<PAGE>   1
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

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

                For the quarterly period ended September 30, 1996
                                               ------------------

                                       OR

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

             For the transition period from            to
                                            ----------    ----------

                         Commission File Number 1-12486
                                               --------

                      ASSOCIATED ESTATES REALTY CORPORATION
             (Exact name of registrant as specified in its charter)

<TABLE>
<CAPTION>
<S>                                <C>                      <C>                                          <C>
            Ohio                        34-1747603          5025 Swetland Court, Richmond Hts., Ohio     44143-1467
-------------------------------    ----------------------   ----------------------------------------     ----------
(State or other jurisdiction of      (I.R.S. Employer       (Address of principal executive offices)     (Zip Code)
incorporation or organization)     Identification Number)
</TABLE>

        Registrant's telephone number, including area code (216) 261-5000
                                                           --------------

              (Former name, former address and former fiscal year,
                         if changed since last report)

     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 [ ]

                      APPLICABLE ONLY TO CORPORATE ISSUERS:
                      -------------------------------------

Indicate the number of shares outstanding of each of the issuer's classes of
common as of the latest practicable date.

             13,872,381 shares outstanding as of November 14, 1996.

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

                                     Page 1


<PAGE>   2



                      ASSOCIATED ESTATES REALTY CORPORATION

                                      INDEX

<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION                                                                                 Page
                                                                                                               ----

<S>                                                                                                              <C>
       ITEM 1     Financial Statements

                  Consolidated Balance Sheets as of September 30, 1996
                    and December 31, 1995.........................................................................3

                  Consolidated Statements of Operations for the three and nine
                    month periods ended September 30, 1996 and 1995...............................................4

                  Consolidated Statements of Cash Flows for the nine month
                    period ended September 30, 1996 and 1995......................................................5

                  Notes to  Financial Statements..................................................................6

       ITEM 2     Management's Discussion and Analysis of Financial Condition
                    and Results of Operations....................................................................10

PART II - OTHER INFORMATION

       ITEM 4     Submission of Matters to a Vote of Security-Holders............................................20

       ITEM 6     Exhibits and Reports on Form 8-K...............................................................20

SIGNATURES.......................................................................................................21
</TABLE>

                                     Page 2


<PAGE>   3



                      ASSOCIATED ESTATES REALTY CORPORATION
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                               September 30,    December 31,
                                                                                   1996             1995
                                                                               ------------     ------------
                                                                                (Unaudited)
                                  ASSETS

<S>                                                                          <C>              <C>
Real estate assets:
   Land                                                                      $    43,817,469  $    37,782,564
   Buildings and improvements                                                    427,356,315      371,213,067
   Furniture and fixtures                                                         18,437,986       16,714,676
                                                                             ---------------  ---------------
                                                                                 489,611,770      425,710,307
       Less:  accumulated depreciation                                          (107,914,818)     (97,301,859)
                                                                             ---------------  ---------------
                                                                                 381,696,952      328,408,448
       Construction in progress (including land)                                  15,900,610        8,254,251
                                                                             ---------------  ---------------
       Real estate, net                                                          397,597,562      336,662,699
Cash and cash equivalents                                                            117,709        2,848,285
Restricted cash and investments                                                    5,329,646        5,078,884
Accounts and notes receivable:
   Rents                                                                           1,176,146        1,363,587
   Affiliates                                                                        361,365          731,580
   Other                                                                              12,651           38,068
Deferred charges and prepaid expenses                                              5,060,675        3,651,537
Other assets                                                                         980,796        1,335,377
                                                                             ---------------  ---------------
                                                                             $   410,636,550  $   351,710,017
                                                                             ===============  ===============
                   LIABILITIES AND SHAREHOLDERS' EQUITY

Secured debt                                                                 $    69,348,832  $    68,909,238
Unsecured debt                                                                   170,772,807      102,325,107
                                                                             ---------------  ---------------
       Total indebtedness                                                        240,121,639      171,234,345
Capital lease obligations                                                            382,486          274,319
Accounts payable and accrued expenses                                             10,396,140       11,794,365
Dividends payable                                                                     -             5,963,834
Resident security deposits                                                         4,161,809        3,668,159
Funds held for non-owned properties                                                2,108,784        5,399,836
Accrued interest                                                                   3,883,715        1,997,181
Accumulated losses and distributions of equity
   investees in excess of investment and advances                                 12,373,411       12,208,299
                                                                             ---------------  ---------------
       Total liabilities                                                         273,427,984      212,540,338
Commitments and contingencies                                                         -                -
Shareholders' equity:
   Preferred shares, Class A cumulative, without par value;
     3,000,000 shares authorized; 225,000 issued and outstanding                  56,250,000       56,250,000
   Common shares, without par value, $.10 stated value;
     50,000,000 shares authorized; 13,872,381 shares
     issued and outstanding                                                        1,387,238        1,387,238
   Paid-in capital                                                               102,506,016      102,567,007
   Accumulated dividends in excess of net income                                 (22,934,688)     (21,034,566)
                                                                             ---------------  ---------------
       Total shareholders' equity                                                137,208,566      139,169,679
                                                                             ---------------  ---------------
                                                                             $   410,636,550  $   351,710,017
                                                                             ===============  ===============
</TABLE>


                   The accompanying notes are an integral part
                          of these financial statements

                                     Page 3


<PAGE>   4



                      ASSOCIATED ESTATES REALTY CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                       For the three months ended      For the nine months ended
                                                             September 30,                  September 30,
                                                           1996          1995            1996          1995
                                                        ---------      --------        --------      ---------
<S>                                                 <C>            <C>             <C>           <C>
Revenues
   Rental                                           $  22,305,673  $   17,858,148  $  64,717,754 $  49,995,168
   Property management fees                               100,128         102,559        292,995       325,875
   Property management fees-affiliates                    835,728         853,497      2,554,799     2,695,073
   Painting service                                       108,015          60,423        310,163       203,029
   Painting service-affiliates                            368,123         218,508        986,210       553,490
   Other                                                  367,085         378,733        796,220     1,245,371
                                                    -------------  --------------  ------------- -------------
                                                       24,084,752      19,471,868     69,658,141    55,018,006
Expenses
   Property operating and maintenance                   9,684,255       7,570,303     27,115,528    20,907,380
   Depreciation and amortization                        3,858,100       3,309,534     11,192,067     9,065,987
   Painting services                                      395,452         236,639      1,127,542       681,104
   General and administrative                           1,163,171       1,247,864      4,041,559     3,814,198
   Interest expense                                     4,076,426       2,819,907     11,691,848     8,180,264
                                                    -------------  --------------  ------------- -------------
       Total expenses                                  19,177,404      15,184,247     55,168,544    42,648,933
   Income before equity in net income of joint
       ventures                                         4,907,348       4,287,621     14,489,597    12,369,073
   Equity in net income of joint ventures                  76,895          54,255        210,029       195,820
                                                    -------------  --------------  ------------- -------------
   Net income before extraordinary income               4,984,243       4,341,876     14,699,626    12,564,893
   Extraordinary item-extinguishment of debt
       prepayment fees and write off of
       deferred finance costs                             -               911,093        -             911,093
                                                    -------------  --------------  ------------- -------------
   Net income                                       $   4,984,243  $    3,430,783  $  14,699,626 $  11,653,800
                                                    =============  ==============  ============= =============

   Net income applicable to common shares           $   3,613,138  $    2,669,158  $  10,586,311 $  10,892,175
                                                    =============  ==============  ============= =============

Per Common Share:
   Net income before extraordinary item             $         .26  $          .26  $         .76 $         .85
                                                    =============  ==============  ============= =============
   Net income                                       $         .26  $          .19  $         .76 $         .79
                                                    =============  ==============  ============= =============
   Dividends paid                                   $         .45  $          .43  $        1.33 $        1.26
                                                    =============  ==============  ============= =============
Weighted average number of common
   shares outstanding (in thousands)                       13,872          13,869         13,872        13,869
</TABLE>


                   The accompanying notes are an integral part
                          of these financial statements

                                     Page 4


<PAGE>   5



                      ASSOCIATED ESTATES REALTY CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30,

