SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 For the fiscal year ended December 31, 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 1-13220

                               PARAGON GROUP, INC.
             (Exact name of registrant as specified in its charter)

            Maryland                                  75-2540957
    (State of Incorporation)                       (I.R.S. employer
                                                  identification no.)

     7557 Rambler Road, Suite 1200
              Dallas, Texas                                       75231
(Address of principal executive offices)                       (Zip code)

Registrant's telephone number, including area code:  (214) 891-2000

Securities registered pursuant to Section 12(b) of the Act:

      Title of each class             Name of each exchange on which registered
      -------------------             -----------------------------------------
         Common Stock,                            New York Stock Exchange
        $0.01 Par Value

Securities registered pursuant to Section 12(g) of the Act:  None

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

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

     As of March 14, 1997, the aggregate  market value of the 13,520,985  shares
of Common  Stock held by  non-affiliates  of the  registrant  was  approximately
$240.0  million,  based upon the  closing  price of $17.75 on the New York Stock
Exchange composite tape on such date.

Number of shares of Common Stock outstanding as of March 14, 1997:  14,791,165

                       DOCUMENTS INCORPORATED BY REFERENCE

     None.


<PAGE>

                                     PART I

Item 1. BUSINESS

General

     Paragon Group, Inc.  (together with its  subsidiaries,  the "Company") is a
fully  integrated,  diversified real estate  investment  trust  headquartered in
Dallas,  Texas  focused  on  the  operation,   development  and  acquisition  of
multifamily  residential  communities  in its  key  markets  in  the  Southwest,
Midwest,  Carolina and Florida markets.  The Company is a self-administered  and
self-managed real estate investment trust ("REIT") that as of December 31, 1996,
owned (either directly or through  interests in other entities)  interests in 64
properties -- 57 multifamily residential communities containing 15,954 apartment
units (the  "Residential  Properties")  and three  office  buildings  containing
724,470  rentable  square  feet (the  "Commercial  Properties")  located  in six
states,  with  three  additional  multifamily   residential   communities  under
construction for which 856 units are planned,  and a 12.6 acre tract of land for
which 320 multifamily  residential  units are planned which the Company acquired
in December 1996 for future development  (collectively,  the  "Properties").  In
addition, the Company, through an affiliate,  managed 77 multifamily residential
communities  (including  the  Residential  Properties)  as of December  31, 1996
located across the United States, totaling approximately 21,696 apartment units.
The Company  sold its  economic  interest in its  commercial  property  services
business as of June 30, 1996. See "Recent Developments" below.

     The Company and its affiliates  succeeded in July 1994 to substantially all
of the interests of Paragon Group,  Inc., a Texas corporation  ("Paragon"),  and
certain others in the Properties and to Paragon's  property services  businesses
and  consummated an initial public  offering (the "Initial  Offering").  Paragon
began its  business  activities  in 1967  (through  a  predecessor  entity) as a
developer and manager of multifamily  residential communities in the midwest and
southwest  regions of the United  States.  It expanded its  geographic  focus to
include ownership and management of properties in the southeast and mid-atlantic
regions in 1972 and added west coast operations in 1981. Over the last 26 years,
Paragon  expanded its residential  and commercial  property  holdings  primarily
through   development,   and  also  through   acquisitions   of   individual  or
multi-product,  multi-market  portfolios of properties owned and/or developed by
others, and evolved into one of the largest  developers,  owners and managers of
multifamily residential and commercial real estate in the United States.

     The Company's principal executive offices are located at 7557 Rambler Road,
Suite 1200, Dallas, Texas 75231, and its telephone number is (214) 891-2000. The
Company is a Maryland  corporation  that was incorporated on March 23, 1994. The
Company and its affiliates employed over 700 persons as of December 31, 1996.

Organizational Structure

     The Company  conducts  substantially  all of its business  through  Paragon
Group L.P. (the "Operating Partnership"), which the Company controls through its
wholly  owned  subsidiaries,  Paragon  Group  GP  Holdings,  Inc.  ("Paragon  GP
Holdings"), the sole general partner of and the holder of a 1.0% general partner
interest in the  Operating  Partnership,  and Paragon  Group LP  Holdings,  Inc.
("Paragon LP Holdings"), the holder of 79.1% of the units of limited partnership
interest  ("Units") in the Operating  Partnership  as of December 31, 1996.  The
other limited partners of the Operating  Partnership include entities controlled
by the Company's  executive  officers and other prior owners of interests in the
Properties and other assets owned by the Operating Partnership.  As sole general
partner,  Paragon GP Holdings has the exclusive  power to manage and conduct the
business of the Operating Partnership.  The Company's interests in the Operating
Partnership  (through Paragon GP Holdings and Paragon LP Holdings) entitle it to
share  in cash  distributions  from,  and in the  profits  and  losses  of,  the
Operating Partnership in proportion to its percentage interest therein.

<PAGE>

     The  Company's  residential  property  services  business is  conducted  by
Paragon Residential Services, Inc. ("PRSI"), an affiliate in which the Operating
Partnership  owns a 95%  economic  interest by virtue of owning  1,880 shares of
nonvoting  common stock and one share of voting common  stock.  The remaining 99
shares of voting common stock, which represent a 5% economic interest, are owned
by a partnership  controlled by certain current and former executive officers of
the Company.  As discussed  below under  "Recent  Developments,"  as of June 30,
1996, PRSI succeeded to the residential  property  services  business of Paragon
Group Property Services, Inc. ("PGPSI").

Business Objectives and Strategy

     The Company's  business  objectives  are to generate  stable and increasing
cash flow and asset value  through (i) continued  improvements  in the operating
margins of its existing  portfolio of properties  through  rental rate increases
and improved operating efficiencies, (ii) active pursuit of attractive apartment
development and acquisition  opportunities,  (iii) continued focus on delivering
profitable  property service  operating results from existing and new management
and  other  property  service   assignments,   (iv)  strategic   existing  asset
disposition  and capital  redeployment,  and (v) continued  utilization of joint
venture  opportunities to broaden the Company's investment capability in its key
markets and to enhance yield generated on the Company's invested capital.

     The Company  believes  that its current  portfolio  of  properties  and new
acquisition  and development  properties  should provide the Company with stable
and increasing cash flow and asset value.  In addition,  the Company will pursue
new property service  assignments that it believes will be profitable,  although
it recognizes that the property  service  business  continues to be increasingly
competitive.  The  knowledge  and  experience  that  Paragon  has gained and the
relationships  that it has  cultivated  through  the  development,  acquisition,
ownership and management of multifamily residential communities over the past 29
years,  coupled with its  presence in numerous  real estate  markets  across the
country through management and/or ownership of properties,  provides the Company
with a solid foundation from which to achieve long-term growth. The Company will
seek to realize  this growth by  continuing  to improve the  performance  of the
existing  portfolio of properties and by expanding its asset  portfolio  through
development or acquisition of additional  multifamily  residential properties in
its key markets in the Southwest, Midwest, Carolina and Florida.

Business Segments

     The Company's two primary  business  segments are property  operations  and
property service  operations.  Results of operations and information  related to
the Properties and the property services businesses conducted by an affiliate of
the Company  and its  predecessor  for 1996,  1995 and 1994 are shown in Note 13
"Segment  Operations" in the Consolidated and Combined Financial  Statements and
Notes  thereto  included  elsewhere  herein  in order  to  provide  a basis  for
analyzing and comparing operating performance.

     PROPERTY  OPERATIONS.   The  Company's  property  operations  generate  the
majority of the  Company's  revenue and  substantially  all of the Company's net
income. In 1997, the Company will continue its practice of seeking opportunities
to improve  operating  margins at the Properties and to implement more effective
and consistent marketing of its apartment communities to potential residents. In
addition,  the Company expects to identify certain residential properties in the
portfolio  that may present  opportunities  for enhanced  revenue growth through
product  repositioning.  The Company believes select properties in the portfolio
that possess  certain  market,  submarket and  locational  qualities can achieve
improved  occupancies and/or greater than market rental rate increases through a
product repositioning program.

     PROPERTY  SERVICES  BUSINESS.  PRSI performs a variety of property  service
tasks for the Company,  affiliate  property owners and third-party  owners.  The
Company  believes  that  the  property   services   business   continues  to  be
increasingly  competitive  and,  as a  result,  operating  results  from  PRSI's
operations could be adversely  impacted.  In 1997, PRSI will continue to explore
ways to improve  operating  results by  focusing  new  business  efforts  toward
longer-term  property owners.  The Company and PRSI intend to analyze additional
methods of achieving  improved  returns from the  Company's  investment  in this
business segment.

                                       3
<PAGE>

Recent Developments and Activities

     PROPOSED MERGER. On December 16, 1996 the Company executed an Agreement and
Plan of Merger (the  "Agreement")  with Camden Property Trust  ("Camden")  which
provides for, among other things,  the merger of the Company into a wholly-owned
subsidiary of Camden through a tax-free  exchange of each share of the Company's
common stock for .64 common  shares of  beneficial  interest of Camden,  whereby
stockholders of the Company will become shareholders of Camden.

     The  Company has the option to  terminate  the  Agreement  in the event the
average  closing price of Camden common shares  ("Average  Closing Price") falls
below $25.67 during a specified pricing period prior to a special meeting of the
stockholders  of the Company.  In the event the Company  elects to terminate the
Agreement, Camden has the option of adjusting the exchange ratio of .64 to equal
a number obtained by dividing $16.43 by the Average Closing Price.

