<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                           ANNUAL REPORT AND FORM 10-K

                       PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934


<TABLE>
<S>                                                            <C>
FOR THE YEAR ENDED
DECEMBER 31, 1997                                              COMMISSION FILE NUMBER 0-11656
</TABLE>

                            THE WENDT-BRISTOL HEALTH
                              SERVICES CORPORATION

             (Exact name of Registrant as specified in its charter)

<TABLE>
<S>                                                                 <C>       
                         DELAWARE                                                22-1807533
     (State or other jurisdiction of incorporation or               (I.R.S. Employer Identification No.)
                       organization)

              TWO NATIONWIDE PLAZA, SUITE 760
                      COLUMBUS, OHIO                                                43215
         (Address of principal executive offices)                                (Zip Code)
</TABLE>

                   REGISTRANT'S TELEPHONE NO.: (614) 221-6000

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

<TABLE>
<S>                                                               <C>
                    Title of Each Class                           Name of each exchange on which registered
                    -------------------                           -----------------------------------------
          Common Stock, par value $.01 per share                           American Stock Exchange
              Common Stock Purchase Warrants                                    Same as above
</TABLE>

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

                                      None

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

          On February 28, 1998, the aggregate market value of the voting stock
of The Wendt-Bristol Health Services Corporation held by non-affiliates of the
Registrant was approximately $5,397,000 based upon the closing price for such
Common Stock on said date as reported by the American Stock Exchange. On such
date, there were 6,116,726 shares of Common Stock of the Registrant and 414,538
Common Stock Purchase Warrants outstanding.

          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
                            ---

                      DOCUMENTS INCORPORATED BY REFERENCE:

                            See Part IV, Item 14(a)3


<PAGE>   2


                           ANNUAL REPORT ON FORM 10-K
                     FOR THE YEAR ENDED DECEMBER 31, 1997 *

                                     PART I


ITEM 1.           BUSINESS

                  The Company, through its 100% subsidiary The Wendt-Bristol
                  Company ("W-B") which was originally incorporated in 1903, has
                  evolved through the years as an outpatient health care
                  provider. During 1997, the Company's operations consisted of
                  ownership and operation of three nursing homes, three retail
                  pharmacies, a Medicare-certified, JCAHO home health agency,
                  and as managing partner of two multi-disciplinary diagnostic
                  and radiology centers. These centers provide state of the art
                  diagnostic imaging techniques, including magnetic resonance
                  imaging (MRI), CT Scans, ultra-sound, x-ray, bone
                  densitometry, mammography, fluoroscopy and out-patient
                  angiography. A third diagnostic center, wholly owned, was
                  opened in February 1998. Additionally, in the fourth quarter
                  of 1997, the Company opened a radiation therapy center in
                  which it is the managing partner.

                  In 1997, the Company sold two of its three nursing homes, two
                  of its three retail pharmacies and ceased operations of its
                  Medicare-certified home health agency.

                  During 1998, the Company has commenced construction of a major
                  31,000 square feet two-building center including radiology,
                  nuclear medicine, cytology, radiation therapy, Positron
                  Emission Tomography (the first PET Scanner in central Ohio),
                  and a therapy and rehab center. A subsidiary of the Company
                  has a participating partnership relationship (20%) in the
                  rehab center, a 22-1/2% interest and management in the
                  radiation therapy, and 100% ownership in the radiology, PET,
                  nuclear and cytology operations. The subsidiary also has a 50%
                  interest in the land and buildings associated to the new
                  center.

                  Where the Company is the managing partner it receives a fee (a
                  percentage of collected revenues) for its services.

                  Additionally, in 1998 the Company has launched a major mobile
                  mammography operation, currently three units.

                  The Company also plans to break ground in the second quarter
                  of 1998 on previously acquired land adjacent to its Kenny Road
                  diagnostic and radiology facility, with a major Womens Center
                  dedicated to the early detection of breast disease including
                  an ambulatory surgery unit for breast surgery.

                  The Company plans to selectively and aggressively expand its
                  diagnostics business activity.

                  The Company's primary activities are currently located in
                  Central Ohio.

                  NURSING HOMES. The Company owned and operated two nursing
                  homes in Columbus, Ohio (147 beds and 75 beds) until December
                  31, 1997 and leases the premises and operates the one
                  remaining nursing home in Springfield, Ohio (100 beds). The
                  nursing home provides skilled care. The Medicaid reimbursement
                  program of the State of Ohio is applicable to costs incurred
                  by some of the persons receiving care in the facility.



                  --------------------------------
                  * Statements contained herein concerning the provisions of any
                  document are not necessarily complete and, in each instance,
                  reference is made to the copy of such document filed as an
                  exhibit to this Form 10-K or otherwise filed with the
                  Securities and Exchange Commission. Each such statement is
                  qualified in its entirety by such reference.



                                       I-1


<PAGE>   3


ITEM 1.           BUSINESS (CONTINUED)

                  MEDICAL AND RELATED SERVICES. During February 1987, W-B formed
                  Wendt-Bristol Diagnostics Company, "Diagnostics", as a
                  subsidiary for the purpose of establishing an outpatient
                  medical diagnostic imaging center. The center was financed
                  through the formation of a limited partnership, Wendt-Bristol
                  Diagnostics Company L.P. (the "Partnership"), of which
                  Diagnostics is the general partner and currently receives 50%
                  of the profits in addition to management fees. The center
                  opened in April 1988 in Columbus, Ohio. The center specializes
                  in state of the art diagnostic imaging techniques, including
                  magnetic resonance imaging (MRI), CT Scans, Ultrasound, X-ray,
                  Mammography, Bone Densitometry and 3-D imaging. In the fourth
                  quarter of 1996 the Center opened a remodeled suite to
                  accommodate a new angiography/fluoroscopy unit.

                  Physicians in the Telequest Network provide radiology services
                  to the partnership via telecommunications technology.
                  Telequest is a consortium of six leading academic radiology
                  centers in the United States. Telequest represents this
                  country's first nationwide sub-specialty radiology network and
                  is dedicated to implementing products and services that
                  enhance the overall quality and efficiency of the radiology
                  services.

                  The consortium consists of the following institutions:

                              Bowman Gray School of Medicine
                              Brigham & Womens Hospital - Boston
                              Emory University Hospital - Atlanta
                              University of California, San Francisco
                              University of Pennsylvania Medical Center
                              University of Washington, Seattle

                  In addition, Diagnostics, through one of its subsidiaries,
                  constructed the Alzheimer's and related syndromes facility
                  referred to above which was sold on December 31, 1997.
                  Diagnostics was engaged in a public offering of its common
                  shares which commenced in October 1993. On or about May 15,
                  1994, sales efforts related to the common shares ceased
                  pending the approval of The National Association of Securities
                  Dealers ("NASD") as it related to the participation of a NASD
                  member firm. As a result of this delay and the need for an
                  amended filing with the Securities and Exchange Commission,
                  the offering was terminated. Prior to the termination, 162,530
                  common shares had been sold; half of such shares were newly
                  issued and the other half were sold by Wendt-Bristol as
                  selling shareholder.

                  The Company has also been engaged in the business of providing
                  Medicare-certified home health care services through its
                  wholly-owned subsidiary, Wendt-Bristol Home Health Care
                  Company, which was incorporated in May 1985 and has attained
                  JCAHO (Joint Commission on Accreditation of Healthcare
                  Organizations) certification. During 1997, the Company ceased
                  operations of this business. The Company also provides a
                  physical therapy clinic in its Springfield facility serving
                  residents and outpatients which by year-end had ceased
                  operations on an out-patient basis.

                  PHARMACIES. The Company operates one retail pharmacy in a
                  downtown Columbus department store. The pharmacy sells
                  pharmaceuticals and medical supplies and equipment, health and
                  beauty aids and other sundries. It also sells and rents
                  durable medical equipment and provides enteral therapy
                  services. During 1997, the Company sold two of its retail
                  pharmacies, one located in Columbus and the other in Canal
                  Winchester.








                                       I-2


<PAGE>   4


ITEM 1.           BUSINESS (CONTINUED)

                  EMPLOYEES: LABOR RELATIONS. The Company has approximately 170
                  employees at February 28, 1998. Non-professional employees of
                  one of its nursing homes located in Columbus, Ohio, had been
                  covered by a collective bargaining agreement until its sale on
                  December 31, 1997. The Company considers its relations with
                  its employees to be good.

                  PATENTS AND TRADEMARKS. The Company owns registered
                  trademarks, including "the Best of Health!", which are
                  utilized in connection with the marketing of Company services
                  and products.

                  INDUSTRY SEGMENTS. The operations of the Company and its
                  subsidiaries fall within two industry segments: Nursing homes;
                  and Medical services and other. Additional information about
                  each of the industry segments, for the respective periods
                  indicated, follows:

                  Financial information by industry segments for the years ended
                  December 31, 1997, 1996 and 1995 is as follows:

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31
                                                                     ----------------------
                                                               1997             1996             1995
                                                          ------------     ------------     ------------
<S>                                                       <C>              <C>              <C>         
                  Revenues/sales to unaffiliated
                   customers:
                      Nursing homes                       $ 13,428,624     $ 13,147,964     $ 12,604,828
                      Medical services and other             7,390,267        8,193,238        8,251,370

                  Operating income or (loss):
                      Nursing homes                          1,560,091          865,837          857,040
                      Medical services and other              (552,308)         (79,340)         508,625

                  Equity in earnings of unconsolidated
                    affiliates
                      Nursing homes                                  -                -                -
                      Medical services and other               198,680                -                -

                  Identifiable assets:
                      Nursing homes                          9,291,623       13,311,345       12,353,302
                      Medical services and other            12,704,896       10,606,760       10,454,023

                  Investment in net assets of
                    unconsolidated affiliates
                      Nursing homes                                  -                -                -
                      Medical services and other               640,980                -                -

                  Depreciation expense:
                      Nursing homes                            209,502          354,152          365,780
                      Medical services and other               613,861          610,563          536,912

                  Capital expenditures:
                      Nursing homes                            278,606          184,143          178,880
                      Medical services and other             1,233,485        1,236,352          968,133
</TABLE>

                  REGULATION OF THE HEALTH CARE INDUSTRY. The Company must
                  comply with extensive federal, state and local government
                  regulations applicable to the health care industry and the
                  pharmacy business.






                                       I-3


<PAGE>   5


ITEM 1.           BUSINESS (CONTINUED)

                  Nursing homes and home health care businesses are subject to
                  federal and state government regulation, including the
                  necessity of obtaining and maintaining a license,
                  certification for participating in the Medicare and/or
                  Medicaid programs, and/or registration. There are also
                  licensing requirements for nurses and other professional staff
                  of the nursing home and/or home health care agency. The
                  operations and activities of nursing homes and home health
                  agencies are also affected by the Medicare/Medicaid conditions
                  of participation and other relevant federal and local laws.
                  Activities of nursing homes and home health care agencies
                  which are regulated, include, but are not limited to, release
                  of medical records, patient confidentiality rights and the
                  dispensing of drugs. In addition, there are federal and state
                  requirements as to patient rights. Failure to abide by the
                  Federal and State laws governing the operations of nursing
                  homes and home health agencies including the requirement
                  governing the foregoing areas, lead to termination of
                  licensure and/or decertification and loss of reimbursement,
                  private enforcement rights by the patient, and other
                  sanctions.

                  The State of Ohio currently licenses nursing homes which are
                  privately owned and operated. A private owner cannot operate a
                  nursing home without a license. In addition to licensure
                  requirements, in the case of long-term care facilities and
                  home health agencies, the Ohio Department of Health, the Ohio
                  Department of Human Services, and the United States Department
                  of Health and Human Services are the principal regulatory
                  agencies to whose jurisdiction the Company is subject.

                  The Company remains in good standing with all requisite
                  agencies.

                  REQUIREMENT OF OBTAINING A CERTIFICATE OF NEED. Under the
                  current Certificate of Need ("CON") law, there is a moratorium
                  on the approval of new nursing home beds until June 30, 1999.

                  New health care facilities, including diagnostic imaging
                  centers, located in metropolitan statistical areas are
                  required to be licensed beginning March 31, 1996, but do not
                  need to obtain a CON. Diagnostic imaging centers located in
                  rural areas required a CON until May 1, 1997 and thereafter
                  require a license. In addition to the foregoing, there is a
                  separate requirement to file a notice of intent with the
                  Director of Health and the local health care agency 60 days
                  prior to the establishment of certain new health care
                  facilities.

                  The acquisition of an existing health care facility that does
                  not involve a change in the number of beds, by service, or the
                  number or type of health services does not require a CON or
                  the filing of a notice of intent.

                  CON review was required until May 1, 1997 for the purchase of
                  medical equipment costing $2 million or more. The cost of
                  purchasing medical equipment is the sum of (1) the greater of
                  its fair market value or the cost of its lease or purchase and
                  (2) the cost of installation and any other activities
                  essential to the acquisition of the equipment and its
                  placement into service.

                  The acquisition of an MRI does not require a CON and is not
                  reviewable (unless the cost is $2 million or more), but does
                  require filing a notice of intent with the Director of Health
                  and the local health care agency 60 days prior to the
                  purchase.

                  New construction or renovation of a nursing home costing $2
                  million or more requires a CON. A CON is not required for
                  other capital expenditures involving home health agencies or
                  nursing homes. Capital expenditures of $2 million or more on
                  behalf of a health care facility in connection with the
                  provision of a health service do require filing a notice of
                  intent with the Director of Health and the local health agency
                  60 days prior to obligating the capital expenditure.




                                       I-4


<PAGE>   6


ITEM 1.           BUSINESS (CONTINUED)

                  Therefore, the Company's business operations and plans must
                  comply with the foregoing laws. There can be no guarantee that
                  such laws will not be expanded in the future.

                  PHARMACIES. There are substantial federal laws and regulations
                  which impact the pharmacy business. Federal laws include the
                  Federal Food, Drug and Cosmetic Act, the Federal Trade
                  Commission Act, the Consumer Product Safety Act, the Poison
                  Prevention Packaging Act, and the Hazardous Substances Act.

                  States generally require that pharmacies and pharmacists be
                  licensed or registered by applicable state agencies. In
                  addition, there are state laws and regulations issued pursuant
                  thereto governing aspects of retail pharmacy operations,
                  including (i) who may write and dispense prescriptions, (ii)
                  how prescriptions must be filled, (iii) how prescription drugs
                  and controlled substances must be stored and safeguarded, (iv)
                  when generic drugs may be substituted, and (v) the uses for
                  which certain drugs may be prescribed. These laws are
                  generally designed to insure the identity, strength, quality
                  and purity and to regulate the packaging, labeling and
                  dispensing of drugs. Regulations are issued by an
                  administrative body in each state, typically a pharmacy board.
                  These agencies are empowered to impose sanctions, including
                  license or registration revocations for noncompliance. In
                  addition, each pharmacy and pharmacist is bound by standards
                  of professional practice. The Company has not experienced, nor
                  does it expect to experience, any difficulties in compliance
                  with regulations promulgated by these agencies.

                  LEGISLATION. The Company also may be affected, directly or
                  indirectly, by legislation affecting medical cost
                  reimbursements. In recent years, Congress has enacted
                  legislation aimed at controlling the cost to certain patients
                  of medical products and services through the regulation of the
                  primary federal and state reimbursement programs: Medicare, a
                  federal program for certain elderly or disabled patients and
                  certain patients suffering from end stage renal disease, and
                  Medicaid, a jointly sponsored federal and state program which
                  focuses on assisting certain qualified recipients.

                  Legislative proposals to regulate or control health care costs
                  and to institute a national health insurance program have been
                  made from time to time and are currently receiving further
                  consideration. Because these proposals vary, their potential
                  effect on the health care industry also vary. If, in the
                  future, legislation or regulations were to be adopted that
                  would significantly reduce governmental reimbursement rates or
                  rates charged to private-pay patients, such legislation or
                  regulations could have a material adverse effect on the
                  Company. Because a significant portion of all nursing home
                  revenues on an industry-wide basis are derived from the
                  federal and state governments, the Company and the industry as
                  a whole will continue to be affected by changes in government
                  programs and regulations.

                  MANUFACTURE OF MEDICAL EQUIPMENT. Until October 1991, the
                  Company was also engaged in the business of manufacturing
                  durable medical equipment and furniture through its Healthcare
                  Division located in Passaic, New Jersey.

                  On October 1, 1991, the Company sold all of the assets (other
                  than the real estate and plant thereon) of its Healthcare
                  Division to a wholly-owned subsidiary of Graham-Field Health
                  Products, Inc., pursuant to an Agreement dated August 31,
                  1991, between the Company and Graham-Field, Inc., as amended
                  on October 1, 1991.

                  To permit the disposition of the Healthcare Division, the New
                  Jersey Department of Environmental Protection and Energy (the
                  "Department") issued its Administrative Consent Order and the
                  Company posted $150,000 in favor of the Department to be used,
                  if necessary, to reimburse clean-up expenditures.




                                       I-5


<PAGE>   7


ITEM 1.           BUSINESS (CONTINUED)

                  The Department had determined that the Passaic, New Jersey,
                  real estate of the Company did not completely comply with
                  applicable New Jersey laws and regulations pertaining to the
                  environment. The contamination in question had resulted
                  primarily from underground tanks, long abandoned by prior
                  owners of the site, and the contents thereof. All of such
                  tanks have been removed by the Company. In part the
                  contamination was also attributable to the method, initiated
                  by prior operators, of disposal of solvents.

                  In March 1992 the Company submitted to the Department a
                  proposed clean-up plan formulated by the Company's special
                  counsel and its environmental engineering firm (collectively
                  the "environmental engineering firm"). The Department in April
                  1993 accepted a part of the Company's proposed plan and
                  proposed its own plan in lieu of that part of the Company's
                  plan that was not acceptable. The Company's environmental
                  engineering firm recommended against acceptance of the
                  Department's proposals.

                  In May 1993 the Company submitted an amended plan. In January
                  1994 the Department accepted a part of the Company's amended
                  plan and proposed its own plan in lieu of that part of the
                  Company's amended plan that was not acceptable.

                  The Company's environmental engineering firm concluded that
                  the additional work that the Department was requiring was both
                  unwarranted and burdensome. In February 1994 the Department
                  agreed to conduct a more detailed analysis of the
                  aforementioned amended plan submitted by the Company and in
                  December 1995 granted a conditional approval of the plan with
                  a two-year monitoring period. The remaining estimated cost to
                  complete the plan is approximately $100,000.

                  The Company has incurred total costs of $1,078,000 related to
                  environmental matters in New Jersey, of which $241,000 was
                  spent in the five fiscal (calendar) years ended December 31,
                  1997. For further information, see Note 12A of Notes to
                  Consolidated Financial Statements.

                  PRIVATE SALE OF STOCK. Reference is hereby made to Note 2 of
                  Notes to Consolidated Financial Statements.

                  SECURITIZATION OF ACCOUNTS RECEIVABLE. Reference is hereby
                  made to Note 4 of Notes to Consolidated Financial Statements
                  herein.

ITEM 2.           PROPERTIES

                  The Company leases approximately 7,600 square feet of space in
                  a downtown Columbus, Ohio, office building which serves as the
                  Company's and W-B's general offices.

                  The pharmacy operated by W-B is located in a leased premises
                  in Columbus, Ohio (3,300 square feet). In addition, a
                  warehouse (3,200 square feet) is leased in Columbus, Ohio to
                  store records and durable medical equipment used at the
                  pharmacy. The Company closed two pharmacies during 1997. One
                  leased premises in Columbus, Ohio (4,000 square feet) and one
                  leased in Canal Winchester (4,000 square feet).

