December 31, 1993...........................  $38,979    $ 5,147,409    $  (299,962)   $ 4,886,426
Net earnings...........................................       --             --        536,823        536,823
Net capital contributions from parent company .........       --        924,139             --        924,139
                                                         ---------- -------------- -------------- -------------
Balance at December 31, 1994...........................   38,979      6,071,548        236,861      6,347,388
Net loss...............................................       --             --     (3,343,509)    (3,343,509)
Net capital contributions from parent company .........       --     11,768,866             --     11,768,866
                                                         ---------- -------------- -------------- -------------
Balance at December 31, 1995...........................   38,979     17,840,414     (3,106,648)    14,772,745
Net earnings...........................................       --             --        446,926        446,926
Net capital contributions from parent company .........       --     23,610,549             --     23,610,549
Net proceeds from initial public offering of 2,800,000
  shares of common stock...............................   28,000     19,108,000             --     19,136,000
                                                         ---------- -------------- -------------- -------------
Balance at December 31, 1996...........................  $66,979    $60,558,963    $(2,659,722)   $57,966,220
                                                         ========== ============== ============== =============

</TABLE>

         See accompanying notes to consolidated financial statements

                               33




<PAGE>
             INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31,
                                                          ------------------------------------------
                                                              1994          1995           1996
                                                          ------------ -------------- --------------
<S>                                                       <C>          <C>            <C>
Cash flows from operating activities:
 Net earnings (loss) ...................................  $  536,823   $(3,343,509)   $    446,926
 Adjustments to reconcile net earnings to net cash
  provided by operating activities:
  Deferred income taxes ................................     162,871      (620,435)             --
  Minority interest ....................................     (28,682)       37,497              --
  Loss on impairment of long-lived assets ..............          --     5,125,838              --
  Depreciation and amortization ........................     368,657       414,401       1,219,911
  Decrease (increase) in accounts receivable ...........     102,777      (335,601)       (193,657)
  Decrease (increase) in prepaid expenses and other
   current assets ......................................    (170,051)       31,720         (85,536)
  Earned entrance fees .................................    (679,319)     (680,409)       (812,187)
  Entrance fees received ...............................     768,798     1,491,593         570,150
  Increase in accounts payable and other current
   liabilities .........................................     532,662       264,869       3,651,711
                                                          ------------ -------------- --------------
Net cash provided by operating activities ..............   1,594,536     2,385,964       4,797,318
                                                          ------------ -------------- --------------

Cash flows from financing activities:
 Net capital distribution to parent company ............    (416,371)   (2,551,050)     (3,559,451)
 Net proceeds from initial public offering .............          --            --      19,136,000
 Borrowings on loan payable to affiliate ...............          --            --      10,879,990
 Repayments of loan payable to affiliate ...............          --            --      (7,578,509)
 Refundable deposits received ..........................     505,865     1,456,709         415,350
 Refunds of deposits and entrance fees .................    (370,769)     (707,367)       (519,073)
                                                          ------------ -------------- --------------
Net cash provided by (used in) financing activities  ...    (281,275)   (1,801,708)     18,774,307
                                                          ------------ -------------- --------------

Cash flows from investing activities:
 Property, plant, and equipment additions ..............    (358,375)     (843,902)    (18,852,080)
 Increase in other assets ..............................    (169,503)     (113,544)       (658,121)
                                                          ------------ -------------- --------------
Net cash (used in) investing activities ................    (527,878)     (957,446)    (19,510,201)
                                                          ------------ -------------- --------------

Increase (decrease) in cash ............................     785,383      (373,190)      4,061,424
Cash, beginning of the period ..........................       1,169       786,552         413,362
                                                          ------------ -------------- --------------
Cash, end of period ....................................  $  786,552   $   413,362    $  4,474,786
                                                          ============ ============== ==============
Noncash investing and financing
 activities--acquisitions of facilities (note 2): ......
 Assets of businesses acquired, net.....................  $1,340,510   $11,911,391    $ 27,170,000
 Capital contributed by parent company and minority
   interest.............................................  $1,340,510   $11,911,391    $ 27,170,000
                                                          ============ ============== ==============

</TABLE>

         See accompanying notes to consolidated financial statements

                               34




<PAGE>

              INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES


                   Notes to Consolidated Financial Statements

                        December 31, 1994, 1995, and 1996

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

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

   In November 1995,  Integrated Living  Communities,  Inc. (ILC or the Company)
was formed through a corporate reorganization whereby the assets and liabilities
of the  Integrated  Living  Communities  Division  (the  Division) of Integrated
Health  Services,  Inc. (IHS or the Parent  Company) were  transferred or leased
from IHS  subsidiaries to ILC and its  subsidiaries.  ILC was formerly  Kingsley
Place  Retirement,  Inc.  until its present name was adopted in January 1996. In
October 1996,  the Company  completed its initial  public  offering of 2,800,000
shares of common stock. This offering reduced IHS' ownership of ILC from 100% to
37%.  The  consolidated   financial   statements  represent  the  operations  of
Integrated  Living  Communities  as a wholly  owned  subsidiary  of IHS  through
October 1996 and as an independent  public company  subsequent to the completion
of the initial public offering.


   Three of the Company's  facilities  are located on campuses  containing  both
assisted-living  facilities and  skilled-nursing  facilities which share certain
operating  expenses.  Prior  to June 1,  1996,  the  facilities  were  owned  by
subsidiaries  of IHS and leased to the Company (see note 4).  Effective  June 1,
1996,  the Company  and an IHS  subsidiary  entered  into  separate  condominium
agreements and shared services  agreements for these  facilities as discussed in
note 2. For  periods  through  May 31,  1996  allocations  of various  operating
expenses  were made by IHS on a monthly  basis in order to present the  separate
operating  expenses  of  the  assisted-living   facilities  and  skilled-nursing
facilities.  The  accompanying  financial  statements  reflect the  revenues and
expenses (including such allocations) related to the assisted-living  facilities
only.

   The consolidated  financial statements reflect the historical accounts of the
assisted  living and other senior living  facilities,  including  allocations of
general  and  administrative  expenses  from  the IHS  corporate  office  to the
individual  facilities.  Such  corporate  office  allocations,  calculated  as a
percentage of revenue,  are based on determinations  that management believes to
be  reasonable.  However,  IHS has operated  certain  other  businesses  and has
provided  certain  services  to  the  Company,   including   financial,   legal,
accounting,  human  resources and  information  systems  services.  Accordingly,
expense  allocations to the Company may not be  representative  of costs of such
services  to be  incurred in the future  (see note 6).  Also,  the  consolidated
financial statements reflect adjustments made by IHS to establish a new basis of
accounting  for the assets and  liabilities  of businesses  acquired,  using the
"push down" approach to accounting for business  combinations under the purchase
method. 

REVENUE RECOGNITION

   Resident  units are rented on a month to month basis and monthly  service fee
revenue is recognized in the months the units are occupied. Service fees paid by
residents for  assisted-living  and other related services are recognized in the
period such services are rendered as other revenue.  Security  deposits on units
rented on a month to month basis are presented as current liabilities.


   Residents of the Waterside  Retirement  Estates facility generally enter into
life-care  contracts  whereby the  resident  pays an  entrance  fee as well as a
monthly rental payment. Under most life-care contracts (membership  agreements),
entrance fees are  partially  refundable  to the  resident.  The minimum  refund
amount  pursuant to the resident's  membership  agreement  (generally 50% of the
total entrance fee) is payable to the resident or the  resident's  estate within
120 days of termination  of the agreement,  which may occur at any time after 30
days  notice.  In  addition,  a portion of the  remainder of the entrance fee is
payable if the contract is terminated within 24 months of move-in, determined on
a declining pro rata basis.  The minimum refund amount and the estimated  amount
of the remainder  which is expected to be refunded  based on past  experience of
the facility are accounted for as refundable deposits and presented as long-term
liabilities.  The  remaining  amount of the entrance  fees is  accounted  for as
deferred revenue under the caption 

                                35




<PAGE>
              INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES
                                  (Continued)


"unearned  entrance  fees." Such deferred  revenue is amortized to operations of
future  periods based on the estimated life of the resident,  adjusted  annually
based on the actuarially  determined estimated remaining life expectancy of each
resident, on the straight-line method.  Unamortized deferred revenue is recorded
as revenue upon the resident's  death or contract  termination.  Earned entrance
fees on  life-care  contracts  were  $679,319  in 1994,  $680,409  in 1995,  and
$812,187 in 1996.

