<PAGE>   1

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K
(Mark one)

     [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR
                   15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       OR

     [ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                   SECURITIES EXCHANGE ACT OF 1934

                         Commission File Number 1-13951


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


                            LEXFORD RESIDENTIAL TRUST
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                    <C>
               MARYLAND                                 31-4427382
   (State or other jurisdiction of                   (I.R.S. Employer
   incorporation or organization)                   Identification No.)
</TABLE>

                         41 SOUTH HIGH STREET SUITE 2410
                              COLUMBUS, OHIO 43215
           (Address of principal executive offices including zip code)

                                 (614) 242-3850
              (Registrant's telephone number, including area code)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:  NONE

<TABLE>
<S>                                                         <C>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON SHARES OF BENEFICIAL INTEREST,
                                                            PAR VALUE $.01 PER SHARE
</TABLE>

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

Indicate by check mark if 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 [ ]

As of March 30, 1998 aggregate market value of voting stock held by
non-affiliates (based on total shares outstanding reduced by the number of
shares held by trustees, officers, and other affiliates) of the Registrant was
$157,403,651 based on the closing price reported on the New York Stock Exchange.

Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES X NO
                         ---  ---

As of March 30, 1998 there were 9,203,916 common shares of beneficial interest
outstanding.

The following document is incorporated herein by reference: Registrant's Form
S-8 Registration Statement and Exhibits thereto dated July 8, 1997.


================================================================================

<PAGE>   2


                            LEXFORD RESIDENTIAL TRUST

                             FORM 10-K ANNUAL REPORT

                       FISCAL YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
PART I:                                                                                PAGE:

<S>            <C>                                                                       <C>
ITEM 1         BUSINESS .................................................................  1
ITEM 2         PROPERTIES ............................................................... 14
ITEM 3         LEGAL PROCEEDINGS ........................................................ 14
ITEM 4         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...................... 15


PART II:

ITEM 5         MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS..... 15
ITEM 6         SELECTED FINANCIAL DATA .................................................. 15
ITEM 7         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS ............................................. 17
ITEM 8         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .............................. 28
ITEM 9         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE .............................................. 28

PART III:

ITEM 10        TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT ........................ 28
ITEM 11        EXECUTIVE COMPENSATION ................................................... 34
ITEM 12        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ........... 48
ITEM 13        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................... 51


PART IV:

ITEM 14        EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K .......... 52

CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES .........................................F-1
</TABLE>


<PAGE>   3




                                     PART I

              This report contains forward-looking statements including, without
limitation: future appreciation in real property market value from investments
and improvements; competitive advantages based upon experience and quality of
service; business strategies; and increases in distributable cash flow available
to Lexford Residential Trust (the "Company") and the Company's qualification to
be taxed as a real estate investment trust ("REIT") for federal income tax
purposes. All of the forward-looking statements contained in this report
represent management's good faith projections of future results and are based
upon existing market, financial and economic conditions known to management.
Future changes or developments in national, regional and local economic and
market conditions, especially increased competition at any of these levels
within the multifamily residential property industry; changing demographics in
the specific locations in which apartment communities owned or managed by the
Company are located; the discontinuance of the identifiable trend towards
consolidation within the multifamily residential property industry generally;
increases in interest rates; or increasing inflation all may operate to render
the forward-looking statements contained in this report inaccurate. There can be
no assurance that any of the forward-looking statements will prove to be
correct. Actual results may differ and such differences may be material.

ITEM 1.       BUSINESS
              --------

                                   THE COMPANY

         Lexford Residential Trust, formerly known as Lexford, Inc. and Cardinal
Realty Services, Inc., is a Maryland real estate investment trust that invests
in and holds direct or indirect ownership interests in multifamily real estate.
Its wholly owned subsidiary, Lexford Properties, Inc., a Texas corporation
("LPI"), provides property management and related services to residential
apartment communities wholly owned ("Rental Properties") and partially owned
("Unconsolidated Partnerships") by the Company. The Company, through its
"Preferred Resources" division, also offers products and services to residents
at the Rental Properties and the apartment communities owned by the
Unconsolidated Partnerships. Where appropriate, references to the "Company" or
"Lexford" also mean and include LPI and the Company's other wholly owned or
controlled subsidiaries.

         As of December 31, 1997, the Company had an ownership interest in 516
apartment communities (consisting of an aggregate of 36,050 apartment units) in
16 states. As of January 1, 1998, Lexford Properties, Inc. managed 576 apartment
communities (consisting of 47,849 apartment units) in 22 states. The Lexford
Properties, Inc. management portfolio included 513 apartment communities (35,844
units) in which the Company has an ownership interest (the "Properties" or
"Portfolio") and 63 apartment communities (12,005 units) managed for third-party
owners. As of January 1, 1998, the Portfolio consists of 405 sites, some of
which consist of multiple phases owned by different legal entities. This
includes 111 entities in which the Company or one of its subsidiaries owns all
of the equity interest and 405 entities in which the Company or one of its
subsidiaries serves as general partner of, and in most cases, also owns some
limited partner interest. Since December 31, 1997, and through March 25, 1998,
287 Properties formerly owned by Unconsolidated Partnerships have become Rental
Properties (SEE "RECENT DEVELOPMENTS").

         On February 19, 1998, in connection with the Company's determination to
elect and qualify to be taxed as a real estate investment trust ("REIT") for
federal income tax purposes, the Company caused LPI to form Lexford Property
Management, Inc., an Ohio corporation ("LPM"), to succeed to the ownership and
operation of its third party property management business. (SEE "RECENT
DEVELOPMENTS").

<PAGE>   4

         The majority of the Portfolio was constructed during the 1980s and is
comprised of buildings of modular construction. On December 31, 1997, the
average economic occupancy of the Portfolio was 92.1% and the average rent
collected per occupied unit was $429. The Portfolio is located in suburban,
secondary and tertiary markets in the midwestern and southeastern United States.

         The Company's executive offices are located in downtown Columbus, Ohio
at The Huntington Center, 41 South High Street, Suite 2410, Columbus, Ohio
43215. The Company's main telephone number is (614) 242-3850. The Company also
maintains a financial operations office in suburban Columbus at 6954 Americana
Parkway, Reynoldsburg, Ohio 43068. Lexford Properties, Inc. is headquartered in
suburban Dallas, Texas at 8615 Freeport Parkway, Suite 200, Irving, Texas 75063.
The Company has regional offices located in Orlando, Florida, and in Houston and
San Antonio, Texas. On December 31, 1997, the Company employed 237 employees in
its corporate and regional offices and 1,961 employees at the Properties.

         The Company's common shares of beneficial interest, par value $.01 per
share ("Common Shares"), are traded on the New York Stock Exchange ("NYSE")
under the trading symbol "LFT". The Common Shares commenced trading on the NYSE
on March 19, 1998 following the merger of the Company's predecessor, Lexford,
Inc., an Ohio corporation, with and into the Company (the "Merger"). The Company
became a publicly held company in 1992 as a result of the distribution of common
stock to creditors pursuant to the Chapter 11 bankruptcy reorganization of the
former Cardinal Industries, Inc. In connection with the bankruptcy
reorganization, Cardinal Industries, Inc. changed its name to Cardinal Realty
Services, Inc. ("CRSI"). CRSI registered its common stock under the Securities
Exchange Act of 1934 in June 1993, pursuant to a Form 10 registration statement.
From 1993 through March 1995, CRSI's common stock was traded on the OTC Bulletin
Board under the trading symbol "CNRV". In March 1995, CRSI listed its common
stock on the National Market Tier of the NASDAQ Stock Market sm. Prior to the
Merger, the common stock traded under the symbol "CRSI". In connection with the
Merger, each share of common stock was converted into the right to receive two
Common Shares. (SEE ITEM 5 - "MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS").

         Prior to the Merger, on October 7, 1997, the Company's shareholders
approved an amendment to the Company's Articles of Incorporation changing the
name of the Company to Lexford, Inc.

RECENT DEVELOPMENTS

         During calendar year 1997, the Company considered various alternative
strategies with respect to its investments in the Properties and with respect to
its property management and Preferred Resource services businesses. Since
January 1, 1996, based upon management's decision to retain the Properties for
investment, the Rental Properties have been fully consolidated in the Company's
Consolidated Statements of Income and the cash flows of the Rental Properties
have been classified as cash flows provided by operating activities in the
Company's Consolidated Statements of Cash Flows.

         The Company's management recognized that the inclusion of the Rental
Properties in its consolidated financial statements depressed net income and,
consequently, earnings per share and gave the Company the appearance of being
highly leveraged even though mortgage indebtedness secured by the Properties is
non recourse to the Company. With the exception of 26 cross-collateralized,
cross-defaulted mortgage loans, mortgage indebtedness secured by the Rental
Properties is structured on a Property-by-Property basis. In the second quarter
of 1997, the Company formed a subsidiary corporation named Lexreit Properties,
Inc. ("Lexreit"), and filed a Form S-11 Registration Statement with the
Securities and Exchange Commission. The Company proposed to contribute
substantially all of its equity ownership interests in the Rental Properties to
Lexreit, to distribute 95% of the common stock of Lexreit to the Lexford
Shareholders (the "Lexreit Spinoff") and to cause Lexreit to qualify and elect
to be taxed as a REIT.

                                       2
<PAGE>   5

         In the weeks following the announcement of the formation of Lexreit,
the Company received comments from its significant shareholders, industry
analysts, representatives of investment banking firms and representatives of
participants in the multifamily residential real estate and REIT industries.
Most commentators positively endorsed the Company's plan to implement a
transaction which would result in the creation of a REIT, as well as the removal
of the appearance of significant leverage from the Company's Consolidated
Balance Sheet, however they suggested that the plan could be enhanced by
increasing its scope, i.e., that Lexford itself effect a REIT election covering
the entire Portfolio of Properties. In the weeks following the filing of the
Form S-11 Registration Statement, the Company's management engaged in further
discussions and began an intensive analysis of the feasibility and the effects
of the Company electing on its own behalf to be taxed as a REIT.

         In August 1997, after consultations with Lexford's independent
accounting firm and outside legal counsel, the Company's Board of Directors
authorized management to proceed with its analysis of effecting REIT status and
engaging a financial advisor. At its Annual Meeting of Shareholders on October
7, 1997 and in a news release published immediately following the Meeting, the
Company announced that it was seriously evaluating a REIT election and that it
had withdrawn its previously announced intention to effect the Lexreit Spinoff.
The Company retained Morgan Stanley & Co., Incorporated as its financial advisor
on October 15, 1997. On December 19, 1997 the Company's Board of Directors
determined that a REIT election and the merger of Lexford, Inc. into a Maryland
real estate investment trust were in the best interests of the Company and its
shareholders.

         Preparatory to the election of REIT status, the Company and its Board
of Directors, effective November 1, 1997, decided to embark upon a program to
consolidate ownership of the Unconsolidated Partnerships (the "Consolidation
Program"). In connection with the Consolidation Program, the Company determined,
with respect to each Unconsolidated Partnership, whether or not the agreement of
limited partnership governing the Unconsolidated Partnership required the
consent of the limited partners to a transfer of the Property owned by the
Unconsolidated Partnership, or equity interests in the Unconsolidated
Partnership, to an affiliate of the Company. The Company also carefully
evaluated the assets and liabilities of each Unconsolidated Partnership,
including the fair value of the Property owned by each Unconsolidated
Partnership. In those cases where the consent of the limited partners of the
Unconsolidated Partnership was required, the Company sought the consent of the
limited partners to a proposed merger transaction whereby the Unconsolidated
Partnership would be merged with a limited partnership formed for the purpose of
the merger, with the Company succeeding to 100% equity ownership of the former
Unconsolidated Partnership. In those cases where consent of the limited partners
was not required, the Company provided the limited partners with notice of its
intent to effect a transaction resulting in the Company's acquiring 100%
ownership of the Unconsolidated Partnership and/or the Property owned by the
Unconsolidated Partnership. The Company has reported the results of the
Consolidation Program to date on Forms 8-K filed on February 17, 1998 and March
2, 1998, respectively. As of March 25, 1998, pursuant to the Consolidation Plan
the Company had acquired 287 Properties formerly owned by Unconsolidated
Partnerships.

         In order to effect its plan to cause a newly created Maryland real
estate investment trust to succeed to the ownership of the Company's assets and
the conduct of its business, the Company created Lexford Residential Trust, a
Maryland real estate investment trust, as its wholly owned subsidiary in January
1998. Lexford, Inc. and Lexford Residential Trust proceeded to file a joint
proxy statement/prospectus under cover of a Form S-4 Registration Statement with
the U.S. Securities and Exchange Commission ("SEC") in order to solicit proxies
for the approval of the proposed Merger as well as register Lexford Residential
Trust's common shares of beneficial interest under the Securities Act of 1933.
The SEC declared the Form S-4 registration statement effective on January 30,
1998 and, in accordance with the joint proxy statement/prospectus, a Special
Meeting of Shareholders was held on March 3, 1998. At the special shareholders
meeting, the Company's shareholders overwhelmingly approved the Merger. The
Merger was effective at the close of business on March 18, 1998 and,
accordingly, Lexford Residential Trust has


                                       3
<PAGE>   6

succeeded to the ownership of the assets and the conduct of the business of
Lexford, Inc. The Common Shares were listed and admitted for trading on the NYSE
on March 19, 1998

         Because the Company's traditional real estate services business
generates revenues which are, in whole or in part, considered "non-qualifying
REIT income," the Company caused LPI to create LPM on February 19, 1998. LPI
contributed substantially all of its assets, tangible and intangible, including,
without limitation, the manager's rights to management contracts incident to the
conduct of its third party property management business, to LPM in exchange for
all of LPM's issued and outstanding preferred stock (representing a 95% economic
interest in LPM). LPI retained all right, title and interest in and to all
contracts for services provided to the Unconsolidated Partnerships as well as
all of its goodwill, training programs, proprietary data with respect to
property management services and systems and its key executive officers. LPM
issued all of its common stock (representing an approximate 5% economic
interest) to Mark D. Thompson, John B. Bartling and the John B. Bartling
Irrevocable Trust for a total consideration of $50,000, payable in a combination
of cash and deferred subscription obligations. The transfer of the third party
management business to, and the capitalization of, LPM will result in reducing
non-qualifying REIT income derived from the Company's third party property
management business from gross revenues received in connection with the conduct
of such business to the net income derived in the form of dividends payable on
LPM's preferred stock held by LPI.

                             THE COMPANY'S BUSINESS

         The Company has historically been engaged in two distinct businesses:
the real estate investment business in which it owns and operates multifamily
residential real estate (the "Real Estate Investment Business"); and the real
estate services business in which it provides fee-based management and other
services to multi-family apartment communities and their residents
(collectively, the "Real Estate Services Business").

         The Company believes that, prior to its decision to elect REIT status,
the primary measure of its ability to generate cash for current obligations and
future acquisitions was Adjusted EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization). Adjusted EBITDA is defined as EBITDA adjusted
for non-recurring items, plus principal payments received on account of second
mortgages held by the Company, less interest paid on mortgage loans to Rental
Properties. Management believes that, in addition to cash flows and net income,
EBITDA is a useful financial performance measure for assessing the operating
performance of an equity REIT because, together with net income and cash flows,
EBITDA provides investors with an additional basis to evaluate the ability of a
REIT to incur and service debt and to find acquisitions and other capital
expenditures and to make distributions to Shareholders. To evaluate EBITDA and
the trends it depicts, the components of EBITDA, such as rental and other
revenues, operating and maintenance expenses, real estate taxes and general and
administrative expenses, should be considered. Excluded from EBITDA are
financing costs such as interest expense as well as depreciation and
amortization, each of which can significantly affect a REIT's results of
operations and liquidity and should be considered in evaluating a REIT's
operating performance. Further, EBITDA does not represent net income or cash
flows provided by (used in) operating, financing and investing activities as
defined by generally accepted accounting principles ("GAAP") and does not
necessarily indicate that cash flows will be sufficient to fund cash needs. It
should not be considered as an alternative to net income as an indicator of the
Company's operating performance or to cash flows as a measure of liquidity. In
the aggregate, Adjusted EBITDA for the 12-month period ended December 31, 1997
was $18.7 million, an increase of 56.1% over Adjusted EBITDA of $12.0 million
for the year ended December 31, 1996. Consistent with its determination to elect
REIT status, the Company intends to begin reporting and emphasizing funds from
operations ("FFO") and cash available for distribution to shareholders ("CAD")
as its primary performance measures beginning with its income statements for the
first quarter of 1998 (SEE "REAL ESTATE INVESTMENT BUSINESS - FUNDS FROM
OPERATIONS").

         In the aggregate, Net Operating Income ("NOI") of the Portfolio
increased approximately 2.8% over 1996 on a same-unit basis due primarily to an
increase of approximately 1.8% in Rental Revenue on a same-unit basis.

REAL ESTATE INVESTMENT BUSINESS

         In its Real Estate Investment Business the Company focuses on its
equity ownership interests in the Properties comprising the Portfolio. Fee

                                       4
<PAGE>   7


simple title to each of the Properties is owned by a limited partnership,
corporation or limited liability company which, in turn, is wholly or partially
owned directly or indirectly by the Company. The Company maintains at least a 1%
partnership (i.e., equity ownership) interest in each of the Unconsolidated
Partnerships, and typically a 9% to 10% managing general partner interest. In
addition to its equity investments (i.e., partnership interests) in the
Unconsolidated Partnerships, the Company holds interest earning receivables from
a majority of the Unconsolidated Partnerships. In most instances, the Company's
interest earning receivable from an Unconsolidated Partnership is the Company's
more meaningful income-producing asset. Positive cash flow generated from the
operations of Unconsolidated Partnerships is generally available to pay accrued
interest on receivables owing to the Company. Interest income on receivables
from Unconsolidated Partnerships has historically been a major source of Company
revenue. (SEE NOTE 1 TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.)
Following the completion of the Consolidation Program, interest income from the
remaining Unconsolidated Partnerships will represent a considerably smaller
portion of the Company's total revenues while rental revenues from the increased
number of Rental Properties will increase significantly.

         The Company has traditionally provided product (asset) management
services to the Unconsolidated Partnerships. In addition, the following services
have been performed for the accounts of the co-owners (limited partners) of the
Unconsolidated Partnerships: informational and financial reporting services,
including tax return preparation and provision of tax return information; and
capital and financial planning, including determination of reserves, funding of
capital requirements and administration of capital distributions to partners.
The Company has earned fees for providing these services, as well as for its
efforts in successful mortgage loan refinancing transactions.

         Location of Properties
         ----------------------

         The table below indicates the geographic locations of apartment
communities in which the Company had an ownership interest at December 31, 1997.

<TABLE>
<CAPTION>
                                 State              No. of Properties               No. of Units
                           -------------------    -----------------------    --- -------------------
<S>                                                                  <C>                    <C>
                                Alabama                                9                      1,296
                                Florida                              128                      8,994
                                Georgia                               75                      5,478
                                Illinois                               4                        281
                                Indiana                               70                      4,415
                                Kentucky                              34                      2,058
                                Maryland                               5                        413
                                Michigan                              25                      1,720
                             North Carolina                            1                        187
                                  Ohio                               137                      8,336
                              Pennsylvania                             9                        580
                             South Carolina                            3                        269
                               Tennessee                               5                        348
                                 Texas                                 1                         67
                                Virginia                               4                      1,211
                             West Virginia                             6                        397
                                                  -----------------------        -------------------
                                                                     516  *                  36,050
                                                  =======================        ===================

<FN>
* The 516 Properties are on a total of 405 sites. Two properties were pending
disposal as of December 31, 1997 and are not included in the above table.
Differences between the number of Properties and the number of sites results
from different legal entities (principally present or former Unconsolidated
Partnerships) which own, or owned, apartment communities on contiguous parcels.
</FN>
</TABLE>

         Rental Properties
         -----------------

         As of December 31, 1997, the Company's Portfolio included 111 Rental
Properties (8,261 units). The Rental Properties are owned by (i) limited
partnerships in which the Company or one of its wholly owned subsidiaries owns
all outstanding partner interests; (ii) limited liability companies in which the
Company and/or one of is wholly owned subsidiaries own all outstanding member
interests; or (iii) wholly owned subsidiaries of the Company.



                                       5
<PAGE>   8
         The following table summarizes the unaudited operating results of the
Rental Properties by quarter in 1997 and for the years ended December 31, 1997
and 1996. Certain amounts for 1996 and the first three quarters of 1997 have
been reclassified to conform to give effect to the Company's capitalization
program described in footnote (2) below. The results shown below are net of
management and other fees paid to the Company. Net income of these partnerships
would be significantly higher if presented after elimination of intercompany
payments representing such fees (about 9-10% of rental revenue on an aggregate
basis).


<TABLE>
<CAPTION>
                                                                  Quarter Ended                     Year        Year
                                                  ----------------------------------------------   Ended       Ended
                                                   March 31,   June 30,   Sept. 30,   Dec. 31,    Dec. 31,    Dec. 31,
                                                      1997       1997        1997       1997        1997        1996
                                                  ============================================== =======================
Statistical information(1)
--------------------------
<S>                                                    <C>        <C>        <C>        <C>          <C>        <C>
Properties at end of period                              113        113        113        111          111        113
Average Units in Service                               8,453      8,453      8,453      8,348        8,427      8,626
Average Economic Occupancy                             90.3%      90.8%      92.6%      92.6%        91.6%      92.4%

<CAPTION>
Financial Information (000s omitted) (1)
----------------------------------------
<S>                                                 <C>        <C>        <C>        <C>          <C>        <C>
Revenues
     Rental Income                                  $  9,862   $  9,988   $ 10,218   $ 10,111     $ 40,179   $ 40,055
     Other Property Income                               325        454        525        368        1,672      1,221
                                                    --------   --------   --------   --------     --------   --------
Total Revenues                                        10,187     10,442     10,743     10,479       41,851     41,276
                                                    --------   --------   --------   --------     --------   --------
Expenses
     Property Operating and Maintenance                3,533      3,732      3,823      3,636       14,724     14,447
     Real Estate Taxes and Insurance                   1,005      1,021      1,059        975        4,060      4,149
                                                    --------   --------   --------   --------     --------   --------
          Operating Expenses                           4,538      4,753      4,882      4,611       18,784     18,596
                                                    --------   --------   --------   --------     --------   --------
          Net Operating Income                         5,649      5,689      5,861      5,868       23,067     22,680
                                                    --------   --------   --------   --------     --------   --------
     Interest - Mortgage                               3,447      3,490      3,569      3,264       13,770     14,132
     Interest - Corporate Advances                       143        146        156        152          597        401
     Major Maintenance (2)                               549        558        (84)      (144)         879      2,772
     Non Operating                                        56        113       (190)        62           41      1,085
     Depreciation and Amortization                     1,236      1,257      1,350      1,358        5,201      4,745
                                                    --------   --------   --------   --------     --------   --------
          Non Operating                                5,431      5,564      4,801      4,692       20,488     23,135
                                                    --------   --------   --------   --------     --------   --------
Income/(Loss) after Certain Expenses                     218        125      1,060      1,176        2,579       (455)
                                                    --------   --------   --------   --------     --------   --------
Capital Expenditures (2)                            $    170   $    203   $  1,156   $    856     $  2,385   $    701
                                                    ========   ========   ========   ========     ========   ========


<FN>
(1)      Not "same store " (not all same Properties in operation during all periods presented).

(2)      The Company initiated a revised capitalization program effective January 1, 1997 which requires capitalization
         of certain replacement items. In prior years all replacement items were expensed.

Note:    See Exhibit 99.1 for Financial Information by Rental Property for each Rental Property as of December 31,
         1997.
</FN>
</TABLE>




                                       6
<PAGE>   9

         Funds from Operations of Rental Properties
         ------------------------------------------

         Funds from Operations does not represent cash flow from operating
activities in accordance with GAAP and is not indicative of cash available to
fund all of the Company's cash needs. Funds from Operations should not be
considered as an alternative to net income or any other GAAP measure as an
indicator of performance and should not be considered as an alternative to cash
flows as a measure of liquidity or ability to make distributions.

         As defined by the National Association of Real Estate Investment Trust
("NAREIT"), Funds From Operations ("FFO") represents net income/(loss) (computed
in accordance with generally accepted accounting principles, consistently
applied ("GAAP")) before minority interest, excluding gains (or losses) from
debt restructuring and sales of property, plus real estate related depreciation
and amortization (excluding amortization of deferred financing costs), and after
adjustment for unconsolidated partnerships and joint ventures. The FFO of the
Rental Properties, for the years ended December 31, 1997, 1996 and 1995 is as
follows: (000s omitted)


<TABLE>
<CAPTION>
                                                             Funds from Operations
                                                  --------------------------------------------
                                                           1997           1996            1995
                                                  -------------  -------------   -------------
<S>                                               <C>            <C>             <C>
     Rental Properties:
     Income/(loss) before Extraordinary Items     $       2,579  $        (455)  $      (2,745)
       Depreciation on Real Estate                        4,806          4,541           4,678
                                                  -------------  -------------   -------------
                                                  $       7,385  $       4,086   $       1,933
                                                  =============  =============   =============

<FN>
       Note:    1995 FFO has been restated for interest expense capitalized during the period the
                Rental Properties were classified as Held for Sale (SEE NOTES 1 AND 2 TO NOTES TO THE
                CONSOLIDATED FINANCIAL STATEMENTS)
</FN>
</TABLE>

         FFO increased approximately $3.3 million for 1997 as compared to 1996
due to the factors discussed in "Property Operating and Maintenance", (SEE ITEM
7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS"), specifically as it relates to the capitalization of interior
replacement items. Excluding the effect of the capitalization, FFO increased
approximately $2.1 million or 33.7% for 1997, as compared to 1996.

         The Company is continuing its efforts to successfully complete its
strategy to qualify and elect to be taxed as a REIT. As an adjunct to its REIT
strategy, the Company has initiated and partially implemented the Consolidation
Program (SEE "RECENT DEVELOPMENTS"). A significant majority of the Properties in
the Company's Portfolio have become Rental Properties and therefore FFO will be
a primary statistic available to investors to evaluate the Company's ability to
fund acquisitions and other capital expenditures and to make distributions to
shareholders (as required of REITs under the federal income tax laws and as
anticipated by investors and the public equity markets).

         Cash Available for Distribution ("CAD") is another measure which the
Company will report in order to provide investors with another financial
performance measure. CAD will not necessarily represent the amount of cash the
Company will, in fact, distribute to its shareholders nor will it represent cash
generated from operating, investing or financing activities as determined in
accordance with


                                        7
<PAGE>   10
GAAP. Some REITs refer to CAD as "funds available for distribution" or "FAD".
Beginning with the Company's financial statements for the quarter ending March
31, 1998, and thereafter, the Company intends to report FFO and CAD in
connection with its periodic reports.

Unconsolidated Partnerships
---------------------------

         The Company holds receivables from substantially all of the 405
Unconsolidated Partnerships in which the Company had an ownership interest on
December 31, 1997, primarily in the form of second mortgages and advances to the
Unconsolidated Partnerships. Interest payments on these receivables generate a
majority of the interest income recognized by the Company. On December 31, 1997,
the contractual obligations of the Unconsolidated Partnerships on account of
second mortgages, advances and other payables, including related interest, was
$232.5 million (SEE NOTE 3 TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS).
In connection with the Consolidation Plan, through March 26, 1998 the Company
has acquired the entire equity interest in a total of 287 former Unconsolidated
Partnerships (all of which were among the 405 Unconsolidated Partnerships at
December 31, 1997). In addition, the acquisition of an additional 39
Unconsolidated Properties is pending final close. Accordingly, receivables owing
from these former Unconsolidated Partnerships should no longer be material to
the financial position of the Company on a consolidated basis. In addition, the
Company has announced that it will continue to seek the consolidation of a
number of additional Unconsolidated Partnerships in connection with the
Consolidation Plan and its intention to elect and qualify to be taxed as a REIT
(see "Recent Developments"). Over the past five years, cash flow from the
Unconsolidated Partnerships has improved, largely as a result of refinanced
first mortgage debt, investments in property improvements and increased NOI. The
improved cash flow allows for increased interest and, in certain instances,
principal reduction payments from the Unconsolidated Partnerships to the
Company.

         The following table summarizes the overall unaudited operating results
of the Unconsolidated Partnerships by quarter in 1997 and for the years ended
December 31, 1997 and 1996. Certain amounts for 1996 and the first three
quarters of 1997 have been reclassified to conform to the quarter and year ended
December 31, 1997 presentation. The results shown below are net of management
and other fees paid to the Company. The net income of the Unconsolidated
Partnerships would have been significantly higher had the Unconsolidated
Partnerships been consolidated for the period presented and thus had such fees
(about 9-10% of rental revenue on an aggregate basis) eliminated from
Unconsolidated Partnership expenses.


<TABLE>
<CAPTION>
Unconsolidated Partnerships                                    Quarter Ended                   Year       Year
                                                 ------------------------------------------    Ended      Ended
                                                 March 31,   June 30,   Sept. 30,  Dec. 31,   Dec. 31,   Dec. 31,
                                                   1997       1997        1997       1997       1997       1996
                                                 --------    -------    -------    --------   -------    -------
<S>                                                <C>        <C>        <C>        <C>        <C>        <C>
     Statistical information(1) (2)
     -----------------------------
     Properties at end of period                      408        408        406        392        392        409
     Average Units                                 25,661     25,661     25,576     25,207     25,438     26,162
     Average Economic Occupancy                      90.6%      91.2%      92.3%      92.8%      91.7%      92.4%
</TABLE>



                                       8
<PAGE>   11

<TABLE>
<CAPTION>
Unconsolidated Partnerships                                    Quarter Ended                           Year         Year
                                                 -----------------------------------------------      Ended         Ended
                                                  March 31,   June 30,     Sept. 30,    Dec. 31,     Dec. 31,     Dec. 31,
                                                    1997        1997         1997          1997        1997         1996
                                                 ---------    ---------    ---------    ---------    ---------    ---------
<S>                                              <C>          <C>          <C>          <C>          <C>          <C>
Financial Information (000s omitted)(1) (2)
-------------------------------------------
Revenues
    Rental Income                                $  29,916    $  30,198    $  30,740    $  31,017    $ 121,871    $ 121,591
    Other Property Income                              948        1,316        1,624        1,036        4,924        3,574
                                                 ---------    ---------    ---------    ---------    ---------    ---------
Total Revenues                                      30,864       31,514       32,364       32,053      126,795      125,165
                                                 ---------    ---------    ---------    ---------    ---------    ---------

Expenses
    Property Operating and Maintenance              10,985       11,486       11,662       11,504       45,637       44,777
    Real Estate Taxes and Insurance                  2,932        2,920        2,845        2,928       11,625       11,978
                                                 ---------    ---------    ---------    ---------    ---------    ---------
          Operating Expenses                        13,917       14,406       14,507       14,432       57,262       56,755
                                                 ---------    ---------    ---------    ---------    ---------    ---------
          Net Operating Income                      16,947       17,108       17,857       17,621       69,533       68,410
                                                 ---------    ---------    ---------    ---------    ---------    ---------
    Interest - Mortgage                              9,777        9,786        9,528        9,469       38,560       39,723
    Interest - General Partner                       3,198        3,176        2,636        3,071       12,081       12,539
    Major Maintenance (3)                            1,371        2,202         (473)         393        3,493       10,350
    Non Operating                                      724          243          500           82        1,549        2,045
    Depreciation and Amortization                    4,640        4,649        4,902        4,859       19,050       18,474
                                                 ---------    ---------    ---------    ---------    ---------    ---------
          Non Operating                             19,710       20,056       17,093       17,874       74,733       83,131
                                                 ---------    ---------    ---------    ---------    ---------    ---------
Inc./(Loss) after Certain Expenses                  (2,763)      (2,948)         764         (253)      (5,200)     (14,721)
                                                 ---------    ---------    ---------    ---------    ---------    ---------
Capital Expenditures (3)                         $     619    $     988    $   4,501    $   3,164    $   9,272    $   3,234
                                                 =========    =========    =========    =========    =========    =========
<FN>
     (1)  Not "same store" (not all same Properties in operation during all periods presented, includes Properties disposed
          of during the year).

     (2)  Excludes 13 Properties acquired late in quarter ended December 31, 1997.

     (3)  The Company initiated a revised capitalization program effective January 1, 1997 which requires capitalization of
          certain replacement items. In prior years all replacement items were expensed.

     Note: See Exhibit 99.1 for Unconsolidated Partnership performance, by property, for all Properties in which the Company
     had an ownership interest as of December 31, 1997.
</FN>
</TABLE>

          On a comparable unit or "same store" basis for the 392 Unconsolidated
Partnerships in operation throughout all periods presented, Net Operating Income
increased $2.0 million or 3.1% in 1997 as compared to 1996. Economic occupancy
for the 393 same store Unconsolidated Partnerships was 92.1% for 1997, as
compared to 92.6% for 1996. Average rent collected per occupied unit per month
on a same store basis was $429 during 1997 as compared to $420 for 1996. The
Unconsolidated Partnership performance for 1997 as compared to 1996, is
comparable to the Rental Properties, and was influenced by the same factors. In
the third quarter, major maintenance was adjusted to capitalize certain
replacement items previously expensed.



                                       9
<PAGE>   12



     The Company's interest income is principally derived from the
Unconsolidated Partnerships. The following table reflects interest income from
Unconsolidated partnerships recognized over the three years ended December 31,
1997.

<TABLE>
                                                                       000s omitted
                                              ---------------------------------------------------------------
Interest Income                                     1997                  1996                   1995
                                              ------------------    ------------------    -------------------
<S>                                           <C>                   <C>                   <C>
  Recurring                                   $          10,681     $           6,960     $            4,099
  Refinancing                                                 0                 1,937                      0
                                              ------------------    ------------------    -------------------
Total                                         $          10,681     $           8,897     $            4,099
                                              ==================    ==================    ===================
</TABLE>

REAL ESTATE SERVICES BUSINESS

         In its Real Estate Services Business the Company provides traditional
property management services to owners of multifamily real estate. These
management services include: day-to-day management and maintenance of apartment
communities; attracting and retaining qualified residents; collecting rents and
other receivables from residents; providing cash management services for rental
revenues, security deposits, taxes, insurance and deferred maintenance escrows;
and compiling and reporting information to property owners. Lexford Properties,
Inc., the Company's wholly owned property management subsidiary, earns fees for
providing such services. LPI's client base included 513 of the 516 Properties in
which the Company had an ownership interest at December 31, 1997. Management
contracts for the Properties are almost all long-term and include incentive fees
for rent collection. LPI's clients also include unrelated third-party owners.
The terms of management contracts for third-party owners ("Third Party
Contracts") vary considerably according to the objectives of the owners, and are
typically subject to termination with 30-day notice. Due to the combination of
controlled and third-party management contracts, the Company expects that the
number of units managed will fluctuate somewhat over time.

         Subsequent to December 31, 1997, in connection with the Company's
determination to elect and qualify to be taxed as a REIT, the Company caused LPI
to transfer its rights in third party contracts to Lexford Property Management,
Inc. a newly formed affiliate corporation (see "Recent Developments"). LPI
continues to act as the property manager for substantially all of those
Properties in which the Company maintains an ownership interest.

         Through its Real Estate Services Business, the Company also provides
ancillary services such as replacement parts, laundry services and maintenance
to apartment properties in which the Company has an ownership interest. The
Company provides these ancillary services under the trade name "Preferred
Resource Company". Through the "Preferred Vendor" volume-buying program,
Preferred Resource Company offers discounted prices on goods produced or
distributed by manufacturers such as General Electric, Whirlpool, Glidden,
Sherwin-Williams, Sears Roebuck and Co. and Maintenance Warehouse/Home Depot. As
of December 31, 1997, the majority of the Properties participated in the
Preferred Vendor program. Throughout 1997, the Company received a rebate for
every purchase made through the Preferred Vendor program, as well as a rebate
from residents' use of laundry equipment. With the Company's transition to REIT
status, the Company will continue to derive rebate revenues from Preferred
Vendor program purchases made by the Unconsolidated Partnerships; however,
Preferred Vendor program purchases made by the Rental Properties will result in
a savings of property operating and major maintenance expenses. The Company has
been informed by legal counsel that rebates from residents' use of laundry
equipment and/or rentals paid for the use of laundry rooms at the Properties
should constitute "rents from real property" within the meaning of the REIT
provisions of the Internal Revenue Code of 1986, as amended (the "Code").


                                       10
<PAGE>   13

         Preferred Resource Company also offers products and services to
residents of apartment communities, including renter's insurance, leased
apartment furnishings, and on a very limited basis, telecommunications and cable
television services. At December 31, 1997, approximately 30% of residents at
apartment communities in which the Company has an ownership interest selected
renters insurance offered through the Company's affiliated insurance agency. The
Company's affiliated insurance agency receives commissions from the sale of
renter's insurance to residents. While the Company has been informed by legal
counsel that commissions received from the sale of renter's insurance will
constitute "non-qualifying REIT income" within the meaning of the Code, the
Company intends to carefully monitor gross revenues derived from each individual
Property as well as renter's insurance commission revenues derived from such
Property in order to ensure that in no event will renter's insurance commissions
ever exceed one percent of the total revenues derived from any individual
Property. Preferred Resource Company also offers leased apartment furnishings
through agreements with national companies such as Aaron Rents, Inc. and Globe
Furniture Rentals, and receives a rebate on furniture packages leased by
residents.

