<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

FOR THE YEAR ENDED
DECEMBER 31, 1996                              COMMISSION FILE NUMBER 0-11656

                            THE WENDT-BRISTOL HEALTH
                              SERVICES CORPORATION

             (Exact name of Registrant as specified in its charter)

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

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

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

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

         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

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, 1997, the aggregate market value of the voting stock
of The Wendt-Bristol Health Services Corporation held by non-affiliates of the
Registrant was approximately $5,097,000 based upon the closing price for such
Common Stock on said date as reported by the American Stock Exchange. On such
date, there were 6,236,020 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, 1996 *

                                     PART I

ITEM 1.           BUSINESS

                  The Company's business is in the health care industry. It is
                  engaged in the ownership and operation of three nursing homes
                  (one specializing in the care of persons with Alzheimer's and
                  related syndromes), the operation of three retail pharmacies
                  and a Medicare-certified home health care agency which is
                  ceasing most of its operations in the second quarter of 1997.
                  It is the general partner in charge of administration and
                  operation of an outpatient diagnostic and radiology center
                  owned by a limited partnership; this diagnostic center, which
                  serves the medical community generally, provides state of the
                  art diagnostic imaging techniques, including magnetic
                  resonance imaging (MRI), CT Scans, Ultrasound, X-ray, Bone
                  Densitometry, Mammography, and 3-D imaging. A second center,
                  featuring an open field magnetic resonance, has been opened in
                  1997 by a limited liability company formed by a subsidiary and
                  an unrelated third party. The Company's primary activities are
                  carried on in the state of Ohio, principally in Columbus.

                  As used herein, "Company", unless the context otherwise
                  requires, includes the subsidiaries of the Company, among
                  which is The Wendt-Bristol Company ("W-B"), and other
                  affiliates of the Company. W-B and its predecessors have been
                  in the health care industry since 1903.

                  NURSING HOMES. The Company owns and operates two nursing homes
                  in Columbus, Ohio (147 beds and 75 beds) and leases the
                  premises and operates one nursing home in Springfield, Ohio
                  (100 beds). All nursing homes provide skilled care, one
                  specializing in the care of persons with Alzheimer's and
                  related syndromes.

                  The Alzheimer Patient Care Center, located in Columbus, Ohio,
                  opened in October, 1994. It is a 75-bed skilled long-term
                  facility that also contains a geriatric day care center and a
                  physician office for geriatric assessment. The Medicaid
                  reimbursement program of the State of Ohio is applicable to
                  costs incurred by some of the persons receiving care in the
                  facility. Approximately 32% (as of March, 1997) are private
                  pay patients. In April 1993, the Company obtained mortgage
                  financing (insured by the U.S. Department of Housing and Urban
                  Development) in the amount of approximately $3,200,000 subject
                  to periodic draws to cover 90% of the cost of construction of
                  the facility; closing on the permanent long-term mortgage
                  occurred in the second quarter of 1995.

                  ---------------------------------
                  * 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. 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. See Notes 2 and 3 of
                  Notes to Consolidated Financial Statements.

                  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. Wendt-Bristol Home Health Care
                  Company employs or contracts with nurses and nurses aides,
                  social workers and therapists of all kinds to provide home
                  health care services in the greater Franklin County, Ohio area
                  and, in 1994, in the Springfield, Ohio area. During second
                  quarter of 1997, the Company is ceasing a significant portion
                  of this business. The Company also provides a physical therapy
                  clinic in its Springfield facility serving residents and
                  outpatients.

                  In August 1985, 1275 Olentangy River Road Limited Partnership
                  was formed. W-B has been the sole general partner of this
                  partnership which owned and operated a medical office building
                  in Columbus, Ohio until it was sold (see Note 1B of Notes to
                  Consolidated Financial Statements).

                                       I-2


<PAGE>   4


ITEM 1.           BUSINESS (CONTINUED)

                  PHARMACIES. The Company operates three retail pharmacies. Two
                  of the pharmacies are located in Columbus and one in Canal
                  Winchester. The pharmacies sell 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.

                  EMPLOYEES: LABOR RELATIONS. The Company has approximately 400
                  employees at February 28, 1997. Non-professional employees of
                  one of its nursing homes located in Columbus, Ohio, have been
                  covered by a collective bargaining agreement through February,
                  1997 which is currently being re-negotiated. The Company
                  considers its relations with its employees and the union 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, 1996, 1995 and 1994 is as follows:

<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31
                                                                          ----------------------
                                                                     1996              1995             1994
                                                                     ----              ----             ----
<S>                                                                <C>               <C>             <C>              
                   Revenues/sales to unaffiliated
                    customers:
                       Nursing homes                               $13,147,964       $12,604,828     $ 9,791,822
                       Medical services and other                    8,193,238         8,251,370       9,695,240

                   Operating income or (loss):
                       Nursing homes                                   865,837           857,040         851,359
                       Medical services and other                      (79,340)          508,625        (146,093)

                   Identifiable assets:
                       Nursing homes                                13,311,345        12,353,302      11,860,805
                       Medical services and other                   10,606,760        10,454,023      14,647,236

                   Depreciation expense:
                       Nursing homes                                   354,152           365,780         259,175
                       Medical services and other                      610,563           536,912         883,419

                   Capital expenditures:
                       Nursing homes                                   184,143           178,880       2,614,683
                       Medical services and other                    1,236,352           968,133         200,925
</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, 1997.
                  The establishment of new nursing home beds (after June 30,
                  1997) and the relocation of nursing home beds requires a CON.
                  An extension of the moratorium until June 30, 1999 is being
                  considered under pending state legislation.

                  New health care facilities, including diagnostic centers,
                  located in metropolitan statistical areas are required to be
                  licensed beginning March 31, 1996, but do not have to obtain a
                  CON. Diagnostic centers located in rural areas still require a
                  CON until May 1, 1997. 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 a new health care facility."

                  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 is 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.

                                       I-4


<PAGE>   6


ITEM 1.           BUSINESS (CONTINUED)

                  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.

                  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.

                                       I-5


<PAGE>   7


ITEM 1.           BUSINESS (CONTINUED)

                  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.

                  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 $1,023,000 related to
                  environmental matters in New Jersey, of which $344,000 was
                  spent in the five fiscal (calendar) years ended December 31,
                  1996. 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 5 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.

                  Three pharmacies operated by W-B are located in leased
                  premises in Ohio: two in Columbus (4,000 square feet and 3,300
                  square feet) and one in Canal Winchester (4,000 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 pharmacies.

                  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 $702,000 at
                  March 1, 1997.

                                       I-6


<PAGE>   8


ITEM 2.           PROPERTIES (CONTINUED)

                  The nursing homes of the Company consist of one owned 147-bed
                  home in Columbus, Ohio, subject to mortgage indebtedness in
                  the amount of $2,928,000, one owned 75-bed Alzheimer's and
                  related syndromes center subject to mortgage indebtedness of
                  $3,166,000 (each indebtedness at March 1, 1997) and one leased
                  100-bed home 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 subject to mortgage indebtedness in
                  the amount of $29,000 at March 1, 1997.

                  The present aggregate annual rentals of all leases referred to
                  are approximately $494,000 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 1997, 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.

                  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 1996, 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
                            ----                     ------------                          --------
                            1996                HIGH               LOW              HIGH              LOW
                            ----                ----               ---              ----              ---

<S>                                             <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

                            1995
                            ----

                        1st Quarter              1/2              5/16              1/2               1/16
                        2nd Quarter              3/4              7/16                    No Trades
                        3rd Quarter             11/16             7/16              1/4               1/4
                        4th Quarter             9/16               3/8              1/8               1/64
</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 31, 1997 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")                           1,092

                   Common Stock Purchase Warrants                          198

                   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,
                                                         1996           1995           1994           1993           1992
<S>                                                  <C>            <C>            <C>            <C>            <C>        
INCOME STATEMENT DATA
Revenues:
 Net sales                                           $     2,816    $     2,709    $     3,694    $     3,686    $     4,450
 Service income                                           18,525         18,147         15,793         15,802         16,124
                                                     -----------    -----------    -----------    -----------    -----------
                                                          21,341         20,856         19,487         19,488         20,574
                                                     -----------    -----------    -----------    -----------    -----------
Costs and expenses:
 Cost of sales                                             2,072          1,920          2,554          2,630          3,033
 Selling, general and administrative expenses, net        17,518         16,668         15,085         14,930         16,205
                                                     -----------    -----------    -----------    -----------    -----------
                                                          19,590         18,588         17,639         17,560         19,238
                                                     -----------    -----------    -----------    -----------    -----------

Operating income before depreciation                       1,751          2,268          1,848          1,928          1,336
                                                     -----------    -----------    -----------    -----------    -----------

Depreciation                                                 965            902          1,143          1,142          1,070
                                                     -----------    -----------    -----------    -----------    -----------