                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                   1996            1995
                                                                                -----------     -----------
<S>                                                                             <C>             <C>
Cash flow from operating activities:
   Net income                                                                   $14,699,626     $11,653,800
   Adjustments to reconcile net income to net cash
     provided by operating activities:
       Depreciation and amortization                                             11,192,067       9,065,987
       Write off of deferred finance costs                                                -         911,093
       Equity in net income of joint ventures                                      (210,030)       (195,820)
       Earnings distributed from joint ventures                                     539,519          96,584
       Net change in accounts and notes receivable                                  212,858         247,839
       Net change in accounts and notes receivable-affiliates                       370,215         340,648
       Net change in accounts payable and accrued expenses                       (1,808,450)      4,079,506
       Net change in other operating assets and liabilities                       1,113,205       2,476,789
       Net change in restricted cash                                               (250,762)     (1,604,088)
       Net change in funds held for non-owned properties                         (3,291,052)     (3,857,023)
                                                                                -----------     -----------
           Total adjustments                                                      7,867,570      11,561,515
                                                                                -----------     -----------
       Net cash flow provided by operations                                      22,567,196      23,215,315
Cash flow from investing activities:
   Acquisition of real estate (net of liabilities assumed)                      (67,029,289)    (87,183,864)
   Fixed asset additions                                                           (487,142)       (752,107)
   Distributions from joint ventures                                               (164,378)        223,727
                                                                                -----------     -----------
       Net cash flow used for investing activities                              (67,680,809)    (87,712,244)
Cash flow from financing activities:
   Increase in unsecured debt                                                    68,400,000      46,119,500
   Decrease in secured debt                                                      (2,596,657)    (13,713,707)
   Payments of deferred financing and offering costs                               (762,488)     (1,669,206)
   Payments under capital lease obligations                                         (94,236)        (48,996)
   Common share dividends paid                                                  (18,450,267)    (17,475,420)
   Preferred share dividends paid                                                (4,113,315)       (761,625)
   Proceeds from the issuance of preferred shares, net of $1,771,875
     of underwriting commissions and $271,337 of offering expenses
     paid                                                                            -           54,206,788
                                                                                -----------     -----------
       Net cash flow provided by financing activities                            42,383,037      66,657,334
                                                                                -----------     -----------
       (Decrease) increase in cash and cash equivalents                          (2,730,576)      2,160,405
Cash and cash equivalents, beginning of period                                    2,848,285       1,870,584
                                                                                -----------     -----------
Cash and cash equivalents, end of period                                        $   117,709     $ 4,030,989
                                                                               ==============  ===============
</TABLE>


                   The accompanying notes are an integral part
                          of these financial statements

                                     Page 5


<PAGE>   6



                      ASSOCIATED ESTATES REALTY CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

1.       NATURE OF BUSINESS

         The Company is a self-administered and self-managed real estate
investment trust ("REIT") which specializes in the acquisition, development,
ownership and management of multifamily properties in Ohio, Michigan and
Pennsylvania (the "Great Lakes Region"). At September 30, 1996, the Company 
owned or was a joint venture partner in 84 multifamily properties containing
15,838 suites. Additionally, the Company manages 40 non-owned properties, 32 of
which are multifamily properties consisting of 7,052 suites and eight of which
are commercial properties containing an aggregate of approximately 825,000
square feet of gross leasable area. The Company's real estate property
management operations, a painting service company, a computer services company
and a mortgage origination and servicing company have for the most part been
assigned to affiliates of the Company that are collectively referred to as the
"Service Companies".

         As referred to herein, the "Company" means Associated Estates Realty
Corporation, its wholly owned subsidiaries, which own certain of the real estate
properties, and the Service Companies.

2.       BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION/COMBINATION

         The accompanying consolidated financial statements include the accounts
of the Company, its wholly owned subsidiaries, which own certain of the real
estate properties, and the Service Companies, which provide various services to
both owned and non-owned properties. The Company holds a preferred share
interest in these Service Companies which entitles it to receive 95% of the
economic benefits from operations and which is convertible into a majority
interest in the voting common shares. The outstanding voting common shares of
these Service Companies are held by an executive officer of the Company. The
Service Companies are consolidated because, from a financial reporting
perspective, the Company is entitled to virtually all economic benefits and has
operating control over the companies.

         One property included in the financial statements is 33-1/3% owned by
third party investors. As this property has an accumulated deficit, no
recognition of the third party interest is reflected in the financial statements
since it is the Company's policy to recognize minority interests only to the
extent that the third party's investment and accumulated share of income exceeds
distributions and its share of accumulated losses. Investments in joint
ventures, which are 50% or less owned by the Company, are presented using the
equity method of accounting. Since the Company intends to fulfill its
obligations as a partner in the joint ventures, the Company has recognized its
share of losses and distributions in excess of its investment.

         The accompanying unaudited financial statements reflect all adjustments
which are, in the opinion of management, necessary to reflect a fair
presentation of the results for the interim periods presented, and all such
adjustments are of a normal recurring nature.

         All significant inter-entity balances and transactions have been
eliminated in consolidation.

         Certain reclassifications have been made to the 1995 financial
statements to conform to the 1996 presentation.

                                     Page 6


<PAGE>   7



USE OF ESTIMATES

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

3.       ACQUISITION AND DEVELOPMENT OF MULTIFAMILY PROPERTIES

         During the period January 1, 1996 through September 30, 1996, the
Company acquired, in separate purchase transactions, six multifamily properties
containing an aggregate of 1,337 suites and two parcels of land consisting of 33
acres for an aggregate purchase price of $59 million, which were financed with
borrowings under the Company's Line of Credit of $46 million, net proceeds of
$9.9 million from the issuance of a medium term note, and the assumption of
mortgage indebtedness with a stated value of $3.1 million.

         Construction in progress for the development of multifamily properties
was $15,900,610 and $8,254,251 at September 30, 1996 and December 31, 1995,
respectively. The Company capitalizes interest, real estate taxes and insurance
costs on funds used in constructing property from the commencement of
construction through the time the property is ready for leasing. Interest, real
estate taxes and insurance of approximately $826,700 and $440,000 were
capitalized at September 30, 1996 and December 31, 1995, respectively. The
following schedule details construction in progress at September 30, 1996:

<TABLE>
<CAPTION>
                                            Construction   Percent
(dollars in thousands)                          Cost     Construction    Percent   Percent
                       Number of            Incurred to    Complete      Leased    Occupied  Estimated
       Property         Suites   Land Cost      Date      at 9/30/96   at 9/30/96 at 9/30/96 Completion
--------------------  ---------- --------- ------------  ------------  ---------- ---------- ---------

AURORA, OH

<S>                         <C>    <C>       <C>             <C>           <C>        <C>     <C>
  Barrington-Phase I        168    $ 1,375   $    2,693      16%           -          -       Fall 1997
  Barrington-Phase II       120        982        -            -           -                  Winter 1998
                       --------    -------   ----------
                            288      2,357        2,693
ANN ARBOR, MI
  Arbor Landings II         TBD        650          118        -           -          -      TBD
COLUMBUS, OH
  Bradford at Easton        324      2,033        5,816      43%           -          -      Fall 1997
FENTON, MI
  Georgetown                TBD        350          TBD        -           -          -      TBD
GRAND RAPIDS, MI
  Aspen Lakes               TBD        400          TBD        -            -         -      TBD
STREETSBORO, OH
  Village of Western
    Reserve                 112        691           86
WESTLAKE, OH
  Westlake                  TBD        523            -        -           -          -      TBD

Future Development
  Project Costs          -         -                184        -           -          -
                       --------    -------   ----------
                            724    $ 7,004   $    8,897
                       ========    =======   ==========
<FN>
TBD (To be determined)
</TABLE>
         At September 30, 1996, the Company held land having an historical cost
of $2,916,273 that it intends to sell since the land will not be rezoned for
multifamily use. Management estimates that proceeds from the sale of the land
will exceed its cost and as a result, the land is stated at cost.

                                     Page 7


<PAGE>   8



4.       SHAREHOLDERS' EQUITY

         The following table summarizes the changes in shareholders' equity
since December 31, 1995:

<TABLE>
<CAPTION>
                                 Class A                                         Accumulated
                               Cumulative        Common                           Dividends
                                Preferred        Shares            Paid-In       In Excess Of
                                 Shares    (at $.10 stated value)  Capital        Net Income        Total
                             --------------- --------------------  ----------  ---------------- -----------

<S>                          <C>             <C>              <C>              <C>              <C>
Balance, Dec. 31, 1995       $    56,250,000 $    1,387,238   $   102,567,007  $   (21,034,566) $   139,169,679
   Net income                        -               -                 -            14,699,626       14,699,626
   Common share
     dividends declared              -               -                 -           (12,486,433)     (12,486,433)
   Preferred share
     dividends declared              -               -                 -            (4,113,315)      (4,113,315)
Additional offering costs            -               -                (60,991)           -              (60,991)
                            ---------------- --------------   ---------------  ---------------  ---------------
Balance, September 30, 1996  $    56,250,000 $    1,387,238   $   102,506,016  $   (22,934,688) $   137,208,566
                             =============== ==============   ===============  ===============  ===============
</TABLE>

5.       SECURED DEBT

CONVENTIONAL MORTGAGE DEBT

         Conventional mortgages payable are comprised of nonrecourse, project
specific, loans to the Company which are collateralized by the associated real
estate and resident leases. Mortgages payable are generally due in monthly
installments of principal and/or interest and mature at various dates through
August 1, 2018.