                  The facilities of the Wendt-Bristol Diagnostics Company L.P.
                  consist of an 8,000 square foot two-story building in
                  Columbus, Ohio, which serves as its general offices and
                  diagnostic and radiology center; such owned facilities are
                  subject to mortgage indebtedness in the amount of $688,000 at
                  March 1, 1998.

                  In February 1998, a subsidiary of the Company opened a 3,200
                  square feet diagnostic center in Granville, Ohio. This one
                  story center, Wendt-Bristol Erinwood, operates on leased
                  premises.



                                       I-6


<PAGE>   8


ITEM 2.           PROPERTIES (CONTINUED)

                  The nursing homes of the Company operated during 1997 consist
                  of one owned 147-bed home in Columbus, Ohio, (sold at December
                  31, 1997), one owned 75-bed Alzheimer's and related syndromes
                  center (sold at December 31, 1997) and one 100-bed home with
                  leased facilities in Springfield, Ohio. The lease expires in
                  July, 2015. Reference is hereby made to Item 3. I. herein. In
                  November, 1994 the Company acquired approximately 2 acres of
                  land adjacent to the Alzheimer's center for approximately
                  $144,000. The property is not subject to any mortgage
                  indebtedness at December 31, 1997.

                  The present aggregate annual rentals of all property leases
                  referred to are approximately $528,000 and their terms have
                  expiration dates ranging through July 2015.

                  The Company believes that the facilities described or referred
                  to above are adequate and sufficient for its present needs and
                  requirements. It should also be noted that, in 1998, the
                  Company is pursuing the acquisition/lease of facilities to
                  accommodate the operations of additional radiological and
                  diagnostic ventures formed with unrelated third parties.

                  The Company owns land and a plant located in Passaic, N.J.,
                  which were formerly used by its Healthcare Division
                  (manufacturer of durable medical equipment), which was sold on
                  October 1, 1991. This property was leased to the purchaser at
                  the time of the transaction. See Item 1.
                  Business.

ITEM 3.           LEGAL PROCEEDINGS

                  I.  ETHAN ALLEN CARE CENTER, INC.

                      American Health Care Centers, Inc. ("AHCC") had filed a
                      complaint for Declaratory Judgment action against Ethan
                      Allen Care Center, Inc. ("EACC") on June 26, 1995 in the
                      Court of Common Pleas, Clark County, Ohio (Case No.
                      95-CV-0326). EACC is a subsidiary of W-B. AHCC is the
                      landlord under a lease with EACC for its nursing home
                      facility doing business as Bristol House of Springfield.
                      AHCC seeks a Declaration that EACC is in default of the
                      lease and seeks the right to repurchase the license for
                      the nursing home. AHCC's Motion for Summary Judgment was
                      denied by the court. EACC is presently current on its rent
                      obligation but is disputing the calculation of late rent
                      charges imposed under the lease.

                      Although not directly subject to the aforementioned
                      complaint, the Company has filed a complaint seeking
                      payment of a receivable related to a Share Transfer
                      Agreement with AHCC. Such amounts became due in February
                      1996, one year after final settlement of certain State of
                      Ohio Medicaid receivables, as provided in the Agreement.
                      Both cases are currently scheduled for different trial
                      dates during 1998.

                  II. INSURANCE COMMISSIONER OF THE COMMONWEALTH OF
                      PENNSYLVANIA, AS THE STATUTORY LIQUIDATOR FOR CORPORATE
                      LIFE INSURANCE COMPANY (UNAFFILIATED THIRD PARTY)

                      On March 19, 1997, the Insurance Commissioner of the
                      Commonwealth of Pennsylvania, as the Statutory Liquidator
                      of Corporate Life Insurance Company dismissed with
                      prejudice an action it commenced against the Company in
                      the Commonwealth Court of Pennsylvania (Case No.
                      509-MD-1995).

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

                  During the fourth quarter of 1997, no matters were submitted
                  to a vote of security holders.





                                       I-7


<PAGE>   9
                                     PART II

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

                  (a)      Price Range of Common Stock

                      The high and low trade prices for the Company's Common
                      Stock and Common Stock Purchase Warrants as reported by
                      the American Stock Exchange for the periods indicated are
                      as follows:

<TABLE>
<CAPTION>
                       AMEX SYMBOL                       WMD                                WMD.WS

                            YEAR                     COMMON STOCK                          WARRANTS
                            ----                     ------------                          --------
                            1997                HIGH              LOW              HIGH               LOW
                            ----                ----              ---              ----               ---

<S>                      <C>                   <C>                <C>               <C>                <C>
                         1st Quarter           1 5/8              1 1/4               1                3/4
                         2nd Quarter           1 7/16                1              11/16              1/2
                         3rd Quarter           1 1/2                 1               7/8               3/4
                         4th Quarter           1 7/16             1 1/16             3/4               5/8

<CAPTION>
                             1996
                             ----

<S>                      <C>                   <C>                <C>               <C>                <C>
                         1st Quarter              3/4              7/16             1/16              1/16
                         2nd Quarter           1 1/2               1/2                1                1/8
                         3rd Quarter           1 3/4               5/8             1 7/16             7/16
                         4th Quarter           1 3/4              1 1/8             1 1/4               1
</TABLE>


                  In conjunction with the issuance of Bonds, the Company issued
                  33 Series No. 1 Warrants exercisable into a total of 300,000
                  shares of the common stock of the Company for two dollars
                  ($2.00) per share. The Warrants were issued pursuant to
                  Regulation S of the Securities Act of 1933 and there is no
                  established public trading market for these Warrants.

                  (b) Approximate Number of Equity Security Holders

                      The number of holders of record for each class of equity
                      securities of the Company as of March 13, 1998 was as
                      follows:

<TABLE>
<CAPTION>
                                                                   NUMBER OF HOLDERS
                    TITLE OF CLASS                                   OF RECORD (1)
                    --------------                                   -------------

<S>                                                                      <C>  
                    Common Stock, par value $.01
                     per share ("Common Stock")                          1,054

                    Common Stock Purchase Warrants                        197

                    Series No. 1 Warrants                                  1
</TABLE>

                      (1) The number of stockholders of record includes shares
                      held in "nominee" or "street" name.

                  (c)   Dividends

                      No cash dividends have been declared or paid by the
Company.

                  PRIVATE SALE OF STOCK

                  Reference is hereby made to Note 2 of Notes to Consolidated
                  Financial Statements.

                                      II-1


<PAGE>   10




Item 6.     Selected Financial Data
 
                             SELECTED FINANCIAL DATA
         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES
 
                        (In Thousands, Except Share Data)
 
 
<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                           1997            1996          1995           1994          1993
<S>                                                    <C>            <C>            <C>            <C>            <C>       
INCOME STATEMENT DATA
Revenues:
  Net sales                                            $    2,435     $    2,816     $    2,709     $    3,694     $    3,686
  Service income                                           18,384         18,525         18,147         15,793         15,802
                                                       ----------     ----------     ----------     ----------     ----------
                                                           20,819         21,341         20,856         19,487         19,488
                                                       ----------     ----------     ----------     ----------     ----------
Costs and expenses:
  Cost of sales                                             1,820          2,072          1,920          2,554          2,630
  Selling, general and administrative expenses, net        17,168         17,518         16,668         15,085         14,930
                                                       ----------     ----------     ----------     ----------     ----------
                                                           18,988         19,590         18,588         17,639         17,560
                                                       ----------     ----------     ----------     ----------     ----------

Operating income before depreciation                        1,831          1,751          2,268          1,848          1,928
                                                       ----------     ----------     ----------     ----------     ----------

Depreciation                                                  823            965            902          1,143          1,142
                                                       ----------     ----------     ----------     ----------     ----------

Operating income                                            1,008            786          1,366            705            786
                                                       ----------     ----------     ----------     ----------     ----------

Other income (expense):
  Minority interest in earnings of
   consolidated subsidiary and limited
   partnerships, net                                          177            (76)          (172)           (53)           (31)
  Equity in earnings of unconsolidated affiliates             198              -              -              -              -
  Interest expense                                         (1,265)        (1,104)        (1,050)        (1,390)        (1,210)
  Gain on sale of stock of subsidiaries                         -              -              -            135            355
  Gain on sale of assets                                    1,778              -              -            726             71
  Other, net                                                   85            109             21            136             38
                                                       ----------     ----------     ----------     ----------     ----------
                                                              973         (1,071)        (1,201)          (446)          (777)
                                                       ----------     ----------     ----------     ----------     ----------

Income (loss) before income taxes                           1,981           (285)           165            259              9
(Provision) benefit for income taxes                         (199)            39             52            (55)          (247)
                                                       ----------     ----------     ----------     ----------     ----------

Net Income (Loss)                                      $    1,782     $     (246)    $      217     $      204     $     (238)
                                                       ==========     ==========     ==========     ==========     ========== 

Per share data - Income (Loss)
  Basic                                                $     0.29     $    (0.04)    $     0.04     $     0.03     $    (0.03)
                                                       ==========     ==========     ==========     ==========     ========== 
  Diluted                                              $     0.26     $    (0.04)    $     0.04     $     0.03     $    (0.03)
                                                       ==========     ==========     ==========     ==========     ========== 

Weighted average shares
  Basic                                                 6,224,241      5,825,686      6,131,770      8,153,382      7,889,512
  Diluted                                               6,916,241      5,825,686      6,131,770      8,153,382      7,889,512

BALANCE SHEET DATA (at year end)
  Working capital (deficiency)                         $    2,886     $   (1,770)    $   (5,340)    $   (4,236)    $   (2,145)
  Total assets                                             21,997         23,918         22,807         26,508         23,920
  Long-term debt and lease obligations, net of
   current portion                                          9,152         12,081          7,881          7,965          9,249
  Stockholders' equity                                      6,445          4,742          4,543          7,200          6,964
</TABLE>

                                      II-2

<PAGE>   11

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

                  SUMMARY OF CONSOLIDATED FINANCIAL RESULTS
                  -----------------------------------------

<TABLE>
<CAPTION>
                                                  1997        1996         1995
                                                --------    --------     --------
                  OPERATIONS                  (In thousands, except per share data)
                  ----------                                             

<S>                                             <C>         <C>          <C>     
                  Revenues:
                    Net sales                   $  2,435    $  2,816     $  2,709
                    Service income                18,384      18,525       18,147
                                                --------    --------     --------
                  Total revenues                $ 20,819    $ 21,341     $ 20,856
                                                ========    ========     ========

                  Operating income              $  1,008    $    786     $  1,366
                  Percent of revenues                4.8         3.7          6.5

                  Net income (loss)             $  1,782    $   (246)    $    217
                  Percent of revenues                8.6        (1.2)         1.0
                  Per common share - basic      $    .29    $   (.04)    $    .04

                  Per common share - diluted    $    .26    $   (.04)    $    .04
</TABLE>


                  NOTE: Reference should be made to the Notes to Consolidated
                  Financial Statements herein.

                  FINANCIAL CONDITION
                  -------------------

                  Management has positioned the Company to focus on continuing
                  the aggressive expansion of its Diagnostic and Radiology
                  business, including radiation therapy. During 1997 the Company
                  ceased operations of its unprofitable home health care
                  business and sold two of its three retail pharmacies in order
                  to concentrate on its core business. In addition, on December
                  31, 1997, the Company sold two of its three nursing homes and
                  will use the cash from the gain on the sale to further expand
                  into the diagnostic and radiology services industry. The sale
                  of these two homes along with the cost savings from the
                  closing of the home health operations further strengthened the
                  liquidity of the Company and will allow management to focus on
                  enhancing the operations and profits at its diagnostic and
                  radiology centers. The previous statements regarding cost
                  savings and profit enhancement are forward-looking statements
                  that are subject to competitive and market influences that
                  cannot be accurately predicted.

                  Working capital increased approximately $4,656,000 during the
                  year ended December 31, 1997. Current assets increased
                  $3,934,000 while current liabilities decreased $722,000 at
                  December 31, 1997 as compared to December 31, 1996. The
                  increase in current assets was due mostly from increases in
                  notes receivable (total $3,116,000 of which $2,924,000 is
                  related to the sale of the two nursing homes), accounts
                  receivable trade ($864,000) and miscellaneous receivables
                  ($760,000), offset by declines in cash and inventories.
                  Accounts receivable trade increased in 1997 over the prior
                  year due mostly to the Company terminating its accounts
                  receivable securitization program during the first quarter of
                  1997 and buying back all of the accounts receivable that were
                  previously sold. Current liabilities decreased approximately
                  $722,000 due mostly from decreases in securitization program
                  advances ($392,000), accrued workers' compensation expenses
                  ($330,000), accrued taxes other than federal income taxes
                  ($506,000), and stock purchase agreement payable ($325,000)
                  offset by increases in accounts payable ($578,000) and current
                  portion of long-term debt ($235,000). The issuance of the
                  long-term bonds (see below) allowed the Company to terminate
                  the accounts receivable securitization program and reduce the
                  amount of current liabilities.






                                      II-3


<PAGE>   12


ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
                  AND RESULTS OF OPERATIONS (CONTINUED)
                                             ----------

                  LIQUIDITY AND CAPITAL RESOURCES

                  The Company ended the year in a much stronger liquidity
                  position due to several significant events that occurred in
                  1997. During February 1997, the Company issued 5% long-term
                  bonds totaling 5,000,000 swiss francs ($3,417,000) to a group
                  of European investors pursuant to Regulation S of the
                  Securities Act of 1933. The proceeds from this issuance were
                  used to repay its higher-interest accounts receivable
                  securitization program advances (totaling approximately
                  $1,462,000) with the remainder of the funds used toward
                  general working capital requirements and expansion into new
                  ventures in the diagnostic and radiology fields.

                  At December 31, 1997 the Company, in two simultaneous and
                  interdependent transactions, sold the assets of its two
                  Columbus, Ohio nursing homes. Terms of the sale provided for a
                  combined purchase price of $9,880,000 which resulted in a gain
                  on the sale of approximately $1,778,000 (see note 1B). The
                  buyers paid $750,000 at the time of closing, assumed mortgages
                  and accrued interest totaling $6,206,000, and issued
                  personally guaranteed notes for the balance of $2,924,000.
                  These notes are anticipated to be collected in full on April
                  21, 1998.

                  In April 1998 the Company secured with a finance company an
                  equipment lease line of credit for $1,000,000. As of the
                  issuance of this report, no draws have been made against this
                  lease line.

                  The Company and its subsidiaries, limited partnership and
                  newly-formed (1997) limited liability companies, have
                  committed to certain equipment upgrades that will be financed
                  either through current equipment financing relationships or
                  vendor programs. In addition, the limited partnership, in
                  which a subsidiary of the Company is the general partner, is
                  planning to expand its facility by adding approximately 7,500
                  square feet. The adjoining addition is anticipated to cost
                  approximately $800,000 and will be used to facilitate a
                  women's health center.

                  Management further believes the present resources available
                  and anticipated through profitable operations will meet
                  anticipated requirements for financing the growth of the
                  business. There are no further material commitments for
                  capital expenditures.

                  RESULTS OF OPERATIONS 1997-1996

                  Consolidated revenues from operations for the year ended
                  December 31, 1997 decreased approximately $522,000 or 2.4%
                  from the previous year. Net sales declined $381,000 or 13.5%
                  while service revenues decreased $141,000 or .8% from the
                  comparable period in 1996. The decline in sales was due to the
                  Company selling two of its retail pharmacies during 1997 while
                  most of the decrease in service revenue was due to the decline
                  in visits in the home health care subsidiary which ceased
                  operations in April, 1997.

                  Cost of sales decreased approximately $251,000 or 12.1% for
                  the year as compared to 1996. Gross margin for the year ended
                  December 31, 1997 was 25.3% as compared to 26.4% for the
                  comparable period in 1996. The decline is attributable to
                  pricing pressures in the competitive retail pharmacy markets
                  and price reductions at the locations that closed during the
                  year.

                  Selling, general and administrative expenses decreased
                  approximately $351,000 or 2.0% for the year ended December 31,
                  1997 as compared to 1996. The decrease is mostly due from
                  decreased visits in the home health care agency offset by
                  small increases elsewhere.





                                      II-4


<PAGE>   13


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

                  RESULTS OF OPERATIONS  1997-1996
                  --------------------------------

                  Interest expense increased approximately $160,000 or 14.5% for
                  the year ended December 31, 1997 as compared to 1996. In 1996
                  the Company did not have a working capital line of credit in
                  place until late May and therefore, incurred interest expense
                  relating only to equipment and mortgages for the first five
                  months of 1996. The 1997 amounts includes the accounts
                  receivable securitization program interest costs through the
                  middle of March and the interest attributable to the
                  convertible subordinated and Series I bonds (see note 7).

                  Inflation has not had a significant effect on the net sales
                  and revenues of the Company. While inflation has caused some
                  increases in costs, there have been corresponding increases in
                  selling prices and service fees, neither of which has been
                  significant.

                  1996-1995
                  ---------

                  Consolidated revenues from operations for the year ended
                  December 31, 1996 increased approximately $485,000 or 2.3%
                  over 1995. Net sales increased approximately $107,000 or 4.0%
                  as compared to the previous year. Service revenues increased
                  approximately $378,000 or 2.1%, due mostly from revenue
                  increases at the Alzheimer's Center partially offset by a
                  decline in Home Health Care.

                  Cost of sales increased approximately $151,000 or 7.9% for the
                  year as compared to 1995. Gross margin for the year ended
                  December 31, 1996 was 26.4% as compared to 29.1% for the
                  comparable period in 1995. The decline is attributable to
                  pricing pressures in the competitive retail pharmacy market.

                  Selling, general and administrative expenses increased
                  approximately $851,000 or 5.1% for the year ended December 31,
                  1996 as compared to 1995. The increase is primarily
                  attributable to certain patient care costs, i.e. labor,
                  remaining level during periods of diminished census as well as
                  competitiveness in the out-patient services market. A further
                  increase resulted from the $376,000 reduction to 1995 expenses
                  as a result of the reversal of a reserve on the life insurance
                  premiums receivable.

                  Operating income decreased approximately $579,000 or 42.4% for
                  the year ended December 31, 1996 as compared to the same
                  period in 1995. The decrease is mostly attributable to the
                  increase in selling, general and administrative expenses.

                  Interest expense increased approximately $54,000 or 5.1% as
                  compared to 1995, primarily from the higher debt balances due
                  to the equipment refinancing and borrowings from the
                  securitization program.








                                      II-5


<PAGE>   14


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


ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

                  None

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  See the list of financial statement schedules included in Part
                  IV, Item 14 of this Form 10-K.

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

                  None.












                                      II-6

<PAGE>   15

                         REPORT OF INDEPENDENT AUDITORS
                         ------------------------------


To the Board of Directors
The Wendt-Bristol Health Services Corporation
Columbus, Ohio

         We have audited the accompanying consolidated balance sheets of The
Wendt-Bristol Health Services Corporation and Subsidiaries for the years ended
December 31, 1997 and 1996, and the related consolidated statements of income,
cash flows and changes in stockholders' equity for each of the three years in
the period ended December 31, 1997. These financial statements and schedules
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Wendt-Bristol Health Services Corporation and Subsidiaries at December 31, 1997
and 1996 and the consolidated results of their operations, cash flows and
changes in stockholders' equity for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.

         Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules listed in the
index to Item 14 relating to Wendt-Bristol Health Services Corporation and
Subsidiaries are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
The supplemental schedules have been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements of Wendt-Bristol
Health Services Corporation and Subsidiaries taken as a whole.