     An affirmative  vote of holders of two-thirds of the outstanding  shares of
the  Company's  common  stock is required to approve  the  Agreement.  A special
meeting of the Company's stockholders is scheduled for April 15, 1997 to vote on
the Agreement.

     SALE OF COMMERCIAL  PROPERTY  SERVICES  BUSINESS.  As of June 30, 1996, the
Company sold its economic interest in the commercial  property services business
which previously had been conducted by PGPSI ("Paragon  Commercial") to Insignia
Financial  Group Inc.  for initial cash  consideration  of  approximately  $18.2
million.  The acquisition price may be adjusted upward or downward  depending on
the future revenue performance of Paragon Commercial.  This transaction does not
include the sale of any  residential  or commercial  real estate assets owned by
the Company.  PRSI will continue the  Company's  residential  property  services
business and will provide all residential  property service functions previously
provided  by  PGPSI,  including  property  management,   leasing,   development,
acquisition and disposition of its owned residential  communities as well as for
affiliated and third party residential owners.

     PARADIM JOINT VENTURE.  On April 1, 1996, the Company  entered into a joint
venture ("Paradim") with Careit Investments Limited Partnership  ("Careit"),  an
affiliate  of Caisse de depot et placement  du Quebec,  to acquire,  develop and
operate  selected  multifamily  residential  properties  in markets in which the
Company  operates.  The Company and Careit each have  committed  to invest up to
$22.5 million,  primarily through a newly formed Maryland corporation,  Paradim,
Inc.,  which intends to qualify as a REIT for Federal income tax purposes.  Each
investment by Paradim,  Inc. is to be made through  separate  limited  liability
companies  or  limited  partnerships  in  which  Paradim,  Inc.  will own an 89%
interest as the managing  member or general  partner,  the Company will own a 1%
interest and a number of private investors will own the remaining interests.  In
connection with Paradim, Inc.'s initial capitalization,  the Company effectively
contributed its interest in three  properties  (Overlook,  formerly known as The
Phoenix,  a  220-unit  multifamily  residential  complex  in  Charlotte,   North
Carolina;  Highpoint,  a  708-unit  multifamily  residential  complex in Dallas,
Texas;  and  Brassfield  Park,  a 336-unit  multifamily  residential  complex in
Greensboro,  North  Carolina  which was under  development  in 1996 and recently
completed  in March  1997) and Careit  contributed  $7.93  million  in cash.  At
formation,  the Company also  received a  distribution  of  approximately  $6.62
million, which was used to repay existing indebtedness under the line of credit.
The Company  recorded the initial  contribution of these properties at their net
carrying  value on April 1, 1996,  which was  approximately  $14.73 million (net
book  value of  $41.84  million  subject  to  existing  indebtedness  of  $27.11
million).  The Company's investment,  which includes a direct 1% interest in two
limited liability  companies and one limited  partnership and an approximate 43%
indirect  interest in such  entities  through  its  ownership  in Paradim,  Inc.
(collectively,  approximately  44%),  is being  accounted  for under the  equity
method. As of December 31, 1996, the Company's  aggregate  investment in Paradim
was approximately $7.95 million.

                                       4
<PAGE>

     PROPERTY  DEVELOPMENT.  During 1996, the Company completed  construction of
three  multifamily  residential  properties  containing a total of 824 apartment
units.  At December 31,  1996,  an  additional  856  apartment  units were under
construction which are scheduled for completion in the first and second quarters
of 1997,  including  336 units owned by Paradim  which were  completed  in March
1997. In addition,  during 1996, the Company,  through PGPSI and PRSI, developed
and sold an office/warehouse development located in suburban Dallas, Texas.

     As of December 31, 1996, the Company owns a 12.6 acre tract of land located
in Orlando,  Florida held for future  development  and is a party to a long term
ground lease on 27.47 acres in Louisville, Kentucky which may be used to develop
additional apartment units in the future.

     PROPERTY ACQUISITIONS. In addition to the development activity noted above,
the Company acquired two multifamily residential operating properties in 1996.

     On November 8, 1996, the Company  purchased two North Carolina  multifamily
residential  communities (the 240 unit Habersham Pointe apartments in Charlotte,
North  Carolina  and the 216 unit River Oaks  apartments  in  Greensboro,  North
Carolina)  from a single  seller for a total  purchase  price of $20.9  million,
including the assumption of mortgage indebtedness in the amount of $6.36 million
collateralized by the River Oaks apartments. Both properties are well leased and
in good physical condition. On a combined basis, the properties are projected to
generate an unleveraged yield for 1997 in excess of 9.5%.

     PROPERTY  DISPOSITIONS.  As a result of the sale of its commercial property
services  business  in June  1996,  the  Company  sold  its  three  wholly-owned
commercial properties in the fourth quarter of 1996.

     In addition, in an effort to maximize the long term growth potential of the
portfolio  through  redeployment  of capital,  the Company sold two  multifamily
residential  properties  during  the  fourth  quarter  of 1996 and  three of the
Residential  Properties  during  January 1997.  Management  intends to regularly
evaluate  additional  dispositions which will create geographic  efficiencies or
improve operating results.

     FINANCING  ACTIVITY.  During the year the Company  increased its total debt
from $293.8 million at December 31, 1995 to $297.3 million at December 31, 1996.
The Company borrowed additional fixed-rate term debt of $7.4 million in November
1996  collateralized by the 278 unit Schooner Bay apartments in Tampa,  Florida.
This  borrowing  was used to fund a portion  of the  purchase  of the  Habersham
Pointe and River Oaks  apartments  in  November  1996.  In  connection  with the
purchase of the River Oaks apartments, the Company also assumed $6.36 million of
mortgage indebtedness  collateralized by the property. In July 1996, the Company
renewed its line of credit facility.  Under the terms of the new agreement,  the
Company may borrow up to $85  million  including  up to $50  million  related to
development activities.  The line of credit matures in 1998, but may be extended
through July 1999 at the Company's  option.  At December 31, 1996, $42.7 million
of debt is represented  by advances  under the Company's  line of credit.  These
advances are in two contracts at fixed rates.

                                       5
<PAGE>


Item 2. PROPERTIES

Residential Properties

     At  December  31,  1996,  fifty-seven  of the  Properties  are  Residential
Properties,  55 of  which  the  Company  considers  to have  reached  stabilized
occupancy.  A residential property is considered by the Company to have achieved
stabilized  occupancy on the earlier to occur of (i)  attainment of 93% physical
occupancy on the first day of any month or (ii) one year after the completion of
construction.  The Residential Properties,  which represented 96.7% of the total
Property revenue for the year ended December 31, 1996, contain a total of 15,954
apartment units. Twenty-one of the Residential Properties, containing a total of
6,007 apartment  units,  are located in Florida,  13 (3,450 apartment units) are
located in  Missouri,  eight (2,167  apartment  units) in North  Carolina,  nine
(2,836 apartment  units) in Texas,  five (1,142 apartment units) in Kentucky and
one (352 apartment units) in South Carolina. The Residential Properties range in
size from 112 to 708 apartment  units.  Forty-two of the Residential  Properties
were  developed  by Paragon  and are now  managed by the  Company  while 14 were
acquired  from third  parties and one from an affiliate and have been managed by
the Company or Paragon for an average of 9 years.  The  weighted  average age of
the Residential  Properties is approximately 12 years and the average  apartment
unit size is  approximately  787 square  feet.  For the year ended  December 31,
1996, the weighted average  occupancy of the stabilized  Residential  Properties
was 92.6% and the weighted  average  monthly  rental rate per apartment unit was
approximately $535.

     Three additional residential properties were under construction at December
31, 1996 with  completion  estimated for the first and second  quarters of 1997.
This includes the 336 unit Brassfield  Park apartments  owned by Paradim located
in  Greensboro,  North Carolina which was completed in March 1997. The other two
properties  are located in North  Carolina and Missouri and will  contain,  when
completed,  232 and 288 units,  respectively.  The Company also owns a 12.6 acre
tract of land located in Florida for which 320 multifamily residential units are
planned which it acquired in December 1996 for future development.  In addition,
the Company has also entered into a non-recourse  ground lease,  which commenced
on  October  24,  1996,  related to  approximately  27.47  acres in  Louisville,
Kentucky for  potential  development  of an additional  multifamily  residential
community   in   1997.   "See   Item   1:   BUSINESS--Recent   Development   and
Activities--Property Development."