PROPERTY AND EQUIPMENT

   Property and equipment are stated at cost.  Depreciation  and amortization of
property and  equipment  are computed  using the  straight-line  method over the
estimated useful lives of the assets as follows:

           Building and improvements ...  40 years
           Land improvements............  25 years
           Equipment....................  3 - 10 years
           Leasehold improvements.......  Term of the lease


   The Company  capitalizes  costs  associated  with acquiring  assisted  living
facilities and related interests therein. Pre-acquisition costs represent direct
costs of the  investigation  and  negotiation  of the  acquisition  of operating
facilities;  indirect  and  general  expenses  related  to such  activities  are
expensed as incurred.  Pre-construction costs represent direct costs incurred to
secure control of the development  site.  Pre-acquisition  and  pre-construction
costs  are  transferred  to  construction  in  progress  and  depreciable  asset
categories when the related tasks are completed.


INCOME TAXES


   The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS 109). The Company was not a
separate  taxable entity until the completion of the initial public  offering in
October 1996; however,  under SFAS 109 the current and deferred tax expense were
allocated among the members of the IHS controlled  corporate group including the
Company and its subsidiaries. Subsequent to the completion of the initial public
offering in October  1996,  the Company will file its own  consolidated  federal
income tax return.


   Under the asset and  liability  method of SFAS 109,  deferred  tax assets and
liabilities  are  recognized  for the future tax  consequences  attributable  to
differences  between the financial statement carrying amounts of existing assets
and  liabilities  and their  respective  tax  bases.  Deferred  tax  assets  and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  those  temporary  differences  are  expected to be
recovered  or settled.  Under SFAS 109,  the effect on  deferred  tax assets and
liabilities  of a change in tax rates is recognized in income in the period that
includes the enactment date.  Valuation allowances are recorded for deferred tax
assets when it is more likely than not that such deferred tax assets will not be
realized.

CASH AND CASH EQUIVALENTS


   Cash and cash  equivalents  consist  of  highly  liquid  instruments  with an
original maturity of three months or less. Prior to the Company's initial public
offering, a cash management facility was provided by the Parent Company, whereby
the  Company's   operating  cash  balances  of  the  facilities  were  generally
transferred to a centralized  account and applied to reduce  additional  paid-in
capital.  The  Company's  cash  needs  for  operating  and other  purposes  were
similarly provided through an increase to additional  paid-in capital.  However,
in 1994 and 1995 the Waterside  Retirement Estates facility  transferred cash to
the Parent Company only to the extent needed to satisfy cash needs for operating
expenses.  The excess of cash receipts over cash  disbursements of this facility
was reflected in the cash and cash  equivalents  account as of December 31, 1994
and  1995.  Subsequent  to  the  initial  public  offering,  this  facility  was
discontinued and the Company retained all excess cash from operations. 

                                36




<PAGE>
              INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES
                                  (Continued)


OBLIGATION TO PROVIDE FUTURE SERVICES

   For life-care contracts, the Company annually calculates the present value of
the net cost of future  service and use of  facilities to be provided to current
residents  and  compares  that amount with the balance of deferred  revenue from
entrance fees. If the present value of the net cost of future service and use of
facilities  exceeds the  deferred  revenue  from  entrance  fees, a liability is
recorded  (obligation to provide  future  service and use of facilities)  with a
corresponding charge to income.

EARNINGS PER COMMON SHARE

   Earnings per share is computed based on the weighted average number of common
and common  equivalent  shares  outstanding  during the  periods.  Common  stock
equivalents  include options to purchase  common stock,  assumed to be exercised
using the treasury  stock method.  Outstanding  shares  through  October 9, 1996
retroactively  reflect the stock split and related  surrender  of common  shares
referred to in note 9.

STOCK OPTIONS

   The Company applies APB No. 25 and related interpretations in accounting
for its stock options. No compensation expense has been recognized in
connection with its stock options.


USE OF ESTIMATES

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

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

   The carrying amounts of cash, accounts receivable, prepaid expenses and other
current assets, other assets, accounts payable, refundable security deposits and
accrued expenses  approximate  fair value because of the short-term  maturity of
these instruments. 

   The carrying  amounts of refundable  deposits may not approximate  fair value
since these  liabilities  are not  short-term  in nature.  However,  since these
liabilities do not have specified maturity dates,  management believes it is not
practicable to determine their fair value.

RECLASSIFICATIONS

   Certain  reclassifications have been made to the 1995 amounts to conform with
the 1996 presentation.


IMPAIRMENT OF LONG-LIVED ASSETS

   Management  regularly  evaluates  whether events or changes in  circumstances
have  occurred  that could  indicate an  impairment  in the value of  long-lived
assets. In December 1995, as part of a company-wide adoption by IHS, the Company
adopted SFAS No. 121,  "Accounting  for Impairment of Long-Lived  Assets and for
Long-Lived  Assets to Be Disposed Of". In accordance with the provisions of SFAS
No. 121, if there is an  indication  that the carrying  value of an asset is not
recoverable,  the Company  determines the amount of impairment loss by comparing
the carrying  amount of the asset to its estimated  fair value.  Estimated  fair
value is determined  through an evaluation of recent  financial  performance and
projected  discounted  cash  flows of its  facilities  using  standard  industry
valuation techniques, including the use of independent appraisals 

                                37




<PAGE>
              INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES
                                  (Continued)

when considered necessary. If an asset tested for recoverability was acquired in
a business  combination  accounted for by using the purchase method, the related
goodwill is included as part of the  carrying  value and  evaluated as described
above  in  determining  the  recoverability  of that  asset.  Recoverability  is
determined  by  estimating  the  projected  undiscounted  cash flows,  excluding
interest, of the related business activities.

   In  addition to  consideration  of  impairment  upon the events or changes in
circumstances  described  above,  management  regularly  evaluates the remaining
lives of its long-lived assets. If estimates are changed,  the carrying value of
the affected assets is allocated over their remaining lives. Estimation of value
and  future  benefits  of  intangible  assets  is made  based  upon the  related
projected undiscounted future cash flows, excluding interest payments.

   Prior to adoption of SFAS No. 121 in 1995, the Company performed its analyses
of  impairment  of  long-lived   assets  by   consideration   of  the  projected
undiscounted cash flows on an entity-wide  basis,  except for goodwill for which
the policy is unchanged.

   The effect of the  adoption of SFAS No. 121 in  December  1995  required  the
Company to perform this analysis on a facility-by-facility  basis. This resulted
in the  recognition of a loss on impairment of long-lived  assets (see note 11).
If the  facility-by-facility  analysis had been adopted prior to December  1995,
the Company may have incurred the loss on impairment of long-lived  assets prior
to December 1995. 

(2) BUSINESS ACQUISITIONS

   During the  three-year  period ended  December  31, 1996,  IHS or the Company
acquired nine of the twelve  assisted-living  and other senior living facilities
owned or leased by the Company which are included in the consolidated  financial
statements  at December 31, 1996.  Each  acquisition  was  accounted  for by the
purchase  method;  accordingly,  the  assets  and  liabilities  of the  acquired
facilities  were  recorded  at their  estimated  fair  values.  The  results  of
operations of the  facilities  acquired  have been included in the  consolidated
financial statements from the respective dates of the acquisitions.