                               /s/ HAUSSER + TAYLOR LLP


Columbus, Ohio
April 20, 1998

                                      II-7
<PAGE>   16


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1997 AND 1996
                           --------------------------




<TABLE>
<CAPTION>

  ASSETS                                                                         1997             1996
  ------                                                                         ----             ----

<S>                                                                         <C>              <C>         
CURRENT ASSETS
  Cash                                                                      $    625,609     $    890,670
                                                                            ------------     ------------
  Restricted cash (Note 3)                                                       221,120          381,025
                                                                            ------------     ------------
  Receivables (Note 4):
   Trade, net of allowance for doubtful accounts of
    $201,000 in 1997 and $190,000 in 1996                                      2,878,726        2,014,403
   Notes receivable - current                                                  3,236,900          120,613
   Miscellaneous                                                               1,650,664          890,655
                                                                            ------------     ------------
                                                                               7,766,290        3,025,671
  Inventories                                                                    202,951          482,930
  Prepaid expenses and other current assets                                      148,825          250,947
                                                                            ------------     ------------
        Total current assets                                                   8,964,795        5,031,243
                                                                            ------------     ------------


PROPERTY, PLANT AND EQUIPMENT (NOTES 5 AND 7)                                 13,081,583       20,880,293
  Less accumulated depreciation and amortization                              (4,742,587)      (6,135,704)
                                                                            ------------     ------------
                                                                               8,338,996       14,744,589
                                                                            ------------     ------------
INVESTMENTS AND OTHER ASSETS
  Notes and other receivables, net of current portion                            420,651          359,007
  Notes receivable from officers and related parties (Notes 11B and 11C)         902,271          993,580
  Life insurance premiums receivable (Note 11D)                                  972,451          865,299
  Investment in unconsolidated affiliates (Note 6)                               640,980                -
  Advances to unconsolidated affiliates, net                                     451,110                -
  Excess of cost over assets of businesses and subsidiaries
   acquired, less accumulated amortization                                       355,439          621,629
  Deferred charges                                                               691,158          956,795
  Other assets                                                                   258,668          345,963
                                                                            ------------     ------------
                                                                               4,692,728        4,142,273
                                                                            ------------     ------------




        Total assets                                                        $ 21,996,519     $ 23,918,105
                                                                            ============     ============
</TABLE>






    The accompanying notes are an integral part of the financial statements.

                                      II-8


<PAGE>   17


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1997 AND 1996
                           --------------------------




<TABLE>
<CAPTION>

                  LIABILITIES AND STOCKHOLDERS' EQUITY           1997             1996
                  ------------------------------------           ----             ----

<S>                                                          <C>             <C>         
CURRENT LIABILITIES
  Notes payable - officer (Note 11E)                         $         -     $     55,000
  Securitization program advances (Note 4)                             -          392,287
  Accounts payable                                             3,307,082        2,729,021
  Accrued expenses and other liabilities:
     Salaries and wages                                          533,346          482,134
     Workers' compensation                                        50,197          380,502
     Taxes, other than federal income taxes                      219,885          726,106
     Interest                                                    117,313          118,640
     Stock purchase agreement payable (Note 2)                         -          325,000
     Other                                                       824,617          841,643
  Long-term obligations classified as current (Note 7)           986,148          750,758
  Federal income taxes payable (Note 9)                           40,000                -
                                                            ------------     ------------
        Total current liabilities                              6,078,588        6,801,091
                                                            ------------     ------------



LONG-TERM OBLIGATIONS LESS AMOUNTS
 CLASSIFIED AS CURRENT (NOTE 7)                                9,151,637       12,080,856
                                                            ------------     ------------

        Total liabilities                                     15,230,225       18,881,947
                                                            ------------     ------------


MINORITY INTERESTS                                               321,168          294,128
                                                            ------------     ------------


CONTINGENCIES AND COMMITMENTS (NOTES 4, 7, 8 AND 12)

STOCKHOLDERS' EQUITY (NOTES 2 AND 10)
  Common stock, $.01 par, authorized 12,000,000 shares;
   issued 8,248,480 shares in 1997 and 8,243,480 shares
   in 1996                                                        82,485           82,435
  Capital in excess of par                                    10,244,805       10,238,750
  Retained earnings (deficit)                                 (1,337,483)      (3,119,096)
                                                            ------------     ------------
                                                               8,989,807        7,202,089

  Treasury stock, at cost, 2,067,254 shares in 1997 and
   2,007,460 shares in 1996                                   (2,544,681)      (2,460,059)
                                                            ------------     ------------
                                                               6,445,126        4,742,030
                                                            ------------     ------------


        Total liabilities and stockholders' equity          $ 21,996,519     $ 23,918,105
                                                            ============     ============
</TABLE>



    The accompanying notes are an integral part of the financial statements.

                                      II-9


<PAGE>   18


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------


<TABLE>
<CAPTION>
                                                                  1997             1996             1995
                                                                  ----             ----             ----
<S>                                                           <C>              <C>              <C>         
REVENUES
  Net sales                                                   $  2,435,334     $  2,816,386     $  2,708,955
  Service income                                                18,383,557       18,524,816       18,147,243
                                                              ------------     ------------     ------------
                                                                20,818,891       21,341,202       20,856,198
                                                              ------------     ------------     ------------
COSTS AND EXPENSES
  Cost of sales                                                  1,820,352        2,071,596        1,920,118
  Selling, general and administrative expenses                  17,167,393       17,518,394       16,667,723
                                                              ------------     ------------     ------------
                                                                18,987,745       19,589,990       18,587,841
                                                              ------------     ------------     ------------

OPERATING INCOME BEFORE
 DEPRECIATION                                                    1,831,146        1,751,212        2,268,357
                                                              ------------     ------------     ------------

DEPRECIATION                                                       823,363          964,715          902,692
                                                              ------------     ------------     ------------

OPERATING INCOME                                                 1,007,783          786,497        1,365,665
                                                              ------------     ------------     ------------

OTHER INCOME (EXPENSE)
  Minority interests in loss (earnings), net of tax                176,888          (76,860)        (171,701)
  Interest expense, net (Notes 4 and 7)                         (1,264,878)      (1,104,278)      (1,050,226)
  Equity in earnings of unconsolidated affiliates (Note 6)         198,680                -                -
  Gain on sale of nursing homes assets (Note 1B)                 1,778,007                -                -
  Other, net                                                        84,633          109,254           21,008
                                                              ------------     ------------     ------------
                                                                   973,330       (1,071,884)      (1,200,919)
                                                              ------------     ------------     ------------

INCOME (LOSS) BEFORE INCOME TAXES                                1,981,113         (285,387)         164,746

INCOME TAX BENEFIT (EXPENSE) (NOTE 9)                             (199,500)          39,109           51,979
                                                              ------------     ------------     ------------

NET INCOME (LOSS)                                             $  1,781,613     $   (246,278)    $    216,725
                                                              ============     ============     ============


INCOME (LOSS) PER COMMON SHARE  (NOTE 1)
  Basic                                                       $       0.29     $      (0.04)    $       0.04
                                                              ============     ============     ============
  Diluted                                                     $       0.26     $      (0.04)    $       0.04
                                                              ============     ============     ============


WEIGHTED AVERAGE SHARES
 OUTSTANDING
   Basic                                                         6,224,241        5,825,686        6,131,770
                                                              ============     ============     ============
   Diluted                                                       6,916,241        5,825,686        6,131,770
                                                              ============     ============     ============
</TABLE>




    The accompanying notes are an integral part of the financial statements.

                                      II-10


<PAGE>   19



         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------
 
 
<TABLE>
<CAPTION>
                                                          COMMON        CAPITAL IN       RETAINED       TREASURY
                                                           STOCK       EXCESS OF PAR     EARNINGS         STOCK          TOTAL
                                                        -----------     -----------     -----------     -----------     -----------

<S>                                                     <C>             <C>             <C>             <C>             <C>        
BALANCE AT DECEMBER 31, 1994                            $    82,407     $10,311,509     $(3,089,543)    $  (104,826)    $ 7,199,547


  Shares contributed to Retirement Plan
   (21,764 shares)                                                          (40,257)                         50,157           9,900

  Warrants exercised for common stock                            28           3,722                                           3,750

  Treasury stock acquired (2,500,000 shares)
   (Note 2 )                                                                                             (2,887,347)     (2,887,347)

  Net income                                                                                216,725                         216,725
                                                        -----------     -----------     -----------     -----------     -----------


BALANCE AT DECEMBER 31, 1995                                 82,435      10,274,974      (2,872,818)     (2,942,016)      4,542,575


  Shares contributed to Retirement Plan
    (16,262 shares)                                                         (10,224)                         18,957           8,733

  Sale of treasury shares (500,000 shares) (Note 10)                        (26,000)                        463,000         437,000

  Net loss                                                                                 (246,278)                       (246,278)
                                                        -----------     -----------     -----------     -----------     -----------


BALANCE AT DECEMBER 31, 1996                                 82,435      10,238,750      (3,119,096)     (2,460,059)      4,742,030


  Shares contributed to Retirement Plan
     (6,306 shares)                                                           1,730                           7,728           9,458

  Treasury stock acquired (66,100 shares)                                                                   (92,350)        (92,350)

  Stock options exercised (5,000 shares)                         50           4,325                                           4,375

  Net income                                                                              1,781,613                        1,781,613
                                                        -----------     -----------     -----------     -----------     -----------


BALANCE AT DECEMBER 31, 1997                            $    82,485     $10,244,805     $(1,337,483)    $(2,544,681)    $ 6,445,126
                                                        ===========     ===========     ===========     ===========     ===========
</TABLE>





    The accompanying notes are an integral part of the financial statements.
 
                                      II-11

<PAGE>   20


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------


<TABLE>
<CAPTION>
                                                            1997            1996            1995
                                                         -----------     -----------     -----------
<S>                                                      <C>             <C>             <C>        
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                      $ 1,781,613     $  (246,278)    $   216,725
                                                         -----------     -----------     -----------
  Adjustments required to reconcile net income
   (loss) to net cash provided by operating
    activities:
     Amortization, depreciation and other, net               851,811         985,200         920,606
     Provision for losses on notes and accounts
      receivable                                             153,995         110,620         105,528
     Gain on sale of nursing home assets                  (1,778,007)              -               -
     Gain on sale of other assets                            (77,169)              -               -
     Life insurance premium reserve                                -               -        (376,000)
     Costs associated with acquisition of minority
       interest in limited partnership                             -               -         151,950
     Minority interest in earnings (losses)  of
      consolidated subsidiaries                             (176,888)         76,860         171,701
     Equity in earnings of unconsolidated affiliates        (198,680)              -               -
     Changes in assets and liabilities:
      Receivables:
        Sale (purchase) of receivables                      (607,229)        970,550      (1,354,048)
        Other changes                                       (429,771)       (534,300)        314,009
      Inventories                                            279,979           6,112         (29,350)
      Prepaid expenses and other current assets              100,045         160,611         130,423
      Accounts payable                                       578,061        (107,453)          3,693
      Accrued expenses and other liabilities              (1,581,208)     (1,656,355)        716,346
      Federal income taxes payable                            40,000        (100,000)       (220,000)
      Deferred charges and other                              35,812        (236,455)         23,607
                                                         -----------     -----------     -----------
       Total adjustments                                  (2,809,249)       (324,610)        558,465
                                                         -----------     -----------     -----------
         Net cash provided by (used in) operations        (1,027,636)       (570,888)        775,190
                                                         -----------     -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of minority interest from limited partners              -               -        (250,000)
  Collection of miscellaneous receivable                           -               -       1,700,000
  Advances to unconsolidated affiliates                     (451,110)              -               -
  Collection on sale of nursing homes assets                 750,000               -               -
  Proceeds from sale of other property, plant and
   equipment and investments                                 115,500               -               -
  Investment in unconsolidated affiliates                   (442,300)              -               -
  Decrease (increase) in notes receivable                   (149,137)        (33,788)        278,962
  Disbursements to related parties and
   former affiliates, net                                    (62,669)       (232,575)       (184,390)
  Utilization of (deposit to) restricted cash               (104,382)        (70,113)        243,654
  Capital expenditures                                      (569,676)       (544,866)       (504,321)
                                                         -----------     -----------     -----------
         Net cash provided by (used in) investing
          activities                                        (913,774)       (881,342)      1,283,905
                                                         -----------     -----------     -----------
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                      II-12


<PAGE>   21


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

<TABLE>
<CAPTION>
                                                                   1997            1996            1995
                                                               -----------     -----------     -----------
<S>                                                            <C>             <C>             <C>        
CASH FLOWS FROM FINANCING
 ACTIVITIES
  Distributions to limited partners, net                          (143,842)              -        (143,842)
  Purchase of common stock of subsidiary                           (92,230)         (8,000)         (2,000)
  Proceeds from sale of treasury stock                                   -         500,000               -
  Treasury stock purchased                                         (92,350)              -               -
  Proceeds from officer obligation                                  90,000         360,000               -
  Principal payments of officer obligation                        (145,000)       (305,000)              -
  Proceeds from warrants and options exercised                       4,375               -           3,750
  Principal payments on long-term obligations                   (1,157,251)       (875,659)     (1,589,240)
  Proceeds from borrowing on long-term obligations               3,604,934       2,243,447           4,520
  Net advances from (payments to)
   securitization program                                         (392,287)        392,287        (478,500)
                                                               -----------     -----------     -----------
        Net cash provided by (used in) financing activities      1,676,349       2,307,075      (2,205,312)
                                                               -----------     -----------     -----------

NET INCREASE (DECREASE) IN CASH                                   (265,061)        854,845        (146,217)

CASH - BEGINNING OF PERIOD                                         890,670          35,825         182,042
                                                               -----------     -----------     -----------

CASH - END OF PERIOD                                           $   625,609     $   890,670     $    35,825

SUPPLEMENTAL DISCLOSURES OF
 CASH FLOW INFORMATION
  Cash paid during the years for:
    Interest, net of interest income                           $ 1,266,205     $ 1,039,873     $ 1,060,226
    Income taxes                                               $    43,816     $   141,688     $   252,593

Supplemental Disclosures of Noncash
 Investing and Financing Activity (Note 15)
</TABLE>



    The accompanying notes are an integral part of the financial statements.

                                      II-13


<PAGE>   22


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



    NOTE 1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL

         A.       PRINCIPLES OF CONSOLIDATION
                  ---------------------------

                  The primary business of The Wendt-Bristol Health Services
                  Corporation and its Subsidiaries (the "Company") is to provide
                  health care services. Through subsidiaries and a limited
                  partnership, The Wendt-Bristol Company ("W-B"), itself a
                  subsidiary, operates three nursing homes (two disposed of at
                  December 31, 1997), a home health care delivery service
                  (ceased operations during 1997), a diagnostics center
                  featuring fixed-site magnetic resonance imaging ("MRI"), CT
                  Scan, Sonography and other modalities. Additionally, the
                  Company operates a retail pharmacy in Ohio and is the landlord
                  of a non-related manufacturing building (see Note 12A).

                  A subsidiary of W-B is a member in three limited liability
                  companies. One company operates a diagnostic center that
                  features an open-field magnetic resonance imaging device. The
                  second company operates a radiation therapy practice. The
                  third company has acquired land for which it has commenced
                  construction (in 1998) of a medical complex, a significant
                  portion of which Company affiliates will rent and operate.
                  Investments in affiliated companies, owned 22-1/2% to 50%
                  inclusive are stated at cost of investment plus the Company's
                  equity in undistributed net income since acquisition. The
                  change in the equity in net income of these companies is
                  included in equity in earnings of unconsolidated affiliates in
                  the Consolidated Statements of Operations.

                  The consolidated financial statements include the accounts of
                  all companies of which The Wendt-Bristol Health Services
                  Corporation or a wholly-owned subsidiary has majority
                  ownership or management control. All material intercompany
                  transactions have been eliminated in consolidation.

         B.       ACQUISITIONS AND DISPOSITIONS OF SUBSIDIARIES, SIGNIFICANT
                  ----------------------------------------------------------
                  ASSETS, PARTNERSHIP INTERESTS OR OWNERSHIP INTERESTS
                  ----------------------------------------------------

                  Effective at the close of business on December 31, 1997, the
                  Company sold all of the operating assets of two of its three
                  nursing homes for a total purchase price of approximately $9.9
                  million. This was financed with cash of $750,000; assumption
                  of mortgage debt of approximately $6.2 million and a note
                  receivable of approximately $2.9 million. The entire note is
                  expected to be paid in full on April 21, 1998. The following
                  summarizes the operations of the two nursing homes for the
                  years ended December 31, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                                        (IN 000'S)
                                           1997 (A)         1996         1995
                                           --------         ----         ----

<S>                                        <C>          <C>          <C>      
                       Revenues            $   9,123    $   9,254    $   8,508
                       Operating income        1,091        1,049          479
                       Net income                495          110         (110)
</TABLE>

                      (A) Excludes gain on sale of nursing home assets
                  During December 1996, the Wendt-Bristol Diagnostics Company
                  ("Diagnostics") formed Wendt-Bristol Crosswoods, Ltd. During
                  January 1997, Diagnostics invested $325,000 for a 50% interest
                  in this new entity. Such funds were used to acquire operating
                  assets, including an open field magnetic resonance imaging
                  device. Operations of this new diagnostics center began in
                  January 1997 and has expanded to include helical CT and
                  additional modalities during 1997.




                                      II-14


<PAGE>   23


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


    NOTE 1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL 
                  (CONTINUED)

         B.       ACQUISITIONS AND DISPOSITIONS OF SUBSIDIARIES, PARTNERSHIP
                  ----------------------------------------------------------
                  INTERESTS OR OWNERSHIP INTERESTS (CONTINUED)
                  --------------------------------------------

                  During 1997, Diagnostics acquired a 22.5% interest in
                  Wendt-Bristol at Park Oncology Center, Ltd., a venture that
                  was formed to own and operate a radiation therapy center.
                  Operations began during the fourth quarter 1997.

                  During 1997, Diagnostics acquired a 50% interest in Jasonway,
                  Ltd., a venture that was formed to construct and rent a
                  medical and office complex. Construction is anticipated to be
                  completed by third quarter 1998.

                  During 1997, the Company ceased to operate its home health
                  care delivery services. Loss from operations approximated
                  $91,000, $124,000, and $47,000 for the years ended December
                  31, 1997, 1996, 1995, respectively, which is included in the
                  Consolidated Statements of Operations.

                  During March 1995, the Company acquired 345,000 common shares
                  in a subsidiary of the Company, Diagnostics, for approximately
                  $744,000 (see Note 2). The purchase of these common shares in
                  addition to nominal subsequent activity has increased the
                  Company's ownership to approximately 86%. The acquisition cost
                  exceeded the underlying equity in net assets ("goodwill") by
                  $146,700. See Note 1H for further discussion with respect to
                  amortization.

                  In 1995, the Company purchased the limited partnership
                  interests for cash of $250,000. The purchase price in excess
                  of the limited partnership's book basis approximating $151,000
                  has been expensed in the Consolidated Statement of Operations
                  and included in the caption "Other, net".

         C.       STATEMENT OF CASH FLOWS
                  -----------------------

                  For purposes of the statement of cash flows, the Company
                  considers all highly liquid debt investments purchased with a
                  maturity of three months or less to be cash. No such
                  investments were purchased during 1997, 1996 or 1995.

         D.       CONCENTRATIONS OF CREDIT RISK
                  -----------------------------

                  Credit risk associated with cash balances in excess of
                  federally-insured amounts is minimized by using several
                  accounts at major financial institutions.