Operating income                                             786          1,366            705            786            266
                                                     -----------    -----------    -----------    -----------    -----------

Other income (expense):
 Minority interest in earnings of
  consolidated subsidiary and limited
  partnerships, net                                          (76)          (172)           (53)           (31)           (26)
 Interest expense                                         (1,104)        (1,050)        (1,390)        (1,210)        (1,123)
 Gain on sale of stock of subsidiaries                         -              -            135            355            997
 Gain (loss) on sale of assets                                 -              -            726             71            (40)
 Other, net                                                  109             21            136             38            178
                                                     -----------    -----------    -----------    -----------    -----------
                                                          (1,071)        (1,201)          (446)          (777)           (14)
                                                     -----------    -----------    -----------    -----------    -----------

Income (loss) before income taxes                           (285)           165            259              9            252
(Provision) benefit for income taxes                          39             52            (55)          (247)           (18)
                                                     -----------    -----------    -----------    -----------    -----------

Net income (Loss)                                           (246)           217            204           (238)           234
                                                     ===========    ===========    ===========    ===========    ===========

Per share data:
 Income (loss)                                       $     (0.04)   $      0.04    $      0.03    $     (0.03)   $      0.04
                                                     ===========    ===========    ===========    ===========    ===========

Weighted average shares                                5,825,686      6,131,770      8,153,382      7,889,512      5,786,643

BALANCE SHEET DATA (AT YEAR END)
 Working capital (deficiency)                        $    (1,770)   $    (5,340)   $    (4,236)   $    (2,145)   $    (2,005)
 Total assets                                             23,918         22,807         26,508         23,920         24,576
 Long-term debt and lease obligations, net of
  current portion                                         12,081          7,881          7,965          9,249          9,816
 Shareholders' equity                                      4,742          4,543          7,200          6,964          6,248
</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>
                                                      1996               1995                   1994
                                                      ----               ----                   ----
                   OPERATIONS                                  (In thousands, except per share data)
                   ----------
<S>                                               <C>                  <C>                    <C>      
                   Revenues:
                     Net sales                    $    2,816           $   2,709              $   3,694
                     Service income                   18,525              18,147                 15,793
                                                  ----------           ---------              ---------
                   Total revenues                 $   21,341           $  20,856              $  19,487
                                                  ==========           =========              =========
                   Operating income               $      786           $   1,366              $     705
                   Percent of revenues                   3.7                 6.5                    3.6

                   Net income (loss)              $     (246)          $     217              $     204
                   Percent of revenues                  (1.2)                1.0                    1.0
                   Per common share               $     (.04)          $     .04              $     .03
</TABLE>


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

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

                  Management believes that the 1996 net loss was incurred
                  primarily as a result of short-term declines in census and
                  Medicaid rates attributable to level of care required of its
                  skilled nursing facilities in addition to certain financing
                  and other significant non-continuing costs. Management is
                  further encouraged by the recognition that certain significant
                  costs incurred in 1996 will no longer continue and the Company
                  has positioned itself for profits in 1997 and thereafter. As a
                  result of late 1996 and early 1997 Stock and Bond issuance's,
                  the Company is now able to reduce its costs of borrowing and
                  achieve cost savings through an improved availability of funds
                  for operations, while also enhancing the expansion of
                  profitable operations through selective ventures with
                  non-related third parties. Clearly the cost savings and the
                  expansion of profitable operations expected in 1997 are
                  forward-looking statements that are subject to competitive and
                  market influences that cannot be accurately predicted.

                  Working capital increased approximately $3,570,000 during the
                  year ended December 31, 1996. Current assets increased
                  $206,000 while current liabilities decreased $3,364,000 at
                  December 31, 1996 as compared to December 31, 1995. The
                  increase in current assets was due mostly from increases in
                  cash ($855,000) offset by a decrease in trade receivables
                  ($664,000). The increase in cash was primarily due to proceeds
                  of a long-term subordinated convertible bond issued just prior
                  to year-end (see Note 8) while the decrease in trade
                  receivables was caused by the sale of receivables related to
                  the securitization program entered into in May 1996 and
                  subsequently terminated through repayment in March 1997 (see
                  Note 5). Current liabilities decreased approximately
                  $3,364,000, due mostly from declines in current portion of
                  long-term debt ($2,010,000), taxes other than federal income
                  taxes ($589,000), accrued expenses other ($605,000), and stock
                  purchase agreement payable ($300,000) partially offset by an
                  increase in securitization program advances. The decrease in
                  current portion of long-term debt was due mostly from the
                  refinancing of a balloon mortgage ($1,640,000) that was
                  classified as currently due at December 31, 1995 and from the
                  refinancing of equipment at several subsidiaries. The increase
                  in securitization program advances arose as a result of the
                  Company entering into a new receivable financing program (see
                  Note 5) which, in conjunction with the treasury stock sale and
                  equipment refinancing, allowed the Company to significantly
                  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
                  1996. In March, the Company, through several of its
                  subsidiaries, refinanced most of its equipment at the nursing
                  homes and diagnostic center. Of the total amount refinanced of
                  $1,700,000, approximately $1,023,000 was used to pay off
                  existing debt while the balance was used for working capital
                  needs.

                  In April, 1996 the Company refinanced the mortgage relating to
                  the New Jersey property leased by the purchaser of its former
                  manufacturing division. The original mortgage balance of
                  approximately $1,640,000 was classified as current on the
                  December 31, 1995 balance sheet. Terms of the new five-year
                  $1,700,000 mortgage include amortization on a ten year basis
                  and a five-year renewal option.

                  In May 1996, certain subsidiaries of the Company entered into
                  a three-year financing arrangement with a finance company to
                  sell, with limited recourse, its health care trade accounts
                  receivable. Terms of the agreement included a commitment of up
                  to $1,500,000 against eligible receivables and the proceeds
                  from the sale of these receivables were used for working
                  capital needs (see Note 5).

                  In October 1996, the Company entered into a private sale of
                  500,000 shares of the Company's common stock, held in
                  treasury. The Regulation S transaction with a foreign investor
                  provided the Company with $500,000 of working capital,
                  utilized partially toward a payment on the stock purchase
                  agreement payable (see Note 2).

                  In December 1996, the Company issued a $1,000,000 Convertible
                  Subordinated Bond due December 30, 2001. The Bond was issued
                  to a European investor and was issued in the name of a Swiss
                  bank, pursuant to Regulation S of the Securities Act of 1933.
                  The Bond provides for interest only quarterly payments
                  commencing March 31, 1997 at a rate of 5.5% per annum. Subject
                  to certain minimums, the Bond holder may convert, from time to
                  time, the principal of the Bond to Common Stock of the Company
                  at $2.00 per share (subject to antidilution provisions).
                  Proceeds will be used for working capital needs and expansion
                  of the Company's Diagnostic and Radiology ventures.

                  See Note 15B concerning the February 1997 issuance of a series
                  of bonds and warrants pursuant to Regulation S of the
                  Securities Act of 1933.

                  The Company and its subsidiaries, limited partnership and
                  newly-formed (1997) limited liability companies, have
                  committed to certain equipment upgrades or acquisitions that
                  will be financed either through the current equipment
                  financing relationship or vendor programs.

                  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.

                                      II-4


<PAGE>   13


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

                  RESULTS OF OPERATIONS  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.

                  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 have been
                  significant.

                  1995-1994
                  ---------

                  Consolidated revenues from operations for the year ended
                  December 31, 1995 increased approximately $1,369,000 or 7.0%
                  over 1994. Net sales declined approximately $985,000 as
                  compared to the previous year, due mostly to the disposition
                  of the liquor operations effective as of January 1, 1995 (see
                  Note 11B). Service revenues increased approximately $2,354,000
                  or 14.9% over the same period in 1994. The increase is
                  primarily attributable to the newly-opened Alzheimer's Center
                  ($2,650,000) offset by a decline in volume in Home Health
                  Care.

                  Cost of sales decreased approximately $634,000 for the year as
                  compared to 1994, primarily from the disposition of the liquor
                  operations. Gross margin for the year ended December 31, 1995
                  was 29.1% as compared to 30.9% for the comparable period in
                  1994.

                  Selling, general and administrative expenses increased
                  approximately $1,583,000 for the year ended December 31, 1995
                  as compared to 1994, primarily attributable to costs
                  associated to the Alzheimer's Center partially offset by the
                  disposition of the liquor operations.

                  Operating income increased approximately $660,000 or 93.6% for
                  the year ended December 31, 1995 as compared to the same
                  period in 1994. The increase is mostly attributable to
                  increases at the Diagnostics Center and the Alzheimer's
                  Center.

                                      II-5


<PAGE>   14


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

                  Interest expense decreased approximately $340,000 as compared
                  to 1994, primarily from reduced borrowings related to the
                  termination of the securitization program.