   On December 1, 1993,  IHS  acquired  100% of the common stock of Central Park
Lodges,  Inc. (CPL). Among the facilities  acquired in this transaction was West
Palm  Beach,  a 120-bed  skilled  nursing  facility  and 34 bed  assisted-living
facility.  The Company  leased the assisted  living portion of the facility from
IHS from  December 1, 1993 through  June 1, 1996.  Effective  June 1, 1996,  the
Company  obtained a condominium  interest in the assisted living portion of this
facility. The facility was renamed Heron's Run in 1996. 

   In connection  with the December 1, 1993  acquisition  of CPL, IHS originally
obtained the 60.5% controlling  interests in two  partnerships,  Lakehouse East,
which owns and operates a retirement  facility  including an assisted care wing,
21 garden apartments and 18 villas,  and Lakehouse West, which owns and operates
an adjacent  retirement  facility  consisting  of a single  building.  The 39.5%
minority  partners  subsequently  filed a suit against IHS and CPL alleging that
the  CPL  acquisition  triggered  a  provision  in  the  partnership  agreements
requiring the sale of the minority  interests in the partnership.  Settlement of
the suit was subsequently  reached pursuant to a Partition Agreement between the
parties.  Under this  agreement,  effective  October 31, 1995 an IHS  subsidiary
became  the sole owner of  Lakehouse  East (now  known as  Waterside  Retirement
Estates)  and the  former  minority  partners  became the sole  partners  of the
partnership which is the sole owner of Lakehouse West.

   The financial statements have been presented including the Company's interest
in Lakehouse East and excluding the operations of Lakehouse  West. The following
represents   the  summarized   financial   information  of  the  Lakehouse  West
partnership  entity  which  is  not  included  in  the  consolidated   financial
statements of the Company (in thousands)

                                38




<PAGE>
              INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES
                                  (Continued)

                                           TEN MONTHS
                           YEAR ENDED         ENDED
                          DECEMBER 31,     OCTOBER 31,
                              1994            1995
                         -------------- ----------------
Revenues ..............      $3,214         $2,672
Operating Expenses....        3,217          2,581
Earnings (loss)  ......      $   (3)        $   91


1994 ACQUISITIONS

   On March 18, 1994,  IHS acquired the Homestead at Denton  facility,  a 50 bed
assisted-living  and adult  daycare  facility for a total cost of  approximately
$1.3 million adjusted for certain accrued liabilities,  prepayments and deposits
assumed by IHS.  Prior to the  purchase  IHS had  managed the  facility  under a
management agreement with the prior owner.

   On August 31,  1994,  Integrated  Health  Services  of Lester,  Inc.,  an IHS
subsidiary,  entered into separate facility operating leases for the 311 bed The
Shores and 95 bed  Cheyenne  Place  facilities.  Integrated  Health  Services of
Lester, Inc. leases these facilities, including the related equipment, furniture
and fixtures, and subleases them to the Company (see note 4.)


1995 ACQUISITIONS

   On December 15, 1995, IHS acquired  Carrington  Pointe,  a 172 bed congregate
care and assisted-living facility for a total cost of approximately $11,900,000.
Prior to the  acquisition,  IHS had  managed  the  facility  under a  management
agreement with the prior owner.  The  acquisition  was recorded  effective as of
December 31, 1995;  accordingly,  results of operations for the period  December
15, 1995 to December 31, 1995 are not included in the financial statements.  The
effect of not including this period is not material to the results of operations
of the Company.  The assets acquired and liabilities  assumed have been adjusted
to reflect the new basis of accounting and are included in the December 31, 1995
balance sheet of the Company.


1996 ACQUISITIONS

   On January 29,  1996,  IHS  acquired  the Vintage  Healthcare  Center,  which
contained a 110 bed skilled nursing center and a 106 bed assisted living center.
The Company  leased the assisted  living  portion from IHS from January 29, 1996
through June 1, 1996. Effective June 1, 1996, the Company obtained a condominium
interest in the assisted living portion of the facility from IHS.

   Effective  June 1, 1996,  the  Company  and an IHS  subsidiary  entered  into
separate  condominium  agreements and shared services agreements for the Heron's
Run, Treemont and Vintage  facilities  whereby the Company owns and operates the
assisted  living and  congregate  care  portions  and IHS owns and  operates the
skilled-nursing  portion of the facilities.  Previously,  these  facilities were
leased from IHS. In connection with the condominium agreements, IHS made capital
contributions  of approximately  $27.2 million,  representing the lesser of IHS'
carryover basis in the assisted living and congregate care assets contributed or
the estimated fair market value of such assets based on independent  appraisals.
The capital  contributions  were  $2,260,000  for Heron's Run,  $21,450,000  for
Treemont and $3,460,000 for Vintage. The Company cannot transfer its condominium
interest  without  the  prior  consent  of IHS.  The IHS  facility  in which the
Treemont facility is located is subject to a mortgage. Should IHS default on its
obligations under the mortgage, the lender could foreclose on the mortgage which
could materially adversely affect the Company's business,  results of operations
and financial condition.  The shared services agreements between the Company and
IHS  with  respect  to  these  facilities  require  that  IHS  provide  laundry,
housekeeping,  building  maintenance,  landscaping,  emergency call services and
common area  maintenance for a combined total of $61,482 per month. In addition,
IHS will provide dietary services to 

                                39




<PAGE>
              INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES
                                  (Continued)

these facilities for between $8 and $10 per resident per day. Utilities and real
estate  costs  will be  allocated  among  the  condominium  units  according  to
pre-defined percentages.  Finally, at the Vintage, IHS and the Company share the
services of the executive  director;  the Company  reimburses IHS for 30% of the
executive director's salary, benefits and other expenses.

   Effective  July 1, 1996,  the  Company  entered  into a lease  agreement  for
Homestead  of Garden City,  a 46 bed  assisted  living  facility in Garden City,
Kansas.  Effective July 17, 1996, the Company entered into a lease agreement for
Homestead of Wichita,  a 46 bed  assisted  living  facility  located in Wichita,
Kansas.  The initial term of each lease is 15 years with three five-year renewal
options. Annual rent under each lease is $287,500, subject to increases based on
the consumer price index. (See Note 4).


   The  Company   acquired  the  Cabot  Pointe   facility  in  August  1996  for
approximately  $2.8 million with funds  borrowed  from IHS. The Company sold and
leased the facility back from  Healthcare  Property  Investors,  Inc.  (HCPI) in
October  for $2.7  million.  The  Company  recognized  a loss of  $62,500 on the
transaction  relating to closing  costs on the original  purchase.  This loss is
included in the operating expenses of the Company.

   Effective  October 9, 1996, the Company acquired  Terrace Gardens  Healthcare
Center,  a 317 unit skill  nursing and assisted  living  facility.  The purchase
price was $12.2 million.  The Company financed the transaction from the proceeds
of its initial public offering.


   The following unaudited pro forma statements of operations  information gives
effect to the 1995 and 1996 acquisition  transactions  described above as though
they had occurred on January 1, 1995, after giving effect to certain adjustments
such as depreciation on the new basis of assets acquired.  The pro forma amounts
also include  adjustments to corporate  administrative  and general  expenses to
reflect  management's  estimate of the  increase in such costs as if the Company
had operated on a  stand-alone  basis during these years.  In addition,  the pro
forma information entitled "1996 including subsequent acquisitions" gives effect
to the acquisitions described above and the acquisitions  subsequent to December
31, 1996 discussed in note 13, as if such  acquisitions  had occurred on January
1, 1996, after giving effect to similar adjustments as referred to above.