         E.       ACCOUNTS RECEIVABLE
                  -------------------

                  In May, 1996 the Company and certain of its subsidiaries
                  entered into a financing arrangement involving the sale of
                  their trade accounts receivable. This financing arrangement
                  terminated through payment in March, 1997 (see Note 4).

                  The agreement provided for the Company's sale of its health
                  care trade accounts receivable, subject to various terms and
                  conditions, with limited recourse, with the Company continuing
                  to service the accounts. A sale was recorded when the health
                  care accounts receivable were transferred to the purchaser,
                  net of contractual allowances. Such sales are not included in
                  the Consolidated Statement of Operations and no gain or loss
                  arises in the transaction.




                                      II-15


<PAGE>   24


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


    NOTE 1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL 
                 (CONTINUED)

         E.       ACCOUNTS RECEIVABLE (CONTINUED)
                  -------------------------------

                  Certain receivables from the Company's medical services
                  segment are due from third party payors, including Medicare,
                  Medicaid and commercial insurance carriers, under contractual
                  arrangements by which payment may be at a discount from billed
                  charges, as is customary within the health care industry. The
                  Company estimates and records allowances for such discounts to
                  billed charges to recognize revenues based on amounts expected
                  to be recovered.

                  A significant portion of the income earned by the nursing
                  homes is related to services provided to Medicaid patients.
                  The income reported for the nursing homes is based on cost
                  reports filed with the State of Ohio and such reports are
                  subject to audit and adjustment by Medicaid auditors.

         F.       INVENTORIES
                  -----------

                  Inventories are stated at the lower of cost or market,
                  determined on the first-in, first-out basis. Inventories at
                  December 31, 1997 and 1996 were $202,951 and $482,930,
                  respectively. These inventories consist of retail
                  pharmaceuticals, durable medical equipment and supplies.

         G.       PROPERTY, PLANT AND EQUIPMENT
                  -----------------------------

                  Property, plant and equipment are stated at cost. Depreciation
                  for financial reporting purposes is computed using principally
                  the straight-line method over the estimated useful lives of
                  the related assets. Leasehold improvements are amortized over
                  the primary lease term or the life of the related improvement,
                  whichever period is shorter. Expenditures for major renewals
                  and betterments that extend the useful lives of property,
                  plant and equipment are capitalized. Expenditures for
                  maintenance and repairs are charged to operations as incurred.

         H.       EXCESS OF COST OVER ASSETS OF BUSINESSES AND SUBSIDIARIES
                  ---------------------------------------------------------
                  ACQUIRED
                  --------

                  Costs of acquired businesses in excess of the value of net
                  assets (i.e., goodwill) are amortized over periods ranging
                  from 20 to 40 years, except for goodwill associated with the
                  manufacturing real estate, which is being amortized over the
                  estimated remaining life of the building. During the fourth
                  quarter of 1997, the Company deducted the remaining goodwill
                  of approximately $189,000 associated to its interest in Health
                  America against the gain on the sale of the nursing homes.
                  Amortization expense excluding this one-time adjustment for
                  the years ended December 31, 1997, 1996, and 1995,
                  approximated $28,400, $20,500 and $17,900, respectively.
                  Accumulated amortization at December 31, 1997, 1996 and 1995,
                  was $141,900, $163,000, and $141,200, respectively. Goodwill
                  consists of an amount applicable to the manufacturing real
                  estate and the purchase of common shares of Diagnostics
                  Company (see Note 1B).

                  The Company periodically evaluates the recoverability of
                  intangibles resulting from business acquisitions and measures
                  the amount of impairment, if any, by assessing current and
                  future levels of income and cash flows as well as other
                  factors, such as business trends and prospects and market and
                  economic conditions. There were no such impairment adjustments
                  at December 31, 1997, 1996 and 1995.






                                      II-16


<PAGE>   25


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



    NOTE 1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL 
                  (CONTINUED)

         I.       DEFERRED CHARGES
                  ----------------

                  The Company has included in deferred charges costs that are
                  being amortized over future periods ranging from 5 to 11
                  years. Deferred charges are predominantly costs associated
                  with financing, costs incurred for staff training, opening new
                  facilities and a rent adjustment to properly recognize rental
                  income on the leased manufacturing facility.

         J.       ESTIMATES
                  ---------

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

         K.       INCOME (LOSS) PER SHARE
                  -----------------------

                  Per share amounts were computed using the weighted average
                  number of shares outstanding during each period for basic
                  which was adjusted for the effect of dilutive potential common
                  shares in the computation of diluted EPS. (See Note 10)

         L.       INCOME TAXES
                  ------------

                  The Company utilizes the liability method of accounting for
                  income taxes. Deferred income taxes reflect the net tax
                  effects of temporary differences between the carrying amounts
                  of assets and liabilities for financial reporting purposes and
                  the amounts used for income taxes, and are measured using the
                  enacted tax rates and laws that will be in effect or expected
                  to continue in effect when the differences are expected to
                  reverse. (See Note 9).

         M.       FINANCIAL INSTRUMENTS AND FAIR VALUE
                  ------------------------------------

                  The estimated fair value of amounts reported in the financial
                  statements have been determined using available market
                  information and valuation methodologies, as applicable (see
                  Note 16).

                  The Company enters into foreign currency contracts in order to
                  reduce the impact of certain foreign currency fluctuations.
                  The Company does not enter into financial instruments for
                  trading or speculative purposes. Gains and losses related to
                  qualifying hedges of firm commitments are deferred and are
                  recognized as income or as adjustments of carrying amounts
                  when the hedged transaction occurs.











                                      II-17

<PAGE>   26


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



    NOTE 1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL 
                  (CONTINUED)

         N.       STOCK BASED COMPENSATION
                  ------------------------

                  The Company utilizes the provisions of Accounting Principles
                  Board ("APB") No. 25, "Accounting for Stock Issued to
                  Employees" which utilizes the intrinsic value based method.
                  The Financial Accounting Standards Board ("FASB") Statement
                  No. 123, "Accounting for Stock-Based Compensation", which
                  utilizes a fair value based method is effective for the
                  Company's year beginning January 1, 1996. The FASB requires
                  disclosure for new employee stock options of the impact to the
                  financial statements of utilizing the intrinsic value versus
                  the fair value based method (see Note 10).

        O.         ACCOUNTING PRONOUNCEMENTS FOR 1998
                   ----------------------------------

                  The FASB has issued three pronouncements for fiscal years
                  beginning after December 15, 1997 -- SFAS No. 130 --
                  "Reporting of Comprehensive Income"; SFAS No. 131 --
                  "Disclosures about Segments of an Enterprise and Related
                  Information", and SFAS No. 132 -- "Employers' Disclosures
                  about Pensions and Other Postretirement Benefits". The Company
                  believes that the effect of the adoption of the above will not
                  be material to its financial position or results of
                  operations.

    NOTE 2.       PRIVATE COMMON STOCK TRANSACTIONS

                  On February 27, 1995, the Company, pursuant to a certain Stock
                  Exchange Agreement (the "Agreement") by and between the
                  Company and the Insurance Commissioner of the Commonwealth of
                  Pennsylvania, as Statutory Liquidator (the "Statutory
                  Liquidator") for Corporate Life Insurance Company ("CLIC") and
                  successor to CLIC, agreed to sell to the Statutory Liquidator
                  thirty thousand (30,000) preferred shares (par value $100 per
                  share or a total of $3,000,000) owned by the Company in Life
                  Holdings, Inc., in exchange for two million (2,000,000) shares
                  of the Company's common stock and three hundred thousand
                  (300,000) shares of common stock of Wendt-Bristol Diagnostics
                  Company ("Diagnostics"), a majority-owned consolidated
                  subsidiary of the Company, owned by CLIC. The closing of the
                  transaction contemplated by the Agreement occurred on March 2,
                  1995. The value assigned to (i) the Company's 2,000,000 common
                  shares of $2,481,091 ($1.24 per share) and (ii) the
                  Diagnostics 300,000 common shares of $518,909 ($1.73 per
                  share) equal $3,000,000. The Company's common shares have been
                  included in Treasury Stock on the accompanying balance sheet
                  for 1997, 1996 and 1995; while Diagnostic's common shares are
                  recorded as an additional investment in a consolidated
                  subsidiary, which is eliminated in consolidation except for
                  goodwill.

                  In addition, as part of the transaction contemplated by the
                  Agreement, the Company or its designee agreed to purchase from
                  the Statutory Liquidator, within ninety (90) days, subject to
                  extension, five hundred thousand (500,000) additional shares
                  of common stock of the Company for a price of $.80 per share,
                  and forty-five thousand (45,000) additional shares of common
                  stock of Diagnostics for a price of $5.00 per share. This
                  resulted in increases in Treasury Stock of the Company of
                  $400,000 (see Note 10 for sale of treasury stock) and $225,000
                  recorded as a further increase in the investment in a
                  consolidated subsidiary which is eliminated in consolidation
                  except for goodwill. The remaining amount payable at December
                  31, 1996 of $325,000 along with additional costs was
                  subsequently paid in its entirety during the first quarter of
                  1997.




                                      II-18

<PAGE>   27


           WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



     NOTE 2.      PRIVATE COMMON STOCK TRANSACTIONS (CONTINUED)

                  Upon the March 2, 1995 closing and acquisition of the
                  additional 500,000 common shares of Company and 45,000 common
                  shares of Diagnostics, the Company has reacquired all shares
                  previously issued and/or sold in transactions with CLIC.

                  At December 31, 1997, 1996 and 1995, the Company owns, through
                  its wholly owned subsidiary, approximately 86%, 83%, and 83%,
                  respectively, in Diagnostics. See above and Note 1B concerning
                  Wendt-Bristol Company's acquisition of approximately 29%
                  additional shares of Diagnostics in 1995 and other subsequent
                  activity.

     NOTE 3.      RESTRICTED CASH

                  The Company has restricted cash of $221,120 and $381,025 at
                  December 31, 1997 and 1996, respectively. The amounts in a
                  bank trust account were $179,934 and $171,654 at December 31,
                  1997 and 1996, respectively. These restricted assets were set
                  aside to satisfy the New Jersey Department of Environmental
                  Protection and Energy in connection with the reimbursement of
                  clean-up expenses at the leased manufacturing facility located
                  in Passaic, New Jersey. (See Item 1. Business and Note 12A.)
                  The remainder of the cash in 1997 represents amounts in a
                  brokerage margin account that is maintained in conjunction
                  with foreign exchange futures contracts. The remainder of the
                  restricted cash in 1996 represents amounts placed in escrow
                  for "replacement" reserves at the mortgage agent for the
                  Department of Housing and Urban Development ("HUD") for HUD
                  insured financed skilled nursing facilities. See Note 1B
                  concerning the sale of the two HUD facilities.

     NOTE 4.      RECEIVABLES

                  The following schedule states current receivables by specific
                  groups as indicated at December 31:

<TABLE>
<CAPTION>
                                                                    1997          1996
                                                                 ----------    ----------
<S>                                                              <C>           <C>       
                       Receivables:
                         Trade (net of allowance for doubtful
                          accounts) - (a)                        $2,878,726    $2,014,403
                                                                 ----------    ----------
                       Notes receivable - current:
                         Nursing homes sales (b)                  2,923,794             -
                         Related parties (c)                         60,760        67,822
                         Unconsolidated affiliates (d)              180,000             -
                         Others                                      72,346        52,791
                                                                 ----------    ----------
                       Total                                      3,236,900       120,613
                                                                 ----------    ----------

                       Miscellaneous receivables:
                         Nursing homes sale (b)                     326,990             -
                         Securitization program reserves (e)              -       232,131
                         Due from limited partners (f)              440,000             -
                         Medicare settlements                       259,202       215,561
                         Others - (g)                               624,472       442,963
                                                                 ----------    ----------
                       Total                                      1,650,664       890,655
                                                                 ----------    ----------

                       Total current receivables                 $7,766,290    $3,025,671
                                                                 ==========    ==========
</TABLE>


                                      II-19


<PAGE>   28


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



     NOTE 4.      RECEIVABLES (CONTINUED)

                  (a)      During May, 1996, the Company and certain of its
                           subsidiaries entered into an agreement with a finance
                           company to secure additional working capital funds.
                           This agreement was terminated amicably through a
                           pay-off in March, 1997. Trade receivables at December
                           31, 1996 are shown net of receivables purchased by
                           the finance company. Total cash proceeds from the
                           sale of these receivables amounted to approximately
                           $5,478,000 in 1996. Uncollected sold receivable
                           balances approximated $736,000 at December 31, 1996.
                           Program fees and costs are included in "interest
                           expense, net" and "selling, general and
                           administrative" approximating 16% for the years ended
                           December 31, 1997 and 1996, respectively, in the
                           Consolidated Statement of Operations. Such sales are
                           not included in the Consolidated Statement of
                           Operations and no gain or loss arise from these
                           transactions.

                           Additionally, the purchaser advanced funds that were
                           in excess of purchased receivables of which $392,287
                           was outstanding at December 31, 1996 and was
                           subsequently paid in 1997.

                  (b)      At December 31, 1997, the Company sold two of its
                           nursing homes assets. The current note receivable was
                           expected to be received in full on April 21, 1998.
                           (See Note 1B) The miscellaneous receivables represent
                           escrow balances related to HUD financing for which
                           the Company is anticipating reimbursement in 1998.

                  (c)      The balance consists of the current portion of notes
                           receivable for the sale of assets to a related party
                           (See Notes 11B and 11C).

                  (d)      The balance consists of notes receivable from
                           unconsolidated affiliates. (See Notes 1A and 6).

                  (e)      In connection with the securitization program above,
                           the third party purchasing the receivables held
                           reserves as additional collateral for the receivables
                           purchased from the Company. These cash reserves were
                           released in full upon termination of the
                           securitization program.

                  (f)      A subsidiary of the Company is the general partner in
                           a limited partnership. Based on the allocation of
                           income in accordance with the partnership agreement,
                           the balance is due from the limited partners for
                           excess income allocated to the limited partners' from
                           the general partner. It is management's estimate that
                           all income reallocated during the current year
                           totaling $440,000 will be restored in 1998 as a
                           result of the priorities established in the
                           partnership agreement.

                  (g)      The balance consists mostly (approximately $400,000
                           and $367,000 in 1997 and 1996, respectively) of a
                           receivable due from the former owner of two of the
                           nursing homes regarding final collection of the
                           purchase price of the transaction. (See Note 12B).

                  Total interest income for the years ended December 31, 1997,
                  1996 and 1995, amounted to approximately $204,000, $193,000,
                  and $134,000, respectively, and is netted against interest
                  expense in the accompanying Consolidated Statements of
                  Operations.





                                      II-20


<PAGE>   29


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



     NOTE 5.      PROPERTY, PLANT AND EQUIPMENT

                  Property, plant and equipment at December 31, 1997 and 1996
                  and the estimated useful lives used in computing depreciation
                  are as follows:
                  
<TABLE>
<CAPTION>
                                                              DECEMBER 31,               ESTIMATED  
                                                              ------------             USEFUL LIVES
                                                         1997             1996          (IN YEARS)
                                                         ----             ----          ----------

<S>                                                  <C>              <C>                      <C>
                       Land and improvements         $  1,385,529     $  1,666,105               30
                       Buildings and improvements       4,910,500       11,941,568             3-40
                       Machinery and equipment          6,785,554        7,272,620             3-14
                                                     ------------     ------------
                                                       13,081,583       20,880,293

                       Accumulated depreciation
                        and amortization               (4,742,587)      (6,135,704)
                                                     ------------     ------------
                                                     $  8,338,996     $ 14,744,589
                                                     ============     ============
</TABLE>

                  Included in machinery and equipment and buildings and
                  improvements are $746,000 and $167,000, respectively of assets
                  not placed in service at December 31, 1996. These assets were
                  placed in service during the third quarter of 1997.

                  Included in property, plant and equipment at December 31, 1997
                  and 1996 are land, buildings and improvements of $4,517,834
                  and $4,453,608 with accumulated depreciation and amortization
                  of $1,176,265 and $1,061,488, respectively, leased to the
                  purchaser of its former manufacturing division (see Note 12A).

                  Depreciation and amortization expense for the years ended
                  December 31, 1997, 1996 and 1995 was $823,363, $964,715, and
                  $902,692, respectively.

     NOTE 6.      EQUITY IN UNCONSOLIDATED AFFILIATES

                  Audited financial information of the affiliates which are
                  accounted for by the equity method (See Note 1A) is summarized
                  below:

<TABLE>
<CAPTION>
                                                                                          (IN 000'S)
                                                                                       DECEMBER 31, 1997
                                                                                       -----------------
                                           COMBINED BALANCE SHEETS
<S>                                                                                       <C>       
                       Current assets                                                     $1,046,000
                       Property, plant and equipment, net of accumulated
                         depreciation                                                      5,340,000
                       Other non-current assets                                              380,000
                                                                                          ----------
                            Total assets                                                  $6,766,000
                                                                                          ==========
                       Liabilities                                                        $5,583,000
                       Equity                                                              1,183,000
                                                                                          ----------
                            Total liabilities and equity                                  $6,766,000
                                                                                          ==========
                                      COMBINED STATEMENTS OF OPERATIONS
                       Service revenues                                                   $1,524,000
                       Operating income                                                      381,000
                       Net income                                                            363,000
</TABLE>

                  A limited liability company in which the Company has a 50%
                  interest with assets of $875,000, liabilities of $840,000 and
                  equity of $35,000 is unaudited as of December 31, 1997. The
                  limited liability company has acquired land for which a 
                  medical facility is under construction, therefore, it has no
                  operations.

                                      II-21
<PAGE>   30


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     NOTE 6.      EQUITY IN UNCONSOLIDATED AFFILIATES (CONTINUED)

                  As a result of the limited liability companies being taxed as
                  partnerships for Federal income tax purposes, there is no tax
                  provided for earnings.

     NOTE 7.      LONG-TERM OBLIGATIONS

                  At December 31, 1997 and 1996, long-term obligations are as
                  follows:
                  
<TABLE>
<CAPTION>
                                                                                     1997          1996
                                                                                  ----------    ----------
<S>                                                                               <C>           <C>       
                  5.5% subordinated convertible bond,
                  interest only payable in quarterly
                  installments, principal due December, 2001                      $1,000,000    $1,000,000

                  5.0% bonds, denominated in Swiss francs,
                  interest only payable in quarterly
                  installments, principal due February, 2002                       3,416,934             -

                  8.875% mortgage, payable in monthly
                  installments including interest through
                  December, 2034.  Paid off as real estate was
                  sold on December 31, 1997                                                -     3,166,432

                  9% mortgage, payable in monthly installments
                  including interest through June, 2027.  Paid
                  off as real estate was sold on December 31,                              -     2,931,243
                  1997 

                  9.41% mortgage, payable in monthly installments
                  including interest through April, 2016                             690,661       704,172

                  Variable rate mortgage - interest at 11.50% and
                  11.25% at December 31, 1997 and 1996, respectively,
                  payable in monthly installments including interest
                  through April, 2001, with any remaining balance due
                  May 1, 2001                                                      1,546,509     1,646,649

                  Variable rate mortgage - interest at 10.5% at
                  December 31, 1996, payable in monthly
                  installments through December, 1997                                      -        34,992

                  7.7% to 13% notes payable in monthly
                  installments including interest, through
                  February, 2004, collateralized by equipment                      3,483,681     3,195,597

                  12% notes payable in monthly installments
                  including interest                                                       -       128,578
</TABLE>






                                     II-22


<PAGE>   31


    THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



     NOTE 7.      LONG-TERM OBLIGATIONS (CONTINUED)

<TABLE>
<CAPTION>
                                                        1997             1996
                                                     -----------      -----------

<S>                                                  <C>              <C>        
                  Capitalized lease obligations                -           23,951
                                                     -----------      -----------
                                                      10,137,785       12,831,614

                  Less: current installments             986,148          750,758
                                                     -----------      -----------
                  Long-term portion                  $ 9,151,637      $12,080,856
                                                     ===========      ===========
</TABLE>


                  SUBORDINATED CONVERTIBLE BOND
                  -----------------------------

                  Beginning February 2, 1997 through December 30, 2001, the
                  subordinated convertible bond may be converted in units of not
                  less than $100,000 into fully paid shares of the Company's
                  common stock at a conversion ratio of $2.00 of principle for
                  one share of common stock for the beneficial ownership of a
                  non United States person, pursuant to Regulation S of the
                  Securities Act of 1933.