         Capitalization of Properties
         ----------------------------

         The Company's investment strategy includes obtaining and maintaining
the best available financing for the Properties, with the goal of maximizing
their operating performance and managing refinancing risk. Over the past five
years, the Company has successfully negotiated long-term, non-recourse, fixed
interest rate financing for approximately 91% of the Properties. The Company
also negotiated and established escrows for property improvements, real property
tax liabilities and working capital as provisions of refinancing.

         For a discussion of Property mortgage loans refinanced in 1997, SEE
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION --
LIQUIDITY AND CAPITAL RESOURCES.

                                   COMPETITION

         The Properties are largely comprised of apartment units made of solid,
durable modular components pre-manufactured off-site in a quality-controlled
environment. The units were manufactured and shipped to be set on foundations
constructed on-site at the project's final location. The units generally consist
of three or four rooms of uniform design and dimension and are small and
efficient with low-maintenance finishes. The building exteriors feature a
low-pitched asphalt shingle roof, masonite siding and fenced patios. The Company
believes the Properties provide a superior residential alternative to most other
comparably priced apartments and an attractive residential feel through their
mature park-like landscaping, well-maintained lawns and gardens and multiple
building single-story layouts. The average age of the apartment units in the
Portfolio is 14 years.

         Lexford's apartment communities generally cater to a "value-conscious"
resident seeking clean, attractive living accommodations without unnecessary
amenities at rental rates below the median rent in relevant housing market. The
Company seeks to serve this segment by maintaining competitively priced rental
rates as represented by its average monthly rents, which currently range from
$400 to $550 per apartment unit, which the Company believes is typically 20-25%
below the average multifamily rental rates in its markets. The Company believes
that the growth and expansion of several cities (including the cities comprising
its "Core Markets" enumerated under "Corporate Strategy" below) toward and
around outer suburbs where a number of the Properties were originally
constructed has resulted in many Properties now being located in very attractive
areas and desirable neighborhoods when compared to similarly priced apartments.
The average rental rate per unit for the Portfolio at December 31, 1997 was
$433. The Company's Portfolio is diversified across 79 metropolitan areas
throughout the Midwest and Southeast, with concentrations in Florida, Georgia,
Ohio, Indiana, Michigan and Kentucky. The Company's Properties tend to be
located in suburban, secondary and tertiary markets, where the Company competes
locally with other apartment communities.



                                       11
<PAGE>   14

         Competition for residents of apartment communities is subject to the
conditions and pricing of individual units, local market conditions, the
location of the apartment community and other factors. The geographic
distribution of the Portfolio reduces the impact of any one set of local
economic conditions on the Company.

         The multi-family market is characterized by increasing demand generated
by steady population and job growth, low levels of new apartment construction
and continued strong occupancies. According to the REIS REPORTS and other
nationally recognized market data, the Company's primary markets are projected
to be substantially above the national average in terms of population and job
growth.

         The Company will continue to invest in improvements to the Properties
to remain competitive and provide opportunities for increases in rental rates.
In addition, the Company is focusing on training to improve the customer service
skills of its property employees.

                               BUSINESS STRATEGY

         The Company's overall business objective is to maximize the total
return to its shareholders and co-investors through increases in the value of
the Portfolio, cash flows and earnings. The Company believes that this objective
is best achieved by the election of REIT status (which it intends to effect for
fiscal year 1998) and by pursuing a strategy of being the leading provider of
housing to "value-conscious" renters. Accordingly, the Company intends to focus
on core markets where it maintains and establishes substantial market share, and
to continually strive for increases in operating margins.

         Lexford's mission is to become the dominant U.S. provider of housing to
"value conscious" renters. Lexford's strategies to fulfill this mission and
build shareholder value are:

         *    A focus on core markets where the Company maintains substantial
              market share;

         *    An emphasis on competitive pricing and operating margins as a
              low-cost operator; and

         *    A commitment to rewarding employees for ingenuity and
              productivity.

         The Company has identified six "core markets" where it has strong
market share: Atlanta, Georgia; Columbus, Ohio; Indianapolis, Indiana; Miami,
Florida; Orlando, Florida; and Tampa, Florida. The Company intends to expand
within these markets by synergistic and opportunistic investing in apartment
communities that complement its "value-conscious" resident profile. The Company
will also pursue external growth through acquisitions in markets with the
potential to develop into new core markets, and through acquisitions of, or
co-investment in, portfolios of apartment communities.

         The Company will strive to increase operating margins through its
emphasis of onsite property management. The Company believes there are
significant opportunities to improve the profitability of individual Properties.

     Increase Revenues at Existing Properties.  The Company will continue to
seek to increase rental rates by embarking on a capital expenditure program over
the next five years. The Company historically has been able to effectuate
meaningful rental rate increases following expenditures on deferred maintenance
and capital improvements. For example, the performance of the Properties where
improvements were effected following recent mortgage loan refinancings has
improved dramatically with revenues from such Properties increasing 16.3% from
1995 through 1997. Following thorough analysis of the Properties and the
sensitivities to rent increases in their respective locales, management has
identified 224 Properties (approximately 15,000 units) for which it believes
disciplined capital spending will yield substantial revenue increases and
attractive returns on investments. Subject to available financing, the Company
expects to invest approximately $43.0 million in excess of its targeted $350 per
unit annual maintenance spending level for various revenue-enhancing projects at
such Properties over the next five years.

     The Company believes that it is uniquely positioned to identify required
improvements, and achieve favorable pricing on these improvements, because of
the homogeneous nature of the Properties and the Company's extensive database of
historical capital improvements. The homogeneity of the Company's apartments
enables the Company to accurately assess useful lives of all major components

                                       12
<PAGE>   15
(i.e. roofs, appliances, painting, asphalt, etc.) and the Company's database of
historical capital expenditures by Property, component and year of replacement
provides the Company with a useful tool to accurately forecast capital
expenditures, and thus budget appropriate replacement reserves.

     Leverage Operating Efficiencies.  The Company emphasizes on-site property
management and believes there are significant opportunities to improve the
profitability of individual Properties. Particular attention is paid to
opportunities to increase rents, raise occupancy rates and control costs, with
property managers being rewarded for monitoring and reacting to market trends.
Since the Company's acquisition of LPI in August 1996, LPI personnel have
assumed responsibility for managing all of the Properties, and in doing so have
brought to the Company their collective experience and high standards for
personnel, training and management systems.

     The Company believes that the durability and uniformity of its Properties
provide for economies and efficiencies in operating and maintenance costs. The
Company seeks to manage expenses through a system of detailed management
reporting and accountability. The Company also expects to realize significant
expense reductions as a result of the Consolidation Program, which eliminates
the costly and cumbersome reporting (both tax and financial), communication and
in many instances, cash segregation required to administer over 400 limited
partnerships with more than 7,000 third party limited partners. The Company may
further seek to control expenses through investment in cost-saving initiatives
such as national contracting, implementation of improved technology, and the
installation of individual apartment unit water and utility meters in certain
locations. With its relatively low operating and maintenance costs, the Company
can offer very competitive rents and still maintain attractive operating
margins.

     Increase FFO Through Deleveraging.  The Company intends to prepay mortgage
indebtedness secured by the Rental Properties. The Company expects that these
actions will significantly increase FFO and Cash Available for Distribution,
reduce the Company's consolidated debt-to-market capitalization ratio to a level
more consistent with other comparable publicly traded REITs, lower the Company's
aggregate cost of capital (by eliminating higher cost mortgage indebtedness) and
enhance borrowing capacity to fund future acquisitions and capital expenditures.
The Company will seek to raise capital to pay mortgage indebtedness of
approximately $174.8 million secured by 135 Rental Properties which by its terms
is prepayable without substantial penalty or premium (collectively the
"Prepayable Debt"). If successful, following such payment and after giving full
effect to the acquisition of the entire equity interest in 326 Properties
subject to the Consolidated Program, the Company will have approximately $342.2
million of mortgage indebtedness remaining on the Rental Properties of which
$99.3 million becomes prepayable in 1998, $107.5 million in 1999, $102.2 million
in 2000 and $17.3 million in 2001, with weighted average interest rates of
8.81%, 8.62%, 8.90% and 8.54%, respectively. The Company intends to further
reduce its interest expense and therefore increase FFO and Cash Available for
Distribution by retiring such indebtedness as it becomes prepayable, subject to
the availability of capital at pricing which makes prepayment desirable.

     Acquisitions.  The Company expects to grow by acquiring individual
apartment properties or portfolios of properties and believes such growth will
result in improved economies of scale and increased cash flows and
profitability. The Company believes that it is well-positioned to take
advantage of consolidation opportunities in the value-conscious segment of the
apartment industry which, when compared to the more active consolidation and
acquisition trends occurring in the high middle and upper income segments, have
yet to be realized. The Company believes it is also well positioned to acquire
and manage apartment communities with smaller numbers of units. The Company
believes that there is less competition among REITs for both properties within
the value-conscious segment and properties containing less than 150 units, and
therefore, that such properties can be acquired at attractive prices.  The
Company believes it has developed the management expertise necessary to compete
in this segment effectively and achieve attractive financial returns on newly
acquired properties. In addition, the Company believes it can improve the
profitability of such properties through revenue enhancement and cost reduction
since many of these properties are owned by parties that are either
inadequately capitalized or lack the professional property management expertise
of the Company.

                                       13
<PAGE>   16

ITEM 2.    PROPERTIES
           ----------

         The Company maintains ownership interests in the Rental Properties and
the Unconsolidated Partnerships (SEE ITEM 1. "BUSINESS").

         The Company's executive offices are located in a 6,158 square-foot
suite in the Huntington Center at 41 South High Street, in downtown Columbus,
Ohio.

         The Company also has corporate offices for 36,120 square feet of space
within a single-story office building at 6954 Americana Parkway, in suburban
Columbus, Ohio. The Company entered into a lease for the building with Americana
Investment Company (an entity affiliated with an outside director of the Company
- SEE PART III ITEM 13: "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS") in
late 1992. This lease expired in October 1997 and was extended on a month to
month basis beginning November 1, 1997. Management believes that the lease terms
are competitive with commercial lease rates in the suburban Columbus market.

         LPI's corporate headquarters are located in a 15,185 square-foot suite
of offices located in an office park at 8615 Freeport Parkway in suburban
Dallas, Texas. LPI entered into a lease for the office suite in 1993. In
addition to the corporate headquarters, the Company leases regional operations
offices in Orlando, Florida; Seattle, Washington; and in Houston and San
Antonio, Texas.

ITEM 3.    LEGAL PROCEEDINGS
           -----------------

         On March 7, 1996, the Company filed suit against Hartford Fire
Insurance Company ("Hartford") in the United States District Court for the
Middle District of Florida, in a case captioned CARDINAL REALTY SERVICES, INC.
V. HARTFORD FIRE INSURANCE CO., Case No. 96-458-CIV T-24A. In that case, the
Company seeks to recover from Hartford, pursuant to an excess property insurance
policy issued to the Company by Hartford, for termite-related losses at
approximately 150 Properties in which the Company holds (or formerly held) an
interest. The termite related losses are the same as those which formed the
subject matter of prior litigation against the Company's former primary
insurance carrier, National Union Fire Insurance Company in which the Company
arrived at a mutual settlement. Hartford's insurance policy provides coverage
for such losses to the extent they constitute a "single occurrence" within the
meaning of the policy and exceed $25 million. The Company has been unsuccessful
in its efforts to arrive at a settlement of its claim in this proceeding in an
amount that the Company believes to be reasonable. A trial was commenced in
Tampa, Florida in February 1998; however, after one week of trial proceedings
the Visiting Judge presiding over the trial became ill and the U.S. District
Judge declared a mistrial. A new trial has been tentatively scheduled for
September 1998.

         The Company is party to a number of other litigation matters arising in
the ordinary course of business, none of which is material or represents any
significant potential impact upon the Company or its financial condition.


                                       14
<PAGE>   17

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
           ---------------------------------------------------
           None

                                     PART II

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

           In 1997 and 1996, the Company's common stock traded on the National
Market tier of the Nasdaq Stock Market sm under the trading symbol "CRSI." On
December 31, 1997, there were approximately 1,338 registered holders of the
Company's Common Stock. The following table sets forth the high and low sale
prices of the Common Stock for the periods indicated as adjusted for the two for
one share exchange in connection with the merger of Lexford, Inc. with and into
the Company.

<TABLE>
<CAPTION>
                                                1997                     1996
                                      -----------------------   -----------------------
                                         High          Low          High         Low
                                      ----------   ----------   ----------   ----------
<S>                                   <C>          <C>          <C>          <C>
    First Quarter                     $    13.38   $    10.25   $     9.38   $     8.75
    Second Quarter                         13.00        11.63        10.88         8.75
    Third Quarter                          14.13        10.94        10.38         9.25
    Fourth Quarter                         17.25        13.57        10.63         9.69
</TABLE>

                        The Company's transfer agent is:

                                Fifth Third Bank
                               Fifth Third Center
                               38 Fountain Square
                                    MD 1090D2
                             Cincinnati, Ohio 45263

         The Company has paid no dividends since it became a public reporting
company. Until August 1995, the Company's ability to pay dividends was subject
to a prohibition contained in its financing arrangements with The Huntington
National Bank. The terms of the Company's current credit facility provided by
The Provident Bank no longer restricts dividends. (SEE ITEM 7. "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
LIQUIDITY AND CAPITAL RESOURCES.")

ITEM 6.  SELECTED FINANCIAL DATA
         -----------------------

         The information below should be read in conjunction with the
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND ITEM 7 - "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

         The unaudited tables set forth below provide a variety of statistical
information about the Company. The Company believes that earnings before
interest, income taxes, depreciation, amortization and extraordinary items
("EBITDA"), Recurring EBITDA (EBITDA less Loan Fees and as adjusted for
Nonrecurring items) and Adjusted EBITDA (Recurring EBITDA plus principal
payments on account of receivables received from Unconsolidated Partnerships
less interest expense on Rental Property mortgage debt) are significant
indicators of the strength of its results. EBITDA is a measure of a Company's
ability to generate cash to service its obligations, including debt service
obligation, and to finance capital and other expenditures, including
expenditures for acquisitions. EBITDA does not represent cash flow as defined by
GAAP and does not necessarily represent amounts of cash available to fund the
Company's cash requirements.



                                       15
<PAGE>   18

<TABLE>
<CAPTION>

                                        Year Ended        Year Ended      Year Ended       Year Ended     Year Ended
                                       December 31,      December 31,    December 31,     December 31,   December 31,
                                          1997(1)          1996(1)           1995            1994            1993
                                       -------------    -------------    -------------   -------------   -------------
<S>                                    <C>              <C>              <C>             <C>             <C>
Operating Revenue                      $  70,367,491    $  65,300,990    $  23,676,429   $  22,600,025   $  16,064,076
                                       =============    =============    =============   =============   =============

Income before Extraordinary Item       $   3,386,112    $   5,370,230    $   4,292,713   $   3,943,943   $     229,049

Extraordinary Item                     $    (180,534)   $  (1,614,356)   $     804,022   $   3,155,901   $   1,050,086
                                       -------------    -------------    -------------   -------------   -------------
Net Income                             $   3,205,578    $   3,755,874    $   5,096,735   $   7,099,844   $   1,279,135
                                       =============    =============    =============   =============   =============
EBITDA(2)                              $  26,528,887    $  29,530,914    $  24,599,501   $  24,752,196   $  19,887,705
                                       =============    =============    =============   =============   =============
Adjusted EBITDA(2)                     $  18,720,209    $  11,990,697    $   8,212,539   $   6,850,341   $   4,189,385
                                       =============    =============    =============   =============   =============


<CAPTION>
Basic Earnings Per Share:
<S>                                    <C>              <C>              <C>             <C>             <C>
    Income before Extraordinary Item   $        0.42    $        0.71    $        0.59   $        0.56   $        0.03

    Extraordinary Item                         (0.02)           (0.21)            0.11            0.45            0.15
                                       -------------    -------------    -------------   -------------   -------------
    Net Income                         $        0.40    $        0.50    $        0.70   $        1.01   $        0.18
                                       =============    =============    =============   =============   =============
Diluted Earnings Per Share:

    Income before Extraordinary Item   $        0.41    $        0.69    $        0.56   $        0.52   $        0.03

    Extraordinary Item                         (0.02)           (0.21)            0.11            0.42            0.14
                                       -------------    -------------    -------------   -------------   -------------
    Net Income                         $        0.39    $        0.48    $        0.67   $        0.94   $        0.17
                                       =============    =============    =============   =============   =============


<CAPTION>
Balance Sheet Data:  (At period end)
<S>                                    <C>              <C>              <C>             <C>             <C>
Total Assets                           $ 241,597,596    $ 245,367,779    $ 239,398,900   $ 236,729,107   $ 243,969,706
Long-Term Debt                           149,998,556      163,319,285      170,111,869     168,159,368     179,816,494
Shareholders' Equity                      74,846,496       62,509,178       51,246,094      43,248,143      31,684,299

<FN>
     The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial
     Accounting Standards No. 128, Earnings Per Share. For further discussion of earnings per share and the impact of
     Statement No. 128 SEE NOTE 1 TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. The earnings per share amounts
     prior to 1997 have also been restated for the two for one share exchange (SEE NOTE 14 TO NOTES TO THE CONSOLIDATED
     FINANCIAL STATEMENTS).

(1)  The Company, during 1995 and prior years, classified the Rental Properties as Held for Sale. While the Rental
     Properties were Held for Sale, the results of operations from the Rental Properties were credited to the carrying
     value of the real estate and no revenues, expenses or depreciation were included in the Consolidated Statements of
     Income. Commencing in 1996, the Company changed the classification of the Rental Properties and fully consolidated
     the operations of the Rental Properties in the Company's Consolidated Statement of Income (SEE NOTES 1 AND 2 TO
     NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS).

(2)  EBITDA and Adjusted EBITDA for the years ended December 31, 1995, 1994 and 1993 includes the funds from operations
     of the Rental Properties during the period such Properties were Held for Sale (SEE ITEM 1 - "BUSINESS - FUNDS FROM
     OPERATIONS").
</FN>
</TABLE>



                                       16
<PAGE>   19

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

                                  INTRODUCTION

         The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto (SEE ITEM 1 -
"BUSINESS" AND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS).

                              RESULTS OF OPERATIONS

Comparison of Results of Operations for the Years ended December 31, 1997 and
1996

         RENTAL REVENUES are derived from the apartment communities that
comprise the Company's Rental Properties. Revenues increased approximately
$574,000, or 1.4%, in 1997 as compared to 1996. The increase was primarily due
to the increase in average rent collected from occupied units from $420 in 1996
to $429 in 1997. The average economic occupancy of the 111 Rental Properties in
operation at all times during 1996 and 1997 was 92.4% in 1996 compared to 91.6%
in 1997. Economic occupancy is defined as the amount of revenue collected from
residents as a percentage of the revenue a property could generate if full rents
for all units were collected.

         FEE BASED REVENUES are comprised of Property Management Services and
Investment Management revenues generated from services provided to Properties
and residents at the Properties. Property Management Services revenues
principally relate to property management and accounting services provided to
the Properties. Preferred Resource (formerly referred to as Ancillary Services
or Preferred Vendor) revenues include a portion of discounts earned by the
Properties for assisting in the acquisition of needed parts and supplies and
managing a coordinated buying group in 1997. In prior years, the Company was
involved in direct sales of parts and supplies to the Properties. In addition,
revenue is generated from renters insurance and other services provided to
residents. Investment Management revenues consist of partnership administration
fees as well as loan refinancing and restructuring fees.

         The following are the major components of Management Services Revenues
and Investment Management Revenues for 1997 as compared to 1996 (certain amounts
previously reported have been reclassified herein between Management Services
and Preferred Resource for all periods presented):

<TABLE>
<CAPTION>
                                                                   1997                 1996
                                                             ----------------     ----------------
<S>                                                          <C>                  <C>
Management Services:
 Property Management Services:
     Unconsolidated Partnerships                             $      7,794,319     $      7,782,722
     Third Party                                                    4,269,553            2,135,429
     Other Management Service Fees                                  1,549,996            1,513,287
 Preferred Resource:
     Furniture Leasing and Renter=s Insurance                         243,867              403,704
     Preferred Resource Purchase Rebates                              302,811                    0
     Resident Applications Fees                                       421,564              399,725
     Replacement and Maintenance Material Revenues - Net                    0               45,676
                                                             ----------------     ----------------
Total Management Services Revenues                                 14,582,110           12,280,543
                                                             ----------------     ----------------

Investment Management:
 Partnership Administration and Other Fees                          1,134,412            1,131,775
 Loan Refinancing and Restructuring Fees                              130,510              751,994
                                                             ----------------     ----------------
Total Investment Management Fee Revenues                            1,264,922            1,883,769
                                                             ----------------     ----------------
Total Fee Based Revenues                                     $     15,847,032     $     14,164,312
                                                             ================     ================
</TABLE>


                                       17
<PAGE>   20

         Fee Based Revenues increased approximately $1.7 million, or 11.9%, in
1997 as compared to 1996. The increase was primarily due to the inclusion in
1997 of a full year of revenues from the operations of Lexford Properties, a
third party property management company, which was acquired on August 1, 1996
(SEE NOTE 1 TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - "LEXFORD
PROPERTIES ACQUISITION"). The approximate $160,000 decrease in income derived
from Furniture Leasing and Renter's Insurance activities from 1996 to 1997 was
more than offset by approximately $303,000 of income generated from the volume
discount/rebate program instituted by the Company in 1996 in connection with
purchases by the Properties. The substantial completion of major debt
refinancing efforts by the Company in 1996 resulted in the decrease of
approximately $621,000 in Loan Refinancing and Restructuring Fees.

         Fee Based and Rental Revenues are dependent to a certain extent on the
financial condition of the Properties owned and managed by the Company and the
Company's ability to retain its ownership interests. Loss of these interests,
due to an increase in interest rates or an inability to refinance matured loans,
could have a material adverse impact on Revenues and the financial condition of
the Company. In addition, the Company derives its third party property
management revenues from 30 day cancelable contracts. Therefore, the amount of
revenue generated from third party management contracts may be subject to
significant fluctuation from period to period.

         Fee Based and Rental Revenues are also directly related to the
occupancy and level of rents collected at the properties managed by the Company.
For the past three years the Company has maintained occupancy, on average, above
90% at the properties managed by the Company. The Company's ability to obtain
rental increases and maintain occupancy are highly dependent upon market
conditions, the physical condition of the properties and the competitive
environments affecting such properties. The Properties are subject to all
operating risks common to residential apartments in general. Such risks include:
competition from other apartments; excessive building of comparable properties
or increases in unemployment in the areas where the apartment communities are
located, any of which might adversely affect apartment occupancy or rental
rates; increases in operating costs due to inflation and other factors, which
increases may not necessarily be offset by increased rents; the inability or
unwillingness of residents to pay rent increases; and future enactment of rent
control laws or other laws regulating multi-family housing, including present
and possible future laws relating to access by physically impaired persons.

         INTEREST INCOME increased $1.8 million, or 20%, in 1997 compared to
1996. Interest Income is primarily derived from the interest collected or
accrued on the recorded value of investments in, and advances to, Unconsolidated
Partnerships. (SEE NOTE 3 TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS).
The increase in interest income derived from cash generated by property
operations was approximately 53% over the same periods, as approximately $1.9
million of 1996 Interest Income was generated from the excess proceeds derived
from refinancing of Unconsolidated Partnerships (SEE "LIQUIDITY AND CAPITAL
RESOURCES" -- FINANCING AND DEBT RESTRUCTURING OF THE PROPERTIES). Although the
interest income generated from excess refinance proceeds is not recurring,
Interest Income was favorably impacted in 1997, and may be favorably impacted in
the future, by the lower debt service as a result of the refinancing
transactions completed in 1996 and prior years. The increase in 1997 was a
result of improved cash flow due to improved operating performance of the
Unconsolidated Partnerships and lower debt service requirements on mortgage debt
refinanced in prior years.

         INCOME FROM DISPOSAL OF ASSETS -- NET, increased approximately $1.0
million, or 106.6%, in 1997 as compared to 1996. This income is derived from the
net disposition proceeds in excess of the aggregate recorded value of these
assets. Additional income from the disposal of assets may be recognized in the
future although it is not a significant long term source of revenue for the
Company.



                                       18
<PAGE>   21

         PROPERTY OPERATING AND MAINTENANCE expense decreased approximately $2.1
million in 1997 as compared to 1996. The majority of the decrease is due to the
capitalization of certain furniture and fixture replacements previously
expensed. In the third quarter of 1997, management reviewed its replacement
maintenance costs and determined that certain expenditures had a longer useful
life and did not require as frequent replacement. These items will now and in
the future be capitalized and depreciated over an estimated useful life of five
years. Management believes that the revised capitalization policy (which by
virtue of a third quarter adjustment has been applied effective as of January 1,
1997) is more like that of its industry peers, most of which are Real Estate
Investment Trusts ("REITs"). The Company has announced its intention to qualify
as a REIT for federal income tax purposes for fiscal year 1998.

         REAL ESTATE TAXES AND INSURANCE expense remained relatively constant
and decreased approximately $88,000, or 2.1%, in 1997 as compared to 1996.

         PROPERTY MANAGEMENT EXPENSES increased approximately $3.0 million in
1997 as compared to 1996. The increase was primarily related to the inclusion in
1997 of a full year of expenses for the third-party management operations of
Lexford Properties, which was acquired effective August 1, 1996.

         ADMINISTRATION EXPENSES increased approximately $416,000 in 1997
compared to 1996. The increase in administration expenses was due, in part, to
the executive and middle management restructuring implemented at the end of 1995
which resulted in lower payroll expense during the first half of 1996 due to
open positions, principally at the senior management level, many of which
positions have since been filled. The Company also incurred additional costs of
approximately $253,000 in 1997 associated with a promotional and marketing
campaign designed to promote the Lexford Properties third party property
management operation and the Company's name change in October 1997.

         PERFORMANCE EQUITY PLAN expense represents the non-cash charge recorded
upon the vesting of 424,000 shares under the 1997 Performance Equity Plan which
was approved by the Company's shareholders at the 1997 annual meeting. An
additional 212,000 shares issued under such Plan remain subject to forfeiture
unless vesting criteria are satisfied during or prior to fiscal year 1999.

         NONRECURRING COSTS in 1997 of $827,000 were up from $243,000 in 1996.
Approximately $400,000 of the charge was due to costs related to the elimination
of overlapping functions between Lexford Properties and the Company's previous
management services operations. In the second half of 1997 the Company recorded
a charge of approximately $427,000 primarily related to costs incurred for the
Form S-11 filing for the proposed spinoff of the Company's Rental Properties.
The Company has withdrawn this filing as it has determined to maintain its
ownership interests in the Rental Properties and seek to qualify as a REIT under
the Internal Revenue Code.

         INTEREST EXPENSE on mortgages on the Rental Properties decreased
approximately $362,000 in 1997 as compared to 1996. The decrease in interest
expense was due to the refinancing transactions completed in late 1996. Interest
expense on the Company's corporate lines of credit decreased approximately
$441,000 in 1997 compared to 1996. The decrease is due to lower outstanding
balances on the lines: $7.4 million was outstanding at December 31, 1997,
compared to $15.3 million at December 31, 1996. (SEE "LIQUIDITY AND CAPITAL
RESOURCES").



                                       19
<PAGE>   22

         DEPRECIATION AND AMORTIZATION EXPENSE increased approximately $1.0
million in 1997 as compared to 1996. The increase is due to the amortization of
goodwill and management contracts associated with the Lexford Properties
acquisition and depreciation associated with the items capitalized as discussed
above in "Property Operating and Maintenance". In addition, in 1997 the Company
recorded a charge of approximately $364,000 as an amortization adjustment to the
value assigned to the third party management contracts acquired in 1996. The
adjustment was based upon the significant decline in the number of third party
property management contracts.

         INCOME BEFORE EXTRAORDINARY ITEM decreased from $5.4 million in 1996 to
$3.4 million in 1997. The Extraordinary charge in 1997 of approximately
$181,000, and in 1996 of $1.6 million, net of taxes, were both a result of
mortgage debt refinancing on certain Rental Properties (SEE NOTE 6 TO NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS AND "LIQUIDITY AND CAPITAL RESOURCES" -
FINANCING AND DEBT RESTRUCTURING OF THE PROPERTIES). Both Income before
Extraordinary Item and Net Income were negatively impacted by the non-cash
charge recorded upon the vesting of 424,000 shares under the Company's 1997
Performance Equity Plan, as discussed above under "Performance Equity Plan."
Before giving effect to that charge, Net Income for 1997 would have increased
86.9% over 1996. After the charge, 1997 Net Income declined about $550,000, or
14.7%, to $3.2 million, from $3.8 million in 1996. In addition, Earnings Per
Share calculations were significantly impacted by the Performance Equity Plan
and the vesting of awards of shares under employment agreements and other
incentive plans. Before giving effect to the charge for the Performance Equity
Plan and the dilutive effect of the associated shares, Basic and Diluted
Earnings Per Share would have been $.88 and $.86, respectively, an increase of
76% and 79% over 1996. After the charge and dilutive effect of the shares, Basic
and Diluted Earnings Per Share for 1997 were $.40 and $.39, respectively, from
$.50 and $.48, respectively for 1996.

Comparison of Results of Operations for the Years ended December 31, 1996 and
Pro Forma 1995

         The financial statements for the year ended December 31, 1995 does not
include the results of operations (revenues or expenses) attributable to the
Rental Properties previously classified as "Real Estate Assets Held for Sale".
Commencing January 1, 1996 the Results of Operations, including depreciation of
the Rental Properties, have been included in the Consolidated Statements of
Income. Therefore, the Consolidated Statement of Income for the year ended
December 31, 1996 is not comparable to the Consolidated Statement of Income for
the year ended December 31, 1995.

         In order to facilitate the comparison of operations in 1996 to prior
years, the following "pro forma" Income Statement (the "Pro Forma Income
Statement") has been prepared for the year ended December 31, 1995 as if the
Rental Properties were previously consolidated. All intercompany transactions
have been eliminated. Depreciation expense for the Rental Properties has been
estimated for 1995 (SEE NOTES 1 AND 2 TO NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS).

         The following discussion of Results of Operations for the year ended
December 31, 1996 as compared to 1995 is based upon the Pro Forma Income
Statement. The earnings per share amounts have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, Earnings Per
Share. For further discussion of earnings per share and the impact of Statement
No. 128 (SEE NOTE 1 TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS). The
earnings per share amounts have also been restated for the two for one share
exchange (SEE NOTE 14 TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS).



                                       20
<PAGE>   23

<TABLE>
<CAPTION>
                                                                    1996              Unaudited
                                                                                      Pro Forma
                                                                                       1995
                                                                 ------------      ------------

<S>                                                              <C>               <C>
        Revenues:
          Rental Revenues ..................................     $ 41,276,684      $ 39,375,333
          Fee Based ........................................       14,164,312        12,540,900
      Interest, Principally from Unconsolidated Partnerships        8,897,233         4,099,329
      Income from Disposal of Assets-Net ...................          962,761         3,408,379
                                                                 ------------      ------------
                                                                   65,300,990        59,423,941
                                                                 ------------      ------------
        Expenses:
          Property Operating and Maintenance ...............       16,980,888        17,970,976
          Real Estate Taxes and Insurance ..................        4,148,545         4,006,814
          Property Management ..............................        9,366,777         6,910,228
          Administration ...................................        5,030,967         4,399,349
          Nonrecurring Costs ...............................          242,899         1,537,073
          Interest - Non Recourse Mortgages ................       14,131,780        13,549,258
          Interest - Corporate Debt ........................        1,098,333         1,522,087
          Depreciation and Amortization ....................        5,514,571         5,261,181
                                                                 ------------      ------------
                                                                   56,514,760        55,156,966
                                                                 ------------      ------------
      Income Before Income Taxes and Extraordinary Item ....        8,786,230         4,266,975
      Provision for Income Taxes ...........................        3,416,000         1,664,000
                                                                 ------------      ------------
      Income before Extraordinary Item .....................        5,370,230         2,602,975
      Extraordinary Item, net of Income Taxes ..............       (1,614,356)          804,022
                                                                 ------------      ------------
      Net Income ...........................................     $  3,755,874      $  3,406,997
                                                                 ============      ============
        EBITDA (Unaudited) .................................     $ 29,530,914      $ 24,599,501
                                                                 ============      ============
        Adjusted EBITDA (Recurring EBITDA reduced by
        interest on Rental Property Debt) (Unaudited) ......     $ 11,990,697      $  8,212,539
                                                                 ============      ============
              Basic Earnings Per Share:
                Income Before Extraordinary Item ...........     $        .71      $       0.36
                Extraordinary Item .........................            (0.21)             0.11
                                                                 ------------      ------------
                Net Income .................................     $       0.50      $       0.47
                                                                  ============      ============
              Diluted Earnings Per Share:
                Income Before Extraordinary Item ...........     $        .69      $       0.34
                Extraordinary Item .........................            (0.21)             0.11
                                                                 ------------      ------------
                Net Income .................................     $       0.48      $       0.45
                                                                 ============      ============
</TABLE>



                                       21
<PAGE>   24

         RENTAL REVENUES are derived from the apartment communities that
comprise the Company's Rental Properties. Revenues increased $1.9 million, or
4.8%, in 1996 as compared to 1995. The increase was primarily due to the
increase in average rent collected from occupied units from $399 in 1995 to $420
in 1996. The average economic occupancy of the 108 Rental Properties in
operation at all times during 1996 and 1995 was 92.5% in 1996 compared to 91.8%
in 1995. Economic occupancy is defined as the amount of revenue collected from
residents as a percentage of the revenue a property could generate if full rents
for all units were collected.

         FEE BASED REVENUES are comprised of Property Management Services and
Investment Management revenues generated from services provided to Properties
and residents at the Properties. Property Management Services revenues
principally relate to property management and accounting services provided to
the Properties. Preferred Resource (formerly referred to as Ancillary Services
or Preferred Vendor) revenues consist principally of revenue generated from the
sale of replacement and maintenance material to the Properties. In addition,
Ancillary Services revenues include revenue generated from furniture leasing and
renters insurance services provided to residents. Investment Management revenues
consist of partnership administration fees as well as loan refinancing and
restructuring fees.

         The following are the major components of Management Services Revenues
and Investment Management Revenues (unaudited) for 1996 as compared to pro forma
1995 (certain amounts previously reported have been reclassified herein between
Management Services and Preferred Resource for all periods presented):

<TABLE>
<CAPTION>
                                                                        1996                1995
                                                                  ---------------     ---------------
<S>                                                               <C>                 <C>
      Management Services:
        Property Management Services:
            Unconsolidated Partnerships                           $     7,782,722     $     7,414,992
                                                                  ---------------     ---------------
            Third Party                                                 2,135,429                   0
            Other Management Service Fees                               1,513,287           1,805,967
        Preferred Resource:
            Furniture Leasing and Renter=s Insurance                      403,704             290,937
            Resident Application Fees                                     399,725             429,134
            Replacement and Maintenance Material Revenues-Net              45,676             532,315
                                                                  ---------------     ---------------
      Total Management Services Revenues                               12,280,543          10,473,345
                                                                  ---------------     ---------------
      Investment Management:
        Partnership Administration and Other fees                       1,131,775           1,181,540
        Loan Refinancing and Restructuring Fees                           751,994             886,015
                                                                  ---------------     ---------------
      Total Investment Management Fee Revenues                          1,883,769           2,067,555
                                                                  ---------------     ---------------
      Total Fee Based Revenues                                    $    14,164,312     $    12,540,900
                                                                  ===============     ===============
</TABLE>


         Fee Based Revenues increased approximately $1.6 million, or 12.9%, in
1996 as compared to 1995. The increase was primarily due to the acquisition of
Lexford Properties, a third party property management company, which generated
$2.1 million in Fee Revenue since its acquisition on August 1, 1996 (SEE NOTE 1
TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - "LEXFORD PROPERTIES
ACQUISITION"). The increase in property management revenues was offset by an
approximately $487,000 decrease in replacement and maintenance material sales to
Unconsolidated Partnerships. The decline in replacement and maintenance material
sales occurred as the Company transitioned from a warehouse operation to a
coordinated buying group for replacement and maintenance material. Revenue in
the future will be derived from a portion of the volume discounts generated by
the property purchases.



                                       22
<PAGE>   25

         INTEREST INCOME increased $4.8 million, or 117%, in 1996 compared to
1995. Interest Income is primarily derived from the interest collected or
accrued on the recorded value of investments in, and advances to, Unconsolidated
Partnerships. (SEE NOTE 3 TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS).
Approximately $1.9 million of the increase was generated from the excess
proceeds derived from refinancing of Unconsolidated Partnerships (SEE "LIQUIDITY
AND CAPITAL RESOURCES -- FINANCING AND DEBT RESTRUCTURING OF THE PROPERTIES).
The balance of the increase was a result of improved cash flow due to increased
operating performance of the Unconsolidated Partnerships (a same unit 7.9%
increase in net operating income in 1996 as compared to 1995) and lower debt
service requirements on mortgage debt refinanced in prior years.