<TABLE>
<CAPTION>
                                       YEARS ENDED DECEMBER 31,
                         -------------------------------------------------------
                                                            1996 INCLUDING
                              1995          1996        SUBSEQUENT ACQUISITIONS
                         -------------   -------------  ------------------------
<S>                          <C>           <C>           <C>
Revenues.................    $27,452,000   $27,716,000   $33,912,000
Net loss.................     (3,065,000)     (263,000)      (67,000)
Net loss per common
share....................           (.55)         (.05)         (.01)

</TABLE>


   The unaudited pro forma results are not necessarily  indicative of what might
actually  have  occurred  if  the  acquisitions  had  been  completed  as of the
beginning of the periods presented.  In addition,  they are not intended to be a
projection  of  future  results  of  operations  and do not  reflect  any of the
business management changes that might be achieved from combined operations.


                                40




<PAGE>
              INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES
                                  (Continued)


(3) PROPERTY, PLANT AND EQUIPMENT


   Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
                                       DECEMBER 31,   DECEMBER 31,
                                           1995           1996
                                      -------------- --------------
<S>                                   <C>            <C>
Land and improvements...............  $ 4,010,343    $ 6,264,844
Building and improvements...........   18,828,646     56,497,955
Equipment...........................    1,312,103      2,238,443
Leasehold improvements..............      102,331        524,712
Pre-construction and construction
in progress.........................      214,332      4,442,519
Preacquisition costs................           --        520,945
                                      -------------- --------------
                                       24,467,755     70,489,418
Less accumulated depreciation ......      716,580      1,928,486
                                      -------------- --------------
Total...............................  $23,751,175    $68,560,932
                                      ============== ==============

</TABLE>


   The Company makes advances to contractors  and developers in connection  with
the  Company's  development  and  construction  of assisted  living  facilities.
Development and construction  advances under development services agreements and
non-recourse  revolving  credit note and security  agreements  secured solely by
real estate of developers are classified as pre-construction and construction in
progress  in the  balance  sheet.  At  December  31,  1996,  the  Company had 19
facilities in the  pre-construction  stage and 10 facilities under construction.
The Company has commitments to make advances under the aforementioned agreements
until such time as the developer  obtains  construction  financing.  The Company
estimates  the  outstanding  amount  of  this  commitment  to  be  approximately
$5,700,000 at December 31, 1996. Under certain circumstances,  the developer may
repay the Company's advances and enter into a lease or management agreement with
the Company with respect to some or all of the facilities.

   The Company has agreed to guaranty the indebtedness on two development  sites
for one of its developers. There is currently no balance outstanding relating to
these two sites. However, the maximum amount of the guarantee on these two sites
is $4,000,000.

(4) LEASES

   Prior to June 1, 1996, the Company had leased five assisted-living facilities
from IHS, and at December 31, 1996,  leased two assisted living  facilities from
IHS.  With respect to the Heron's Run,  Treemont,  and Vintage  facilities,  IHS
subsidiaries  own the  premises  of both  skilled  nursing and  assisted  living
facilities, operate the respective skilled nursing facilities, and prior to June
1, 1996 leased the  assisted  living  facilities  to the  Company.  Rent expense
included in the financial  statements under these three intercompany  leases was
$999,152  in 1994,  $1,029,126  in 1995 and  $581,667  in 1996.  The Company has
obtained condominium interests in these three facilities effective June 1, 1996.
Cheyenne  Place and The Shores  are  leased  from  Litchfield  Asset  Management
Corporation by Integrated Health Services of Lester,  Inc. (a subsidiary of IHS)
under separate  leases.  The Company  entered into separate  subleases for these
facilities  with the IHS subsidiary  effective June 1, 1996. The initial term of
the subleases is seven years and provide for various renewal terms at the option


                                41




<PAGE>
              INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES
                                  (Continued)

of ILC at fair market rentals.  Prior to June 1, 1996, the Company was allocated
rentals based on the lease between  Litchfield Asset Management  Corporation and
IHS. Rent expense  included in the financial  statements  under these leases was
$467,091 in 1994 and $1,401,271 in 1995, and $1,588,769 in 1996. The Company has
also entered  into  operating  leases for three  additional  facilities  and the
Company's corporate office.  Minimum rent payments under  noncancellable  leases
and subleases are summarized as follows for the years ended December 31: 

<TABLE>
<CAPTION>
                    TOTAL           IHS          OTHER
                ------------- -------------- -------------
<S>             <C>           <C>            <C>
1997..........  $ 2,753,236   $ 1,722,696    $ 1,030,540
1998..........    2,753,236     1,722,696      1,030,540
1999..........    2,753,236     1,722,696      1,030,540
2000..........    2,753,236     1,722,696      1,030,540
2001..........    2,664,136     1,722,696        941,440
Thereafter ...   10,607,051     2,440,486      8,166,565
                ------------- -------------- -------------
                $24,284,131   $11,053,966    $13,230,165
                ============= ============== =============

</TABLE>


(5) INCOME TAXES

   Through  October 9, 1996 (the closing date of the  Company's  initial  public
offering), the Company had been included in IHS' consolidated federal income tax
return.  Beginning  October 10, 1996 the Company will file its own  consolidated
federal income tax return.  The provision for income taxes is summarized  below:


<TABLE>
<CAPTION>
                     YEARS ENDED DECEMBER 31,
              -------------------------------------
                  1994         1995         1996
              ----------- ------------- -----------
<S>           <C>         <C>           <C>
Current.....  $159,223    $ (23,208)    $279,783
Deferred ...   162,871     (620,435)          --
              ----------- ------------- -----------
              $322,094    $(643,643)    $279,783
              =========== ============= ===========

</TABLE>

   The amount  computed by applying  the  Federal  corporate  tax rate of 34% to
earnings  before income taxes is reconciled to the provision for income taxes as
follows:

<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                                --------------------------------------
                                                    1994         1995          1996
                                                ----------- -------------- -----------
<S>                                             <C>         <C>            <C>
Income tax computed at statutory rates .......  $292,032    $(1,355,632)   $ 247,081
State income taxes, net of Federal tax
benefit.......................................    32,057       (176,920)      29,329
Allocation of NOL carryover benefit...........        --             --     (420,000)
Other (net)...................................    (1,995)        (2,501)       3,373
Valuation allowance adjustment................        --        891,410      420,000
                                                ----------- -------------- -----------
                                                $322,094    $  (643,643)   $ 279,783
                                                =========== ============== ===========

</TABLE>

                                42




<PAGE>
              INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES
                                  (Continued)

   Deferred income tax liabilities (assets) are summarized as follows:

<TABLE>
<CAPTION>
                                                   YEARS ENDED DECEMBER 31,
                                         -----------------------------------------
                                              1994          1995          1996
                                         ------------- ------------- -------------
<S>                                      <C>           <C>           <C>
Excess of book over tax basis of
assets.................................  $ 2,032,363   $   798,083   $   172,577
Unearned entrance fees.................   (1,382,890)   (1,661,811)   (1,591,638)
Accrued expenses.......................      (29,038)      (27,682)     (144,303)
Allowances and other reserves..........           --            --      (219,635)
Net operating loss carryover...........           --            --      (240,144)
Other..................................           --            --       (49,319)
                                         ------------- ------------- -------------
                                             620,435      (891,410)   (2,072,462)
Valuation allowance ...................           --       891,410     2,072,462
                                         ------------- ------------- -------------
Deferred income tax liability..........  $   620,435   $        --   $        --
                                         ============= ============= =============

</TABLE>

   The  provision  for Federal and state income taxes has been  allocated by IHS
generally  based on the overall  effective  tax rate of the  consolidated  group
applied  to  the  Company's  pre-tax  earnings.  Deferred  income  tax  (assets)
liabilities are recorded for the Company's temporary  differences using the same
effective tax rate. The difference  between the total provision for income taxes
and the deferred  income tax  provision,  both  determined  as discussed  above,
represents  income taxes  currently  payable to the Parent  Company and has been
accounted for as  additional  paid-in  capital.  The provision for income taxes,
deferred  income  taxes and income  taxes  currently  payable may vary from such
amounts that would have been computed on a stand-alone basis.


