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

                                    Form 10-Q

{x}     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
        OF THE SECURITIES AND EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 1996

                                       OR

{ }     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)

             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                   (IRS Employer
 incorporation or organization)                 Identification No.)

                                 Bernwood Centre
                                    Suite 10
                            Bonita Springs, FL 34135
                    (Address of principal executive offices)

                                 (941) 947-7200
              (Registrant's telephone number, including area code)

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

                      Yes          No   X*
                         ----         -----

Number of shares of Registrant's  common stock,  $.01 par value,  outstanding at
November 14, 1996: 6,697,900

* The  registrant  became  subject to the reporting  requirements  on October 3,
1996.

<PAGE>



                       INTEGRATED LIVING COMMUNITIES, INC.
                                      INDEX



Part 1.  Financial Information

Item 1.  Financial Statements

         Consolidated Balance Sheets - December 31, 1995 and
         September 30, 1996                                                   2

         Consolidated Statements of Operations -
         Three and Nine Months Ended September 30, 1995 and 1996              3

         Consolidated Statements of Cash Flows -
         Nine Months Ended September 30, 1995 and 1996                        4

         Consolidated Statement of Changes in Stockholder's Equity -
         Nine Months Ended September 30, 1996                                 5

         Notes to the Consolidated Financial Statements                       6

Item 2   Management's Discussion and Analysis of Financial Condition and
         Results of Operations                                                8

Part II. Other Information                                                   12

Item 6   Exhibits and Report on Form 8-K
         Signature Page                                                      13




<PAGE>

              INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES


                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                          December 31,             September 30,
                                                              1995                      1996
Assets                                                                              (Unaudited)
                                                       --------------------     ---------------------
<S>                                                       <C>                    <C>                
Current assets:
     Cash and cash equivalents                            $        413,362       $           143,644
     Accounts receivable                                           525,555                   279,892
     Prepaid expenses and other current assets                     187,294                   247,757
                                                       --------------------     ---------------------
          Total current assets                                   1,126,211                   671,293
     Assets limited as to use                                      658,726                   707,243
     Property, plant, and equipment                             23,751,175                53,667,966
     Other assets                                                  237,650                 5,917,962
                                                       --------------------     ---------------------
                                                           $    25,773,762         $      60,964,464
                                                       ====================     =====================

Liabilities and stockholders equity
Current liabilities:
     Accounts payable                                     $        510,353        $        1,395,301
     Accrued expenses                                              930,941                 2,157,704
                                                       --------------------     ---------------------
          Total current liabilities                              1,441,294                 3,553,005
Note payable to parent company                                           -                 8,416,176
Refundable deposits                                              5,243,332                 5,075,241
Deferred income taxes                                                    -                   324,106
Unearned entrance fees                                           4,316,391                 3,895,883
                                                       --------------------     ---------------------
          Total liabilities                                     11,001,017                21,264,411
Stockholder's equity:
     Common stock                                                   38,979                     38,979
     Additional paid in capital                                 17,840,414                41,692,311
     Accumulated deficit                                        (3,106,648)               (2,031,237)
                                                       --------------------     ---------------------
          Net stockholder's equity                              14,772,745                39,700,053
                                                       --------------------     ---------------------
                                                           $    25,773,762         $      60,964,464
                                                       ====================     =====================
</TABLE>

           See accompanying notes to consolidated financial statements


                                       2

<PAGE>

              INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES


                      CONSOLIDATED STATEMENTS OF OPERATIONS
             THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                              Three Months Ended,                       Nine Months Ended,
                                                                September 30,                             September 30,
                                                    ---------------------------------------    -------------------------------------

                                                          1995                 1996                 1995                1996
                                                    ------------------  -------------------    ----------------- -------------------
<S>                                                    <C>                  <C>                  <C>                 <C>           
Revenues:
    Monthly service and entrance fees                  $    3,820,180       $    5,533,526       $   11,291,261      $   16,101,131
    Management services and other                             276,997              293,042              824,496           1,020,436
                                                    ------------------  -------------------    ----------------- -------------------
       Total revenues                                       4,097,177            5,826,568           12,115,757          17,121,567

Expenses:
    Community operations                                    2,825,876            3,789,936            8,401,941          10,927,903
    Corporate general and administrative                      256,112              847,194              754,814           1,524,894
    Facility rents                                            607,599              575,640            1,822,798           1,884,728
    Depreciation and amortization                             102,525              352,669              308,544             832,850
                                                    ------------------  -------------------    ----------------- -------------------
       Total expenses                                       3,792,112            5,565,439           11,288,097          15,170,375