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, 1996 and 1995, 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, 1996. 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, 1996
and 1995 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, 1996 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

Columbus, Ohio
April 11, 1997

                                      II-7


<PAGE>   16


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

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

<TABLE>
<CAPTION>
                   ASSETS                                                       1996             1995
                   ------                                                       ----             ----

<S>                                                                         <C>              <C>         
CURRENT ASSETS
  Cash                                                                      $    890,670     $     35,825
                                                                            ------------     ------------
  Restricted cash (Note 4)                                                       381,025          310,912
                                                                            ------------     ------------
  Receivables (Note 5):
   Trade, net of allowance for doubtful accounts of
    $190,000 in 1996 and $340,000 in 1995                                      2,014,403        2,678,551
   Notes receivable - current                                                    120,613           49,920
   Miscellaneous                                                                 890,655          858,032
                                                                            ------------     ------------
                                                                               3,025,671        3,586,503
  Inventories                                                                    482,930          489,042
  Prepaid expenses and other current assets                                      250,947          402,824
                                                                            ------------     ------------
        Total current assets                                                   5,031,243        4,825,106
                                                                            ------------     ------------


PROPERTY, PLANT AND EQUIPMENT (NOTES 6 AND 7)                                 20,880,293       19,531,862
  Less accumulated depreciation and amortization                              (6,135,704)      (5,243,057)
                                                                            ------------     ------------
                                                                              14,744,589       14,288,805
                                                                            ------------     ------------
INVESTMENTS AND OTHER ASSETS
  Notes and other receivables, net of current portion                            359,007          395,912
  Notes receivable from officers and related parties (Notes 11B and 11C)         993,580          863,509
  Life insurance premiums receivable (Note 11D)                                  865,299          758,795
  Excess of cost over assets of businesses and subsidiaries
   acquired, less accumulated amortization                                       621,629          637,729
  Deferred charges                                                               956,795          776,622
  Other assets                                                                   345,963          260,847
                                                                            ------------     ------------
                                                                               4,142,273        3,693,414
                                                                            ------------     ------------




        Total assets                                                        $ 23,918,105     $ 22,807,325
                                                                            ============     ============
</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, 1996 AND 1995
                           --------------------------

<TABLE>
<CAPTION>
         LIABILITIES AND STOCKHOLDERS' EQUITY                         1996             1995
         ------------------------------------                         ----             ----

<S>                                                               <C>              <C>     
CURRENT LIABILITIES
  Notes payable - officer (Note 11E)                              $     55,000     $      -
  Securitization program advances (Note 5)                             392,287            -
  Accounts payable                                                   2,729,021        2,836,474
  Accrued expenses and other liabilities:
     Salaries and wages                                                482,134          451,718
     Workers' compensation                                             380,502          540,669
     Taxes, other than federal income taxes                            726,106        1,315,508
      Interest                                                         118,640           87,520
      Stock purchase agreement payable (Note 2)                        325,000          625,000
      Other                                                            841,643        1,446,965
  Long-term obligations classified as current (Notes 7 and 15)         750,758        2,760,789
  Federal income taxes payable (Note 9)                                    -            100,000
                                                                  ------------     ------------
        Total current liabilities                                    6,801,091       10,164,643
                                                                  ------------     ------------
LONG-TERM OBLIGATIONS LESS AMOUNTS
 CLASSIFIED AS CURRENT (NOTES 7 AND 15)                             12,080,856        7,880,566
                                                                  ------------     ------------

        Total liabilities                                           18,881,947       18,045,209
                                                                  ------------     ------------

MINORITY INTERESTS                                                     294,128          219,541
                                                                  ------------     ------------

CONTINGENCIES AND COMMITMENTS (NOTES 5, 7, 8 AND 12)

STOCKHOLDERS' EQUITY (NOTES 2 AND 10)
  Common stock, $.01 par, authorized 12,000,000 shares;
   issued 8,243,480 shares in 1996 and 1995                             82,435           82,435
  Capital in excess of par                                          10,238,750       10,274,974
  Retained earnings (deficit)                                       (3,119,096)      (2,872,818)
                                                                  ------------     ------------
                                                                     7,202,089        7,484,591
  Treasury stock, at cost, 2,007,460 shares in 1996 and
   2,523,722 shares in 1995                                         (2,460,059)      (2,942,016)
                                                                  ------------     ------------
                                                                     4,742,030        4,542,575
                                                                  ------------     ------------

        Total liabilities and stockholders' equity                $ 23,918,105     $ 22,807,325
                                                                  ============     ============
</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, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                               1996             1995              1994
                                                               ----             ----              ----
<S>                                                          <C>              <C>              <C>       
REVENUES
  Net sales                                                $  2,816,386     $  2,708,955     $  3,693,912
  Service income                                             18,524,816       18,147,243       15,793,150
                                                           ------------     ------------     ------------
                                                             21,341,202       20,856,198       19,487,062
                                                           ------------     ------------     ------------
COSTS AND EXPENSES
  Cost of sales                                               2,071,596        1,920,118        2,554,002
  Selling, general and administrative expenses               17,518,394       16,667,723       15,085,200
                                                           ------------     ------------     ------------
                                                             19,589,990       18,587,841       17,639,202
                                                           ------------     ------------     ------------

OPERATING INCOME BEFORE
DEPRECIATION                                                  1,751,212        2,268,357        1,847,860
                                                           ------------     ------------     ------------

DEPRECIATION                                                    964,715          902,692        1,142,594
                                                           ------------     ------------     ------------

OPERATING INCOME                                                786,497        1,365,665          705,266
                                                           ------------     ------------     ------------
OTHER INCOME (EXPENSE)
  Minority interests in earnings, net of tax                    (76,860)        (171,701)         (52,856)
  Interest expense, net (Notes 5 and 7)                      (1,104,278)      (1,050,226)      (1,389,997)
  Gain on sale of stock of subsidiaries (Notes 2 and 3)             -                -            135,101
  Gain on sale of assets                                            -                -            726,273
  Other, net                                                    109,254           21,008          135,671
                                                           ------------     ------------     ------------
                                                             (1,071,884)      (1,200,919)        (445,808)
                                                           ------------     ------------     ------------

INCOME (LOSS) BEFORE INCOME TAXES                              (285,387)         164,746          259,458

INCOME TAX BENEFIT (EXPENSE) (NOTE 9)                            39,109           51,979          (55,340)
                                                           ------------     ------------     ------------
NET INCOME (LOSS)                                          $   (246,278)    $    216,725     $    204,118
                                                           ============     ============     ============

INCOME (LOSS) PER COMMON SHARE
 (NOTE 1)                                                  $      (0.04)    $       0.04     $       0.03
                                                           ============     ============     ============

WEIGHTED AVERAGE SHARES

 OUTSTANDING                                                  5,825,686        6,131,770        8,153,382
                                                           ============     ============     ============
</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, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                           COMMON       CAPITAL IN      RETAINED      TREASURY
                                                            STOCK      EXCESS OF PAR    EARNINGS        STOCK          TOTAL
                                                        -------------  -------------  ------------   -------------  ------------

<S>                                                     <C>            <C>            <C>            <C>            <C>         
BALANCE AT DECEMBER 31, 1993                            $     82,407   $ 10,311,509   $ (3,293,661)  $   (136,536)  $  6,963,719


  Shares contributed to Retirement Plan
   (8,448 shares)                                                                                          13,066         13,066

  Shares exchanged (45,000) for shares (10,000)
   of Diagnostic Company                                                                                   18,644         18,644

  Net income                                                                               204,118                       204,118
                                                        ------------   ------------   ------------   ------------   ------------


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
                                                        ============   ============   ============   ============   ============
</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, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                         1996            1995             1994
                                                         ----            ----             ----
<S>                                                   <C>             <C>             <C>        
CASH FLOWS FROM OPERATING
ACTIVITIES
  Net income (loss)                                   $  (246,278)    $   216,725     $   204,118
                                                      -----------     -----------     -----------
  Adjustments required to reconcile net income
   (loss) to net cash provided by operating
    activities:
     Amortization, depreciation and other, net            985,200         920,606       1,156,801
     Provision for losses on notes and accounts
      receivable                                          110,620         105,528         111,647
     Gain on sale of assets                                   -               -          (726,273)
     Life insurance premium reserve                           -          (376,000)            -
     Costs associated with acquisition of minority
       interest in limited partnership                        -           151,950             -
     Gain on sale of stock of subsidiary                      -               -          (135,101)
     Minority interest in earnings of consolidated
      subsidiaries                                         76,860         171,701          52,856
     Changes in assets and liabilities:
      Receivables:
        Sale (purchase) of receivables                    970,550      (1,354,048)            -
        Other changes                                    (534,300)        314,009        (435,478)
      Inventories                                           6,112         (29,350)         47,269
      Prepaid expenses and other current assets           160,611         130,423        (182,615)
      Accounts payable                                   (107,453)          3,693       1,137,403
      Accrued expenses and other liabilities           (1,656,355)        716,346         229,816
      Federal income taxes payable                       (100,000)       (220,000)        100,000
      Deferred charges and other                         (236,455)         23,607        (231,790)
                                                      -----------     -----------     -----------
       Total adjustments                                 (324,610)        558,465       1,124,535
                                                      -----------     -----------     -----------
         Net cash provided by (used in) operations       (570,888)        775,190       1,328,653
                                                      -----------     -----------     -----------

