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

FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from ______ to ______.

Commission file number 0-28656

KARRINGTON HEALTH, INC.
(Exact name of registrant as specified in its charter)

OHIO 31-1461482
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

919 OLD HENDERSON ROAD
COLUMBUS, OH 43220
(614) 451-5151
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

Securities Registered Pursuant to Section 12(b) of the Act:
None

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value

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

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

Shares of registrant's common shares, without par value, outstanding at March
13,1998 was 6,837,363. As of March 13, 1998, the aggregate market value of
the voting stock held by non-affiliates of the registrant was $45,887,000.

Documents Incorporated By Reference

The information required by Part I, Item 2 and Part II, Items 5(a), 6, 7 and
8, of Form 10K is incorporated herein by reference to the registrant's Annual
Report to Shareholders for the year ended December 31, 1997. The information
required by Part III of Form 10K is incorporated herein by reference to the
registrant's definitive Proxy Statement relating to its 1998 Annual Meeting
of Stockholders to be held on May 12, 1998.

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PART I

ITEM 1. BUSINESS

The Company develops, owns and operates licensed assisted living
residences. Assisted living residences provide housing and care for elderly
or frail individuals who, although generally ambulatory, need assistance with
one or more activities of daily living, such as bathing, grooming, dressing,
eating or personal hygiene.

In 1990, Richard R. Slager, the Company's Chief Executive Officer, and
the Company's former Chief Operating Officer and Chief Financial Officer,
formed DevelopMed Associates, Inc., an Ohio corporation ("DMA"), for the
purpose of developing an assisted living residence business. In 1991, DMA
entered into a strategic alliance with JMAC, Inc. ("JMAC"), an investment
company owned by John H. McConnell and John P. McConnell, the founder and the
Chairman, respectively, of Worthington Industries, Inc., pursuant to which
alliance DMA and JMAC Properties, Inc., an Ohio corporation ("JMAC
Properties"), which is a wholly-owned subsidiary of JMAC, formed the
Company's predecessor, Karrington Operating Company, an Ohio general
partnership ("Karrington Operating"). Prior to the consummation of the
reorganization transactions (as described below), JMAC Properties owned a
two-thirds equity interest in Karrington Operating, and DMA owned a one-third
equity interest.

Immediately prior to the Company's initial public offering in July 1996,
JMAC transferred to the Company all of its shares of JMAC Properties in
exchange for two-thirds of the pre-offering outstanding common shares of the
Company and the shareholders of DMA transferred all of their shares of DMA to
the Company in exchange for one-third of the pre-offering outstanding common
shares of the Company.

As of March 23, 1998, the Company has developed 46 residences in its
target markets, 32 of which are open and 14 of which are under construction
and scheduled to open in 1998. These 46 residences are located in Ohio,
Pennsylvania, Illinois, Minnesota, North Dakota, Iowa, Indiana, Colorado,
North Carolina, Michigan and New Mexico. As part of its nationwide expansion
strategy, the Company has sites for an additional 20 residences under
contract in these states, as well as in Alabama, Mississippi, Texas,
Nebraska, Washington, California and Tennessee.

Recognizing that not all seniors share the same acuity at various income
levels, Karrington has created three standard models of residence, an
evolution of the Company's original prototype mansion-style residence. While
standardization to the three models will enable the Company to get its
product to market faster, Karrington's commitment to its residents remains
intact.

Along with creating three standard models, the Company has branded, or
named, its residential products to help build Karrington's national identity.
Karrington's original mansion-style residence, now known as K1 or the
Karrington model, was upgraded and enhanced in 1997. Located in established
upper-income communities, the K1 is a 72-unit model that replaces the
original 53-unit prototype.

Karrington Place, or K2, is the Company's one-story, small-town solution
to high-quality assisted living. Karrington Place offers residents of
smaller and rural communities access to the skilled and caring professionals,
unique products and services, and dignified environments that enable
Karrington residents to age-in-place gracefully.

The Company's third residential model is the outgrowth of Karrington's
May 1997 acquisition of Kensington Management Group, Inc. of Golden Valley,
Minnesota. Operating innovative Alzheimer's care communities, now known as
Karrington Cottages or KC, the Company provides residential Alzheimer's care
and other programs under the medical direction of geriatric and dementia
specialists.

The early 1998 completion of a nine-Cottage campus in Rochester,
Minnesota will further Karrington's relationship with geriatric physicians of
the world-famous Mayo Clinic. The Company expects to develop future
Karrington Cottages in conjunction with other regional health care systems
throughout the Midwest.

With the addition of Karrington Cottages to the Company's product mix,
management plans to broaden the way high-acuity care and assisted living in
general are viewed by the health care industry and the public. Residential
care for persons with Alzheimer's Disease and other forms of dementia will
continue to be the focus of Karrington Cottages. In addition, some

residential Cottages on each campus will be devoted to other physical and
cognitive conditions, based on the needs or specialties of the regional
health care providers associated with Karrington.

Karrington residences typically are staffed with licensed nurses on a
24-hour basis and are designed to permit residents to "age in place" within
the residence as they develop further physical or cognitive frailties. The
Company believes that it is able to care for individuals with higher acuity
levels (i.e., those needing greater assistance with activities of daily
living) than is typical in the assisted living industry.