         INCOME FROM DISPOSAL OF ASSETS -- NET, decreased approximately $2.4
million in 1996 as compared to 1995. This income is derived from the proceeds of
the sale of assets and the recovery of investor notes receivables in excess of
the aggregate recorded value of these assets.

         PROPERTY OPERATING AND MAINTENANCE expense decreased approximately
$990,000, or 5.5%, in 1996 as compared to 1995. The decrease was primarily due
to the implementation in 1996 of a capitalization program which resulted in the
capitalization of major building exterior improvements. Previously all items
were expensed. In 1996 approximately $700,000 of improvements were capitalized
that would have been expensed in prior years. In addition, major maintenance
expense decreased approximately $487,000 in 1996 as compared to 1995. The
decrease in 1996 primarily related to major maintenance on Rental Properties
refinanced in 1995 and 1994.

         REAL ESTATE TAXES AND INSURANCE expense remained relatively constant
and only increased approximately $142,000, or 3.5% in 1996 as compared to 1995.

         PROPERTY MANAGEMENT EXPENSES increased approximately $2.5 million in
1996 as compared to 1995. Approximately $2.0 million of the increase was related
to the third-party management operation of Lexford Properties, which was
acquired effective August 1, 1996.

         ADMINISTRATION EXPENSES increased approximately $632,000 in 1996
compared to 1995. The increase was primarily due to bonuses payable to employees
pursuant to the Company's 1996 Incentive Compensation Plan. The incentive
compensation is based upon certain increases in Company profitability. The
percentage increase used as a measurement for the majority of the incentive
compensation is computed net of the cost of such plan. The increase in incentive
compensation in 1996 compared to 1995 is reflective of the significant increases
in profitability achieved in 1996 compared to 1995.

         NONRECURRING COSTS in 1996 of $242,899 related to realignments to the
Company's organization to eliminate overlapping responsibilities. The
restructuring in 1996 was a follow up to the restructuring costs incurred in
1995 of $1.5 million. The restructuring costs are primarily comprised of
severance and separation costs.

         INTEREST EXPENSE on mortgages on the Rental Properties increased
approximately $582,000 in 1996 as compared to 1995. The increase in interest
expense was due to the refinancing transactions completed in 1996 and 1995.
Although the overall contractual interest rates decreased, interest expense
increased, due to the impact of "Fresh Start" reporting with effective interest
rates applied to the Carrying Value of the mortgages. Interest expense on the
Company's corporate lines of credit decreased approximately $424,000 in 1996
compared to 1995. The decrease is due to lower outstanding balances on the
lines, and the refinancing of the Company's corporate credit lines in August
1995 at more favorable interest rates (SEE "LIQUIDITY AND CAPITAL RESOURCES").

         DEPRECIATION AND AMORTIZATION EXPENSE increased approximately $253,000
in 1996 as compared to 1995. The increase is primarily due to amortization
expense related to loan origination costs capitalized in connection with the
refinancing of corporate debt and mortgages on the Rental Properties, combined
with amortization of management contracts and goodwill associated with the
Lexford Properties acquisition.

                                       23
<PAGE>   26

         INCOME BEFORE EXTRAORDINARY ITEM increased from $2.6 million in 1995 to
$5.4 million in 1996. The extraordinary charge of $1.6 million, net of taxes was
a result of mortgage debt refinancing on certain Rental Properties (SEE NOTE 6
TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND "LIQUIDITY AND CAPITAL
RESOURCES" FINANCING AND DEBT RESTRUCTURING OF THE PROPERTIES). The
extraordinary gain of $804,000 recognized in 1995 was due to debt forgiveness
generated from the debt restructuring and refinancing of mortgages on Rental
Properties. Net income increased from $3.4 million in 1995 to $3.8 million in
1996.

Earnings before Interest, Taxes, Depreciation and Amortization

         The Company believes that earnings before interest, income taxes,
depreciation, amortization and extraordinary items ("EBITDA"), Recurring EBITDA
(EBITDA less Loan Fees and as adjusted for Nonrecurring items) and Adjusted
EBITDA (Recurring EBITDA plus principal payments of receivables from
Unconsolidated Partnerships less interest on Rental Property mortgage debt) are
significant indicators of the strength of its results. EBITDA is a measure of a
Company's ability to generate cash to service its obligations, including debt
service obligation, and to finance capital and other expenditures, including
expenditures for acquisitions. EBITDA does not represent cash flow as defined by
GAAP and does not necessarily represent amounts of cash available to fund the
Company's cash requirements. Unaudited EBITDA and the computation of Adjusted
EBITDA for the years ended December 31, 1997, 1996 and 1995 (pro forma because
the rental properties were classified as held for sale in 1995) is as follows:
(000s omitted)

<TABLE>
<CAPTION>
                                                                                                       Pro Forma
                                                                                                    ---------------

                                                                1997                 1996                 1995
                                                          ---------------      ---------------      ---------------
<S>                                                       <C>                  <C>                  <C>
      EBITDA                                              $        26,529      $        29,531      $        24,600
      ------                                              ---------------      ---------------      --------------
        Interest Income derived from refinance proceeds                 0               (1,936)                   0
        Income from Disposal of Assets                             (1,989)                (963)              (3,408)
        Loan Fees                                                    (130)                (752)                (966)
        Second Mortgage Principal Amortization                        972                    0                    0
        Performance Equity Plan                                     6,281                    0                    0
        Nonrecurring Costs                                            827                  243                1,537
                                                          ---------------      ---------------      ---------------
      Recurring EBITDA                                             32,490               26,123               21,763
      ----------------                                    ---------------      ---------------      ---------------
        Interest on Rental Properties                             (13,770)             (14,132)             (13,549)
                                                          ---------------      ---------------      ---------------
      Adjusted EBITDA                                     $        18,720      $        11,991      $         8,214
      ---------------                                     ===============      ===============      ===============
</TABLE>


         EBITDA decreased $3.0 million, or 10.2%, and Adjusted EBITDA increased
$6.7 million, or 56.1%, in 1997 as compared to 1996. EBITDA increased $4.9
million, or 20.0%, and Adjusted EBITDA increased $3.8 million, or 46.0%, in 1996
as compared to 1995.



                                       24
<PAGE>   27

                         LIQUIDITY AND CAPITAL RESOURCES

         The principal sources of liquidity for the Company are cash flow from
its operations and borrowings available under the Company's credit facility. The
Company's Net Cash Provided by Operating Activities has increased significantly
over the past three years, from approximately $5.6 million in 1995; to
approximately $12.7 million in 1996; to approximately $18.1 million in 1997.
Increases in Interest and Other Revenues received from Unconsolidated
Partnerships has been a major factor in such increase. Interest and Other
Revenues received from Unconsolidated Partnerships, which is primarily comprised
of payments of accrued interest, increased 41.0%, or $3.7 million, in 1997
compared to 1996, and 82.7%, or $4.1 million, in 1996 as compared to 1995. In
1997, 359 Unconsolidated Partnerships provided operating cash flow to the
Company, as compared to 294 in 1996 and 220 in 1995.

         The increase in Net Cash Provided by Operating Activities in 1997 was
also due to an increase in operating cash flow from the Rental Properties of
54.8% or $2.5 million in 1997 compared to 1996. The increase was due to the
improved operating performance of the Rental Properties and approximately $1.4
million of replacement furniture and fixtures capitalized in the second half of
1997. In 1995 this operating cash flow was treated as cash flow from investing
activity as the Rental Properties were classified as "Real Estate Assets Held
for Sale" (SEE NOTES 1 AND 2 OF NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS).

         The other factors impacting the Company's cash flow in 1997, 1996 and
1995 are discussed in "Results of Operations" and "Financing and Debt
Restructuring of the Properties".

         The Company anticipates that cash flow from its operations and
borrowings available under the Company's credit facility will be adequate to
meet the reasonably foreseeable capital and liquidity needs of the Company. If
the Company is successful in its future growth and capital expenditure plans, it
may be necessary to seek additional capital sources through other debt or equity
sources (SEE ITEM 1- "BUSINESS").

         On September 30, 1997 the Company entered into an Amended and Restated
Loan and Security Agreement with The Provident Bank (the "Bank"). The new
revolving credit facility ("Facility") is for $35 million and represents an
increase to and replacement of all former revolving credit facilities with the
Bank. The scheduled term of the Facility expires March 30, 2000, although the
Company may elect from time to time to convert all or any portion of the
principal amount outstanding under the Facility into a five year term loan.
Revolving loans outstanding under the Facility bear interest at a variable
interest rate equal to the Bank's prime rate of interest, currently 8.5%, minus
1%. The Company's former $7.0 million revolving line of credit for acquisitions
and Property debt restructuring (the "Acquisition Line"), was converted into a
term loan which matures in March 2001 and has a 7.25% fixed interest rate with
monthly installments of principal and interest of $139,435. As of the end of
1997, the aggregate unpaid principal balance outstanding under the Facility and
the Acquisition term debt was approximately $7.3 million.

         In the first quarter of 1998, the Company reached an agreement
with the Bank to increase the Facility by $5.0 million to $40. 0 million.

         In addition, all of the Company and the majority of Property bank
accounts are maintained at the Bank. The banking relationship has increased cash
flow at the Properties as a result of reduced service charges and increased
interest income on the Property bank account balances. The Company benefits from
a portion of the improved cash flow at the Properties.

         The Company's corporate capital expenditures for 1997 amounted to
approximately $1.2 million funded from cash flow and the Company's credit
facility. The Company anticipates that its capital needs in the future can be
satisfied out of cash flow from operations or the Company's credit facility. The
Company is upgrading its software systems in order to obtain optimal
efficiencies from technology. In addition, during the course of 1998, the
Company will evaluate implementing technology at the Properties. Capital
Expenditures, combined


                                       25
<PAGE>   28
 with Improvement and Replacement Expense for the Rental Properties, was $3.3
million during 1997. These costs are funded from Rental Properties cash flow and
maintenance escrow funds. In 1998 the Company anticipates capital expenditures
of $1.0 million for corporate purposes and approximately $5.1 million for Rental
Properties. The capital expenditures for the Rental Properties is part of a
capital expenditure program the Company is planning for the entire Portfolio
(SEE ITEM 1 BUSINESS - "CORPORATE STRATEGY").

         Phase I environmental site assessments have been completed within the
last 36 months for more than one-half of the Properties in connection with
mortgage refinancing transactions. None of the Phase I environmental site
assessments revealed any environmental contaminant or condition that the Company
believes would have a material adverse effect on the Company or the Properties.
Nevertheless, it is possible that there exists material environmental
contamination of which the Company is unaware.

         In the year 2000, many existing computer programs that use only two
digits (rather than four) to identify a year in the date field could fail or
create erroneous results if not corrected. This computer program flaw is
expected to affect virtually all companies and organizations. The Company cannot
quantify the potential costs and uncertainties associated with this computer
program flaw at this time, but does not anticipate that the effect of this
computer program flaw on the operations of the Company will be significant. The
Company's major internal computer programs are year 2000 compliant; however, the
Company may be required to spend time and monetary resources addressing any
necessary external year 2000 issues as well as minor internal computer program
changes. The Company does not expect that any such time or monetary resources
will be material.

Lexford Properties Acquisition
------------------------------

         Effective August 1, 1996, the Company acquired Lexford Properties,
Inc., a privately held, third-party multi-family management company
headquartered in Dallas, Texas (SEE NOTE 1 OF NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS - BUSINESS OVERVIEW - MANAGEMENT SERVICES AND - LEXFORD
PROPERTIES ACQUISITION). As a result of the acquisition, the Company derives
Management Services fee income from apartment communities in which it has no
ownership interest. At December 31, 1997, Lexford Properties' third party
management portfolio comprised 12,005 units of the Company's management
portfolio of approximately 47,900 units. Lexford Properties' Dallas office is
headquarters for the Company's combined property management business, which is
conducted under the Lexford Properties name.

         To acquire Lexford Properties, the Company issued 1,400,000 shares of
Common Stock valued, for acquisition purposes, at $10 per share representing a
maximum purchase price of $14 million. Approximately $9 million of the purchase
price (900,000 shares) is subject to forfeiture in the event the Company's
combined property management operations do not achieve certain profitability
criteria. Lexford Properties' shareholders received 500,000 shares of the
Company's Common Stock free of contingencies. The remaining 900,000 contingent
shares will cease to be subject to risk of forfeiture if and when specified
increases in the profitability of the Company's property management operations
are achieved during the three full fiscal years following the merger (i.e. on or
before the end of the Company's 1999 fiscal year). If, during any one of the
three fiscal years in the specified period, profit from property management
operations increases $1.8 million or more from combined 1995 levels, the former
Lexford Properties shareholders would own 300,000 of the contingent shares free
of contingencies, and if the increase is $4.0 million or more from combined 1995
levels, the former Lexford Properties shareholders would own the entire
1,400,000 shares free of contingencies, or approximately 14.9% of the Company's
shares outstanding as of December 31, 1997 (SEE "SUBSEQUENT EVENTS").

Subsequent Events
-----------------

         In December 1997, the Company announced that it would seek to qualify
and elect to be taxed as a REIT in 1998. In connection with this decision, the
Company established a new entity known as Lexford Residential Trust (the
"Trust") and in January 1998 filed a Form S-4 Registration Statement with the
Securities and Exchange Commission relating to the proposed merger of the
Company with



                                       26
<PAGE>   29

and into the Trust. The Trust expects to be taxed as a REIT. On March 3, 1998,
the shareholders of the Company approved the merger of the Company with and into
the Trust. The terms of the merger transaction provide that each share of the
Company's common stock be canceled and converted to two common shares of
beneficial interest in the Trust, resulting in a restatement of the earnings per
share amounts of the Company.

         In connection with the Company's decision to elect REIT status, the
Company initiated a plan ("the Consolidation Plan"), the purpose of which was to
minimize third party interests in the entities owning the Unconsolidated
Partnerships. As of March 3, 1998, the Company has acquired the entire third
party ownership interests in 287 Unconsolidated Partnerships (the "Consolidating
Properties"). The Company has made cash payments to former partners of the 287
Unconsolidated Partnerships totaling $21.3 million. The Company intends to
pursue the acquisition of the third party interests in all or a substantial
portion of the remaining Unconsolidated Partnerships at an additional cost of
$10.0 to $15.0 million. The cost of the Consolidation Plan will be funded from
the Company's cash flow and its credit facility. The Consolidation Plan will
significantly change the financial statements of the Company. The Investments in
and Advances to Unconsolidating Partnerships of $57.1 million at December 31,
1997, and the related interest income derived from such investments and Fee
Based Revenue earned from managing the properties will be almost entirely
eliminated as the formerly Unconsolidated Partnerships are consolidated in the
financial statements of the Company. In addition, upon qualification and
maintaining REIT status, the Company will no longer record a provision for
income taxes.

         On March 13, 1998, the Company negotiated a settlement with the prior
shareholders of Lexford Properties whereby 300,000 of the 900,000 shares subject
to forfeiture were released in exchange for the forfeiture of the remaining
600,000 shares (SEE NOTE 1 "LEXFORD PROPERTIES ACQUISITION"). The agreement was
a result of the Company's decision to elect REIT status which would impact the
third party management business and the ability of Lexford Properties to achieve
the profitability criteria necessary for the release of the shares subject to
forfeiture. The release of the 300,000 shares will result in a $3.0 million
charge in the first quarter of 1998.

Financing and Debt Restructuring of the Properties
--------------------------------------------------

         In 1997 the Company refinanced mortgages on 14 Unconsolidated
Partnerships and six Rental Properties. The new mortgages on 13 Properties were
financed through PaineWebber Incorporated ("PaineWebber"), the mortgages on two
Properties were financed through First Union Capital Markets Group ("First
Union"), and the mortgages on five Properties were financed through Morgan
Stanley and Co. Incorporated ("Morgan Stanley"). The PaineWebber mortgages have
fixed interest rates ranging from 8.2% to 9.0% with a 25 year principal
amortization schedule, beginning in year four, and a ten year maturity. The new
First Union mortgages have fixed interest rates of 8.7% with a 25 year principal
amortization and a ten year maturity. The Morgan Stanley mortgages have fixed
interest rates of 7.45% with a 25 year principal amortization and a ten year
maturity. An extraordinary non-cash loss of approximately $180,000, net of tax
benefits, resulted from the mortgage debt refinancings of the Rental Properties.
The loss arose from the mortgages repaid from refinance proceeds at the
contractual balance which exceeded the carrying value of the mortgages. The
Company was able to negotiate debt discounts from the previous lenders of
approximately $1.8 million in the aggregate on five of the Unconsolidated
Partnerships. The extraordinary gain resulting from these discounts was recorded
at the partnership level. In addition, annual debt service at the Unconsolidated
Partnerships will decrease in the aggregate, approximately $229,000 per year
over the next three years and approximately $18,000 per year on the Rental
Properties, as a result of these transactions.

         In the third quarter of 1997, the Company paid off the mortgage debt on
one Rental Property. The payment of $1.2 million approximated the Carrying Value
of the mortgage and represented a significant discount from the contractual
value of $1.9 million.

         In December 1997, the Company entered into a mortgage purchase
agreement with a financial institution wherein the lender agreed to purchase
outstanding mortgage notes with a balance of $4.8 million on certain
Unconsolidated Partnerships. As part of the agreement, the financial institution
has a put option whereby the Company has agreed to purchase the mortgage notes
at a discounted amount of $3.6 million.



                                       27
<PAGE>   30

ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
             -------------------------------------------

             Documents filed as part of this report:

             Financial Statements: The Audited Consolidated Balance Sheets of
             the Company and Subsidiaries as of December 31, 1997 and 1996, and
             the related Consolidated Statements of Income, Shareholders' Equity
             and Cash Flows of the Company and Subsidiaries for the years ended
             December 31, 1997, 1996 and 1995.

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

             None.

                                    PART III

ITEM 10.     TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT
             -------------------------------------------------

             (a)    TRUSTEES

             The Board of Trustees ("Board") of the Company consists of eleven
             members. The Company's Bylaws classify the directors into three
             classes, with the directors in each class serving for three year
             terms and until their successors are elected. The terms of the
             directors listed below will expire at the 1998, 1999 and 2000
             annual meetings of the Company's shareholders, respectively, as
             indicated below.


             CLASS I TRUSTEES SERVING UNTIL THE 1999 ANNUAL MEETING


<TABLE>
<CAPTION>
                                                Has Served as
               Name                   Age       Trustee Since      Principal Occupation and Business Experience
  -------------------------------   --------   ----------------  --------------------------------------------------------
<S>                                   <C>           <C>          <C>
  Patrick M. Holder                   49            1997         Executive Vice President of the Company until
                                                                 December 12, 1997 and has served as President of LPI
                                                                 since August 1996. Mr. Holder had previously been
                                                                 President of Lexford Partners, a Texas joint venture
                                                                 and manager of multifamily properties and successor
                                                                 to Brentwood Properties (and the predecessor to LPI)
                                                                 from 1988 through July 1996. Mr. Holder previously
                                                                 served as President of Brentwood Properties, a
                                                                 property management firm, from 1987 to May, 1988.

  Robert V. Gothier, Sr.              50            1992         President of RVG Management & Development Company, a
                                                                 manager and developer of residential and commercial
                                                                 properties, since 1976 and general partner of Rostan
                                                                 Associates, a real estate holding company associated
                                                                 with RVG Management and Development Company, since
                                                                 1986. Mr. Gothier also is a member of the Harrisburg
                                                                 Board of Realtors and the Legislative Board of the
                                                                 Pennsylvania Manufactured Home Association.


</TABLE>


                                       28
<PAGE>   31

<TABLE>
<CAPTION>
                                                Has Served as
               Name                   Age       Trustee Since      Principal Occupation and Business Experience
  -------------------------------   --------   ----------------  --------------------------------------------------------
<S>                                 <C>        <C>               <C>
  H. Jeffrey Schwartz                 43           1992          Partner in the law firm of Benesch, Friedlander,
                                                                 Coplan & Aronoff LLP since 1988 and Chairman of the
                                                                 firm's Business Reorganization Department since
                                                                 1991. Prior to joining the law firm in 1983, Mr.
                                                                 Schwartz was a law clerk to the Honorable William J.
                                                                 O'Neill, United States Bankruptcy Court for the
                                                                 Northern District of Ohio, from 1982 to 1983 and to
                                                                 the Honorable Joseph T. Molitoris, United States
                                                                 Bankruptcy Court for the Northern District of Ohio
                                                                 from 1980 to 1982. Mr. Schwartz was a faculty member
                                                                 of the Bankruptcy Litigation Institute, has written
                                                                 numerous articles on securities, real estate and
                                                                 business reorganization law and is a former Chairman
                                                                 of the Section of Bankruptcy and Commercial Law of
                                                                 the Cleveland Bar Association.



  Gerald E. Wedren                    61           1992          President of Craig Capital Co., a Washington,
                                                                 D.C.-based merger and acquisition firm, since 1973.
                                                                 Mr. Wedren has also been Managing Partner of Tavern
                                                                 Real Estate Limited Partnership and Wedren
                                                                 Associates, which own and lease properties in the
                                                                 Washington and Baltimore area, since 1988. Mr.
                                                                 Wedren was President of G.E.W., Inc., an owner of
                                                                 fast food restaurants, from 1981 to 1988; was of
                                                                 counsel with the Columbus law firm of Brownfield,
                                                                 Bowen, Bally & Sturtz from 1973 to 1981; and was
                                                                 Acting Director of the Department of Commerce and
                                                                 Commissioner of Securities for the State of Ohio in
                                                                 1971 and 1972. He is a Director of American Eagle
                                                                 Outfitters, Inc., Marwed Corporation and Tavern
                                                                 Realty Co.
</TABLE>



                                       29
<PAGE>   32

CLASS II TRUSTEES SERVING UNTIL THE 2000 ANNUAL MEETING




<TABLE>
<CAPTION>
                                                Has Served as
               Name                   Age       Trustee Since      Principal Occupation and Business Experience
  -------------------------------   --------   ----------------  --------------------------------------------------------
<S>                                 <C>        <C>               <C>
Joseph E. Madigan                     65           1992          A corporate financial consultant, Mr. Madigan also
                                                                 is a Director of Skyline Chili, Inc., Donatos Pizza,
                                                                 Inc., VOCA Holdings, Inc. and The Frank Gates
                                                                 Service Company. Mr. Madigan currently serves as
                                                                 Chairman of the Company's Board and served as Acting
                                                                 Chairman and Chief Executive Officer of Lexford,
                                                                 Inc. from June 1995 to December 1995. Mr. Madigan
                                                                 was Executive Vice President, Chief Financial
                                                                 Officer and Director of Wendy's International, Inc.
                                                                 from July, 1980 through December, 1987. He was
                                                                 Treasurer and Vice President of Borden, Inc. between
                                                                 October, 1968 and June, 1980.

George J. Neilan                      62           1992          President of Allstate Development Company, and has
                                                                 been involved in land acquisition and development in
                                                                 the Charleston, West Virginia area since 1982. He
                                                                 also maintains an intellectual property legal
                                                                 practice in South Charleston, West Virginia.

Glenn C. Pollack                      40           1992          Managing Director and Principal of Brown, Gibbons,
                                                                 Lang & Company, L.P., an investment banking firm
                                                                 located in Cleveland, Ohio, since January 6, 1997.
                                                                 Mr. Pollack served as President of Zeus Advisors,
                                                                 Inc., a consulting firm located in Cleveland, Ohio,
                                                                 from November 1994 to December 1996. From September
                                                                 1989 to October 1994, Mr. Pollack was Chief
                                                                 Executive Officer of A & W Foods, Inc., a regional
                                                                 food distributor. Mr. Pollack was a senior manager
                                                                 in the Corporate Strategies Group at the Cleveland
                                                                 Office of Price Waterhouse in 1988 and 1989, and
                                                                 served in a similar capacity from 1984 to 1988 with
                                                                 Siedmann & Associates, a Cleveland-based consulting
                                                                 firm.
</TABLE>


                                       30
<PAGE>   33

<TABLE>
<CAPTION>
                                                Has Served as
               Name                   Age       Trustee Since      Principal Occupation and Business Experience
  -------------------------------   --------   ----------------  --------------------------------------------------------
<S>                                 <C>        <C>               <C>
Stanley R. Fimberg                    63           1997          Managing member of FSC Realty, LLC, a real estate
                                                                 firm specializing in the ownership of multi-family
                                                                 properties, since March 1996. Mr. Fimberg served as
                                                                 President of Fimberg Realty, Inc., a co-venturer of
                                                                 LPI, a Texas joint venture and manager of
                                                                 multifamily properties and successor to Brentwood
                                                                 Properties (and the predecessor to LPI), from May
                                                                 1988 until July 1996. Mr. Fimberg has devoted his
                                                                 energies solely to real estate investment activities
                                                                 since 1970. Prior to that time, Mr. Fimberg served
                                                                 as an attorney with O'Melveny & Myers and worked in
                                                                 the Office of the Tax Legislative Counsel of the
                                                                 U.S. Treasury Department in Washington, D.C.


<CAPTION>
                                 CLASS III TRUSTEES SERVING UNTIL THE 1998 ANNUAL MEETING

                                                Has Served as
               Name                   Age       Trustee Since      Principal Occupation and Business Experience
  -------------------------------   --------   ----------------  --------------------------------------------------------
<S>                                 <C>        <C>               <C>
John B. Bartling, Jr.                 40           1995          President and Chief Executive Officer of the Company
                                                                 since December 1, 1995. From April 1993 until
                                                                 December 1995, Mr. Bartling was a Director in the
                                                                 Real Estate Products Group of CS First Boston, an
                                                                 investment banking firm. He was an executive officer
                                                                 of NHP, Inc., a company specializing in the
                                                                 development, ownership and management of real estate
                                                                 assets, from June 1987 to April 1993. In addition,
                                                                 Mr. Bartling served as Executive Vice President of
                                                                 NHP Real Estate Corp., NHP Capital Corp. and NHP
                                                                 Servicing Inc., wholly owned subsidiaries of NHP,
                                                                 Inc., from 1991 to April 1993. Mr. Bartling is a
                                                                 member of the Executive Committee of the National
                                                                 Multi-Housing Council, where he serves as a member
                                                                 of its Finance and Joint Legislation Committee.

</TABLE>

                                       31
<PAGE>   34

<TABLE>
<CAPTION>
                                                Has Served as
               Name                   Age       Trustee Since      Principal Occupation and Business Experience
  -------------------------------   --------   ----------------  --------------------------------------------------------
<S>                                 <C>        <C>               <C>
George R. Oberer, Sr.                 70           1992          Chairman of the Board and past President and CEO of
                                                                 Oberer Development Company since the early 1970s. He
                                                                 was President of the predecessor corporation, Oberer
                                                                 Construction Company, since 1953. Mr. Oberer is
                                                                 President and Chief Executive Officer of Oberer
                                                                 Development Company and Gold Key Realty Company
                                                                 which are engaged in real estate development and
                                                                 management.

Robert J. Weiler                      62           1992          A central Ohio real estate developer, Mr. Weiler
                                                                 joined The Robert Weiler Company in 1957 and has
                                                                 been Chairman of the Board since 1987. A real estate
                                                                 consultant since 1970, Mr. Weiler also is a licensed
                                                                 real estate appraiser and a member of the Appraisal
                                                                 Institute, having served as President of the Ohio
                                                                 Chapter. Mr. Weiler served as the Company's Acting
                                                                 President and Chief Operating Officer from June
                                                                 through December 1995. He was a Director of the
                                                                 National and Ohio Association of Realtors and is a
                                                                 past President of the Columbus Board of Realtors.
                                                                 Mr. Weiler is a member of the Executive Committee of
                                                                 the Capital University Board of Trustees. He also
                                                                 served as a member of the Columbus Board of
                                                                 Education where he served as its President in 1987.
</TABLE>

              (b) EXECUTIVE OFFICERS

              In addition to John B. Bartling, Jr., Chief Executive Officer and
President and a trustee of the Company, listed below are the executive officers
of the Company as of March 28, 1998. Each executive officer will serve until his
or her successor is selected by the Board or until his or her earlier
resignation or removal. There are no family relationships among these officers.

<TABLE>
<CAPTION>

             Name                    Age                 Principal Occupation During the Past Five or More Years
--------------------------------    -------   ------------------------------------------------------------------------------

<S>                                   <C>     <C>
Mark D. Thompson                      40      Chief Financial Officer and Executive Vice President of the Company
                                              since October 31, 1996. Prior to that time, Mr. Thompson was Executive
                                              Vice President of Corporate Acquisitions of the Company since April 1,
                                              1996. Mr. Thompson was a partner in the law firm of McDonald, Hopkins,
                                              Burke & Haber from January 1995 to April 1996. Prior to that time, Mr.
                                              Thompson was an associate and partner in the law firm of Benesch,
                                              Friedlander, Coplan & Aronoff LLP from January 1985 and October 1992,
                                              respectively.
</TABLE>

                                       32
<PAGE>   35

<TABLE>
<CAPTION>

             Name                    Age                 Principal Occupation During the Past Five or More Years
--------------------------------    -------   ------------------------------------------------------------------------------

<S>                                   <C>     <C>
Leslie B. Fox                         39      Executive Vice President and Chief Operating Officer of the Company
                                              since December, 1997. Prior to that, she had been Executive Vice
                                              President -- Investment Management of the Company since June 1997. Ms.
                                              Fox was President of each of Asset Investors Corporation ("AIC") and
                                              Commercial Assets, Inc. ("CAI"), both publicly traded real estate
                                              investment trusts, from October 1996 through May 1997. Prior to that
                                              time, Ms. Fox served as Executive Vice President and Chief Operating
                                              Officer of CAI and AIC from February 1995 through September 1996. From
                                              November 1993 through February 1995, Ms. Fox served as a Vice President
                                              of AIC and as Executive Vice President, Chief Investment Officer and
                                              Assistant Secretary of CAI. Ms. Fox served as Senior Vice President of
                                              NHP Capital Corp., a subsidiary of NHP, Inc. from December 1991 to
                                              October 1993 and Vice President of Finance/MIS of NHP Property
                                              Management, Inc., a subsidiary of NHP, Inc. from November 1987 to
                                              November 1991.

Bradley A. Van Auken                  40      Mr. Van Auken is the Company's Senior Vice President, General Counsel
                                              and Secretary, serving in such capacity for the Company since January
                                              1998. Mr. Van Auken was a partner and associate with the law firm of
                                              Benesch, Friedlander, Coplan & Aronoff LLP from January 1992 and
                                              November 1986, respectively.



Mark M. Culwell                       46      Mr. Culwell has served as Senior Vice President -- Asset Management of
                                              the Company since December 1997 and served as Construction Services
                                              Supervisor of LPI from April through December of 1997. Mr. Culwell was
                                              Vice President -- Real Estate Investment and Construction of Cornerstone
                                              Housing Corp., a company engaged in real estate investment and
                                              construction, from October 1991 through March 1997. He was a Southwest
                                              Partner of Trammell Crow Residential from October, 1982 to December,
                                              1986.



Annette Hoover                        70      Senior Vice President -- Property Operations since December 1997. Prior
                                              to that time, Ms. Hoover was a Vice President of LPI since August 1,
                                              1996. From 1988 to August 1996, Ms. Hoover was Vice President of Lexford
                                              Partners, a property management firm and the predecessor of LPI prior to
                                              its acquisition by the Company.



Paul R. Selid                         35      Senior Vice President--Acquisitions of the Company since December 1997.
                                              Prior to that time, Mr. Selid was a Senior Vice President from April 15,
                                              1996 to December 1997. Mr. Selid was Vice President of Acquisitions of
                                              NHP, Inc. from December 1994 to April 1996. Mr. Selid also served as
                                              Vice President of Asset Management & Underwriting of NHP, Inc. from
                                              September 1992 to December 1994. Mr. Selid previously served as Vice
                                              President of Finance of Hall Financial Group, Inc. from January 1990 to
                                              September 1992.
</TABLE>

                                       33
<PAGE>   36


<TABLE>
<CAPTION>

             Name                    Age                 Principal Occupation During the Past Five or More Years
--------------------------------    -------   ------------------------------------------------------------------------------

<S>                                   <C>     <C>
Ronald P. Koegler                     45      Vice President and Controller of the Company since December 20, 1996.
                                              Mr. Koegler served as Vice President and Treasurer of the Company from
                                              January 16, 1996 to December 20, 1996. Prior to that time, Mr. Koegler
                                              was Controller of the Company since April 1992. He served as Assistant
                                              Controller of the Company from October 1989 to April 1992.

Michael F. Sosh                       36      Vice President and Treasurer of the Company since January 9, 1997. Prior
                                              to that time, Mr. Sosh served as Divisional Vice President and Assistant
                                              Treasurer of The Bon-Ton Stores, Inc. since March 1995. He previously
                                              served as Manager of Financial Planning and Financial Analyst of The
                                              Bon-Ton Stores, Inc. from 1987 to 1995. Mr. Sosh was a banking officer
                                              with Meridian Bancorp, Inc. from 1983 to 1987.
</TABLE>

                COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of the Company's Common Stock, to
file initial statements of beneficial ownership (Form 3), and statements of
changes in beneficial ownership (Forms 4 or 5) of Common Stock of the Company
with the Securities and Exchange Commission (the "SEC"). Officers, directors and
greater than 10% shareholders are required by SEC regulation to furnish the
Company with copies of all such forms they file.

         To the Company's knowledge, based on its review of the copies of such
forms received by it, or written representations from certain reporting persons
that no additional forms were required for those persons, the Company believes
that during the previous fiscal year, all filing requirements applicable to its
officers, directors, and greater than 10% beneficial owners were complied with.

ITEM 11.      EXECUTIVE COMPENSATION
              ----------------------

              (a)     SUMMARY COMPENSATION TABLE

              The following table sets forth the compensation earned by the
Company's Chief Executive Officer during 1997 and the other four most highly
compensated executive officers for services rendered in all capacities to the
Company during 1997 as well as 1996 and 1995, where applicable.



                                       34
<PAGE>   37

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                                                                                   LONG-TERM
                                                                                                  COMPENSATION
                                                      ANNUAL COMPENSATION                            AWARDS
                                        --------------------------------------------------------------------------------
                                                                                                               SECURITIES
                                                                            OTHER           RESTRICTED           UNDER-
                                                                            ANNUAL            STOCK              LYING
      NAME AND                             SALARY           BONUS(ES)    COMPENSATION        AWARD(S)           OPTIONS/
 PRINCIPAL POSITION             YEAR        ($)                ($)            ($)               ($)               SARS #
---------------------------------------------------------------------------------------------------------------------------

<S>                             <C>    <C>              <C>              <C>              <C>                  <C>
John B. Bartling, Jr            1997   $  340,000(1)    $  198,000(2)    $    9,000(3)            --               --
Chief Executive Officer         1996   $  285,000       $  171,000(6)    $  503,800(7)    $  402,188(8)        40,000(9)
and President                   1995   $   23,750(11)           --       $   13,250(12)           --               --


Mark D. Thompson                1997   $  230,000(13)   $  207,000(14)           --               --               --
Chief Financial Officer and     1996   $  127,885(17)   $  157,491(18)   $  216,635(19)   $  136,875(20)       25,000(21)
Executive Vice President        1995           --               --               --               --               --

Leslie B. Fox                   1997   $  102,981(23)   $  178,125(24)           --       $  180,000(25)       25,000(26)
Chief Operating Officer         1996           --               --               --               --               --
and Executive Vice President    1995           --               --               --               --               --

Michael F. Sosh                 1997   $  105,000       $   47,250(28)           --               --            5,000(29)
Vice President and Treasurer    1996           --               --               --               --               --
                                1995           --               --               --               --               --

Ronald P. Koegler               1997   $  105,000       $   42,000(32)           --               --            2,500(33)
Vice President and Controller   1996   $   84,492       $   38,250(36)           --               --            5,000(37)
                                1995   $   75,194       $   15,450(39)           --               --               --

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






                                      LTIP             ALL OTHER
      NAME AND                       PAYOUTS        COMPENSATION
 PRINCIPAL POSITION                    ($)               ($)
------------------------------------------------------------------

<S>                              <C>              <C>
John B. Bartling, Jr             $1,660,266(4)         6,260(5)
Chief Executive Officer                  --       $    7,371(10)
and President                            --               --


Mark D. Thompson                 $1,058,968(15)   $    2,400(16)
Chief Financial Officer and              --       $      934(22)
Executive Vice President                 --               --

Leslie B. Fox                            --       $    1,236(27)
Chief Operating Officer                  --               --
and Executive Vice President             --               --

Michael F. Sosh                     325,864(30)   $    2,400(31)
Vice President and Treasurer             --               --
                                         --               --

Ronald P. Koegler                $  325,864(34)   $    2,400(35)
Vice President and Controller            --       $    6,218(38)
                                         --       $    5,603(38)


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

<FN>
(1)      This amount includes a cash payment of $300,000 and $40,000 Mr. Bartling elected to receive in the form of 4,000 shares of
         Common Stock in lieu of cash. The shares of Common stock were issued based on a valuation of $10.312 per share, being the
         closing price of the Common Stock on December 31, 1996. Mr. Bartling elected to contribute the shares to the Cardinal
         Realty Services, Inc. Executive Deferred Compensation Rabbi Trust.