   As a result  of the  Company's  initial  public  offering  of  common  stock,
effective  October  10,  1996 the  Company  is no  longer  a  member  of the IHS
consolidated  group for income tax  purposes.  The provision for income taxes in
1996 has been reduced by the Company's net operating loss carryovers realized by
IHS as a result of the Company no longer being a member of the IHS  consolidated
group. The effect of this tax benefit allocated by IHS in 1996 was approximately
$420,000. 

   Also,  the  Company's  net  deferred  tax  asset  and the  related  valuation
allowance increased by approximately $800,000 in 1996 as a result of the Company
no longer being a member of the IHS consolidated group.

   At December  31,  1996,  the Company has a net  operating  loss  carryover of
approximately $624,000 for federal income tax purposes, which expires in 2011.


(6) OTHER RELATED PARTY TRANSACTIONS


   Through September 1996, IHS provided all corporate administrative and general
services to the Company pursuant to a management services agreement.  Management
fees have been provided at 6% of total revenues of each facility, except for the
Lakehouse East partnership  facility which has provided management fees at 9% of
monthly service fees revenue pursuant to the partnership agreement in effect for
the period December 1, 1993 to October 31, 1995 (of which approximately $224,000
was paid to an IHS subsidiary and $224,000 was paid to the other partner).


   Management  fees charged by IHS at 6% of total revenues have been  determined
based on an allocation of IHS' corporate  general and  administrative  expenses,
which apply to all IHS divisions,  including the Integrated  Living  Communities
Division.  Such  allocation  has been made because  specific  identification  of
expenses is not  practicable.  Beginning  October 1, 1996,  this  agreement  was
terminated and the Company began  providing all of its corporate  administrative
and general services.

                                43





<PAGE>
              INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES
                                  (Continued)

   As  discussed  in note 2 the  Company  has  agreements  with IHS  whereby IHS
subleases  two  facilities  to the Company and provides  services at three other
locations where the Company and IHS both operate the facilities.  As of December
31, 1996, the Company owed IHS $256,000 under these agreements.

(7) ACCRUED EXPENSES


   Accrued expenses are summarized as follows:

<TABLE>
<CAPTION>
                                     DECEMBER 31,
                              -------------------------
                                 1995         1996
                              ----------- -------------
<S>                           <C>         <C>
Accrued salaries and
wages.......................  $307,327    $1,305,881
Other accrued expenses .....   253,283       870,982
                              ----------- -------------
                              $560,610    $2,176,863
                              =========== =============

</TABLE>


(8) LONG TERM DEBT

   Effective  June 30,  1996,  IHS made  available  to the Company a $75 million
revolving  credit facility.  After the Company's public offering,  this facility
was replaced by a $3.4 million  unsecured  term loan in October,  1996. The term
loan bears interest at 14% and is to be repaid in 24 monthly  installments  plus
accrued interest.

(9) CAPITAL STOCK

   From  inception  through June 1996, the Company was authorized to issue up to
1,000 shares of common stock of which 100 shares were issued,  and  outstanding.
All  shares  were  held by IHS.  In June  1996,  the  Company's  certificate  of
incorporation  was restated to increase  the  authorized  shares to  100,000,000
shares of common stock,  $.01 par value and 5,000,000 shares of preferred stock,
$.01 par value.  Also, the Company effected a 49,610-for-one  common stock split
(in  the  form  of a  stock  dividend).  In  August  1996,  the  Parent  Company
surrendered 1,063,100 shares of common stock to the Company. Share and per share
data for all periods  presented in the  financial  statements  give  retroactive
effect to the revised shares,  the common stock split and the related  surrender
of common  shares  referred to above.  On October 3, 1996,  the  Company  issued
2,800,000  common shares to the public at a price of $8 per share. IHS also sold
1,400,000  of its shares of the  Company's  common  stock at $8 per share.  This
reduced IHS' ownership in the Company to 37%.

   The preferred  stock may be issued from time to time in one or more series as
determined  by the Board of  Directors.  The Board of Directors is authorized to
issue the shares of preferred stock in one or more series and to fix the rights,
preferences,  privileges and restrictions  thereof,  including  dividend rights,
dividend  rates,   conversion  rights,   voting  rights,  terms  of  redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series,  without further vote or action by
the stockholders.  The preferred stock could be issued by the Board of Directors
with voting and conversion  rights that could adversely  affect the voting power
and other rights of the holders of the common  stock.  In addition,  because the
terms of the  preferred  stock  may be fixed by the  Board of  Directors  of the
Company without  stockholder action, the preferred stock could be issued quickly
with terms calculated to defeat or delay a proposed takeover of the Company,  or
to make the removal of the management of the Company more difficult.

   The Company  adopted two stock options plans during 1996. The Stock Incentive
Plan provides for options to be granted to certain  employees and consultants at
an exercise  price per share not less than 100% of fair market value at the date
of grant (110% in certain cases). In addition, the Company

                                44





<PAGE>
              INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES
                                  (Continued)

adopted a Stock Option Plan for  Non-Employee  Directors  which provides for the
grant of options at an exercise  price per share equal to the fair market  value
on the date of grant.  The Board of  Directors  has  authorized  the issuance of
545,040  shares of common stock under the two plans.  Options  granted under the
Stock  Incentive  Plan vest over five  years and expire at the end of ten years.
Options granted under the Stock Option Plan for Non-Employee  Directors (none of
which have been  granted  through  December  31, 1996) vest over three years and
expire at the end of ten years.  In addition,  during 1996, the Company  granted
options  to  purchase  an  aggregate  of 405,000  shares of common  stock to six
directors.  These  options  vest over  three  years and expire at the end of ten
years. Stock option transactions are summarized as follows: 

<TABLE>
<CAPTION>
                                                        NON PLAN
                                                        DIRECTOR
                             STOCK INCENTIVE PLAN        OPTIONS                TOTAL
                             ------------------------------------------- --------------------
                                        WEIGHTED              WEIGHTED             WEIGHTED
                                         AVERAGE               AVERAGE              AVERAGE
                                        EXERCISE              EXERCISE             EXERCISE
                              SHARES      PRICE     SHARES      PRICE     SHARES     PRICE
                            ---------  ---------- ---------- ---------- --------- ----------
<S>                         <C>        <C>        <C>        <C>        <C>       <C>
Granted...................  451,000    $8.00      405,000    $8.00      856,000   $8.00
Canceled..................  (56,500)    8.00      (28,000)    8.00      (84,500)   8.00
                            ---------             ----------            ---------           
Outstanding at end of
year......................  394,500     8.00      377,000     8.00      771,500    8.00
                            =========             ==========            =========           

</TABLE>

<TABLE>
<CAPTION>
                             OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
                  ------------------------------------------------------------------
                                    WEIGHTED
                                     AVERAGE      WEIGHTED                 WEIGHTED
                      NUMBER        REMAINING      AVERAGE      NUMBER      AVERAGE
    RANGE OF       OUTSTANDING     CONTRACTUAL    EXERCISE   EXERCISABLE   EXERCISE
EXERCISE PRICES    AT 12/31/96        LIFE          PRICE    AT 12/31/96     PRICE
---------------   ------------- ---------------- ---------- ------------- ----------
<S>               <C>           <C>              <C>          <C>           <C>
$8.00             771,500       9.76 years       $8.00        --            --

</TABLE>


   The Company applies APB No. 25 and related  interpretations in accounting for
its stock options.  Accordingly,  no compensation expense has been recognized in
connection with its stock options.  Had  compensation  expense for the Company's
stock options been determined  consistent with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation",  the Company's net
earnings and earnings per share would have been reduced to the pro forma amounts
indicated below:


<TABLE>
<CAPTION>
                                                    1995         1996
                                               ------------   ----------
<S>                               <C>          <C>            <C>
Net earnings.....................  As reported  $(3,343,509)   $446,926
                                   Pro forma     (3,343,509)    339,342
Earnings per share...............  As reported         (.86)        .10
                                   Pro forma           (.86)        .07

</TABLE>


   The fair value of the options for purposes of the above pro forma  disclosure
was calculated  using the  Black-Scholes  option pricing model and the following
assumptions:  risk  free  interest  rate of 6.58%,  expected  life of 6.0 to 6.5
years, no dividend payments,  and a volatility of 35.8%. The effects of applying
SFAS  123 in the  earnings  and  earnings  per  share  data  for 1996 may not be
representative of the effects on such pro forma information in future years.