Operating income                                              305,065              261,129              827,660           1,951,192

Interest expense                                                    -              202,557                    -             202,557
                                                    ------------------  -------------------    ----------------- -------------------

Earnings before income taxes and minority interest            305,065               58,572              827,660           1,748,635

Minority interest                                                9,812                   -               32,484                   -
                                                    ------------------  -------------------    ----------------- -------------------

Earnings before income taxes                                  295,253               58,572              795,176           1,748,635

Federal and state income taxes                                113,672               22,550              306,143             673,224
                                                    ------------------  -------------------    ----------------- -------------------

Net earnings                                          $       181,581     $         36,022      $       489,033      $    1,075,411
                                                    ==================  ===================    ================= ===================

Shares outstanding                                          3,897,900            3,897,900            3,897,900           3,897,900

Earnings per share                                   $           0.05     $           0.01     $           0.13      $         0.28
                                                    ==================  ===================    ================= ===================
</TABLE>

           See accompanying notes to consolidated financial statements

                                        3
<PAGE>
              INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES


                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                                Nine month ended
                                                                                 September 30,
                                                                          1995                 1996
                                                                     ----------------     ----------------
<S>                                                                      <C>                 <C>         
Cash flow from operating activities
      Net earnings                                                       $   489,033         $  1,075,411
      Adjustments to reconcile net earnings to
          net cash provided by operating activities:
          Deferred income taxes                                               30,614              324,106
          Minority Interest                                                   32,484                      -
          Depreciation and amortization                                      308,544              832,850
          Decrease (increase) in accounts receivable                         (13,993)             245,663
          Increase in prepaid expenses and
              other current assets                                          (100,628)             (60,463)
          Earned entrance fees                                              (457,944)            (695,033)
          Entrance fees received                                           1,113,114              383,250
          Increase  in accounts payable and
              accrued expenses                                               163,885            1,564,648
                                                                     ----------------     ----------------
Net cash provided by operating activities                                  1,565,109            3,670,432
                                                                     ----------------     ----------------

Cash flows from financing activities:
      Net capital distribution to parent company                          (2,246,698)          (3,318,103)
      Refundable deposits received                                         1,210,112              242,250
      Refunds of deposits and entrance fees                                 (510,224)            (519,066)
                                                                     ----------------     ----------------
Net cash used in financing activities                                     (1,546,810)          (3,594,919)
                                                                     ----------------     ----------------

Cash flows from investing activities:
      Property, plant, and equipment additions                              (621,897)            (767,450)
      Decrease (increase) in other assets                                   (104,677)             470,736
      Decrease (increase) in assets limited as to use                         43,167              (48,517)
                                                                     ----------------     ----------------
Net cash used in investing activities                                       (683,407)            (345,231)
                                                                     ----------------     ----------------

Decrease in cash                                                            (665,108)            (269,718)
Cash, beginning of the period                                                786,552              413,362
                                                                     ----------------     ----------------
Cash, end of period                                                      $   121,444         $    143,644
                                                                     ================     ================
</TABLE>


           See accompanying notes to consolidated financial statements


                                       4
<PAGE>
              INTEGRATED LIVING COMMUNITIES, INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>

                                                                              ADDITIONAL
                                                             COMMON            PAID-IN             RETAINED
                                                              STOCK            CAPTIAL              DEFICIT              TOTAL
                                                           ------------    -----------------    ----------------    ----------------

<S>                                                           <C>              <C>                  <C>                 <C>        
 Balance at December 31, 1995                                 $ 38,979         $ 17,840,414         $(3,106,648)        $14,772,745

 Net earnings (unaudited)                                            -                    -           1,075,411           1,075,411

 Net capital contributions from parent
        company (unaudited)                                          -           23,851,897                   -          23,851,897
                                                           ------------    -----------------    ----------------    ----------------

 Balance at September 30, 1996 (unaudited)                    $ 38,979         $ 41,692,311         $(2,031,237)        $39,700,053
                                                           ============    =================    ================    ================
</TABLE>


           See accompanying notes to consolidated financial statements.