FEDERALLY INSURED MORTGAGE DEBT

         This mortgage indebtedness is insured by HUD pursuant to certain of the
mortgage insurance programs administered under the National Housing Act of 1934.
These government-insured loans are nonrecourse to the Company. Payments of
principal, interest and HUD mortgage insurance premiums are made in equal
monthly installments and mature at various dates through August 1, 2028.

         Under certain of the mortgage agreements, the Company is required to
make escrow deposits for taxes, insurance and replacement of project assets. One
underlying mortgage is secured by a letter of credit which is renewed annually.

6.       UNSECURED DEBT

SENIOR NOTES

         The Senior Notes were issued in 1995, and their net proceeds of $83.6
million, after underwriting commissions, offering expenses and discounts, were
applied to amounts drawn on the Company's revolving credit facility. Senior
Notes with a principal balance of $75 million accrue interest at 8.38% and
mature in 2000. Senior Notes with a principal balance of $10 million, accrue
interest at 7.10% and mature in 2002.

LINE OF CREDIT

         The Company utilizes a $75 million unsecured revolving credit facility
(the "Line of Credit"). The Line of Credit includes certain restrictive
covenants which, among others, requires the Company to maintain a minimum level
of net worth, to limit dividends to 90% of Distributable Cash Flow, to restrict
the use of its borrowings and to maintain certain debt coverage ratios. The Line
of Credit provides for a scaled reduction in the LIBOR, prime rate and
commitment fee margins based on the Company's credit ratings. Based on the
Company's present credit ratings and pursuant to a March 1996 interest rate
reduction amendment to the Line of Credit, the LIBOR margin is 150 basis points
fixed in increments of 30, 60, 90, 120 or 180 days and

                                     Page 8


<PAGE>   9



Prime Rate borrowings are at the Prime Rate with no margin. An annual commitment
fee of 25 to 37.5 basis points based on the average daily unused amount of the 
facility is paid quarterly in arrears. The Line of Credit expires in 
September 1997 and the Company has the option to extend the facility for an 
additional one year period. At September 30, 1996, $58.5 million was drawn on 
the Line of Credit.

MEDIUM TERM NOTES PROGRAM

         During 1996, the Company issued five Medium Term Notes (the "MTN's")
aggregating $27.5 million under its $75 million MTN program. The principal
amounts of these MTN's range from $2.5 million to $10 million and bear interest
from 6.60% to 7.93% over terms of between 5 to 30 years. The holder of a $2.5
million, 30 year MTN has the option to require payment on March 15, 2003. The
net proceeds to the Company with respect to these issuances was $27.3 million,
of which $17.4 million was applied to amounts outstanding under the Line of
Credit and the remaining $9.9 million was used to acquire a multifamily
property.

7.       EARNINGS PER SHARE

         Net income per share has been computed by dividing common share
dividends paid or declared for the period by the weighted average number of
common shares outstanding plus the undistributed net income applicable to common
shareholders as appropriate, divided by the weighted average number of common
shares outstanding. Common share equivalents were excluded from the earnings per
share calculation as they were not dilutive. The weighted average number of
shares outstanding utilized in the calculation was 13,872,381 and 13,869,381 for
the periods ended September 30, 1996 and 1995, respectively.

8.       PRO FORMA FINANCIAL INFORMATION

         The following unaudited supplemental pro forma operating data for the
nine months ended September 30, 1996 is presented to reflect the effects of the
six property and two land parcel acquisitions completed through September 30,
1996, as if such transactions had occurred on January 1, 1996. The unaudited
supplemental pro forma operating data for the nine months ended September 30,
1995 is presented to reflect the effects of (i) the issuance of the Senior and
Medium Term Notes, (ii) the offering of 2,250,000 Depositary Shares, each
representing 1/10 of a share of the Company's 9 3/4% Class A Cumulative
Redeemable Preferred Shares, (iii) the 15 property acquisitions completed in
1995, (iv) the six property and two land parcel acquisitions completed in
1996, as if such transactions had occurred on January 1, 1995, and (v) the
issuance of 3,000 restricted shares in 1995.

<TABLE>
<CAPTION>
                                                                   For the nine months ended
                                                                         September 30,
                                                                   ------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)                               1996         1995
                                                                   -----------   ----------

<S>                                                                <C>          <C>
Revenues                                                           $    72,883  $   68,893
Net income applicable to common shares                                  11,250      10,144
Net income applicable to common shares per share                           .81         .73
Weighted average common shares outstanding                              13,872      13,872
</TABLE>

         The 1995 pro forma financial information does not include the revenue
and expenses for Colony Bay East Phase I and II, Kensington Grove or the
Residence at Washington for the period January 1 through September 30, 1995. The
revenue and expenses of the aforementioned properties were excluded from the pro
forma financial information for the period as they were under construction for
substantially all of the period prior to their acquisition.

9.       SUBSEQUENT EVENTS

         On October 2, 1996, the Company declared a dividend of $.45 per share
for the quarter ending September 30, 1996. The dividend was paid on November 1,
1996 to shareholders of record on October 15, 1996.

                                     Page 9


<PAGE>   10



                      ASSOCIATED ESTATES REALTY CORPORATION
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

         Associated Estates Realty Corporation (the "Company") is a Real Estate
Investment Trust ("REIT") that currently owns, or is a joint venture partner, in
84 multifamily properties containing 15,838 suites located in Ohio, Michigan and
Western Pennsylvania.

         The following discussion should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this report.
Historical results and percentage relationships set forth in the Consolidated
Statements of Operations contained in the financial statements, including trends
which might appear, should not be taken as indicative of future operations.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has elected to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended, commencing with
its taxable year ending December 31, 1994. REIT's are subject to a number of
organization and operational requirements including a requirement that 95% of
the income that would otherwise be considered as taxable income be distributed
to its shareholders. Providing the Company continues to qualify as a REIT, it
will generally not be subject to a Federal income tax on net income.

         The Company expects to meet its short-term liquidity requirements
generally through its net cash provided by operations. The Company believes that
its net cash provided by operations will be sufficient to meet both operating
requirements and the payment of dividends by the Company in accordance with REIT
requirements in both the short and long term.

Financing:

         Sixty-four of the Company's 77 wholly owned properties were
unencumbered at September 30, 1996 with annualized earnings before interest,
depreciation and amortization of over $40.5 million and an historical cost basis
of over $364.0 million. The remaining thirteen of the Company's wholly owned
properties, having an historical cost basis of $100.8 million, secured property
specific debt of $67.8 million at September 30, 1996. Unsecured debt, which
totaled $170.8 million at September 30, 1996, consisted of $27.5 in Medium Term
Notes, Senior Notes of $84.8 million and amounts drawn on the revolving credit
facility of $59 million. The Company's proportionate share of the mortgage debt
relating to the seven joint venture properties was $18.0 million at September
30, 1996. The weighted average interest rate on the secured, unsecured and the
Company's proportionate share of the joint venture debt was 7.91% at September
30, 1996.

         The Company utilizes borrowings under a $75 million unsecured revolving
credit facility (the "Line of Credit") for the acquisition and development of
multifamily properties and working capital purposes. The Line of Credit includes
certain restrictive covenants which, among others, requires the Company to
maintain a minimum level of net worth, to limit dividends to 90% of
Distributable Cash Flow, to restrict the use of its borrowings and to maintain
certain debt coverage ratios. The Line of Credit provides for a scaled reduction
in the LIBOR or prime rate margins and commitment fees based on the Company's
credit ratings. Based on the Company's present credit ratings, the LIBOR margin
is 150 basis points fixed in increments of 30, 60, 90, 120 or 180 days and Prime
Rate borrowings are at the Prime Rate with no margin. An annual commitment fee
of between 25 basis points and 37.5 basis points on the average daily unused
amount of the facility is paid quarterly in arrears. The Line of Credit expires
in September 1997 and the Company has the option to extend the facility for an
additional one year period. At September 30, 1996, $58.5 million was drawn on
the Line of Credit with a weighted average interest rate of 7.09%.

         During the nine-month period ending September 30, 1996, the Company
issued five Medium-Term Notes (the "MTN's") aggregating $27.5 million under its
$75 million MTN program. The principal amounts of these MTN's range from $2.5 
million to $10 million and bear interest from 6.60% to 7.93% over terms of
between 5 to 30 years. The holder of a $2.5 million, 30 year Medium Term Note
has the option to require payment on March 15, 2003. The net proceeds to the
Company with respect to these issuances was $27.3 million, of which $17.4
million was applied to amounts  outstanding under the Line of Credit and the
remaining $9.9 million was used

                                     Page 10


<PAGE>   11



to acquire a multifamily property.

Registration statements filed in connection with financing:

         The Company has filed two shelf registration statements with the 
Securities and Exchange Commission for the registration of up to $250 million
and $200 million of debt securities, preferred shares, depositary shares,
common shares and common share warrants in January and December of 1995,
respectively. The Company has $233.8 million of securities under these shelf
filings available for issuance.