In addition to its own development activities, the Company has entered
into joint development relationships with health care providers, including
Sisters of Charity Health Care Systems, Inc. ("SCHCS"), a not-for-profit
corporation of which the sole member is Catholic Health Initiatives ("CHI").
CHI is a large, not-for-profit health organization formed by the recent
consolidation of Catholic Health Corporation, SCHCS and Franciscan Health
Systems. CHI operates 67 hospitals and 48 long-term care facilities in 22
states and has revenues of $4.7 billion. The Company and CHI currently intend
to develop and operate assisted living residences with CHI's health care
system. See "Relationship with CHI."

THE ASSISTED LIVING INDUSTRY

The assisted living industry has developed over the past decade to
provide a cost-effective residential alternative for elderly individuals who
do not require the intensive medical attention provided by a skilled nursing
facility but who cannot, or choose not to, live independently due to physical
frailty or cognitive disorders. It is estimated that the assisted living
industry has annual revenues of $15 billion. Assisted living represents a
combination of housing and 24-hour a day personal support services designed
to aid elderly residents with activities of daily living, such as bathing,
grooming, dressing, eating and personal hygiene. Assisted living residences
provide assistance to residents with limited medical needs and may provide
higher levels of personal assistance for special need residents, such as
incontinent residents or residents with Alzheimer's disease or other forms of
cognitive disorders.

The assisted living industry is fragmented and, to date, is
characterized by many small operators. The scope of assisted living services
varies substantially among operators, ranging from basic "board and care"
services to full service assisted living residences such as those operated by
the Company. Many smaller assisted living providers do not operate in
residences designed specifically for assisted living, do not have
professionally trained staffs and may provide only limited assistance with
low-level care activities. The Company believes there are few assisted living
operators in its markets who provide the same comprehensive range of assisted
living services, such as Alzheimer's care and other special care programs, as
the Company.

The Company believes that the following factors should continue to
positively affect the assisted living industry:

CONSUMER PREFERENCES. The Company believes assisted living is increasingly
the alternative preferred by prospective residents and their families in
providing care for the frail elderly. Assisted living residents have greater
independence, and assisted living services allow them to "age in place" in a
residential setting. The Company believes these factors result in a higher
quality of life than that experienced in the more institutional or clinical
settings, such as skilled nursing facilities.

POSITIVE DEMOGRAPHIC CHANGES. According to the U.S. Bureau of Census, the
number of individuals in the United States 85 years and older is expected to
increase by approximately 43% during the 1990s, from 3.0 million in 1990 to
an estimated 4.3 million in 2000, as compared to total U.S. population growth
of approximately 11% during the same period. It is further estimated that
approximately 57% of the population of seniors over age 85 currently need
assistance with activities of daily living and that more than one-half of
seniors are likely to develop Alzheimer's disease or other cognitive
disorders by age 85.

ASSISTED LIVING DEMAND EXCEEDS SUPPLY. The supply of long-term care beds per
1,000 individuals 85 years of age and older declined from 686 beds per
thousand to 604 beds per thousand between 1980 and 1991, according to the
U.S. Bureau of Census, and the Company expects this trend to continue. The
Company believes this decline is attributable to several factors. The
majority of states in the United States have adopted certificate of need
("CON") or similar statutes which generally require that, prior to the
addition of new beds, the addition of new services or the making of certain
capital expenditures, a state agency must determine that a need exists for
the new beds or the proposed activities. The Company believes that this CON
process tends to restrict the supply and availability of licensed nursing
facility beds. High construction costs, limitations on government
reimbursement for the full costs of construction and start-up expenses also
act to constrain growth in the supply of such facilities and beds. At the
same time, nursing facility operators are focusing on patients requiring
higher levels of nursing care

which results in fewer nursing beds being available to patients with lower
acuity levels.

COST ADVANTAGES. The Company believes that the assisted living industry can
provide comparable services for significantly less than the cost of such
services to private pay residents in nursing facilities. The Company's market
research indicates that the Company provides services at a cost of 25% to 35%
less than the cost of comparable services provided by private intermediate
care nursing facilities in the same market.

CHANGES IN FAMILY COMPOSITION. As a result of the increasing number of
two-income families, the high divorce rate and the number of single-parent
households, as well as the increasing geographic dispersion of families, many
adult children are not available to care in their own homes for elderly
parents. Two-income families are, however, often better able to provide
financial support for elderly parents.

COST CONTAINMENT PRESSURES. Responding to rising health care costs,
governmental and private pay or sources have adopted cost containment
measures that have encouraged reduced lengths of stay in hospitals. A result
of this trend is an increase in the number of individuals receiving nursing
facility care as compared to hospitalization. That, in turn, causes nursing
facility operators to focus on improving occupancy and increasing services to
residents requiring high levels of nursing care. As the level of care for
nursing facility residents rises and the supply of nursing facility space is
filled by residents having more acute needs, the Company believes that there
will be greater demand for assisted living residences to provide for
residents requiring less nursing care than generally will be provided to
residents in nursing facilities.

STRATEGY

The principal components of the Company's strategy are to:

DEVELOP KARRINGTON MODEL RESIDENCES IN CURRENTLY-SERVED AND NEW COMMUNITIES.
The Company's plans call for rapid development of the Karrington models in
the communities it currently serves, as well as expansion into additional
communities. The Company targets middle-to upper-income metropolitan markets
which have well-established populations of persons 75 years of age and older.
This development activity, in conjunction with the Company's relationship
with CHI, is intended to result in regional concentrations of assisted living
residences. The Company's ultimate objective is to develop a nationwide
network of assisted living residences which will be utilized by managed care
companies.