(10) LIFE-CARE CONTRACTS


   The obligation under life-care contracts to provide future service and use of
facilities is calculated as the present value of the net future  service and use
costs.  Unamortized  deferred revenue exceeded the net present value of such net
costs at December 31, 1995 and 1996;  accordingly,  there was no future  service
liability  recorded in connection  with the life-care  contracts at December 31,
1995 and 1996.

                                45

<PAGE>
              INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES
                                  (Continued)


   In accordance  with the  contractual  arrangements  under  certain  life-care
contracts,  a minimum amount  (generally  50%) of the entrance fee is refundable
and a portion of the entrance fee is  refundable  if the contract is  terminated
within  a  specified  time  period   (potentially   refundable  entrance  fees).
Refundable   deposits   represent  the  minimum  refunds  under  the  membership
agreements and the estimated  amount  expected to be refunded of the potentially
refundable  entrance fees, based on past experience with contract  terminations.
Potentially  refundable  entrance fees were $882,779 and  $1,073,292 at December
31, 1995 and 1996, respectively,  of which $215,627 and $200,248,  respectively,
is  included  in  refundable  deposits;  the  remainder  is included in unearned
entrance  fees.  Refunds  paid were  $370,769  in 1994,  $707,367  in 1995,  and
$519,073 in 1996,  including  minimum  refunds of $343,819 in 1994,  $553,213 in
1995, and $495,966 in 1996.


(11) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS

   The Company implemented  Financial  Accounting Standards Board's Statement of
Financial  Accounting  Standards No. 121 in connection with the Parent Company's
implementation  in 1995.  In  connection  with the adoption of SFAS No. 121, the
Company  performed an  evaluation  of the  financial  performance  and projected
undiscounted  cash  flows  of  each  of its  facilities.  Using  an  independent
appraisal,  the  Company  estimated  the  fair  market  value  of its  Waterside
(Lakehouse East) facility and determined that the carrying value of certain long
lived assets, including goodwill, land, buildings and improvements, exceeded the
fair  values.  The excess  carrying  value of  $5,125,838  (of which  $1,533,152
represented goodwill and $3,592,686  represented buildings and improvements) was
written off and is included in the statement of operations for 1995 as a loss on
impairment  of  long-lived   assets.  At  the  time  the  Company  acquired  the
controlling  interest in the Waterside  facility in December 1993, the Waterside
facility and Lakehouse West, a separate  adjacent  facility,  were operated in a
manner whereby the facilities shared certain services and expenses. The December
1993  valuation  assumed that these  facilities  would  continue  their existing
cross-referral  and joint  marketing  relationship  and would  continue to enjoy
other corporate synergies. In 1995, the Company and the minority partners in the
Waterside  facility and the Lakehouse West facility  exchanged  interests,  such
that the  Company  became  the  sole  owner of the  Waterside  facility  and the
minority partners became the sole owner of the adjacent  Lakehouse West facility
(see  note 2).  All  joint  arrangements  were  terminated.  The  December  1995
appraisal  reflected that (i) the benefits discussed above no longer existed and
(ii) the other  facility was now a competitor  of the Waterside  facility.  As a
result,  the December 1995 valuation of the Waterside facility was less than the
December 1993 valuation used for purchase accounting purposes.

(12) LEGAL PROCEEDINGS


   The Company is involved in various legal  proceedings  that are incidental to
the conduct of its  business.  Management  believes  that pending or  threatened
legal  proceedings  will  have  no  material  adverse  effect  on the  Company's
financial condition or results of operations.


(13) EVENTS SUBSEQUENT TO DECEMBER 31, 1996

   In January 1997, the Company  purchased four facilities in Virginia  totaling
198 beds for $15,750,000.  The Company financed the transaction through a bridge
loan with  NationsBank.  The loan is dated January 29, 1997 and matures on April
29,  1997.  The loan bears  interest at a floating  rate of libor plus 300 basis
points.  The Company  expects to refinance  this loan with the revolving  credit
facility discussed below.

   In February and March 1997, the Company acquired a leasehold  interest in one
facility in South  Carolina  totaling 55 beds, and two facilities in Florida and
Georgia totaling 103 beds. 

                                46




<PAGE>
              INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES
                                  (Continued)

   In February 1997, the Company received  commitment  letters from NationsBank,
AmSouth,  and SouthTrust for a total $50,000,000 senior secured revolving credit
facility.  Under the senior secured  revolving credit facility,  the Company can
borrow up to the lesser of 75% of the appraised value of the facilities  secured
in the  line  or six  times  the  total  EBITDAR  (as  defined)  of the  secured
facilities.  The facility  will bear  interest at a rate between  libor plus 225
basis  points  and libor plus 300 basis  points and have an initial  term of two
years.  Facilities  may be put in and  pulled  out of the line at the  Company's
discretion  as long as the  outstanding  balance  does not exceed the  available
borrowings  (calculated as discussed  above).  The proposed  credit  facility is
subject to completion of definitive documentation, and there can be no assurance
that the Company will obtain this facility on the proposed  terms,  on different
terms, or at all.

   The Company intends to use the NationsBank line to fund future  acquisitions.
However, under the facility, the Company may borrow up to $5,000,000 for working
capital  purposes.  The  NationsBank  line will  enable the  Company to complete
acquisitions  without long financing delays. Once the acquisition is closed, the
company  will seek longer term  financing  for the  community  either  through a
mortgage or lease.

                                47





<PAGE>

                         INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Integrated Living Communities, Inc.:

   Under date of February  21,  1997,  we reported on the  consolidated  balance
sheets of Integrated Living Communities,  Inc. and subsidiaries (the Company) as
of  December  31,  1995 and 1996,  and the related  consolidated  statements  of
operations,  stockholders'  equity  and cash  flows for each of the years in the
three-year  period ended December 31, 1996, as contained in the annual report on
Form 10-K for the year 1996. In connection with our audits of the aforementioned
consolidated  financial  statements,  we also  audited the related  consolidated
financial statement schedule in the Form 10-K. This financial statement schedule
is the  responsibility  of the Company's  management.  Our  responsibility is to
express an opinion on this financial statement schedule based on our audits.

   In our  opinion,  such  financial  statement  schedule,  when  considered  in
relation  to the  basic  consolidated  financial  statements  taken  as a whole,
presents fairly, in all material respects, the information set forth therein.

Baltimore, Maryland                                        KPMG PEAT MARWICK LLP
February 21, 1997  



                                48





<PAGE>

             INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES
               SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                                        YEAR ENDED     YEAR ENDED      YEAR ENDED
                                                       DECEMBER 31,   DECEMBER 31,    DECEMBER 31,
                                                           1994           1995            1996
                                                     --------------- -------------- ---------------
<S>                                                  <C>             <C>            <C>
Allowance for doubtful accounts
 Balance at beginning of period....................  $ 0             $ 0           $       0
 Provisions for bad debts charged to operations....   --              --             250,000
 Acquired companies................................   --              --                   0
 Accounts receivable written-off (net of
  recoveries)......................................   --              --                   0
                                                     --------------- -------------- ---------------
 Balance at end of period..........................  $ 0             $ 0             250,000
                                                     =============== ============== ===============

</TABLE>


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

   None

                                49





<PAGE>

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

   The section entitled "Proposal No. 1 -- Election of Directors" in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders is
incorporated herein by reference.