Acquisitions, development and dispositions:

         The Company intends to continue to finance its multifamily property
acquisitions and development with the most appropriate sources of capital, which
may include undistributed Funds From Operations, the issuance of equity
securities, bank and other institutional borrowings, the issuance of debt
securities, the assumption of mortgage indebtedness or through the exchange of
properties. The Company may also determine to raise additional working capital
through one or more of these sources.

         During the nine-month period ended September 30, 1996, the Company
acquired six multifamily properties containing 1,289 suites for an aggregate
purchase price of $59.0 million. The acquisitions are located in Michigan, Ohio
and Western Pennsylvania, and were financed with borrowings under the Line of
Credit, the issuance of MTN's and cash on hand. The Company has also entered 
into a contract for the construction of a 324 suite property that will be known
as Bradford at Easton on a 45 acre Columbus, Ohio land parcel owned by the
Company with an estimated completion in the Fall of 1997. The Company is also
developing Barrington, a 288 suite multifamily property in Aurora, Ohio, that
will be constructed in two phases with an estimated completion of the first
phase in the Fall of 1997. The construction of Bradford at Easton and
Barrington Phase I was approximately 43% and 16% complete, respectively, at
September 30, 1996. In addition to the land on which Bradford at Easton and
Barrington are being developed, the Company owns six parcels of undeveloped
land, three of which are in Ohio and three of which are in Michigan, containing
136 acres on which an estimated 1,224 suites could be developed. Development
activities for the construction of 360 suites have commenced with respect to
three of these parcels.

         The Company is currently under contract to purchase a 10 acre parcel 
of undeveloped land located in Mt. Sterling, Ohio. The parcel of land under
contract is adjacent to a property owned by the Company and, if acquired, will
be held for future development. The Company expects to finance the acquisition
of the land parcel using borrowings under the Line of Credit. There can be no
assurances, however, that the Company will be successful in acquiring the land
parcel under contract.

         The Company is exploring opportunities to sell several of the
Government Assisted properties and has received an expression of interest from a
number of different sources. In addition, the Company has determined that a 90
acre parcel of land, which was one of the assets acquired by the Company at the
time of the IPO that is presently zoned for office and industrial use, will not
be rezoned for multifamily use. The Company intends to sell the property and has
received interest from parties interested in developing office and industrial
buildings on the property.

Dividends

         On October 2, 1996, the Company declared a dividend of $0.45 per common
share for the quarter ending September 30, 1996 which was paid on November 1,
1996 to shareholders of record on October 15, 1996. On August 22, 1996, the
Company declared a dividend of $0.60938 per depositary share on its Class A
Cumulative Preferred Shares (the "Perpetual Preferred Shares") which was paid on
September 16, 1996 to shareholders of record on September 6, 1996.

                                     Page 11


<PAGE>   12



Cash flow sources and applications:

         Net cash provided by operating activities decreased $648,120 to
$22,567,200 from $23,215,315 for the nine-month period ended September 30, 1996
when compared with the nine-month period ended September 30, 1995. This decrease
was primarily the result of the application of cash flow from operating
activities to the reduction of accounts payable and accrued expenses.

         Net cash flows used for investing activities of $67,680,800 for the
nine-month period ended September 30, 1996 were primarily used for the
acquisition of multifamily real estate, properties and undeveloped land
parcels.

         Net cash flows provided by financing activities of $42,383,00 for the
nine-month period ended September 30, 1996 were primarily comprised of
borrowings on the Line of Credit and the issuance of MTN's. Funds were also
used to pay dividends on the Company's common and Perpetual Preferred Shares.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE-MONTHS ENDED SEPTEMBER 30, 1996 TO THE THREE-MONTHS
ENDED SEPTEMBER 30, 1995.

         Overall, total revenue increased $4,612,900 or 23.7% and total expenses
increased $3,993,200 or 26.3% for the quarter ended September 30, 1996 as
compared to the quarter ended September 30, 1995. Net income applicable to
common shares increased $944,000 or 35.4% after the Company's interest in the
net income of the joint venture properties and dividends on the Company's
Perpetual Preferred Shares.

         In the following discussion of the comparison of the three-months ended
September 30, 1996 to the three-months ended September 30, 1995, the term "Core
Portfolio Properties" refers to the 64 wholly owned properties that were
acquired by the Company prior to June 30, 1995 and "Acquired Properties" refers
to the 16 multifamily properties acquired between July 1, 1995 and September 30,
1996. During the three-months ended September 30, 1996, the Acquired Properties
generated total revenues of $5,087,200 while incurring property, operating and
maintenance expenses of $2,071,600.

Rental Revenues:

         Rental revenues increased $4,447,500 or 24.9% for the quarter. Rental
revenues from the Acquired Properties increased $3,997,600 for the same period.
Increases in occupancy and suite rents at the Core Portfolio market rate and
Government Assisted properties resulted in a $449,600 or 2.7% increase in rental
revenue from these properties.

         The following table summarizes the comparative rents per suite and
economic occupancies(1) by property type:

<TABLE>
<CAPTION>
                                        Average Net Collected             Average Economic
                                           Rent Per Suite(2)                 Occupancy
                               --------------------------------------  ----------------------
                                  For the three-months                 For the three-months
                                  ended September 30,    Percent        ended September 30,
                                   1996       1995       Increase        1996          1995
                                ---------   ---------   -----------    ---------     --------
<S>                             <C>         <C>             <C>          <C>           <C>
Core Portfolio Properties:
  Market rate                   $    565    $    540        4.6%         95.2%         94.6%
  Market rate  - joint venture
     properties                      478         478        0.0%         90.3%         92.9%
  Government Assisted                643         618        4.0%         99.9%         99.3%
     Weighted average - Core
         Portfolio Properties        569         547        4.0%         95.6%         95.3%
<FN>
--------
         1 Economic occupancy is defined as the actual rent revenue divided by
the total rent expected to be earned based on the market rental rate of all
occupied suites.

         2 Net collected rent revenue per suite is defined as the rent revenue
recognized on occupied suites at the actual rents in accordance with the
respective leases divided by the total number of suites available to be leased.

</TABLE>

                                     Page 12


<PAGE>   13



         Table I on page 17 summarizes the rental rates, occupancies and certain
other information for each of the Acquired Properties and Core Portfolio
Properties.

Other Revenues:

         Painting service revenue and painting service revenue - affiliates
increased $197,200 or 70.7% for the quarter and reflects an increase in revenue
generated from suite painting and major renovation projects when compared with
the three-months ended September 30, 1995. The increase in painting service
revenue and painting service revenue - affiliates was partially offset by an
increase in painting service expenses as discussed elsewhere herein.

Property operating and maintenance expenses:

         Property operating and maintenance expenses increased $2,114,000 or
27.9% for the quarter. Operating and maintenance expenses at the Acquired
Properties increased $1,841,400 for the quarter due primarily to the operating
and maintenance expenses incurred at the 16 properties that were acquired
between July 1, 1995 and September 30, 1996. Property operating and maintenance
expenses at the Core Portfolio Properties increased $272,600 or 3.7% when
compared with the prior three-month period primarily due to increases in
payroll, advertising and real estate taxes. Payroll expense at the Core
Portfolio Properties increased $106,400 or 6% due to an increase in staff at the
properties acquired during 1994. Real estate taxes for the Core Portfolio
Properties increased $148,800 or 9.9% due primarily to the increase in the real
estate tax valuations for certain of these properties. Total expenditures for 
building renovations and suite and common area refurbishment (including suite
painting) in the Core Portfolio Properties averaged $175 per suite for the
three-months ended September 30, 1996 as compared to $163 per suite for the
three-months ended September 30, 1995.

Other expenses:

         Depreciation and amortization increased $754,100 or 16.6% for the
quarter primarily due to the increased depreciation and amortization expense
recognized on the Acquired Properties of $919,800.

         Painting services expenses increased $158,800 or 67.1% for the quarter.
These increases were primarily the result of an increase in payroll related
expenses attributable to the increase sales of the painting company.

         Interest expense increased $1,256,500 or 44.6% for the quarter
primarily due to the interest incurred with respect to the borrowings under the
Line of Credit and the MTN's which were used for the acquisition of properties.

COMPARISON OF THE NINE-MONTHS ENDED SEPTEMBER 30, 1996 TO THE NINE-MONTHS ENDED
SEPTEMBER 30, 1995.

         Overall, total revenue increased $14,640,100 or 26.6% and total
expenses increased $12,519,600 or 29.4% for the nine-month period. Net income
applicable to common shares decreased $305,900 or 2.8% after the Company's
interest in the net income of the joint venture properties and dividends on the
Company's Perpetual Preferred Shares. During the nine-months ended September 30,
1996, the Acquired Properties generated total revenues of $17,034,900 while
incurring property, operating and maintenance expenses of $6,861,500.