EXPAND JOINT DEVELOPMENT RELATIONSHIPS WITH MAJOR HEALTH CARE SYSTEMS ACROSS
THE UNITED STATES. The Company believes that it will continue to benefit
from its relationship with major health care systems, including CHI, pursuant
to which the Company expects to develop and operate, and jointly own assisted
living residences in communities where these providers or their affiliates
have a major presence as a health care provider. In addition, the Company
believes its relationship with CHI provides a significant source of referrals
and the opportunity to leverage the Company's expertise by developing similar
relationships with other large, primarily not-for-profit, health care systems
throughout the country.

CONTINUE ITS FOCUS ON PROVIDING A BROAD RANGE OF SERVICES TO HIGHER-ACUITY
RESIDENTS. The Company believes it provides a higher acuity level of care to
its residents than is typically available at assisted living facilities,
including care for individuals with Alzheimer's disease and other cognitive
disorders. The Company is able to provide these services by building its
residences to higher standards and specifications, hiring licensed
professionals, providing advanced training to its staff and complying with
relevant regulations. In addition to providing care to residents with more
complex medical conditions, the Company seeks to offer a broad range of
services to meet the varied needs of all of its residents. In the future,
these services are expected to include physical, occupational, speech and
other rehabilitation therapy programs and other resident services. By
providing a higher level of care and a broader spectrum of services, the
Company is able to allow its residents to "age in place." The Company also is
able to provide these services at rates which are substantially less than the
cost of similar services provided by nursing care facilities.

RELATIONSHIP WITH CHI

In addition to its own residence development activities, the Company and
Catholic Health Initiatives have entered into five joint venture agreements
to develop, own and operate six assisted living residences, all of which are
open at the end of 1997. The genesis of the CHI relationship was the joint
development by the Company and SCHCS of Karrington of Oakwood, a 53-unit
assisted living residence located in the Dayton, Ohio area which opened in
November 1994. Following the success of the Karrington of Oakwood residence,
the Company and CHI determined to expand their relationship and in 1995,
entered into

a letter of intent relating to the joint development of six additional
projects over a three-year period. The first of the six projects consists of
a 61-unit assisted living residence and an adjacent 28-unit Alzheimer's and
cognitive disorder residence located in Albuquerque, New Mexico, which opened
in October 1996. Three additional residences located in Cincinnati and
Dayton, Ohio and Colorado Springs, Colorado opened in 1997.

Each project is owned jointly by the Company and CHI, with CHI typically
owning approximately 80% of the equity of the project. Construction and
permanent debt financing generally is arranged by CHI on behalf of the
venture and is non-recourse to the Company. The Company provides all
development and management services with respect to each residence under a
standard agreement that generally provides for a development fee of $250,000
and a management fee of 5% of revenues.

SERVICES AND OPERATIONS

SERVICES PROVIDED

Seventy-five percent of Karrington residents are females and the average
age of all residents is 83. Most Karrington residents have some disability
associated with aging, such as dementia, Alzheimer's disease, arthritis,
nutritional problems, incontinence, strokes or other disorders, and need
assistance with two or more activities of daily living. Residents needs
generally fall into one or more of the following categories: (i) requiring
physical support or assistance with activities of daily living; (ii)
requiring assistance, reminders and cuing due to some cognitive impairment;
and (iii) requiring socialization and interaction with others.

Residents generally pay a daily suite rental rate under a resident
agreement which is renewable annually and cancelable with 30 days notice. The
daily suite rental rate ranges from $34 to $137 per day, depending on unit
size, location, number of occupants and level of care required. Approximately
70% of Karrington's residents live in private suites. While the Company's
average basic daily suite rental rate is approximately $85, the wide range of
rates offered by the Company allows the Company to accommodate persons of
varying financial resources. Medication administration and various levels of
extended care services, which depend on the degree of frailty, add to the
basic care rate. Additional charges may be incurred for other services such
as hair care and special diets. Currently, approximately 93% of all resident
revenues are from private pay sources.

The Company's basic care program is provided to all residents at no
additional cost and includes: assistance with daily living, such as eating,
bathing, grooming, dressing and personal hygiene; three meals per day served
in a common dining room; 24-hour security; emergency call systems in each
unit and living area; transportation to offices, stores and community
services; assistance with arranging outside services such as physician care,
various therapy programs and other medical services; personal laundry
services; housekeeping services; and social and recreational activities.

In addition to the basic care program, residents may be included in the
extended care program, which assists residents who require more frequent or
more intensive assistance or care. Prior to entering a Karrington residence,
and periodically during their stay, individuals' needs are assessed to
determine the level of extended care services required, and an individual
care plan is designed. The Company's experience is that approximately 90% of
its residents require some extended care services or require medication
administration.

The Company's Alzheimer's and other cognitive disorder programs are
provided in each prototype residence on a designated "special care" floor or
wing. The Company also develops residences designed specifically for
Alzheimer's disease care. Trained staff provide special care programs for
cognitively impaired residents, and each is charged additional daily fees for
this added support. Programs include added assistance, stimulation, special
activities, intervention and therapeutic programs that are developed and
supported by physicians specializing in dementia care that consult with the
Company.