                  OTHER
                  -----

                  Aggregate future principal maturities of long-term debt and
                  capital lease obligations are as follows: 1998- $986,148, 1999
                  - $831,526, 2000 - $938,203, 2001 - $1,702,655, and thereafter
                  - $5,679,254.

                  All land and real estate is collateralized by the mortgages
                  payable.

                  The Company incurred interest expense in the amount of
                  $1,469,251, $1,297,630, and $1,183,945 in 1997, 1996 and 1995,
                  respectively.

                  COMMITMENTS
                  -----------

                  The Company, its subsidiaries, and a limited partnership have
                  committed to certain equipment acquisitions that will be
                  financed through a combination of current equipment financing
                  relationships, vendor programs or newly available resources.
                  The cost of such equipment currently on order is approximately
                  $2,500,000.

                  In April 1998, the Company secured with a finance company an
                  equipment lease line of credit for $1,000,000. The entire
                  lease line is available.

                  See Commitments and Contingencies Note 12D for debt guarantees
                  made by the Company for entities which the Company has equity
                  ownership interests.

     NOTE 8.      LEASE COMMITMENTS

                  With the exception of the medical diagnostic center which is
                  owned by a limited partnership, the Company leases all of the
                  locations used in its businesses under leases expiring on
                  dates ranging through July 2015.





                                      II-23
<PAGE>   32


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 8.    LEASE COMMITMENTS (CONTINUED)

           As of December 31, 1997, minimum annual rental commitments under
           noncancelable leases amount to: OPERATING LEASES

                               1998            $    590,619
                               1999                 549,156
                               2000                 478,409
                               2001                 366,901
                               2002                 344,302
                            Thereafter            4,120,816
                                               ------------
                                               $  6,450,203
                                               ============

           In addition, the Company remains contingently liable for certain
           leases on locations that have been sold. These contingent leases
           include payments aggregating $104,000 over the next three years.

           Rental expense included in the Consolidated Statements of Operations
           for the years ended December 31, 1997, 1996 and 1995, was
           approximately $567,000, $569,000, and $564,000, respectively, net of
           annual sublease income of $870, $1,740, and $20,180, respectively.
           Amortization of assets recorded under capital leases is included in
           depreciation expense.

NOTE 9.    INCOME TAXES

           The Company has recognized a deferred tax liability, a deferred tax
           asset and a valuation allowance against the deferred tax assets. The
           components of these consolidated deferred tax items at December 31,
           1997 and 1996 are as follows:

<TABLE>
<CAPTION>

                                                          1997           1996
                                                          ----           ----
           Assets:
<S>                                                  <C>            <C>       
             Net operating loss carryforwards        $  781,700     $1,874,000
             Investment tax credit carryforwards         25,900         28,400
             Bad debt allowance                          51,300         47,600
             Other                                        3,000          3,000
                                                        -------      ---------
                                                        861,900      1,953,000
             Less:  valuation allowance                     -          200,000
                                                        -------      ---------
                                                        861,900      1,753,000
                                                        =======      =========
</TABLE>












                                      II-24


<PAGE>   33


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 9.    INCOME TAXES (CONTINUED)

<TABLE>
<CAPTION>

                                                      1997           1996
<S>                                                 <C>            <C>    
           Liabilities:
             Depreciation and amortization          109,300        604,500
             Costs capitalized in connection
              with acquisitions                     605,000        884,600
             Other                                   10,200         10,200
                                                 ----------     ----------
                                                    724,500      1,499,300

           Net deferred tax asset                $  137,400     $  253,700
                                                 ==========     ==========
</TABLE>

           These deferred tax assets and liabilities have been offset for
           balance sheet presentation except for the "net deferred tax asset"
           which is included in the balance sheet caption "Other Assets".
           Management has utilized approximately $3.2 million of net operating
           loss carryforwards through the sale of two nursing home assets in
           1997. Additionally, the valuation allowance was reduced by $200,000.
           These two factors combined to result in a deferred tax expense of
           $116,300 in 1997. Management has recognized a deferred tax benefit of
           $84,300 in 1996 by a reduction in the valuation allowance for the
           expected utilization of net operating losses during the carryforward
           period. Management has considered the provisions of SFAS No. 109 that
           allows for utilization of tax planning strategies associated with
           real estate. These strategies, if necessary, could consider a
           possible sale and/or sale/leaseback of such real estate to preclude
           the expiration of net operating losses without realization of a tax
           benefit. Realization of the deferred tax asset is dependent on
           generating sufficient taxable income including use of management's
           tax planning strategies prior to the expiration of the loss
           carryforwards. Although realization is not assured, management
           believes it is more likely than not that a significant amount of the
           deferred tax asset will be realized. The amount of the deferred tax
           asset considered realizable, however, could be reduced in the near
           term if either the current estimates of future taxable income are
           reduced or management would be unable to effect an expected sale
           and/or sale/leaseback of real estate. Both of these conditions are
           currently necessary for consideration in the evaluation of the
           realizability of the deferred tax assets and estimated valuation
           allowance.

           Consolidated net operating losses available for tax purposes at
           December 31, 1997 are approximately $2,300,000, expiring $645,000 in
           2004, $935,000 in 2006, $335,000 in 2008 and $383,000 in 2009.
           Investment tax credits available for tax purposes at December 31,
           1997 are approximately $25,900 expiring at various dates from 1998 to
           2000. In 1997 and 1996 as a result of consolidated taxable income the
           Company was able to utilize net operating losses of $3,160,000 and
           $27,000, respectively, of which $730,000 and $27,000, respectively,
           was pre-operating losses of an acquired subsidiary which was only to
           be used to offset taxable income by that subsidiary.

           As discussed in Note 2, the Company had previously sold a portion of
           its interest in Diagnostics and, as a result, Diagnostics began to
           file its income tax returns on a separate company basis. Diagnostics
           has no significant temporary differences that give rise to deferred
           tax assets or liabilities at December 31, 1997, 1996 and 1995.







                                      II-25


<PAGE>   34


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 9.    INCOME TAXES (CONTINUED)

           During 1995, see Note 2, the Company acquired additional common
           shares in Diagnostics, thereby allowing for its inclusion in the
           consolidated tax return of the Company.

           For the years ended December 31, 1997, 1996 and 1995 a reconciliation
           of the statutory rate and effective rate for the provision for income
           taxes consists of the following based on amounts that do not include
           minority interests:

<TABLE>
<CAPTION>

                                                              NOT INCLUDING
                                                               DIAGNOSTICS
                                                              (PERCENTAGE)
                                                              ------------
<S>                                                               <C> 
           DECEMBER 31, 1997
           -----------------
           Federal statutory rate                                 34.0
           Minority interests                                     (3.7)
           Equity in unconsolidated affiliates                    (4.2)
           State and local income taxes, net of federal
            tax benefit                                            1.1
           Alternative minimum tax                                 2.5
           Tax effect of permanent differences                    (5.0)
           Valuation allowance                                   (12.4)
                                                                 ----- 

           Effective rate                                         12.3
                                                                 ===== 

           DECEMBER 31, 1996
           -----------------
           Federal statutory rate                                (34.0)
           Minority interests                                     13.6
           State and local income taxes, net of federal
            tax benefit                                            6.3
           Tax effect of permanent differences                    44.0
           Valuation allowance                                   (49.1)
                                                                 ----- 

           Effective rate                                        (19.2)
                                                                 ===== 
</TABLE>


<TABLE>
<CAPTION>

                                                               DIAGNOSTICS
                                                              (PERCENTAGE)
                                                              ------------

<S>                                                           <C>       <C> 
           DECEMBER 31, 1995
           -----------------
           Federal statutory rate                             34.0      34.0
           Minority interests                                 (8.1)     (8.2)
           State and local income taxes, net of federal
            tax benefit                                        1.3       1.1
           Tax effect of permanent differences
                                                             (26.0)      2.0
           Valuation allowance                               (43.6)      -
                                                             -----      ----

           Effective rate                                    (42.4)     28.9
                                                             =====      ====
</TABLE>






                                      II-26


<PAGE>   35


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 9.    INCOME TAXES (CONTINUED)

           The expense (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>

                                                1997          1996          1995
                                                ----          ----          ----
<S>                                           <C>          <C>           <C>      
           Federal:
             Consolidated
               Current expense                $ 40,000     $    -         $   -
               Deferred expense (benefit)      116,300      (84,300)          -
             Without Diagnostics
               Current expense                     -            -             -
               Deferred benefit                    -            -         (74,540)

           State:
             Consolidated
               Current expense                  43,200       45,191           -
             Without Diagnostics
               Current expense                     -            -           7,006
             Diagnostics
               Current expense                     -            -          15,555
                                              --------     --------      -------- 

           Total tax expense (benefit)        $199,500     $(39,109)     $(51,979)
                                              ========     ========      ======== 
</TABLE>

           The principal differences between the income or loss reported for
           financial reporting purposes and the income or loss reported for
           federal income tax purposes results from (i) accelerated depreciation
           methods being utilized for tax purposes, (ii) inventory
           capitalization methods required for tax purposes, (iii) reserving for
           doubtful accounts receivable and certain other reserves, and (iv)
           costs capitalized in connection with certain acquisitions for
           financial reporting purposes and not for tax purposes.


NOTE 10.   STOCKHOLDERS' EQUITY

           COMMON STOCK

           See Note 2 for reacquisition of 2,500,000 shares of Common Stock into
           treasury in 1995.

           In October 1996, the Company sold at $1.00 per share 500,000 shares
           of common stock held in treasury, pursuant to Regulation S of the
           Securities Act of 1933. The total cost of such shares sold totaled
           $463,000.











                                      II-27


<PAGE>   36


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 10.   STOCKHOLDERS' EQUITY (CONTINUED)

           WARRANTS

           A.     At December 31, 1997, there were 414,538 warrants outstanding.
                  Each warrant, as a result of a November 1990 amendment, is
                  exercisable for two and three quarters (2-3/4) shares of The
                  Wendt-Bristol Health Services Corporation common stock. The
                  Company has reserved 1,139,980 shares for such issue. The
                  exercise price of $3.75 per warrant is the equivalent of $1.36
                  per share. Other terms of the warrants remain the same as when
                  originally issued in 1986, including the anti-dilution
                  provisions, except that the expiration date has been extended
                  to May 1, 1999, and the redemption feature has been removed.

                  Also, as a result of the November 1990 amendment, upon
                  exercise of existing warrants, in addition to the common
                  shares to be received upon such exercise, each warrant holder
                  will receive, upon registration under the Securities Act of
                  1933, a newly-created Series II warrant which has been
                  extended to May 2000, which enables the warrant holder upon
                  exercise of the Series II warrant to purchase 2 shares of
                  common stock at $3.00 per share.

           B.     In conjunction with the issuance, pursuant to Regulation S of
                  the Securities Act of 1933, of Series No. 1 bonds issued on
                  February 14, 1997, the Company issued thirty-three (33) Series
                  No. 1 warrants exercisable into a total of 300,000 shares of
                  the common stock of the Company for $2.00 per share for the
                  beneficial ownership of non U.S. persons.

           STOCK OPTIONS

           The Company has previously adopted a qualified employee incentive
           stock option plan (the "Plan"). The Plan provides for 250,000 common
           shares to be made available for options granted to eligible officers,
           directors and employees. The options may be granted for a term not to
           exceed ten years (five years with respect to a 10% shareholder) and
           are not transferable or assignable. The exercise price of all options
           must be at least equal to the fair market value of the common stock
           at the date of grant, or 110% of such fair market value with respect
           to any optionee who is a 10% shareholder of the Company.

           The Board of Directors granted options for 10,000 shares to each
           outside Director upon their election. All such options have expired
           except for one block of options to purchase 10,000 shares at a price
           of $.375 with an expiration date of February 1, 2000. Beginning in
           1992, 1,000 options were granted annually to each outside Director
           upon his anniversary month as an outside Director. As of December 31,
           1997, 17,000 options were issued to outside directors. The annual
           expense for these outside directors using the fair value based method
           (SFAS No. 123) approximated $300.

           In June, 1993 the Board of Directors granted 80,000 options to
           purchase shares at a price of $1.25 to certain officers and key
           employees of which 65,000 are outstanding at December 31, 1997. These
           options will expire on June 3, 1998.

           In May, 1996 the Board granted options totaling 130,000 shares to
           certain officers and key employees of which 110,000 are outstanding
           at December 31, 1997. Such options are exercisable at a price of
           $.875 per share and expire on May 23, 2001.





                                      II-28


<PAGE>   37


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 10.   STOCKHOLDERS' EQUITY (CONTINUED)

           In 1997, 5,000 options were exercised at $.875 per share for total
           proceeds of $4,375. Additionally, 30,000 options with exercise prices
           of $.875 to $1.25 were terminated as the employees are no longer
           employed by the Company.

           No options were exercised in 1996 or 1995. There were 192,000 stock
           options outstanding at December 31, 1997 at prices ranging from $.375
           to $1.4375 per share. At December 31, 1997 and 1996, options
           available for grant were 53,000 and 19,000, respectively.

           The Company utilizes the intrinsic value method under APB No. 25 to
           account for employee stock options. The Company has utilized the
           Black Scholes option pricing model for proforma footnote purposes
           with the following assumptions used for grants in all years. Dividend
           yield of 0%, risk-free interest rate of 6%, and expected option life
           of 5 years. Expected volatility was 74.6%. If the Company had
           utilized the fair value based method under FASB No. 123, the impact
           would not be significant to the financial statements.

           EARNINGS PER SHARE

           The following is a reconciliation of the basic and diluted EPS for
           December 31, 1997. As noted below, basic and diluted EPS are the same
           for the years ended December 31, 1996 and 1995.

<TABLE>
<CAPTION>

                                            INCOME          SHARES     PER SHARE
                                          (NUMERATOR)  (DENOMINATOR)    AMOUNT
<S>                                       <C>              <C>          <C>    
           BASIC EPS
           ---------
             Income available to
              common stockholders         $1,781,613       6,224,241    $   .29
                                                                        =======

             Effect of dilutive
              securities (net of tax)
               5.5% convertible bond          35,200        500,000
               Options                        15,017        192,000
                                              ------        -------


           DILUTED EPS
           -----------
             Income available to
              common stockholders and
              assumed conversions         $1,831,830      6,916,241     $   .26
                                          ==========      =========     =======
</TABLE>


           At December 31, 1997 and 1995, 1,440,980 and 1,248,980 stock options
           and warrants not associated with convertible debt were excluded from
           the computation of diluted EPS because the exercise price was greater
           than the average market price of the common shares. At December 31,
           1996, all potential common stock would be anti-dilutive due to the
           net loss. At December 31, 1995, all outstanding stock options and
           warrants were excluded from diluted EPS because the exercise price
           was greater than the average market price of the common shares.








                                      II-29


<PAGE>   38


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



NOTE 11.   RELATED PARTY TRANSACTIONS

      A.   PARTNERSHIP OWNERSHIP

           Certain officers and directors own, in the aggregate, less than 6% of
           the outstanding limited partnership interests of a limited
           partnership of which a subsidiary of the Company is the managing
           general partner.

      B.   SALE OF ASSETS TO A RELATED PARTY

           Effective January 1, 1995, the Company sold the operating assets of a
           subsidiary's retail liquor store and two lounges in Florida to MHK
           Corp., a company owned by certain of the Company's officers and
           directors. The purchase price was equivalent to the net book value of
           the net assets, with no gain or loss recognized, totaling $574,949,
           as adjusted for certain 1995 transactions.

           The purchase price is evidenced by a promissory note bearing interest
           at 9%. The note accrued interest from the effective date of the sale
           through June 30, 1996 at which time the total accrued interest of
           $77,618 was added to the original sale price for a total amended
           principal sum of $652,567. The note is payable in monthly
           installments of $8,266 including interest, from July 1, 1996 through
           June 1, 2006 with the balance fully amortized.

           At April 15, 1996, the Company combined all advances to MHK Corp.
           into a promissory note totaling $156,868 earning interest of 9% which
           accrues from July 1, 1996 until paid. The note will be payable in
           monthly installments, including interest, of $1,987 from July 1, 1996
           through June 1, 2006 with the balance fully amortized.

           The notes receivable due from MHK Corp. are collateralized by the
           assets of a lounge and a retail liquor store. The Company has
           received additional collateral in the form of a security interest on
           real estate in Ohio, an assignment of the lease and rents associated
           to that property as well as the leasehold interest in a Florida
           property leased by MHK Corp. and subleased to a third party, and a
           pledge of the common stock of MHK Corp.

           Management's current estimate of the business activities of these
           Florida operations combined with the rental operations is that they
           will earn sufficient cash flow to amortize the notes. No further
           advances or support is expected by the Company. If the notes are not
           being amortized, an allowance for non-collectibility will be
           considered absent other remedies not considered at this time.

      C.   NOTES RECEIVABLE FROM OFFICERS AND RELATED PARTIES

           At December 31, 1997 and 1996, the notes receivable amounts due from
           MHK Corp. approximate $730,000 and $800,000, respectively. Interest
           income totaling $68,328 and $76,668 for the year ended December 31,
           1997 and 1996, respectively is included in "interest expense, net".
           Refer to Note 11B for the related party transactions and applicable
           collateral for 1995 activity.

           At December 31, 1997 and 1996, the President and CEO of the Company
           had outstanding advances totaling approximately $213,000 and
           $243,000, respectively. The President/CEO has granted a security
           interest in certain collateral to enhance the realization of the
           indebtedness, which is evidenced by a non-interest bearing promissory
           note. A representation has been made that the amount will not further
           increase and the existing balance will be reduced by $25,000 annually
           in 1998 and subsequent years.

                                      II-30
<PAGE>   39


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 11.  RELATED PARTY TRANSACTIONS (CONTINUED)

      C.   NOTES RECEIVABLE FROM OFFICERS AND RELATED PARTIES (CONTINUED)

           In addition, pursuant to a ten year lease entered into in 1985, the
           Company leased a warehouse facility from two of the officers and
           directors of MHK Corp. Effective May 1, 1992, a renewal option was
           exercised on the lease, extending its term to 2005. In January 1996,
           the officers sold a portion of the property and terminated the lease
           with the Company. The remaining parcel is pledged as additional
           collateral toward a note due the Company from the sale of the liquor
           operations (see Note 11B).