(2)      Cash bonus for 1997 paid in 1998.

(3)      Car allowance of $750 per month.

(4)      Mr. Bartling received an award of 40,000 restricted shares of Common Stock April 5, 1996, providing that so long as Mr.
         Bartling remains in the employ of the Company, one-third of such shares will be earned and will be issued when the average
         number of issued and outstanding shares of Common Stock over ten consecutive trading days multiplied by the average closing
         price of the Common Stock on the Nasdaq National Market tier of the Nasdaq Stock Market sm over such period (or if the
         Common Stock is not listed or admitted to trading on such exchange, the principal securities exchange on which the Common
         Stock is listed or admitted to trading) plus the liquidation value of all issued and outstanding preferred stock of the
         Company ("Market Capitalization"), exceeds $90 million, one-third of which shall vest when the Market Capitalization
         exceeds $120 million, and the final one-third of which shall vest when the Market Capitalization exceeds $120 million, and
         the final one-third of which shall vest when the Market Capitalization exceeds $150 million. The terms of the restricted
         share grant provides for acceleration upon a change of control of the Company or the termination of Mr. Bartling's
         employment other than for cause. Mr. Bartling vested in two thirds, 26,666 of the 40,000 shares, in 1997. The value of the
         stock was determined by multiplying the number of shares subject to this grant by the closing price of the Common Stock on
         April 5, 1996 which was $8.937. In addition, Mr. Bartling vested in 96,000 shares of restricted stock pursuant to the terms
         of the Performance Equity Plan. The value of this stock was determined by multiplying the number of shares subject to this
         grant by the closing price of the Common Stock on October 7, 1997, $14.812, the closing price of the Common Stock at the
         date of the grant. The value of these vested awards at the end of 1997 fiscal year was $2,115,989 based upon the fiscal
         year-end price of $17.25 per share.
</FN>
</TABLE>

                                       35
<PAGE>   38

(5)      Includes the Company's payment of a premium in the amount of $3,860 for
         a term life insurance policy with a death benefit of $2,000,000 and the
         Company's portion of the cost of group term life insurance, health
         insurance and disability insurance paid on behalf of Mr. Bartling in
         the aggregate amount of $2,400.

(6)      This amount includes a cash bonus for 1996 paid in 1997 in the amount
         of $27,862. This amount also includes an award of 13,880 shares of
         Common Stock as a stock bonus for 1996 granted in 1997. The value of
         the stock bonus was determined by multiplying the number of shares
         subject to this grant by the closing price of the Common Stock at
         fiscal year-end, which was $10.312.

(7)      This amount includes an award of 20,000 shares of restricted Common
         Stock in 1997 pursuant to the terms of Mr. Bartling's Employment
         Agreement with the Company, which states that Mr. Bartling will receive
         one share of Common Stock for each share of Common Stock purchased by
         him, up to a maximum of 20,000 shares. The value of 20,000 shares
         subject to this award was determined by multiplying such shares by the
         closing price of the Common Stock on June 10, 1996, the date of his
         matching purchase, which was $9.937. In addition, pursuant to an
         amendment to Mr. Bartling's Employment Agreement, Mr. Bartling elected
         to receive shares of Common Stock in lieu of cash bonus compensation
         otherwise payable to him on account of the Company's 1996 fiscal year.
         The shares of Common Stock were issued based on a valuation of $10.312
         per share, being the closing price of the Common Stock on December 31,
         1996. The shares issued to Mr. Bartling pursuant to this election
         qualified as shares purchased for the grant of matching stock and
         accordingly the value of these 20,000 shares of matching stock was
         determined by multiplying such shares by the closing price of the
         Common Stock on December 31, 1996, the date applicable to such
         qualified matching purchase, which was $10.312. Mr. Bartling elected to
         contribute the shares subject to each of the foregoing grants to the
         Cardinal Realty Services, Inc. Executive Deferred Compensation Rabbi
         Trust. This amount also includes (a) payments of $12,500 per month from
         January 1, 1996 to November 30, 1996 for Mr. Bartling's relocation and
         temporary living expenses, as well as a payment of $154,800 to
         compensate Mr. Bartling for any taxes relating to such monthly
         payments, and (b) a car allowance of $750 per month.

(8)      Mr. Bartling received an award of 45,000 shares of restricted Common
         Stock on April 5, 1996, one-third of which vest on the third, fourth
         and fifth anniversaries of such date. The value of this award was
         determined by multiplying the number of shares subject to this grant by
         the closing price of the Common Stock on April 5, 1996, $8.937. The
         value of this award at the end of the 1997 fiscal year was $776,250
         based on the fiscal year-end price of $17.25 per share. Mr. Bartling is
         entitled to receive dividends, if paid, on this restricted Common Stock
         as and when such stock vests.

(9)      Mr. Bartling received an option to purchase 40,000 shares of Common
         Stock at $8.937 per share on April 5, 1996, one-fourth of which vest on
         the second, third, fourth and fifth anniversaries of the date of grant.

(10)     Includes the Company's payment of a premium in the amount of $1,190 for
         a term life insurance policy with a death benefit of $2,000,000 and the
         Company's portion of the cost of group term life insurance, health
         insurance and disability insurance paid on behalf of Mr. Bartling in
         the aggregate amount of $6,181.

(11)     Salary for the period from December 1, 1995, when Mr. Bartling
         commenced his employment with the Company, to December 31, 1995.

(12)     Includes a payment of $12,500, which sum was required to be paid
         monthly from December 1, 1995 to November 30, 1996 for Mr. Bartling's
         relocation and temporary living expenses, and (b) a car allowance of
         $750 for the month of December, 1995.

(13)     This amount includes a cash payment of $200,000 and $30,000 Mr.
         Thompson elected to receive in the form of 2,912 shares of Common Stock
         in lieu of cash. The shares of Common Stock were issued based on a
         valuation of $10.312 per share, being the closing price of the Common
         Stock on December 31, 1996. Mr. Thompson elected to contribute the
         shares to the Cardinal Realty Services, Inc. Executive Deferred
         Compensation Rabbi Trust.


                                       36
<PAGE>   39

(14)     Cash bonus of $138,000 for 1997 paid in 1998. This amount also includes
         an award of 4,000 shares of Common Stock as a stock bonus for 1997
         granted in 1998. The value of the stock bonus was determined by
         multiplying the number of shares subject to this grant by the closing
         price of Common Stock at fiscal year end, which was $17.25.

(15)     Mr. Thompson received an award of the 18,000 restricted shares of
         Common Stock April 15, 1996, providing that so long as Mr. Thompson
         remains in the employ of the Company, one-third of such shares will be
         earned and will be issued when the average number of issued and
         outstanding shares of Common Stock over ten consecutive trading days
         multiplied by the average closing price of the Common Stock on the
         Nasdaq National Market tier of the Nasdaq Stock Market sm over such
         period (or if the Common Stock is not listed or admitted to trading on
         such exchange, the principal securities exchange on which the Common
         Stock is listed or admitted to trading) plus the liquidation value of
         all issued and outstanding preferred stock of the Company ("Market
         Capitalization"), exceeds $90 million, one-third of which shall vest
         when the Market Capitalization exceeds $120 million, and the final
         one-third of which shall vest when the Market Capitalization exceeds
         $120 million, and the final one-third of which shall vest when the
         Market Capitalization exceeds $150 million. The terms of the restricted
         share grant provides for acceleration upon a change of control of the
         Company or the termination of Mr. Thompson's employment other than for
         cause. Mr. Thompson earned two thirds, 12,000 of the 18,000 shares, in
         1997. The value of the stock was determined by multiplying the number
         of shares subject to this grant by the closing price of the Common
         Stock on April 15, 1996, which was $9.25. In addition, Mr. Thompson
         earned 64,000 shares of restricted stock pursuant to the terms of the
         Performance Equity Plan. The value of this stock was determined by
         multiplying the number of shares subject to this grant by the closing
         price of the Common Stock on October 7, 1997, $14.812, the closing
         price of the Common Stock at the date of the grant. The value of these
         vested awards at the end of 1997 fiscal year was $1,311,000 based upon
         the fiscal year-end price of $17.25 per share.

(16)     Includes the Company's portion of the cost of group term life
         insurance, disability and health insurance paid on behalf of Mr.
         Thompson in the aggregate amount of $2,400.

(17)     Salary for the period from April 1, 1996, when Mr. Thompson commenced
         his employment with the Company, to December 31, 1996.

(18)     This amount includes a cash bonus for 1996 paid in 1997 in the amount
         of $27,203. This amount also includes an award of 12,634 shares of
         Common Stock as a stock bonus for 1996 granted in 1997. The value of
         the stock bonus was determined by multiplying the number of shares
         subject to this grant by the closing price of the Common Stock at
         fiscal year-end, which was $10.312.

(19)     Includes an award of 10,000 shares of Common Stock in 1997 pursuant to
         the terms of Mr. Thompson's Employment Agreement with the Company,
         which states that Mr. Thompson will receive one share of Common Stock
         for each share of Common Stock purchased by him, up to a maximum of
         10,000 shares. The value of 10,000 shares subject to this award was
         determined by multiplying such shares by the closing price of the
         Common Stock on June 10, 1996, the date of his matching purchase, which
         was $9.968. In addition, pursuant to an amendment to Mr. Thompson's
         Employment Agreement, Mr. Thompson elected to receive shares of Common
         Stock in lieu of cash bonus compensation otherwise payable to him on
         account of the Company's 1996 fiscal year. The shares of Common Stock
         were issued based on a valuation of $10.312 per share, being the
         closing price of the Common Stock on December 31, 1996. The shares
         issued to Mr. Thompson pursuant to this election qualified as shares
         purchased for the grant of matching stock and accordingly the value of
         these 10,000 shares of matching stock was determined by multiplying
         such shares by the closing price of the Common Stock on December 31,
         1996, the date applicable to such qualified matching purchase, which
         was $10.312. Mr. Thompson elected to contribute the shares subject to
         each of the foregoing grants to the Cardinal Realty Services, Inc.
         Executive Deferred Compensation Rabbi Trust. This amount also includes
         a relocation bonus of $60,000 paid in 1997 for moving his principal
         residence to Columbus, Ohio, as well as payment of $55,385 to
         compensate Mr. Thompson for any taxes relating to such relocation
         bonus.


                                       37
<PAGE>   40

(20)     Mr. Thompson received an award of 15,000 shares of restricted Common
         Stock on April 15, 1996, one-third of which vests on the third, fourth
         and fifth anniversaries of such date. The value of this award was
         determined by multiplying the number of shares subject to this grant by
         the closing price of the Common Stock on April 15, 1996, $9.125. The
         value of this award at the end of the 1997 fiscal year was $258,750
         based on the fiscal year-end price of $17.25 per share. Mr. Thompson is
         entitled to receive dividends, if paid, on the Common Stock as and when
         such stock vests.

(21)     Mr. Thompson received an option to purchase 25,000 shares of Common
         Stock at $8.812 per share on April 1, 1996, one-fifth of which vest on
         the first, second, third, fourth and fifth anniversaries of the date of
         grant.

(22)     Includes the Company's portion of the cost of group term life insurance
         and disability insurance paid on behalf of Mr. Thompson in the
         aggregate amount of $934.

(23)     Salary for the period from June 1, 1997, when Ms. Fox commenced
         employment with the Company, to December 31, 1997.

(24)     This amount includes a cash bonus for 1997 paid in 1998 in the amount
         of $78,750 and a $60,000 payment made upon the execution of her
         employment contract. This amount also includes an award of 2,282 shares
         of Common Stock as a stock bonus for 1997 granted in 1998. The value of
         the stock bonus was determined by multiplying the number of shares
         subject to this grant by the closing price of the Common Stock at
         fiscal year end, which was $17.25.

(25)     Ms. Fox received an award of 15,000 shares of Restricted Common Stock
         on June 1, 1997, one-third of which vest on the third, fourth and fifth
         anniversaries of such date. The value of this award was determined by
         multiplying the number of shares subject to this grant by the closing
         price of the Common Stock on June 1, 1997, $12.00. The value of this
         award at the end of the 1997 fiscal year was $258,750 based upon the
         fiscal year-end price of $17.25 per share. Ms. Fox elected to
         contribute the shares subject to the foregoing grant to the Cardinal
         Realty Services, Inc. Executive Deferred Compensation Rabbi Trust.

(26)     Ms. Fox received an option to purchase 25,000 shares of Common Stock at
         $11.875 per share on June 1, 1997, one-fifth of which vest on the
         first, second, third, fourth and fifth anniversaries of the date of the
         grant.

(27)     Includes the Company's portion of the cost of group term life insurance
         and disability insurance paid on behalf of Ms. Fox in the aggregate
         amount of $1,236.

(28)     Cash bonus for 1997 paid in 1998.

(29)     Mr. Sosh received an option to purchase 5,000 shares of Common Stock at
         $9.625 per share on January 1, 1997, one-third of which options vest on
         the first, second and third anniversaries of the date of grant.

(30)     Mr. Sosh vested in 22,000 shares of restricted stock pursuant to the
         terms of the Performance Equity Plan. The value of this stock was
         determined by multiplying the number of shares subject to this grant by
         the closing price of the Common Stock on October 7, 1997, which was
         $14.812. The value of these vested awards at the end of 1997 fiscal
         year was $379,500 based upon the fiscal year-end price of $17.25 per
         share.

(31)     Includes the Company's portion of the cost of group term life
         insurance, health insurance and disability insurance paid on the behalf
         of Mr. Sosh in the aggregate amount of $2,400.


                                       38
<PAGE>   41
(32)     Cash bonus for 1997 paid in 1998.

(33)     Mr. Koegler received an option to purchase 2,500 shares of Common Stock
         at $10.312 per share on January 1, 1997, one-third of which options
         vest on the first, second and third anniversaries of the date of grant.

(34)     Mr. Koegler vested in 22,000 shares of restricted stock pursuant to the
         terms of the Performance Equity Plan. The value of this stock was
         determined by multiplying the number of shares subject to this grant by
         the closing price of the Common Stock on October 7, 1997, which was
         $14.812. The value of these vested awards at the end of 1997 fiscal
         year was $379,500 based upon the fiscal year-end price of $17.25 per
         share.

(35)     Includes the Company's portion of the cost of group term life
         insurance, health insurance and disability insurance paid on the behalf
         of Mr. Koegler in the aggregate amount of $2,400.

(36)     Cash bonus for 1996 paid in 1997.

(37)     Mr. Koegler received an option to purchase 5,000 shares of Common Stock
         at $9.625 per share on June 27, 1996, one-third of which options vest
         on the first, second and third anniversaries of the date of the grant.

(38)     Includes the Company's portion of the cost of group term life
         insurance, health insurance and disability insurance paid on behalf of
         Mr. Koegler.

(39)     Cash bonus for 1995 paid in 1996.


                                       39
<PAGE>   42

         (b)      STOCK OPTIONS GRANTS TABLE

         The following table sets forth the information noted for all grants of
stock options to each of the executive officers named in the Summary
Compensation Table during 1997:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                    INDIVIDUAL GRANTS                                         POTENTIAL REALIZABLE VALUE AT
                                                                                           ASSUMED ANNUAL RATES OF STOCK PRICE
                                                                                              APPRECIATION FOR OPTION TERM
--------------------------------------------------------------------------------------------------------------------------------
          NAME               NUMBER OF     PERCENT OF TOTAL  EXERCISE OF  EXPIRATION DATE      5% ($)            10% ($)
                            SECURITIES     OPTIONS GRANTED    BASE PRICE
                            UNDERLYING     TO EMPLOYEES IN      ($/SH)
                              OPTIONS        FISCAL YEAR
                            GRANTED (#)
--------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>            <C>                <C>       <C>                   <C>                 <C>
Leslie B. Fox                    25,000(1)      32.4%              $11.875   6/01/2007             $186,703            $473,142
Chief Operating Officer
and Executive Vice
President

Michael F. Sosh                   5,000(2)       13%               $10.312   1/01/2007               32,426              82,173
Vice President
and Treasurer

Ronald P. Koegler                 2,500(3)       6.5%              $10.312   1/01/2007               16,213              41,087
Vice President
and Controller


<FN>

(1)      Ms. Fox received an option to purchase 25,000 shares of Common Stock with an exercise price of $11.875 per share on June
         1, 1997, one-fifth of which vest on the first, second, third, fourth and fifth anniversaries of the date of the grant.

(2)      Mr. Sosh received an option to purchase 5,000 shares of Common Stock with an exercise price of $10.312 per share on
         January 1, 1997, one-third of which vest on the first, second and third anniversaries of the date of the grant.

(3)      Mr. Koegler received an option to purchase 2,500 shares of Common Stock with an exercise price of $10.312 per share on
         January 1, 1997, one-third of which vest on the first, second and third anniversaries of the date of the grant.
</FN>
</TABLE>



         (c)      STOCK OPTIONS VALUE TABLE

         The following table sets forth the fiscal year-end value of unexercised
stock options for each of the executive officers named in the Summary
Compensation Table for the 1997 fiscal year.




                                       40
<PAGE>   43
'
<TABLE>
<CAPTION>

                                                                          NUMBER OF SECURITIES              VALUE OF
                                                                         UNDERLYING UNEXERCISED            UNEXERCISED
                                                                                OPTIONS               IN-THE-MONEY OPTIONS
                                                                           AT FISCAL YEAR-END          AT FISCAL YEAR-END
                                            SHARES          VALUE                 (#)                          ($)
                                         ACQUIRED ON       REALIZED           EXERCISABLE/                EXERCISABLE/
                   NAME                   EXERCISE (#)        ($)             UNEXERCISABLE              UNEXERCISABLE (1)
--------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>             <C>       <C>                          <C>
John B. Bartling, Jr., Chief                                                 0 Exercisable/             N/A Exercisable/
Executive  Officer and President........      0               0         40,000 Unexercisable(1)             $332,500
                                                                                                        Unexercisable(2)

Mark D. Thompson, Chief  Financial                                       5,000 Exercisable(3)/       $42,188 Exercisable(4)/
Officer and Executive Vice President....      0               0         20,000 Unexercisable(3)             $168,750
                                                                                                        Unexercisable(4)

Leslie B. Fox                                                                0 Exercisable/             N/A Exercisable/
Executive Vice President                                                25,000 Unexercisable(5)             $134,375
Chief Operating Officer.................      0               0                                         Unexercisable(6)


Michael F. Sosh                                                            1,666 Exercisable/         $11,559 Exercisable/
Vice President                                                           3,334 Unexercisable(7)              $23,131
and Treasurer...........................      0               0                                         Unexercisable(8)


Ronald P. Koegler                                                         5,210 Exercisable/          $63,306 Exercisable/
Vice President and                                                               5,000                       $36,987
Controller..............................      0               0             Unexercisable(9)            Unexercisable(10)


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

<FN>

         (1)      Mr. Bartling received an option to purchase 40,000 shares of Common Stock with an exercise price of
                  $8.937 per share on April 5, 1996, one-fourth of which vest on the second, third, fourth and fifth
                  anniversaries of the date of grant, subject to accelerated vesting upon attainment of certain market
                  capitalization targets.

         (2)      The value of the stock option was calculated by multiplying the number of underlying securities by the
                  difference between (a) $17.25 per share being the closing price of the Common Stock at fiscal year-end
                  on the Nasdaq National Market tier of the Nasdaq Stock Market sm, and (b) the exercise price of the
                  option, $8.937 per share.

         (3)      Mr. Thompson received an option to purchase 25,000 shares of Common Stock with an exercise price of
                  $8.8125 per share on April 1, 1996, one-fifth of which vest on the first, second, third, fourth and
                  fifth anniversaries of the date of grant.

         (4)      The value of the stock option was calculated by multiplying the number of underlying securities by the
                  difference between (a) $10.312 per share being the closing price of the Common Stock at fiscal year-end
                  on the Nasdaq National Market tier of the Nasdaq Stock Market sm, and (b) the exercise price of the
                  options, $8.812 per share.

         (5)      Ms. Fox received an option to purchase 25,000 shares of Common Stock with an exercise price of $11.875
                  per share on June 1, 1997, one-fifth of which vest on the first, second, third, fourth and fifth
                  anniversaries of the date of the grant.

         (6)      The value of the stock option was calculated by multiplying the number of underlying securities by the
                  difference between (a) $17.25 per share being the closing price of the Common Stock at fiscal year-end on the
                  Nasdaq National Market tier of the Nasdaq Stock Market sm, and (b) the exercise price
</FN>
</TABLE>

                                       41
<PAGE>   44

                  of the options, $11.875 per share.

         (7)      Mr. Sosh received an option to purchase 5,000 shares of Common
                  Stock with an exercise price of $10.312 per share on January
                  1, 1997 one-third of which vest on the first, second and third
                  anniversaries of the date of grant.

         (8)      The value of the stock option was calculated by multiplying
                  the number of underlying securities by the difference between
                  (a) $17.25 per share being the closing price of the Common
                  Stock at fiscal year-end on the Nasdaq National Market tier of
                  the Nasdaq Stock Marketsm, and (b) the exercise price of the
                  options, $10.312 per share.

         (9)      Mr. Koegler received an option to purchase 2,500 shares of
                  Common Stock with an exercise price of $10.312 per share on
                  January 1, 1997 one-third of which vest on the first, second
                  and third anniversaries of the date of grant. Mr. Koegler
                  received an option to purchase 5,000 shares of Common Stock
                  with an exercise price of $9.625 per share on June 27, 1996,
                  one-third of which vest on the first, second and third
                  anniversaries of the date of grant. In addition, Mr. Koegler
                  received an option to purchase 2,710 shares of Common Stock
                  with an exercise price of $0.71 per share on September 11,
                  1992, all which have been vested.

         (10)     The value of the stock option was calculated by multiplying
                  the number of underlying securities by the difference between
                  (a) $17.25 per share being the closing price of the Common
                  Stock at fiscal year-end on the Nasdaq National Market tier of
                  the Nasdaq Stock Market sm, and (b) the exercise price of the
                  options.

                  (d)      LONG-TERM INCENTIVE PLANS TABLE

         The following table sets forth the information noted for all long-term
incentive plans awards granted to each of the executive officers named in the
Summary Compensation Table during 1997:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                                    Performance     Estimated Future Payouts Under Non-Stock Price-Based Plans
                                   Number of      or Other Period  ---------------------------------------------------------
                                    Shares       Until Maturation    Threshold            Target              Maximum
            Name                     (#)            or Payout        ($ or #)           ($ or #)            ($ or #)
------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>                  <C>       <C>                 <C>                 <C>
John B. Bartling, Jr., Chief       144,000(1)           (1)       96,000 shares (1)   20,000 or 28,000    48,000 shares (1)
Executive Officer and President                                                          shares (1)

Mark D. Thompson, Chief             96,000(2)           (2)       64,000 shares (2)   14,000 or 18,000    32,000 shares (2)
Financial Officer and Executive                                                          shares (2)
Vice President ...............

Michael F. Sosh                     33,000(3)           (3)       22,000 shares (3)       4,000 or        11,000 shares (3)
Vice President                                                                        7,000 shares(3)
and Treasurer ................

Ronald P. Koegler                   33,000(4)           (4)       22,000 shares (4)       4,000 or        11,000 shares (4)
Vice President                                                                        7,000 shares(4)
and Controller

---------------------
<FN>
(1)      Mr. Bartling received an award of the right to receive 144,000 deferred shares of Common Stock pursuant to the
         Performance Equity Plan approved by the shareholders on October 7, 1997. The Performance Plan has a three year
         term with increasing performance goals associated with each year. Vesting under the Performance Plan occurs
         only upon attainment of specified performance goals. Based upon the performance of the Company in 1997, 96,000
         of the deferred shares were earned. The terms of the deferred shares provide for acceleration upon change of
         control of the Company or the termination of Mr. Bartling's employment other than for cause. The earned shares
         were contributed to the Cardinal Realty Services, Inc. Executive Deferred Compensation Rabbi Trust.

(2)      Mr. Thompson received an award of the right to receive 96,000 deferred shares of Common Stock pursuant to the
         Performance Equity Plan approved by the shareholders on October 7, 1997. The Performance Plan has a
</FN>
</TABLE>



                                       42
<PAGE>   45

         three year term with increasing performance goals associated with each
         year. Vesting under the Performance Plan occurs only upon attainment of
         specified performance goals. Based upon the performance of the Company
         in 1997, 64,000 of the deferred shares were earned. The terms of the
         deferred shares provide for acceleration upon change of control of the
         Company or the termination of Mr. Thompson's employment other than for
         cause. The earned shares were contributed to the Cardinal Realty
         Services, Inc. Executive Deferred Compensation Rabbi Trust.

(1)      Mr. Sosh received an award of the right to receive 33,000 deferred
         shares of Common Stock pursuant to the Performance Equity Plan approved
         by the shareholders on October 7, 1997. The Performance Plan has a
         three year term with increasing performance goals associated with each
         year. Vesting under the Performance Plan occurs only upon attainment of
         specified performance goals. Based upon the performance of the Company
         in 1997, 22,000 of the deferred shares were earned. The terms of the
         deferred shares provide for acceleration upon change of control of the
         Company or the termination of Mr. Sosh's employment other than for
         cause. The earned shares were contributed to the Cardinal Realty
         Services, Inc. Executive Deferred Compensation Rabbi Trust.

(2)      Mr. Koegler received an award of the right to receive 33,000 deferred
         shares of Common Stock pursuant to the Performance Equity Plan approved
         by the shareholders on October 7, 1997. The Performance Plan has a
         three year term with increasing performance goals associated with each
         year. Vesting under the Performance Plan occurs only upon attainment of
         specified performance goals. Based upon the performance of the Company
         in 1997, 22,000 of the deferred shares were earned. The terms of the
         deferred shares provide for acceleration upon change of control of the
         Company or the termination of Mr. Koegler's employment other than for
         cause. The earned shares were contributed to the Cardinal Realty
         Services, Inc. Executive Deferred Compensation Rabbi Trust.


         (e)      TRUSTEE COMPENSATION


         Each trustee of the Company who is not an employee of the Company is
paid an annual retainer fee of $15,000, plus (a) meeting fees of $1,000 for
attendance at each meeting of the Board and (b) $750 for each committee meeting
that occurs on a date when the full Board does not meet. Pursuant to the
Company's 1992 Incentive Equity Plan, as amended (the "Incentive Equity Plan"),
each member of the Board who was not employed by the Company was granted, at the
commencement of the trustee's term, a stock option to purchase shares of the
Company's Common Stock representing 0.1875% of the Company's "Total Committed
Equity", subject to certain vesting requirements (all of which have been
satisfied), which was subsequently calculated to be an option to purchase 15,000
shares of the Company's Common Stock for each trustee. The foregoing stock
options expire on September 19, 2002. "Total Committed Equity" is defined in the
Incentive Equity Plan as the total number of shares of the Company's Common
Stock (a) issued upon the allowance of claims (as defined in Section 101(5) of
the Bankruptcy Code) pursuant to the Third Amended Plan of Reorganization of the
Company and its substantively consolidated subsidiaries (the "Plan of
Reorganization") that was confirmed by the United States Bankruptcy Court for
the Southern District of Ohio, Eastern Division (the "Bankruptcy Court") on
August 26, 1992 and became effective on September 11, 1992 (the "Effective
Date") and (b) issued or reserved for issuance under the Incentive Equity Plan
as of September 11, 1992. In addition, each trustee was granted on November 30,
1995, May 23, 1996 and October 7, 1997 and will be granted annually on the day
after the Company's Annual Meeting of Shareholders, so long as each trustee
remains a trustee of the Company, an option to purchase 4,000 shares of the
Company's Common Stock with an exercise price equal to the fair market value on
the date of the grant a ten year term from date of grant and a vesting period of
the lesser of one year or the period from the date of the grant to the next
annual meeting of shareholders.

         In October 1997, the shareholders of the Company approved the Company's
1997 Performance Equity Plan (the "Performance Plan"). The Performance Plan
authorizes the grant of restricted stock awards to certain officers and
non-employee trustees. The Performance Plan has a three year term (1997 through
1999), with increasing performance goals associated with each year of the term.
A total of 636,000 shares of restricted Common Stock are available for grants.
On October 7, 1997 the Compensation Committee of the Company's Board of Trustees
authorized restricted stock grants for the full 636,000 shares of which 297,000
shares were awarded to the non-employee trustees. The trustees vested in 198,000
shares based upon the achievement of



                                       43
<PAGE>   46


certain performance goals in 1997. Vesting under the Performance Plan occurs
only upon attainment of specified performance goals. The performance goals are
stated as percentage increases over base line amounts established, and as
defined, in the Performance Plan approved by shareholders. Any awards that
remain non-vested after the third year will be forfeited.

         At the Company's annual shareholders meeting held on May 22, 1996, the
shareholders approved the Company's Non-Employee Trustee Restricted Stock Plan
(the "Trustees Restricted Stock Plan"). Under the terms of the Trustees
Restricted Stock Plan, each non-employee trustee of the Company may elect to
receive shares of the Company's Common Stock in lieu of cash trustees fees
otherwise payable to him. The Company has reserved 50,000 shares for issuance
under the Trustees Restricted Stock Plan and is also authorized to purchase
shares of the Company's Common Stock on the open market or in private
transactions in order to provide for the payment of shares of Common Stock to
non-employee trustees under the Trustees Restricted Stock Plan. Each
non-employee trustee who participates in the Trustees Restricted Stock Plan
receives shares of restricted Common Stock in lieu of cash compensation with the
shares paid to such trustee being valued at a 20% discount from their fair
market value on the date of payment. Shares of restricted Common Stock issued or
paid to trustees under the Trustees Restricted Stock Plan have a restriction
period of 3 years. The trustee may not sell, exchange, transfer, pledge,
hypothecate, assign or otherwise dispose of the shares during the restriction
period, except by bequest pursuant to a will or by intestacy. All restrictions
will lapse and the holder of the restricted Common Stock will be entitled to
receipt of the shares following the earliest of (a) 3 years from the date of the
issuance or payment of the restricted Common Stock to the holder; (b) the date
of the holder's death or disability; (c) the date the holder, after being
nominated by the Board, is not elected by the shareholders in an election for
the Board; or (d) the date on which the Board determines that the holder will
not be nominated for election to the Board. Shares of the restricted Common
Stock will be forfeited to the Company in the event that, during the restriction
period, the holder (a) resigns (other than by reason of disability) or is
dismissed for cause from the Board during his elected term as a trustee; (b)
declines to stand for an election to the Board after having been nominated by
the Board; or (c) sells, exchanges, transfers, pledges, hypothecates, assigns or
otherwise attempts to dispose of shares of restricted Common Stock except by
bequest pursuant to a will or intestacy. As of the end of the Company's 1997
fiscal year, each non-employee trustee had elected to participate in the
Trustees Restricted Stock Plan by electing to receive shares of restricted
Common Stock in lieu of a percentage of trustees fees otherwise payable in cash,
such elective percentages ranging from 25% to 100% of trustees fees.

         (g)      COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

         The following Report of the Compensation Committee and the Performance
Graph included in this Form 10-K shall not be deemed to be incorporated by
reference by any general statement incorporating by reference this Form 10-K
into any filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, except to the extent the Company specifically
incorporates this Report or the Performance Graph by reference therein, and
shall not be deemed soliciting material or otherwise deemed filed under either
of such Acts.

         The Compensation Committee administers the Company's various
compensation plans and reviews and recommends to the Board of Trustees
compensation levels for executive officers, evaluates executive management's
performance and considers executive management succession and related matters.
The Compensation Committee is composed exclusively of independent, non-employee
trustees.

         Philosophy of Compensation Committee

         The Compensation Committee believes that executive compensation should
reflect the value created for the Company's shareholders while supporting the
Company's long-term strategic goals. It is the belief of the Compensation
Committee that executive compensation should serve to:


                                       44
<PAGE>   47

         *        reward individuals for significant contribution to the
                  Company's success;
         *        align the interests of executives with those of the Company's
                  long-term investors;
         *        retain, motivate and attract qualified executives; and
         *        provide incentives to executives to achieve strategic
                  objectives in a manner consistent with the Company's values.

Executive Officer Compensation

         Individual executive officer compensation consists of three components:
base salary, annual cash and stock incentive bonuses and long-term equity
incentives. Each component will be discussed below.

         Salaries for executive officers are reviewed by the Compensation
Committee on an annual basis and may be increased based on (a) individual
performance and contribution and (b) increases in competitive pay levels.

         The Compensation Committee believes that the compensation packages
agreed to with its executive officers and other significant employees genuinely
preserves its philosophical objectives by placing significant emphasis on the
latter two components of the Compensation Committee's stated compensation
components, namely, annual cash and stock incentive bonus and long term equity
incentives. In this regard, the Company's compensation arrangements are weighted
heavily towards incentive bonuses based upon the Company's financial performance
measured in terms of its earnings before interest, taxes, depreciation, and
amortization without regard to extraordinary gains or losses ("Adjusted EBITDA")
and awards of restricted stock which will vest on the basis of growth in the
Company's market capitalization. A significant portion of management's
compensation takes the form of equity ownership in the Company. In this way, the
Compensation Committee believes that Mr. Bartling's Chief Executive Officer
compensation package and the compensation packages of the Company's other
executive officers implements its goal of aligning his interests with those of
the Company's long-term investors.

         The Compensation Committee has confirmed that all base salaries for the
Company's executive officers, including Mr. Bartling's base compensation, are
reasonable and competitive, based upon the surveys compiled by management, as
well as the advice and consultation of the representatives of the consulting
firm.

Management Incentive Plan

         Annual bonuses for the executive officers on account of the Company's
1997 fiscal year were governed by the Company's 1996 Incentive Compensation Plan
(the "Incentive Compensation Plan"), which was specifically designed to link
executive compensation to the Company's achieving certain operating goals and
exceeding certain projected increases in specific financial measures applicable
to the specific role in which each executive officer (and each other employee of
the Company participating in the Incentive Compensation Plan) is engaged. The
financial measures include Adjusted EBIDTA for the Company's Chief Executive
Officer and senior financial and legal officers, net income from property
management for the Company's property management employees, and return on equity
for the Company's Investment Management division employees (i.e., those
employees committed to maximizing the Company's return on its investments in
real property assets). Under the terms of the Incentive Compensation Plan, upon
achieving increases in the designated financial performance measure when
compared to the Company's 1996 results, the executive officers and other
participating employees are entitled to certain cash and stock awards.

         As discussed above and disclosed elsewhere in this Form 10-K, a
significant part of Mr. Bartling's compensation package includes the award of
the aggregate of 85,000 shares of restricted stock which will vest in part based
upon Mr. Bartling's continued employment and in part upon increases in the
Company's market capitalization as well as the award of stock options and
matching stock. These awards were provided for in Mr. Bartling's Employment
Agreement, which became effective on December 1, 1995, while the shares of


                                       45
<PAGE>   48

restricted stock as well as the stock option award were issued on April 5, 1996.
Similar awards, albeit in lesser amounts, were granted to the Company's new
Executive Vice President and Chief Operating Officer and its incumbent Executive
Vice President and Chief Financial Officer and Senior Vice President --
Acquisitions when such executive officers were retained in April 1996.

Deductibility

         The Company intends, to the extent practicable, to preserve the
deductibility under the Internal Revenue Code of compensation paid to its
executive officers, while maintaining compensation programs that will attract
and retain its executives in a competitive environment; provided that, in light
of the Company's ability to offset current income taxes through the utilization
of net operating loss carry forwards and passive activity loss carry forwards,
the Compensation Committee will consider facilitating executives' ability to
defer taxable incentive compensation (thereby also deferring, but not reducing,
the Company's deductibility of such items). In keeping with this philosophy to
provide for maximizing compensation payable in the form of the Company's Common
Shares, as well as to provide its executives with the ability to defer taxable
incentive compensation, the Company adopted its Executive Deferred Compensation
Plan and Executive Deferred Compensation Rabbi Trust in 1996. Pursuant to the
Executive Deferred Compensation Plan, the Company's highly compensated executive
officers can elect to direct the Company to issue any shares of the Company's
Common Stock to The Provident Bank, as Trustee under the Executive Deferred
Compensation Rabbi Trust, rather than directly to the employee otherwise
entitled to receive the shares of Common Stock, thereby deferring the
recognition of taxable income for federal income tax purposes. The Company
believes that, for the foreseeable future, this practice will not otherwise
result in increased income tax liability to the Company due to the availability
of net operating and passive activity loss carry forwards for federal income tax
purposes.

Conclusion

         In conclusion, the Compensation Committee will enable the Company to
retain highly qualified executive management and motivate its officers with
respect to the attainment of important goals and objectives. The Compensation
Committee believes the focus on Common Stock ownership by the executive officers
and other long-term stock programs has aligned and will continue to align the
interests of management with the interests of shareholders of the Company. The
Compensation Committee further believes that its continuing efforts to refine
the best measures of the Company's long-term growth and improving financial
results are reflected in the terms of the 1996 Incentive Compensation Plan and
will continue to be reflected in future management incentive programs.