STAFFING

Each residence has an Administrator and a seven-person management team.
This management team includes the Resident Care Director (who supervises all
resident support staff and care plans), a Registered Nurse/Wellness Director
(responsible for all wellness programs, as well as medication programs), the
Director of Administration (responsible for general administrative duties)
and the Marketing Director. The Activities Director, Chef and Environmental
Services Director complete the management team. Residence management teams
report to a Regional Director responsible for the operation of several
residences. Regional directors provide support, oversight and mentoring to
each residence's staff.

Staffing models are used to determine appropriate personnel levels.
Screening is used to help select staff with "care providing" characteristics.
For each residence, services are typically provided by a staff of
approximately 28 full-time equivalents. The largest staff component is
"Resident Assistants," who include licensed practical nurses and other
trained staff members who are responsible for administering services to
residents.

The Company maintains competitive compensation programs, including
incentives and quarterly profit sharing, which it believes help attract and
retain excellent employees. The Company believes that the combination of
proper interviewing, selection methods and review, training and appropriate
incentives significantly reduces hiring and retraining costs and allows for a
more stable, long-term work force. All employees participate in a recruitment
and development program called the Predictive Index-Registered Trademark-, a
third-party program which is focused on determining key criteria and personal
attributes which the Company believes are important to the proper placement
of staff and management.

TRAINING AND QUALITY ASSURANCE

The Company provides its personnel with an extensive and innovative
training program. This training covers all aspects of Karrington's operation.
At the end of a 90-day probationary period, each new employee is evaluated
for permanent placement. Additionally, the Company has an extensive
administrator-in-training ("AIT") program which provides classroom and
on-the-job training to develop future Karrington administrators. The Company
believes investment in the AIT program is vital to its continued growth,
quality control and consistency of service delivery.

The Company has structured a comprehensive quality assurance ("QA")
program intended to maintain standards of care established for each
residence. Under the Company's QA program, the care and services provided at
each residence are monitored by the professional services staff which reports
directly to the Company's senior management. The QA team works with residence
management teams to assure that all staff members are trained, that clinical
policies and procedures are followed, and that all state and federal
standards are met while achieving the stringent requirements of the Company.
The Company's QA program helps support compliance with federal and state
regulations and requirements for licensing. Karrington has also developed a
Quality of Service program which includes periodic surveys and follow-up with
all current and former residents and responsible parties.

DEVELOPMENT

The Company's development personnel research and identify potential
markets, primarily in major metropolitan areas and their surrounding suburban
communities, and select sites for development within such markets. In
evaluating a market, the Company considers a number of factors, including
population, income and age demographics, traffic count, site visibility,
residential and commercial characteristics, probability of obtaining zoning
approvals, proximity of various competitors, estimated market demand and the
potential to achieve economies of scale in a specific market by concentration
of its development and operating activities.

The principal stages in the development process are (i) strategic market
selection and assessment (ii) site selection and contract signing, (iii)
zoning and site plan approval, (iv) architectural planning and design, (v)
contractor selection and (vi) 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 three to nine months and
are typically the most difficult step in the development process as a result
of the Company's selection of sites in established communities which
frequently require site rezoning. Architectural planning and design and
contractor selection often occur during the zoning process but can prolong
the start of construction. Residence construction generally takes 12 months.
After a residence receives a certificate of occupancy and appropriate
licenses, residents usually begin to move in immediately. The Company's
experience indicates that new residences typically reach a stable level of
occupancy of over 90% within 12 months, but there can be no assurance that
these results will be achieved in new markets. The Company estimates that
total capitalized cost to develop, construct and open a K1 or K2 Karrington
model residence, including land acquisition and construction costs, ranges
from approximately $5.0 million to $11.0 million, an average cost per unit of
approximately $110,000. The cost of any particular residence may vary
considerably based on a variety of site-specific factors.

The Company's development activities are coordinated by its 18-person
development staff, which has extensive real estate acquisition, design,
engineering, zoning, general construction and project management experience.
Architectural design and hands-on construction functions are usually
contracted to experienced outside architects and contractors.

The Company's construction strategies include the development of
national purchasing contracts for major building components and the retention
of several regional contractors engaged to construct its residences. The
Company believes these approaches will help reduce construction costs or
mitigate the rate of cost increases due to inflation, increase product
quality, and shorten construction periods that result from increased
familiarity with the architectural, engineering and construction design of
the Company's prototype residences.

ARCHITECTURAL DESIGNS

The K1 or Karrington model residence is a freestanding, mansion-style
building with a designed capacity of 75 to 85 residents in any of a variety
of exterior styles. The K1 prototype averages 72 units and approximately
50,000 square feet and is generally built on a 2.5 to 4 acre site. The K2 or
Karrington Place model residence averages 48 units with a designed capacity
of 61 residences. The KC or Karrington Cottage prototype model is 20 units
with 36 beds. Approximately 45-50% of the buildings are devoted to common
areas and amenities. The Company's three basic building plan designs provide
it with flexibility in adapting the model to a particular site and local
zoning requirements. The building is usually two or three stories of concrete
and steel frame construction built to institutional health care standards but
residential in appearance. The interior design promotes a home-like
environment while permitting the effective provision of resident care
programs and promoting resident independence.