         In the following discussion of the comparison of the nine-months ended
September 30, 1996 to the nine-months ended September 30, 1995, the term "Core
Portfolio Properties" refers to the 59 wholly owned properties that were
acquired by the Company prior to December 31, 1994 and "Acquired Properties"
refers to the 21 multifamily properties acquired between January 1, 1995 and
September 30, 1996.

                                     Page 13


<PAGE>   14



Rental Revenues:

         Rental revenues increased $14,722,600 or 29.5% for the nine-month
period. Rental revenues from the Acquired Properties increased $12,971,600 for
the same period. Increases in occupancy and suite rents at the Core Portfolio
Conventional and Government-Assisted Properties resulted in a $1,751,000 or 3.8%
increase in rental revenue.

Other Revenues:

         Property management fees and property management fees - affiliates
decreased $173,200 or 5.7% for the nine-month period. This decrease was due
primarily to a (i) decline in supplemental management fees earned on two of the
Government Assisted properties managed by the Company and (ii) a reduction in
rental revenue at the managed properties as management fees are earned based on
a percentage of the rents collected. The supplemental management fees are based
on the cash flow available for distribution of the two managed properties which
declined due to an increase in repair and maintenance expenses at the two
managed properties.

         Painting service revenue and painting service revenue - affiliates
increased $539,900 or 71.4% for the nine-month period and reflects the increase
in revenue generated from suite painting and major renovation projects when
compared with the nine-months ended September 30, 1995. The increase in painting
service revenue and painting service revenue - affiliates was partially offset
by an increase in painting service expenses as discussed elsewhere herein.

         Other income for the nine-months ended September 30, 1996 decreased
$449,200 or 36.1% when compared with the nine-months ended September 30, 1995.
The decrease is due primarily to a decrease in supervisory management fees
received from one of the managed properties.

Property operating and maintenance expenses:

         Property operating and maintenance expenses increased $6,208,100 or
29.7% for the nine-months ended September 30, 1996. Operating and maintenance
expenses at the Acquired Properties increased $5,495,500 for the nine-month
period due primarily to the operating and maintenance expenses incurred at the
six properties acquired during 1996 and the recognition of a full nine-month
period's operating expenses at the 15 properties acquired during 1995. Property
operating and maintenance expenses at the Core Portfolio Properties increased
$712,700 when compared with the nine-months ended September 30, 1995 primarily
due to increases in real estate taxes, personnel and advertising expenses. Total
expenditures for building renovations and suite and common area refurbishment in
the Core Portfolio Properties, including suite painting, averaged $370 per suite
for the nine-months ended September 30, 1996 as compared to $385 per suite for
the nine-months ended September 30, 1995.

Other expenses:

         Depreciation and amortization increased $2,126,100 or 23.5% for the
nine-months ended September 30, 1996 as compared to the nine-months ended
September 30, 1995 primarily due to the increased depreciation and amortization
expense recognized on the Acquired Properties of $2,505,900.

         Painting service expenses increased $446,400 or 65.5% for the
nine-month period. These increases were primarily the result of additional
payroll related expenses attributable to an increase in the sales activity of
the painting company.

         General and administrative expenses for the nine-months ended September
30, 1996 increased $227,400 or 6.0% when compared with the nine-months ended
September 30, 1995. This increase is primarily attributable to payroll and
related expenses.

         Interest expense increased $3,511,600 or 42.9% for the nine-month
period primarily due to the interest incurred with respect to the borrowings 
under the Line of Credit and the MTN's which were used for the acquisition of 
properties.


                                     Page 14


<PAGE>   15
Equity in net income (loss) of the joint ventures:

         The following table presents the historical statements of operations of
the Company's beneficial interest in the operations of the joint ventures for 
the three- and nine-months ended September 30, 1996 and 1995.

<TABLE>
<CAPTION>
                            For the three-months ended            For the nine-months ended
                                   September 30,                        September 30,
                         --------------------------------      --------------------------------

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

Beneficial interests in
  joint venture operations

<S>                      <C>              <C>                  <C>               <C>
    Rental revenue       $    1,643,740   $     1,644,429      $      4,949,030  $    4,915,986
    Cost of operations          994,452         1,015,309             3,014,758       2,989,776
                         --------------   ---------------      ----------------  --------------
                                649,288           629,120             1,934,272       1,926,210
    Interest income               5,183             7,451                14,412          19,591
    Interest expense           (443,995)         (449,728)           (1,338,367)     (1,352,601)
    Depreciation               (121,173)         (120,181)             (363,067)       (360,160)
    Amortization                (12,408)          (12,407)              (37,221)        (37,221)
                         --------------   ---------------      ----------------  --------------
    Net income           $       76,895   $        54,255      $        210,029  $      195,819
                         ==============   ===============      ================  ==============
</TABLE>

Net income applicable to common shares:

         Net income applicable to common shares is reduced by dividends on the
Perpetual Preferred Shares, of $1,371,000 and $761,625 for the three months
ended September 30, 1996 and 1995, respectively and $4,113,315 and $761,625 for
the nine-months ended September 30, 1996 and 1995, respectively.

OUTLOOK

         The following two paragraphs contain forward-looking statements and are
subject to certain risks, trends and uncertainties that could cause actual
results to vary from those projected. Readers are cautioned not to place undue
reliance on forward-looking statements, which are based only on current
judgments and current knowledge. These forward-looking statements are intended
to be covered by the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that the Company's forward-looking
statements involve risks and uncertainty, including without limitation risks of
a lessening of demand for the apartments owned by the Company, changes in
government regulations affecting the Government Assisted properties, and
expenditures that cannot be anticipated such as utility rate and usage
increases, unanticipated repairs, additional staffing, insurance increases and
real estate tax valuation reassessments.

         Approximately 56% of the Company's multifamily properties are located
in the greater Cleveland/Akron, Ohio area which is the fourteenth largest
consumer market in the United States containing over four million people within
a fifty mile radius of Akron. In Central Ohio, Columbus is the only city in the
northeast quadrant of the country that has experienced continuous population
growth since 1970, according to Census Bureau data. Columbus, Ohio was selected
by the E & Y Kenneth Leventhal Real Estate Group as one of the 12 best
investment markets in the country because of its well-diversified economic base,
strong rental growth and lower vacancy rates. The Company's Michigan portfolio
is located in eight separate markets having a combined projected population
growth of approximately 4.2%, or 153,000 people, with a projected 8.5% increase
in job growth or an additional 17,000 jobs.

         With an average economic occupancy for the Core Portfolio over 95%, and
strong market fundamentals, it would appear that opportunities exist for
continued rental growth at the Company's market-rate properties. The Company
expects that building and grounds repair and maintenance expenditures for the
Core Portfolio properties will increase when compared to the prior year
as the Company continues to maintain its properties to maximize their earnings
potential. Real estate tax increases should begin to decline as the effect of
the reassessed values diminishes over time. Utility expenditures will vary over
prior periods as the effect of weather related usage variances is factored into
the level of utility expense.

                                     Page 15


<PAGE>   16



INFLATION

         Substantially all of the residential leases at the properties allow, at
the time of renewal, for adjustments in the rent payable thereunder, and thus
may enable the Company to seek increases in rents. The substantial majority of
these leases are for one year or less and the remaining leases are for terms up
to two years. The short-term nature of these leases generally serves to reduce
the risk to the Company of the adverse effect of inflation.

CONTINGENCIES

         There are no recorded amounts resulting from environmental liabilities
as there are no known contingencies with respect thereto. Future claims for
environmental liabilities are not measurable given the uncertainties surrounding
whether there exists a basis for any such claims to be asserted and, if so,
whether any claims will, in fact, be asserted. Furthermore, no condition is
known to exist that would give rise to a liability for site restoration, post
closure and monitoring commitments, or other costs that may be incurred with
respect to the sale or disposal of a property. Phase I environmental audits have
been completed on all of the Company's wholly owned and joint venture
properties. The Company has obtained environmental insurance covering (i)
pre-existing contamination, (ii) on-going third party contamination, (iii) third
party bodily injury and (iv) remediation. The policy is for a five year term and
carries a limit of liability of $2 million per environmental contamination
discovery (with a $50,000 deductible) and has a $10 million policy term
aggregate. Management has no plans to abandon any of the properties and is
unaware of any other material loss contingencies.



                                     Page 16


<PAGE>   17
         The following tables present information concerning the Multifamily
Properties owned by Associated Estates Realty Corporation.