                                       6
<PAGE>

     The  following  table  sets  forth  certain  information  about each of the
residential Properties that were owned by the Company as of December 31, 1996:
<TABLE>
<CAPTION>


                                                                                                              Twelve Months Ended
                                                                                                               December 31, 1996
                                                                                  Average                       Average Monthly
                                                          Year                     Unit          1996            Rental Revenue
                                Percent      Number      Placed      Net Rental    Size         Average          --------------
     Property and Location       Owned      of Units   in Service   Area (Sq Ft)  (Sq Ft)    Occupancy (1)   Per Unit    Per Sq Ft
     ---------------------       -----      --------   ----------   ------------  -------    -------------   --------    ---------
<S>                              <C>        <C>         <C>          <C>          <C>        <C>             <C>         <C>
Stabilized Residential Properties

   FLORIDA
      Orlando
        Grove                      100%        232         1973         157,116       677         96.2%        $  434      $ 0.64
        Landtree                    75% (4)    220         1983         164,484       748         96.0%           477        0.64
        The Reserve                100%        146         1991         130,368       893         98.0%           599        0.67
        Summerplace I & II          90% (4)    344         1984         260,520       757         92.1%           451        0.60
        Summerplace III             75% (4)    208         1986         152,022       731         89.2%           456        0.62
        Vineyard                   100%        380         1990         303,148       798         96.0%           542        0.68

      St. Petersburg
        4th Street Station I        75% (4)    384         1982         278,118       724         85.9%           466        0.64
        4th Street Station II       75% (4)    304         1983         222,702       733         85.2%           469        0.64

      Tampa
        Broadmoor                  100%        384         1986         250,032       651         89.9%           425        0.65
        Chasewood                  100%        247         1985         173,889       704         92.8%           458        0.65
        Coco West I                 75% (4)    208         1983         149,838       720         89.2%           434        0.60
        Coco West II                75% (4)    276         1985         199,668       723         89.4%           432        0.60
        Dolphin Pointe             100%        416         1989         315,406       758         93.4%           512        0.68
        Greenhouse                  90% (4)    324         1982         224,958       694         93.2%           415        0.60
        Heron Pointe (3)           100%        276         1996         259,872       942         92.8%           666        0.71
        Lookout Pointe             100%        416         1987         306,528       737         93.2%           496        0.67
        Parsons Run                 75% (4)    228         1986         166,056       728         94.6%           478        0.66
        Schooner Bay               100%        278         1986         202,304       728         94.4%           535        0.74
        Summerset Bend              75% (4)    272         1984         197,982       728         93.9%           465        0.64

      Winterhaven
        Citrus Lakes I             100%        192         1976         139,698       728         90.2%           390        0.54

   KENTUCKY
      Louisville
        Copper Creek               100%        224         1987         164,024       732         93.7%           576        0.79
        Deerfield                  100%        400       1987/90        298,336       746         92.3%           563        0.75
        Glenridge                  100%        138         1990         126,340       916         93.5%           695        0.76
        Post Oak                   100%        126         1981         106,780       847         92.4%           526        0.62
        Sundance                   100%        254         1975         173,130       682         95.4%           468        0.69

   MISSOURI
      Kansas City
        Camden Passage             100%        308         1989         238,324       774         93.8%           645        0.83

      St. Charles
        San Miguel (6)             100%        251         1970         214,430       854         87.2%           494        0.58

      St. Louis
        Knollwood I                100%        308         1981         222,648       723         93.6%           470        0.65
        Knollwood II               100%        300         1985         216,036       720         95.6%           485        0.67
        Pear Tree                  100%        134         1967          96,892       723         95.6%           459        0.64
        Spanish Trace              100%        372         1972         430,628     1,158         94.2%           611        0.53
        Sunswept                   100%        334         1971         268,842       805         93.3%           463        0.58
        Tempo                      100%        304         1975         205,381       676         92.9%           454        0.67
        The Cove                   100%        276         1990         228,480       828         96.3%           829        1.00
        The Knolls                 100%        112         1973         167,270     1,493         96.7%           736        0.49
        Westchase Park             100%        160         1986         151,124       945         93.3%           788        0.83
        Westgate I                 100%        189         1973         220,967     1,169         85.9%           746        0.64
        Westgate II                100%        402         1980         338,659       842         85.8%           606        0.72

</TABLE>


                                       7
<PAGE>
<TABLE>
<CAPTION>

                                                                                                               Twelve Months Ended
                                                                                                                December 31, 1996
                                                                                   Average                       Average Monthly
                                                        Year                        Unit         1996             Rental Revenue
                               Percent      Number     Placed      Net Rental       Size        Average           --------------
    Property and Location       Owned      of Units   in Service   Area (Sq Ft)    (Sq Ft)    Occupancy (1)   Per Unit    Per Sq Ft
    ---------------------       -----      --------   ----------   ------------    -------    -------------   --------    ---------
<S>                            <C>         <C>        <C>          <C>             <C>        <C>             <C>         <C>
 NORTH CAROLINA
    Charlotte
      Copper Creek               100%        208         1989         146,248       703           92.8%           531        0.75
      Eastchase                   70% (4)    220         1986         153,560       698           95.1%           514        0.74
      Falls                      100%        352         1984         248,391       706           95.4%           556        0.79
      Habersham (2)              100%        240         1986         185,440       773           94.6%           641        0.83
      Pinehurst                  100%        407         1967         466,865     1,147           92.5%           653        0.57
      The Overlook (5)            44%        220         1985         165,790       754           96.7%           571        0.76

    Greensboro
     Glen                        100%        304         1980         201,112       662           94.0%           499        0.75
     River Oaks (2)              100%        216         1985         171,680       795           86.6%           658        0.83

 SOUTH CAROLINA
    Charleston
     Westchase (6)                75% (4)    352         1986         248,391       706           96.7%           469        0.66

 TEXAS
    Dallas
     Brookfield (6)              100%        232         1986         165,544       714           95.3%           448        0.63
     Chesapeake                  100%        128         1982         116,708       912           91.4%           639        0.70
     Highpoint (5)                44%        708         1985         591,428       835           89.9%           553        0.66
     Nob Hill                    100%        486         1986         311,940       642           91.1%           449        0.70
     Stone Creek                 100%        240         1995         199,521       831           89.1%           720        0.87

    Irving
     Fairlane                     75% (4)    320         1980         213,200       666           97.0%           434        0.65
     Los Rios                    100%        286         1992         220,660       772           93.1%           739        0.96

    Plano
     Highland Trace              100%        160         1985         130,531       816           95.2%           587        0.72
                                             ---                  -----------       ---           -----     ---------    --------

 TOTAL/WEIGHTED
 AVERAGE                                  15,406                   12,060,009       783           92.6%     $     535    $   0.68


 Development Properties (10)

 FLORIDA
    Orlando
      Renaissance Pointe (7)     100%        272         1996         255,604       940

 MISSOURI
    Kansas City
      Camden Passage II          100%        288                      257,736       895

 NORTH CAROLINA
    Charlotte
      The Park                   100%        232                      199,388       859

    Greensboro
     Brassfield Park (5) (9)      44%        336         1997         298,604       889

 TEXAS
    Dallas
     Stone Gate (8)              100%        276         1996         240,312       871
                                             ---                  -----------       ---

 TOTAL/WEIGHTED
 AVERAGE                                    1,404                   1,251,644       891

</TABLE>

                                       8
<PAGE>
     ------------------

     (1)  Weighted  Average   Occupancy  is  calculated  by  taking  the  actual
          apartment  units occupied at the end of each month the Property was in
          operation  during the year,  divided by the total  number of apartment
          units in  operation  at the end of such  month,  and  averaging  those
          amounts.

     (2)  The Company  acquired these  Properties in the fourth quarter of 1996.
          Therefore,  the weighted average occupancy and weighted average rental
          rate per  apartment  unit are  based on  information  from the date of
          acquisition only.

     (3)  The Company  completed  this  property  in the first  quarter of 1996.
          Therefore,  the weighted average occupancy and weighted average rental
          rate per  apartment  unit are  based on  information  from the date of
          completion only.

     (4)  The Company  (through the Operating  Partnership)  is the  controlling
          partner of the  partnership  that owns this Property and generally has
          the  right to  receive a  preferred  return  on its  interest  that is
          expected  to provide the Company  with  substantially  all of the cash
          flow  distributed  with respect to the  Property  for the  foreseeable
          future. The percentage  disclosed  generally  represents the Company's
          interest in cash flow and sales and  refinancing  proceeds in addition
          to and payable  after the  Company's  preference  and certain  partner
          preferences.

     (5)  These properties are owned by Paradim.

     (6)  These properties were sold in January 1997.

     (7)  Property achieved  stabilization on January 1, 1997 at an occupancy of
          93.0%.

     (8)  Property is in the initial lease-up phase.  Construction was completed
          in August 1996.

     (9)  Construction of this property was completed in March 1997.

     (10) The development  properties listed do not include a 12.6 acre tract of
          land in Orlando,  Florida which the Company  acquired in December 1996
          for future development.  A 320 unit multifamily  residential community
          is planned  for the site  which,  when  completed,  will be the second
          phase of the completed 272 unit Renaissance Pointe apartments.


     The  following  table  sets  forth the total  number  of  apartment  units,
weighted  average  occupancy and weighted average rental rate per apartment unit
for each of the last five years for the Residential Properties as a whole:

<TABLE>
<CAPTION>
                                                      Number of         Weighted          Weighted Average
             Year Ended             Number            Apartment          Average             Rental Rate
            December 31,      of Properties (1)         Units           Occupancy        Per Apartment Unit
            ------------      -----------------         -----           ---------        ------------------
            <S>               <C>                      <C>               <C>             <C>
                1996                  55                15,406            92.6%                $535
                1995                  53                14,818            93.6%                 512
                1994                  49                13,240            93.6%                 488
                1993                  48                12,833            93.8%                 474
                1992                  47                12,547            92.4%                 461
</TABLE>
---------------------------

(1)  Represents the number of Residential  Properties stabilized as of January 1
     of the applicable year. A Residential Property is considered by the Company
     to have  achieved  stabilized  occupancy  on the  earlier  to  occur of (i)
     attainment of 93% physical  occupancy on the first day of any month or (ii)
     one year after the  completion of  construction.  Information  for the year
     ended  December  31,  1996  reflects  the  acquisition  of  River  Oaks and
     Habersham Pointe, the stabilization of Stone Creek and Heron Pointe and the
     sale of Turtle Creek I and Turtle Creek II.  Information for the year ended
     December 31, 1995 includes the acquisition of Schooner Bay,  Spanish Trace,
     The Overlook and  Highpoint.  Information  for the year ended  December 31,
     1994 includes the acquisition of Pinehurst. Information for a year in which
     properties  are acquired or become  stabilized is included from the date of
     acquisition or  stabilization  through year end.  Information for a year in
     which  properties  are sold is  excluded.  Information  for the years ended
     December 31, 1993 and 1992 do not include  information  for the  properties
     listed in this  footnote  which were  acquired  or became  stabilized  in a
     subsequent year.
                                       9
<PAGE>


Commercial Properties

     Three  of  the  Properties  are  Commercial   Properties.   The  Commercial
Properties  consist of three office  buildings  (one in which the Company owns a
20% interest and two in which the Company owns a 10% interest containing a total
of  approximately  724,470 square feet of office space).  One office building is
located in St. Louis,  Missouri and two in suburban Washington,  D.C. One of the
three Commercial Properties was developed by Paragon and the Company acquired an
ownership  interest in the remaining two properties in April, 1995. All of these
properties  were  managed by PGPSI  until the sale of the  Company's  commercial
property services operations as of June 30, 1996. See "Item 1: BUSINESS - Recent
Developments"  above.  The  weighted  average age of the  Commercial  Properties
(adjusted to reflect the Company's  ownership  interests) is approximately  11.4
years.  As of December 31, 1996,  the  Commercial  Properties  were 96.1% leased
(adjusted to reflect the Company's ownership interests).