The individual resident suites are clustered on each floor to resemble a
neighborhood, with a variety of suite floor plans of one or two rooms and
varying square footage. Each floor has a quiet area resembling a library or
den and an active area designed to support activity programs and interaction
among residents, staff and families. The main floor usually includes the main
dining room, private dining rooms, administrative offices, a library, a
living or family room, an ice cream parlor and a year-round sun porch. Also
included are public restrooms, outside porches, a foyer and a formal entryway
with grand staircase and central elevator. On other floors in each residence
are located a resident laundry room, a wellness center, a bathing spa area,
employee break rooms, a beauty salon and activity areas. The special care
floor also includes a separate resident kitchen and dining area.

Recently, the Company opened its third stand-alone Alzheimer's care
residence in Columbus, Ohio designed specifically for residents with
Alzheimer's disease. The Karrington Cottage or KC model residences are
constructed using a special design concept intended to provide the atmosphere
and physical environment believed by the Company to be most effective in
assisting residents in the later stages of Alzheimer's disease. The Company
intends to develop additional KC models in many of the markets it enters.

The architectural and interior design of the Karrington prototypes
incorporate Karrington's philosophy of dedication to excellence in preserving
and enhancing personal dignity, independence, individuality and quality of
life. The Company believes that its residential environments accomplish other
objectives as well, including: (i) lowering the stress and disruption of the
resident and their family that occurs because of a move; (ii) providing a
secure environment that is easily traveled by residents with a wide variety
of ambulation disabilities; (iii) making available a comfortable home-like
environment that welcomes visitation by family and friends; and (iv)
supporting the Company's special activities programs that promote
inter-generational activities and events to bring together elderly residents
with younger persons in the community.

MARKETING

The Company's marketing approach emphasizes consumer education and
awareness directed to potential residents and family members. The adult
children of residents tend to be significant decision-makers in the selection
of the assisted living option. Other significant referral sources include
hospital discharge planners, physicians, churches, social service agencies
focused on the elderly, nursing facilities in the area, home health agencies,
social workers, legal advisors, other health care providers and families of
existing residents. Telephone directory advertising, media products and
informal "networking" are directed by the Company toward educating
decision-makers and other referral sources in a community. The marketing
personnel in the Company's corporate office develop the overall strategy in
each market as well as media materials, databases, direct mail, signage and
community outreach activities. Each residence has a marketing director
responsible for generating and following-up leads, coordinating referral
activities and providing tours, counseling and caregiving advice for
potential residents and their families with respect to the Company's
residences and services.

Marketing activities begin during the development stage of a residence,
after the Company has obtained site control, and continue with increased
emphasis when an information center opens for a specific residence
approximately six to nine months prior to opening.

REGULATION

The Company's assisted living residences are subject to regulation and
licensing by state and local health and social service agencies and other
regulatory authorities, which requirements vary from state to state. These
requirements address, among other things: personnel education, training and
records; facility services, including administration of medication and
limited nursing services; physical plant specifications; furnishing of
residents' units; food and housekeeping services; emergency evacuation plans;
and residents' rights and responsibilities. In several states in which the
Company operates or intends to operate, assisted living residences also
require a certificate of need before the residences can be opened. In most
states, assisted living residences are subject to state or local fire and
building codes and food service licensure requirements. Like other health
care residences, assisted living residences are subject to periodic survey or
inspection by governmental authorities. From time to time in the ordinary
course of business, the Company receives survey reports. The Company reviews
such reports and takes appropriate corrective action if deficiencies are
noted. Inspection deficiencies are resolved through a plan of correction,
although the reviewing agency typically is authorized to take action against
a licensed facility where deficiencies are noted in the survey process. Such
action may include imposition of fines, imposition of a provisional or
conditional license or suspension or revocation of a license or other
sanctions.

Health care is an area of extensive and frequent regulatory change. The
assisted living model for long-term care is relatively new, and, accordingly,
the manner and extent to which it is regulated at the federal and state
levels is evolving. Changes in the laws or new interpretations of existing
laws may have a significant effect on methods and costs of doing business.
The Company is actively involved in monitoring regulatory and legislative
changes affecting the assisted living industry and participates with industry
organizations to encourage improvements to existing laws and regulations.

The success of the Company will depend in part upon its ability to
satisfy applicable regulations and requirements and to procure and maintain
required licenses as the regulatory environment for assisted living evolves.
The Company's operations could also be adversely affected by, among other
things, future regulatory developments such as mandatory increases in the
scope and quality of care to be offered to residents and revisions to
licensing and certification standards.

The Company currently is not a Medicare provider. Under some state
licensure laws, and for the convenience of its residents, some of the
Company's assisted living residences maintain contracts with certain health
care providers and practitioners, including pharmacies, visiting nurses,
social service and home health organizations, through which health care
providers make their health care products or services available to residents.
Some of the services furnished by these contract parties may be covered by
the Medicare programs.