                                       5

<PAGE>




                       INTEGRATED LIVING COMMUNITES, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE UNAUDITED THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996

1.    BASIS OF PRESENTATION

Integrated  Living  Communities,  Inc.  ("ILC" or "the  Company")  was formed in
November  1995  through  a  corporate  reorganization  whereby  the  assets  and
liabilities of the Integrated Living  Communities  Division of Integrated Health
Services,  Inc.  ("IHS") were transferred or leased from IHS subsidiaries to ILC
and its  subsidiaries.  At September 30, 1996, ILC was a wholly owned subsidiary
of IHS. In October 1996, the Company  consummated an initial public  offering of
4,200,000 shares of common stock (see note 2 below).

The  consolidated  financial  statements  included  herein  do not  contain  all
information and footnote  disclosures  normally included in financial statements
prepared in  accordance  with  generally  accepted  accounting  principles.  For
further  information,  such as the significant  accounting  policies followed by
ILC,  refer to the  consolidated  financial  statements  and  footnotes  thereto
included in the Company's  Registration  Statement on Form S-1 (No.  333-05877),
which was  declared  effective by the  Securities  and  Exchange  Commission  on
October 3,  1996.  In the  opinion of  management,  the  consolidated  financial
statements  include  all  necessary  adjustments   (consisting  only  of  normal
recurring  accruals)  for a fair  presentation  of the  financial  position  and
results  of  operations  for the  interim  periods  presented.  The  results  of
operations for the interim periods  presented are not necessarily  indicative of
the results that may be achieved for the full year.

2.    INITIAL PUBLIC OFFERING

On October 9, 1996, ILC completed an initial public offering of 4,200,000 shares
of common stock, of which 2,800,000 shares were sold by ILC and 1,400,000 shares
were sold by IHS. The initial  public  offering  price was $8.00 per share.  The
Company  received net proceeds of  approximately  $19.0 million,  which proceeds
were used to acquire  the  Terrace  Gardens  Healthcare  and  Retirement  Center
("Terrace  Gardens"),  a 317 unit  facility  located in Wichita,  Kansas  ($12.2
million)  and to repay  outstanding  indebtedness  to IHS ($7.4  million).  This
offering reduced IHS's ownership of the Company's common stock to 37%.

3.    ACQUISITIONS

In January 1996, IHS acquired Vintage  Healthcare Center  ("Vintage") and leased
the 105 bed assisted living portion of the facility to the Company.

In June 1996, the Company acquired condominium interests in the 231 bed assisted
living portion of the Dallas at Treemont  facility,  the 105 bed assisted living
portion of  Vintage,  and the 34 bed  assisted  living  portion of the West Palm
Beach  Retirement  facility.  The acquisition of the  condominium  interests was
treated as a capital  contribution by IHS of approximately  $27.2 million to the
Company  representing  IHS's basis in the assisted living and congregate  living
portion of these  facilities.  These communities had previously been leased from
IHS.

In July 1996, the Company  acquired  leasehold  interests in two 35 bed assisted
living communities located in Garden City and Wichita, Kansas.

In August  1996,  the Company  purchased  the Cabot  Pointe  facility,  a 56 bed
dementia facility located in Bradenton,  Florida,  for $2.8 million.  In October
1996,  the Company  sold this  facility to and leased it back from a real estate
investment trust. See note 4.

                                       6
<PAGE>

4.    SUBSEQUENT EVENTS

In October,  1996, the Company  completed a  sale-leaseback  of the Cabot Pointe
facility for $2.8 million with Health Care Property  Investors.  No gain or loss
was recorded on this transaction.

In October 1996, the Company  completed its initial public  offering (see note 2
above).

In October  1996,  the company  acquired  Terrace  Gardens,  a 317 bed  facility
located in Wichita, Kansas, for $12.2 million.


                                       7
<PAGE>




ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The  following  discussion  of results of  operations  and  financial  condition
contains forward-looking information that involves risks and uncertainties.  The
Company's actual results could differ materially from those anticipated. Factors
that could cause or contribute to such differences  include, but are not limited
to: business  conditions,  risks of downturns in economic conditions  generally,
and in the health care industry specifically, development delays, cost overruns,
difficulty  in  integrating  acquisitions  and the other  risks  detailed in the
Company's  Securities and Exchange Commission  filings,  including the Company's
Registration Statement on Form S-1.

OVERVIEW

As of November 14, 1996, the Company operates 19 facilities  consisting of 2,147
beds.  The  Company  also has 35 sites in  various  stages  of  development  and
construction.

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 25 to 35 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 from 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 and its  anticipated  operating
losses for at least the next 12 months. There can be no assurance, however, that
the Company will not be required to seek additional capital earlier.

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.