     As a result of the sale of its commercial  property services business,  the
Company disposed of its three wholly-owned  commercial  properties in the fourth
quarter of 1996. The properties  sold included one office  building (The Paragon
in St. Louis,  Missouri containing 102,486 square feet) and two shopping centers
(Westgate  Centre in St.  Louis,  Missouri  containing  58,935  square  feet and
Southwood Mall in Bradenton, Florida containing 113,949 square feet).

                                       10
<PAGE>

     The  following  table  sets  forth  certain  information  about each of the
Commercial Properties that was owned by the Company as of December 31, 1996:

<TABLE>
<CAPTION>
                                                                                                 As of December 31, 1996
                                                                                         -------------------------------------------
                                                                                                              Average
                                                               Net Rentable                                     Base
                                                                Area/Gross                                    Rent Per       Net
                                       Ownership     Year      Leasable Area   Percent         Annual          Leased      Effective
   Property            Location        Interest    Completed   (Square Feet)  Leased (1)    Base Rent (2)    Sq. Ft. (3)    Rent(4)
   --------            --------        --------    ---------   ------------   ----------    -------------    ----------     -------
<S>                   <C>                <C>         <C>        <C>            <C>           <C>              <C>           <C>
Office Properties:
Gateway (5)           St. Louis, MO       20%        1985         401,625       95.9%        $1,311,833        $17.03       $9.48
Fair Oaks (5)         Fairfax, VA         10%        1986         135,808      100.0%           217,929         16.05        6.90
Shady Grove (5)       Rockville, MD       10%        1988         187,037       93.8%           331,733         18.92        9.93
                                                                  -------      -----         ----------       -------        ----

Office (3 Properties) (6)                                         724,470       96.1%        $1,861,495        $17.23       $9.24
                                                                  =======      =====         ==========       =======       =====
</TABLE>

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

(1)  Percent leased represents square footage leased at the end of the year.

(2)  Annual base rent is calculated  using base rents (which are the gross rents
     payable by tenants,  before  taking into  account any tenant  improvements,
     leasing concessions and expense stops) at December 31, 1996.

(3)  Average  base rent per leased  square foot is equal to the annual base rent
     divided by the total leased square feet.

(4)  For  presentation  of net  effective  rent for leases  entered into for the
     three years ended December 31, 1996, see the table on page 13.

(5)  The Company owns a 20% interest in Gateway, a 10% interest in Fair Oaks and
     a 10%  interest  in Shady  Grove.  Information  for these  properties  with
     respect to the net rentable  area,  percent  leased,  average base rent per
     leased  square  foot and net  effective  rent is  presented  for the entire
     property  and  information  with  respect to annual base rent  reflects the
     partial ownership interests.

(6)  Weighted  average,  taking into account the Company's  partial ownership in
     Gateway, Fair Oaks and Shady Grove.


                                       11
<PAGE>


     The  following  table sets forth the net  rentable  area or gross  leasable
area, as applicable, percent leased and average base rent per leased square foot
as of the end of each of the  last  five  years  for the  Commercial  Properties
(including three wholly-owned  commercial  properties sold by the Company in the
fourth quarter of 1996):
<TABLE>
<CAPTION>
                                                                                     Average
                            Net Rentable                                          Base Rent Per
                             Area/Gross          Percent Leased (2)          Leased Square Foot (4)
     Year Ended            Leasable Area        ---------------------          ----------------------
     December 31,         (Square Feet)(1)      Office (3)     Retail          Office     Retail
     ------------         ----------------      ----------     ------          ------     ------
<S>                       <C>                   <C>           <C>              <C>          <C>
         1996                   724,470            96.1%         N/A           $17.23        N/A
         1995                   999,840            96.3%        90.8%           16.32       $9.17
         1994                   677,026            95.5%        88.3%           15.47        9.38
         1993                   677,026            95.5%        91.9%           15.47        9.86
         1992                   677,026            90.9%        93.6%           16.96        8.97
</TABLE>

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

(1)  As space is re-leased to new tenants, certain immaterial adjustments to net
     rentable  area or gross  leasable  area may occur as a result of  build-out
     adjustments  for  tenants.  The  total  shown  is used by the  Company  for
     consistency.

(2)  Percent leased represents square footage leased at the end of the year.

(3)  Weighted  average  percent  leased,   considering  the  Company's   partial
     ownership interests in Gateway, Fair Oaks and Shady Grove.

(4)  Average base rent per leased square foot is calculated  using year-end base
     rent figures for the respective periods.


     The  following  table sets forth a schedule  of the lease  expirations  for
leases in place as of December 31, 1996 for the Commercial Properties:

<TABLE>
<CAPTION>
                                               Net Rentable                                        Percent of Total
      Year of           Number of               Area/Gross                Annualized Base           Annualized Base
       Lease          Tenants with             Leasing Area                   Rent of                   Rent of
     Expiration      Expiring Leases        (Square Feet) (1)         Expiring Leases (1)(2)        Expiring Leases
     ----------      ---------------        -----------------         ----------------------        ---------------
       <S>               <C>                  <C>                      <C>                           <C>
          1997              12                  43,994                        68,917                     6.3%
          1998               9                 123,648                       263,170                    17.8%
          1999              16                  85,705                       206,650                    12.3%
          2000              20                 159,385                       390,905                    22.9%
          2001              12                 139,049                       542,360                    20.0%
          2002               7                 104,976                       272,025                    15.1%
          2003               3                  26,790                        83,556                     3.8%
          2004               2                   3,836                         7,224                      .5%
          2005               1                   4,160                         8,320                      .6%
          2006               1                   4,834                        18,368                      .7%
          2007+              0                       -                             -                       -
                           ---               ---------                     ---------                   -----
                            83                 696,377                     1,861,495                   100.0%
                           ===                 =======                     =========                   =====
</TABLE>

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

(1)  Excludes  28,093  square feet of space not leased as of December  31, 1996.
     Net rentable  area of expiring  leases  includes 100% of leases at Gateway,
     Fair Oaks and  Shady  Grove in which the  Company  owns a 20%,  10% and 10%
     interest,  respectively.  Annualized base rent includes 20%, 10% and 10% of
     rent  attributable  to  leases  at  Gateway,  Fair  Oaks and  Shady  Grove,
     respectively, to reflect the Company's partial ownership interest.

(2)  Annualized  base rent is  calculated  using base rents as of  December  31,
     1996.


                                       12
<PAGE>


     The following table sets forth certain additional leasing  information with
respect to all new leases for  permanent  space  entered into at the  Commercial
Properties owned by the company at December 31, 1996, for the last three years:


<TABLE>
<CAPTION>
                                                                   Office Properties
                                                                Year Ended December 31,
                                                     ---------------------------------------------
                                                        1996          1995 (2)         1994 (2)
                                                        ----          --------         --------
<S>                                                   <C>             <C>               <C>
New Leasing Activity (per square foot):
Square Feet Leased                                    $82,355         $ 118,527         $ 28,941
Number of Leases                                           19                21                7
Weighted Average Term of Lease (years)                    4.4               4.5              4.9

Base Rent                                             $ 16.33         $   18.22         $  13.44
Expense Stop                                            (6.29)            (6.13)           (4.35)
                                                       ------         ---------         --------

Net Rent                                              $ 10.04         $   12.09         $   9.09
Tenant Improvements/Commissions (1)                     (3.22)            (2.08)           (2.14)
                                                      -------         ---------         --------

Net Effective Rent                                    $  6.82         $   10.01         $   6.95
                                                      =======         =========         ========
</TABLE>

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

(1)  Tenant   Improvements/Commissions   calculated  as  total  cost  of  tenant
     improvements  and  leasing  commissions,  divided  by square  feet  leased,
     divided by weighted average lease term.

(2)  1995 and 1994 only include properties owned as of December 31, 1996.