COMPETITION

The long-term care industry is highly competitive. The Company believes
the assisted living sector of long-term care, in which it operates, will
become even more competitive in the future. The Company competes with
numerous other companies providing similar long-term care alternatives such
as home health care agencies, community-based service programs, retirement
communities and convalescent centers, and other assisted living providers.
The Company expects that, as the providers of assisted living services
receive increased attention and the number of states providing reimbursement
for assisted living rises, competition will intensify as a result of new
market entrants. The Company also competes with skilled nursing facilities
that provide long-term care services. In implementing its growth strategy the
Company expects increased competition in its efforts to develop, construct
and operate assisted living communities. Some of the Company's present and
potential competitors are significantly larger and have, or may obtain,
greater financial resources than those of the Company.

PROPRIETARY INFORMATION

The Company is the registered owner of the service mark "Karrington
Communities-Registered Trademark-." The Company believes this mark is of
material importance to its business.

EMPLOYEES

As of March 13, 1998, the Company had approximately 1,300 employees,
including approximately 275 employed by the Company's joint ventures. None of
the Company's employees are represented by a union or covered by a collective
bargaining agreement. The Company has experienced no work stoppages and
considers its relationship with its employees to be good.

ITEM 2. PROPERTIES

Information required by this Item 2 is contained on page 32 of the
Company's Annual Report to Shareholders for the year ended December 31, 1997
and is incorporated herein by reference.

ITEM 3. LEGAL PROCEEDINGS

There are no pending material legal proceedings involving the Company.

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

The Company did not submit any matter to a vote of its security holders
during the fourth quarter of its fiscal year ended December 31, 1997.

PART II

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

Information required by the first sentence of Item 5(a) is contained on
page 30 of the Company's Annual Report to Shareholders for the year ended
December 31, 1997 and is incorporated herein by reference. The remaining
portion of Item 5(a) and Item 5(b) are not applicable.

ITEM 6. SELECTED FINANCIAL DATA

Information required by this Item 6 is contained on page 29 of the
Company's Annual Report to Shareholders for the year ended December 31, 1997 and
is incorporated herein by reference.

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

Information required by this Item 7 is contained on pages 14 through 16
of the Company's Annual Report to Shareholders for the year ended December
31, 1997 and is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and Report of Independent Auditors required by
this Item 8 are set forth as indicated in Item 14.

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this Item 10 is contained under the captions
"Election of Directors", "Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement
relating to its 1998 annual meeting of Shareholders and is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this Item 11 is contained under the captions
"Executive Compensation" and "Election of Directors - Compensation of
Directors" in the Company's definitive Proxy Statement relating to its 1998
annual meeting of Shareholders and is incorporated herein by reference.
Neither the report of the Compensation Committee of the Registrant's Board of
Directors on executive compensation nor the performance graph included in the
Registrant's definitive Proxy Statement relating to the annual meeting of
Shareholders shall be deemed to be incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this Item 12 is contained under the caption
"Beneficial Ownership of Company Securities" in the Company's definitive
Proxy Statement relating to its 1998 annual meeting of Shareholders and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this Item 13 is contained under the caption
"Certain Relationships and Related Party Transactions" in the Company's
definitive Proxy Statement relating to its 1998 annual meeting of
Shareholders and is incorporated herein by reference.

PART IV

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

(a)(1)&(2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

See index to financial statements and financial statement schedules at
page F-1.

(3) EXHIBITS

EXHIBIT NUMBER DESCRIPTION REFERENCE
- -------------- ----------- ---------

2.1 Stock Purchase Agreement dated April 24,
1997 by and among Kensington Cottages
Corporation of America, Karrington Health,
Inc., Kensington Cottages Corporation of
Minnesota and the individual shareholders
of Kensington Cottages Corporation of
Minnesota. (2)

2.2 Agreement and Plan of Merger dated April
24, 1997 by and among Karrington Health,
Inc., Kensington Mergeco, Inc., Kensington
Management Group, Inc. and Jon D. Rappaport. (2)

EXHIBIT NUMBER DESCRIPTION REFERENCE
- -------------- ----------- ---------

2.3 Asset Purchase Agreement dated April 24,
1997 by and among Kensington Cottages
Corporation of America, Karrington Health,
Inc., Buffalo Hills Residence and Jon D.
Rappaport. (2)

2.4 Asset Purchase Agreement dated April 24,
1997 by and among Kensington Cottages
Corporation of America, Karrington Health,
Inc., Centex-Kensington (Mankato I)
Partnership, Centex Senior Services
Corporation, Centex Life Solutions, Inc.,
Kensington Cottages Corporation of Mankato
and Jon D. Rappaport. (2)

2.5 Asset Purchase agreement dated April 24,
1997 by and among Kensington Cottages
Corporation of America, Karrington Health,
Inc., Kensington Cottages Corporation of
North Dakota and the individual
shareholders of Kensington Cottages
Corporation of North Dakota. (2)

2.6 Asset Purchase Agreement dated April 24,
1997 by and among Kensington Cottages
Corporation of America, Karrington Health,
Inc., Kensington Cottages Corporation of
Rochester and Jon D. Rappaport. (2)

2.7 Asset Purchase Agreement dated April 24,
1997 by and among Kensington Cottages
Corporation of America, Karrington Health,
Inc., Kensington Cottages Corporation of
Iowa and the individual shareholders of
Kensington Cottages Corporation of Iowa. (2)

2.8 Asset Purchase Agreement dated April 24,
1997 by and among Kensington Cottages
Corporation of America, Karrington Health,
Inc., Bismarck Investors, Kensington Living
Centers, Inc. and Jon D. Rappaport. (2)