From its  inception in November  1995 through the present,  the Company has been
operated as a wholly-owned  subsidiary of Integrated  Health  Services,  Inc. To
date,  IHS  has  provided  all  required  financial,  legal,  accounting,  human
resources and information systems services to the Company, and has satisfied all
of the Company's capital requirements in excess of internally generated funds.

The Company derives its revenues from two primary sources: (i) resident fees for
the delivery of assisted living services and (ii) management services income for
the  management  of  facilities  that the  Company  does  not own a  controlling
interest.

The  Company  categorizes  its  operating  expenses as  follows:  (i)  community
operations,  which includes labor, food, advertising, and other direct operating
expense; (ii) general and administrative  expenses,  consisting of corporate and
other  support  functions;  (iii) rent,  which  includes  facility and equipment
rentals,  (iv) depreciation and amortization,  and (v) interest. In anticipation
of its  growth,  the  Company  made  significant  investments  in its  corporate
infrastructure  and staffing in the third  quarter of 1996.  Through  October 9,
1996, the Company operated as a wholly owned subsidiary of IHS.


                                       8
<PAGE>

THREE MONTHS ENDED  SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED  SEPTEMBER
30, 1995

Total  revenue  increased  $1.7  million  or 42%,  to $5.8  million in the third
quarter  of 1996  from  $4.1  million  in the  third  quarter  of 1995.  Of this
increase,  $1.5 million,  or 88%, was due to revenue from  communities  acquired
after September 30, 1995. The remaining increase was due to increased revenue at
communities in operation in both periods and increased management fee revenue.

Community  operations  expense increased $964,000 or 34%, to $3.8 million in the
third quarter of 1996 from $2.8 million in the third quarter of 1995.  Community
operations  increased $1 million due to communities acquired after September 30,
1995.  Community  operating  expense at  communities  in operation  both periods
decreased due to increased efficiencies.

Corporate general and  administrative  expense increased  $591,000,  or 231%, to
$847,000  in the third  quarter of 1996 from  $256,000  in the third  quarter of
1995.  This  increase  was  primarily  due to the  relocation  of the  Company's
corporate office from Owings,  Mills,  Maryland to Bonita Springs,  Florida.  In
addition,  the Company  increased  corporate  capacity in anticipation of future
growth.

Rent expense decreased $32,000,  or 5%, to $576,000 in the third quarter of 1996
from  $608,000  in the  third  quarter  of 1995.  This  decrease  was due to the
acquisition of condominium  interests in the West Palm and Treemont  communities
in June of 1996.  These facilities had been leased in the third quarter of 1995.
This decrease was partially offset by rent expense at communities acquired after
September  30, 1995 and an increase in rent  expense at the Shores and  Cheyenne
communities effective June 1, 1996.

Depreciation and amortization  increased  $250,000,  or 244%, to $353,000 in the
third quarter of 1996 from $103,000 in the third quarter of 1995.  This increase
was primarily due to communities acquired subsequent to September 30, 1995.

Interest  expense  increased  from $0 in  1995  to  $203,000  in  1996.  This is
attributable to interest on the Company's note payable to IHS.

NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1995

Total  revenues  increased  $5.0 million,  or 41%, to $17.1 million in 1996 from
$12.1 million in 1995. Of the increase, $4.0 million, or 80%, was due to revenue
from communities  acquired after September 30, 1995. The remaining  increase was
due to  increased  revenue at  communities  in  operation  in both  periods  and
increases in management fee revenue.

Community operations expense increased $2.5 million, or 30%, to $10.9 million in
1996 from $8.4  million  in 1995.  Of this  increase,  $2.9  million  was due to
operating  expenses from  communities  acquired  after  September 30, 1995.  The
remaining  net decrease  was due to increased  efficiencies  at  communities  in
operation in both periods.

Corporate general and  administrative  expense increased  $770,000,  or 102%, to
$1.5 million in 1996 from  $755,000 in 1995.  This increase was primarily due to
the relocation of the Company's corporate office from Owings, Mills, Maryland to
Bonita Springs,  Florida. In addition,  the Company increased corporate capacity
in anticipation of future growth.

Rent expense increased $62,000, or 3%, to $1.9 million in 1996 from $1.8 million
in 1995. This increase was due to leasehold  interests  acquired after September
30,  1996,  increase  in rent  expense at the Shores and  Cheyenne  communities,
partially  offset by decreased  rentals due to the  acquisition of the West Palm
and Treemont communities which had been leased in 1995.