                                       13
<PAGE>

Property Services

     Prior to the sale as of June 30, 1996 of the Company's  commercial property
services  operations  referred  to in "Item 1:  BUSINESS - Recent  Developments"
above,  PGPSI  provided a wide array of  property  services  to the  Properties,
affiliates of PGPSI and the Company, and third-party clients, including property
management,  marketing,  leasing, asset management,  construction management and
disposition  services.  As of December  31, 1995,  PGPSI  managed a total of 274
income-producing  properties  (including  61  properties  owned by the  Company)
located in 20 states, consisting of 195 commercial properties and 79 multifamily
residential communities.  This management portfolio, which totaled approximately
26.4 million square feet of commercial  space and 22,000  apartment  units as of
December 31,  1995,  includes (i) 61  properties  owned by the Company,  (ii) 64
additional  properties  owned by  affiliates  of the Company  and its  executive
officers and (iii) 149 properties owned by unaffiliated third-party owners.

     PRSI has continued the residential  property services  operations of PGPSI,
including its focus on maximizing  the  performance  of each property  under its
management  through  proactive  management  that focuses on  maintaining  tenant
satisfaction to reduce tenant rollover,  aggressive reletting of apartment units
and  utilization  of  operating  efficiencies  as a result of the size of PRSI's
management  operations.  In addition to providing the Company with an additional
source of cash flow, providing property services to clients through PRSI enables
the Company to achieve  economies of scale in its  management  operations and to
obtain in-depth  knowledge about existing and new markets and submarkets,  which
provides the Company  with greater  information  about  future  development  and
acquisition opportunities.  As of December 31, 1996, PRSI managed 77 multifamily
residential  communities  (including the Residential  Properties) located across
the United States containing approximately 21,696 apartment units.

Operating Information

     For  information  relating to the Company's net income and other aspects of
its  results  of  operations,   see  the  Consolidated  and  Combined  Financial
Statements  and Notes  thereto  and  Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations included elsewhere herein.


                                       14
<PAGE>

Mortgage Financing

     The  Properties  are  subject  to  existing  mortgage  indebtedness  in  an
aggregate principal amount as of December 31, 1996 of $297.3 million, carrying a
weighted  average  interest rate of 7.7% and a weighted  average maturity of 5.8
years (assuming loans callable before maturity are called as early as possible).
The existing  mortgage  indebtedness on the Properties is set forth in the table
below:

<TABLE>
<CAPTION>
                                                                                                       Estimated
                                              Principal          Annual                                Balance
                              Interest      Balance (15)         Debt               Maturity            Due at
          Property              Rate      (as of 12/31/96)      Service             Date (1)           Maturity
          --------              ----      ----------------      -------             --------           --------
<S>                            <C>         <C>               <C>                <C>                 <C>
Pool A Properties (2)           8.36%       $61,710,000      $5,158,956         July 15, 2001        $61,700,000

Landtree                        8.52%         3,780,000         322,056         July 15, 1999          3,780,000
Summerplace I & II              8.52%         6,330,000         539,316         July 15, 1999          6,330,000
Summerplace III                 8.52%         3,720,000         316,944         July 15, 1999          3,720,000
The Vineyard                    7.30%        10,500,000         766,500         Jan. 15, 1999         10,500,000
4th Street Station I            8.52%         5,120,000         436,224         July 15, 1999          5,120,000
4th Street Station II           8.52%         5,070,000         431,964         July 15, 1999          5,070,000
CocoWest I                      8.52%         2,670,000         227,484         July 15, 1999          2,670,000
CocoWest II                     8.52%         3,780,000         322,056         July 15, 1999          3,780,000
Greenhouse                      8.52%         3,580,000         305,016         July 15, 1999          3,580,000
Parsons Run                     8.52%         3,840,000         327,168         July 15, 1999          3,840,000
Summerset Bend                  8.52%         4,500,000         383,400         July 15, 1999          4,500,000
Deerfield                       5.75%         8,200,000         471,500          June 1, 2003 (3)      8,200,000
Deerfield                       7.00%         1,685,833         224,150 (4)      June 1, 2003 (5)        820,000(6)
Copper Creek (KY)               5.88%         8,900,000         523,320          June 1, 2003 (7)      8,900,000
Copper Creek (KY)               6.00%           230,000         125,342 (4)      Dec. 1, 1998 (8)              0
Glenridge                       7.50%         2,984,231         223,817         Nov. 15, 1998          2,984,231
Glenridge                       7.50%           710,530          53,290         Nov. 15, 1998            710,530
Camden Passage                  7.50% (9)     7,350,373         551,278       October 1, 2003          6,572,145
Eastchase                       7.50%         2,948,521         221,139          June 7, 1998 (10)     2,948,521
Glen                            7.50% (11)    6,571,571         546,904          Jan. 1, 2000          6,371,817
Westchase                       8.52%         4,440,000         378,288         July 15, 1999          4,440,000
Fairlane                        8.50%         3,461,542         359,856        August 1, 1999          3,272,709
Nationwide-North  Carolina
  Property (12)                 7.29%        14,000,000       1,020,600         Dec. 10, 2005         12,225,503
Nationwide-Texas
  Properties (12)               7.29%        22,073,000       1,609,122         Dec. 10, 2005         19,275,252
Nationwide-Missouri
  Properties (12)               7.29%        32,927,000       2,400,378         Dec. 10, 2005         28,753,509
River Oaks                      8.44%         6,350,443         611,749 (13)    Oct. 15, 1999          6,116,824
Spanish Trace                   7.35%         9,763,629         795,275         Sept. 1, 2028                  0
Schooner Bay                    7.70%         7,391,832         667,820 (13)    Nov. 10, 2003          6,508,363
PGPSI Equipment Loans           9.50%             3,151           2,515         April 1, 1998                  0
                                         --------------    ------------                             ------------
   Subtotal:                               $254,591,656     $20,323,427                             $232,689,404

Line of Credit (14)            Various       42,700,000       3,265,210         July 27, 1998         42,700,000
                                         --------------   --------------                           -------------
   Total:                                  $297,291,656     $23,588,637                             $275,389,404
                                           ============     ===========                             ============
</TABLE>

                                       15
<PAGE>

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

(1)  All of the  mortgages  can be  prepaid  at any  time,  in whole or in part,
     subject to prepayment penalties typically calculated on a yield maintenance
     basis, except for the mortgages  encumbering Copper Creek (KY),  Deerfield,
     Glen and Fairlane,  which are closed to prepayment  for varying  lengths of
     time.

(2)  The "Pool A  Properties"  are Grove,  The  Reserve,  Broadmoor,  Chasewood,
     Dolphin  Pointe,  Lookout  Pointe,  Post  Oak,  Sundance,  Westchase  Park,
     Westgate I, Westgate II, Copper Creek (NC), Falls and Chesapeake.  The loan
     is secured by the Pool A Properties on a cross-collateralized basis.

(3)  Information  presented  relates to the Series A bonds.  The  maturity  date
     noted represents the date on which credit enhancement on the Series A bonds
     expires. The stated maturity date for the Series A bonds is June 1, 2023.

(4)  Information presented relates to the Series B bonds which amortize over the
     life of the loan.

(5)  Information  presented  relates to the Series B bonds.  The  maturity  date
     noted represents the date on which credit enhancement on the Series B bonds
     expires. The stated maturity date for the Series B bonds is June 1, 2008.

(6)  Information presented relates to the Series B bonds which amortize over the
     life of the loan. The balance reflects the principal  balance which will be
     due at the date on which the credit enhancement on the bonds expires.

(7)  Information  presented  relates to the Series A bonds.  The  maturity  date
     noted represents the date on which credit enhancement on the Series A bonds
     expires. The stated maturity date for the Series A bonds is June 1, 2023.

(8)  Information  presented  relates to the  Series B bonds.  The Series B bonds
     self-liquidate,  with the final  payment of  principal  due on  December 1,
     1998.

(9)  Represents  the  rate in  effect  pursuant  to an  interest  rate  buy down
     agreement  in effect  through  July  1999,  after  which time the rate will
     increase to 8.07%.

(10) The  lender of the loan  secured by this  Property  has a right to call the
     loan,  and the Company  will have the right to prepay the loan,  on June 7,
     1998. The stated maturity date for the note is June 1, 2003.

(11) In  connection  with the  Initial  Offering,  the Company  entered  into an
     interest swap agreement. The agreement,  which expires on January 27, 2000,
     effectively reduces the fixed interest rate on this note from 9.5% to 7.5%.

(12) The  Nationwide  debt is structured  with three  separate loan  agreements.
     "Nationwide-North Carolina" is secured by Pinehurst.  "Nationwide-Texas" is
     secured  by Los Rios,  Nob Hill and  Brookfield.  "Nationwide-Missouri"  is
     secured by Tempo, Knollwood I, Knollwood II and The Cove at Westgate.

(13) The amount noted represents the annual debt service projected for 1997.

(14) Advances  under the line of credit are  secured by  Properties  that do not
     secure other mortgage  loans.  The principal  balance shown  represents the
     amount  advanced  and  outstanding  as of December  31,  1996.  Annual debt
     service represents the amount projected for 1997, assuming no change in the
     interest rates in effect as of December 31, 1996.

(15) The mortgage  indebtedness  for properties owned by Paradim is not included
     in the  table.  The  two  completed  properties  are  subject  to  mortgage
     indebtedness  in the  outstanding  amount of $23,731,658 as of December 31,
     1996. One property under construction is collateral for a construction loan
     from the Company in the  outstanding  amount of  $9,723,075 at December 31,
     1996.  Under  the  terms of the loan  agreement  effective  April 1,  1996,
     Paradim may borrow up to  $11,500,000  from the Company for the  property's
     construction.