CASH FLOWS FROM INVESTING
ACTIVITIES
  Purchase of minority interest from limited
   partners                                                   -          (250,000)            -
  Collection of miscellaneous receivable                      -         1,700,000             -
  Proceeds from sale of property, plant and
   equipment and investments                                  -               -           275,000
  Decrease (increase) in notes receivable                 (33,788)        278,962          67,087
  Disbursements to related parties and
   former affiliates, net                                (232,575)       (184,390)        (96,622)
  Utilization of (deposit to) restricted cash             (70,113)        243,654          72,484
  Capital expenditures                                   (544,866)       (504,321)       (771,549)
                                                      -----------     -----------     -----------
         Net cash provided by (used in) investing
          activities                                     (881,342)      1,283,905        (453,600)
                                                      -----------     -----------     -----------
</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, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                                   1996            1995            1994
                                                                   ----            ----            ----
<S>                                                            <C>             <C>             <C>        
CASH FLOWS FROM FINANCING
ACTIVITIES
  Distributions to limited partners, net                               -          (143,842)       (238,878)
  Purchase of common stock of subsidiary                            (8,000)         (2,000)            -
  Proceeds from sale of treasury stock                             500,000             -               -
  Proceeds from stock offering                                         -               -           128,655
  Proceeds from officer obligation                                 360,000             -               -
  Principal payments of officer obligation                        (305,000)            -               -
  Proceeds from warrants exercised                                     -             3,750             -
  Principal payments on long-term obligations                     (875,659)     (1,589,240)       (940,052)
  Proceeds from borrowing on long-term obligations               2,243,447           4,520          93,944
  Net advances from (payments to)
   securitization program                                          392,287        (478,500)        (46,500)
                                                               -----------     -----------     -----------
        Net cash provided by (used in) financing activities      2,307,075      (2,205,312)     (1,002,831)
                                                               -----------     -----------     -----------

NET INCREASE (DECREASE) IN CASH                                    854,845        (146,217)       (127,778)

CASH - BEGINNING OF PERIOD                                          35,825         182,042         309,820
                                                               -----------     -----------     -----------

CASH - END OF PERIOD                                           $   890,670     $    35,825     $   182,042
                                                               ===========     ===========     ===========

SUPPLEMENTAL DISCLOSURES OF
 CASH FLOW INFORMATION
  Cash paid during the years for:
    Interest, net of amount capitalized (1994) and
      interest and income                                      $ 1,039,873     $ 1,060,226     $ 1,360,602
    Income taxes                                               $   141,688     $   252,593     $    25,656

Supplemental Disclosures of Noncash
 Investing and Financing Activity (Note 16)
</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, a home health care
                  delivery service, and a diagnostics center featuring
                  fixed-site magnetic resonance imaging ("MRI"), CT Scan,
                  Sonography and other modalities. Additionally, the Company
                  operates retail pharmacy locations in Ohio and is the landlord
                  of a non-related manufacturing building (see Note 12A).

                  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, PARTNERSHIP 
                  ----------------------------------------------------------
                  INTERESTS OR OWNERSHIP INTERESTS
                  --------------------------------

                  During December, 1996 the Wendt-Bristol Diagnostics Company
                  ("Diagnostics") formed Wendt-Bristol Crosswoods, Ltd.
                  Diagnostics acquired a 50% interest through a capital
                  contribution of $325,000 in January 1997. The new entity
                  closed, in January 1997, on the acquisition of operating
                  assets, including an open field magnetic resonance imaging
                  device. Operations of the diagnostics center began in January
                  1997 and will expand to include helical CT and additional
                  modalities in 1997.

                  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 are anticipated to begin third quarter 1997. These
                  ownership interests will be accounted for utilizing the equity
                  method of accounting.

                  During second quarter 1997, the Company ceased to operate a
                  significant portion of their home health care delivery
                  services. Loss from operations approximated $124,000 for the
                  year ended December 31, 1996 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 additional common
                  shares has increased the Company's ownership to approximately
                  83%. The acquisition cost exceeded the underlying equity in
                  net assets ("goodwill") by $148,103. See Note 1H for further
                  discussion with respect to amortization. 

                  During 1994, the Company sold 17,400 common shares of its 
                  holdings in Diagnostics resulting in a gain of $46,744.
                  Further, the Company has expensed previously deferred
                  operating costs due to the termination of the offering, see
                  Note 3, and recognized a gain for the increase in their share
                  of the equity of Diagnostics as a result of the dilution of
                  the minority shareholders. Dilution has occurred due to
                  shares being sold at values in excess of book value. The
                  combined amounts total $135,101 and are included in the
                  Consolidated Statements of Operations in the caption "Gain on
                  sale of stock of subsidiaries".

                                      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 1994, the Company, as general partner of a limited
                  partnership, sold the assets of a partnership which owned a
                  rental medical office building. 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 1996, 1995 or 1994.

     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 thereby replacing a previous
                  arrangement which terminated in 1995 through an action filed
                  by the Company. This financing arrangement terminated through
                  payment in March, 1997 (see Notes 5 and 15).

                  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.

                  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, 1996 and 1995 were $482,930 and $489,042,
                  respectively. These inventories consist of retail
                  pharmaceuticals, durable medical equipment and supplies.

                                      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)

     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. Amortization expense
                  for the years ended December 31, 1996, 1995, and 1994,
                  amounted to approximately $20,485, $17,900, and $14,200,
                  respectively. Accumulated amortization at December 31, 1996,
                  1995 and 1994, was $163,000, $141,200, and $123,000,
                  respectively. Goodwill consists of an amount applicable to the
                  manufacturing real estate, purchase of a 50% interest of
                  Health America, Inc. 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, 1996, 1995 and 1994.

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

                  The Company has included in deferred charges costs that are
                  being amortized over future periods of up to 40 years related
                  to mortgage financing. They are predominantly costs associated
                  with financing, costs incurred for staff training and other
                  pre-opening items prior to admittance of patients at the new
                  Alzheimer's facility 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. The common
                  stock equivalents (stock options and warrants) outstanding
                  would be anti-dilutive for all years presented.

                                      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)

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

                  The Company utilizes the provisions of Statement of Financial
                  Accounting Standards ("SFAS") No. 109, "Accounting for Income
                  Taxes" (see Note 9).

     M.           FAIR VALUE
                  ----------

                  On January 1, 1995, the Company adopted SFAS No. 107,
                  "Disclosure about Fair Value of Financial Instruments", which
                  requires the disclosure of the fair market value of all
                  financial instruments for which it deems practicable to
                  estimate fair value (See Note 17).

     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.           RECLASSIFICATIONS
                  -----------------

                  Certain Balance Sheet amounts have been reclassified in the
                  1995 financial statements to be in conformity with 1996.

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 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.

                                      II-17


<PAGE>   26


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2.           PRIVATE COMMON STOCK TRANSACTIONS (CONTINUED)

                  In total this additional obligation of $625,000 has been
                  included in the December 31,1995 Balance Sheet caption in
                  "Stock Purchase Agreement Payable" with resulting 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 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.

                  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. These
                  transactions included:

                  (i)      During 1992, the sale and issuance by the Company to
                           CLIC of 3,000,000 common shares of the Company for
                           $3,000,000 and sale by the Company to CLIC of 250,000
                           (which was increased to 300,000 shares upon issuance
                           of a stock dividend to all holders) common shares of
                           Diagnostics for $1,000,000 such shares being paid for
                           by delivery by CLIC to the Company of 1,000,000
                           shares (of the aforementioned 3,000,000 shares) of
                           common stock of the Company.

                  (ii)     During 1993, $1,000,000 of subordinated debt was
                           liquidated by issuing 500,000 shares of common stock
                           of the Company at $2.00 per share to CLIC that was
                           the holder of such debt.

                  (iii)    The  purchase, by CLIC, of an additional 45,000 
                           shares of Diagnostics common stock during its public 
                           offering. See Note 3.

NOTE 3.           SALE OF STOCK OF SUBSIDIARIES

                  WENDT-BRISTOL DIAGNOSTICS COMPANY ("DIAGNOSTICS")
                  -------------------------------------------------

                  In September 1993, Diagnostics updated certain information and
                  filed a second Preliminary Regulation A Offering Circular with
                  the Securities and Exchange Commission ("SEC") for the sale of
                  up to 807,900 shares of common stock of which 553,950 shares
                  were being sold by Diagnostics and the balance sold by a
                  wholly-owned subsidiary of the Company.