             The Compensation Committee of the Board of Trustees

                     Glenn C. Pollack, Chairman
                     George J. Neilan
                     Stanley R. Fimberg



                                       46
<PAGE>   49

         (h)      PERFORMANCE GRAPH

         The graph below compares the cumulative total shareholder return on the
Company's Common Shares, to that of the Dow Jones Real Estate Investment Index
and the Dow Jones Market Index. In calculating cumulative total shareholder
return, reinvestment of dividends is assumed. This graph is shown for the five
full fiscal years in which the Company's Common Shares (NYSE: LFT, formerly
Nasdaq: CRSI) have been registered under the Securities Exchange Act of 1934, as
amended.
                                  [GRAPH]

                       VALUE OF $100 INVESTED AT 12/31/92

<TABLE>
<CAPTION>
          -----------------------------------------------------------------------------------------------------------------------
                                           12/31/92      12/31/93       12/31/94      12/31/95        12/31/96       12/31/97
          -----------------------------------------------------------------------------------------------------------------------
<S>                                          <C>            <C>           <C>            <C>            <C>           <C>
          LFT Market Value                   100            250           350            583            687           1,149
          -----------------------------------------------------------------------------------------------------------------------
          Dow Jones Real Estate              100            112           103            121            150            170
          -----------------------------------------------------------------------------------------------------------------------
          Dow Jones Equity Mkt               100            107           104            139            167            220
          -----------------------------------------------------------------------------------------------------------------------
</TABLE>




                                       47
<PAGE>   50

     ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
              --------------------------------------------------------------

                      SECURITY OWNERSHIP OF CERTAIN PERSONS

         On March 27, 1998, the Company had outstanding 9,203,916 shares of
Common Stock. The following table sets forth the information as of March 27,
1998 regarding Common Stock owned beneficially by (a) each person known by the
Company to own beneficially more than 5% of the Company's outstanding Common
Stock, (b) each trustee of the Company and executive officer named in the
Summary Compensation table above and (c) all present executive officers and
trustees of the Company as a group.

<TABLE>
<CAPTION>
                                                                     AMOUNT AND
                                                                      NATURE OF                                     UNVESTED
                    NAME AND ADDRESS OF                              BENEFICIAL               PERCENTAGE OF       COMPENSATORY
                      BENEFICIAL OWNER                              OWNERSHIP(a)              COMMON STOCK          SHARES(b)
------------------------------------------------------------- -------------------------     ---------------------------------------
<S>                                                                          <C>                   <C>              <C>
Bank of America National                                                     1,027,858             11.2%               --
   Trust & Savings Association
333 South Hope Street
Los Angeles, CA  90071

Trustees and Executive Officers  Named in "Summary Compensation Table"

John B. Bartling, Jr.                                                          268,880 (c)          2.9%             48,000

Mark D. Thompson                                                               156,546 (d)          1.7%             32,000

Leslie B. Fox                                                                   43,282 (e)          *               113,000

Michael F. Sosh                                                                 23,666 (f)          *                14,334

Stanley R. Fimberg                                                             210,000 (g)          2.3%             11,000

Robert V. Gothier, Sr.                                                          54,732 (h)          *                15,000

Ronald P. Koegler                                                               39,194 (i)          *                16,000

Joseph E. Madigan                                                               51,522 (j)          *                21,668

George J. Neilan                                                                48,308 (k)          *                15,000

George R. Oberer, Sr.                                                           89,878 (l)          1.0%             15,000

Glenn C. Pollack                                                                55,614 (m)          *                15,000

H. Jeffrey Schwartz                                                             70,938 (n)          *                15,000

Gerald E. Wedren                                                                47,788 (o)          *                15,000

Robert J. Weiler                                                               121,586 (p)          1.3%             15,000

All present executive officers and trustees                                  1,695,832 (q)         17.9%            409,002
of the Company as a group (20 persons)
--------------------
<FN>
* Less than one percent (1%)
</FN>
</TABLE>





                                       48
<PAGE>   51

(a)      Unless otherwise indicated, the beneficial owner has sole voting and
         investment power over these shares subject to the spousal rights, if
         any, of the spouses of those beneficial owners who have spouses.

(b)      The amounts reported in this column consist of restricted shares and
         Deferred Shares, which will not vest within 60 days, held on behalf of
         the specified individual by the Cardinal Realty Services, Inc.
         Executive Deferred Compensation Rabbi Trust ("Rabbi Trust") and as to
         which the specified individual has neither investment nor voting power,
         and Common shares subject to options which are not exercisable within
         60 days. These amounts are not deemed to be beneficially owned and are
         not included in the column "Amount and Nature of Beneficial Ownership."

(c)      This amount includes 40,000 Common Shares subject to options which are
         exercisable within 60 days. This amount also includes 218,880 Common
         Shares held on behalf of Mr. Bartling by the Rabbi Trust which shares
         Mr. Bartling has the right to receive under certain circumstances
         within 60 days. This amount does not include 48,000 restricted shares
         held on behalf of Mr. Bartling by the Rabbi Trust as to which shares
         Mr. Bartling has neither investment nor voting power.

(d)      This amount includes 25,000 Common Shares subject to options which are
         exercisable within 60 days. This amount also includes 126,546 Common
         Shares held on behalf of Mr. Thompson by the Rabbi Trust which shares
         Mr. Thompson has the right to receive under certain circumstances
         within 60 days. This amount does not include 32,000 restricted shares
         held on behalf of Mr. Thompson by the Rabbi Trust as to which shares
         Mr. Thompson has neither investment nor voting power.

(e)      This amount does not include 25,000 Common Shares subject to options
         which are not exercisable within 60 days. This amount also includes
         43,282 Common Shares held on behalf of Ms. Fox by the Rabbi Trust which
         shares Ms. Fox has the right to receive under certain circumstances
         within 60 days. This amount does not include 88,000 restricted shares
         held on behalf of Ms. Fox by the Rabbi Trust as to which shares Ms. Fox
         has neither investment nor voting power.

(f)      This amount includes 1,666 Common Shares subject to options which are
         exercisable within 60 days but does not include 3,334 Common Shares
         subject to options which are not exercisable within 60 days. This
         amount also includes 22,000 Common Shares held on behalf of Mr. Sosh
         by the Rabbi Trust which shares Mr. Sosh has the right to receive
         under certain circumstances within 60 days. This amount does not
         include 11,000 restricted shares held on behalf of Mr. Sosh by the
         Rabbi Trust as to which shares Mr. Sosh has neither investment nor
         voting power.

(g)      This amount includes 22,000 Common Shares held on behalf of Mr. Fimberg
         by the Rabbi Trust which shares Mr. Fimberg has the right to receive
         under certain circumstances within 60 days. This amount does not
         include 11,000 restricted shares held on behalf of Mr. Fimberg by the
         Rabbi Trust as to which shares Mr. Fimberg has neither investment nor
         voting power.



                                       49
<PAGE>   52

(h)      This amount includes 600 Common Shares held in Mr. Gothier's 401(k)
         retirement plan account and 15,500 Common Shares subject to options
         which are exercisable within 60 days but does not include 4,000 Common
         Shares subject to options which are not exercisable within 60 days.
         This amount also includes 22,000 Common Shares held on behalf of Mr.
         Gothier by the Rabbi Trust which shares Mr. Gothier has the right to
         receive under certain circumstances within 60 days and 4,382 restricted
         shares as to which Mr. Gothier has voting power but does not have
         investment power. This amount does not include 11,000 restricted shares
         held on behalf of Mr. Gothier by the Rabbi Trust as to which shares Mr.
         Gothier has neither investment nor voting power.

(i)      This amount includes 5,210 Common Shares subject to options which are
         exercisable within 60 days but does not include 5,000 Common Shares
         subject to options which are not exercisable within 60 days. This
         amount also includes 22,968 Common Shares held on behalf of Mr.
         Koegler by the Rabbi Trust which shares Mr. Koegler has the right to
         receive under certain circumstances within 60 days. This amount does
         not include 11,000 restricted shares held on behalf of Mr. Koegler by
         the Rabbi Trust as to which shares Mr. Koegler has neither investment
         nor voting power.

(j)      This amount includes 23,000 Common Shares subject to options which are
         exercisable within 60 days but does not include 4,000 Common Shares
         subject to options which are not exercisable within 60 days. This
         amount also includes 23,332 Common Shares held on behalf of Mr. Madigan
         by the Rabbi Trust which shares Mr. Madigan has the right to receive
         under certain circumstances within 60 days and 2,524 restricted shares
         as to which Mr. Madigan has voting power but does not have investment
         power. This amount does not include 17,668 restricted shares held on
         behalf of Mr. Madigan by the Rabbi Trust as to which shares Mr. Madigan
         has neither investment nor voting power.

(k)      This amount includes 23,000 Common Shares subject to options which are
         exercisable within 60 days but does not include 4,000 Common Shares
         subject to options which are not exercisable within 60 days. This
         amount also includes 22,000 Common Shares held on behalf of Mr. Neilan
         by the Rabbi Trust which shares Mr. Neilan has the right to receive
         under certain circumstances within 60 days and 3,308 restricted shares
         as to which Mr. Neilan has voting power but does not have investment
         power. This amount does not include 11,000 restricted shares held on
         behalf of Mr. Neilan by the Rabbi Trust as to which shares Mr. Neilan
         has neither investment nor voting power.

(l)      This amount includes 23,000 Common Shares subject to options which are
         exercisable within 60 days but does not include 4,000 Common Shares
         subject to options which are not exercisable within 60 days. This
         amount also includes 22,000 Common Shares held on behalf of Mr. Oberer
         by the Rabbi Trust which shares Mr. Oberer has the right to receive
         under certain circumstances within 60 days and 5,302 restricted shares
         as to which Mr. Oberer has voting power but does not have investment
         power. This amount does not include 11,000 restricted shares held on
         behalf of Mr. Oberer by the Rabbi Trust as to which shares Mr. Oberer
         has neither investment nor voting power.

(m)      This amount includes 23,000 Common Shares subject to options which are
         exercisable within 60 days but does not include 4,000 Common Shares
         subject to options which are not exercisable within 60 days. This
         amount also includes 22,000 Common Shares held on behalf of Mr. Pollack
         by the Rabbi Trust which shares Mr. Pollack has the right to receive
         under certain circumstances within 60 days and 5,614 restricted shares
         as to which Mr. Pollack has voting power but does not have investment
         power. This amount does not include 11,000 restricted shares held on
         behalf of Mr. Pollack by the Rabbi Trust as to which shares Mr. Pollack
         has neither investment nor voting power.

(n)      This amount includes 23,000 Common Shares subject to options which are
         exercisable within 60 days but does not include 4,000 Common Shares
         subject to options which are not exercisable within 60 days. This
         amount also includes 22,000 Common Shares held on behalf of Mr.
         Schwartz by the Rabbi Trust which shares Mr. Schwartz has the right to
         receive under certain circumstances within 60 days and 5,938 restricted
         shares as to which Mr.



                                       50
<PAGE>   53

         Schwartz has voting power but does not have investment power. This
         amount does not include 11,000 restricted shares held on behalf of Mr.
         Schwartz by the Rabbi Trust as to which shares Mr. Schwartz has neither
         investment nor voting power.

(o)      This amount includes 23,000 Common Shares subject to options which are
         exercisable within 60 days but does not include 4,000 Common Shares
         subject to options which are not exercisable within 60 days. This
         amount also includes 22,000 Common Shares held on behalf of Mr. Wedren
         by the Rabbi Trust which shares Mr. Wedren has the right to receive
         under certain circumstances within 60 days and 2,788 restricted shares
         as to which Mr. Wedren has voting power but does not have investment
         power. This amount does not include 11,000 restricted shares held on
         behalf of Mr. Wedren by the Rabbi Trust as to which shares Mr. Wedren
         has neither investment nor voting power.

(p)      This amount includes 23,000 Common Shares subject to options which are
         exercisable within 60 days but does not include 4,000 Common Shares
         subject to options which are not exercisable within 60 days. This
         amount also includes 22,000 Common Shares held on behalf of Mr. Weiler
         by the Rabbi Trust which shares Mr. Weiler has the right to receive
         under certain circumstances within 60 days and 4,586 restricted shares
         as to which Mr. Weiler has voting power but does not have investment
         power. This amount does not include 11,000 restricted shares held on
         behalf of Mr. Weiler by the Rabbi Trust as to which shares Mr. Weiler
         has neither investment nor voting power.

(q)      This amount includes 1,456 Common Shares held in individual Trustee and
         executive officer 401(k) retirement plan accounts, 34,442 restricted
         shares as to which certain trustees have voting power but do not have
         investment power, 699,493 Common Shares held on behalf of certain
         Trustees and executive officers by the Rabbi Trust which shares such
         Trustees and executive officers have the right to receive under certain
         circumstances within 60 days, and 262,070 Common Shares subject to
         options which are exercisable within 60 days. This amount does not
         include 328,667 restricted shares held on behalf of certain Trustees
         and executive officers by the Rabbi Trust as to which shares such
         Trustees and executive officers have neither investment nor voting
         power.

         ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
                  ----------------------------------------------

         Joseph E. Madigan, Chairman of the Company's Board of Trustees,
received a retainer in 1997 of $5,000 per month. Mr. Madigan also received in
December 1997, and will receive annually during his tenure as chairman, an award
of 4,000 shares of restricted Common Stock, one-third of which shares vest
annually over a three year period.

         H. Jeffrey Schwartz, trustee of the Company, is a partner in the law
firm of Benesch, Friedlander, Coplan & Aronoff LLP, which serves as outside
legal counsel to the Company.

         Robert J. Weiler, a trustee of the Company, is a principal of Americana
Investment Company, the lessor of the building housing the Company's principal
operating offices. Mr. Weiler did not participate in the Company's decision to
relocate to the headquarters or in negotiations for a renewal term for a lease
(for a smaller amount of space) as its operating officer. Management believes
that the lease terms for the Company's executive offices are competitive with
commercial lease rates in the Columbus, Ohio market. The annual lease payments
are as follows:

<TABLE>
<S>        <C>                     <C>                      <C>
           1997                    $282,580                 ($6.50/sq. ft.)
</TABLE>



                                       51
<PAGE>   54

                                     PART IV

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

    (a)  Documents filed as part of this report:


         Consolidated Financial Statement Schedules: (See the financial
         statement schedules listed on Index to Consolidated Financial
         Statement Schedules on Page F-1 of this report).

    (b)  Reports on Form 8-K: The Company did not file any reports on Form 8-K
                              during the fourth quarter of 1997.



                                       52
<PAGE>   55

         3.       Exhibits:


                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
 EXHIBIT                                                                               SEQUENTIAL
   NO.                            DESCRIPTION                                             PAGE
   ---                            -----------                                             ----

<S>          <C>                                                     <C>
   2.1       Third Amended Disclosure Statement Pursuant to          Incorporated by reference to Exhibit 2.1 to
             Section 1125 of Bankruptcy Code to Accompany the        the Company's Registration Statement on Form
             Plan of Reorganization of Jay Alix, Chapter 11          10 (the "Form 10")
             Trustee for Cardinal Industries, Inc. and its
             Substantively Consolidated Subsidiaries and Third
             Amended Plan of Reorganization of Jay Alix, Chapter
             11 Trustee, for Cardinal Industries, Inc. and its
             Substantively Consolidated Subsidiaries

   2.2       Findings of Fact, Conclusions of Law and Order          Incorporated by reference to Exhibit 2.2 to
             Confirming Third Amended Plan of Reorganization of      the Form 10
             Jay Alix, Chapter 11 Trustee, for Cardinal
             Industries, Inc. and its Substantively Consolidated
             Subsidiaries

   3.1       Amended and Restated Articles of Incorporation filed    Incorporated by reference to Exhibit 3.1 to
             September 11, 1992 with the Ohio Secretary of State     the Form 10


   3.2       Certificate of Amendment to the Articles of             Incorporated by reference to Exhibit 3.2 to
             Incorporation of Cardinal Reality Services, Inc.        the Form 10
             filed October 27, 1992 with the Ohio Secretary of
             State

   3.3       Certificate of Amendment to the Articles of             Incorporated by reference to Exhibit 3.3 to the
             Incorporation filed January 9, 1996 of Cardinal         Company's Annual Report on Form 10-K for the fiscal
             Realty Services, Inc. with the Ohio Secretary           year ended December 31, 1996 (the "1995 Form 10-K")
             of State

   3.4       Certificate of Amendment to the Articles of             Filed as an Exhibit to this Form 10-K
             Incorporation of Lexford, Inc. filed October
             8, 1997 with the Ohio Secretary of State

   3.5       Amended Code of Regulations of Lexford, Inc.            Incorporated by reference to Exhibit 3.3 to
                                                                     the Company's Annual Report on Form 10-K for
                                                                     the fiscal year ended December 31, 1993 (the
                                                                     "1993 Form 10-K")

   3.6       Declaration of Trust of Lexford Residential             Incorporated by reference to Annex B to the
             Trust, dated January 16, 1998 as amended                Prospectus filed pursuant to Rule 424(b) under
             (the "Declaration of Trust")                            the Securities Act as part of the Company's
                                                                     Registration Statement on Form S-4 initially
                                                                     filed on January 20, 1998

   3.7       Articles of Amendment to Declaration of Trust           Filed as an Exhibit to this Form 10-K
             dated March 14, 1998

   3.8       Bylaws of Lexford Residential Trust                     Incorporated by reference to Annex C Amendment
                                                                     Number 1 to the Form S-4 Registration Statement
                                                                     filed January 30, 1998

   4.1       Form of Common Share Certificate                        Filed  as  an   Exhibit   to  this  Form  10-K
</TABLE>



                                       53
<PAGE>   56

<TABLE>
<CAPTION>
 EXHIBIT                                                                               SEQUENTIAL
   NO.                            DESCRIPTION                                             PAGE
   ---                            -----------                                             ----

<S>          <C>                                                     <C>
  10.1       Amended and Restated Loan and Security Agreement,       Incorporated by reference to Exhibit 10.1 to the
             dated September 30, 1997, among The Provident Bank,     Company's Quarterly Report on Form 10-Q for the
             the Company and certain of the Company's subsidiaries   quarterly period ended September 30, 1997 (the
                                                                     "Third Quarter 1997 Form 10-Q")

  10.2       Cognovit   Promissory  Note  (Renewal   Consolidating   Incorporated  by  reference to Exhibit 10.2 to
             Balance  Revolving  Line)  dated  September  30, 1997   the Third Quarter 1997 Form 10-Q
             issued by the Company and its  material  subsidiaries
             in favor of The Provident Bank.

  10.3       Cognovit  Promissory  Note dated  August 11,  1995 in   Incorporated  by  reference to Exhibit 10.4 to
             the amount of  $7,000,000  issued by the  Company and   the 1995 Form 10-K
             certain   of  its   subsidiaries   in  favor  of  The
             Provident Bank.

  10.4       Agreement for  Modification  of Management  Agreement   Incorporated  by  reference to Exhibit 10.5 to
             dated as of August 11, 1995 among Cardinal  Apartment   the 1995 Form 10-K
             Management  Group,  Inc.,  the Company and certain of
             its subsidiaries

  10.5       Assignment of Management  Contracts  dated August 11,   Incorporated  by  reference to Exhibit 10.6 to
             1995 between  Cardinal  Apartment  Management  Group,   the 1995 Form 10-K
             Inc. and The Provident Bank

  10.6       Stock Pledge  Agreement dated August 11, 1995 between   Incorporated  by  reference to Exhibit 10.7 to
             the Company and The Provident Bank                      the 1995 Form 10-K

  10.7       Stock Pledge  Agreement dated August 11, 1995 between   Incorporated  by  reference to Exhibit 10.8 to
             Cardinal  Industries of Texas, Inc. and The Provident   the 1995 Form 10-K
             Bank

  10.8       Stock Pledge  Agreement dated August 11, 1995 between   Incorporated  by  reference to Exhibit 10.9 to
             Cardinal Industries  Development  Corporation and The   the 1995 Form 10-K
             Provident Bank

  10.9       Stock Pledge  Agreement dated August 11, 1995 between   Incorporated  by reference to Exhibit 10.10 to
             Cardinal Realty Company and The Provident Bank          the 1995 Form 10-K

  10.10      Limited  Power of Attorney  dated  August 11, 1995 by   Incorporated  by reference to Exhibit 10.11 to
             certain subsidiaries of the Company to the Company      the 1995 Form 10-K
</TABLE>

                                       54
<PAGE>   57

<TABLE>
<CAPTION>
 EXHIBIT                                                                               SEQUENTIAL
   NO.                            DESCRIPTION                                             PAGE
   ---                            -----------                                             ----

<S>          <C>                                                     <C>
  10.11      Limited  Power of Attorney  dated  August 11, 1995 by   Incorporated  by reference to Exhibit 10.12 to
             the Company and  certain of its  subsidiaries  to The   the 1995 Form 10-K
             Provident Bank

  10.12      Waiver  Agreement  dated  August  11,  1995 among The   Incorporated  by reference to Exhibit 10.13 to
             Provident  Bank and the  Company  and  certain of its   the 1995 Form 10-K
             subsidiaries

  10.13      Post  Closing  Agreement  dated as of August 11, 1995   Incorporated  by reference to Exhibit 10.14 to
             among The Provident  Bank and the Company and certain   the 1995 Form 10-K
             of its subsidiaries

  10.14      Assumption  of Loan and Security  Agreement  dated as   Filed as an Exhibit to the 1996 Form 10-K
             of February 26, 1997 between The  Provident  Bank and
             Lexford Properties, Inc.

  10.15      Form  of  Management   Agreement   between   Lexford,   Filed  as  an   Exhibit   to  this  Form  10-K
             Properties,  Inc. and certain  Properties (as revised
             August 1, 1996)

  10.16      Form  of  Partnership  Asset  Management   Agreement,   Filed  as  an   Exhibit   to  this  Form  10-K
             dated  January  1, 1995  between  Cardinal  Apartment
             Management  Group,  Inc.  (which was merged  with and
             into the Company) and certain Properties

  10.17      Form   of   Extended    Partnership    Administration   Filed  as  an   Exhibit   to  this  Form  10-K
             Agreement,  dated  January 1, 1995  between  Cardinal
             Apartment  Management  Group,  Inc. (which was merged
             with and into the Company) and certain Properties

  10.18      Form of  Agreement  for Tax Appeal  Services  between   Filed  as  an   Exhibit   to  this  Form  10-K
             the  Company  and  certain   Properties  (as  revised
             February 1996)

  10.19      Lease, dated February 24, 1998, between the Company     Filed as an Exhibit to this Form 10-K
             and the Americana Investment Company


  10.20      Master Equipment Lease dated September 30, 1996,        Filed  as  an   Exhibit   to  this  Form  10-K
             between Alliance Leasing and Services Group, Ltd.
             and the Company
</TABLE>

                                       55
<PAGE>   58

<TABLE>
<CAPTION>
 EXHIBIT                                                                               SEQUENTIAL
   NO.                            DESCRIPTION                                             PAGE
   ---                            -----------                                             ----

<S>          <C>                                                     <C>
  10.21      Agreement and Plan of Merger by and among the           Incorporated by reference to Exhibit 10.1 to the
             Company, Rexflor Acquisition Corporation and            Company's Quarterly Report on Form 10-Q for the
             Lexford Properties, Inc. ("Lexford") and the            quarterly period ended June 30, 1996 (the "Second
             Shareholders of Lexford dated as of July 19, 1996       Quarter 1996 Form 10-Q")


  10.22      Employment Agreement dated as of August 1, 1996         Incorporated  by  reference to Exhibit 10.2 to
             between Lexford and Patrick M. Holder, President of     the Second Quarter 1996 Form 10-Q
             Lexford Properties, Inc.

  10.23      Employment Agreement dated as of August 1, 1996         Incorporated  by  reference to Exhibit 10.3 to
             between Lexford and Bruce Woodward, Vice President      the Second Quarter 1996 Form 10-Q
             of Lexford Properties, Inc.

  10.24      Employment Agreement dated as of August 1, 1996         Incorporated  by  reference to Exhibit 10.4 to
             between Lexford and Annette Hoover, Senior Vice         the Second Quarter 1996 Form 10-Q
             President of Lexford -- Property Management of the
             Company

  10.25      Employment Agreement dated as of August 1, 1996         Incorporated  by  reference to Exhibit 10.6 to
             between Lexford and Peggy Crow Smith, Vice President    the Second Quarter 1996 Form 10-Q
             of Lexford

  10.26      Consulting Agreement dated as of August 1, 1996         Incorporated  by  reference to Exhibit 10.7 to
             between the Company and Stanley R. Fimberg              the Second Quarter 1996 Form 10-Q

  10.27      Form of Registration Rights Agreement by and between    Incorporated  by reference to Exhibit 10.10 to
             the Company and the former shareholders of Lexford      the Second Quarter 1996 Form 10-Q
             Properties, Inc.

  10.28      1997 Performance Equity Plan of the Company             Incorporated  by  reference  to the  Company's
                                                                     Proxy  Statement,  dated August 28, 1997,  for
                                                                     the Company's Annual Shareholders Meeting

  10.29      1992  Incentive  Equity  Plan  of  the  Company,   as   Incorporated  by reference to Exhibit 10.26 to
             amended (effective November 30, 1995)                   the 1995 Form 10-K

  10.30      Form of Deferred  Shares  Agreement  for Employees of   Incorporated  by reference to Exhibit 10.31 to
             the Company                                             the Form 10

  10.31      Form  of   Restricted   Shares   Agreement   for  Key   Incorporated  by reference to Exhibit 10.32 to
             Employees of the Company                                the Form 10

  10.32      Form of  Restricted  Shares  Agreement  for Executive   Incorporated  by reference to Exhibit 10.33 to
             Officers of the Company                                 the Form 10
</TABLE>

                                       56
<PAGE>   59

<TABLE>
<CAPTION>
 EXHIBIT                                                                               SEQUENTIAL
   NO.                            DESCRIPTION                                             PAGE
   ---                            -----------                                             ----
<S>          <C>                                                     <C>
  10.33      Form of  Non-Qualified  Stock  Option  Agreement  for   Incorporated  by reference to Exhibit 10.33 to
             Participants in Trustee's Employee Retention Plan       the Form 10

  10.34      Form of  Non-Qualified  Stock  Option  Agreement  for   Incorporated  by reference to Exhibit 10.36 to
             Non-Employee Directors                                  the Form 10

  10.35      401(k) Plan of the Company                              Incorporated  by reference to Exhibit 10.41 to
                                                                     the Form 10

  10.36      Employment  Agreement  dated as of  December 1, 1995,   Incorporated  by reference to Exhibit 10.38 to
             as   amended,   between   the  Company  and  John  B.   the 1995 Form 10-K
             Bartling,  Jr., President and Chief Executive Officer
             of the Company

  10.37      Employment Agreement dated as of April 1, 1996, as      Incorporated by reference to Exhibit 4.11 to Form
             amended, between the Company and Mark D. Thompson,      S-8 Registration Statement dated July 8, 1997
             Executive Vice President and Chief Financial Officer    (the "1997 Form S-8")
             of the Company

  10.38      Employment  Agreement  dated as of April 15, 1996, as   Incorporated  by  reference  to Exhibit 4.15
             amended,  between  the  Company  and  Paul R.  Selid,   to 1997 Form S-8
             Senior Vice President-Asset Management of the Company

  10.39      Employment  Agreement  dated  as  of  June  1,  1997,   Incorporated  by  reference  to  Exhibit 4.27 of
             between  the  Company  and  Leslie B. Fox,  Executive   1997 Form S-8
             Vice  President  and Chief  Operating  Officer of the
             Company ("Fox Employment Agreement")

  11.1       Statement re: computation of per share earnings         See Index to  Financial  Information  - Note 1
                                                                     in  the   Notes  to   Consolidated   Financial
                                                                     Statements

  21.1       Subsidiaries of The Company                             Filed  as  an   Exhibit   to  this  Form  10-K

  27.1       Financial Data Schedule                                 Filed as an Exhibit to this Form 10-K

  99.1       Individual Property Financial Information Summary       Filed as an Exhibit to this Form 10-K
</TABLE>


                                       57
<PAGE>   60

                                   SIGNATURES




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

<TABLE>
<S>                        <C>
                           LEXFORD RESIDENTIAL TRUST
                           (Registrant)

Date: March 31, 1998
                           By: /s/ John B. Bartling, Jr.
                              ------------------------------------------------------------
                              John B. Bartling, Jr., President and Chief Executive Officer
</TABLE>


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 date indicated.

<TABLE>
<CAPTION>
Signature                          Title                                                  Date
---------                          -----                                                  ----
<S>                                <C>                                               <C>
 /s/ Joseph E. Madigan             Chairman of the Board                             March 31, 1998
--------------------------------
Joseph E. Madigan

 /s/ John B. Bartling, Jr.         President, Chief Executive Officer and Director   March 31, 1998
--------------------------------
John B. Bartling, Jr.

 /s/ Mark D. Thompson              Executive Vice President
--------------------------------   and Chief Financial Officer                       March 31, 1998
Mark D. Thompson

 /s/ Ronald P. Koegler             Vice President and Controller                     March 31, 1998
--------------------------------
Ronald P. Koegler

 /s/ Robert V. Gothier, Sr.        Director                                          March 31, 1998
--------------------------------
Robert V. Gothier, Sr.

 /s/ George J. Neilan              Director                                          March 31, 1998
--------------------------------
George J. Neilan

 /s/ George R. Oberer, Sr.         Director                                          March 31, 1998
--------------------------------
George R. Oberer, Sr.

 /s/ Glenn C. Pollack              Director                                          March 31, 1998
--------------------------------
Glenn C. Pollack

 /s/ H. Jeffrey Schwartz           Director                                          March 31, 1998
--------------------------------
H. Jeffrey Schwartz

 /s/ Gerald E. Wedren              Director                                          March 31, 1998
--------------------------------
Gerald E. Wedren

 /s/ Robert J. Weiler              Director                                          March 31, 1998
--------------------------------
Robert J. Weiler

 /s/ Stanley R. Fimberg            Director                                          March 31, 1998
--------------------------------
Stanley R. Fimberg

 /s/ Patrick M. Holder             Director                                          March 31, 1998
--------------------------------
Patrick M. Holder
</TABLE>



                                       58
<PAGE>   61
                         LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULES


FINANCIAL STATEMENTS

   Report of Independent Auditors............................................F-2

   Consolidated Balance Sheets at December 31, 1997 and 1996.................F-3

   Consolidated Statements of Income for the years ended
        December 31, 1997, 1996 and 1995 ....................................F-4

   Consolidated Statements of Shareholders' Equity for the years ended
        December 31, 1997, 1996 and 1995 ....................................F-5

   Consolidated Statements of Cash Flows for the years ended
        December 31, 1997, 1996 and 1995 ..............................F-6 - F-7

   Notes to Consolidated Financial Statements.........................F-8 - F-33

   Consolidated Financial Statement Schedules:

        Schedule II - Valuation and Qualifying Accounts.....................F-34

        Schedule III - Real Estate and Accumulated Depreciation......F-35 - F-41

   All other schedules for which provision is made in the applicable  accounting
   regulation of the Securities  and Exchange  Commission are not required under
   the related  instructions,  are inapplicable,  or the information required is
   included  in the  Consolidated  Financial  Statements  or notes  thereto  and
   therefore have been omitted.

                                       F-1

<PAGE>   62


                         REPORT OF INDEPENDENT AUDITORS





Shareholders and Board of Trustees
Lexford Residential Trust


We  have  audited  the  accompanying  consolidated  balance  sheets  of  Lexford
Residential Trust (formerly  Lexford,  Inc. and Cardinal Realty Services,  Inc.)
and  subsidiaries as of December 31, 1997 and 1996 and the related  consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period  ended  December  31,  1997.  Our audits also  included  the
financial  statement schedules listed in the accompanying index. These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility  is  to  express  an  opinion  on  these  consolidated  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 consolidated  financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Lexford
Residential  Trust and  subsidiaries  at  December  31,  1997 and 1996,  and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity  with generally
accepted  accounting  principles.  Also, in our opinion,  the related  financial
statement  schedules,  when  considered  in  relation  to  the  basic  financial
statements  taken  as a whole,  present  fairly  in all  material  respects  the
information set forth therein.