Line of Credit

     Concurrent with the Initial Offering, the Company obtained a line of credit
facility in the amount of $75 million. The commitment was subsequently increased
to $115  million and in December  1995 was reduced by the Company to $90 million
and under certain  conditions  could be increased to $150  million.  On July 27,
1996,  the  Company  executed a renewal and  modification  of the line of credit
facility. Under the terms of the new agreement, the Company may borrow up to $85
million including up to $50 million related to development activities.  The line
of credit  matures in July 1998,  but may be extended  through  July 1999 at the
Company's  option.  Borrowings  under the line of credit are  collateralized  by
specified  operating  properties and properties under development.  The interest
rate on the amounts  outstanding  under the line are based on, at the  Company's
election, either (i) the greater of the prime rate or the

                                       16
<PAGE>

Federal Funds rate plus .50% or, (ii) the London  Interbank Offer Rate ("LIBOR")
plus 2.0% - 2.25%, depending on certain financial ratios concerning leverage and
debt service coverage. The line of credit reprices, at the Company's discretion,
in defined  intervals ranging from 1 to 360 days. As the line of credit is drawn
or  reprices,  the Company  enters into a contract  and selects the term and the
interest rate option it desires.  If the Company  selects a contract  based upon
LIBOR  plus 2.0% - 2.25%,  then the  interest  rate  becomes  fixed for the term
selected. Otherwise, the contract rate varies based upon the appropriate index.

     At March 25, 1997,  $42.7 million was outstanding  under the line of credit
in two separate contracts. One contract in the amount of $30.7 million is priced
at 7.50% and the second  contract  in the  amount of $12.0  million is priced at
7.69%. Both contracts reprice on April 16, 1997.

     The Company  anticipates  that the line of credit will  continue to be used
primarily to fund  development or  acquisition of additional  properties and for
general working capital purposes.

     Under the terms of the modified  line of credit  agreement,  the Company is
subject  to the  following  financial  covenants:  1)  maintenance  of a defined
minimum tangible net worth, 2) limitation on the percentage of total liabilities
to a  calculated  gross asset  value,  3)  coverage  ratio  requirement  against
interest expense, 4) coverage ratio requirement against debt service and defined
capital expenditures, 5) limitations,  which vary with each respective quarterly
period, on partner distributions in excess of a defined percentage of funds from
operations (as defined herein) buy the Operating Partnership, and 6) limitations
on the percentage of certain investments to the calculated gross asset value.

Item 3. LEGAL PROCEEDINGS

     Neither  the  Company  nor the  Properties  are  presently  subject  to any
material litigation nor, to the Company's knowledge,  is any material litigation
threatened against the Company or the Properties,  other than routine litigation
and administrative  proceedings arising in the ordinary course of business, most
of which are expected to be covered by liability insurance and none of which are
expected to have a material adverse effect on the business,  financial condition
or results of operations of the Company.

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

     The Company did not submit any matters to a vote of security holders in the
fourth quarter of 1996.

                                       17
<PAGE>

                                     PART II


Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The shares of Common  Stock of Paragon  Group,  Inc.  are listed on the New
York Stock Exchange under the symbol "PAO".CUSIP:699116 10 9.

     On March 14, 1997 the last  reported  sale price of the Common Stock on the
NYSE was $17.75 per share.

     As  of  March  14,  1997,   Paragon  Group,   Inc.  had  approximately  298
stockholders of record and 14,791,165 shares of Common Stock outstanding.

<TABLE>
<CAPTION>
Quarterly Stock Price Information
-------------------------------------------------------------------------------------------------------------
                                                                                             Dividend
                                                                                              Per
Partial Period or Quarter Ended                                High           Low             Share
-------------------------------------------------------------- -------------- --------------- ---------------
<S>                                                            <C>            <C>             <C>
January 1, 1995 through March 31, 1995.....................    19 1/2         15 3/4          $0.465
April 1, 1995 through June 30, 1995........................    18 7/8         16 1/2          $0.465
July 1, 1995 through September 30, 1995....................    19             16 3/8          $0.465
October 1, 1995 through December 31, 1995..................    17 5/8         15 1/4          $0.465

January 1, 1996 through March 31, 1996.....................    19             17 1/8          $0.465
April 1, 1996 through June 30, 1996........................    18 1/4         15              $0.465
July 1, 1996 through September 30, 1996....................    17             15              $0.465
October 1, 1996 through December 31, 1996..................    17 3/4         15 1/2          $0.465
</TABLE>

                                       18
<PAGE>
Item 6. SELECTED FINANCIAL DATA

PARAGON GROUP, INC. AND PREDECESSORS
SELECTED FINANCIAL DATA
(In thousands, except per share data and property data)

<TABLE>
<CAPTION>
                                                          Company                                Predecessors
                                           ---------------------------------------   --------------------------------------
                                                                     For the Period  For the Period
                                           Years Ended December 31,    July 27 to      January 1    Years Ended December 31,
                                           -------------------------  December 31,        to       ------------------------
                                                                        1994, as       July 26,
                                              1996          1995      Restated (1)      1994          1993         1992
                                           -------------------------------------------------------------------------------
<S>                                       <C>           <C>           <C>          <C>          <C>           <C>
Operating Data
Rental                                    $  91,037     $  80,437     $  32,099         39,018       66,848        60,984
Property management and leasing services      8,851        22,296         9,821         13,875       24,900        24,541
Other income                                  4,841         4,835         2,792          4,049        5,104         4,435
                                           ---------    -----------   ----------   -----------  -----------   -----------
   Total revenues                           104,729       107,568        44,712         56,942       96,852        89,960
Operating expenses (before depreciation
   and amortization)                         58,709        60,075        24,798         33,375       52,560        51,300
Depreciation and amortization                19,552        18,561         7,019          6,499       11,321        10,747
Interest expense                             22,066        17,011         6,448         14,858       26,713        27,793
Reorganization costs (2)                          -             -         7,796              -            -             -
Gain (loss) on sale of properties             9,209           (21)            -              -          136             3
Gain on sale of commercial property
    services business                        11,930             -             -              -            -             -
Income (loss) before extraordinary items     21,215        10,063          (825)         2,639        6,871           277
Net extraordinary items (3)                       -             -         1,636          1,776        9,092           965
Net income                                $  21,215        10,063           811          4,415       15,963         1,242

Per share data:
   Income (loss) before extraordinary
      items                               $    1.43          0.68         (0.06)
   Net income                             $    1.43          0.68          0.06
   Dividends declared per common share
      outstanding (4)                     $    1.86          1.86         0.795
   Weighted average common shares
      outstanding                         $  14,791        14,698        14,514

Balance Sheet Data
Real estate, net of accumulated
   depreciation                           $ 489,906       505,034       411,777                     245,523       252,660
Total assets                                536,867       539,611       442,548                     262,953       266,242
Mortgages and notes payable                 297,292       293,780       182,056                     267,650       274,174
Stockholders' equity (deficit)              174,506       178,466       193,434                     (40,031)      (42,726)

Other Data
Cash flows provided by (used in):
   Operating activities                   $  28,936        36,522        11,098         11,995       18,630        12,269
   Investing activities                     (14,434)     (103,366)     (192,477)        (3,140)      (3,585)      (20,731)
   Financing activities                     (13,998)       67,514       179,509         (5,927)     (14,285)        7,342
Funds from operations (5)                    27,285        32,553        15,020          9,739       19,228        11,918

Property Data (6)
Total Residential Properties (end of year)       55            53            49                          48            47
Total Apartment Units (end of year)          15,406        14,818        13,240                      12,833        12,547
Total Commercial Properties (end of year)         3             6             4                           4             4
Weighted Average Monthly Residential Rate
   per Apartment Unit for Residential
   Properties                              $    535           512           488                         474           461
Weighted Average Occupancy for
   Residential Properties                      92.6%         93.6%         93.6%                       93.8%         92.4%
</TABLE>

(1)  In 1995, the Company changed its method of accounting for its investment in
     its property services subsidiary from the cost method to consolidation. The
     financial  statements for the period from July 27 to December 31, 1994 have
     been restated to reflect this accounting change. See Note 2 to the December
     31, 1996 consolidated financial statements included elsewhere herein.

(2)  Reorganization  costs represents  non-recurring  costs,  principally legal,
     accounting  and other costs,  incurred in connection  with the formation of
     the Company.

(3)  Net extraordinary  items represents  extraordinary gain from forgiveness of
     debt,  net of  minority  interests,  less  extraordinary  loss  from  early
     extinguishment of debt, net of minority interest.

                                       19
<PAGE>

(4)  The dividend paid by the Company for the partial  quarter  ended  September
     30,  1994 was $.33 per share.  During  1995,  the  Company  paid  quarterly
     dividends,  with  respect to the fourth  quarter of 1994  through the third
     quarter  of 1995,  of $.465  per  share.  During  1996,  the  Company  paid
     quarterly dividends, with respect to the fourth quarter of 1995 through the
     third quarter of 1996, of $.465 per share.  On January 2, 1997, the Company
     declared a dividend  with respect to the fourth  quarter of 1996,  of $.465
     per share which was paid on January 23, 1997.