      D.   LIFE INSURANCE PREMIUMS RECEIVABLE

           The balance sheet includes $972,471 and $865,299 at December 31, 1997
           and 1996 respectively, under the caption "Life insurance premiums
           receivable". The Company, pursuant to agreements, has purchased life
           insurance on the lives of certain officers and key employees on a
           "split-dollar" basis. The program is designed so that payments the
           Company makes on behalf of each officer are collateralized by
           assignments of the related life insurance policies (i.e., the
           accumulated policy cash value, the policy death benefit, or a
           combination thereof). The life insurance premiums receivables are
           noninterest-bearing. The insured parties own the policies and, with
           the consent of the Company, are permitted to borrow from the cash
           surrender values of the policies. Under the "split-dollar"
           agreements, the Company advances the premium payments and upon the
           death of the insured would receive the return of such advances from
           the death benefits or from cash value (without termination of the
           policy) at such other times (i.e. termination of employment) prior to
           the death of the insured.

           During 1995, the Company restored a $376,000 reserve that had been
           recorded in 1991 to reduce life insurance premiums receivable.
           Management believes the reserve is no longer necessary due to the
           improvement in operations and increased cash values over the last
           four years. By Amendment No. 1 to the "split dollar" agreement, the
           applicable officers of the Company recognize the premiums receivable
           not collateralized by the policy cash surrender values of $375,500 at
           December 31, 1997, are their personal responsibility if not collected
           through the respective policies as long as the Company continues to
           maintain the policies. The Company has represented its intention and
           obligation to maintain the policies. The individuals have agreed to
           provide additional collateral, to the Company, by pledging common
           shares they own in the Company to enhance the realization of these
           receivables.

      E.   NOTES PAYABLE TO OFFICER

           In January 1996, the Company borrowed the sum of $300,000 from Marvin
           D. Kantor, a director and the Chairman of the Board of the Company.
           In September 1996, the Company borrowed an additional $60,000 (the
           "Loans"). The Loans were obtained to meet certain short-term working
           capital needs of the Company. The Loans bear interest at 8.5% per
           annum. The Loans are payable in monthly installments and are
           collateralized by a pledge of the Company's common stock held in
           Wendt-Bristol Diagnostics Company. The balance outstanding at
           December 31, 1996 was $55,000 and was repaid in full in 1997.







                                      II-31

<PAGE>   40


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



NOTE 11.   RELATED PARTY TRANSACTIONS (CONTINUED)

      F.   MANAGEMENT FEES FROM UNCONSOLIDATED AFFILIATES

           A subsidiary of the Company, Diagnostics, which owns equity interests
           in limited liability companies (See Note 1B), is the management agent
           for one of the companies. Management fees totaling $67,600 were
           included in the Consolidated Statements of Operations for the year
           ended December 31, 1997.

NOTE 12.  COMMITMENTS AND CONTINGENCIES

      A.   REAL ESTATE RELATED TO PREVIOUSLY SOLD DIVISION

           In October 1991, the Company sold substantially all of the assets
           (other than real estate) of its manufacturing division located in New
           Jersey.

           As part of that transaction, the buyer entered into a lease on the
           physical facilities which initially included a purchase option. The
           buyer is responsible for taxes, maintenance, and insurance costs.
           Rental income has been recorded on a straight-line basis over the
           term of the lease.

           During September 1994, the buyer/tenant instituted arbitration
           proceedings against the Company. The Company and the tenant settled
           in June 1995. The settlement agreement provides (a) a revised term of
           ten years for the lease commencing January 1, 1995, (b) monthly
           rental of $28,000 for the first five years and $30,000 for the
           remaining five years, (c) identification of approximately $200,000 in
           repairs, of which the tenant has paid $40,000; such repairs were
           subsequently completed, (d) tenant's option to renew for an
           additional two years at $10,000 per month; if option not exercised,
           the tenant is obligated to pay $10,000 per month in the eleventh year
           despite the fact that premises are vacated and (e) tenant abandoned
           its option to purchase the premises as well as any role in the
           Company's compliance with the environmental laws of the State of New
           Jersey.

           As a result of compliance with the State of New Jersey environmental
           laws and in connection with the sale of the division, the Company is
           in the process of a clean-up of contamination caused by prior
           ownership whereby the property had been contaminated by leaking
           underground storage tanks and the discharge of certain industrial
           fluids into the sewage system. The Company spent approximately
           $56,000, $50,000, and $61,000 related to the clean-up during the
           years ended December 31, 1997, 1996 and 1995, respectively. Costs
           attributable to the project, incurred or accrued, have been
           capitalized. The Company's consulting engineers have completed a
           study of the contamination and have submitted a clean-up plan to the
           appropriate State of New Jersey department. In December 1995, the
           State of New Jersey granted a conditional approval of the plan with a
           two year monitoring period. The remaining estimated costs to complete
           the plan are approximately $100,000. Refer to Note 3 regarding
           restricted cash set aside to satisfy the New Jersey Department of
           Environmental Protection and Energy.









                                      II-32


<PAGE>   41


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)




NOTE 12.           COMMITMENTS AND CONTINGENCIES (CONTINUED)

      B.   RENTAL AGREEMENT ON A NURSING HOME

           The landlord of a nursing home facility filed a complaint for
           Declaratory Judgment against a subsidiary of the Company seeking a
           judgment that the subsidiary is in default of the lease agreement and
           seeks the right to purchase the license of the nursing home. The
           landlord had filed a Motion for Summary Judgment and was denied by
           the court. The subsidiary is presently current on its rent obligation
           but is disputing the calculation of the late rent charges imposed
           under the lease. Although not directly subject to this complaint, the
           Company is seeking payment of a receivable related to a Share
           Transfer Agreement with the subsidiary of the Company. Such amounts
           became due in February 1996, one year after final settlement of
           certain State of Ohio Medicaid receivables, as provided in the
           Agreement. See Item 3. Legal Proceedings for additional discussion.

           In the opinion of management, the ultimate costs and liability to the
           Company and its subsidiaries as a result of this legal proceeding
           will not be material. It is further believed that the receivable at
           December 31, 1997 totaling $400,000 (see Note 4(e)) will be realized
           through the ultimate settlement of the entire dispute in the near
           term.

      C.   INSURANCE COMMISSIONER OF THE COMMONWEALTH OF PENNSYLVANIA, AS THE
           STATUTORY LIQUIDATOR FOR CORPORATE LIFE INSURANCE COMPANY
           (UNAFFILIATED THIRD PARTY)

           On February 20, 1995, the Company entered into a Stock-Exchange
           Agreement with the Insurance Commissioner of the Commonwealth of
           Pennsylvania, as the Statutory Liquidator of Corporate Life Insurance
           Company (CLIC) (see Note 2). The Statutory Liquidator caused a Writ
           of Summons in the Commonwealth Court of Pennsylvania (Case No.
           509-MD-1995) to be served on the Company indicating in its entirety
           that Statutory Liquidator has commenced an unspecified action against
           the Company which counsel for the Statutory Liquidator advised the
           Company that the Statutory Liquidator intends to seek performance in
           the action for the amounts due it from the Company. During 1996, the
           Company paid $300,000 toward the purchase of the shares, leaving a
           balance of $325,000 at December 31, 1996. The Company subsequently
           paid the balance during the first quarter of 1997.

           On March 19, 1997, the Insurance Commissioner of the Commonwealth of
           Pennsylvania, as the Statutory Liquidator of CLIC dismissed with
           prejudice the action it had commenced against the Company in the
           Commonwealth Court of Pennsylvania.

           Additionally, as a result of a Federal investigation of the
           activities of CLIC, the Company had been requested to furnish
           documents and information in its files related to transactions with
           CLIC and Life Holdings, Inc. The Company complied with this request
           and is cooperating fully with this on-going investigation.









                                      II-33


<PAGE>   42


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



NOTE 12.   COMMITMENTS AND CONTINGENCIES (CONTINUED)

      D.   DEBT GUARANTEES

           The Company or its subsidiaries is contingently liable as a guarantor
           of long-term debt and capital lease obligations totaling $1,775,000
           for medical equipment that is currently in or will be placed in
           service by entities that a subsidiary, Wendt-Bristol Diagnostics
           Company ("Diagnostics"), has ownership interests varying from 22.5%
           to 50%. In addition, the Company is contingently liable for
           $3,500,000 as guarantor of debt on the construction of a medical and
           office complex that Diagnostics has a 50% ownership interest in.

           Additionally, the Company and Diagnostics are contingently liable for
           a two year lease agreement and the purchase price ($1,400,000) of a
           building used by an entity in which Diagnostics has a 22.5% ownership
           interest. The Company and Diagnostic are currently 100% contingently
           liable for the two year lease and purchase price.

NOTE 13.   INDUSTRY SEGMENT DATA

           Industry segment data for years ended December 31, 1997, 1996 and
           1995 included in Item 1 ("Industry Segments") of this report is an
           integral part of these financial statements.


NOTE 14.   RETIREMENT PLAN

           The Company adopted, effective July 1, 1989, a retirement plan, under
           Section 401(k) of the Internal Revenue Code, covering substantially
           all employees with more than one year of service. The plan provides
           for the Company to contribute, on an annual basis, 10% of the
           employees' eligible deferred compensation; such employer contribution
           is in the form of Company common stock. The Company values the actual
           shares transferred to the Plan from the treasury at the respective
           December 31 market value. During 1997, 1996 and 1995, the Company
           contributed 6,306, 16,262, and 21,764 shares, and recorded an expense
           of $9,458, $8,733, and $9,900, respectively.




















                                      II-34


<PAGE>   43


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 15.   SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITY

<TABLE>
<CAPTION>

                                                                                1997           1996        1995
                                                                                ----           ----        ----
<S>                                                                           <C>              <C>         <C>
           SUPPLEMENTAL DISCLOSURES OF
            NONCASH INVESTING AND
             FINANCING ACTIVITY Note receivable from officers and
             related parties was reduced by assigning a non-related
             party note receivable
               Increase in notes receivable                                   $105,000
               Decrease in notes receivable from
                 officers and related parties                                  (46,826)
               Decrease in accrued interest payable                            (58,174)

             A subsidiary of the Company is a general partner in a
             limited partnership. Capital was reallocated from the
             general partner to the limited partners resulting in a
             receivable from the limited partners
               Increase in miscellaneous receivables                          $440,000
               Increase in minority interests                                 (440,000)

             A Partnership, which the Company is the general partner,
             transferred equipment,
             at net book value to an unconsolidated
             affiliate
               Increase in advances to unconsolidated
                 affiliate                                                     $40,000
               Decrease in property, plant and
                 equipment, net                                                (40,000)

             Two subsidiaries of the Company sold nursing home assets 
             Additionally, HUD replacement reserves are to be returned
             as part of the sale 
               Increase in notes receivable, current                        $2,923,794
               Increase in miscellaneous receivables                           261,327
               Decrease in restricted cash                                    (264,287)
               Decrease in prepaid expenses                                    (11,535)
               Decrease in property, plant and
                 equipment, net                                             (7,064,636)
               Decrease in excess of cost over assets
                 of businesses and subsidiaries                               (189,096)
                 acquired
               Decrease in deferred charges and other
                 assets                                                       (317,120)
               Increase in accrued expenses                                   (394,367)
               Decrease in debt                                              6,083,927
               Gain on sale of nursing home assets,
                net of cash proceeds ($750,000)                             (1,028,007)
</TABLE>




                                      II-35


<PAGE>   44


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



NOTE 15.  SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITY 
          (CONTINUED)

<TABLE>
<CAPTION>

                                                                        1997           1996             1995
                                                                        ----           ----             ----
<S>                                                                   <C>           <C>               <C>
                      A subsidiary and a  partnership, of which
                      the company is the managing general
                      partner, purchased equipment which was
                      financed by entering into an
                      installment finance agreement.
                        Increase in equipment cost, net               $ 942,415     $ 875,626
                        Increase in long-term obligations              (942,415)     (875,626)

                      Subsidiaries of the Company sold trade 
                      accounts receivable, a portion of which 
                      was used for certain related fees
                        Increase in deferred costs                                  $   27,500
                        Increase in miscellaneous accounts
                          receivable reserves                                          185,507
                        Decrease in notes payable                                       53,155
                        Decrease in accounts receivable - sold                       (266,162)

                      Common stock of the Company 
                      (2,000,000 shares) and common stock of 
                      a subsidiary (300,000 shares) were 
                      exchanged for 30,000 shares of preferred 
                      stock, par value $100 per share, owned by 
                      the Company in Life Holdings, Inc.
                        Decrease in investment in preferred
                         stock, at cost                                                             $(3,000,000)
                        Decrease in minority interest                                                   512,653
                        Increase in treasury stock                                                    2,487,347

                      The Company purchased common stock 
                      (500,000 shares) of the Company for a 
                      price of $.80 per share and common stock 
                      of a subsidiary (45,000 shares) for a price
                      of $5.00 per share
                        Increase in accrued expenses and other
                         liabilities                                                                $  (625,000)
                        Increase in treasury stock                                                      400,000
                        Increase in excess of cost of assets of                                     
                         businesses and subsidiaries acquired,                                      
                         less amortization                                                          $   148,103
                        Decrease in minority interest                                                    76,897
                                                                                               
</TABLE>









                                      II-36


<PAGE>   45


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 15.  SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITY 
          (CONTINUED)

<TABLE>
<CAPTION>

                                                                   1997         1996          1995
                                                                   ----         ----          ----
<S>                                                                                         <C>      
           A subsidiary of the Company sold
           the operating assets, net of associated
           liabilities to a related party in exchange
           for an interest bearing note (Note 11B)
             Increase in notes receivable from
              officers, employees and related parties,
              net of amounts payable:
               Note arising in transaction                                                  $ 574,949
               Other                                                                          (55,936)
             Decrease in accounts payable                                                      48,624
             Decrease in accrued expenses and                                               
              other liabilities                                                                83,006
             Decrease in trade and miscellaneous                                            
              receivables                                                                      (4,668)
             Decrease in inventories                                                         (126,703)
             Decrease in prepaid expenses and other                                         
              current assets                                                                  (38,409)
             Decrease in property, plant and                                                
              equipment, net                                                                 (240,079)
             Decrease in deferred charges                                                        (500)
             Decrease in other assets                                                        (240,284)
                                                                                            
           A partnership, of which the Company is                                           
           the managing general partner, traded - in                                        
           a piece of equipment for a substantially                                         
           improved model, which was financed by                                            
           entering into an installment finance                                             
           agreement, which included a refinancing                                          
           of existing debt                                                                 
             Increase in equipment cost, net                                                $ 642,692
             Increase in long-term obligations                                               (642,692)
                                                                                            
           A subsidiary of the Company incurred                                             
           costs for the construction of an                                                 
           Alzheimer's and related syndromes                                                
           facility with draws against a HUD-                                               
           insured financing agreement                                                      
             Increase in property, plant and                                                
              equipment                                                                     $       -
             Increase in long-term obligations                                               (166,826)
             Increase in prepaid expenses and other                                         
              current assets                                                                   45,116
             Decrease in accounts payable                                                     121,710
</TABLE>





                                      II-37


<PAGE>   46


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



NOTE 16.   FAIR VALUE OF FINANCIAL INSTRUMENTS

           Financial Accounting Standard Board ("FASB") Statement No. 107,
           "Disclosure about Fair Value of Financial Instruments", is effective
           for the Company's year ended December 31, 1995 and thereafter. The
           statement requires disclosure of fair value information about
           financial instruments. For certain of the Company's financial
           instruments including cash, receivables, accounts and notes payable,
           and other accrued liabilities the carrying amounts approximate fair
           value due to their short maturities. For long-term notes receivable
           and notes payable, the Company believes the carrying value will
           approximate their fair value. For the subordinated note, the Company
           believes the carrying amount approximates fair value with the
           conversion feature to the Company's common stock available.

           At December 31, 1997 and 1996, management believes the carrying
           amount of these long-term receivables are not impaired and will be
           realized in the normal course of business in accordance with their
           contract terms. The fair value of debt is believed to be
           approximately equal to their current carrying value based on current
           market prices.

           At December 31, 1997, the Company had outstanding multiples of three
           month foreign exchange futures contracts that were to expire March,
           1998. Management's intent is to continue to repurchase these
           contracts (currently holding June 1998 expirations) as a hedge
           against the Swiss Franc on 5,000,000 Swiss Franc 5% bonds payable in
           February, 2002. As these futures contracts are not for trading or
           speculative purposes, the Company has deferred the current loss of
           approximately $104,000 at December 31, 1997 until 2002 when the bond
           becomes due and a determination of the cumulative gain or loss is
           known.


                                      II-38

<PAGE>   47

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

           The following table and the text following the table set forth
           certain information with respect to the Directors and Executive
           Officers (being all of the Directors of the Company, except for Dr.
           Penn, Mr. Del Ponte and Mr. Levine) of the Company. Each Director
           serves until the next Annual Meeting of Stockholders of the Company
           and until his successor is elected and qualifies, unless such
           Director resigns or dies prior thereto. Each Executive Officer serves
           at the pleasure of the Board.

<TABLE>
<CAPTION>

                 NAME                     AGE          CURRENT POSITIONS WITH COMPANY
                 ----                     ---          ------------------------------

<S>                                        <C>    <C>                               
           Marvin D. Kantor                69     Chairman of the Board, Director

           Sheldon A. Gold                 55     President, Treasurer, Chief Executive Officer,
                                                   Director, member of Audit Committee

           Reed A. Martin                  44     Executive Vice President, Chief Operating
                                                   Officer and Director

           Harold T. Kantor                64     Vice Chairman of the Board, Director

           Paul H. Levine                  57     Director, member of Audit Committee

           Gerald M. Penn                  60     Director, Vice President of Medical Affairs (1998),
                                                   member of Audit Committee until December
                                                   31, 1997

           Clemente Del Ponte              55     Director

           Charles R. Cicerchi             38     Vice President of Finance, Principal Financial
                                                   and Accounting Officer
</TABLE>

           Marvin D. Kantor has been Chairman of the Board since May 1988; prior
           to June 1993 he had also been President and Chief Executive Officer
           of the Company and W-B since May 1988. In addition, he is a Director
           of all of the Company's subsidiaries. He is a brother of Harold T.
           Kantor.

           Sheldon A. Gold is a certified public accountant and has been
           President and Chief Executive Officer of the Company since June 1993.
           Prior thereto and since March 1992 he had been Vice Chairman of the
           Board and since May 1988 he had been Executive Vice President,
           Treasurer, and Chief Financial and Accounting Officer of the Company.
           He again became Treasurer and Chief Financial and Accounting Officer
           of the Company in July 1992, until May, 1996. In addition, he has
           been a Director of the Company since May 1988. He has also been the
           President of W-B since June 1993, Executive Vice President between
           1979 and June 1993, and Chief Financial and Accounting Officer of W-B
           since 1979 through May 1996.

           Reed A. Martin, elected as a Director in May 1992, has since June
           1993 been Executive Vice President and Chief Operating Officer, since
           May 1991 he had been a Senior Vice President of the Company
           supervising operations. Mr. Martin is a son-in-law of Marvin D.
           Kantor.

           Harold T. Kantor has been Vice-Chairman since June 1993 and a
           Director of the Company since May 1988. In addition, he has been Vice
           President of W-B since October 1985. He is a brother of Marvin D.
           Kantor.


                                      III-1
<PAGE>   48


ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (CONTINUED)

           Paul H. Levine has been a Director since January, 1990 and serves on
           the audit and stock option committee. He is President of Nichols and
           Levine Asset Management, Inc., a registered investment advisor. Mr.
           Levine is an attorney and a certified public accountant and has been
           active in venture capital, investment banking and financial
           consulting since 1972. He is also a Director of Learning
           Technologies, Inc., Bio-Catalytic Enterprises, Inc., and Retirement
           Strategies Group, Ltd.