                  As of December 31, 1994 gains of approximately $46,700 had
                  been recorded as a result of the sale of 17,400 of Diagnostics
                  by Wendt-Bristol Company through a public offering. During
                  1994, the offering was terminated and related offering costs
                  were charged against gain on sale of stock of subsidiary (see
                  Item 1. Business). No shares were sold in 1996 or 1995.

                  At December 31, 1996, 1995 and 1994, the Company owns, through
                  its wholly owned subsidiary, approximately 83%, 83%, and 54%,
                  respectively, after retroactively adjusting for the effects of
                  a 20% stock dividend in shares of the common stock of
                  Diagnostics to all its stockholders, except Wendt-Bristol
                  Company, which waived its right to receive the stock dividend.
                  See Notes 1B and 2 concerning Wendt-Bristol Company's
                  acquisition of approximately 29% additional shares of
                  Diagnostics in 1995.

                                      II-18


<PAGE>   27


           WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4.           RESTRICTED CASH

                  The Company has restricted cash of $381,025 and $310,912 at
                  December 31, 1996 and 1995, respectively. The amounts in a
                  bank trust account were $171,654 and $163,962 at December 31,
                  1996 and 1995, 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 restricted cash 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.

NOTE 5.           RECEIVABLES

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

<TABLE>
<CAPTION>
                                                                       1996                    1995
                                                                       ----                    ----
<S>                                                                 <C>                      <C>        
                     Receivables:
                       Trade (net of allowance for doubtful
                        accounts) - (a)                             $  2,014,403             $ 2,678,551
                                                                    ------------             -----------
                     Notes receivable - current:
                       Related parties (d)                                67,822                     -
                       Others                                             52,791                  49,920
                                                                    ------------             -----------
                     Total                                               120,613                  49,920
                                                                    ------------             -----------

                     Miscellaneous receivables:
                       Securitization program reserves (c)               232,131                     -
                       Medicaid settlements                                 -                     73,666
                       Medicare settlements                              215,561                 289,232
                       Others - (b)                                      442,963                 495,134
                                                                    ------------             -----------
                     Total                                               890,655                 858,032
                                                                    ------------             -----------

                     Total current receivables                      $  3,025,671             $ 3,586,503
                                                                    ============             ===========
</TABLE>

                  (a)      During February, 1993, the Company and certain of its
                           subsidiaries entered into a three-year financing
                           arrangement to sell, with limited recourse, its
                           health care trade accounts receivable. This agreement
                           terminated in 1995. See additional discussion in Note
                           1E. Cash proceeds from the sale of these receivables
                           amounted to approximately $7,932,000 in 1995.
                           Accounts receivable balances at December 31, 1995
                           have been reinstated on the balance sheet as the
                           financing arrangement had terminated.

                           During May, 1996, the Company and certain of its
                           subsidiaries entered into an agreement with a finance
                           company to secure additional working capital funds to
                           replace the accounts receivable securitization
                           program that terminated in 1995. 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% and 20% for the years ended
                           December 31, 1996 and 1995, 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.

                                      II-19


<PAGE>   28


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5.           RECEIVABLES (CONTINUED)

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

                  (b)      The balance consists mostly (approximately $367,000
                           and $340,000 in 1996 and 1995, respectively) of a
                           receivable due from the former owner of two of the
                           nursing homes regarding adjustments to the final
                           purchase price of the transaction. See Note 12B.

                  (c)      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.

                  (d)      The balance consists of the current portion of notes
                           receivable for the sale of assets to a related party.
                           See Note 12C.

                  (e)      Total interest income for the years ended December
                           31, 1996, 1995 and 1994, amounted to $193,352,
                           $133,719, and $53,323, respectively, and is netted
                           against interest expense in the accompanying
                           Consolidated Statements of Operations.

NOTE 6.           PROPERTY, PLANT AND EQUIPMENT

                  Property, plant and equipment at December 31, 1996 and 1995
                  and the estimated useful lives used in computing depreciation
                  are as follows:

<TABLE>
<CAPTION>
                                                                                            
                                                                DECEMBER 31,                ESTIMATED  
                                                                ------------               USEFUL LIVES
                                                        1996                  1995          (IN YEARS)
                                                        ----                  ----          ----------
<S>                                               <C>                    <C>                     <C>
                   Land and improvements          $    1,666,105         $    1,615,349          30
                   Buildings and improvements         11,941,568             11,606,280         3-40
                   Machinery and equipment             7,272,620              6,310,233         3-14
                                                  --------------         --------------
                                                      20,880,293             19,531,862
                   Accumulated depreciation

                    and amortization                  (6,135,704)            (5,243,057)
                                                  --------------         --------------
                                                  $   14,744,589         $   14,288,805
                                                  ==============         ==============
</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 are
                  anticipated to be placed in service second quarter 1997.

                  Included in property, plant and equipment at December 31, 1996
                  and 1995 are land, buildings and improvements of $4,453,608
                  and $4,427,021 with accumulated depreciation and amortization
                  of $1,061,488 and $948,851, respectively, leased to the
                  purchaser of its former manufacturing division (see Note 12A).

                  Depreciation and amortization expense for the years ended
                  December 31, 1996, 1995 and 1994 was $964,715, $902,692, and
                  $1,142,594, respectively.

                                      II-20


<PAGE>   29


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7.           LONG-TERM OBLIGATIONS

                  At December 31, 1996 and 1995, long-term obligations are as
                  follows:

<TABLE>
<CAPTION>
                                                                    1996          1995
                                                                    ----          ----
<S>                                                              <C>           <C>
5.5% subordinated convertible bond,
interest only payable in quarterly
installments, principal due December, 2001                       $1,000,000    $     -

8.875% mortgage, payable in monthly
installments including interest through
December, 2034                                                    3,166,432     3,176,074

9% mortgage, payable in monthly installments
including interest through June, 2027                             2,931,243     2,948,694

8.25% mortgage, payable in monthly
installments including interest through
February 2002, refinanced April, 1996                                   -         431,674

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

11.26% mortgage, payable in monthly installments plus
interest through September 1995, with any remaining balance
due October 1, 1995, extended to April 1, 1996 at
10%, refinanced April, 1996                                             -       1,639,556

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

Variable rate mortgage - interest at 10.5% at
December 31, 1996 and 1995,  payable in
monthly installments through December, 1997                          34,992        69,996

7.9% to 13% notes payable in monthly
installments including interest, through
February, 2004, collateralized by equipment,
a portion refinanced in March, 1996                               3,195,597     2,162,653

Advances due under accounts receivable securitization program
of which $157,509 is due on a 9% note payable in monthly
installments April through June, 1996                                   -         174,445
</TABLE>





                                      II-21


<PAGE>   30


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7.            LONG-TERM OBLIGATIONS (CONTINUED)

<TABLE>
<CAPTION>
                                                 1996            1995
                                                 ----            ----
<S>                                           <C>            <C>        
12% notes payable in monthly installments
including interest, subsequently paid in
March, 1997 (see Note 15)                         128,578            -

Capitalized lease obligations (see Note 8)         23,951         38,263
                                              -----------    -----------
                                               12,831,614     10,641,355
Less:
  Current installments                            750,758      2,760,789
                                              -----------    -----------
Long-term portion                             $12,080,856    $ 7,880,566
                                              ===========    ===========
</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: 1997 - $750,758,
                  1998- $861,947, 1999 - $803,562, 2000 - $856,373, 2001 -
                  $1,558,360, and thereafter - $8,000,614.

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

                  The Company incurred interest expense, exclusive of
                  capitalized construction interest of $162,730 in 1994, in the
                  amount of $1,297,630, $1,183,945 and $1,443,320, in 1996, 1995
                  and 1994, respectively.

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

                  The Company is obtaining an upgrade of its magnetic resonance
                  imaging ("MRI") in the second quarter 1997. The cost of such
                  upgrade, approximating $400,000, is to be financed.

                  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, and the two Columbus, Ohio
                  nursing homes, the Company leases all of the locations used in
                  its businesses under leases expiring on dates ranging through
                  July 2015.

                                      II-22


<PAGE>   31


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8.           LEASE COMMITMENTS (CONTINUED)

                  As of December 31, 1996, minimum annual rental commitments
                  under noncancelable leases amount to:

<TABLE>
<CAPTION>
                                                OPERATING         CAPITAL
                                                  LEASES          LEASES
                                                  ------          ------

<S>                                           <C>                <C>     
                               1997           $     457,078      $  9,530
                               1998                 342,516         9,530
                               1999                 319,141         8,736
                               2000                 311,409         -
                               2001                 300,308         -
                           Thereafter             4,145,225         -
                                              -------------      --------
                                              $   5,875,677        27,796
                                              =============
                   Less amounts representing
                    interest                                       (3,845)
                                                                 --------
                                                                 $ 23,951
                                                                 ========
</TABLE>

                  In addition, the Company remains contingently liable for
                  certain leases on locations that have been sold. These
                  contingent leases include payments aggregating $267,000 over
                  the next five years.