<TABLE>
<CAPTION>
                                                                                                        For the three months ending
                                                                                                      ------------------------------
                                                                                                           September 30, 1996
                                                                                                      ------------------------------
                                                                                 Year     Average     Average
                                                     Type of            Total  Built or  Unit Size    Economic       Physical
  The Multifamily Properties       Location        Construction         Suites  Rehab.    Sq. Ft.     Occupancy      Occupancy
-------------------------------  --------------  --------------------   ------ --------  ---------    ---------    ----------

MARKET RATE
ACQUIRED PROPERTIES
MARKET RATE
CENTRAL OHIO PROPERTIES

<S>                              <C>               <C>                    <C>             <C>            <C>          <C>
Kensington Grove                 Westerville       Garden/Townhm/Ranch     76  1995        1,109         96.2%        98.7%
Perimeter Lakes                  Dublin            Garden/Townhomes       189  1992          999         N/A          98.9
The Residence at Washington      Wash. Ct. House   Ranch                   72  1995          862         99.2         88.9
                                                                        -----            -------        -----        ------
                                                                          337                989         97.4%        96.7%
WESTERN PENNSYLVANIA
Chestnut Ridge                   Pittsburgh        Garden                 468  1986          769         93.2%        97.4

MICHIGAN PROPERTIES
Aspen Lakes                      Grand Rapids      Garden                 144  1981          789         N/A          97.9%
Summer Ridge Apartments          Kalamazoo         Garden                 248  1989-91       960         93.8         96.4
Spring Brook Apartments          Holland           Garden/Townhomes       168  1986          818         96.4         97.1
The Oaks and Woods at Hampton    Rochester Hills   Garden/Townhomes       544  1986-88     1,050         96.4         97.1
The Landings at the Preserve     Battle Creek      Garden                 190  1990-91       952         95.5         97.4
                                                                      -------             ------        -----         ----
                                                                        1,294                966         95.7%        96.7%
NORTHERN OHIO PROPERTIES
Cloisters                        Toledo            Townhomes              188  1990        1,037         93.7%        97.9%
Kensington Village               Toledo            Garden/Townhomes       190  1985-90       920         95.9         98.4
Treetops                         Toledo            Townhomes              128  1988-89     1,350         97.0         96.1
Vantage Villa                    Toledo            Garden                 150  1974          935         95.0         94.7
                                                                      -------            -------        -----         ----
                                                                          656              1,041         95.4         97.0
                                                                      -------             ------        -----         ----
  Acquired Property Subtotal                                            2,755                960         95.2%        96.9%

CORE PORTFOLIO PROPERTIES
MICHIGAN PROPERTIES
Arbor Landings Apartments        Ann Arbor         Garden                 168  1990        1,116          97.7%       97.7%
Central Park Place               Grand Rapids
Country Place Apartments         Mt. Pleasant      Garden                 144  1987          859         100.0       100.0
Georgetown Park Apartments       Fenton            Garden                  36  1987-95     1,005          98.3        97.8
                                                                         ----              -----        ------      ------
                                                                          888                984          97.4%       98.2
CENTRAL OHIO PROPERTIES
Arrowhead Station                Columbus          Townhomes              102  1987        1,344          98.9%       99.0%
Bedford Commons                  Columbus          Townhomes              112  1987        1,157          99.4        98.2
Bentley Station                  Columbus          Garden                  96  1993          891          97.1        94.8
Bolton Estates                   Columbus          Garden                 196  1992          687          89.7        91.8
Colony Bay East                  Columbus          Garden                 156  1994          903          96.6        96.8
Heathermoor                      Worthington       Garden/Townhomes       280  1989          829          98.3        98.6
Lake Forest                      Columbus          Garden                 192  1994          788          90.2        92.7
Muirwood Village at Bennell      Columbus          Ranch                  140  1988          807          96.3        96.4
Muirwood Village at Gemstar      Columbus          Ranch                   24  1988          769          96.3        91.7
Muirwood Village at London       London            Ranch                  112  1989          769          97.2        94.6
Muirwood Village at Mt. Sterling Mt. Sterling      Ranch                   48  1990          769          96.4        97.9
Muirwood Village at Zanesville   Zanesville        Ranch                  196  1991          769          99.7        95.4
Pendleton Lakes                  Columbus          Garden                 160  1990          903          98.5        97.5
Residence at Christopher Wren    Gahanna           Garden/Townhomes       264  1993        1,062          98.8        98.5
Residence at Turnberry           Pickerington      Garden/Townhomes       216  1991        1,182          93.5        98.1
Sheffield at Sylvan              Circleville       Ranch                  136  1989          791          97.1        94.1
Sterling Park                    Grove City        Garden                 128  1994          763          92.2        94.5
The Residence at Newark          Newark            Ranch                  112  1993          868          99.5        97.3
Wyndemere                        Franklin          Ranch                  128  1991          768          99.3       100.0
                                                                        -----              -----          ----       -----
                                                                        2,798                892          96.5%       96.4
NORTHERN OHIO PROPERTIES
Bay Club                        Willowick         Garden                  96    1990         925          96.6%       94.8%
Colonade Elyria                 Elyria            Garden                  72    1964         512          95.1        98.6
Colonade West                   Cleveland         Garden                 216    1964         502          94.6        91.2
Cultural Gardens                Euclid            Mid Rise               186    1966         688          95.1        96.2
Edgewater Landing               Cleveland         High Rise              241    1988 r       585          95.3        96.3
Gates Mills III                 Mayfield Hts.     High Rise              320    1978         874          92.0        93.8
Holly Park                      Kent              Garden                 192    1990         875          92.4       100.0
Huntington Hills                Stow              Townhomes               85    1982         976          95.6        97.6
Mallard's Crossing              Medina            Garden                 192    1990         998          97.1        93.8

<CAPTION>

                                              For the three months ending
                               ---------------------------------------------------------
                                September 30, 1996            September 30, 1995
                               -------------------  ------------------------------------


                                    Average Rent     Average                Average Rent
                                        Per         Economic    Physical        Per
  The Multifamily Properties      Suite   Sq. Ft.   Occupancy   Occupancy  Suite  Sq. Ft.
-------------------------------   -----   -------  -----------  ----------  -------------
MARKET RATE
ACQUIRED PROPERTIES
MARKET RATE
CENTRAL OHIO PROPERTIES

<S>                               <C>       <C>         <C>       <C>    <C>    <C>
Kensington Grove                  $ 761     $ 0.69      N/A       97.4%  $ 765  $ 0.69
Perimeter Lakes                     N/A        N/A      N/A        N/A     N/A     N/A
The Residence at Washington         519       0.60      N/A        N/A     N/A     N/A
                                  -----     ------    -----        ----  -----    ----
                                  $ 643     $ 0.65      N/A        N/A     N/A     N/A
WESTERN PENNSYLVANIA
Chestnut Ridge                    $ 691     $ 0.90      N/A        N/A     N/A     N/A

MICHIGAN PROPERTIES
Aspen Lakes                         N/A        N/A      N/A        N/A     N/A     N/A
Summer Ridge Apartments             693       0.72      N/A        N/A     N/A     N/A
Spring Brook Apartments             771       0.73      N/A        N/A     N/A     N/A
The Oaks and Woods at Hampton       771       0.73      N/A       93.8     741    0.71
The Landings at the Preserve        666       0.70      N/A       92.1     728    0.76
                                  -----     ------      ---       ----    ----    ----
                                  $ 704     $ 0.72      N/A        N/A     N/A     N/A
NORTHERN OHIO PROPERTIES
Cloisters                         $ 514     $ 0.50      N/A       97.3%  $ 408    0.38
Kensington Village                  438       0.48      N/A       98.9     398    0.43
Treetops                            715       0.53      N/A       98.4     626    0.46
Vantage Villa                       573       0.61      N/A        N/A     N/A     N/A
                                   ----       ----      ---       ----   -----  ------
                                    545       0.52      N/A        N/A     N/A     N/A
                                   ----       ----      ---       ----   -----  ------
  Acquired Property Subtotal      $ 655     $ 0.68      N/A        N/A     N/A     N/A