           Dr. Gerald M. Penn, M.D., Ph.D., was elected as a director on
           February 8, 1995 and became the Vice President of Medical Affairs of
           the Company on January 1, 1998. He serves on the stock option
           committee and also served on the audit committee through December 31,
           1997. Dr. Penn was previously Chairman and Medical Director of the
           Department of Pathology at Grant Medical Center 1981-1996. Educated
           at The Ohio State University, Doctor Penn received his medical degree
           from the College of Medicine and a doctoral degree in biochemistry.
           He completed a pathology residency at University Hospital and
           postgraduate training at The Rockefeller University, New York, NY. He
           is board certified in clinical and anatomical pathology,
           immunopathology and hematopathology. He serves on the Board of
           Trustees of the Columbus Medical Association Foundation.

           Clemente Del Ponte was elected as a director of the Company on June
           18, 1997. For the past five years he has been the managing director
           of McBridge Advisory, Ltd., an import/export consulting agency. Prior
           thereto, he was an independent consulting agent. Mr. Del Ponte
           resides in Lugano, Switzerland.

           Charles R. Cicerchi is a certified public accountant and has been
           Vice President of Finance since joining the Company in September,
           1994. Prior thereto, he was Controller of Speer Industries, a
           mechanical contractor, where he was responsible for all accounting
           and treasury functions from the period 1990 to 1994. Since May, 1996
           he has been the Principal Financial and Accounting Officer of the
           Company.

ITEM 11.   EXECUTIVE COMPENSATION

           GENERAL. The following table sets forth the total annual compensation
           paid or accrued by the Company and its subsidiaries to or for the
           account of (i) the President (the chief executive officer) of the
           Company and (ii) for the Company's most highly compensated executive
           officers other than the chief executive officer who were serving as
           executive officers at December 31, 1997 and with respect to each of
           whom such compensation exceeded $100,000.


                                      III-2


<PAGE>   49


ITEM 11.   EXECUTIVE COMPENSATION (CONTINUED)



                    SUMMARY COMPENSATION TABLE
                    --------------------------
<TABLE>
<CAPTION>

                                                                    LONG-TERM
                                                                    COMPENSATION
                                                                    ------------

                                          ANNUAL COMPENSATION       AWARDS
                                          -------------------       ------

                                                                    SECURITIES
                                                                    UNDERLYING
                   NAME AND                                         OPTIONS/               ALL OTHER
              PRINCIPAL POSITION       YEAR          SALARY ($)     SARS (#)              COMP. ($)**
              ------------------       ----          ----------     --------              -----------

<S>                                    <C>         <C>              <C>                     <C>     
           Sheldon A. Gold             1997        $    160,000        *                    $ 15,532
           President and Chief         1996             150,000     50,000/0                     -
           Executive Officer           1995             140,000        *                     -

           Marvin D. Kantor            1997             140,000        *                      65,028
           Chairman of the             1996             130,000        *                      75,866
           Board                       1995             127,404        *                      65,028
<FN>
           --------------
           *   Not applicable

           ** Includes life insurance premiums paid by the Company for
           each of named persons (see Note 11 of the Notes to the
           Consolidated Financial Statements herein). For the fiscal year
           ended December 31, 1997, the amounts paid by the Company for
           each of the named persons is:
</TABLE>

<TABLE>
<CAPTION>
                                                              LIFE
           NAME                                             INSURANCE
           ----                                             ---------

<S>                                                        <C>        
           Sheldon A. Gold                                 $    15,532
           Marvin D. Kantor                                     65,028
</TABLE>


















                                      III-3


<PAGE>   50


ITEM 11.   EXECUTIVE COMPENSATION (CONTINUED)

           OPTIONS. The following table sets forth information respecting
           the grant by the Company of options to purchase shares of its
           Common Stock and other information related to options granted
           by the Company:

                 OPTION/SAR GRANTS IN LAST FISCAL YEAR
                 -------------------------------------

<TABLE>
<CAPTION>

                                      INDIVIDUAL GRANTS
                                      -----------------


                                 NUMBER OF        % OF TOTAL
                                 SECURITIES      OPTIONS/SARS     EXERCISE
                                 UNDERLYING       GRANTED TO       OR BASE                  GRANT DATE
                                OPTIONS/SARS     EMPLOYEES IN       PRICE    EXPIRATION      PRESENT
                   NAME         GRANTED(#)        FISCAL YEAR      ($/SH)       DATE          VALUE($)
                   ----         -----------       -----------      ------       ----        ---------

<S>                             <C>              <C>               <C>          <C>         <C>
             None
</TABLE>


           AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
           --------------------------------------------------------------
                               OPTION/SAR VALUES
                               -----------------

<TABLE>
<CAPTION>

                                                                                           VALUE OF
                                                                        NUMBER OF         UNEXERCISED
                                                                       UNEXERCISED       IN-THE-MONEY
                                                                     OPTIONS/SARS AT     OPTIONS/SARS
                                                                      FY-END-# SHRS       AT FY END-$
                                      SHARES
                                     ACQUIRED          VALUE          EXERCISABLE/       EXERCISABLE/
                                   ON EXERCISE        REALIZED        UNEXERCISABLE      UNEXERCISABLE

<S>                                     <C>              <C>            <C>                <C>     
           Sheldon A. Gold              0                0              50,000/0           $62,500/0
</TABLE>

           ----------
           All options held by Mr. Sheldon A. Gold were exercisable at December
           31, 1997. All were "in-the-money". American Stock Exchange reported
           quotations for the Common Stock of the Company on December 31, 1997,
           are: high, $1.25; low $1.1875; and close, $1.25; such prices on
           February 27, 1998 are: high, $1.25; low, $1.25; and close, $1.25. The
           exercise price of each of the options of Mr. Sheldon A. Gold is $.875
           and the options expire on May 23, 2001.









                                      III-4


<PAGE>   51


ITEM 11.   EXECUTIVE COMPENSATION (CONTINUED)

           STOCK OPTION PLAN. In 1983, the Company adopted an Incentive Stock
           Option Plan which was amended in 1989 (as amended, the "Plan").
           Pursuant to the Plan, the Company is authorized to grant stock
           options to purchase up to 250,000 shares of Common Stock of the
           Company, subject to anti-dilution provisions, to key personnel,
           including eligible directors, officers and employees of the Company.
           In the event that any option granted under the Plan shall terminate
           prior to its exercise in full for any reason, then the shares subject
           to the option not acquired by exercise of the option shall be added
           to the shares otherwise available for the grant of options under the
           Plan. Options granted under the Plan may be those intended to qualify
           as "incentive stock options", as defined in Section 422 of the
           Internal Revenue Code of 1986, as amended (the "Code"), or those not
           intended so to qualify. At February 28, 1998, options to purchase an
           aggregate of 52,000 shares of Common Stock of the Company, subject to
           anti-dilution provisions, could still be granted under the Plan.

           The Plan is currently administered by a Committee of the Board of
           Directors of the Company consisting of Messrs. Levine and Penn, which
           have the authority (except with respect to stock options to
           Non-Employee Directors [as defined in the Plan, i.e., directors of
           the Company who are not also employees of the Company, who have
           served as directors for twelve consecutive full calendar months, and
           who at the end of such period are continuing to serve as directors]
           which are mandated by the Plan) to determine the grantees of the
           options, whether options granted are to be "incentive stock options"
           or non-incentive stock options except that Non-Employee Directors
           must receive non-incentive stock options, the number of shares to be
           covered by each option, the time at which each option is exercisable,
           the method of payment, and certain other provisions of the option.
           Options may be granted for a term not to exceed 10 years (five years
           with respect to a 10% stockholder) and are not transferable or
           assignable other than by will or the laws of descent and
           distribution.

           An option may be exercised within twelve months after the death or
           disability of the optionee, to the extent the option was exercisable
           at the time of death or disability. The exercise price of all options
           (other than non-incentive stock options granted to persons other than
           Non-Employee Directors) must be at least equal to the fair market
           value of shares of Common Stock of the Company on the date of grant,
           or 110% of such fair market value with respect to any optionee who is
           a 10% stockholder of the Company.

           The Plan will terminate on April 25, 2001. The Board of Directors of
           the Company may, however, terminate the Plan at any time prior to
           such date. Termination of the Plan will not alter or impair, without
           the consent of the optionee, any of the rights or obligations under
           any option theretofore granted under the Plan.

           The Plan provides that no option granted thereunder shall be
           exercisable if the Company shall, at any time and in its sole
           discretion, determine that (i) the listing upon any securities
           exchange, registration or qualification under any state or federal
           law of any shares otherwise deliverable upon such exercise, or (ii)
           the consent or approval of any regulatory body of the satisfaction of
           withholding tax or other withholding liabilities, is necessary or
           appropriate in connection with such exercise. In any of such events,
           the exercisability of the option is suspended and is not effective
           unless and until such withholding, listing, registration,
           qualification or approval shall have been effected or obtained free
           of any conditions not acceptable to the Company in its sole
           discretion, notwithstanding any termination of any option or any
           portion of any option during the period when exercisability has been
           suspended.








                                      III-5


<PAGE>   52


ITEM 11.   EXECUTIVE COMPENSATION (CONTINUED)

           The Plan also provides that the Board or, if so designated, the
           Committee (of directors of the Company appointed to administer the
           Plan) may require, as a condition to the right to exercise an option,
           that the Company receive from the option holder, at the time of any
           such exercise, the representation, warranties and agreements to the
           effect that the shares acquired upon exercise of such options are
           being purchased by the option holder only for investment and without
           any present intention to sell or otherwise distribute such shares and
           that the option holder will not dispose of such shares in
           transactions which, in the opinion of counsel to the Company, would
           violate the registration provisions of the Securities Act of 1933 and
           the rules and regulations thereunder. The certificates issued to
           evidence such shares will bear appropriate legends summarizing such
           restriction on the disposition thereof.

           SPLIT-DOLLAR INSURANCE POLICIES. The following table sets forth
           information as of December 31, 1997, concerning split-dollar
           insurance policies on the lives of the named persons in the Summary
           Compensation Table (1):

<TABLE>
<CAPTION>

                                         INITIAL FACE                          INSURANCE PREMIUMS
                                          AMOUNT OF                           ADVANCED IN EXCESS OF
           NAME OF INSURED (2)              POLICY              ISSUED           CASH VALUE (5)
           -------------------              ------              ------           --------------

<S>                                     <C>                  <C>                  <C>      
           Marvin D. Kantor             $  1,500,000 (3)     06/08/92             $ 421,000
           Sheldon A. Gold                   375,000 (4)     09/11/86                67,000
</TABLE>

           The Company, pursuant to split-dollar agreements, has purchased life
           insurance on the lives of certain officers (including named persons
           in the Summary Compensation Table) and key employees on a
           "split-dollar" basis. The program is designed so that advances of
           premium payments (the "advances") the Company makes on behalf of each
           insured are collateralized by assignment of the related life
           insurance policy (i.e., the accumulated policy cash value and the
           policy death benefit).

           The insured person owns the policy and, with the consent of the
           Company, is permitted to borrow from the cash surrender value of the
           policy.

           Under the "split-dollar" agreements, the Company upon death or other
           separation from service of the insured receives the return of the
           advances from the death benefits or cash surrender value, if any, of
           the policy, as the case may be.

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

           (1)    See footnote to the Summary Compensation Table for information
                  respecting Company premium payments for the fiscal year ended
                  December 31, 1997.

           (2)    The beneficiaries of the policies are the spouses of the
                  insured.

           (3)    The policy is an increasing death benefit policy (through use
                  of dividends) and has replaced a previous universal life
                  policy.

           (4)    The policy is of the universal life nature, whereby the cash
                  value is added to the face value at all times, including
                  death.

           (5)    Represents monies advanced by the Company in excess of cash
                  value available in the policies.







                                      III-6


<PAGE>   53


ITEM 11.   EXECUTIVE COMPENSATION (CONTINUED)

           Additionally, the insureds/officers of the Company have accepted
           personal responsibility for these amounts to the extent they are not
           recovered through the respective policies. The Company has
           represented its intention and obligation to maintain the policies.
           The individuals have enhanced the realization of these receivables by
           pledging a portion of their common stock ownership in the Company.

           SECTION 401(k) PLAN. Effective July 1, 1989, the Company established
           a Plan and Trust (the "Plan") intended to comply with the provisions
           of Section 401(k) of the Internal Revenue Code.

           All full-time (as defined) employees of the Company and of its
           subsidiaries (collectively referred to under this sub-caption as the
           "Company") who were employees on July 1, 1989, and persons who became
           employees thereafter and are continuously employed for one year are
           eligible to participate in the Plan. Under the Plan, an eligible
           employee who elects to participate defers a portion (the "Portion")
           of his compensation, as defined, the Portion being up to the maximum
           which will not cause the Plan to favor Highly-Compensated Employees,
           as defined, or cause the Plan to exceed the maximum amount allowable
           as a deduction to the company under Section 404 of the Code. The
           Company contributes under the Plan, for the account of such eligible
           employee, an amount equal to the Portion; in substance the
           contribution is being made by the eligible employee.

           The Plan provides that the Company shall make a contribution (which
           is in addition to the contribution referred to in the preceding
           sentence and shall be in shares of Common Stock of the Company) equal
           to 10% of the aggregate amount of all contributions made by
           participants, except that for this purpose a maximum of 10% of the
           compensation of each participant is taken into account. The Plan also
           provides that the Company may contribute a discretionary amount to
           all participants out of its current or accumulated Net Profit, as
           defined, for the applicable Fiscal Year, as defined.

           All contributions of the participant vest immediately. Contributions
           of the Company vest in accordance with the number of Years of
           Service, as defined, of the participant with vesting of 20% after one
           year of Service and thereafter increasing by 20% increments for each
           Year so that after five years or more of Service, the Company's
           contributions become fully vested. Notwithstanding the foregoing, the
           Company's contributions fully vest upon the retirement of a
           participant at his Normal Retirement Date or Early Retirement Date,
           as defined; upon the death of a participant before his Retirement
           Date, as defined, or certain other termination of his employment; in
           the event of a participant's Total and Permanent Disability, as
           defined, prior to his Retirement Date, as defined, or other
           Disability, as defined, prior to his Retirement Date or other
           termination of his employment; or in the event that the Plan is
           terminated in whole, or to the extent particular participants are
           affected thereby, in part.

           The Trustee under the Plan, Merrill Lynch Trust Company, invests cash
           contributed or otherwise held under the Plan as it is instructed by
           the employee participants, who have the discretion of fund selection.

           Distributions from the Plan are made on a participant's Normal
           Retirement Date, Early Retirement Date, death, Total and Permanent
           Disability, or the termination of employment for any reason other
           than the foregoing. Advance distributions on account of hardship may
           be made in limited circumstances as provided in the Plan.

           Payment of vested amounts are made in accordance with directions of
           the Committee, appointed by the Company to act under the Plan, either
           in one lump sum payment or in annual cash installments over a period
           not to exceed 10 years.




                                      III-7


<PAGE>   54


ITEM 11.   EXECUTIVE COMPENSATION (CONTINUED)

           During 1995, the Company did not make the contributions to the 401(k)
           plan on a timely basis. The IRS instituted an amnesty program for
           matters of this nature that the Company utilized to bring the
           contributions to a current status in 1996.

           COMPENSATION OF DIRECTORS. Non-employee Directors of the Company
           receive $650 for each meeting of the Board of Directors of the
           Company which they attend and such Directors are also reimbursed for
           any expenses incurred. In addition, beginning January 1, 1995 all
           non-employee directors are compensated $500 per month for serving as
           director of the Company. No additional amounts are paid for committee
           participation.

           In addition, Non-Employee Directors have been granted stock options
           under the Plan (see "Item 11. Executive Compensation - Stock Option
           Plan") to purchase shares of Common Stock of the Company.
           Non-Employee Directors are defined in the Plan as Directors of the
           Company who are not also employees of the Company, who have served as
           Directors for twelve consecutive full months, and who at the end of
           such period are continuing to serve as Directors. Dr. Gerald M. Penn
           was elected as a director in February, 1995 and was granted options
           on February 1, 1995 to purchase up to an aggregate of 10,000 shares,
           subject to anti-dilution provisions, at a price of $.375 per share.
           The Plan also provides for a grant of additional stock options to
           each Director who received an option ("initial option") as
           hereinbefore described, each of such additional options to provide
           for the purchase of an aggregate maximum of 1,000 shares of Common
           Stock of the Company at a price per share equal to the fair market
           value of the Common Stock of the Company on the date of grant,
           subject to anti-dilution provisions, one of such additional options
           to be granted on each successive anniversary of the date of grant of
           the initial option, provided that such Director continues on such
           anniversary to be a Non-Employee Director. Pursuant to this provision
           of the Plan, Mr. Levine received on July 11, 1993, options to
           purchase an aggregate of 1,000 shares of the common stock of the
           Company at a price of $1.0625 per share, subject to anti-dilution
           provisions; he received on July 11, 1994, options to purchase an
           aggregate of 1,000 shares of the common stock of the Company at a
           price of $.6875 per share, subject to anti-dilution provisions; he
           received on July 11, 1995, options to purchase an aggregate of 1,000
           shares of common stock of the Company at a price of $.4375 per share,
           subject to anti-dilution provisions; he received on July 11, 1996,
           options to purchase an aggregate of 1,000 shares of common stock of
           the Company at a price of $.875 per share, subject to anti-dilution
           provisions and he received on July 11, 1997, options to purchase an
           aggregate of 1,000 shares of common stock of the Company at a price
           of $1.1875 per share, subject to anti-dilution provisions. Dr. Penn
           received on February 1, 1996, options to purchase an aggregate of
           1,000 shares of common stock of the Company at a price of $.375 per
           share, subject to anti-dilution provisions, he received on February
           1, 1997, options to purchase an aggregate of 1,000 shares of common
           stock of the Company at a price of $1.435, subject to anti-dilution
           provisions and he received on February 1, 1998, options to purchase
           an aggregate of 1,000 shares of common stock of the Company at a
           price of $1.25 per share, subject to anti-dilution provisions. Each
           of the stock options referred to in this paragraph are exercisable
           commencing on the date of grant and ending on the fifth anniversary
           of such date. None of the options referred to in this paragraph have
           been exercised.














                                      III-8


<PAGE>   55


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

           The table below presents as of February 28, 1998, certain information
           (1) with respect to any person (including any "group" as that term is
           used in Section 13(d)(3) of the Securities Exchange Act of 1934, as
           amended ) who is known to the Company to be the beneficial owner of
           more than five percent of any class of the Company's voting
           securities and (2) as to each class of equity securities of the
           Company or any of its parents or subsidiaries, other than directors'
           qualifying shares, beneficially owned by each director and executive
           officer of the Company and by all directors and executive officers of
           the Company as a group.

<TABLE>
<CAPTION>

                                                                   AMOUNT AND NATURE AND          PERCENT
       TITLE OF CLASS                 NAME                       BENEFICIAL OWNERSHIP (1)       OF CLASS (2)
       --------------                 ----                       ------------------------       ------------

<S>                         <C>                                           <C>                        <C>   
        Common Stock         Marvin D. Kantor                             871,420                    13.79%
                             Two Nationwide Plaza
                             Suite 760
                             Columbus, Ohio 43215

        Common Stock         Harold T. Kantor                             247,475 (3)                 3.92%

        Common Stock         Sheldon A. Gold                              106,375 (4)                 1.68%

        Common Stock         Reed A. Martin                                40,351 (5)                     -

        Common Stock         Paul H. Levine                                 5,500 (6)                     -

        Common Stock         Dr. Gerald M. Penn                            16,000 (7)                     -

        Common Stock         Clemente Del Ponte                           655,200 (8)                10.37%
                             Dollard House
                             Wellington Quay
                             Dublin 2 Ireland

        Common Stock         All Directors and                          1,942,321 (9)                30.74%
                             Executive Officers
                             As a Group (7 persons)

        Common Stock         Gerald F. Schroer                            389,800                     6.17%
                             25109 Detroit Road
                             Westlake, Ohio 44145
<FN>
                  -------------------

                  (1)      The individuals named have direct ownership and sole
                           voting and investment power, except as otherwise
                           indicated.