                  Rental expense included in the Consolidated Statements of
                  Operations for the years ended December 31, 1996, 1995 and
                  1994, was approximately $569,000, $564,000 and $656,000,
                  respectively, net of annual sublease income of $1,740, $20,180
                  and $18,100, respectively. Amortization of assets recorded
                  under capital leases is included in depreciation expense.

NOTE 9.           INCOME TAXES

                  The Company utilizes the provisions of SFAS No. 109 which
                  requires the use of the liability method of accounting for
                  deferred income taxes. As a result, 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, 1996 and
                  1995 are as follows:

<TABLE>
<CAPTION>
                                                                      1996               1995
                                                                      ----               ----
                   Assets:

<S>                                                             <C>                  <C>         
                     Net operating loss carryforwards           $   1,874,000        $  1,846,800
                     Investment tax credit carryforwards               28,400              28,400
                     Bad debt allowance                                47,600             101,000
                     Other                                              3,000              24,000
                                                                -------------        ------------
                                                                    1,953,000           2,000,200
                     Less:  valuation allowance                       200,000             300,000
                                                                -------------        ------------
                                                                    1,753,000           1,700,200
                                                                -------------        ------------
</TABLE>





                                      II-23


<PAGE>   32


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9.            INCOME TAXES (CONTINUED)

<TABLE>
<CAPTION>
                                                                    1996             1995
                                                                    ----             ----
<S>                                                             <C>              <C>         
                   Liabilities:
                     Depreciation and amortization                  604,500           572,000
                     Costs capitalized in connection
                      with acquisitions                             884,600           908,000
                     Other                                           10,200            50,800
                                                                -----------      ------------
                                                                  1,499,300         1,530,800
                                                                -----------      ------------
                   Net deferred tax asset                       $   253,700      $    169,400
                                                                ===========      ============
</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 recognized a deferred tax benefit of
                  $84,300 in 1996 and $74,540 in 1995 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 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 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, 1996 are approximately $5,511,000, expiring
                  $102,000 in 2003, $1,744,000 in 2004, $274,000 in 2005,
                  $2,672,000 in 2006, $336,000 in 2008 and $383,000 in 2009.
                  Included in such net operating losses are approximately
                  $782,000 of pre-acquisition net operating loss carryforwards
                  acquired in the acquisition of a wholly-owned subsidiary in
                  1990, which can only be used to offset taxable income
                  generated by that subsidiary. Investment tax credits available
                  for tax purposes at December 31, 1996 are approximately
                  $28,400 expiring at various dates from 1997 to 2000. In 1996
                  and 1995 as a result of consolidated taxable income the
                  Company was able to utilize net operating losses of $27,000
                  and $193,000, respectively, all of which was pre-operating
                  losses of the acquired subsidiary. There was no taxable income
                  in 1994.

                  As discussed in Note 3, 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. During 1994, Diagnostics generated taxable
                  income and, as a result, incurred current tax expense in the
                  amount of $112,500. Diagnostics has no significant temporary
                  differences that give rise to deferred tax assets or
                  liabilities at December 31, 1996, 1995 and 1994.

                                      II-24


<PAGE>   33


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9.           INCOME TAXES (CONTINUED)

                  During 1995, see Note 3, 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, 1996, 1995 and 1994 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>
                   DECEMBER 31, 1996                                              PERCENTAGE
                   -----------------                                              ----------
<S>                                                                                  <C>   
                   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>
                                                                       NOT INCLUDING
                                                                        DIAGNOSTICS       DIAGNOSTICS
                                                                        (PERCENTAGE)      (PERCENTAGE)
                                                                        ------------      ------------

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

<S>                                                                         <C>               <C>  
                   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
                                                                            =====             =====
                   DECEMBER 31, 1994
                   -----------------

                   Federal statutory rate                                    34.0              34.0
                   Minority interests                                       (39.5)             -
                   State and local income taxes, net of federal
                    tax benefit                                              11.3               2.7
                   Tax effect of permanent differences                       15.4               0.6
                   Tax credits and other                                      9.3              (0.7)
                   Valuation allowance                                      (56.4)             -
                                                                            -----             -----
                   Effective rate                                           (25.9)             36.6
                                                                            =====             =====
</TABLE>


                                      II-25


<PAGE>   34


         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>
                                  1996          1995          1994
                                  ----          ----          ----
<S>                            <C>           <C>           <C>      
Federal:
  Consolidated
    Current expense            $       -     $       -     $       -
    Deferred benefit             (84,300)            -             -
  Without Diagnostics
    Current expense                    -             -             -
    Deferred benefit                   -       (74,540)      (94,860)
  Diagnostics
    Current expense                    -             -       100,000

State:
  Consolidated
    Current expense               45,191             -             -
  Without Diagnostics
    Current expense                    -         7,006        37,700
  Diagnostics
    Current expense                    -        15,555        12,500
                               ---------     ---------     ---------

Total tax expense (benefit)    $ (39,109)    $ (51,979)    $  55,340
                               =========     =========     =========
</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-26


<PAGE>   35


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10.          STOCKHOLDERS' EQUITY (CONTINUED)

                  WARRANTS
                  --------

                  A.       At December 31, 1996, 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 had been extended to May 1, 1997,
                           and the redemption feature has been removed. The
                           Board of Directors is currently considering a further
                           extension of the expiration date.

                           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 expires in May 1998, 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 (see Note
                           15B), 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.

                  During 1991, the Board of Directors granted options for 30,000
                  shares to outside directors at a price of $.75 per share.
                  Subsequent to the grant, options for 10,000 of these shares
                  were terminated due to the resignation of one of the Directors
                  and subsequently re-issued in 1992 to the remaining two
                  outside Directors with an exercise price of $1.375. The $.75
                  per share options expired in 1996 and one outside Director has
                  5,000 of the options at $1.375. 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, 1996, 6,000 such options were issued. 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.
                  Subsequent to the grant, options to purchase 17,000 shares
                  were terminated in 1995 due to the death of one of the outside
                  Directors. Upon election of a replacement Director, options to
                  purchase 10,000 shares at a price of $.375 were granted to the
                  new outside Director with an expiration date of February 1,
                  2000.

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

                                      II-27


<PAGE>   36


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10.          STOCKHOLDERS' EQUITY (CONTINUED)

                  No options were exercised in 1996, 1995 or 1994. There were
                  231,000 stock options outstanding at December 31, 1996 at
                  prices ranging from $.375 to $1.375 per share. At December 31,
                  1996 and 1995, options available for grant were 19,000 and
                  141,000, respectively.

                  In 1997, 5,000 options were exercised at $.875 per share for
                  total proceeds of $4,375. Additionally, 10,000 options with
                  exercise prices of $.875 to $1.25 were terminated as the
                  employees are no longer employed by the Company.

                  The Company utilizes the intrinsic value method under APB No.
                  25 to account for employee stock options. If the Company had
                  utilized the fair value based method under FASB No. 123, the
                  impact would not be significant to the financial statements.

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 its
                  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.

                  This sale has been finalized before government approval for
                  transfer of the liquor licenses has been obtained. If such
                  transfer is not approved by the government, then the Company
                  shall be required to repurchase these assets or provide
                  similar benefits to MHK Corp. Management and MHK believe it is
                  more likely than not that the transfer of the licenses will be
                  achieved.

                  At December 31, 1995, MHK Corp. had a balance outstanding for
                  previous advances, without interest totaling $146,944. 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 the two lounges and the 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.

                                      II-28


<PAGE>   37


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11.          RELATED PARTY TRANSACTIONS (CONTINUED)

      B.          SALE OF ASSETS TO A RELATED PARTY (Continued)
                  ---------------------------------

                  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, 1996 and 1995, the notes receivable amounts
                  due from MHK Corp. approximate $732,000 and $774,000,
                  respectively. Interest income totaling $76,668 and $61,668 for
                  the year ended December 31, 1996 and 1995, 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, 1996 and 1995, the President and CEO of the
                  Company had outstanding Advances totaling approximately
                  $243,000 and $205,000, 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 approximately $30,000
                  during 1997 and $25,000 in years subsequent thereto.

                  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 $865,299 and $758,795 at December
                  31, 1996 and 1995 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.