(5)  Funds from  Operations  ("FFO") is defined by the National  Association  of
     Real Estate Investment  Trusts  ("NAREIT") to mean net income,  computed in
     accordance  with  generally  accepted   accounting   principles   ("GAAP"),
     excluding gains (or losses) from debt  restructuring and sales of property,
     plus real estate  depreciation and amortization,  and after adjustments for
     unconsolidated partnerships and joint ventures. In addition,  extraordinary
     or  unusual  items,  along  with  significant   non-recurring  events  that
     materially distort the comparative measure of FFO, should be disregarded in
     its calculation.  Prior to March 1995, the NAREIT definition of FFO allowed
     the add back of non-real  estate  depreciation  and  amortization,  such as
     deferred loan cost amortization.  The Company has reported FFO according to
     the  definitions  prescribed  by NAREIT for each of the periods  presented.
     Management  generally considers FFO to be a useful measure of the operating
     performance  of an equity REIT  because,  together with net income and cash
     flows,  FFO provides  investors  with an  additional  basis to evaluate the
     ability of a REIT to incur and service  debt and to fund  acquisitions  and
     other  capital  expenditures.  FFO  does  not  represent  cash  flows  from
     operating  activities  as defined by GAAP,  should not be  considered as an
     alternative  to net  income  as an  indicator  of the  Company's  operating
     performance  and is not  indicative of cash available to fund all cash flow
     needs,   including  principal   amortization,   capital   improvements  and
     distributions to stockholders. Further, FFO as disclosed by other REITs may
     not be comparable to the Company's  calculation of FFO. The following table
     represents the Company's calculation of FFO (dollars in thousands):

<TABLE>
<CAPTION>
                                                               Company                                Predecessors
                                                ---------------------------------------    --------------------------------------
                                                                          For the Period
                                                 Years Ended December 31,   July 27 to    For the Period   Years Ended December 31,
                                                -------------------------   December 31,   January 1 to   -------------------------
                                                                             1994, as        July 26,
                                                   1996            1995     Restated (1)      1994         1993           1992
                                                ----------------------------------------   ----------------------------------------
   <S>                                          <C>             <C>         <C>            <C>          <C>            <C>
   Net income                                   $   21,215      $  10,063   $     811      $   4,415    $   15,963     $    1,242
   Adjustments to net income:
    Minority interests in income                     5,338          2,612        (207)             -             -              -
    Minority interests in cash flow                   (219)          (287)       (147)             -             -              -
    Reorganization costs incurred in connection
        with the formation of the Company                -              -       7,796              -             -              -
    Gain on sale of properties *                    (8,590)             -           -              -          (136)            (3)
    Gain on sale of commercial property
        services business                          (11,930)             -           -              -             -              -
    Post-Measurement Date FFO from commercial
       property services business                      674              -           -              -             -              -
    Extraordinary items, net of minority
        interests                                        -              -      (1,636)        (1,776)       (9,092)          (965)
    Real Estate depreciation/amortization           17,783         15,377       6,357          6,200        10,771         10,201
    Non-real estate depreciation/amortization            -              -         180            299           550            546
    Real Estate depreciation/amortization from
        unconsolidated ventures                        891            542         180            110             -              -
    Deferred loan cost amortization included in
        interest expense                                 -              -         602            472         1,219            800
    Amortization of management and
        leasing contracts                              598          2,231         482              -             -              -
    Grants/amortization of employee
        restricted stock                             1,525          1,462         577              -             -              -
    Other cash reorganization expenses                   -            553           -              -             -              -
    Adjustment for straight-lining of
        rents                                            -              -          25             19           (47)            97
                                                ----------       --------   ---------      ---------    ----------     ----------
   Funds from Operations                        $   27,285       $ 32,553   $  15,020      $   9,739    $   19,228     $   11,918
                                                ==========       ========   =========      =========    ==========     ==========
   Supplemental Information:
    Adjustment for straight-lining of
        rents                                   $      (47)     $   (128)   $        -     $       -    $        -     $        -
                                                ==========      ========    ==========     =========    ==========     ==========

*    Excludes $619 of gain on the sale of the Post and Paddock  office/warehouse
     development which the Company's property services subsidiary  developed for
     sale.
</TABLE>

(6)  Includes statistical  information for all stabilized residential properties
     and all commercial properties for the periods presented as if controlled by
     the Company or the  Predecessors.  A residential  property is considered by
     the Company to have achieved  stabilized  occupancy on the earlier to occur
     of (i)  attainment of 93% physical  occupancy on the first day of any month
     or (ii) one year after completion of construction.

                                       20
<PAGE>

Item 7: MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
     OF OPERATIONS

     The  following  discussion  is based  primarily  on,  and should be read in
conjunction with, the Consolidated and Combined Financial  Statements of Paragon
Group,  Inc. and  Predecessors  and notes  thereto  appearing  elsewhere in this
report.

Overview

     Paragon Group, Inc.  (together with its  subsidiaries,  the "Company") is a
fully  integrated,  diversified real estate  investment  trust  headquartered in
Dallas,  Texas  focused  on  the  operation,   development  and  acquisition  of
multifamily  residential  communities  in its  key  markets  in  the  Southwest,
Midwest,  Carolina and Florida markets.  The Company is a self-administered  and
self-managed real estate investment trust ("REIT") that as of December 31, 1996,
owned (either directly or through  interests in other entities)  interests in 64
properties -- 57 multifamily residential communities containing 15,954 apartment
units and 3 commercial  properties located in six states,  with three additional
multifamily  residential  communities under construction for which 856 units are
planned,  and a 12.6 acre  tract of land for which 320  multifamily  residential
units are  planned  which the  Company  acquired  in  December  1996 for  future
development.   At  December  31,  1996,  two  of  the  multifamily   residential
communities  containing  548  units  are  in the  initial  lease-up  phase.  The
commercial properties include three office buildings containing 724,470 rentable
square  feet.  The Company has also entered into a  non-recourse  ground  lease,
which  commenced on October 24, 1996,  related to  approximately  27.47 acres in
Louisville,  Kentucky for potential  development  of an  additional  multifamily
residential community in 1997.

     In  addition,  the  Company,  through  an  affiliate,  Paragon  Residential
Services,  Inc. ("PRSI"),  provides  residential  property  services,  including
property  management,  leasing,  construction,   development,  acquisition,  and
disposition  services,  for its  owned  residential  communities  as well as for
affiliated and third party  residential  owners.  As of December 31, 1996,  PRSI
managed 77 multifamily  residential communities located across the United States
containing  approximately  21,696  apartment  units (of which 57 communities and
15,954 units were owned by the Company,  either directly or through interests in
other  entities).  The Company  sold its  economic  interest  in its  commercial
property services business as of June 30, 1996. See "Company  Activities" below.
Prior to June 30,  1996,  the  Company's  residential  and  commercial  property
services  business was conducted through Paragon Group Property  Services,  Inc.
("PGPSI").

Company Activities

Proposed Merger

     On December 16, 1996 the Company  executed an Agreement  and Plan of Merger
(the  "Agreement")  with Camden  Property Trust  ("Camden")  which provides for,
among other things, the merger of the Company into a wholly-owned  subsidiary of
Camden through a tax-free  exchange of each share of the Company's  common stock
for .64 common shares of beneficial interest of Camden,  whereby stockholders of
the Company will become shareholders of Camden.

     The  Company has the option to  terminate  the  Agreement  in the event the
average  closing price of Camden common shares  ("Average  Closing Price") falls
below $25.67 during a specified pricing period prior to a special meeting of the
stockholders  of the Company.  In the event the Company  elects to terminate the
Agreement, Camden has the option of adjusting the exchange ratio of .64 to equal
a number obtained by dividing $16.43 by the Average Closing Price.

     An affirmative  vote of holders of two-thirds of the outstanding  shares of
the  Company's  common  stock is required to approve  the  Agreement.  A special
meeting of the Company's stockholders is scheduled for April 15, 1997 to vote on
the Agreement.


                                       21
<PAGE>

Sale of Commercial Property Services Business

     In May 1996,  the Company  executed  an  agreement  to sell its  commercial
property  services  business to an affiliate of Insignia  Financial Group,  Inc.
("Insignia").  In order to accomplish  the sale,  PGPSI's  residential  property
services business was transferred to PRSI.  Immediately  following the transfer,
as of June 30, 1996, Insignia acquired all of the outstanding stock of PGPSI and
a $12.4 million note receivable from PGPSI held by the Company.  The acquisition
price  included  initial cash  consideration  of $18.2 million and two potential
earn-out  payments  totaling up to $4.0 million which are contingent  upon PGPSI
revenue  meeting  certain  specified  targets  over the next  three  years.  The
earn-out payments may be reduced by as much as $2.9 million in the event certain
management  contracts are terminated within a two year period after closing.  In
addition,  the initial acquisition price may be reduced by up to $1.1 million in
the event that the employment of certain employees of PGPSI is terminated within
one year after closing or certain existing  management  contracts are terminated
within a five-year period after closing.

     In connection with the sale, the Company  received  warrants to purchase up
to 50,000 shares of Insignia  Financial  Group,  Inc. stock at a price of $28.96
per share and  Insignia  received  warrants  to  purchase  50,000  shares of the
Company's  stock at $18.25 per share and may  receive  warrants  to  purchase an
additional  238,000 shares at $18.25 per share,  depending on the termination of
certain management contracts during the two-year period after closing.

     As a result of the sale,  the Company  recognized  a gain of $11.9  million
which does not  consider  potential  earn-out  payments,  the value of  warrants
issued or received, or $1.1 million of the acquisition price which is contingent
on future events.  The contingent  portion of the initial  acquisition price and
the earn-out payments,  if any, will be recognized when earned. The gain on sale
was determined in accordance  with Accounting  Principles  Board Opinion No. 30,
"Reporting the Results of Operations",  whereby the commercial property services
net loss of $.8 million from the date (May 7, 1996) management  committed to the
disposal of the commercial  property services business (the "Measurement  Date")
through the date of sale (June 30,  1996) was treated as a reduction of the gain
on sale.