                  (2)      Percent of class shown net of treasury shares (see
                           (9) below). Except as otherwise indicated, shares
                           owned by the individuals named represent less than 1%
                           of the outstanding shares of Common Stock of the
                           Company.
</TABLE>

                  -------------------
                  (Footnotes continued on following page)





                                      III-9


<PAGE>   56


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

           MHK Corp., of which Marvin D. Kantor and Harold T. Kantor are the
           sole shareholders, has incurred indebtedness to the Company. The
           largest amount of such indebtedness outstanding in 1997 was $799,718;
           1996 was $809,435; and 1995 was $773,638. On February 28, 1998, the
           amount of such indebtedness, exclusive of interest, outstanding was
           $729,158. Interest at 9% totaling $68,328 and $61,823 has been
           charged, through December 31, 1997 and 1996, respectively. See Note
           11B.

           Effective January 1, 1995, the Company sold the operating assets of a
           subsidiary's retail liquor store and two lounges in Florida to MHK
           Corp. The purchase price was equivalent to the net book value of the
           net assets which totaled $574,949 as adjusted for certain 1995
           transactions. A promissory note bears interest at 9%. Additional
           advances were made in 1995 and 1996. (See Note 11B)

           The President and CEO of the Company has incurred indebtedness to the
           Company. The largest amount of such indebtedness outstanding in 1997
           was $243,412; 1996 was $243,412; and 1995 was $204,975. On February
           28, 1998, the amount of such indebtedness was $204,300. No interest
           is paid or charged on such indebtedness. The President/CEO has
           granted collateral to the Company to enhance the realization of the
           indebtedness, which is evidenced by a promissory note providing for
           minimum annual payments of $25,000. (See Note 11C).

           Pursuant to a ten-year lease entered into in 1985, the Company leased
           a warehouse facility from the Kantors. Effective May 1, 1992, a
           renewal option was exercised on the leased warehouse facility
           extending its term to 2005. During the extension, the annual rent of
           $66,000 continued to be payable by the Company; however,
           approximately $24,000 of the amount due annually applied against the
           amount due the Company from MHK Corp. The Company also collected
           annually approximately $18,500, through 1995, from a sub-tenant of
           part of the premises. In May 1992, the Company received a second
           mortgage on the warehouse facility as collateral for the amount
           remaining due from MHK Corp. In January 1996, the officers sold a
           portion of the property and terminated the lease with the Company.
           The remaining parcel is pledged as additional collateral toward a
           note due the Company from the sale of the liquor operations (see Note
           11B).

           Certain executive officers and directors of the Company are limited
           partners owning less than an aggregate 10% interest in Wendt-Bristol
           Diagnostics Company L.P. A subsidiary of W-B is the general partner
           of Wendt-Bristol Diagnostics Company L.P. which owns and operates an
           outpatient medical diagnostic imaging center in Columbus, Ohio.

                  See also Note 11 of the Notes to Consolidated Financial 
                  Statements.

                  -------------------
                  (Footnotes continued from previous Page)

                  (3)      Includes 25,000 shares which Mr. Kantor may acquire
                           by exercising options granted to him under the
                           Company's Stock Option Plan.

                  (4)      Includes 13,750 shares of Common Stock which Mr. Gold
                           may acquire by exercising Warrants and 50,000 shares
                           of common stock which Mr. Gold may acquire by
                           exercising options granted to him under the Company's
                           stock option plan.

                  (5)      Includes 1,100 shares of Common Stock which Mr.
                           Martin may acquire by exercising Warrants and 35,000
                           shares of Common Stock which he may acquire by
                           exercising options granted to him under the Company's
                           Stock Option Plan.

                  (6)      Includes 5,000 shares of Common Stock which Mr.
                           Levine may acquire by exercising options granted
                           under the Company's Stock Option Plan.

                  -------------------
                  (Footnotes continued on following page)

                                     III-10


<PAGE>   57


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)

                  (Footnotes continued from previous page)

                  (7)      Includes 13,000 shares of Common Stock which Dr. Penn
                           may acquire by exercising options granted under the
                           Company's Stock Option Plan.

                  (8)      All of the shares are in the record name of McBridge
                           Advisory, Ltd. of which Mr. Del Ponte is the sole
                           owner of said company.

                  (9)      Includes 14,850 shares of Common Stock which may be
                           acquired by exercise of Warrants and 128,000 shares
                           which may be acquired by exercise of options granted
                           under the Company's Stock Option Plan.

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








                                     III-11


<PAGE>   58


                                     PART IV

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

     (a)   Documents filed as part of this Form 10-K:

           1.       Financial Statements. The following financial statements are
                    included in Part II, Item 8:

<TABLE>
<CAPTION>

                                                                                      PAGE
                                                                                      ----

<S>                                                                           <C>
                     Report of Independent Auditors                                   II-7

                     Consolidated Balance Sheets as of December
                      31, 1997 and 1996                                          II-8 and II-9

                     Consolidated Statements of Operations for
                      the years ended December 31, 1997, 1996
                      and 1995                                                       II-10

                     Consolidated Statements of Stockholders'
                      Equity for the years ended December 31,
                      1997, 1996 and 1995                                            II-11

                     Consolidated Statements of Cash Flow for
                      the years ended December 31, 1997, 1996
                      and 1995                                                  II-12 and II-13

                     Notes to Consolidated Financial Statements               II-14 through II-38
</TABLE>


             2.     Financial Statement Schedules. The following financial
                    statement schedules for the years ended December 31,
                    1997, 1996 and 1995 are included in Part IV:
<TABLE>
<CAPTION>

                 SCHEDULE                                                             PAGE
                 --------                                                             ----

<S>                                                                                  <C>
                    II.      Valuation and Qualifying Accounts and
                             Reserves                                                IV-6
</TABLE>


           All other schedules are omitted because they are not required,
           inapplicable, or the information is otherwise shown in the Financial
           Statements or Notes thereto.

             3.     Exhibits Filed Under Item 601 of Regulation S-K. (Numbers
                    assigned to the following correlate to those used in such
                    Item 601).

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

             3.1    Certificate of Incorporation of registrant. Filed as Exhibit
                    B to the Company's Proxy Statement (June 27, 1988) and
                    incorporated herein by reference pursuant to Rule 411(c).






                                      IV-1


<PAGE>   59


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

      (a)  Documents filed as part of this Form 10-K: (Continued)

             3.     Exhibits Filed Under Item 601 of Regulation S-K. (Numbers
                    assigned to the following correlate to those used in such
                    Item 601). (Continued)

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

                        3.2   By-Laws of the Company. Filed as Exhibit C to the
                              Company's Proxy Statement (June 27, 1988) and
                              incorporated herein by reference pursuant to Rule
                              411(c).

                        4.1   See Exhibits numbered Exhibit 3.1 and 3.2

                        4.2   Warrant Agreement, dated April 29, 1988, between
                              The Wendt-Bristol Company, Corna & Co., Inc. and
                              Mellon Securities Trust Company, as Warrant Agent.
                              Filed as Exhibit 4.2 to Registration Statement on
                              Form S-1 of The Wendt-Bristol Company (Reg. No.
                              33-8399, filed October 15, 1986) and incorporated
                              herein by reference to Rule 411(c).

                        4.3   Warrant Agreement, dated April 29, 1988, between
                              The Wendt- Bristol Company, Pittsburgh National
                              Bank, N.A., and The Fifth Third Bank, as Warrant
                              Agent. Filed as Exhibit 4.3 to the Company's
                              Annual Report on Form 10-K for the year ended
                              December 31, 1992 and incorporated herein by
                              reference pursuant to Rule 411(c).

                        9     Voting Trust Agreement, dated December 4, 1992,
                              between The Wendt-Bristol Health Services
                              Corporation, Corporate Life Insurance Company and
                              Marvin D. Kantor, as Voting Trustee. Filed as
                              Exhibit 9 to the Company's Annual Report on Form
                              10-K for the year ended December 31, 1993 and
                              incorporated herein by reference pursuant to Rule
                              411(c).

                        10.1  Employee Stock Option Plan, as amended. Filed as
                              Exhibit 28.1 to the Company's Annual Report on
                              Form 10-K for the year ended December 31, 1991,
                              and incorporated herein by reference pursuant to
                              Rule 411(c).

                        10.2  Temco National Corporation 401(k) Profit Sharing
                              Plan. Filed as Exhibit 28.2 to the Company's
                              Annual Report on Form 10-K for the Year Ended
                              December 31, 1991, and incorporated herein by
                              reference pursuant to Rule 411(c).

                        10.3  Sale and Subservicing Agreement, dated as of
                              February 5, 1993, among The Wendt-Bristol Company,
                              et al, NPF IV, Inc. and National Premier Financial
                              Services, Inc., relating to the health care
                              receivables securitization program. Filed as
                              Exhibit 28.6 to the Company's Annual Report on
                              Form 10-K for the year ended December 31, 1992,
                              and incorporated herein by reference pursuant to
                              Rule 411(c).






                                      IV-2


<PAGE>   60


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

      (a)  Documents filed as part of this Form 10-K: (Continued)

             3.     Exhibits Filed Under Item 601 of Regulation S-K. (Numbers
                    assigned to the following correlate to those used in such
                    Item 601) (Continued)


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

                        10.4  Stock Purchase Agreement, dated June 4, 1993,
                              between The Wendt-Bristol Health Services
                              Corporation and Corporate Life Insurance Company.
                              Filed as Exhibit 10.4 to the Company's Annual
                              Report on Form 10-K for the year ended December
                              31, 1993 and incorporated herein by reference
                              pursuant to Rule 411(c).

                        10.5  Installment Business Loan Note, dated January 30,
                              1996, between The Wendt-Bristol Company and Marvin
                              D. Kantor related to working capital loan. Filed
                              as Exhibit 10.5 to the Company's Annual Report on
                              Form 10-K for the year ended December 31, 1995 and
                              incorporated herein by reference pursuant to Rule
                              411(c).

                        10.6  Stock Pledge Agreement dated January 30, 1996,
                              between The Wendt-Bristol Company and Marvin D.
                              Kantor related to working capital loan. Filed as
                              Exhibit 10.6 to the Company's Annual Report on
                              Form 10-K for the year ended December 31, 1995 and
                              incorporated herein by reference pursuant to Rule
                              411(c).

                        10.7  Loan and Security Agreement, dated March 27, 1996,
                              between Wendt-Bristol Diagnostics Company, L.P.
                              and DVI Capital Company relating to equipment
                              financing. Filed as Exhibit 10.7 to the Company's
                              Annual Report on Form 10-K for the year ended
                              December 31, 1995 and incorporated herein by
                              reference pursuant to Rule 411(c).

                        10.8  Loan and Security Agreement, dated March 27, 1996,
                              between Health America, Inc. dba Wendt-Bristol
                              Center and DVI Capital Company relating to
                              equipment financing. Filed as Exhibit 10.8 to the
                              Company's Annual Report on Form 10-K for the year
                              ended December 31, 1995 and incorporated herein by
                              reference pursuant to Rule 411(c).

                        10.9  Loan and Security Agreement, dated March 27, 1996,
                              between American Care Center, Inc. dba Bristol
                              House of Columbus and DVI Capital Company relating
                              to equipment financing. Filed as Exhibit 10.9 to
                              the Company's Annual Report on Form 10-K for the
                              year ended December 31, 1995 and incorporated
                              herein by reference pursuant to Rule 411(c).

                        10.10 Loan and Security Agreement, dated March 27, 1996,
                              between Ethan Allen Care Center, Inc. dba Bristol
                              House of Springfield and DVI Capital Company
                              relating to equipment financing. Filed as Exhibit
                              10.10 to the Company's Annual Report on Form 10-K
                              for the year ended December 31, 1995 and
                              incorporated herein by reference pursuant to Rule
                              411(c).


                                      IV-3


<PAGE>   61


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

      (a)  Documents filed as part of this Form 10-K: (Continued)

             3.     Exhibits Filed Under Item 601 of Regulation S-K. (Numbers
                    assigned to the following correlate to those used in such
                    Item 601) (Continued)

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

                     10.11    Asset Purchase Agreement, dated April 15, 1996,
                              between Congress Liquors, Inc. and MHK Corp. Filed
                              as Exhibit 10.11 to the Company's Annual Report on
                              Form 10-K for the year ended December 31, 1995 and
                              incorporated herein by reference pursuant to Rule
                              411(c).
                              
                     10.11    Mortgage and security agreement dated April 1,
                              1996, between Wendt-Bristol Diagnostics Co. L.P.
                              and National City Bank. Filed as Exhibit 10.11 to
                              the Company's Form 10-Q for the quarter ended June
                              30, 1996 and incorporated herein by reference
                              pursuant to Rule 411(c).
                              
                     10.12    Mortgage and security agreement dated April 19,
                              1996 between The Wendt-Bristol Health Services
                              Corporation and Grand Pacific Finance Corp. Filed
                              as Exhibit 10.12 to the Company's Form 10-Q for
                              the quarter ended June 30, 1996 and incorporated
                              herein by reference pursuant to Rule 411(c).
                              
                     10.13    Receivables purchase and sale agreement dated May
                              30, 1996 between The Wendt-Bristol Company, et al,
                              and HealthPartners Funding L.P., relating to the
                              health care receivables securitization program.
                              Filed as Exhibit 10.13 to the Company's Form 10-Q
                              for the quarter ended June 30, 1996 and
                              incorporated herein by reference pursuant to Rule
                              411(c).
                              
                     10.14    Amendment to Receivables Purchase and Sale
                              Agreement dated August 29, 1996 between The
                              Wendt-Bristol Company, et al, and HealthPartners
                              Funding L.P., relating to the health care
                              receivables financing program. Filed as Exhibit
                              10.14 to the Company's Form 10-Q for the quarter
                              ended September 30, 1996 and incorporated herein
                              by reference pursuant to Rule 411(c).
                              
                     10.15    Convertible subordinated bond, dated December 23,
                              1996, by and between The Wendt-Bristol Health
                              Services Corporation and Societe Generale Bank &
                              Trust, or registered assigns. Filed as Exhibit 1
                              to the Company's Form 8-K dated December 23, 1996
                              and incorporated herein by reference pursuant to
                              Rule 411(c).
                              
                     10.16    Series 1 Bond dated February 14, 1997, by and
                              between The Wendt-Bristol Health Services
                              Corporation and Societe Generale Bank & Trust, or
                              registered assigns, with Schedule 1. Filed as
                              Exhibit 1 to the Company's Form 8-K dated February
                              14, 1997 and incorporated herein by reference
                              pursuant to Rule 411(c).
                              
                           






                                      IV-4


<PAGE>   62


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

      (a)  Documents filed as part of this Form 10-K: (Continued)

             3.     Exhibits Filed Under Item 601 of Regulation S-K. (Numbers
                    assigned to the following correlate to those used in such
                    Item 601) (Continued)

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

                     10.17    Series 1 Warrant dated February 14, 1997, by and
                              between The Wendt-Bristol Health Services
                              Corporation and Societe Generale Bank & Trust, or
                              registered assigns, with Schedule 1. Filed as
                              Exhibit 2 to the Company's Form 8-K dated February
                              14, 1997 and incorporated herein by reference
                              pursuant to Rule 411(c).

                     21       List of Subsidiaries

                     27       EDGAR Financial Data Schedule

      (b)  Reports on Form 8-K filed during last fiscal (calendar) quarter of
           1997:
           
           (1)   Report dated December 31, 1997 relating to the sale of the 
                 assets of two nursing homes.



































                                      IV-5

<PAGE>   63



                                   SCHEDULE II

         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
              ----------------------------------------------------


<TABLE>
<CAPTION>

            COLUMN A                      COLUMN B             COLUMN C            COLUMN D             COLUMN E
            --------                      --------             --------            --------             --------
                                                              ADDITIONS
                                                              ---------
                                          BALANCE AT          CHARGED TO                                 BALANCE
                                          BEGINNING            COSTS AND                                  AT END
                                          OF PERIOD            EXPENSES            DEDUCTIONS           OF PERIOD
                                          ----------          ----------           ----------           --------- 
<S>                                          <C>             <C>               <C>   <C>             <C>       
 December 31, 1997
   Reserve deducted from asset to
    which it applies:
     Allowance for doubtful trade
      accounts                               $ 190,000       $ 146,000         $ (a) 135,000         $  201,000
                                             =========       =========         =============         ==========
   Valuation allowance for deferred                                                                
    tax assets                               $ 200,000       $                 $     200,000         $      -
                                             =========       =========         =============         ==========
                                                                                                   
 December 31, 1996                                                                                 
   Reserve deducted from asset to                                                                  
    which it applies:                                                                              
     Allowance for doubtful trade                                                                  
      accounts                               $ 340,000       $ 114,620         $ (a) 264,620         $  190,000
                                             =========       =========         =============         ==========
   Valuation allowance for deferred                                                                
    tax assets                               $ 300,000       $     -           $     100,000         $  200,000
                                             =========       =========         =============         ==========
                                                                                                   
 December 31, 1995                                                                                 
   Reserve deducted from asset to                                                                  
    which it applies:                                                                              
     Allowance for doubtful trade                                                (a)               
      accounts                               $ 250,000       $ 105,528         $ (b)  15,528        $  340,000
                                             =========       =========         =============         ==========
   Valuation allowance for deferred                                                                
    tax assets                               $ 400,000       $     -           $     100,000        $  300,000
                                             =========       =========         =============         ==========
</TABLE>
                                                                  
Notes:   (a)  Write-off of uncollectible amounts
         (b)  Net of reserves of approximately $150,000 which are no longer
              connected with a financing arrangement involving the
              securitization of certain accounts receivable. See Note 4.











                                      IV-6


<PAGE>   64



                                   SIGNATURES



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

                                              THE WENDT-BRISTOL HEALTH SERVICES
                                              CORPORATION
                                              (Registrant)

April 20, 1998                                By: /s/ Sheldon A. Gold
                                                  ------------------------------

                                                   President


April 20, 1998                                 By: /s/ Charles R. Cicerchi
                                                  ------------------------------
                                               Vice-President, Finance and 
                                               Principal Financial and 
                                               Accounting Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
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/ Marvin D. Kantor          Chairman of the Board and
 -----------------------       Director                           April 20, 1998
 Marvin D. Kantor                


 /s/ Harold T. Kantor          Vice Chairman of the Board         April 20, 1998
 -----------------------       and Director
 Harold T. Kantor                              


 /s/ Sheldon A. Gold           President (Principal Executive     April 20, 1998
 -----------------------       Officer) and Director
 Sheldon A. Gold               

 /s/ Reed A. Martin            Executive Vice President, Chief    April 20, 1998
 -----------------------       Operating Officer and Director
 Reed A. Martin                                


 /s/ Paul H. Levine            Director                           April 20, 1998
 -----------------------
 Paul H. Levine


 /s/ Gerald M. Penn            Director                           April 20, 1998
 -----------------------

 Gerald M. Penn

                               Director
 -----------------------                      
 Clemente Del Ponte


                                      IV-7