                                      II-29


<PAGE>   38


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11.          RELATED PARTY TRANSACTIONS (CONTINUED)

      D.          LIFE INSURANCE PREMIUMS RECEIVABLE (CONTINUED)
                  ----------------------------------------------

                  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 $282,000 at December
                  31, 1996, 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. In
                  September 1996, the Company borrowed an additional $60,000
                  (the "Loans") from Marvin D. Kantor, a director and the
                  Chairman of the Board of the Company. 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 totals $55,000.

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.

                                      II-30


<PAGE>   39


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12.          COMMITMENTS AND CONTINGENCIES (CONTINUED)

      A.          REAL ESTATE RELATED TO PREVIOUSLY SOLD DIVISION (CONTINUED)
                  -----------------------------------------------------------

                  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 $50,000, $61,000 and
                  $52,000 related to the clean-up during the years ended
                  December 31, 1996, 1995 and 1994, 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 4 regarding restricted
                  cash set aside to satisfy the New Jersey Department of
                  Environmental Protection and Energy.

      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, 1996 totaling $367,000 (see
                  Note 5(b)) 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.

                                      II-31


<PAGE>   40


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12.           COMMITMENTS AND CONTINGENCIES (CONTINUED)

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

                  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.

      D.          DEBT GUARANTEES
                  ---------------

                  The Company or its subsidiaries is contingently liable as a
                  guarantor of long-term debt and capital lease obligations
                  totaling $790,000 for medical equipment that will be placed in
                  service the second quarter 1997 by entities that a subsidiary,
                  Wendt-Bristol Diagnostics Company ("Diagnostics"), has
                  ownership interests varying from 22.5% to 50%. The Company and
                  its subsidiaries anticipate obtaining cross-collateral
                  agreements with the other investors in their applicable
                  ownership interest. After these cross-collateral agreements
                  are obtained, the Company and its subsidiaries will be
                  contingently liable for debt obligations approximating
                  $310,000.

                  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. The Company anticipates
                  obtaining cross-collateral agreements from the other investors
                  related to their applicable ownership interest.

        E.        CONTINGENT LIABILITY
                  --------------------

                  The Company has received a proposed correction notice for
                  payroll taxes, interest and penalties. The amounts for payroll
                  taxes and accrued interest have been accrued at December 31,
                  1996 while the amounts for penalties approximate $166,000. The
                  Company has a meeting scheduled in the second quarter 1997
                  with the applicable tax authorities to structure a payment
                  plan for the payroll tax and interest and to request a waiver
                  of all or a portion of the penalties. Management has been
                  successful in the past at obtaining waivers for all or a
                  portion of tax penalties. Management has accrued $40,000 of
                  these penalties as their estimate of their pending successful
                  negotiations. While the Company believes it has meritorious
                  defenses against the penalties assessed, the ultimate
                  resolution of the matter, which is expected to occur within
                  one year, could result in an additional expense of $126,000 in
                  excess of the amount accrued.

NOTE 13.          INDUSTRY SEGMENT DATA

                  Industry segment data for years ended December 31, 1996, 1995
                  and 1994 included in Item 1 ("Industry Segments") of this
                  report is an integral part of these financial statements.

                                      II-32


<PAGE>   41


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 1996, 1995 and 1994, the
                  Company contributed 16,262, 21,764 and 8,448 shares, and
                  recorded an expense of $8,733, $9,900 and $13,066,
                  respectively.

NOTE 15.          SUBSEQUENT EVENTS

      A.          During December, 1996, Wendt-Bristol Diagnostics Company
                  ("Diagnostics") formed Wendt-Bristol Crosswoods, Ltd., an Ohio
                  limited liability company. Diagnostics acquired a 50% interest
                  through a capital contribution of $325,000 in January 1997.
                  The new entity closed, in January 1997, on the acquisition of
                  operating assets, including an open field magnetic resonance
                  imaging device. Operations began in January, 1997. The Company
                  is managing the facility. See Note 12D for commitments and
                  contingencies relating to this entity.

      B.          On February 14, 1997, the Company issued thirty-three (33)
                  bonds, designated as Series No. 1 Bonds, totaling five million
                  Swiss francs, due February 14, 2002, to European investors.
                  The Company received $3,416,934 for the conversion of the
                  proceeds of these Bonds. The Bonds provide for quarterly
                  interest payments commencing March 31, 1997 at a rate of 5%
                  per annum. The Bonds and interest are payable in Swiss francs,
                  and as a result, the Company is hedging the currency risk by
                  entering into future contracts. The Bond holders were issued
                  Series No. 1 warrants to purchase an aggregate of 300,000
                  shares of common stock of the Company at $2.00 per share
                  exercisable after March 25, 1997 and before February 15, 2002
                  to warrant holders outside the U.S. Both the Series No. 1
                  Bonds and the Series No. 1 Warrants were issued pursuant to
                  Regulation S of the Securities Act of 1933. Proceeds will be
                  used to liquidate its accounts receivable securitization
                  program (Notes 5 and 15C), expansion in the diagnostic and
                  radiology ventures (Notes 1B and 15A) and general working
                  capital requirements.

      C.          On March 14, 1997, the Company terminated its accounts
                  receivable securitization program and repaid advances which
                  totaled $1,461,633.

      D.          In April, 1997, Wendt-Bristol Diagnostics Company acquired a
                  22.5% interest in Wendt-Bristol at Park Oncology Center, Ltd.
                  ("WB at Park"), an Ohio limited liability company which will
                  operate a radiation therapy practice. WB at Park has entered
                  into a two year lease agreement which includes a mandatory
                  purchase of the building for $1,400,000. The Company will
                  manage the facility. See Note 12D for commitments and
                  contingencies relating to this entity.

      E.          Effective mid April 1997, management has decided to cease
                  operations of a significant portion of its home health care
                  agency in order to eliminate unprofitable portions of the
                  business. Management believes the impact to operations in 1997
                  is not anticipated to be significant. See Note 1B for the 1996
                  impact to operations.

                                      II-33


<PAGE>   42


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 16.         SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING 
                 ACTIVITY

<TABLE>
<CAPTION>
                                                                         1996          1995             1994
                                                                         ----          ----             ----
<S>                                                                   <C>          <C>              <C>
                   SUPPLEMENTAL DISCLOSURES OF
                    NONCASH INVESTING AND
                     FINANCING ACTIVITY 
                     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                $ 875,626
                       Increase in long-term obligations               (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-34


<PAGE>   43


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 16.         SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING 
                 ACTIVITY (CONTINUED)

<TABLE>
<CAPTION>
                                                                          1996           1995            1994
                                                                          ----           ----            ----
<S>                                                                   <C>            <C>              <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                                                    $      -         $ 1,901,236
                       Increase in long-term obligations                                 (166,826)     (1,901,236)
                       Increase in prepaid expenses and other
                        current assets                                                     45,116
                       Decrease in accounts payable                                       121,710

                     A subsidiary of the Company purchased
                     equipment with a capital lease obligation
                       Increase in property, plant and
                        equipment                                                                     $    37,823
                       Increase in capital lease obligation                                               (37,823)
</TABLE>




                                      II-35


<PAGE>   44


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 16.         SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING 
                 ACTIVITY (CONTINUED)

<TABLE>
<CAPTION>
                                                                       1996            1995           1994
                                                                       ----            ----           ----
<S>                                                                <C>                <C>         <C>
                     A subsidiary of the Company purchased 
                     land with a portion financed with a 
                     bank note payable
                       Increase in land                                                           $  105,000
                       Increase in note payable                                                     (105,000)

                     A partnership, of which the Company is 
                     managing general partner, sold the land 
                     and building and reduced related
                     deferred charges
                       Increase in miscellaneous receivable                                       $1,700,000
                       Decrease in deferred charges                                                  (21,097)
                       Increase in accrued expenses, other                                           (74,800)
                       Decrease in gain on sale of assets                                           (621,860)
                       Decrease in property, plant and
                        equipment, net                                                              (982,243)

                     A subsidiary of the Company, less than 
                     100% owned, sold shares of common 
                     stock; deferred offering costs have been
                     reduced against the gain on sale of 
                     subsidiaries
                       Decrease gain on sale of stock of
                        subsidiary                                                                $  (88,357)
                       Decrease in deferred charges                                                  (61,643)
                       Decrease in minority interest                                                 150,000

                     Common stock in treasury of the
                     Company was exchanged for common
                     stock of a subsidiary
                       Decrease in treasury stock                                                 $  (18,644)
                       Decrease in minority interest                                                  18,644

                     A partnership, of which a subsidiary 
                     of the Company is the managing general 
                     partner refinanced a mortgage on its
                     Diagnostic and Radiology Center 
                     building and has capitalized certain costs 
                     relating to the transaction
                       Increase in deferred charges                                               $   9,735
                       Increase in long-term obligations                                             (9,735)
</TABLE>






                                      II-36


<PAGE>   45


         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17.          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, 1996 and 1995, 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.