CORE PORTFOLIO PROPERTIES
MICHIGAN PROPERTIES
Arbor Landings Apartments        $  821     $ 0.74      97.4%     96.4%  $ 805  $ 0.72
Central Park Place
Country Place Apartments            504       0.59      99.5      98.6     482    0.56
Georgetown Park Apartments          709       0.71      98.6      96.5     630    0.63
                                 ------      -----    ------     -----   -----  ------
                                 $  671     $ 0.70      98.7%     98.4%  $ 631  $ 0.66
CENTRAL OHIO PROPERTIES
Arrowhead Station                $  660     $ 0.49      89.1%     95.1%  $ 631  $ 0.47
Bedford Commons                     718       0.62      98.8      98.2     704    0.61
Bentley Station                     507       0.57      97.1      92.7     496    0.56
Bolton Estates                      453       0.66      90.9      91.3     454    0.66
Colony Bay East                     493       0.55      93.0      85.9     467    0.52
Heathermoor                         450       0.54      92.6      98.6     517    0.62
Lake Forest                         538       0.68      82.9      91.7     523    0.66
Muirwood Village at Bennell         484       0.60      96.0      95.0     469    0.58
Muirwood Village at Gemstar         478       0.62      91.9      91.7     460    0.60
Muirwood Village at London          491       0.64     100.0      94.6     478    0.62
Muirwood Village at Mt. Sterling    490       0.64      99.9      95.8     470    0.61
Muirwood Village at Zanesville      518       0.67      96.6      95.8     485    0.69
Pendleton Lakes                     502       0.56      91.4      91.3     486    0.54
Residence at Christopher Wren       709       0.67      97.5      97.3     700    0.66
Residence at Turnberry              722       0.61      94.3      96.3     702    0.59
Sheffield at Sylvan                 502       0.63      97.0      94.9     503    0.64
Sterling Park                       537       0.70      92.3      92.2     523    0.69
The Residence at Newark             540       0.62      98.9      99.1     524    0.60
Wyndemere                           523       0.68      92.3      94.3     503    0.65
                                 ------     ------     -----      -----  -----  ------
                                 $  550     $ 0.62      94.2%     94.6%  $ 521  $ 0.58
NORTHERN OHIO PROPERTIES
Bay Club                         $  618     $ 0.67      96.3%     96.9%  $ 596  $ 0.64
Colonade Elyria                     364       0.71      97.1      98.6     350    0.68
Colonade West                       397       0.79      95.9      96.8     381    0.76
Cultural Gardens                    492       0.72      98.1      99.5     479    0.70
Edgewater Landing                   409       0.70      96.0      94.6     411    0.70
Gates Mills III                     664       0.76      92.0      94.1     658    0.75
Holly Park                          686       0.78      79.0      73.4     719    0.82
Huntington Hills                    641       0.66      98.6      97.6     624    0.64
Mallard's Crossing                  674       0.68      95.8      95.8     644    0.65

</TABLE>


                                     Page 17


<PAGE>   18



<TABLE>
<CAPTION>
                                                                                                        For the three months ending
                                                                                                        ---------------------------
                                                                                                          September 30, 1996
                                                                                                        ----------------------------
                                                                                    Year      Average      Average
                                                     Type of              Total   Built or   Unit Size     Economic  Physical
  The Multifamily Properties        Location        Construction          Suites   Rehab.     Sq. Ft.     Occupancy  Occupancy
-------------------------------    -------------  ---------------        -------- ---------  ---------    ---------  ---------
<S>                                <C>               <C>                  <C>     <C>         <C>           <C>      <C>
Memphis Manor                      Cleveland         Garden                 120    1966         554          94.3      91.7
Park Place                         Parma Hts.        Mid Rise               164    1966         760          93.2      95.7
Pinecrest                          Broadview Hts.    Garden                  96    1987 r       598          94.6      77.1
Portage Towers                     Cuyahoga Falls    High Rise              376    1973         869          94.2      91.2
Somerset West (a)                  North Royalton    Garden/Townhomes       197    1982       1,038          94.0      97.5
The Triangle (b)                   Cleveland         High Rise              273    1989         616          99.8     100.0
Timbers I                          Broadview Hts.    Garden                  48    1987         920          98.3     100.0
Timbers II                         Broadview Hts.    Garden                  48    1989         940          92.5      97.9
Villa Moderne                      North Olmsted     Garden                 135    1963         504          94.9      91.1
Washington Manor                   Elyria            Garden                  48    1963         584          96.6     100.0
West Park Plaza                    Cleveland         Garden                 118    1964         520          91.8      90.7
Westchester Townhouses             Westlake          Townhomes              136    1989       1,000          90.7      93.4
Westlake Townhomes                 Westlake          Townhomes                7    1985       1,000          94.2     100.0
Williamsburg at Greenwood Village  Sagamore Hill     Townhomes              260    1990         938          96.0      97.3
Winchester Hills I  (c)            Willoughby Hills  High Rise              362    1972         822          88.6      93.9
Winchester Hills II                Willoughby Hills  High Rise              362    1979         822          87.8      90.6
                                                                          -----               -----         -----     -----
                                                                          4,350                 782          93.8      94.3
                                                                          -----               -----         -----     -----
   Core Market Rate Properties                                            8,036                 840          95.2%     95.5%

GOVERNMENT ASST.-ELDERLY
Ellet Development                  Akron             High Rise              100   1978          589          99.7%  100.0%
Hillwood I                         Akron             High Rise              100   1976          570          99.4   100.0
Puritas Place (d)                  Cleveland         High Rise              100   1981          518          99.2    99.0
Riverview                          Massillon         High Rise               98   1979          553          98.8   100.0
State Road Apartments              Cuyahoga Falls    Garden                  72   1977 r        750         100.0   100.0
Statesman II                       Shaker Heights    Garden                  47   1987 r        796         100.0   100.0
Sutliff Apartments II              Cuyahoga Falls    High Rise              185   1979          577         100.0   100.0
Tallmadge Acres                    Tallmadge         Mid Rise               125   1981          641          99.3   100.0
Twinsburg Apartments               Twinsburg         Garden                 100   1979          554          99.6   100.0
Village Towers                     Jackson Twp.      High Rise              100   1979          557         100.0   100.0
West High Apartments               Akron             Mid Rise                68   1981 r        702          99.9   100.0
                                                                          -----                ----        ------   ------
                                                                          1,095                 602          99.7%   99.9%
GOVERNMENT ASST.-FAMILY
Jennings Commons                   Cleveland         Garden                  50   1981          823         100.0%  100.0%
Rainbow Terrace                    Cleveland         Garden                 484   1982 r        768         100.0    97.5
Shaker Park Gardens II             Warrensville      Garden                 151   1964          753         100.0    99.3
                                                                          -----                ----        ------   ------
                                                                            685                 769         100.0    98.1
                                                                          -----                ----        ------   ------
  Core Portfolio Government Asst. Propeties                               1,780                 666          99.9%   99.2%

CONGREGATE CARE
Gates Mills Club                   Mayfield Heights  High Rise              120   1980          721          96.1%  100.0%
The Oaks                           Westlake          Garden                  50   1985          672          93.9    98.0
                                                                          -----                ----        ------   ------
                                                                            170                 707          95.3    99.4
                                                                          -----                ----        ------   ------
                                                                          9,986                 806          96.1%  96.2%
JOINT VENTURE PROPERTIES
NORTHEAST OHIO
MARKET RATE
Americana                          Euclid            High Rise              738   1968          803          86.1%   84.7%
College Towers                     Kent              Mid Rise               380   1969          662          88.8    93.7
Euclid House                       Euclid            Mid Rise               126   1969          654          95.9    96.8
Gates Mills Towers                 Mayfield Hts.     High Rise              760   1969          856          93.3    94.6
Highland House                     Painesville       Garden                  36   1964          539          96.4    97.2
Watergate                          Euclid            High Rise              949   1971          831          90.0    89.1
                                                                          -----                ----        ------   ------
                                                                          2,989                 789          90.3%   90.4%
GOVERNMENT ASST.-FAMILY
Lakeshore Village                  Cleveland         Garden                 108   1982          786         100.0%  100.0%
                                                                          ------               ----        ------   -----
                                                                          3,097                 789          90.8    90.8
                                                                          ------               ----        ------   -----
                                                                         15,838                 763          94.5%   94.2
                                                                         ======                ====        ======   =====


<CAPTION>

                                                       For the three months ending
                                      ------------------------------------------------------
                                      September 30, 1996        September 30, 1995
                                      ------------------ -----------------------------------
                                          Average Rent      Average                  Average Rent
                                               Per          Economic    Physical        Per
  The Multifamily Properties             Suite  Sq. Ft.    Occupancy   Occupancy  Suite     Sq. Ft.
-------------------------------          -----  -------   ---------  ----------   -----     ------
<S>                                       <C>       <C>        <C>       <C>       <C>       <C>
Memphis Manor                             440       0.79       94.5       95.0     424       0.77
Park Place                                521       0.69       96.5       98.8     508       0.67
Pinecrest                                 456       0.76       92.4       97.9     443       0.74
Portage Towers                            559       0.64       96.3       93.1     537       0.62
Somerset West (a)                         699       0.67       93.0       94.4     678       0.65
The Triangle (b)                          881       1.43       94.6       98.2     848       1.38
Timbers I                                 653       0.71       98.0       93.8     639       0.69
Timbers II                                721       0.77       99.5       89.6     682       0.73
Villa Moderne                             428       0.85       95.2       93.3     410       0.81
Washington Manor                          387       0.66       96.3       95.8     373       0.64
West Park Plaza                           421       0.81       97.7       97.5     405       0.78
Westchester Townhouses                    767       0.77       94.9       96.3     736       0.74
Westlake Townhomes                        772       0.77       99.8      100.0     735       0.74
Williamsburg at Greenwood Village         809       0.86       96.7       93.8     777       0.83
Winchester Hills I  (c)                   564       0.69       91.3       93.1     552       0.67
Winchester Hills II                       601       0.73       92.3       93.9     578       0.70
                                        -----      -----     ------     ------     ---     ------
                                          596       0.76       94.0       94.3     580       0.74
                                        -----     ------     ------     ------   -----     ------
   Core Market Rate Properties          $ 588     $ 0.70       94.6%      94.7%  $ 570     $ 0.68