                                                           /s/ ERNST & YOUNG LLP

Columbus, Ohio
February 16, 1998, except for Note 14,
     as to which the date is March 18, 1998

                                       F-2

<PAGE>   63

<TABLE>
<CAPTION>

                         LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1997 AND 1996
                                                                                       1997             1996
                                                                                 ---------------- -----------------
<S>                                                                              <C>              <C>
                                     ASSETS
Rental Properties (Notes 2 and 5):
  Land...........................................................................$     23,124,313 $      23,652,841
  Buildings, Improvements and Fixtures...........................................     138,244,903       137,917,083
                                                                                 ---------------- -----------------
                                                                                      161,369,216       161,569,924
  Accumulated Depreciation.......................................................      (9,151,786)       (4,478,379)
                                                                                 ---------------- -----------------
                                                                                      152,217,430       157,091,545

Investments in and Advances to Unconsolidated Partnerships,  net of an allowance
  of $2.6 and $1.6 million at December 31, 1997 and 1996, Respectively
  (Notes 3 and 12)...............................................................      57,111,374        54,610,421

Cash.............................................................................       2,568,890         3,593,121
Accounts Receivable, Affiliates ($1,990,967 and $4,089,328, net
  of an allowance of $941,521 and  $2,034,290, at December 31,
  1997 and 1996, Respectively), Residents and Other (Note 12)....................       4,898,993         5,044,603
Furniture, Fixtures and Other, Net (Note 1)......................................       1,719,521         1,167,579
Funds Held in Escrow (Note 1)....................................................      11,887,936        14,011,013
Intangible Assets (Note 1).......................................................       9,200,531         8,694,925
Prepaids and Other ..............................................................       1,992,921         1,154,572
                                                                                 ---------------- -----------------
                                                                                 $    241,597,596 $     245,367,779
                                                                                 ================ =================

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages and Corporate Debt
  Non Recourse Mortgages (Note 5)................................................$    142,636,874 $     148,056,017
  Corporate Debt (Note 4)........................................................       7,361,682        15,263,268
                                                                                 ---------------- -----------------
                                                                                      149,998,556       163,319,285
                                                                                 ---------------- -----------------

Accounts Payable.................................................................       1,287,753         1,560,749
Accrued Interest, Real Estate and Other Taxes....................................       3,719,625         4,023,310
Other Accrued Expenses...........................................................       8,241,526         8,531,031
Other Liabilities................................................................       3,503,640         5,424,226
                                                                                 ---------------- -----------------
  Total Liabilities..............................................................     166,751,100       182,858,601
                                                                                 ---------------- -----------------

Commitments and Contingencies (Notes 7, 8, 10)

Shareholders' Equity (Notes 1 and 7):
  Preferred Stock, 5,000,000 Shares Authorized, Unissued.........................           --               --
  Common Stock, .01 par value; 50,000,000 Shares Authorized
    8,493,648 and 7,817,534 Shares Issued and
    Outstanding, at December 31, 1997 and 1996, Respectively.....................          84,936            78,175
  Additional Paid-in Capital.....................................................      54,137,777        45,012,798
  Retained Earnings..............................................................      20,623,783        17,418,205
                                                                                 ---------------- -----------------
                                                                                       74,846,496        62,509,178
                                                                                 ---------------- -----------------
                                                                                 $    241,597,596 $     245,367,779
                                                                                 ================ =================
<FN>
                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>

                                      F-3

<PAGE>   64
<TABLE>
<CAPTION>

                         LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                        CONSOLIDATED STATEMENTS OF INCOME

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

                                                                                     1997               1996               1995
                                                                              ------------------  -----------------  ---------------
<S>                                                                           <C>                 <C>                <C>
Revenues:
   Rental Revenues (Note 2)...................................................$       41,851,081  $      41,276,684
   Fee Based, primarily from Affiliates (Note 12).............................        15,847,032         14,164,312  $    15,906,553
   Interest, Principally from Unconsolidated Partnerships (Note 12)...........        10,680,767          8,897,233        4,361,497
   Income from Disposal of Assets-Net.........................................         1,988,611            962,761        3,408,379
                                                                              ------------------  -----------------  ---------------
                                                                                      70,367,491         65,300,990       23,676,429
                                                                              ------------------  -----------------  ---------------

Expenses:
   Property Operating and Maintenance.........................................        14,883,691         16,980,888
   Real Estate Taxes and Insurance............................................         4,060,311          4,148,545
   Property Management........................................................        12,339,727          9,366,777        8,667,358
   Administration.............................................................         5,446,969          5,030,967        4,399,349
   Performance Equity Plan (Note 7)...........................................         6,280,500                  0                0
   Nonrecurring Costs (Note 9)................................................           827,407            242,899        1,537,073
   Interest - Non Recourse Mortgages (Note 5).................................        13,769,562         14,131,780                0
   Interest - Corporate Debt (Note 4).........................................           657,349          1,098,333        1,522,087
   Depreciation and Amortization (Note 2).....................................         6,526,863          5,514,571          537,849
                                                                              ------------------  -----------------  ---------------
                                                                                      64,792,379         56,514,760       16,663,716
                                                                              ------------------  -----------------  ---------------

Income Before Income Taxes and Extraordinary Item.............................         5,575,112          8,786,230        7,012,713
Provision for Income Taxes (Note 8):
   Credited to Additional Paid-in Capital.....................................         1,809,000          3,166,000        2,356,000
   Current....................................................................           380,000            250,000          364,000
                                                                              ------------------  -----------------  ---------------
Income Before Extraordinary Item..............................................         3,386,112          5,370,230        4,292,713

Extraordinary (Loss) / Gain, Net of Income Tax  Benefit/(Provision)
of $115,000 in 1997, $1,015,000 in 1996
and ($510,000) in 1995, Respectively (Note 6).................................          (180,534)        (1,614,356)         804,022
                                                                              ------------------  -----------------  ---------------
Net Income....................................................................$        3,205,578         $3,755,874       $5,096,735
                                                                              ==================  =================  ===============



Basic Earnings Per Share:
   Income before Extraordinary Item...........................................$             0.42  $            0.71  $          0.59
   Extraordinary Item.........................................................             (0.02)             (0.21)            0.11
                                                                              ------------------  -----------------  ---------------
   Net Income.................................................................$             0.40  $            0.50  $          0.70
                                                                              ==================  =================  ===============
Diluted Earnings Per Share:
   Income before Extraordinary Item...........................................$             0.41  $            0.69  $          0.56
   Extraordinary Item.........................................................             (0.02)             (0.21)            0.11
                                                                              ------------------  -----------------  ---------------
   Net Income.................................................................$             0.39  $            0.48  $          0.67
                                                                              ==================  =================  ===============
<FN>
                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>
                                      F-4
<PAGE>   65
<TABLE>
<CAPTION>
                         LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

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

                                                                 Common Stock
                                                         ----------------------------   Additional      Retained
                                                            Shares         Amount     Paid-in Capital   Earnings           Total
                                                         ------------- -------------- --------------- -------------- ---------------
<S>                                                         <C>        <C>            <C>             <C>            <C>
Balance, January 1, 1995.................................    6,817,254 $       68,173 $    34,614,374 $    8,565,596 $   43,248,143

    Shares issued in 1995, principally in connection
    with the claims resolution process (Note 1) .........      366,708          3,667          (3,667)

    Exercise of options under Non-Qualified Stock
    Option Plan (Note 7).................................       30,606            306          34,910                        35,216

    Less: Treasury Shares Issued to Rental Properties and
          subsidiaries (Note 1)..........................       (8,248)           (82)             82

    Credit from utilization of pre-confirmation tax
    benefits (Note 8)....................................                                   2,866,000                     2,866,000

    Net Income for the year ended December 31, 1995......                                                  5,096,735      5,096,735
                                                         ------------- -------------- --------------- -------------- --------------
Balance, December 31, 1995...............................    7,206,320         72,064      37,511,699     13,662,331     51,246,094

    Shares issued in 1996, in connection with the claims
    resolution process (Note 1) .........................       13,340            133            (133)

    Shares issued in connection with Lexford Acquisition
    (Note 1).............................................    1,400,000         14,000      13,986,000                    14,000,000

       Contingent........................................     (900,000)        (9,000)     (8,991,000)                   (9,000,000)

    Exercise of options under Non-Qualified Stock
    Option Plan (Note 7).................................       68,616            686          60,985                        61,671

    Restricted stock compensation awards and Director
    Restricted Stock Plan................................       32,334            323         325,546                       325,869

    Less: Treasury Shares primarily from the redemption
          in 1996 of stock held by Unconsolidated
          Partnerships ..................................       (3,076)           (31)        (31,299)                      (31,330)

    Credit from utilization of pre-confirmation tax
    benefits (Note 8)....................................                                   2,151,000                     2,151,000

    Net Income for the year ended December 31, 1996......                                                  3,755,874      3,755,874
                                                         ------------- -------------- --------------- -------------- --------------
Balance, December 31, 1996...............................    7,817,534         78,175      45,012,798     17,418,205     62,509,178

    Shares issued in 1997, in connection with the claims
    resolution process (Note 1)..........................       22,264            222            (222)

    Exercise of options under Non-Qualified Stock
    Option Plan (Note 7).................................       18,264            183          37,595                        37,778

    Stock Compensation and Director Restricted Stock
    Plan, Net of 267,334 Shares subject to Vesting
    Restrictions (Note 7)................................      635,586          6,356       7,393,606                     7,399,962

    Credit from utilization of pre-confirmation tax
    benefits (Note 8)....................................                                   1,694,000                     1,694,000

    Net Income for the year ended December 31, 1997......                                                  3,205,578      3,205,578
                                                         ------------- -------------- --------------- -------------- --------------
Balance, December 31, 1997...............................    8,493,648 $       84,936 $    54,137,777 $   20,623,783 $   74,846,496
                                                         ============= ============== =============== ============== ==============
<FN>
                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>
                                      F-5
<PAGE>   66
<TABLE>
<CAPTION>
                         LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                                                                            1997           1996           1995
                                                                                        ------------- -------------- --------------
<S>                                                                                     <C>           <C>            <C>
Cash flows provided by/(used in) Operating activities:
Management and Investment Management activities:
   Cash received from Fee Based activities..............................................$  20,046,613 $   22,414,166 $   22,173,861
   Interest and Other Revenues received from Unconsolidated Partnerships................   12,797,325      9,074,008      4,965,246
   Cash receipts -- other...............................................................    1,913,305      2,170,253      3,261,207
   Cash paid to Vendors, Suppliers and Employees........................................  (22,337,316)   (21,784,246)   (21,784,640)
   Interest paid on Corporate Debt......................................................     (593,913)    (1,147,593)    (1,554,454)
   Income Taxes paid - City and State...................................................     (285,382)      (239,145)      (234,436)
   Taxes paid, other than Income Taxes..................................................     (108,231)       (76,575)      (553,140)
   Payments related to nonrecurring items...............................................     (342,361)    (2,221,248)      (705,075)
                                                                                        ------------- -------------- --------------
                                                                                           11,090,040      8,189,620      5,568,569
                                                                                        ------------- -------------- --------------
Rental Property activities:
   Cash received from Rental activities.................................................   41,586,891     41,297,937              0
   Cash paid on Rental activities.......................................................  (17,757,630)   (19,855,056)             0
   Real Estate Taxes....................................................................   (3,254,401)    (3,406,946)             0
   Interest paid on Mortgages...........................................................  (13,579,541)   (13,517,318)             0
                                                                                        ------------- -------------- --------------
                                                                                            6,995,319      4,518,617              0
                                                                                        ------------- -------------- --------------
Net Cash provided by Operating activities...............................................   18,085,359     12,708,237      5,568,569
                                                                                        ------------- -------------- --------------
Cash Flow provided by/(used in) Investing activities:
   Management and Investment Management Activities:
     Proceeds from Sale of Assets and Other.............................................    2,869,955      1,016,334      3,787,441
     Capital Expenditures...............................................................   (1,191,992)      (422,853)      (397,519)
     Advances to Unconsolidated Partnerships - net......................................     (992,427)    (2,556,807)    (8,565,119)
     Acquisition of Real Estate.........................................................            0              0     (1,864,736)
     Investments in Unconsolidated Partnerships.........................................   (4,696,916)             0              0
     Investment in Management Contracts.................................................   (1,700,000)             0              0
   Rental Property activities:
     Net cash flow provided by Rental activities during period
       Held for Sale (net of Interest paid of $13,692,045 in 1995).....................             0              0      3,037,826
     Capitalized Refinancing Costs......................................................            0     (1,687,492)             0
     Funding of Escrows.................................................................      290,805        (41,279)             0
     Capital Expenditures...............................................................   (2,385,951)      (681,639)             0
                                                                                        ------------- -------------- --------------
Net Cash used in Investing activities...................................................   (7,806,526)    (4,373,736)    (4,002,107)
                                                                                        ------------- -------------- --------------
Cash Flows provided by/(used in) Financing activities:
   Management and Investment Management activities:
     Proceeds from the exercise of Stock Options........................................       37,778         61,671         35,216
     Redemption of Stock held by Unconsolidated Partnerships............................            0        (31,330)             0
     Proceeds from Corporate Debt and Other.............................................            0              0     21,000,505
     Principal payments on Corporate Debt and Other.....................................   (8,035,774)    (7,052,484)   (21,859,553)
   Rental Property activities:
     Proceeds from Mortgage Debt........................................................    7,428,500     47,442,961              0
     Payments on Mortgages - principal amortization.....................................   (2,124,904)    (2,139,137)    (2,150,733)
     Payments on Mortgages - lump sum...................................................   (8,608,664)   (45,775,047)      (479,554)
                                                                                        ------------- -------------- --------------
Net Cash used in Financing activities:..................................................  (11,303,064)    (7,493,366)    (3,454,119)
                                                                                        ------------- -------------- --------------
Increase/(Decrease) in Cash.............................................................   (1,024,231)       841,135     (1,887,657)
Cash at Beginning of Year...............................................................    3,593,121      2,751,986      4,639,643
                                                                                        ------------- -------------- --------------
Cash at End of Year.....................................................................$   2,568,890 $    3,593,121 $    2,751,986
                                                                                        ============= ============== ==============

<FN>
                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>
                                       F-6
<PAGE>   67

<TABLE>
<CAPTION>
                         LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                                                                     1997             1996            1995
                                                                                ----------------  -------------- ----------------
<S>                                                                             <C>               <C>            <C>
Reconciliation of Net Income to Net Cash
   Provided By Operating Activities:
     Net Income.................................................................$      3,205,578  $    3,755,874 $      5,096,735
     Adjustments to Reconcile Net Income to Net Cash
       Provided by Operating Activities:
         Depreciation ..........................................................       5,426,309       5,111,068          496,392
         Amortization...........................................................       1,100,554         403,503           41,457
         Provision for Losses on Accounts Receivable............................         389,361         503,421        1,138,869
         Income from Disposal of Assets -- Net..................................      (1,988,611)       (962,761)      (3,408,379)
         (Gain) / Loss on Debt Restructuring....................................         295,534       2,629,356       (1,314,022)
         Provision for Income Taxes credited to Additional Paid-in Capital......       1,694,000       2,151,000        2,866,000
         Stock Compensation credited to Additional Paid-in Capital..............       7,399,962         325,869                0
         Changes in Operating Assets and Liabilities:
           Investments in and Advances to Unconsolidated Partnerships...........       1,949,767         (94,014)        (390,570)
           Accounts Receivable and Other........................................        (339,386)     (4,339,533)         (17,039)
           Funds Held in Escrow.................................................       1,832,273      (4,857,423)         595,256
           Accounts Payable and Other Liabilities...............................      (2,879,982)      8,081,877          463,870
                                                                                ----------------  -------------- ----------------
   Net Cash Provided by Operating Activities....................................$     18,085,359  $   12,708,237 $      5,568,569
                                                                                ================  ============== ================
</TABLE>

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

In 1995, the Company  acquired four Rental  Properties  primarily  financed with
$4,770,000 of first mortgages on the properties.

In June 1995,  the Company  purchased  from a mortgage  lender the  non-recourse
mortgages on one  Unconsolidated  Partnership  and four Rental  Properties.  The
mortgages  totaled $8.8 million and were acquired for $7.8 million.  The Company
financed  the  acquisition  with a $7.8  million  note  payable to the  mortgage
lender. The note was repaid in June 1996.

In 1996,  the Company  granted deeds in lieu of foreclosure to the mortgagee for
three Rental Properties.  The properties had an aggregate carrying value of $3.9
million.  In 1995  the  Company  granted  deeds  in lieu of  foreclosure  to the
mortgagees  for certain  Rental  Properties.  The  properties  had an  aggregate
carrying value of $3.5 million.  No  significant  gain or loss was recognized on
these transactions because the assets and the non-recourse  mortgages on each of
these Rental Properties had been recorded in equal amounts.

Effective August 1, 1996, the Company acquired Lexford Properties,  Inc. through
a merger with a wholly  owned  subsidiary  of the  Company.  The Company  issued
1,400,000 shares of its Common Stock (valued at $14,000,000) in consideration of
the acquisition; however 900,000 of the shares issued (valued at $9,000,000) are
subject to forfeiture,  in whole or in part, if the Company's  combined property
management  operations  fail to achieve  certain  profitability  criteria  on or
before the end of the Company's 1999 fiscal year.

In October 1997 the Company sold two Rental  Properties.  The buyer  assumed the
mortgages with a carrying value of $2.3 million.

In 1997 and 1996,  all  interest  incurred  was  expensed.  In 1995 the interest
incurred on the Rental  Properties was  capitalized as the properties  were Held
for Sale, while interest on corporate debt was expensed (SEE NOTE 2).

                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                       F-7
<PAGE>   68


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1:     BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

            Business

            The  principal  business  of  Lexford  Residential  Trust,  formerly
            Lexford,   Inc.  and  Cardinal  Realty   Services,   Inc.,  and  its
            subsidiaries  (the  "Company") is the  ownership  and  management of
            multi-family  apartment properties.  The Company changed its name in
            October 1997 to emphasize its new executive and property  management
            personnel and to eliminate the negative  stigma  associated with the
            "Cardinal" name due to its bankruptcy filing in 1989. The Company is
            also involved in the  acquisition and  redevelopment  of multifamily
            apartment  properties.  The Company  holds an ownership  interest in
            apartment  communities  either  as (i) the  sole  owner  of  various
            limited partnerships or subsidiaries which own apartment communities
            (the "Rental Properties" or "Wholly Owned Properties"),  or (ii) the
            general partner in various limited  partnerships which own apartment
            communities  (the   "Unconsolidated   Partnerships"  or  "Syndicated
            Partnerships").  The Rental Properties and the apartment communities
            owned by the Unconsolidated  Partnerships are collectively  referred
            to as the  "Properties".  The Company's general partner interests in
            the  Unconsolidated  Partnerships  ranges  from 1.0% to  10.0%,  but
            typically 9.0% to 10.0%.  The limited  partnership  interests in the
            Unconsolidated Partnerships are substantially all owned by unrelated
            third party investors.  The Company also has receivables,  typically
            in  the  form  of   second   mortgages,   from  the   Unconsolidated
            Partnerships  that  generate  a  majority  of  the  interest  income
            recognized by the Company.

            The  majority  of the  Properties  are  located in the  midwest  and
            southeast  United  States,  with  the  heaviest   concentrations  in
            Florida, Ohio, Georgia,  Indiana, Michigan and Kentucky. The typical
            Property  is  comprised  of multiple  single  story  buildings  with
            studio,  one and two bedroom  apartments.  Substantially  all of the
            Properties have non-recourse  first mortgage  indebtedness  which is
            owed to financial institutions. The Company is not dependent for its
            revenues on any  particular  Property  and the loss of any  Property
            would  not  be  material  to  the  Company's   financial   position.
            Geographic   distribution  of  the  Properties  also  minimizes  the
            Company's exposure to local economic conditions.

            The Company has  historically  engaged in and derived revenues from,
            two  distinct  businesses:  the real estate  investment  business in
            which it owns and  operates  multi-family  residential  real  estate
            ("Investment  Management" or "Real Estate Investment  Business") and
            the real estate services  business  ("Management  Services" or "Real
            Estate Services Business") in which it provides fee-based management
            and other services to multi-family apartment communities,  including
            services  to  properties  in  which  the  Company  does  not have an
            ownership interest ("Third Party Owners") and their residents.


                                       F-8
<PAGE>   69


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 NOTE 1:    BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

            Investment Management

            The objective of the Company's Investment  Management division is to
            maximize  the value of its real estate  holdings  and its returns on
            real estate  investments.  The Company performs these functions both
            with respect to the Rental Properties as well as the  Unconsolidated
            Partnerships.  The Company  strives to obtain and  maintain the best
            available   financing  for  the   Properties  and  to  maximize  the
            Properties'  operating   performance.   The  Company  evaluates  the
            performance  of all real  estate  holdings  to  identify  investment
            requirements,  under-performing Properties or those that can be sold
            at an attractive price relative to their performance.

            The  Company's  Investment   Management  division,   acting  in  the
            Company's   capacity  as  general  partner  of  the   Unconsolidated
            Partnerships,    provides   asset   management   services   to   the
            Unconsolidated  Partnerships.  In addition, the Company's Investment
            Management division performs the following services for the accounts
            of  the   co-owners   (limited   partners)  of  the   Unconsolidated
            Partnerships:   informational  and  financial   reporting   services
            (including  tax  return  preparation  and  provision  of tax  return
            information  to the limited  partners)  and  capital  and  financial
            planning  (including  determination of reserves,  funding of capital
            requirements  and   administration   of  capital   distributions  to
            partners).

            Management Services

            The  Company's  Management  Services  division  is charged  with the
            conduct of the Company's property management business. The Company's
            property  management  business involves all traditional  elements of
            third party property management including: day-to-day management and
            maintenance  of  multi-family   residential   apartment  properties,
            attracting and retaining qualified  residents,  collecting rents and
            other receivables from residents, providing cash management services
            for rental  revenues,  security  deposits,  taxes and  insurance and
            deferred   maintenance   escrows,   and  compiling  and   furnishing
            information to property owners.

            Effective August 1, 1996, the Company  acquired Lexford  Properties,
            Inc.  ("Lexford  Properties") by merger of a wholly owned subsidiary
            of the  Company  with and into  Lexford  Properties.  On that  date,
            Lexford  Properties became a wholly owned subsidiary of the Company.
            Lexford  Properties  has been engaged in the business of third party
            property  management services to Third Party Owners since commencing
            business  operations in June 1988.  Lexford Properties has succeeded
            to the operation of the Company's Management Services Division.


                                       F-9
<PAGE>   70


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 NOTE 1:    BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

            Lexford  Properties  also  operates  an adjunct  business  which the
            Company refers to as "Preferred  Resource"  (formerly referred to as
            Ancillary  Services or Preferred  Vendor).  The  Preferred  Resource
            business  currently  provides  assistance to most of the  Properties
            managed by Lexford  Properties,  in the  acquisition of needed parts
            and  supplies  and the  management  of a  coordinated  buying  group
            enjoying  substantial  volume  discounts.  In consideration of these
            services  for the benefit of the  Unconsolidated  Partnerships,  the
            Company  generates  income by  retaining  some  portion of discounts
            earned.  In  addition,   Preferred  Resource  provides  services  to
            residents such as renter's insurance.

            Fresh Start Accounting

            The  Company  adopted a method of  accounting  referred  to as fresh
            start  ("Fresh  Start")  reporting  as of  September  11, 1992 ("The
            Effective  Date")  as a result  of the  Company's  judicial  plan of
            reorganization (the "Plan of Reorganization").  The Company prepared
            financial  statements on the basis that a new  reporting  entity was
            created with assets and liabilities recorded at their estimated fair
            values as of the  Effective  Date.  At the  Effective  Date,  to the
            extent the  non-recourse  debt on  certain  Rental  Property  assets
            exceeded  the  estimated  fair  value of the  Rental  Property,  the
            Company reduced the contractual  amount of the related  non-recourse
            first mortgage debt by the amounts of the deficiency  (the "Mortgage
            Deficiencies").   The  contractual  mortgage  balance,  net  of  any
            applicable  Mortgage  Deficiency,  is referred  to as the  "Carrying
            Value" of the  mortgage.  In  addition,  the Plan of  Reorganization
            provided  for  the  issuance  of  the  Company's   common  stock  in
            satisfaction   of   claims.   In   accordance   with   the  Plan  of
            Reorganization,  a total of 6,645,246  shares were issued to satisfy
            claimants in the bankruptcy  case.  During 1997,  22,264 shares were
            released to claimants upon final resolution of all claims.


                                       F-10
<PAGE>   71


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1:     BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

            Lexford Properties Acquisition

            Effective August 1, 1996 the Company acquired Lexford  Properties by
            way of a merger (the "Lexford  Merger") of a wholly owned subsidiary
            of the Company with and into Lexford Properties. The acquisition was
            accounted  for  as a  purchase.  The  terms  of the  Lexford  Merger
            provided  that the Company  would succeed to the ownership of all of
            the  issued and  outstanding  stock of  Lexford  Properties  and the
            shareholders of Lexford Properties would receive 1,400,000 shares of
            restricted,  newly issued Common Stock.  For purposes of the Lexford
            Merger,  the Common Stock was valued at $10 per share. $9.0 million,
            or 900,000 shares, of the purchase price is subject to forfeiture in
            whole or in part in the event  Lexford  Properties  does not achieve
            certain  profitability  criteria by December 31, 1999.  These shares
            are  held in  escrow  pending  release  or  forfeiture.  If and when
            Lexford Properties attains some or all of the profitability criteria
            the  corresponding  number  of  shares  (up to all  900,000  shares)
            subject to forfeiture will be released  without  contingency and the
            Company  will  record the  additional  purchase  price.  The Lexford
            Properties shareholders received 500,000 shares of Common Stock free
            of  contingencies.  The 900,000 shares subject to forfeiture are not
            reflected  in the  Shareholders'  Equity  section  of the  Company's
            Consolidated  Balance Sheets nor in the  Consolidated  Statements of
            Shareholders' Equity presented herein (SEE NOTE 14).

            Use of Estimates

            The preparation of financial statements in conformity with generally
            accepted accounting principles requires management to make estimates
            and  assumptions  that affect the amounts  reported in the financial
            statements and accompanying  notes. Actual results could differ from
            those estimates.

            Fair Value of Financial Instruments

            The following  disclosure  of the estimated  fair value of financial
            instruments  is made in  accordance  with the  requirements  of FASB
            Statement  No.  107,   Disclosure  About  Fair  Value  of  Financial
            Instruments.  The fair  value of Cash and  Funds  Held in  Escrow is
            equal to their respective  carrying amounts.  For Investments in and
            Advances to Unconsolidated Partnerships,  the Company used the Fresh
            Start accounting  methodology used at the Effective Date to estimate
            the value at December  31, 1997 and 1996,  which value  approximated
            $140.3 million and $133.4 million, respectively. Such methodology is
            generally  based  on  estimates  of the  fair  market  value  of the
            apartment communities owned by the Unconsolidated Partnerships, less
            related  indebtedness  senior  to  the  Company's   investments  and
            advances.   The  Investments  in  and  Advances  to   Unconsolidated
            Partnerships   consist   substantially   of  second  mortgage  loans
            receivable,  whose  ultimate  repayment  is  subject  to a number of
            variables,  including the  performance  and value of the  underlying
            real estate  property and the ultimate  timing of  repayments of the
            receivables. Considerable judgment is required in the interpretation
            of market data to develop estimates of fair value, accordingly,  the
            estimates are not  necessarily  indicative of the amounts that could
            be  realized  or would be paid in a  current  market  exchange.  The
            effect  of using  different  market  assumptions  and/or  estimation
            methodologies  may be material to the  estimated  fair value amounts
            (SEE NOTE 3).


                                       F-11
<PAGE>   72


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


NOTE 1:     BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

            The carrying value of the amounts comprising the Company's corporate
            debt as described in Note 4 approximate  their fair value based upon
            the Company's current borrowing rates for similar types of borrowing
            arrangements.  The carrying amount of accrued interest  approximates
            its fair value.

            As further  described in Note 5, at December  31, 1997  mortgages on
            the Company's Rental  Properties in the amount of $142.6 million had
            contractual  balances  totaling  $150.3  million  (resulting  in  an
            aggregate  Mortgage  Deficiency of $7.7 million).  Interest rates on
            the  mortgages  ranged  from 7.0% to 10.0% with rates being fixed on
            approximately  $142.1 million of the contractual  balances (SEE NOTE
            5). The Carrying  Value of the amounts  comprising  the mortgages on
            Rental  Properties  as described in Note 5,  approximate  their fair
            value based upon the Company's  borrowing rates for similar types of
            mortgage debt.

            Basis of Presentation

            The  consolidated  financial  statements  include  the  accounts  of
            Lexford Residential Trust and its wholly owned subsidiaries, and all
            entities which the Company  has  majority  interest or control.  All
            significant intercompany balances  and  transactions (except for Fee
            Based Revenues and related expenses generated from Rental Properties
            in 1995) have been eliminated in consolidation.  Total Revenues from
            Rental  Properties  (during the period such properties were held for
            sale) amounted to $3.6 million for the year ended December 31, 1995.
            Any  gross  profit  on  such   revenues  has  been   eliminated   in
            consolidation (SEE NOTE 2).

            Reclassification

            Certain  amounts  in  the  1995  and  1996  Consolidated   Financial
            Statements   have  been   reclassified   to   conform  to  the  1997
            presentation.

            Rental Properties (previously Held for Sale)

            During  1995 and prior  years,  the  Company  classified  the Rental
            Properties as Held for Sale. However,  based upon mortgage debt that
            had been restructured with favorable  amortization  terms,  combined
            with  improved  net  operating  income  and cash  flow  performance,
            management  decided to retain the Rental  Properties for investment.
            Therefore,  commencing  January 1, 1996,  the  Company  changed  the
            classification  of the Rental  Properties and  discontinued the Held
            for Sale accounting treatment.  The Rental Properties are carried at
            lower of cost or fair value and  depreciated  over  their  estimated
            remaining useful lives, typically  approximately 30 years, using the
            straight-line  method  for  financial  reporting  purposes  and  tax
            purposes.  The Company  capitalizes  interior  replacement costs and
            major building  exterior  improvements,  and  depreciates the assets
            over their estimated useful lives ranging from five to 20 years (SEE
            NOTE 2). The Company  evaluates its Rental  Properties  periodically
            for indicators of impairment,  including  recurring operating losses
            and other  significant  adverse changes in the business climate that
            affect the recovery of the recorded asset value.  If Rental Property
            is  considered  impaired,  a loss  is  provided  to  reduce  the net
            carrying value of the asset to its estimated fair value.  Management
            is not aware of any indicator  that would result in any  significant
            impairment loss.


                                       F-12
<PAGE>   73


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1:     BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

            Investments in and Advances to Unconsolidated Partnerships

            Investments in and Advances to Unconsolidated Partnerships represent
            the   Company's   general   partners'   interest   and  advances  to
            non-controlled   partnerships   which  own  multi-family   apartment
            communities.  The carrying  value  represents  the allocation of the
            estimated fair value of the underlying  real estate assets as of the
            Effective Date or, if later,  date of purchase or investment and, as
            described in Note 3, the contractual  amounts of the receivables are
            significantly  more than the  recorded  amounts.  These  receivables
            generally include long-term second mortgages and other  receivables.
            In addition,  subsequent to the Effective Date, the Company has made
            advances  to  the   Unconsolidated   Partnerships.   These  advances
            primarily  relate to operating  needs and  supplemental  funding for
            refinancing  transactions,  and  bear  interest  at  prime  plus one
            percent.  Interest is accrued on the  recorded  values of the second
            mortgages   and  certain  of  the  other   receivables   based  upon
            contractual   interest  rates,   and  allowances  are  provided  for
            estimated   uncollectible   interest   based  upon  the   underlying
            Properties' net cash flows. In certain instances, cash flow received
            in excess of accrued second mortgage interest on the recorded values
            of the second  mortgages is recorded as income.  The Company is also
            entitled  to  receive  incentive  management  fees and  supplemental
            second mortgage  interest based upon certain levels of cash flows of
            certain  of  the  underlying  Properties.  Also,  in the  event  the
            underlying  Properties  are  sold  or  refinanced,  the  Company  is
            generally entitled to a participation  interest in the net proceeds,
            as  a  general  partner  and/or  a  second  mortgage   holder.   The
            realization  of the  Investments  in and Advances to  Unconsolidated
            Partnerships is dependent on the future operating performance of the
            Unconsolidated Partnerships.

            Prior to November 1, 1997, the Company accounted for its investments
            by the  cost  method.  Effective  November  1,  1997,  based  on the
            Company's board of directors  decision to seek to acquire  ownership
            of  third  party  equity  interests  in  substantially  all  of  the
            Unconsolidated  Partnerships,  the Company began  accounting for its
            investments on the equity method.  The Company's share of net income
            or loss of the  Unconsolidated  Partnerships  is classified with Fee
            Based Revenues in the Consolidated  Statement of Income (SEE NOTES 3
            AND 14).

            In December 1997, the Company purchased a  non-controlling  interest
            in certain  limited  partnerships  that have an  ownership  interest
            and/or other investments in 15 properties,  comprising approximately
            3,400  units.  The  purchase  price of $3.3  million is  included in
            Investments  in  and  Advances  to  Unconsolidated  Partnerships  at
            December 31, 1997. The Company is accounting  for these  investments
            under the equity method.

            Furniture, Fixtures and Other, Net

            Furniture  and fixtures,  net of  accumulated  depreciation  of $2.5
            million   and  $1.8   million  at   December   31,  1997  and  1996,
            respectively,  are recorded at cost and are  depreciated  over their
            estimated  useful lives  ranging  from three to 10 years,  using the
            straight-line  method for financial  reporting  purposes and various
            accelerated or straight-line methods for income tax purposes.


                                     F-13
<PAGE>   74


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1:     BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

            Funds Held in Escrow

            The amounts at  December  31,  1997 and 1996  include  funds of $6.7
            million  and  $7.0   million,   respectively,   escrowed  by  Rental
            Properties for  improvements and deferred  maintenance,  real estate
            taxes,  insurance and resident security deposits.  In addition,  the
            Company is holding  $2.0 million and $3.0  million,  at December 31,
            1997 and 1996, respectively,  as funds held primarily for payment of
            insurance  premiums  which are  collected  from the  Properties.  At
            December 31, 1997 and 1996 the  Company's  Funds Held in Escrow also
            includes  $3.2  million  and $4.0  million,  respectively,  of funds
            received  from the  settlement  of  litigation  brought  against the
            Company's  former  insurance  carrier to prosecute policy claims for
            termite infestation losses at certain of the Properties. These funds
            are being used to pay additional  litigation  costs  associated with
            the  Company's  prosecution  of claims  against  its  former  excess
            coverage insurance carrier. The Company's Other Liabilities includes
            $1.9  million  and $3.4  million  at  December  31,  1997 and  1996,
            respectively,   representing   the  settlement   proceeds  from  the
            litigation allocable to certain Unconsolidated Partnerships.

            Revenue Recognition

            Rental revenue is recognized as income in the period earned.

            Intangible Assets

            Intangible  Assets  at  December  31,  1997  and  1996 is  primarily
            comprised of goodwill and management  contracts,  net of accumulated
            amortization of approximately  $816,700 and $129,600,  respectively.
            In 1997,  the Company  acquired  management  contracts on a group of
            affiliated  properties for $1.7 million. The goodwill and management
            contracts  related to the Lexford  Properties  Acquisition  is being
            amortized  on the  straight  line  basis over 25 years and 10 years,
            respectively.  In the third quarter of 1997, the Company  recorded a
            charge of  approximately  $364,000 as an amortization  adjustment to
            the value assigned to the third party management  contracts acquired
            with the Lexford  Properties  Acquisition.  The adjustment was based
            upon the significant decline in the number of third party management
            contracts.  The  management  contracts  purchased  in 1997 are being
            amortized on the straight line basis over seven years.

            Intangible Assets also includes deferred financing costs at December
            31, 1997 and 1996 of $2.5  million and $2.7  million,  respectively.
            The costs relate to mortgage  refinancings on the Rental  Properties
            and are amortized over the terms of the respective loans.

                                     F-14
<PAGE>   75


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1:     BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

            Earnings Per Share

            In 1997, the Financial  Accounting  Standards Board issued Statement
            No. 128, Earnings Per Share.  Statement 128 replaced the calculation
            of  primary  and fully  diluted  earnings  per share  with basic and
            diluted earnings per share. Unlike primary earnings per share, basic
            earnings  per  share  excludes  any  dilutive  effects  of  options,
            warrants and convertible  securities.  Diluted earnings per share is
            very similar to the previously  reported fully diluted  earnings per
            share.  All  earnings  per share  amounts for all periods  have been
            presented  and,  where  appropriate,  restated  to conform  with the
            Statement  128  requirements.  Also see Note 14 - Subsequent  Events
            regarding two for one stock exchange.

            The  following  table shows the amounts used in computing  basic and
            diluted  earnings per share as well as weighted  average  numbers of
            shares  outstanding  and the effect on income of  restricted  common
            stock and stock options with dilutive potential.

<TABLE>
<CAPTION>

                                                                       1997               1996               1995
                                                                  ---------------    ---------------   ----------------
<S>                                                               <C>                <C>               <C>
Numerator for Basic and Diluted Earnings Per Share:
     Income before Extraordinary Items                            $     3,386,112    $     5,370,230   $      4,292,713
     Extraordinary Item                                                  (180,534)        (1,614,356)           804,022
                                                                  ---------------    ---------------   ----------------
     Net Income                                                         3,205,578          3,755,874          5,096,735
                                                                  ===============    ===============   ================

Denominator:
     Denominator for Basic Earnings Per Share -
     Weighted Average Shares                                            8,071,970          7,537,298          7,256,100
     Effect of Dilutive Securities:
         Stock Options                                                    171,862            192,166            260,956
         Time Vesting Restricted Stock Awards                              70,084             95,210             69,000
                                                                  ---------------    ---------------   ----------------
     Dilutive Potential Common Shares                                     241,946            287,376            329,956
                                                                  ---------------    ---------------   ----------------

     Denominator for Diluted Earnings Per Share -
     Adjusted Weighted Average Shares                                   8,313,916          7,824,674          7,586,056
                                                                  ===============    ===============   ================

Basic Earnings Per Share:
     Income Before Extraordinary Item                             $          0.42    $          0.71   $           0.59
     Extraordinary Item                                                     (0.02)             (0.21)              0.11
                                                                  ---------------    ---------------   ----------------
     Net Income                                                   $          0.40    $          0.50   $           0.70
                                                                  ===============    ===============   ================

Diluted Earnings Per Share:
     Income Before Extraordinary Item                             $          0.41    $          0.69   $           0.56
     Extraordinary Item                                                     (0.02)             (0.21)              0.11
                                                                  ---------------    ---------------   ----------------
     Net Income                                                   $          0.39    $          0.48   $           0.67
                                                                  ===============    ===============   ================
</TABLE>


                                      F-15
<PAGE>   76


                           LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1:     BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

            In August, 1996, the Company issued 1,400,000 shares of Common Stock
            in  connection  with the  Lexford  merger,  900,000  shares of which
            remain subject to forfeiture in whole or in part. The 900,000 shares
            subject  to  forfeiture  are  contingent   upon  achieving   certain
            profitability  criteria.  The 900,000 contingent shares are excluded
            from the weighted average shares outstanding  because  profitability
            criteria have not been met (SEE "LEXFORD PROPERTIES ACQUISITION").

            The weighted average shares  outstanding  excludes 267,334 shares of
            Common Stock awarded to certain officers which vesting is contingent
            upon the Company  achieving certain  performance  criteria that were
            not met as of December 31, 1997. In addition, weighted average stock
            options for 8,000 shares were excluded from weighted  average shares
            outstanding  since the exercise  price  exceeded  the average  stock
            price. For additional  disclosures  regarding  outstanding  employee
            stock options, SEE NOTE 7.

            In February 1997, the Company retired  approximately  420,600 shares
            that were previously held as treasury shares.

NOTE 2:     RENTAL PROPERTIES

            During 1995 and prior years, the Company had attempted to market and
            sell the Rental  Properties and classified the Rental  Properties as
            Held for Sale.  While the Rental  Properties were held for sale, the
            results of operations  from the Rental  Properties  were credited to
            the  carrying  value of the real estate and no  revenues,  operating
            expenses  or   depreciation   were  included  in  the   Consolidated
            Statements of Income. Cash flows from the Rental Properties prior to
            1996 were classified as Cash Flow Provided by Investing  Activities.
            Commencing  January 1, 1996,  based upon  management's  decision  to
            retain  the  Rental  Properties  for  investment,   the  operations,
            including a provision  for  depreciation,  of the Rental  Properties
            have  been  fully   consolidated   in  the  Company's   Consolidated
            Statements  of  Income.  Further,  the  cash  flows  of  the  Rental
            Properties  have  been   reclassified  as  Cash  Flows  Provided  by
            Operating Activities.