EXECUTIVE OFFICERS

   See "Part I -- Item 1. Business -- Executive Officers of the Company".

ITEM 11. EXECUTIVE COMPENSATION


   The  section  entitled  "Executive   Compensation"  in  the  Company's  Proxy
Statement  for the 1997  Annual  Meeting  of  Stockholders  in  incorporated  by
reference herein.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


   The section entitled "Beneficial Ownership of Common Stock" in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders in
incorporated herein by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   The sections  entitled  "Executive  Compensation  --  Compensation  Committee
Interlocks  and  Insider   Participation"  and  "Certain  Transactions"  in  the
Company's  Proxy  Statement  for the 1997  Annual  Meeting  of  Stockholders  is
incorporated herein by reference. 

                               50




<PAGE>
                                   PART IV


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


   (a) Financial Statements

   (1) and (2) See "Index to  Consolidated  Financial  Statements"  as Item 8 of
this Annual Report of Form 10-K.

   (3) Exhibits


   Exhibit Nos. 10.23, 10.24, 10.25, 10.26, 10.27, 10.29, 10.31, and 10.32
are management contracts, compensatory plans, or arrangements.


<TABLE>
<CAPTION>
   EXHIBIT
     NO.                                                DESCRIPTION
------------  ----------------------------------------------------------------------------------------------
<S>           <C>
2.1.........  ASSET PURCHASE AGREEMENT,  DATED AS OF , 1996, BY AND AMONG TERRACE GARDENS,  L.P., HERBERT L.
              KRUMSICK, JOHN KARDATZKE, LOUIS WEISS, CHESTER WEST, ROSS G. TIDEMANN, NESTOR R. WEIGAND, Jr.,
              and Integrated Living Communities of Terrace Gardes, Inc. *
2.2.........  Asset  Purchase  Agreement,  dated as of June 1,  1996,  between  Cabot  Pointe  I,  Inc.  and
              Integrated Living Communities at Cabot Pointe, Inc. and Certain  Shareholders of Cabot Pointe,
              Inc. *
2.3.........  Asset Purchase Agreement dated January 24, 1997, by and among Integrated Living Communities of
              Portsmouth,  Inc. and Retirement Home of Portsmouth Limited  Partnership as Seller and Bullock
              Corporation as general partner**
2.4.........  Asset Purchase  Agreement dated January 24, 1997 by and among Integrated Living Communities of
              Redgate, Inc., and Ghent Arms Limited Partnership as Seller and Bullock Corporation as general
              partner**
2.5.........  Asset Purchase Agreement dated January 24, 1997, by and among Integrated Living Communities of
              Gloucester,  Inc. and American Retirement Homes as Seller and Bullock Corporation as successor
              and former general partner of Retirement Homes of Gloucester Limited Partnership**
2.6.........  Asset Purchase  Agreement dated January 24, 1997 by and among Integrated Living Communities of
              Virginia Beach, Inc. and Retirement Homes of Virginia Beach Limited  Partnership as Seller and
              Bullock Corporation as general partner.**
2.7.........  Management  Agreements  Acquisition  Agreement dated January 24, 1997 by and among  Integrated
              Living  Communities of Redgate,  Integrated Living  Communities of Virginia Beach,  Integrated
              Living  Communities of Gloucester,  Integrated Living  Communities of Portsmouth as buyers and
              American Retirement Homes, Inc. as seller**
2.8.........  Asset Purchase Agreement with Health Care Property Investors for Cabot Pointe, dated September
              30, 1996***
3.1.........  Restated Certificate of Incorporation (as amended)*
3.2.........  Bylaws*
4.1.........  Specimen Stock Certificate*
10.1........  Declaration of  Condominium  of West Palm Beach,  a Condominium,  dated as of June 3, 1996, by
              Central Park Lodges of West Palm Beach and  Integrated  Living  Communities of West Palm Beach
              Inc.*
10.2........  Services  Agreement,  dated as of June 1, 1996,  between Integrated Living Communities of West
              Palm Beach, Inc. and Central Park Lodges of West Palm Beach, Inc.*

10.3........  Amendment  to  Services  Agreement,  dated  as of  June 1,  1996,  between  Integrated  Living
              Communities of West Palm Beach, Inc. and Central Park Lodges of West Palm Beach, Inc.*

                               51




<PAGE>
   EXHIBIT
     NO.                                                DESCRIPTION
------------  ----------------------------------------------------------------------------------------------
10.4........  Declaration of Condominium of Treemont, a Condominium,  dated as of June 1, 1996, by Cambridge
              Group of Texas, Inc. and Integrated Living Communities of Dallas, Inc.*
10.5........  Services Agreement, dated as of June 1, 1996, between Integrated Living Communities of Dallas,
              Inc. and Cambridge Group of Texas, Inc.*
10.6........  Amendment  to  Services  Agreement,  dated  as of  June 1,  1996,  between  Integrated  Living
              Communities of Dallas, Inc. and Cambridge Group of Texas, Inc.*
10.7........  Declaration of Condominium of Vintage,  a Condominium,  dated as of June 1, 1996 by Integrated
              Health Services at Great Bend, Inc. and Integrated Living Communities of Denton (Texas), Inc.*
10.8........  Services Agreement,  dated as of June 1, 1996, between Integrated Living Communities of Denton
              (Texas), Inc. and Integrated Health Services at Great Bend, Inc.*
10.9........  Amendment  to  Services  Agreement,  dated  as of  June 1,  1996,  between  Integrated  Living
              Communities of Denton (Texas), Inc. and Integrated Health Services at Great Bend, Inc.*
10.10.......  Administrative  Services  Agreement,  effective June 1, 1996, by and between Integrated Living
              Communities, Inc. and Integrated Health Services, Inc.*
10.11.......  Lease Agreement, dated as of June 18, 1996, between The Hartmoor Homestead, L.C., as Landlord,
              and Integrated Living Communities at Wichita, Inc., as Tenant.*
10.12.......  Purchase Option Agreement,  dated as of June 18, 1996, by and between The Hartmoor  Homestead,
              L.C., as Owner, and Integrated Living Communities at Wichita, Inc., as Optionee.*
10.13.......  Right of First  Refusal  Agreement,  dated as of June 18,  1996,  by and between The  Hartmoor
              Homestead, L.C. and Integrated Living Communities at Wichita, Inc.*
10.14 ......  Lease  Agreement,  dated as of June 18, 1996,  between The Homestead of Garden City,  L.C., as
              Landlord, and Integrated Living Communities at Garden City, Inc., as Tenant.*
10.15 ......  Purchase Option  Agreement,  dated as of June 18, 1996, by and between The Homestead of Garden
              City, L.C., as owner, and Integrated Living Communities at Garden City, Inc., as Optionee.
10.16 ......  Right of First Refusal  Agreement,  dated as of June 18, 1996, by and between The Homestead of
              Garden City, L.C. and Integrated Living Communities at Garden City, Inc.*
10.17 ......  Sublease,  dated as of June 1, 1996, between Integrated Living Communities of Bradenton,  Inc.
              and Integrated Health Services of Lester, Inc. (relating to "The Shores").*
10.18 ......  Guaranty, dated as of June 1, 1996, by Integrated Living Communities,  Inc. for the benefit of
              Integrated Health Services of Lester, Inc. and Litchfield Asset Management Corp.*
10.19 ......  Sublease,  dated as of June 1, 1996, between Integrated Living Communities of Bradenton,  Inc.
              and Integrated Health Services of Lester, Inc. (relating to "Cheyenne").*
10.20 ......  Registration  Rights  Agreement,   dated  as  of  June  1,  1996,  between  Integrated  Living
              Communities, Inc. and Integrated Health Services, Inc.*
10.21 ......  Purchase and Sale Agreement,  dated as of October 4, 1995,  between Liberty  Carrington Pointe
              Limited Partnership, as Seller, and Integrated Management-Carrington Pointe, Inc. as Buyer.*
10.22 ......  First  Amendment  to Purchase  and Sale  Agreement,  dated as of December  15,  1995,  between
              Liberty/Carrington Pointe Limited Partnership, as Seller, and Integrated Management-Carrington
              Pointe, Inc., as Buyer.*
10.23 ......  Employment Agreement, dated as of May 1, 1996, between the Company and Edward J. Komp.*