GOVERNMENT ASST.-ELDERLY
Ellet Development                         $ 586      $ .99       98.8%     100.0%  $ 587      $1.00
Hillwood I                                  593       1.04      100.0      100.0     598       1.05
Puritas Place (d)                           782       1.51       99.5      100.0     782       1.51
Riverview                                   594       1.07       99.6      100.0     593       1.07
State Road Apartments                       593       0.79      100.0      100.0     596       0.79
Statesman II                                604       0.76      100.0      100.0     650       0.82
Sutliff Apartments II                       585       1.01       99.5      100.0     589       1.02
Tallmadge Acres                             653       1.02       98.9      100.0     658       1.03
Twinsburg Apartments                        600       1.08      100.0      100.0     602       1.09
Village Towers                              568       1.02      100.0      100.0     580       1.04
West High Apartments                        794       1.13      100.0      100.0     789       1.12
                                          -----     ------    -------    -------   -----     ------
                                          $ 626     $ 1.04       99.7%     100.0%  $ 631     $ 1.05
GOVERNMENT ASST.-FAMILY
Jennings Commons                          $ 663     $ 0.81      100.0%     100.0%  $ 668     $ 0.81
Rainbow Terrace                             708       0.92       98.7       97.3     620       0.81
Shaker Park Gardens II                      532       0.71       98.5      100.0     533       0.71
                                          -----     ------    -------      -----   -----     ------
                                            666       0.87       98.9       98.1     604       0.79
                                           ----     ------    -------     ------   -----     ------
  Core Portfolio Government Asst.         $ 642     $ 0.96       99.4%      99.3%  $ 621     $ 0.93

CONGREGATE CARE
Gates Mills Club                          $ 798     $ 1.11       97.1%     100.0%  $ 742     $ 1.03
The Oaks                                    987       1.47       93.5       92.0     949       1.41
                                           ----     ------     ------     ------   -----    -------
                                            854       1.21       95.8       97.6     803       1.14
                                           ----     ------     ------     ------   -----    -------
                                          $ 602     $ 0.75       95.5%      95.6%  $ 579     $ 0.72
JOINT VENTURE PROPERTIES
NORTHEAST OHIO
MARKET RATE
Americana                                 $ 493     $ 0.61       93.0%      94.2%  $ 475     $ 0.59
College Towers                              402       0.61       89.3       89.7     385       0.58
Euclid House                                431       0.66       95.4       92.1     424       0.65
Gates Mills Towers                          666       0.78       94.9       96.4     647       0.76
Highland House                              398       0.74       96.9       94.4     375       0.70
Watergate                                   544       0.65       92.1       91.8     535       0.64
                                          -----     ------     ------     ------   -----     ------
                                          $ 529     $ 0.67       92.9%      93.3%  $ 514     $ 0.65
GOVERNMENT ASST.-FAMILY
Lakeshore Village                         $ 669     $ 0.85       98.8%     100.0%  $ 671     $ 0.85
                                          -----     ------       ----     ------   -----     ------
                                            536       0.68       93.3       93.6     522       0.66
                                          -----     ------       ----     ------   -----     ------
                                          $ 580     $ 0.70       94.4%      94.4%  $ 564     $ 0.68
                                          =====     ======       ====     ======   =====     ======


<FN>
---------------
         (a)  Somerset West has 77 Contract Suites and 120 Conventional Property
              suites.
         (b)  The Triangle also contains 63,321 square feet of office/retail
              space.
         (c)  The Company acquired a noteholder interest entitling the Company
              to substantially all cash flows from operations. The Company has
              certain rights under a security agreement to foreclose on the
              property to the extent that the unpaid principal and interest on
              the underlying notes exceed seven years equivalent principal and
              interest payments. Unpaid principal and interest is expected to
              exceed seven years of equivalent principal and interest payments
              in 1995.
         (d)  The property was developed by AEG in 1981 subject to a warranty
              deed reversion provision. This provision states that the
              assignment of fee simple title of the property to AEG (transferred
              to the Company) shall expire in 2037.
         r =  Rehabilitated
</TABLE>

                                     Page 18


<PAGE>   19



          HISTORICAL FUNDS FROM OPERATIONS AND DISTRIBUTABLE CASH FLOW

         Industry analysts generally consider Funds From Operations to be an
appropriate measure of the performance of an equity REIT. Funds From Operations
is defined as net income (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from sales of property,
non-recurring and extraordinary items, plus depreciation on real estate assets
and after adjustments for unconsolidated joint ventures. Adjustments for joint
ventures are calculated to reflect Funds From Operations on the same basis.
Funds From Operations does not represent cash generated from operating
activities in accordance with generally accepted accounting principles and is
not necessarily indicative of cash available to fund cash needs and should not
be considered an alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flow as a measure of
liquidity. Distributable Cash Flow is defined as Funds From Operations less
capital expenditures funded by operations and loan amortization payments. The
Company believes that in order to facilitate a clear understanding of the
consolidated historical operating results of the Company, Funds From Operations
and Distributable Cash Flow should be presented in conjunction with net income
as presented in the consolidated financial statements and data included
elsewhere in this report.

         Funds From Operations and Funds Available for Distribution
("Distributable Cash Flow") for the nine month period ended September 30, 1996
and 1995 are summarized in the following table:

<TABLE>
<CAPTION>
                                                   For the three months    For the nine months
                                                    ended September 30,     ended September 30,
(IN THOUSANDS)                                       1996         1995        1996       1995
                                                   --------    --------    ---------   --------

<S>                                                <C>         <C>         <C>         <C>     
NET INCOME APPLICABLE TO COMMON SHARES             $  3,613    $  2,669    $ 10,586    $ 10,892
Extraordinary item                                     --           911        --           911

Depreciation on real estate assets
  Wholly owned properties                             3,626       2,961      10,513       8,223
  Joint venture properties                              121         120         363         360
                                                   --------    --------    --------    --------
FUNDS FROM OPERATIONS                                 7,360       6,661      21,462      20,386

Depreciation - other assets                              80          96         226         217
Amortization of deferred financing fees                 164         265         490         661
Scheduled mortgage principal amortization              (229)       (193)       (668)       (514)
Scheduled mortgage principal amortization-
    joint venture properties                            (50)        (45)       (145)       (132)
Fixed asset additions                                   (97)       (166)       (276)       (558)
Fixed asset additions - joint venture properties       --          --          --           (20)
                                                   --------    --------    --------    --------
DISTRIBUTABLE CASH FLOW                            $  7,228    $  6,618    $ 21,089    $ 20,040
                                                   ========    ========    ========    ========

Weighted average shares outstanding                  13,872      13,869      13,872      13,869
</TABLE>



                                     Page 19


<PAGE>   20



                                     PART II

                                OTHER INFORMATION

           Except to the extent noted below, the items required in Part II are
inapplicable or, disapplicable, would be answered in the negative and have been
omitted.

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

           None

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

           (a)    Exhibits

<TABLE>
<CAPTION>
                                                                                      FILED HEREWITH OR
                                                                                        INCORPORATED
                                                                                          HEREIN BY
      Number                                    TITLE                                     REFERENCE
-----------------   ------------------------------------------------              -----------------------

<C>                 <C>                                                           <C>     
10                  Associated Estates Realty Corporation Directors'              Exhibit 10 filed
                       Deferred Compensation Plan                                    herewith.

27                  Financial Data Schedule                                       Exhibit 27 filed
                                                                                    herewith.
</TABLE>

           (b)    Reports on Form 8-K

                  A Current Report on Form 8-K dated February 1, 1996 was filed
                  on September 25, 1996. This report describes the Company's
                  acquisition of multifamily properties, partnership interests
                  and undeveloped land. This report includes (i) unaudited
                  statements of revenue and certain expenses of certain of the
                  multifamily properties for the period ended June 30, 1996 or
                  date of acquisition, whichever is earlier, and (ii) audited
                  statements of revenue and certain expenses for the year ended
                  December 31, 1995 of the those properties. The report also
                  includes pro forma financial information (unaudited) of the
                  Company and the acquired properties as follows: condensed
                  balance sheet as of June 30, 1996; condensed statement of
                  operations for the six months ended June 30, 1996 and for the
                  year ended December 31, 1995; and estimated twelve-month pro
                  forma statement of taxable net operating income and operating
                  funds available.

                                     Page 20


<PAGE>   21



SIGNATURES

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

                                      ASSOCIATED ESTATES REALTY CORPORATION

November 14, 1996                     /s/ Dennis W.  Bikun
------------------------              -----------------------------------------
(Date)                                Dennis W. Bikun, Chief Financial Officer 
                                      and Treasurer





                                     Page 21