                                      F-16
<PAGE>   77


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:     RENTAL PROPERTIES (cont'd)

            Condensed  combined balance sheets,  with intercompany  payables and
            receivables  eliminated,   of  the  Company's  111  and  113  Rental
            Properties  as of December 31, 1997 and 1996,  respectively,  are as
            follows:

<TABLE>
<CAPTION>
                                                                          1997                   1996
                                                                   ------------------    -----------------
<S>                                                                <C>                   <C>
                              ASSETS
Net Rental Properties                                              $      152,217,430    $     157,091,545
Cash                                                                        2,619,761            3,322,494
Accounts Receivable                                                           817,948              324,772
Funds Held in Escrow                                                        6,689,337            6,980,142
Intangible Assets                                                           2,492,029            2,721,365
Prepaids and Other                                                            310,292              832,132
                                                                   ------------------    -----------------
                                                                   $      165,146,797    $     171,272,450
                                                                   ==================    =================

                      LIABILITIES AND EQUITY
Non Recourse Mortgages Payable:
   Contractual                                                     $      150,284,725    $     157,381,603
   Mortgage Deficiency                                                     (7,647,851)          (9,325,586)
                                                                   ------------------    -----------------
                                                                          142,636,874          148,056,017
Accounts Payable                                                              561,203            1,160,426
Accrued Interest and Real Estate Taxes                                      2,825,450            2,961,795
Other Accrued Expenses                                                      1,175,438            1,337,083
Other Liabilities                                                             959,987              683,202
                                                                   ------------------    -----------------
                                                                          148,158,952          154,198,523
Equity                                                                     16,987,845           17,073,927
                                                                   ------------------    -----------------
                                                                   $      165,146,797    $     171,272,450
                                                                   ==================    =================
</TABLE>

            Condensed  consolidated  statement  of  income  of  the  116  Rental
            Properties while Held for Sale, including intercompany expenses, for
            the year ended December 31, 1995 is as follows:

<TABLE>
<CAPTION>

                                                                                                1995
                                                                                        ------------------
<S>                                                                                     <C>
Rental Revenues                                                                         $       40,000,678
Operating Expenses                                                                             (18,691,062)
                                                                                        ------------------
   Net Operating Income                                                                         21,309,616

Improvements and Replacement Expense                                                            (2,213,586)
Improvements and Replacement Expense funded from Escrows                                        (1,746,156)
Interest Expense (contractual interest of approximately $14,562,000)                           (13,549,258)
Other Expenses                                                                                  (1,464,630)
Reorganization Expenses                                                                            (96,227)
                                                                                        ------------------
   Income, less expenses, excluding depreciation                                        $        2,239,759
                                                                                        ==================
</TABLE>

                                      F-17
<PAGE>   78


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


NOTE 3:     INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED PARTNERSHIPS

            The Investments in and Advances to  Unconsolidated  Partnerships net
            of allowances of $2.6 million and $1.6  million,  respectively,  are
            comprised of the following major components:

                                                  1997               1996
                                             ---------------    --------------
Second Mortgage Notes                            $35,778,288       $36,450,176
Advances, since the Effective Date                14,770,765        14,271,906
Investments in Unconsolidated Partnerships         3,395,474                 0
Other, including accrued interest                  3,166,847         3,888,339
                                             ---------------    --------------
                                                 $57,111,374       $54,610,421
                                             ===============    ==============

            The  majority  of the second  mortgage  notes bear  interest  at 6%.
            Interest  income is accrued  based upon the Fresh Start value of the
            second  mortgage  notes,  as  described  in  Note  1.  The  advances
            currently  bear  interest at prime plus 1%. At December 31, 1997 and
            1996, the contractual obligations of the Unconsolidated Partnerships
            on  account  of  second  mortgages,  advances  and  other  payables,
            including  related  interest,  aggregated  $232.5 million and $238.7
            million,  respectively.  Amounts  due  under  second  mortgages  are
            collateralized  substantially  by all the real estate  assets of the
            Unconsolidated   Partnerships  and  are  subordinate  to  the  first
            mortgage  debt.  There can be no  assurance  that the  Company  will
            collect the full carrying  value of, or any  additional  contractual
            balances owing under, these receivables.


                                      F-18
<PAGE>   79


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3:     INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED PARTNERSHIPS(cont'd)

            Following  is  a  summary  of  financial  position  and  results  of
            operations of the 394  Unconsolidated  Partnerships  at December 31,
            1997 and 406  Unconsolidated  Partnerships  at December 31, 1996 and
            1995.  The  presentation  does not  include  data for 15  additional
            Unconsolidated  Partnerships  in  which  the  Company  made  initial
            investments  in  December  1997  (SEE NOTE 1 -  "INVESTMENTS  IN AND
            ADVANCES TO UNCONSOLIDATED PARTNERSHIPS")

<TABLE>
<CAPTION>

                                                           1997                  1996                 1995
                                                    -------------------   -------------------  -------------------

<S>                                                 <C>                   <C>                  <C>
Real Estate Assets, Net                             $       394,138,048   $       413,430,542  $       427,165,373
Cash, Funds Held in Escrow and
   Resident Receivables                                      32,117,034            35,821,876           33,579,786
Other Assets                                                 12,721,170            14,650,648           11,610,306
                                                    -------------------   -------------------  -------------------
   Total Assets                                     $       438,976,252   $       463,903,066  $       472,355,465
                                                    ===================   ===================  ===================

Non Recourse Mortgage Debt                                  437,235,691           456,926,896          457,388,544
Other Liabilities                                            21,613,975            25,175,139           20,499,327
Amounts Due to the Company                                  232,511,337           238,676,999          237,098,604
                                                    -------------------   -------------------  -------------------
                                                    $       691,361,003   $       720,779,034  $       714,986,475
                                                    -------------------   -------------------  -------------------
   Net Deficit                                      $      (252,384,751)  $      (256,875,968) $      (242,631,010)
                                                    ===================   ===================  ===================

Rental and Other Revenues                           $       123,922,337   $       122,712,181   $      117,213,041
                                                    ===================   ===================  ===================
Net Loss                                            $        (5,019,247)  $       (13,732,614)  $      (12,482,318)
                                                    ===================   ===================  ===================

Company's Share of Loss (Equity Method)
   November 1 through December 31, 1997             $           (80,644)
                                                    ===================
</TABLE>



            Prior to  November  1, 1997 and during  1996 and 1995 the  Company's
            share  of  loss  relating  to  its   investment  in   Unconsolidated
            Partnerships was not recorded because the Company  accounted for the
            investment under the cost method (SEE NOTE 1).


                                      F-19
<PAGE>   80


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 4:     CORPORATE DEBT

            Corporate  debt  consisted of the following at December 31, 1997 and
            1996:

<TABLE>
<CAPTION>

                                                                               1997                      1996
                                                                      ----------------------    ----------------------
<S>                                                                   <C>                       <C>
Amended and Restated Revolving Credit Facility
   principal payable March 30, 2000;
   interest payable monthly in arrears
   at Prime minus 1% (7.5% for 1997)                                  $            2,572,092    $                    0
Reducing Balance Revolving Credit
   Agreement - amended in 1997                                                             0                 9,110,816
Acquisition Term Debt - principal and interest in monthly
   installments of $139,435 through March 31, 2001; interest
   at a fixed rate of 7.25%                                                        4,733,283                 6,007,232
Other notes payable                                                                   56,307                   145,220
                                                                      ----------------------    ----------------------
                                                                      $            7,361,682    $           15,263,268
                                                                      ======================    ======================
</TABLE>

            On  September  30,  1997 the  Company  entered  into an Amended  and
            Restated  Loan  and  Security  Agreement  with  the  Provident  Bank
            ("Bank"). The new revolving credit facility ("Facility"), is for $35
            million and represents an increase to and  replacement of the former
            Provident  revolving  credit  facilities  and  commitments  ("Former
            Lines"), consisting of a $3 million working capital revolving credit
            facility  ("Working  Capital  Line"),  and  a $22  million  reducing
            balance revolving line ("Reducing Line") and a committed $10 million
            acquisition  line  ("Acquisition  Line").  The scheduled term of the
            Facility expires March 30, 2000, although the Company may elect from
            time to time to reduce the  Facility  and convert all or any portion
            of the principal amount  outstanding  under the Facility into a five
            year term loan.  Revolving  loans under the Facility  bear  interest
            equal to the Bank's prime rate of interest,  currently  8.5%,  minus
            1%. The Facility and  Acquisition  Term Debt continues to be secured
            by all of the Company's assets, subject to the interest of the first
            mortgage  holder  on  non  recourse  mortgage  debt  of  the  Rental
            Properties. At December 31, 1997 the Company had unrestricted credit
            availability of approximately  $31.7 million.  This amount is net of
            $767,400  restricted  for  unfunded  stand-by  letters of credit for
            1997.

            The  Company's  loan  agreements  contain   restrictive   covenants,
            including but not limited to, the  maintenance of certain net worth,
            financial ratios,  certain  restrictions on incurrence of additional
            debt and certain restrictions on acquisitions.


                                      F-20
<PAGE>   81


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 4:     CORPORATE DEBT (cont'd)

            The Company's  annual long-term debt maturities  following  December
            31, 1997 are:



                       1998              $         1,419,915
                       1999                        1,503,254
                       2000                        4,162,150
                       2001                          276,363
                                         -------------------
                                         $         7,361,682
                                         ===================

NOTE 5:     NON RECOURSE MORTGAGES

            In  connection  with Fresh Start  reporting as further  described in
            Note 1,  mortgages  on  Rental  Properties  were  restated  to their
            estimated  fair  value as of the  Effective  Date.  The  contractual
            principal  balances of the mortgages on Rental Properties exceed the
            carrying  values by $7.7  million and $9.3  million at December  31,
            1997 and 1996,  respectively.  The mortgages  are non recourse,  are
            collateralized  by the  Rental  Properties  (generally  on a  single
            Rental Property by Rental  Property  basis,  although a portfolio of
            mortgages  on 26  Rental  Properties  are  cross-collateralized  and
            cross-defaulted)  and are payable  over  periods  through  2007.  At
            December  31, 1997  contractual  interest  rates ranged from 7.0% to
            10.0%  with  fixed  rates on  approximately  $142.1  million  of the
            outstanding  contractual  mortgage  balances.  Interest  expense  is
            recorded using the effective interest method based upon the carrying
            value of the mortgage debt. The weighted average effective  interest
            rate  was  8.63%  at  December  31,  1997.   The  weighted   average
            contractual  interest  rate and term to maturity on the mortgages on
            Rental Properties, was 8.61% and 6.2 years at December 31, 1997. The
            annual debt service  requirement  was $15.2  million at December 31,
            1997. In addition,  ten Rental  Properties have second mortgage debt
            totaling  $1.5  million at December  31,  1997,  that  requires  the
            application of all excess cash flow from operations to be applied to
            the outstanding  principal on such debt. The range of interest rates
            and related  carrying  amounts of mortgages  payable at December 31,
            1997 is as follows:


      Contractual                    Contractual                Carrying
           Rate                        Balance                    Value
----------------------------  -----------------------   -----------------------
       Less than 8.0%         $            15,979,531   $            14,351,759
        8.01% - 9.0%                      120,960,409               116,421,071
      More than 9.01%                      13,344,785                11,864,044
                              -----------------------   -----------------------
                              $           150,284,725   $           142,636,874
                              =======================   =======================


                                      F-21
<PAGE>   82


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5:     NON RECOURSE MORTGAGES (cont'd)

            Minimum estimated  repayment  requirements of mortgages for the next
            five years  based upon the  contractual  principal  balances  are as
            follows:



                                     Contractual
                                       Amounts
                                  -------------------
                     1998        $        10,009,959
                     1999                  4,738,553
                     2000                  7,408,432
                     2001                 22,365,496
                     2002                  9,072,499
               Thereafter                 96,689,786
                                 -------------------
                                 $       150,284,725
                                 ===================

NOTE 6:     EXTRAORDINARY ITEM - REFINANCED MORTGAGE DEBT

            During  1997,  the  Company  refinanced   mortgages  on  six  Rental
            Properties. Mortgage indebtedness on these Rental Properties, with a
            contractual value of approximately $7.4 million and a Carrying Value
            of approximately $7.1 million, was refinanced with mortgages bearing
            a fixed rate of interest  ranging from 7.45% to 9.03%,  with 25 year
            amortization  and ten year  maturities.  Annual debt  service on the
            affected  Rental  Properties  decreased  approximately  $18,000.  An
            extraordinary  non-cash loss of approximately  $180,000,  net of tax
            benefits, resulted from the mortgage debt refinancings of the Rental
            Properties.  The loss arose from the mortgages repaid from refinance
            proceeds at the  contractual  balance  which  exceeded  the Carrying
            Value of the mortgages (SEE NOTE 1).

            The  refinancing  of  mortgages on the  Unconsolidated  Partnerships
            generated  loan fee  revenue of  approximately  $130,000  in 1997 as
            compared to $752,000  and  $886,000 in 1996 and 1995,  respectively.
            The fees were  based  upon a  graduated  percentage  of the new loan
            amounts  and  are   classified   with  Fee  Based   Revenue  in  the
            Consolidated Statements of Income.

            In 1996 and 1995, the Company completed  modification or refinancing
            transactions on Rental  Properties and  Unconsolidated  Partnerships
            which  resulted in an  extraordinary  non-cash loss of $1.6 million,
            net of tax benefits in 1996 and an  extraordinary  gain on discharge
            of  indebtedness   net  of  closing  costs  reserves  and  taxes  of
            approximately  $804,000 in 1995. The loss arose from those mortgages
            repaid from  refinance  proceeds at the  contractual  balance  which
            exceeded the Carrying Value of the mortgage (SEE NOTE 1).


                                      F-22
<PAGE>   83


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7:     STOCK BASED COMPENSATION

            The company  provides  stock based  compensation  to  employees  and
            non-employee  directors  including  stock options,  stock awards and
            stock in lieu of cash payments  under various plans and  contractual
            arrangements.

            Performance Equity Plan

            In October  1997,  the  shareholders  of the  Company  approved  the
            Company's 1997 Performance Equity Plan (the "Performance Plan"). The
            Performance  Plan authorizes the grant of restricted stock awards to
            certain  officers and non-employee  directors.  The Performance Plan
            has  a  three  year  term  (1997  through  1999),   with  increasing
            performance  goals associated with each year of the term. A total of
            636,000 shares of restricted  Common Stock are available for grants.
            On October 7, 1997 the Compensation Committee of the Company's Board
            of Directors authorized restricted stock grants for the full 636,000
            shares.   Vesting  under  the  Performance  Plan  occurs  only  upon
            attainment of specified performance goals. The performance goals are
            stated as percentage  increases over base line amounts  established,
            and as defined,  in the Performance  Plan approved by  shareholders.
            Any  awards  that  remain  non-vested  after the third  year will be
            forfeited.

            In 1997,  424,000 shares awarded under the  Performance  Plan vested
            upon  achievement  of the  performance  goals.  The vesting of these
            shares  resulted in a non-cash  charge in the fourth quarter of 1997
            of approximately $6.3 million.

            Incentive Equity Plan and Other Stock Compensation

            The  Company   also  has an  Incentive  Equity  Plan (the "Incentive
            Plan"),  that was  established in 1992 and amended with  shareholder
            approval in 1995, that authorizes the Company's issuance of stock in
            connection  with stock  options and  restricted  stock  awards.  The
            Incentive  Plan,   which  benefits   officers,   key  employees  and
            non-employee  directors,  authorized  approximately 1,182,000 shares
            for officers and key employees and approximately  280,400 shares for
            non-employee  directors. At December 31, 1997, 287,036 shares remain
            available for officers and key employees  and  approximately  64,400
            shares remain  available for grants of stock options to non-employee
            directors.  The shares of stock  available  for future  options  and
            awards may be granted at the  discretion of the  Company's  Board of
            Directors or its Compensation  Committee.  Approximately  496,800 of
            the 895,200  shares or options  previously  issued  under the Equity
            Plan are held by officers and key  employees  currently  employed by
            the Company and all of the  non-employee  director shares or options
            issued are held by individuals currently serving as directors.

            In 1997,  the Company  granted to officers and key  employees  stock
            options  for  the  purchase  of  72,550  shares,  15,000  shares  of
            restricted stock, and 18,000 shares of stock with vesting contingent
            on certain Company performance criteria. In addition,  stock options
            for the purchase of 32,000  shares,  and 4,000 shares of  restricted
            stock were granted to  non-employee  directors in 1997. In addition,
            certain officers and key employees received 8,620 shares of stock in
            lieu of cash  compensation  in 1997 and  150,800  shares were issued
            under employment agreements.


                                      F-23
<PAGE>   84


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7:     STOCK BASED COMPENSATION (cont'd)

            In 1996,  the Company  granted  stock  options  for 152,000  shares,
            including 32,000 to non employee directors,  restricted stock awards
            for 99,000 shares and deferred stock awards for 76,000  shares.  The
            restricted  stock awards  included up to 35,000  shares as a Company
            match of shares if purchased by officers by April,  1997, and 64,000
            shares which vest ratably over time.  The deferred stock awards vest
            upon achievement of specified performance criteria.

            The shares authorized under the Incentive Plan in 1992 were provided
            for in the  Plan of  Reorganization,  prior to the  Effective  Date.
            Therefore  these shares were deemed  awarded  prior to the Effective
            Date with no compensation expense recorded for periods subsequent to
            the Effective  Date.  Awards of shares provided for in the amendment
            to the Incentive Plan in 1995, depending on the nature of the award,
            may  be  reflected  as   compensation   over  the  vesting   period.
            Compensation expense resulting from transactions under this plan and
            other stock compensation  arrangements was $842,600 and $207,500 for
            1997 and 1996,  respectively,  in  addition  to the non cash  charge
            recorded for the Performance  Plan. There was no stock  compensation
            expense in 1995. The weighted  average per share value at grant date
            of the restricted and deferred stock awards was $14.68 and $9.29 for
            1997 and 1996, respectively.

            In 1996,  the  shareholders  of the Company  approved  the  director
            restricted  stock  plan (the  "Director  Plan")  that  provides  for
            compensation  earned by the  directors to be paid,  at the option of
            the  Directors,  in whole or in part,  in shares of stock in lieu of
            cash fees. The Director Plan  authorized  100,000  shares,  of which
            approximately  66,800 shares remain  available at December 31, 1997.
            In 1997  and 1996  the  Company  recorded  compensation  expense  of
            $276,800 and $118,400, respectively, related to the Director Plan.

            Stock Option Valuation

            The  Company  has  elected  to follow  Accounting  Principles  Board
            Opinion No. 25,  "Accounting  for Stock Issued to  Employees"  ("APB
            25") and related  interpretations in accounting for its employee and
            director  stock  options,   because  the   alternative   fair  value
            accounting  provided for under FASB  Statement No. 123,  "Accounting
            for Stock Based  Compensation,"  ("FASB 123") requires use of option
            valuation models that were not developed for use in valuing employee
            stock  options.  Under APB 25,  because  the  exercise  price of the
            Company's  employee  stock  options  equals the market  price of the
            underlying  stock on the date of grant, no  compensation  expense is
            recognized.

            Pro forma information regarding net income and earnings per share is
            required by FASB 123,  which also requires that the  information  be
            determined as if the Company has  accounted  for its employee  stock
            options granted subsequent to December 31, 1994 under the fair value
            method of that  Statement.  The fair  value for  these  options  was
            estimated  at the  date  of the  grant  using  Black-Scholes  option
            pricing model.

            The  following  assumptions  were utilized in the pricing  model:  a
            weighted average risk free interest rate of 5.6% in 1997 and 6.5% in
            1996 and 1995; dividend yield of one percent;  volatility factors of
            the expected market price of the Company's  common stock of 0.248 in
            1997 and 0.236 in 1996 and 1995;  and a  weighted  average  expected
            life of 6.3 years in 1997,  seven  years in 1996 and eight  years in
            1995.


                                      F-24
<PAGE>   85


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


NOTE 7:     STOCK BASED COMPENSATION (cont'd)

            The  Black-Scholes  option  valuation model was developed for use in
            estimating  the fair value of traded  options  which have no vesting
            restriction  and  are  fully  transferable.   In  addition,   option
            valuation models require the input of highly subjective  assumptions
            including the expected stock price volatility. Because the Company's
            employee stock options have characteristics  significantly different
            from those of traded options,  and because changes in the subjective
            input assumptions can materially affect the fair value estimate,  in
            management's opinion, the existing models do not necessarily provide
            a reliable  single  measure of the fair value of its employee  stock
            options.

            For purposes of pro forma  disclosures,  the estimated fair value of
            the  options is  amortized  over the  options  vesting  period.  The
            Company's pro forma information follows:


                                          1997           1996           1995
                                      ------------- -------------- -------------
Pro forma net income                  $   3,026,754 $    3,629,797 $   5,090,716
                                      ============= ============== =============
Pro forma basic earnings per share    $        0.37 $         0.48 $        0.70
                                      ============= ============== =============
Pro forma diluted earnings per share  $        0.36 $         0.46 $        0.67
                                      ============= ============== =============

            The following table  summarizes the Company's stock option activity,
            and related  information for the years ended December 31, 1997, 1996
            and 1995 (in thousands except for exercise prices):

<TABLE>
<CAPTION>

                                                        1997                   1996                      1995
                                                 -------------------  ----------------------    ----------------------
                                                          Weighted                Weighted                  Weighted
                                                            Ave.                    Ave.                      Ave.
                                                          Exercise                Exercise                  Exercise
                                                 Options    Price      Options      Price        Options     Price
                                                 -------------------  ---------- -----------    --------- ------------
<S>                                                   <C>     <C>           <C>       <C>            <C>        <C>
Options outstanding at beginning of year              352      $5.45         270       $2.05          270        $1.17
                                                 -------------------  ---------- -----------    --------- ------------
     Options granted                                  104     $12.27         152       $9.44           35        $8.63
     Options exercised                                (18)     $2.07         (68)      $0.90          (31)       $1.14
     Options forfeited                                 (4)     $9.59          (2)      $1.31           (4)       $1.31
                                                 -------------------  ---------- -----------    --------- ------------
 Options outstanding at end of year                   434      $7.20         352       $5.46          270        $2.05
                                                 ===================  ========== ===========    ========= ============

 Options exercisable at end of year                   234      $4.17         176       $2.60          192        $1.11
                                                 ===================  ========== ===========    ========= ============
 Weighted Ave.  Fair Value of Options                          $4.15                   $3.19                     $3.42
      Granted during the Year                            ===========             ===========              ============

</TABLE>


                                      F-25
<PAGE>   86


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 NOTE 7:    STOCK BASED COMPENSATION (cont'd)

            Options  awarded have an exercise price equal to or greater than the
            market price of the Common  Stock at the time of the award,  and are
            subject to vesting schedules as determined by the Company's Board of
            Directors or its Compensation Committee. The options granted expire,
            if not  exercised,  ten years  from the date on which the option was
            granted.  Exercise prices for options outstanding as of December 31,
            1997 ranged  from $0.71 to $15.50 per share with a weighted  average
            remaining  term of 7.3  years.  At  December  31,  1997,  there were
            options outstanding to purchase  approximately  152,000 shares at an
            exercise price less than $5 and  approximately  282,000 shares at an
            exercise price in excess of $5.

 NOTE 8:    INCOME TAXES

            The Company and its subsidiaries file a consolidated  Federal income
            tax return. For financial  reporting  purposes,  the Company follows
            FASB  Statement No. 109 ("FASB 109").  In accordance  with FASB 109,
            income taxes have been provided at statutory  rates in effect during
            the period.  Tax benefits  associated  with net operating loss carry
            forwards and other  temporary  differences  that existed at the time
            Fresh Start  reporting  was adopted are  reflected as an increase to
            Additional  Paid-in  Capital  in  the  period  in  which  they  were
            realized.

            The  provision  for income taxes in the  Consolidated  Statements of
            Income (including amounts  applicable to extraordinary  items) is as
            follows:


                                                 Years Ended
                              --------------------------------------------------
                                    1997             1996              1995
                              ---------------  ----------------  ---------------
 Current:
     Federal                   $            0   $             0   $       50,000
     State                            380,000           250,000          314,000
 Amounts not payable in cash        1,694,000         2,151,000        2,866,000
                              ---------------  ----------------  ---------------
                               $    2,074,000   $     2,401,000   $    3,230,000
                              ===============  ================  ===============

            The Company's  actual  income tax payments for the years 1997,  1996
            and 1995 were significantly less than the total provision for income
            taxes  because of available net  operating  loss carry  forwards and
            other tax benefits.  The amounts included in the provision for taxes
            for which no amounts were payable in cash are set forth in the table
            above.


                                      F-26
<PAGE>   87


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 NOTE 8:    INCOME TAXES (cont'd)

            The  effective  income tax rates  varied from the federal  statutory
            rates as follows:


                                               1997         1996         1995
                                           ------------ ------------ -----------
 Federal Tax provision at statutory rates  $  1,787,000 $  2,094,000 $ 2,832,000
 State Income Taxes, Net of Federal Income
    Tax Benefit                                 251,000      165,000     207,000
 Other Permanent Differences                     36,000      142,000     191,000
                                           ------------ ------------ -----------
                                           $  2,074,000 $  2,401,000 $ 3,230,000
                                           ============ ============ ===========
 Effective Income Tax Rate                        39.3%        39.0%       38.8%
                                           ============ ============ ===========

            Significant  components  of the  Company's  deferred  tax assets and
            liabilities are as follows at December 31, 1997 and 1996:
<TABLE>
<CAPTION>

                                                                                  (000s omitted)
                                                                          ------------------------------
                                                                               1997             1996
                                                                          --------------   -------------
<S>                                                                       <C>              <C>
Deferred Tax Assets and Other:
  Net operating loss carry forwards and other carry forwards              $       22,000   $      19,000
  Suspended passive activity losses                                               34,000          38,000
  Tax basis of assets in excess of Fresh Start estimated fair values              11,000          39,000
                                                                          --------------   -------------
                                                                                  67,000          96,000
                                                                          --------------   -------------
Less: valuation allowance                                                        (31,000)        (24,000)
                                                                          --------------   -------------
                                                                          $       36,000   $      72,000
                                                                          ==============   =============

Deferred Tax Liabilities:
  Negative capital accounts                                               $       33,000   $      41,000
  Tax basis of liabilities in excess of related Fresh Start
      estimated fair values                                                        3,000           3,000
  Tax basis of assets less than related Fresh Start estimated fair values              0          28,000
                                                                          --------------   -------------
                                                                          $       36,000   $      72,000
                                                                          ==============   =============
</TABLE>


                                      F-27
<PAGE>   88


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8:     INCOME TAXES (cont'd)

            The valuation  reserve against  deferred tax assets has been reduced
            by amounts  equivalent to the portions of the tax  provisions  which
            are not payable in cash.  Corresponding  increases have been made to
            Additional Paid-in Capital.

            As  a  result  of  the   uncertainties   relating  to  the  ultimate
            utilization of favorable tax attributes described below, the Company
            has provided a valuation  allowance for the remaining  excess of the
            net deferred tax assets as of December 31, 1997 and 1996.

            In  addition  to regular  corporate  income  tax,  corporations  are
            subject  to an  alternative  minimum  tax  liability  to the  extent
            alternative minimum tax exceeds regular tax. The Company will record
            an  alternative  minimum tax  liability  in the year that events and
            transactions  create an alternative minimum tax which is probable of
            being paid and can be  reasonably  estimated by the  Company.  As of
            December  31,  1997,  the  Company  has  estimated  that  it has net
            operating   loss  ("NOL")   carry   forwards  for  tax  purposes  of
            approximately  $64.9 million  which if not  utilized,  expire in the
            years 2001  through  2013.  In the event  that  current or future 5%
            shareholders  (as defined by the Internal  Revenue  Code) acquire or
            dispose of shares,  over a defined time period,  representing in the
            aggregate  50%  or  more  of the  Company's  outstanding  shares,  a
            limitation on the use of NOL carry forwards will occur.  The Company
            has also  estimated  that it has  approximately  $101.3  million  in
            suspended passive activity losses ("PALs") which may be available to
            offset  future  passive  and active  income.  In  December  1997 the
            Company's Board of Directors  accelerated the scheduled  termination
            date  of  transfer  restrictions  with  respect  to the  sale of the
            Company's  stock.  This  provision  was  originally  included in the
            Company's  Restated Articles of Incorporation  (which, in turn, were
            included within the Plan of Reorganization) to prevent the potential
            for an ownership  change that would otherwise result in a limitation
            in the  Company's  ability to utilize net operating and passive loss
            carryforwards.  As  contemplated  under  the  Restated  Articles  of
            Incorporation,  the Board  determined that the transfer  restriction
            was no longer  necessary.  The Company's  determination of its NOLs,
            PALs,  and other tax  attributes,  as well as its ability to utilize
            them to reduce taxable income is subject to uncertainties.  Although
            the Company  believes  that its  determinations  concerning  its tax
            attributes are supportable  under  applicable tax laws, there can be
            no assurance  that taxing  authorities,  upon  examination  will not
            argue to the contrary.


                                      F-28
<PAGE>   89


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9:     NONRECURRING COSTS

            In  1997,   the  Company   incurred   Nonrecurring   Costs  totaling
            approximately $827,000. Approximately $400,000 of the charge was due
            to costs related to the elimination of overlapping functions between
            Lexford  Properties and the Company's previous  management  services
            operations. In the second half of 1997 the Company recorded a charge
            of approximately  $427,000  primarily  related to costs incurred for
            the Form S-11  filing  for the  proposed  spinoff  of the  Company's
            Rental  Properties.  The Company has withdrawn this filing as it has
            determined  to  maintain  its  ownership  interests  in  the  Rental
            Properties and seek to qualify as a REIT under the Internal  Revenue
            Code (SEE NOTE 14). At December 31,  1997,  the Company had deferred
            REIT organization costs of approximately  $808,000.  These costs are
            included in Prepaids and Other on the Consolidated Balance Sheet.

            In 1995, the Company implemented a corporate  restructuring plan and
            initiated  further  restructuring  in 1996.  The Company  recorded a
            charge of approximately  $243,000 and $1.5 million in 1996 and 1995,
            respectively, related to the costs of the restructuring, principally
            severance and  separation  costs.  Approximately  26 employees  were
            released as a result of the restructurings in 1995 and 1996. In 1996
            the Company paid $1.7 million of costs  related to the 1995 and 1996
            restructuring.

NOTE 10:    COMMITMENTS AND CONTINGENCIES

            Office and Operating Leases

            The Company leases  corporate  office space under an operating lease
            which expired in October,  1997 and was extended on a month to month
            basis beginning November 1, 1997. The Company has an option for five
            additional terms of three years each. The Company is responsible for
            the payment of insurance,  real estate taxes and operating  expenses
            of the leased  facility  (SEE NOTE 12). The Company  entered into an
            operating  lease for its executive  offices which expires  December,
            2004.  Lexford  Properties  leases  office  space in four  cities to
            support  its  third  party  management  operations.   Annual  rental
            requirements are approximately  $463,000 in 1998,  $282,000 in 1999,
            $109,000 in 2000,  $102,000 in 2001,  $108,000 in 2002 and  $235,000
            thereafter.  The Company also leases various equipment and software,
            typically over five years,  and management  offices under  operating
            leases which  generally have remaining  terms of less than one year.
            The equipment and software  rental  requirements  are  approximately
            $322,000 in 1998,  $231,000 in 1999,  $13,200 in 2000 and $12,000 in
            2001. Rent expense for the years ended December 31, 1997,  1996, and
            1995,  was  approximately   $1,122,000,   $749,000,   and  $512,000,
            respectively.

            Mortgage Notes

            In December  1997,  the  Company  entered  into a mortgage  purchase
            agreement with a financial  institution wherein the lender agreed to
            purchase  outstanding  mortgage notes with a balance of $4.8 million
            on certain  Unconsolidated  Partnerships.  As part of the agreement,
            the financial  institution  has a put option whereby the Company has
            agreed to purchase the mortgage notes at a discounted amount of $3.6
            million.



                                      F-29
<PAGE>   90


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 10:    COMMITMENTS AND CONTINGENCIES (cont'd)

            Litigation

            The Company is involved in various legal actions  arising out of the
            normal course of its business. Management of the Company, based upon
            knowledge  of facts and the advice of  counsel,  believes  potential
            exposure to loss from legal actions  should not result in a material
            adverse effect on the Company's consolidated financial position.

NOTE 11:    RETIREMENT PLAN

            The Company  maintains the Cardinal Realty  Services,  Inc.  Savings
            Plan (the  "Savings  Plan")  under  section  401(k) of the  Internal
            Revenue Code (the "Code"),  to which  participants  may contribute a
            percentage  of their  base pay and  overtime  earnings  up to limits
            established  by the Code. The Savings Plan was amended and restated,
            effective  July 1, 1993, to (i) provide for  discretionary  matching
            contributions by the Company,  (ii) provide for immediate vesting in
            all Company  contributions  and (iii)  allow loans to  participants.
            Effective  December 31, 1995 the Savings Plan was amended to exclude
            highly  compensated  employees.  Effective July 1, 1996, the Savings
            Plan  was  amended  to  include   employees  at  the  Properties  as
            participants,  increase  the  Company  match  and  to  allow  highly
            compensated  employees  to  participate  in the  Plan.  The  Company
            contribution   amounts  to  1%  of  wages  for  every  2%  of  wages
            contributed  by a participant up to a maximum of the lesser of 3% of
            wages or $2,000 per year.  In 1997,  1996,  and 1995,  the Company's
            cash contributions amounted to approximately $126,400, $134,000, and
            $92,000,  respectively.  The Company's cash  contributions  are then
            invested in Company stock held by the Savings Plan Trustee.

NOTE 12:    RELATED PARTY TRANSACTIONS

            The  Company  is the sole  beneficial  equity  owner  of all  Rental
            Properties   and  is  a  general   partner  in  the   Unconsolidated
            Partnerships.  The Company also serves as the management company for
            substantially  all of the Properties and provides various  ancillary
            services,  including a Preferred Resource  purchasing program to the
            Properties  and renter's  insurance to residents.  The Company's fee
            based  revenue,  and  interest  income are  derived  primarily  from
            Properties  affiliated with the Company.  Approximately $1.9 million
            and $4.1 million of the Company's  accounts  receivable are due from
            the  Unconsolidated  Partnerships as of December 31, 1997, and 1996,
            respectively.

            The  Company  advanced,  net of amounts  repaid,  to  Unconsolidated
            Partnerships  approximately $992,000, $2.6 million, and $8.6 million
            in 1997, 1996 and 1995,  respectively.  The majority of the advances
            relate to operating needs and advances to facilitate the refinancing
            of the mortgages on the Properties as described in Note 6. Effective
            October 1, 1995, in conjunction with the favorable terms the Company
            achieved on its credit facility, the interest rate on these advances
            was revised to prime plus one percent  from  principally  prime plus
            six percent.  The  interest  rate on advances may be adjusted in the
            future based on prevailing market rates.




                                      F-30


<PAGE>   91


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 12:    RELATED PARTY TRANSACTIONS (cont'd)

            An  outside  director  of the  Company  is a partner in the law firm
            which serves as outside general  counsel to the Company.  Legal fees
            paid  related to  services  provided to the Company by this law firm
            were approximately  $981,000 in 1997,  $286,000 in 1996 and $255,000
            in 1995. The Company had accrued expenses of approximately  $176,000
            and  $105,000  to this  law firm at  December  31,  1997  and  1996,
            respectively.   In  addition,   legal  fees  paid  related  to  debt
            restructuring and refinancing  services provided by this law firm to
            the  Rental   Properties  and   Unconsolidated   Partnerships   were
            approximately  $99,000 in 1997,  $523,000 in 1996,  and  $739,400 in
            1995.

            Another outside director of the Company has an ownership interest in
            the  lessor  of  the  office  facility  that  houses  the  Company's
            operations (SEE NOTE 10).

                                      F-31


<PAGE>   92


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 13:      QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                                              First              Second               Third              Fourth
                                                             Quarter             Quarter             Quarter            Quarter
                                                         ---------------    -----------------   ------------------  ----------------
<S>                                                      <C>                <C>                 <C>                 <C>
Revenues
     1997                                                $    16,830,272    $      17,524,626   $       18,231,947  $    17,780,646
     1996                                                $    14,689,011    $      14,711,256   $       15,709,041  $    20,191,682
Income/(loss) before Extraordinary Item
     1997                                                $     1,276,038    $       1,655,497   $        1,840,975  $    (1,386,398)
     1996                                                $     1,091,350    $         757,284   $          887,034  $     2,634,562
Extraordinary Item, net of Income Taxes
     1997                                                $             0    $        (180,534)  $                0  $             0
     1996                                                $             0    $               0   $                0  $    (1,614,356)
Net Income/(Loss)
     1997                                                $     1,276,038    $       1,474,963   $        1,840,975  $    (1,386,398)
     1996                                                $     1,091,350    $         757,284   $          887,034  $     1,020,206
Earnings per share:<F1>
Basic
     Income/(Loss) before Extraordinary Item
          1997                                           $          0.16    $            0.21   $             0.23  $         (0.16)
          1996                                           $          0.15    $            0.10   $             0.12  $          0.34
     Extraordinary Item
          1997                                           $          0.00    $           (0.02)  $             0.00  $          0.00
          1996                                           $          0.00    $            0.00   $             0.00  $         (0.21)
     Net Income/(Loss)
          1997                                           $          0.16    $            0.19   $             0.23  $         (0.16)
          1996                                           $          0.15    $            0.10   $             0.12  $          0.13
Diluted
     Income/(Loss) before Extraordinary Item
          1997                                           $          0.16    $            0.20   $             0.22  $         (0.16)
          1996                                           $          0.14    $            0.10   $             0.11  $          0.32
     Extraordinary Item
          1997                                           $          0.00    $           (0.02)  $             0.00  $          0.00
          1996                                           $          0.00    $            0.00   $             0.00  $         (0.20)
     Net Income/(Loss)
          1997                                           $          0.16    $            0.18   $             0.22  $         (0.16)
          1996                                           $          0.14    $            0.10   $             0.11  $          0.13
<FN>

<F1>      The 1996 and the  first  three  quarters  of 1997  Earnings  per share
          amounts  have been  restated to comply  with  Statement  of  Financial
          Accounting Standards No. 128, Earnings Per Share.  Also see Note 14 -
          Subsequent Events regarding two for one stock exchange.
</FN>
</TABLE>



                                      F-32


<PAGE>   93


                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 14:    SUBSEQUENT EVENTS

            In  December  1997,  the  Company  announced  that it would  seek to
            qualify and elect to be taxed as a REIT in 1998. In connection  with
            this decision, the Company established a new entity known as Lexford
            Residential Trust (the "Trust") and in January 1998 caused the Trust
            to file a Form S-4  Registration  Statement  with the Securities and
            Exchange  Commission  relating to the proposed merger of the Company
            with and into the Trust. The Trust expects to be taxed as a REIT. On
            March 3, 1998, the  shareholders of the Company  approved the merger
            of the  Company  with and into the  Trust.  The terms of the  merger
            transaction provide that each share of the Company's common stock be
            canceled and converted to two common  shares of beneficial  interest
            in the  Trust.  The  merger  became  effective  on March  18,  1998.
            Shareholders  of the Company who did not vote in favor of the merger
            were entitled to exercise dissenter's rights through March 13, 1998.
            As of March 18,  1998 the  Company  had not  received  notice of the
            exercise of any such dissenter's  rights. All share and earnings per
            common  share  amounts  disclosed  in  the  Consolidated   Financial
            Statements   and  the  notes  thereto  have  been  restated   giving
            retroactive effect to the two for one stock exchange.