3.1 Form of Amended Articles of Incorporation
of the Company (1)

3.2 Form of Code of Regulations of the Company (1)

10.1 1996 Incentive Stock Plan * (1)

10.4 Registration Rights Agreement dated May 8,
1996, by and among the Company and the
Investors (as defined therein) (1)

10.5 Reorganization Agreement dated May 8, 1996,
by and among the Company and the Investors
(as defined therein) (1)

10.6 Letter of Intent Dated April 29, 1996, by
and between the Company and Sisters of
Charity Health Care Systems, Inc. (1)

13 Annual Report to Shareholders (3)

21 Subsidiaries of the Registrant (3)

23.1 Consent of Ernst & Young LLP (3)

24.1 Power of Attorney - Richard R. Slager (3)

24.2 Power of Attorney - Pete A. Klisares (3)

24.3 Power of Attorney - Thomas J. Klimback (3)

24.4 Power of Attorney - Mark N. Mace (3)

24.5 Power of Attorney - Charles S. McCreary (3)

24.6 Power of Attorney - John S. Christie (3)

24.7 Power of Attorney - Bernadine P. Healy (3)

24.8 Power of Attorney - David H. Hoag (3)

24.9 Power of Attorney - John H. McConnell (3)

24.10 Power of Attorney - James V. Pickett (3)

EXHIBIT NUMBER DESCRIPTION REFERENCE
- -------------- ----------- ---------

24.11 Power of Attorney - Harold A. Poling (3)

24.12 Power of Attorney - Michael H. Thomas (3)

24.13 Power of Attorney - Robert D. Walter (3)

27 Financial Data Schedule (4) (3)

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

(1) Included as an exhibit by the same number in the Company's
Registration Statement on Form S-1 (File No. 333-03491) and
incorporated herein by reference.

(2) Included as an exhibit by the same number in the Company's Form
8-K/A filed on May 21, 1997 and incorporated herein by reference.

(3) Filed herewith.

(4) No restated Financial Data Schedules are required to be filed.

* Management contract or compensatory plan or arrangement.

(b) REPORTS ON FORM 8-K

The Company's current report on Form 8-K filed with the Securities and
Exchange Commission on May 15, 1997 (as amended May 21, 1997 and July
14, 1997) reported under Item 2, Acquisition or Disposition of Assets,
the acquisition of Kensington Management Group, Inc. and affiliated
entities ("Kensington"), including audited financial statements of
Kensington for the years ended December 31, 1996 and 1995 and the
unaudited financial statements for the three month period ended March
31, 1997 and proforma financial information.

Exhibits filed with this Annual Report on Form 10-K are attached hereto.
For a list of such exhibits, see Item 14(a)(3).

(d) FINANCIAL STATEMENT SCHEDULES

Financial statement schedules filed with this Annual Report on Form 10-K
are attached hereto. For a list of such schedules, see Item 14(a)(2).

SIGNATURES

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

Karrington Health, Inc.

By: /s/ RICHARD R. SLAGER
----------------------
Richard R. Slager
Chairman of the Board

Date: March 31, 1998

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

SIGNATURE TITLE DATE
--------- ----- ----

/s/ RICHARD R. SLAGER Chairman of the Board and March 31, 1998
- ------------------------------- Chief Executive Officer (Principal Executive Officer)
Richard R. Slager

/s/ PETE A. KLISARES President, Chief Operating Officer and Director March 31, 1998
- -------------------------------
Pete A. Klisares

/s/ THOMAS J. KLIMBACK Executive Vice President, Chief Financial Officer March 31, 1998
- ------------------------------- (Principal Financial Officer)
Thomas J. Klimback

/s/ MARK N. MACE Senior Vice President, Finance and Treasurer March 31, 1998
- ------------------------------- (Principal Accounting Officer)
Mark N. Mace

/s/ CHARLES H. MCCREARY Secretary and Director March 31, 1998
- -------------------------------
Charles H. McCreary

/s/ JOHN S. CHRISTIE Director March 31, 1998
- -------------------------------
John S. Christie

/s/ BERNADINE P. HEALY, M.D. Director March 31, 1998
- -------------------------------
Bernadine P. Healy, M.D.

/s/ DAVID H. HOAG Director March 31, 1998
- -------------------------------
David H. Hoag

/s/ JOHN H. MCCONNELL Director March 31, 1998
- -------------------------------
John H. McConnell

/s/ JAMES V. PICKETT Director March 31, 1998
- -------------------------------
James V. Pickett

/s/ HAROLD A. POLING Director March 31, 1998
- -------------------------------
Harold A. Poling

/s/ MICHAEL H. THOMAS Director March 31, 1998
- -------------------------------
Michael H. Thomas

/s/ ROBERT D. WALTER Director March 31, 1998
- -------------------------------
Robert D. Walter

KARRINGTON HEALTH, INC.

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

(ITEMS 14(a)(1) AND (2))

1. DESCRIPTION OF FINANCIAL STATEMENTS

The following are incorporated by reference PAGE(S) IN 1997
in this Annual Report on Form 10-K ANNUAL REPORT TO
for the year ended December 31, 1997 SHAREHOLDERS
----------------

Report of Independent Auditors 17
Consolidated Balance Sheets 18
Consolidated Statements of Operations 19
Consolidated Statements of Equity 20
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 22-28

2. FINANCIAL STATEMENT SCHEDULES

PAGE
----------------

Schedule II - Valuation and Qualifying Accounts F-2

All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.