                                      II-37

<PAGE>   46

                                    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 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              68    Chairman of the Board, Director

                   Sheldon A. Gold               54    President, Treasurer, Chief Executive Officer,
                                                       Director, member of Audit Committee

                   Reed A. Martin                43    Executive Vice President, Chief Operating
                                                       Officer and Director

                   Harold T. Kantor              63    Vice Chairman of the Board, Director

                   Paul H. Levine                56    Director, member of Audit Committee

                   Gerald M. Penn                59    Director, member of Audit Committee

                   Charles R. Cicerchi           37    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 brother
                  of Marvin D. Kantor.

                                      III-1


<PAGE>   47


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.

                  Dr. Gerald M. Penn, M.D., Ph.D., was elected as a director on
                  February 8, 1995 and serves on the audit and stock option
                  committees. 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, the
                  Health Coalition of Central Ohio and the editorial board of
                  the American Association of Laboratory Immunology.

                  Charles R. Cicerchi is a certified public accountant and has
                  been Vice President of Finance since joining the Company in
                  September, 1994. Since May, 1996 he has been the Principal
                  Financial and Accounting Officer of the Company. 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.

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, 1996 and with respect each of whom
                  such compensation exceeded $100,000.

                                      III-2


<PAGE>   48


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              1996   $  150,000    50,000/0        $  -
                   President and Chief          1995      140,000       *               -
                   Executive Officer            1994      140,000       *               -

                   Marvin D. Kantor             1996      130,000       *             75,866
                   Chairman of the              1995      127,404       *             65,028
                   Board                        1994      127,404       *             59,609


                  --------------
<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, 1996, the amounts paid by the Company for
                  each of the named persons is:
</TABLE>

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

<S>                                                           <C>      
                   Marvin D. Kantor                           $  75,866
</TABLE>





                                      III-3


<PAGE>   49


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:

<TABLE>
<CAPTION>
                      OPTION/SAR GRANTS IN LAST FISCAL YEAR
                      -------------------------------------

                                             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>  
                   Sheldon A. Gold      50,000/0          38.5%/0          .875      5/23/01      $    43,750
</TABLE>



<TABLE>
<CAPTION>
                  AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES

                                                                                                    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          $75,000/0
</TABLE>


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

                  All options held by Mr. Sheldon A. Gold were exercisable at
                  December 31, 1996. All were "in-the-money". American Stock
                  Exchange reported quotations for the Common Stock of the
                  Company on December 31, 1996, are: high, $1.50; low $1.50; and
                  close, $1.50; such prices on February 28, 1997 are: high,
                  $1.4375; low, $1.375; and close, $1.4375. 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>   50


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,
                  1997, options to purchase an aggregate of 19,000 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>   51


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, 1996, 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              $414,000
                   Sheldon A. Gold                375,000(4)         09/11/86                62,000
</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, 1996.

                  (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>   52


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>   53


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. Mr. Levine was granted options on May
                  13, 1992, to purchase up to an aggregate of 5,000 shares of
                  the Common Stock of the Company at a price of $1.375 per
                  share, subject to anti-dilution provisions. 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,
                  1992, options to purchase an aggregate of 1,000 shares of the
                  Common Stock of the Company at a price of $1.375 per share,
                  subject to anti-dilution provisions; 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 antidilution 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 antidilution 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 and 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. 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 and 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. 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>   54


ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                  The table below presents as of February 28, 1997, 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                                 866,120              13.57%
                             Two Nationwide Plaza
                             Suite 760
                             Columbus, Ohio 43215

        Common Stock         Harold T. Kantor                                 247,475 (3)          3.88%

        Common Stock         Sheldon A. Gold                                  106,375 (4)          1.67%

        Common Stock         Reed A. Martin                                    40,064 (5)            -

        Common Stock         Paul H. Levine                                    10,500 (6)            -

        Common Stock         Dr. Gerald M. Penn                                15,000 (7)            -

        Common Stock         All Directors and                              1,285,534 (8)          20.14%
                             Executive Officers
                             As a Group (6 persons)

        Common Stock         McBridge Advisory, Ltd.                          626,200              9.81%
                             Dollard House
                             Wellington Quay
                             Dublin 2 Ireland

        Common Stock         Gerald F. Schroer                                389,800              6.11%
                             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
                           (8) 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>

                                      III-9


<PAGE>   55


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 1996 was $809,435; 1995 was $773,638; and 1994 was
                  $121,818. On March 1, 1997, the amount of such indebtedness,
                  exclusive of interest, outstanding was $794,776. Interest at
                  9% totaling $61,823 has been charged, through December 31,
                  1996. 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 1996 was $243,412; 1995 was $204,975; and 1994
                  was $146,454. 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 were
                  limited partners owning less than an aggregate 10% interest in
                  1275 Olentangy River Road Limited Partnership and 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. W-B was the general
                  partner of 1275 Olentangy River Road Limited Partnership which
                  owned and operated a medical office building in Columbus,
                  Ohio. 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.

                  (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 10,000 shares of Common Stock which Mr.
                           Levine may acquire by exercising options granted
                           under the Company's Stock Option Plan.

                                     III-10


<PAGE>   56



ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)

                  (Footnotes continued from previous page)

                  (7)      Includes 12,000 shares of Common Stock which Dr. Penn
                           may acquire by exercising options granted under the
                           Company's Stock Option Plan.

                  (8)      Includes 14,850 shares of Common Stock which may be
                           acquired by exercise of Warrants and 132,000 shares
                           which may be acquired by exercise of options granted
                           under the Company's Stock Option Plan.

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






                                     III-11


<PAGE>   57


                                    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, 1996 and 1995                                           II-8 and II-9

                         Consolidated Statements of Operations for
                          the years ended December 31, 1996, 1995
                          and 1994                                                        II-10

                         Consolidated Statements of Stockholders'
                          Equity for the years ended December 31,
                          1996, 1995 and 1994                                             II-11

                         Consolidated Statements of Cash Flow for
                          the years ended December 31, 1996, 1995
                          and 1994                                                   II-12 and II-13

                         Notes to Consolidated Financial Statements                II-14 through II-37
</TABLE>

                  2.     Financial Statement Schedules.  The following financial
                         statement schedules for the years ended December 31, 
                         1996, 1995 and 1994 are included in Part IV:

<TABLE>
<CAPTION>
                      SCHEDULE                                                             PAGE
                      --------                                                             ----

<S>                              <C>                                                       <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>   58


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>   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
                              ------                -----------

                               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>   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
                              ------                 -----------

                               10.11     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>   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
                              ------                -----------

                               10.17     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 1996:

                  (1)      Report dated December 23, 1996 relating to the sale
                           of a subordinated convertible bond, pursuant to
                           Regulation S of the Securities Act of 1933.

                  (2)      Report dated February 14, 1997 relating to the sale
                           of bonds and warrants, pursuant to Regulation S of
                           the Securities Act of 1933.



                                      IV-5



<PAGE>   62



                                                       SCHEDULE II

         THE WENDT-BRISTOL HEALTH SERVICES CORPORATION AND SUBSIDIARIES

                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

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

<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>      
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
                                      ==========        ==========    ==============     =========
                                                    
December 31, 1994                                                            
  Reserve deducted from asset to                                             
   which it applies:                                                         
    Allowance for doubtful trade                                             
     accounts                        $   224,353        $  111,647    $  (a)  86,000     $ 250,000
                                      ==========        ==========    ==============     =========
  Valuation allowance for deferred                                           
   tax assets                        $   531,480        $      -      $      131,480     $ 400,000
                                      ==========        ==========    ==============     =========

<FN>
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 5.
</TABLE>


                                      IV-6


<PAGE>   63



                                   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)

                                             By: /s/ Sheldon A. Gold
                                                 ------------------------------
April 14, 1997                                        Sheldon A. Gold
                                                      President

                                             By: /s/ Charles R. Cicerchi
                                                 -------------------------------
April 14, 1997                                        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:

<TABLE>
<CAPTION>
              SIGNATURE                                   TITLE                              DATE
              ---------                                   -----                              ----

<S>                                            <C>                                        <C>
/s/   Marvin D. Kantor                         Chairman of the Board and
------------------------                       Director                                   April 14, 1997
Marvin D. Kantor         


/s/   Harold T. Kantor                         Vice Chairman of the Board                 April 14, 1997
------------------------                       and Director
Harold T. Kantor


/s/   Sheldon A. Gold                          President (Principal Executive             April 14, 1997
------------------------                       Officer) and Director
Sheldon A. Gold


/s/   Reed A. Martin                           Executive Vice President, Chief            April 14, 1997
------------------------                       Operating Officer and Director
Reed A. Martin      


/s/   Paul H. Levine                           Director                                   April 14, 1997
-----------------------
Paul H. Levine


/s/   Gerald M. Penn                           Director                                   April 14, 1997
-----------------------
Gerald M. Penn
</TABLE>

                                      IV-7