            In connection with the Company's  decision to elect REIT status, the
            Company initiated a plan ("the Consolidation  Plan"), the purpose of
            which was to minimize third party  interests in the entities  owning
            the  Unconsolidated  Partnerships.  As of March 3, 1998, the Company
            has  acquired  the entire  third party  ownership  interests  in 287
            Unconsolidated  Partnerships (the "Consolidating  Properties").  The
            Company  has  made  cash  payments  to  former  partners  of the 287
            Unconsolidated  Partnerships  totaling  $21.3  million.  The Company
            intends to pursue the  acquisition  of the third party  interests in
            all  or  a  substantial  portion  of  the  remaining  Unconsolidated
            Partnerships.  The Consolidation Plan will significantly  change the
            financial statements of the Company. The Investments in and Advances
            to  Unconsolidated  Partnerships  of $57.1  million at December  31,
            1997, and the related  interest income derived from such investments
            and Fee Based Income  earned from  managing the  properties  will be
            almost   entirely   eliminated   as  the   formerly   Unconsolidated
            Partnerships  are  consolidated  in the financial  statements of the
            Company.  In  addition,  upon  qualification  and  maintaining  REIT
            status,  the Company  will no longer  record a provision  for income
            taxes.

            On March 13, 1998,  the Company  negotiated  a  settlement  with the
            prior  shareholders  of Lexford  Properties  whereby  300,000 of the
            900,000 shares  subject to forfeiture  were released in exchange for
            the forfeiture of the remaining  600,000 shares (see Note 1 "Lexford
            Properties  Acquisition").   The  agreement  was  a  result  of  the
            Company's decision to elect REIT status which would impact the third
            party management  business and the ability of Lexford  Properties to
            achieve the profitability  criteria necessary for the release of the
            shares subject to forfeiture. The release of the 300,000 shares will
            result in a $3.0 million charge in the first quarter of 1998.


                                      F-33
<PAGE>   94


                                                                     SCHEDULE II

                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                        VALUATION AND QUALIFYING ACCOUNTS

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

<TABLE>
<CAPTION>

                                                                        Allowance for Doubtful Accounts
                                                            -------------------------------------------------------
                                                                  1997               1996               1995
----------------------------------------------------------  ----------------  ------------------  -----------------
<S>                                                         <C>               <C>                 <C>
Balance at Beginning of Period                              $      3,691,117  $        3,414,943  $       2,276,074

    Add:  Charged to Costs and Expenses:

           Recovery of Allowances                                          0            (300,000)                 0
           Allowances associated with Loan Fees                            0                   0            291,164
           Other Allowances                                          389,361             803,421            847,705

    Less:  Account Charge Offs                                      (533,256)           (227,247)                 0
                                                            ----------------  ------------------  -----------------
Balance at End of Period                                    $      3,547,222  $        3,691,117  $       3,414,943
                                                            ================  ==================  =================
</TABLE>

                                      F-34


<PAGE>   95
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                                                    SCHEDULE III
                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1997
-----------------------------------------------------------------------------------------------------------------------------
          COLUMN A                |     COLUMN B             |            COLUMN C         |            COLUMN D
--------------------------------------------------------------------------------------------------------------------------
         DESCRIPTION -            |                          |                             |       COSTS CAPITALIZED
    (ALL GARDEN APARTMENTS)       |    ENCUMBRANCES          | INITIAL COST TO THE COMPANY |   SUBSEQUENT TO ACQUISITION
--------------------------------------------------------------------------------------------------------------------------
                                  |                          |                             |
                                  |                   AT     |                             |
                                  |     AT          STATED   |                BUILDINGS    |
                                  | CONTRACTUAL    CARRYING  |                    &        |                     CARRYING
    PROPERTY NAME             ST  |    VALUE        VALUE    |    LAND       IMPROVEMENTS  |       IMPROVEMENTS    COSTS
--------------------------------------------------------------------------------------------------------------------------

<S>                           <C>   <C>            <C>            <C>        <C>                   <C>           <C>
GLENVIEW                      AL       1,709,168     1,709,168       178,221       1,784,904         11,948         0
BEL AIRE II                   FL       1,184,188       435,852        81,451         287,059          7,149         0
BLUEBERRY HILL                FL         761,259       761,259        63,610         362,610         38,063         0
CALIFORNIA GARDENS            FL       1,160,100       582,868        96,067         521,414         11,725         0
CANTERBURY CROSSING           FL       1,422,021       676,003        78,303         385,838          9,360         0
CENTRE LAKE I, II & III       FL       4,889,630     4,889,630     1,210,779       3,116,732         68,104         0
FOREST GLEN                   FL       1,118,325     1,118,325       229,086         994,552         29,840         0
GARDEN TERRACE I              FL         612,875       612,875        89,123         801,137         98,214         0
HERON POINTE                  FL       1,637,264     1,637,264       367,599       1,440,838         62,162         0
HIDDEN ACRES                  FL       1,674,287     1,674,287       388,349       1,136,083         30,846         0
HILLSIDE TRACE                FL       1,088,000     1,088,000       197,277         833,232          5,764         0
HOLLY SANDS II                FL       1,054,940     1,054,940       231,970         943,482         78,939         0
JEFFERSON WAY                 FL       1,045,792     1,045,792       116,366       1,062,590         28,688         0
JUPITER COVE I                FL       1,360,455     1,133,250       219,698         805,001          9,439         0
JUPITER COVE III              FL       1,434,204     1,434,204       285,929       1,026,413          8,443         0
MARK LANDING I                FL       1,329,188     1,329,188       250,827       1,481,543         58,239         0
MIGUEL PLACE                  FL       1,493,801     1,493,801       237,234       1,125,414         14,504         0
OAK GARDENS                   FL       2,707,634     1,857,319       582,419       1,758,597         11,050         0
OAKWOOD VILLAGE               FL         748,356       314,278       103,045         566,398         26,493         0
PELICAN POINTE I              FL       1,337,084     1,337,084       221,311       1,204,527         33,502         0
PELICAN POINTE II             FL       1,023,399     1,023,399       158,390       1,190,595         36,446         0
PINE BARRENS                  FL       1,538,535     1,538,535       302,399       1,405,048         76,590         0
RIVERS END II                 FL       1,161,409     1,161,409       160,894         936,779         20,100         0
SKY PINES II                  FL         909,906       909,906       266,498         676,283         76,635         0
SUNSET WAY I                  FL       1,665,024     1,665,024       621,326       1,353,585         27,225         0
SUNSET WAY II                 FL       2,694,057     2,131,279       649,409       1,678,049         24,364         0
THYMEWOOD II                  FL       1,692,441       836,509       429,480         731,592         16,512         0
WHISPERING PINES II           FL         627,822       627,822        71,433         505,435          8,800         0
WINDWOOD I                    FL         599,612       599,612        24,569         457,382         52,283         0
COLONY WOODS II               GA       1,581,032     1,581,032       273,901       1,556,452          4,509         0
GLEN ARM MANOR                GA       1,200,000     1,200,000       148,679       1,274,345         68,736         0
GLENWOOD VILLAGE              GA       1,518,815       887,795       156,445       1,000,148          8,820         0
HATCHERWAY                    GA         965,525       965,525       111,336       1,102,856         29,093         0
INDIAN LAKE I & II            GA       4,557,695     4,557,695       898,265       5,262,660         33,694         0
KINGS COLONY                  GA       2,098,525     1,506,804       237,393       1,723,165         17,690         0
LAKESHORE I                   GA       1,256,570     1,256,570        45,846         995,214         36,755         0
LAUREL GLEN                   GA       1,730,108     1,730,108       265,974       1,627,699         50,551         0
MARSHLANDING II               GA         972,993       925,655        28,851         918,445         14,918         0
MILL RUN                      GA       1,274,864     1,274,864       187,772       1,260,209         70,545         0

</TABLE>


                                      F-35

<PAGE>   96
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                                                    SCHEDULE III
                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1997
----------------------------------------------------------------------------------------------------------------------------
          COLUMN A                |      COLUMN B             |            COLUMN C         |            COLUMN D
----------------------------------------------------------------------------------------------------------------------------
         DESCRIPTION -            |                           |                             |       COSTS CAPITALIZED
    (ALL GARDEN APARTMENTS)       |     ENCUMBRANCES          | INITIAL COST TO THE COMPANY |   SUBSEQUENT TO ACQUISITION
----------------------------------------------------------------------------------------------------------------------------
                                  |                           |                             |
                                  |                    AT     |                             |
                                  |      AT          STATED   |                BUILDINGS    |
                                  |  CONTRACTUAL    CARRYING  |                    &        |                    CARRYING
    PROPERTY NAME             ST  |     VALUE        VALUE    |    LAND       IMPROVEMENTS  |       IMPROVEMENTS   COSTS
---------------------------------------------------------------------------------------------------------------------------


<S>                           <C>    <C>            <C>            <C>        <C>                   <C>          <C>

RAMBLEWOOD II                 GA        1,870,245     1,870,245      264,381       1,906,078         12,359         0
STEWART WAY I                 GA        1,387,052     1,387,052      260,869       1,614,962         66,645         0
STEWART WAY II                GA        1,244,267     1,244,267      215,612       1,468,190         41,638         0
VALLEYBROOK                   GA        1,568,241     1,568,241      129,440       1,353,762         38,062         0
WILLCREST WOODS               GA        1,060,687     1,060,687      245,513       1,189,165         69,577         0
BRADFORD PLACE                IL        1,173,564       883,185      215,924         719,156          9,994         0
BRUNSWICK APTS                IL        1,432,000     1,432,000       53,500       1,644,920         16,323         0
HUNTER GLEN                   IL        1,022,337     1,022,337      256,720       1,461,719          8,529         0
 CADIA COURT II               IN        1,862,018     1,862,018      398,032       1,668,862         19,968         0
APPLEGATE APTS II             IN        1,256,575     1,256,575      163,470       1,815,278         20,993         0
ARAGON WOODS                  IN        1,136,613     1,136,613      298,431       1,248,762         12,454         0
CAMBRIDGE COMMONS III         IN                0             0        1,087       1,306,118         23,322         0
CHERRY GLEN I                 IN        1,369,733     1,369,733      203,862       1,465,002         15,084         0
CHERRY GLENN II               IN        1,115,664     1,115,664        4,343       1,731,393         17,319         0
DOGWOOD GLEN I                IN        1,779,466     1,779,466      248,246       1,427,201         36,170         0
ELMTREE PARK I                IN        1,200,137     1,200,137      208,426       1,308,102          9,396         0
ELMTREE PARK II               IN        1,040,873     1,040,873       45,751       1,107,766          9,531         0
MARABOU MILLS II              IN        1,009,103     1,009,103       84,391       1,190,609         10,654         0
MARABOU MILLS III             IN        1,196,481     1,196,481       75,122       1,099,183         30,972         0
MARIBOU MILLS                 IN        1,451,240     1,451,240      179,704       1,570,450         17,585         0
MEADOWOOD II                  IN          744,494       744,494       61,771       1,193,299         18,315         0
RIDGEWOOD                     IN        1,207,481     1,207,481      100,300       1,320,200          8,200         0
RIDGEWOOD II & III            IN        1,364,345     1,364,345      100,795       1,564,956         11,831         0
ROSEWOOD COMMONS II           IN        1,280,756     1,280,756      121,194       1,172,776         26,240         0
SHERBROOK                     IN        1,202,138     1,202,138      141,991       1,254,354         32,218         0
SPICEWOOD APT                 IN        1,029,011     1,029,011       90,619       1,025,442         28,571         0
WILLOWOOD II                  IN        1,148,500     1,148,500      149,671       1,310,162         64,383         0
CEDARGATE II                  KY        1,160,000     1,160,000      123,475         966,198         26,454         0
CEDARWOOD II                  KY        1,012,738     1,012,738      173,648         913,048         31,399         0
CEDARWOOD III                 KY          877,391       877,391      122,917         966,624         31,238         0
HAYFIELD PARK                 KY        1,603,515     1,603,515      341,799       1,680,717         52,787         0
SPRINGWOOD                    KY          827,693       827,693       85,723         844,029         34,466         0
CHERRY TREE APT               MD        2,154,213     2,154,213      623,153       2,711,201         44,484         0
FORSYTHIA COURT II            MD        2,385,060     1,786,419      283,697       1,597,543         14,337         0
MERRIFIELD                    MD        2,102,577     2,102,577      210,294       2,271,824         23,169         0
GARDEN COURT                  MI        2,173,656     2,173,656      127,573       2,247,404         18,534         0
HEATHMOORE I                  MI        1,590,427     1,590,427      128,605       1,329,672         25,865         0
LAUREL BAY                    MI          903,500       903,500      164,159       1,160,480          8,953         0
NEWBERRY II                   MI        1,295,979       733,305       91,315         715,532          5,843         0

</TABLE>


                                      F-36
<PAGE>   97
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                                    SCHEDULE III
                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1997
----------------------------------------------------------------------------------------------------------------------------
          COLUMN A                |      COLUMN B             |            COLUMN C         |            COLUMN D
----------------------------------------------------------------------------------------------------------------------------
         DESCRIPTION -            |                           |                             |       COSTS CAPITALIZED
    (ALL GARDEN APARTMENTS)       |     ENCUMBRANCES          | INITIAL COST TO THE COMPANY |   SUBSEQUENT TO ACQUISITION
----------------------------------------------------------------------------------------------------------------------------
                                  |                           |                             |
                                  |                    AT     |                             |
                                  |      AT          STATED   |                BUILDINGS    |
                                  |  CONTRACTUAL    CARRYING  |                    &        |                    CARRYING
    PROPERTY NAME             ST  |     VALUE        VALUE    |    LAND       IMPROVEMENTS  |       IMPROVEMENTS   COSTS
----------------------------------------------------------------------------------------------------------------------------

<S>                           <C>    <C>           <C>          <C>           <C>                 <C>            <C>

AMBERWOOD                     OH          902,458       902,458      171,878       1,003,228         10,388         0
AMESBURY I                    OH        1,248,882     1,248,882      136,179       1,133,012         25,711         0
AMESBURY II                   OH        1,314,616     1,314,616      168,000       1,621,000         29,660         0
ANNHURST II                   OH        1,106,590     1,182,406      123,397       1,006,847         43,349         0
ANNHURST III                  OH          935,760       935,760       70,246       1,003,822         50,596         0
APPLERIDGE I                  OH        1,053,897     1,053,897      214,233         912,594         32,571         0
ASHFORD HILLS                 OH        1,400,000     1,400,000      359,522       1,260,948         50,205         0
CLEARWATER APTS               OH        1,053,902     1,053,902      132,478       1,045,131         33,881         0
DARTMOUTH PLACE II            OH          878,578       878,578      114,393       1,135,027         18,752         0
FOXHAVEN                      OH        1,871,766     1,871,766      403,075       1,657,128         25,040         0
HARVEST GROVE I               OH        1,375,970     1,375,970      225,001       1,276,072          4,741         0
HARVEST GROVE II              OH        1,110,103     1,110,103      251,000       1,201,600         16,167         0
LINDENDALE APTS               OH        1,422,218     1,422,218      188,724       1,717,434         27,436         0
MEADOWOOD                     OH          472,439       472,439       50,520         573,536          9,593         0
MONTROSE SQUARE               OH        1,778,276     1,778,276      568,914       2,184,937         25,587         0
PICKERINGTON MEADOWS          OH        1,177,725     1,177,725      150,000       1,200,000         12,719         0
RED DEER II                   OH        1,234,575     1,234,575      235,173       1,474,820         10,825         0
RIVER GLEN I                  OH        1,069,821     1,069,821      146,287       1,287,027         10,341         0
RIVER GLEN II                 OH        1,175,707     1,175,707      178,568       1,230,268          3,935         0
RIVERVIEW ESTATES             OH        1,374,578     1,374,578       74,073       1,609,026         60,626         0
SUFFOLK GROVE II              OH        1,082,115     1,082,115      154,263       1,248,211         14,648         0
THE WILLOWS I                 OH          589,511       589,511      157,611         761,576         28,428         0
THE WILLOWS III               OH          877,710       877,710       44,602         871,216         11,338         0
WILLOWOOD II                  OH          944,544       944,544       35,657         622,170          9,183         0
WINTHROP COURT II             OH          754,613       754,613      145,906         825,115         17,310         0
SHERBROOK                     PA        1,361,339     1,361,339      355,188       1,492,285         21,350         0
WOODLANDS II                  PA        1,168,417     1,168,417      118,447       1,346,599         20,173         0
RAVENWOOD                     SC        1,672,542     1,672,542      169,601       1,507,589          7,532         0
SPRINGBROOK                   SC        1,730,569     1,730,569      120,467       1,762,353         51,993         0
WILLOW LAKE                   SC        2,084,584     2,084,584      188,704       1,738,232          8,820         0
CEDARHILL                     TN        1,476,915     1,476,915      235,269       1,331,238         43,030         0
WALKER PLACE                  TX        1,183,000     1,183,000      269,890       1,196,059              0         0
BRUNSWICK II                  WV        1,324,332     1,324,332      104,000       1,696,000         18,094         0
                                  ---------------------------------------------------------- -------------------------------
TOTALS                               $150,284,725  $142,636,874  $23,124,313    $143,768,544     $3,064,622        $0
                                  ========================================================== ===============================
</TABLE>

                                      F-37
<PAGE>   98
                                                                    SCHEDULE III
                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1997
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
            COLUMN A           |               COLUMN E                 |    COLUMN F    |   COLUMN G  |COLUMN H   |    COLUMN I
-----------------------------------------------------------------------------------------------------------------------------------
                               |                                        |                |             |           |
                               |                                        |                |             |           |
                               |   GROSS AMOUNT AT WHICH CARRIED AT     |                |             |           |
          DESCRIPTION -        |  CLOSE OF PERIOD, DECEMBER 31, 1997    |                |             |           |
     (ALL GARDEN APARTMENTS)   |           NOTES (1) AND (2)            |                |             |           |   LIFE ON
-------------------------------|----------------------------------------|                |    DATE     |           |    WHICH
                               |            |   BUILDINGS & |           |  ACCUMULATED   |     OF      |     DATE  | DEPRECIATION
        PROPERTY NAME       ST |   LAND     |  IMPROVEMENTS |   TOTAL   |  DEPRECIATION  | CONSTRUCTION|   ACQUIRED| IS COMPUTED
-------------------------------|--------------------------------------------------------------------------------------------------


<S>                         <C>  <C>           <C>           <C>           <C>            <C>             <C>              <C>

GLENVIEW                     AL      178,221      1,608,261     1,786,482       105,648      8/1/86          N/A            31
BEL AIRE II                  FL       81,451        402,530       483,981        27,238      1/1/86          N/A            30
BLUEBERRY HILL               FL       63,610        400,114       463,724        25,320     12/1/86          N/A            31
CALIFORNIA GARDENS           FL       96,067        407,896       503,963        26,405      7/1/87          N/A            32
CANTERBURY CROSSING          FL       78,303        555,560       633,863        40,298     12/1/83          N/A            28
CENTRE LAKE I, II & III      FL    1,210,779      3,171,034     4,381,813       212,759      6/1/86          N/A            30
FOREST GLEN                  FL      229,086        932,862     1,161,948        63,594      1/1/86          N/A            30
GARDEN TERRACE I             FL       89,123        898,117       987,240        72,068      9/1/81          N/A            26
HERON POINTE                 FL      367,599      1,459,693     1,827,292        99,632      1/1/86          N/A            30
HIDDEN ACRES                 FL      388,349        467,556       855,905        31,473      1/1/87          N/A            31
HILLSIDE TRACE               FL      197,277        837,712     1,034,989        53,029      9/1/87          N/A            32
HOLLY SANDS II               FL      231,970      1,001,290     1,233,260        73,551      6/1/86          N/A            30
JEFFERSON WAY                FL      116,366      1,069,855     1,186,221        67,887      8/1/87          N/A            32
JUPITER COVE I               FL      219,698        887,389     1,107,087        56,580      9/1/87          N/A            32
JUPITER COVE III             FL      285,929      1,033,274     1,319,203        65,626      9/1/87          N/A            32
MARK LANDING I               FL      250,827      1,537,499     1,788,326       107,681     11/1/87          N/A            32
MIGUEL PLACE                 FL      237,234      1,098,108     1,335,342        69,936     10/1/87          N/A            32
OAK GARDENS                  FL      582,419      1,260,153     1,842,572        79,905      1/1/88          N/A            32
OAKWOOD VILLAGE              FL      103,045        236,593       339,638        16,522      1/1/86          N/A            30
PELICAN POINTE I             FL      221,311      1,236,173     1,457,484        78,872     11/1/87          N/A            32
PELICAN POINTE II            FL      158,390      1,148,174     1,306,564        73,232     11/1/87          N/A            32
PINE BARRENS                 FL      302,399      1,479,473     1,781,872       101,261      6/1/86          N/A            30
RIVERS END II                FL      160,894        928,416     1,089,310        62,320      1/1/86          N/A            30
SKY PINES II                 FL      266,498        751,876     1,018,374        58,412      6/1/86          N/A            30
SUNSET WAY I                 FL      621,326      1,378,724     2,000,050        88,703      8/1/87          N/A            32
SUNSET WAY II                FL      649,409      1,499,675     2,149,084        93,991     4/27/88          N/A            32
THYMEWOOD II                 FL      429,480        379,444       808,924        26,709      1/1/86          N/A            30
WHISPERING PINES II          FL       71,433        513,456       584,889        34,589     3/31/86          N/A            30
WINDWOOD I                   FL       24,569        508,960       533,529        32,352      5/1/88          N/A            32
COLONY WOODS II              GA      273,901      1,506,624     1,780,525        93,704     3/28/88          N/A            32
GLEN ARM MANOR               GA      148,679      1,207,004     1,355,683        93,390      1/1/86          N/A            30
GLENWOOD VILLAGE             GA      156,445        665,292       821,737        43,496     12/1/86          N/A            31
HATCHERWAY                   GA      111,336      1,099,966     1,211,302        76,588      1/1/86          N/A            30
INDIAN LAKE I & II           GA      898,265      4,907,355     5,805,620       312,759     8/11/87          N/A            32
KINGS COLONY                 GA      237,393      1,244,186     1,481,579        78,687    11/15/87          N/A            32
LAKESHORE I                  GA       45,846        930,784       976,630        62,944     6/20/86          N/A            31
LAUREL GLEN                  GA      265,974      1,675,742     1,941,716       111,052      4/4/86          N/A            30
MARSHLANDING II              GA       28,851        894,596       923,447        58,396    12/31/86          N/A            31
MILL RUN                     GA      187,772      1,328,812     1,516,584        93,353     4/14/86          N/A            30

</TABLE>

                                      F-38
<PAGE>   99
<TABLE>
<CAPTION>

                                                                    SCHEDULE III
                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1997

-----------------------------------------------------------------------------------------------------------------------------------
            COLUMN A            |               COLUMN E                 |    COLUMN F    |   COLUMN G  |  COLUMN H |    COLUMN I
-----------------------------------------------------------------------------------------------------------------------------------
                                |                                        |                |             |           |
                                |                                        |                |             |           |
                                |   GROSS AMOUNT AT WHICH CARRIED AT     |                |             |           |
          DESCRIPTION -         |  CLOSE OF PERIOD, DECEMBER 31, 1997    |                |             |           |
     (ALL GARDEN APARTMENTS)    |           NOTES (1) AND (2)            |                |             |           |   LIFE ON
--------------------------------|----------------------------------------|                |    DATE     |           |    WHICH
                                |            |   BUILDINGS & |           |  ACCUMULATED   |     OF      |     DATE  | DEPRECIATION
        PROPERTY NAME       ST  |   LAND     |  IMPROVEMENTS |   TOTAL   |  DEPRECIATION  | CONSTRUCTION|   ACQUIRED| IS COMPUTED
-----------------------------------------------------------------------------------------------------------------------------------


<S>                         <C>  <C>           <C>           <C>            <C>            <C>             <C>             <C>

RAMBLEWOOD II                GA      264,381      1,775,754     2,040,135       115,118     10/1/86          N/A            31
STEWART WAY I                GA      260,869      1,667,283     1,928,152       123,098      1/1/86          N/A            30
STEWART WAY II               GA      215,612      1,507,566     1,723,178       103,151     12/1/86          N/A            31
VALLEYBROOK                  GA      129,440      1,389,738     1,519,178        94,215    10/15/86          N/A            31
WILLCREST WOODS              GA      245,513      1,225,269     1,470,782        90,474    12/31/86          N/A            31
BRADFORD PLACE               IL      215,924        625,791       841,715        41,522     7/23/86          N/A            31
BRUNSWICK APTS               IL       53,500      1,623,865     1,677,365       108,240      4/1/86          N/A            30
HUNTER GLEN                  IL      256,720      1,322,878     1,579,598        85,599      3/1/87          N/A            31
ACADIA COURT II              IN      398,032      1,620,669     2,018,701       107,109      6/6/86          N/A            30
APPLEGATE APTS II            IN      163,470      1,833,474     1,996,944       119,714      6/1/87          N/A            31
ARAGON WOODS                 IN      298,431      1,183,847     1,482,278        76,700    12/26/86          N/A            31
CAMBRIDGE COMMONS III        IN        1,087      1,195,015     1,196,102        73,622     1/29/88          N/A            32
CHERRY GLEN I                IN      203,862      1,465,277     1,669,139        96,609     7/10/86          N/A            31
CHERRY GLENN II              IN        4,343      1,698,391     1,702,734       109,846      4/1/87          N/A            31
DOGWOOD GLEN I               IN      248,246      1,320,813     1,569,059        85,730     7/18/86          N/A            31
ELMTREE PARK I               IN      208,426      1,181,214     1,389,640        77,970      6/8/86          N/A            30
ELMTREE PARK II              IN       45,751      1,115,030     1,160,781        71,553      5/1/87          N/A            31
MARABOU MILLS II             IN       84,391      1,153,343     1,237,734        71,073       N/A          10/29/93         33
MARABOU MILLS III            IN       75,122      1,128,403     1,203,525        71,606     12/1/87          N/A            32
MARIBOU MILLS                IN      179,704      1,585,615     1,765,319       108,653     6/23/86          N/A            31
MEADOWOOD II                 IN       61,771      1,058,489     1,120,260        71,408     5/30/86          N/A            30
RIDGEWOOD                    IN      100,300      1,328,399     1,428,699        63,215       N/A           8/1/96          30
RIDGEWOOD II & III           IN      100,795      1,427,169     1,527,964        96,160      3/1/86          N/A            30
ROSEWOOD COMMONS II          IN      121,194      1,197,210     1,318,404        77,135      6/1/87          N/A            31
SHERBROOK                    IN      141,991      1,233,871     1,375,862        81,970     6/16/86          N/A            31
SPICEWOOD APT                IN       90,619      1,009,511     1,100,130        68,058     3/16/86          N/A            30
WILLOWOOD II                 IN      149,671      1,264,887     1,414,558        80,911      6/1/87          N/A            31
CEDARGATE II                 KY      123,475        893,838     1,017,313        59,175      6/1/86          N/A            30
CEDARWOOD II                 KY      173,648        913,492     1,087,140        61,848      1/1/86          N/A            30
CEDARWOOD III                KY      122,917        996,373     1,119,290        70,068     5/20/86          N/A            30
HAYFIELD PARK                KY      341,799      1,558,181     1,899,980       103,526     7/17/86          N/A            31
SPRINGWOOD                   KY       85,723        877,194       962,917        60,728      1/1/86          N/A            30
CHERRY TREE APT              MD      623,153      2,470,168     3,093,321       161,679      9/1/86          N/A            31
FORSYTHIA COURT II           MD      283,697      1,484,064     1,767,761        94,891      6/1/87          N/A            31
MERRIFIELD                   MD      210,294      2,219,004     2,429,298       139,664     1/11/88          N/A            32
GARDEN COURT                 MI      127,573      2,177,868     2,305,441       137,211     4/22/88          N/A            32
HEATHMOORE I                 MI      128,605      1,216,286     1,344,891        80,094     7/31/86          N/A            31
LAUREL BAY                   MI      164,159      1,079,514     1,243,673        76,263     10/1/89          N/A            34
NEWBERRY II                  MI       91,315        631,930       723,245        41,777    12/26/86          N/A            31

</TABLE>

                                      F-39
<PAGE>   100
<TABLE>
<CAPTION>

                                                                    SCHEDULE III
                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1997

-----------------------------------------------------------------------------------------------------------------------------------
            COLUMN A           |               COLUMN E                 |    COLUMN F    |   COLUMN G  |COLUMN H   |    COLUMN I
-----------------------------------------------------------------------------------------------------------------------------------
                               |                                        |                |             |           |
                               |                                        |                |             |           |
                               |   GROSS AMOUNT AT WHICH CARRIED AT     |                |             |           |
          DESCRIPTION -        |  CLOSE OF PERIOD, DECEMBER 31, 1997    |                |             |           |
     (ALL GARDEN APARTMENTS)   |           NOTES (1) AND (2)            |                |             |           |   LIFE ON
-------------------------------|----------------------------------------|                |    DATE     |           |    WHICH
                               |            |   BUILDINGS & |           |  ACCUMULATED   |     OF      |     DATE  | DEPRECIATION
        PROPERTY NAME       ST |   LAND     |  IMPROVEMENTS |   TOTAL   |  DEPRECIATION  | CONSTRUCTION|   ACQUIRED| IS COMPUTED
-----------------------------------------------------------------------------------------------------------------------------------


<S>                         <C>  <C>           <C>           <C>           <C>            <C>             <C>              <C>

AMBERWOOD                    OH      171,878      1,012,070     1,183,948        64,544     10/1/87          N/A            32
AMESBURY I                   OH      136,179      1,043,969     1,180,148        72,912     2/17/86          N/A            30
AMESBURY II                  OH      168,000      1,648,162     1,816,162       112,361       N/A          09/26/95         30
ANNHURST II                  OH      123,397      1,171,504     1,294,901        75,772      7/1/86          N/A            31
ANNHURST III                 OH       70,246      1,028,853     1,099,099        62,381      5/5/88          N/A            32
APPLERIDGE I                 OH      214,233        742,825       957,058        52,819      1/1/87          N/A            28
ASHFORD HILLS                OH      359,522        975,907     1,335,429        65,009     6/23/86          N/A            31
CLEARWATER APTS              OH      132,478        986,621     1,119,099        68,625     11/1/86          N/A            31
DARTMOUTH PLACE II           OH      114,393      1,097,803     1,212,196        73,083     7/18/86          N/A            31
FOXHAVEN                     OH      403,075      1,588,159     1,991,234       106,636     8/18/86          N/A            31
HARVEST GROVE I              OH      225,001      1,162,235     1,387,236        76,172      9/8/86          N/A            31
HARVEST GROVE II             OH      251,000      1,215,915     1,466,915        81,044       N/A          09/26/95         30
LINDENDALE APTS              OH      188,724      1,660,305     1,849,029       107,245      3/1/87          N/A            31
MEADOWOOD                    OH       50,520        582,245       632,765        39,060      1/1/86          N/A            30
MONTROSE SQUARE              OH      568,914      2,185,903     2,754,817       146,705      1/1/87          N/A            30
PICKERINGTON MEADOWS         OH      150,000      1,210,870     1,360,870        79,996       N/A          03/29/95         30
RED DEER II                  OH      235,173      1,391,719     1,626,892        89,220      8/1/87          N/A            32
RIVER GLEN I                 OH      146,287      1,255,066     1,401,353        81,434      4/1/87          N/A            31
RIVER GLEN II                OH      178,568      1,200,194     1,378,762        75,784     11/1/87          N/A            32
RIVERVIEW ESTATES            OH       74,073      1,667,173     1,741,246       122,226      1/1/87          N/A            28
SUFFOLK GROVE II             OH      154,263      1,203,575     1,357,838        77,257      6/1/87          N/A            31
THE WILLOWS I                OH      157,611        768,235       925,846        59,083      1/1/87          N/A            28
THE WILLOWS III              OH       44,602        845,236       889,838        55,820      7/1/87          N/A            32
WILLOWOOD II                 OH       35,657        605,790       641,447        39,875      8/1/86          N/A            31
WINTHROP COURT II            OH      145,906        840,546       986,452        56,194     2/25/86          N/A            30
SHERBROOK                    PA      355,188      1,448,955     1,804,143        94,750    12/20/86          N/A            31
WOODLANDS II                 PA      118,447      1,302,332     1,420,779        84,609      3/1/87          N/A            31
RAVENWOOD                    SC      169,601      1,512,798     1,682,399        96,793      5/7/87          N/A            31
SPRINGBROOK                  SC      120,467      1,744,503     1,864,970       123,541     6/13/86          N/A            30
WILLOW LAKE                  SC      188,704      1,763,237     1,951,941       114,007    12/12/86          N/A            31
CEDARHILL                    TN      235,269      1,268,996     1,504,265        82,286     5/30/86          N/A            30
WALKER PLACE                 TX      269,890      1,194,215     1,464,105        74,399     1/25/88          N/A            32
BRUNSWICK II                 WV      104,000      1,712,076     1,816,076       112,799       N/A          09/26/95         30
                                -------------------------------------------------------
TOTALS                           $23,124,313   $138,244,903  $161,369,216    $9,151,786
                                =======================================================
</TABLE>

                                      F-40
<PAGE>   101
<TABLE>
<CAPTION>

                            LEXFORD RESIDENTIAL TRUST
           (Formerly Lexford, Inc. and Cardinal Realty Services, Inc.)

                              NOTES TO SCHEDULE III
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


Note (1) Schedule III Reconciliation:                                 1997                   1996                  1995
                                                               -------------------    ------------------     -----------------

<S>                                                            <C>                    <C>                    <C>                <C>
    Balance as of beginning of year                            $       161,569,924     $     164,334,055      $    166,430,698  (4)
          Additions during the year:
          Acquisitions of Property                                               0             1,420,501             6,391,600
          Costs Capitalized                                              2,355,122               702,056                     0

           Deductions during the year:
               Disposals through foreclosure                                     0            (4,886,688)           (3,380,382)
               Disposals through sales                                  (2,555,830)                    0                     0
               Other (4)                                                         0                     0              (937,482)
               Application of Income from the Effective
               Date through December 31, 1995 upon full
               consolidation from "Held for Sale"
               classification                                                    0                     0            (4,170,379)

                                                               -------------------    ------------------     -----------------
     Balance at close of year:                                         161,369,216           161,569,924           164,334,055
                                                               -------------------    ------------------     -----------------
          Other:
               Furniture and Fixtures                                            0                     0             3,368,617
               Application of Income from the Effective
               Date through December 31, 1995 upon full
               consolidation from "Held for Sale"
               classification                                                    0                     0            (3,368,617)
                                                               -------------------    ------------------     -----------------
     Balance, Rental Properties                                $       161,369,216     $     161,569,924      $    164,334,055
          December 31, 1997, 1996, 1995, respectively          ===================    ==================     =================

<FN>
   Note (2)   Tax basis of assets:
              The tax basis for federal income tax purposes in Rental Properties
              was approximately $106,963,000 at December 31, 1997.

   Note (3)   Depreciation:
              No  depreciation  has been  provided for the period  September 11,
              1992 (Effective Date) to December 31, 1995 as the assets were held
              for sale (SEE NOTES 1 AND 2 TO CONSOLIDATED FINANCIAL STATEMENTS).

   Note (4)   Correction  of  interest  recorded  in  prior years; such interest
              was  capitalized  during the period  the  Rental  Properties  were
              classified as Held for Sale and therefore has no impact on equity.
</FN>
</TABLE>


                                      F-41