Depreciation and amortization  increased $524,000,  or 170%, to $833,000 in 1996
from $309,000 in 1995.  This increase was primarily due to communities  acquired
subsequent to September 30, 1995.


                                       9

<PAGE>

Interest  expense  increased from $0 in 1995 to $203,000 in 1996. This is due to
interest on the Company's note payable to IHS.

LIQUIDITY AND CAPITAL RESOURCES

In October 1996, the Company completed an initial public offering of 4.2 million
shares.  The net proceeds to the Company were  approximately $19 million,  after
deducting  underwriting  discounts and  commissions and offering  expenses.  The
company used the net proceeds to acquire the Terrace  Gardens  community  and to
repay certain amounts due to IHS.

During  1996,  the  Company  secured a  commitment  with  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 to real
estate investment trust transactions.

Each developer  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.  HCPI will pay all development
costs up to a  specified  maximum  and the  Company  will be required to pay any
costs in excess  thereof.  The Company will  guarantee  the  completion of a New
Facility within 12 months.  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 traded on a national  securities exchange or the NASDAQ National
Market.

HCPI will pay fair market  value,  based on  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 to 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  renewals 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 an existing  facility  will be 325 basis  points over the 10-year
Treasury Note  multiplied by the purchase price of the facility.  The base lease
rate for New Facility leases will be 350 basis points over the 10-year  Treasury
Note  multiplied by the purchase price of the facility.  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 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.

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. 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 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.  Dr.  Elkins,  the Chairman of the Board of Directors of
the Company, is a director of Capstone.

Following this offering,  the Company will be dependent on third-party financing
for  its  acquisition  and  development   program.   Except  for  the  financing
commitments   discussed  above,  the  Company  has  no  other  arrangements  for
financing.   there  can  be  no  assurance  that  financing  for  the  Company's
acquisition  and  development  program  will  be  available  to the  company  on
acceptable  terms  or at all.  moreover,  to the  extent  the  Company  acquires
facilities  that do not generate  positive cash flow (after rent expense  and/or
interest),  the Company may be required to seek  additional  capital for working
capital  and  liquidity  purposes.  See  "Risk  Factors  - Need for  Substantial
Additional Capital."

The Company  presently  anticipates  that it will make capital  expenditures  of
approximately  $3  million  in 1996  relating  to its  existing  facilities.  In
addition,  the Company used  approximately  $12.2 million of the net proceeds of
this  offering to acquire the Terrace  Gardens  facility  simultaneous  with the
closing of this offering,  and anticipate that it will make capital expenditures
of  approximately  $500,000 with respect to the Cabot Pointe and Terrace Gardens
facilities.  The  Company  anticipates  that it will  spend  approximately  $9.0
million in 1996 to purchase  land for the  development  of new  assisted  living
facilities.  The Company has provided two of its third-party developers lines of
credit aggregating $2.0 million.

At September  30, 1996,  the Company had $8.4  million  outstanding  under a $75
million  credit  line with IHS.  In  October,  the $75  million  credit line was
replaced  with a new credit  facility  with IHS that is due on December 2, 1996.
The outstanding  balance under this credit agreement is $3.4 million at November
14, 1996.

For the nine months ended September 30, 1995 and 1996, cash flows from operating
activities  were $1.6 million and $3.7 million,  respectively.  Net cash used in
financing  activities  was $1.5  million  and  $3.6  million  in 1995 and  1996,
respectively. Net cash used in investing activities was $700,000 and $300,000 in
1995 and 1996, respectively.


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<PAGE>



Part II.          Other Information

Items 1 - 5 are not applicable

Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits

Exhibit Number    Description
--------------    -----------

         2        Asset Purchase Agreement with Health  Care  Property Investors
                  for Cabot Pointe, dated September 30, 1996.

         10.1     Lease Agreement with Health Care  Property Investors for Cabot
                  Pointe, dated September 30, 1996.

         10.2     Credit  agreement  with  Integrated   Health  Services,  dated
                  October 10, 1996.

         27       Financial Data Schedule

(b)      Reports on Form 8-K

         Current  report on Form 8-K dated  October  9,  1996,  relating  to the
         acquisition of the Terrace Gardens facility.


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<PAGE>



SIGNATURES

Pursuant to the  requirements  of the  Securities  and Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized



                             Integrated Living Communities, Inc.
                             (Registrant)



                             John B. Poole
                             -----------------------------------------------
                             John  B. Poole
Dated November 14, 1996      Senior Vice President - Chief Financial Officer


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