F-1

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

- ------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------
DESCRIPTION BALANCE AT ADDITIONS DEDUCTIONS - BALANCE AT
BEGINNING ------------------------ DESCRIBE END
OF PERIOD (1) (2) OF PERIOD
CHARGED TO CHARGED TO
COSTS AND OTHER
EXPENSES ACCOUNTS -
DESCRIBE
- ------------------------------------------------------------------------------------------

Reserve for
Terminated Projects
- -------------------
Year Ended
- -------------------
December 31, 1997 $ 0 1,191,909 - (1,161,909) (1) $ 30,000
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
December 31, 1996 $ 0 - - - $ 0
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
December 31, 1995 $ 0 - - - $ 0
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------

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

(1) The deduction resulted from the Company's decision to abandon certain
projects. At the time a project is abandoned, all previously
capitalized costs are charged against the reserve.

F-2

KARRINGTON HEALTH, INC.
INDEX TO EXHIBITS

EXHIBIT NUMBER DESCRIPTION REFERENCE
- -------------- ----------- ---------

2.1 Stock Purchase Agreement dated April 24, 1997 by
and among Kensington Cottages Corporation of
America, Karrington Health, Inc., Kensington
Cottages Corporation of Minnesota and the
individual shareholders of Kensington Cottages
Corporation of Minnesota. (2)

2.2 Agreement and Plan of Merger dated April 24, 1997 by
and among Karrington Health, Inc., Kensington
Mergeco, Inc., Kensington Management Group, Inc. and
Jon D. Rappaport. (2)

2.3 Asset Purchase Agreement dated April 24, 1997 by and
among Kensington Cottages Corporation of America,
Karrington Health, Inc., Buffalo Hills Residence and
Jon D. Rappaport. (2)

2.4 Asset Purchase Agreement dated April 24, 1997 by and
among Kensington Cottages Corporation of America,
Karrington Health, Inc., Centex-Kensington (Mankato
I) Partnership, Centex Senior Services Corporation,
Centex Life Solutions, Inc., Kensington Cottages
Corporation of Mankato and Jon D. Rappaport. (2)

2.5 Asset Purchase agreement dated April 24, 1997 by and
among Kensington Cottages Corporation of America,
Karrington Health, Inc., Kensington Cottages Corporation
of North Dakota and the individual shareholders of
Kensington Cottages Corporation of North Dakota. (2)

2.6 Asset Purchase Agreement dated April 24, 1997 by and
among Kensington Cottages Corporation of America,
Karrington Health, Inc., Kensington Cottages
Corporation of Rochester and Jon D. Rappaport. (2)

2.7 Asset Purchase Agreement dated April 24, 1997 by and
among Kensington Cottages Corporation of America,
Karrington Health, Inc., Kensington Cottages
Corporation of Iowa and the individual shareholders
of Kensington Cottages Corporation of Iowa. (2)

2.8 Asset Purchase Agreement dated April 24, 1997 by and
among Kensington Cottages Corporation of America,
Karrington Health, Inc., Bismarck Investors,
Kensington Living Centers, Inc. and Jon D.
Rappaport. (2)

3.1 Form of Amended Articles of Incorporation of the
Company (1)

3.2 Form of Code of Regulations of the Company (1)

10.1 1996 Incentive Stock Plan * (1)

10.4 Registration Rights Agreement dated May 8, 1996, by
and among the Company and the Investors (as defined
therein) (1)

10.5 Reorganization Agreement dated May 8, 1996, by and
among the Company and the Investors (as defined
therein) (1)

10.6 Letter of Intent Dated April 29, 1996, by and
between the Company and Sisters of Charity Health
Care Systems, Inc. (1)

13 Annual Report to Shareholders (3)

EXHIBIT NUMBER DESCRIPTION REFERENCE
- -------------- ----------- ---------

21 Subsidiaries of the Registrant (3)

23.1 Consent of Ernst & Young LLP (3)

24.1 Power of Attorney - Richard R. Slager (3)

24.2 Power of Attorney - Pete A. Klisares (3)

24.3 Power of Attorney - Thomas J. Klimback (3)

24.4 Power of Attorney - Mark N. Mace (3)

24.5 Power of Attorney - Charles S. McCreary (3)

24.6 Power of Attorney - John S. Christie (3)

24.7 Power of Attorney - Bernadine P. Healy (3)

24.8 Power of Attorney - David H. Hoag (3)

24.9 Power of Attorney - John H. McConnell (3)

24.10 Power of Attorney - James V. Pickett (3)

24.11 Power of Attorney - Harold A. Poling (3)

24.12 Power of Attorney - Michael H. Thomas (3)

24.13 Power of Attorney - Robert D. Walter (3)

27 Financial Data Schedule (4) (3)

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

(1) Included as an exhibit by the same number in the Company's
Registration Statement on Form S-1 (File No. 333-03491) and
incorporated herein by reference.

(2) Included as an exhibit by the same number in the Company's Form
8-K/A filed on May 21, 1997 and incorporated herein by reference.

(3) Filed herewith.

(4) No restated Financial Data Schedules are required to be filed.

* Management contract or compensatory plan or arrangement.