                               52




<PAGE>
   EXHIBIT
     NO.                                                DESCRIPTION
------------  ----------------------------------------------------------------------------------------------
10.24 ......  Employment Agreement, dated as of May 1, 1996, between the Company and Kayda Johnson.*
10.25 ......  Employment Agreement, dated as of May 1, 1996, between the Company and John Poole.*
10.26 ......  Form of Indemnification Agreement for officers and directors.*
10.27 ......  Stock Incentive Plan.*
10.28 ......  Form of Option Agreement under Stock Incentive Plan.*
10.29 ......  Non-Employee Director Stock Option Plan.*
10.30 ......  Form of Option Agreement under non-Employee Director Stock Option Plan.*
10.31 ......  Form of Non-Plan Director Option.*
10.32 ......  Integrated Living Communities, Inc. Supplemental Deferred Compensation Plan.*
10.33 ......  Revolving  Credit Demand Note,  dated February 29, 1996, in the principal  amount of $750,000,
              between Lori Zito d/b/a  Elderly  Development  Company,  as Borrower,  and  Integrated  Health
              Service  Retirement  Management,  Inc. as Lender,  as amended by Amendment  No. 1 to Revolving
              Credit and Security Agreement dated as of July 9, 1996.*
10.34 ......  Revolving  Credit and Security  Agreement,  dated as of February 29,  1996,  in the  principal
              amount of $750,000,  between Lori Zito d/b/a Elderly  Development  Company,  as Borrower,  and
              Integrated Health Services Retirement Management,  Inc. as Lender, as amended by Amendment No.
              1 to Revolving Credit and Security Agreement dated as of July 9, 1996.*
10.35 ......  Development  Services  Agreement,  dated as of June 3, 1996,  by and among  Integrated  Living
              Communities, Inc. Integrated Health Services, Inc. and Aguirre, Inc.*
10.36 ......  Letter of Intent Agreement,  dated August 23, 1996, among Integrated Living Communities,  Inc.
              and Capstone Capital Corporation.*
10.37 ......  Loan Commitment letter, dated June 11, 1996, from Health Care Property Investors,  Inc. to the
              Company.*
10.38 ......  Asset Purchase Agreement,  dated as of January, 1996 among C.S. Denton partners,  Ltd., Thomas
              Scott and Integrated Health Services at Great Bend, Inc. *
10.39 ......  Letter Agreement Re: Options to Receive  Assignments of Various Land Contracts dated March 27,
              1996 between Integrated Living Communities, Inc. and The Homestead Company, L.C.*
10.40 ......  Letter Agreement Re: Options to Receive  Assignments of Various Land Contracts dated March 21,
              1996 between  Integrated  Living  Communities,  Inc. and Lori Zito d/b/a  Elderly  Development
              Company.*
10.41 ......  Revolving Credit Note,  dated June 30, 1996, in the principal  amount of $75,000,000,  between
              Integrated  Living  Communities,  Inc., as Maker,  and Integrated  Health  Services,  Inc., as
              Lender.*
10.42 ......  Letter of Intent Agreement,  dated as of March 18, 1996, among Integrated Living  Communities,
              Inc. and The Homestead Company, L.C.*
10.43 ......  Revolving Credit Note, dated March 18, 1996, in the principal amount of $800,000,  between The
              Homestead Company,  L.C., as Borrower,  and Integrated Health Services Retirement  Management,
              Inc., as amended by Allonge and Amendment of Revolving Credit Note dated as of July 12, 1996.*
10.44 ......  Revolving  Credit and Security  Agreement,  dated as of March 18, 1996,  between The Homestead
              Company,  L.C., as Borrower,  and Integrated Health Services Retirement  Management,  Inc., as
              Lender,  as amended by Amendment No. 1 to Revolving Credit and Security  Agreement dated as of
              July 12, 1996.*

                               53




<PAGE>
   EXHIBIT
     NO.                                                DESCRIPTION
------------  ----------------------------------------------------------------------------------------------
10.45 ......  Indemnification  Agreement dated August 15, 1996 by and between  Integrated  Health  Services,
              Inc. and Integrated Health Services, Inc. and Integrated Living Communities, Inc.*
10.46 ......  Ancillary  Services  Agreement  dated  as of  June  3,  1996 by and  among  Integrated  Living
              Communities, Inc. Integrated Health Services, Inc. and Aquirre, Inc.*
10.47 ......  Partition Agreement,  dated as of October 31, 1995, by and among Donald Ross, Fred Fiala, John
              E. Rowe,  Integrated Health Services,  Inc., Central Park Lodges, Inc. Florida Life Care, Inc.
              and FLC Lakehouse Inc. and Janice Blivas.* 
10.48 ......  Letter of Agreement,  dated August 23, 1996, between Health Care Property  Investors,  Inc. and
              Integrated  Living  Communities,  Inc.,  amending  certain  provisions  of  that  certain  Loan
              commitment  letter,  dated June 11,  1996,  from Health Care  Property  Investors,  Inc. to the
              Company.*
10.49 ......  Credit Agreement with Integrated Health Services, dated October 10, 1996***
10.50 ......  Lease  Agreement with  Healthcare  Property  Investors for Cabot Pointe,  dated  September 30,
              1996***
10.51 ......  Promissory note made by Integrated  Living  Communities in favor of NationsBank,  N.A. (South)
              for $15,750,000 dated January 24, 1997.
10.52 ......  Lease Agreement between Capstone Capital  Corporation and Integrated Living Communities of St.
              Petersberg for Jaylene Retirement Center, dated March 4, 1997.
10.53 ......  Lease Agreement between Capsone Capital  Corporation and Integrated Living Communities of West
              Columbia for Jenni-Lynn Retirement Center, dated February 21, 1997.
10.54 ......  Lease  Agreement  with Health Care Property  Investors and  Integrated  Living  Communities of
              Milledgeville for Brantely Retirement Center, dated March 17, 1997.
21..........  Subsidiaries of the Registrant.
23.1........  Consent of KPMG Peat Marwick LLP.*
27..........  Financial Data Schedule.
</TABLE>

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

       Previously filed with the Commission as Exhibits to, and  incorporated by
        reference from, the following documents:

     * Registration statement on From S-1, (File No. 333-05877)

    ** Current Report of Form 8-K dated January 29, 1997

   *** Quarterly Report on Form 10-Q for the quarter ended September 30, 1996

                               54




<PAGE>
                                  SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities Exhange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                                             INTEGRATED LIVING COMMUNITIES, INC.
                                                       (Registrant)

                                             By:  /s/ JOHN B. POOLE
                                                --------------------------------
                                                John B. Poole
                                                Senior Vice President -
                                                Chief Financial Officer
                                                (Principal Financial Officer)

<TABLE>
<CAPTION>
           SIGNATURE                      TITLE                   DATE
------------------------------  ------------------------- -------------------
<S>                             <C>                       <C>                
/s/ EDWARD J. KOMP              President, CEO and        March 14, 1997
--------------------------
(Edward J. Komp)                Director

/s/ ROBERT N. ELKINS, M.D.      Chairman of the Board     March 14, 1997
--------------------------
(Robert N. Elkins, M.D.)        of Directors

/s/ LAWRENCE P. CIRKA                                     March 14, 1997
--------------------------
(Lawrence P. Cirka)             Director

/s/ CHARLES A. LAVERTY                                    March 14, 1997
--------------------------
(Charles A. Laverty)            Director

/s/ LISA K. MERRITT                                       March 14, 1997
--------------------------
(Lisa K. Merritt)               Director                  

</TABLE>

                               55