     The closing of the sale occurred on July 2, 1996, at which time the Company
received net proceeds  from the sale of $18.1  million (net of prorations of $.1
million).  Proceeds  from the sale were used to  reduce  borrowings  outstanding
under the Company's line of credit.

     The  Company  believes  that the  property  services  business  has  become
increasingly competitive, and is likely to remain so for the foreseeable future,
which could adversely impact future operating  results.  As a result of the sale
of the commercial  property  services  business,  the Company has  substantially
reduced its dependence on such service oriented revenues. The Company intends to
continue  providing its full range of residential  property services to existing
clients  and  select  potential   clients  where   relational,   operational  or
geographical  efficiencies  exist and will actively pursue  opportunities  which
complement its current operations.

Development

     On January 29, 1996, the Company, through PGPSI, acquired a 5.15 acre tract
of land in suburban  Dallas,  Texas and  commenced  construction  on the 108,600
square  feet Post and Paddock  office/warehouse  development.  Construction  was
completed  in November  1996 and the  property  was sold on December 4, 1996 for
$3.7 million.

                                       22
<PAGE>

     The Company  entered into a non-recourse  ground lease,  which commenced on
October 24, 1996, related to approximately  27.47 acres in Louisville,  Kentucky
for  potential  development  in 1997.  The ground  lease  allows the  Company to
develop,  at  its'  discretion,  a one  or  two  phase  multifamily  residential
community  on the  leased  acreage.  The  lease has a term of 40 years and under
certain  conditions,  the Company  has the option to acquire  the land.  Monthly
lease  payments  which are  estimated to range from $7 to $14 have been deferred
until July 1, 1997.

     On December  13,  1996,  the Company  acquired a 12.6 acre tract of land in
Orlando,  Florida for $2.0 million. A 320 unit multifamily residential community
is planned for the site which,  when developed,  will be the second phase of the
completed 272 unit Renaissance Pointe apartments.

     During  1996,  the  Company  completed  construction  of three  multifamily
residential  communities  containing a total of 824 apartment units. At December
31, 1996, an additional 856 apartment  units were under  construction  which are
scheduled for completion in the first and second quarters of 1997, including 336
units owned by Paradim. The three multifamily  residential  properties completed
in 1996 include the 276 unit Heron Pointe apartments in Tampa, Florida completed
in February 1996, the 272 unit Renaissance Pointe apartments in Orlando, Florida
completed  in July 1996 and the 276 unit  Stone  Gate  apartments  completed  in
August 1996. At December 31, 1996,  the  Renaissance  Pointe  apartments and the
Stone Gate apartments were in the initial lease-up phase.

     In  March  1997,  the  Company  completed  construction  of  the  336  unit
Brassfield  Park  apartments in  Greensboro,  North  Carolina  which is owned by
Paradim.

     On July 1, 1996, the Heron Pointe apartments  achieved  stabilization at an
occupancy of 94.9%.  On October 1, 1996, the 240 unit Stone Creek  apartments in
suburban north Dallas, Texas, completed in November 1995, achieved stabilization
at an occupancy of 94.6%. On January 1, 1997, the Renaissance  Pointe apartments
achieved  stabilization  at an occupancy  of 93.0%.  A  residential  property is
considered by the Company to have achieved  stabilized  occupancy on the earlier
to occur of (i)  attainment  of 93%  physical  occupancy on the first day of any
month or (ii) one year after completion of construction.

     The Company  anticipates  that  development  properties which were recently
completed will not generate  their full net income  potential for the year ended
December 1997.  Additionally,  those properties  currently under development are
expected to experience  operating losses during their stabilization  period from
completion to lease-up. The Company believes,  however, that the positive impact
of these development  projects,  once stabilized  occupancy levels are achieved,
will significantly contribute to the net income from operations of the Company.

Acquisitions

     On November 8, 1996, the Company  purchased two North Carolina  multifamily
residential  communities (the 240 unit Habersham Pointe apartments in Charlotte,
North  Carolina  and the 216 unit River Oaks  apartments  in  Greensboro,  North
Carolina)  from a single  seller for a total  purchase  price of $20.9  million,
including the assumption of mortgage indebtedness in the amount of $6.36 million
collateralized by the River Oaks apartments. Both properties are well leased and
in good physical condition. On a combined basis, the properties are projected to
generate an unleveraged yield for 1997 in excess of 9.5%.

Dispositions

     As a result of the sale of its commercial  property services business,  the
Company disposed of its three wholly-owned  operating  commercial  properties in
the fourth  quarter of 1996.  The Company  also sold the Turtle  Creek I and the
Turtle Creek II apartments in Asheville, North Carolina in the fourth quarter of
1996.

                                       23
<PAGE>

The 1996  property  sales are  summarized  in the  following  table  (dollars in
thousands):
<TABLE>
<CAPTION>
                                                                                     SF/
                Date Sold                 Property              Location          # of Units      Sales Price
                ---------                 --------              --------          ----------      -----------
       <S>                           <C>                       <C>                 <C>            <C>
       Commercial Properties
       October 1, 1996               Southwood Mall            Bradenton, FL       113,949        $  3,170
       October 31, 1996              Westgate Centre           St. Louis, MO        58,935           7,130
       December 19, 1996             The Paragon               St. Louis, MO       102,486          10,000

       Multifamily Properties
       December 12, 1996             Turtle Creek I            Asheville, NC           208           7,075
       December 12, 1996             Turtle Creek II           Asheville, NC           176           6,725
                                                                                                     -----

       Total                                                                                       $34,100
                                                                                                   =======
</TABLE>

     In accordance  with  Statement of Financial  Accounting  Standards No. 121,
"Accounting for the Impairment of Long-Lived  Assets",  properties held for sale
are to be carried at the lower of the carrying  amount or  estimated  fair value
less selling costs.  Accordingly,  at June 30, 1996,  the Company  recognized an
impairment  adjustment of $1.1 million,  all of which related to Southwood Mall,
which is  included  in gain  (loss) on sale of  properties  in the  accompanying
statements of operations.

     In January  1997,  the Company sold the 232 unit  Brookfield  apartments in
Dallas,   Texas  for  $5.46  million,  the  352  unit  Westchase  apartments  in
Charleston,  South  Carolina  for  $11.13  million  and the 251 unit San  Miguel
apartments in St. Louis,  Missouri for $6.88 million. Net proceeds from the sale
of these  properties were used to repay  borrowings  under the Company's line of
credit,  fund  multifamily  development  expenditures  and for  general  working
capital purposes.

     In addition, in an effort to maximize the long term growth potential of the
portfolio,  management intends to regularly evaluate the possible disposition of
targeted  multifamily  residential  assets where a  redeployment  of capital can
increase geographic efficiencies or improve operating results.

Joint Venture

     On April 1, 1996, the Company  entered into a joint venture  (Paradim) with
Careit Investments  Limited  Partnership  ("Careit"),  an affiliate of Caisse de
depot  et  placement  du  Quebec,  to  acquire,  develop  and  operate  selected
multifamily residential properties in markets in which the Company operates. The
Company and Careit each have committed to invest up to $22.5 million,  primarily
through a newly formed Maryland  corporation,  Paradim,  Inc.,  which intends to
qualify as a REIT for Federal income tax purposes.  Each  investment by Paradim,
Inc. is to be made  through  separate  limited  liability  companies  or limited
partnerships  in which  Paradim,  Inc.  will own an 89% interest as the managing
member or general  partner,  the Company  will own a 1% interest and a number of
private investors will own the remaining interests.  In connection with Paradim,
Inc.'s initial capitalization,  the Company effectively contributed its interest
in three  properties  (Overlook,  formerly  known  as The  Phoenix,  a  220-unit
multifamily  residential  complex in Charlotte,  North  Carolina;  Highpoint,  a
708-unit multifamily  residential complex in Dallas, Texas; and Brassfield Park,
a 336-unit multifamily  residential complex in Greensboro,  North Carolina which
was under  development in 1996 and recently  completed in March 1997) and Careit
contributed  $7.93 million in cash.  At  formation,  the Company also received a
distribution of  approximately  $6.62 million,  which was used to repay existing
indebtedness  under  the  line of  credit.  The  Company  recorded  the  initial
contribution  of these  properties at their net carrying value on April 1, 1996,
which was approximately $14.73 million (net book value of $41.84 million subject

                                       24
<PAGE>

to existing  indebtedness of $27.11 million).  The Company's  investment,  which
includes a direct 1% interest in two limited liability companies and one limited
partnership  and an approximate 43% indirect  interest in such entities  through
its  ownership in Paradim,  Inc.  (collectively,  approximately  44%),  is being
accounted for under the equity  method.  As of December 31, 1996,  the Company's
aggregate investment in Paradim was approximately $7.95 million.


Dividends and Capital

     On January 3, 1996, the Company, through the Operating Partnership,  issued
4,694 Units to an affiliate in partial  settlement of debt assumed in connection
with the purchase of the Overlook Apartments.

     On February  27,  1996,  the Company  paid a dividend,  with respect to the
fourth quarter of 1995, of $.465 per share of common stock.  Concurrent with the
dividend payments, the Operating Partnership distributed $.465 per Unit.

     On May 17,  1996,  the Company  paid a dividend,  with respect to the first
quarter  of 1996,  of $.465  per  share of  common  stock.  Concurrent  with the
dividend payment, the Operating Partnership distributed $.465 per Unit.

     On August 27, 1996, the Company paid a dividend, with respect to the second
quarter  of 1996,  of $.465  per  share of  common  stock.  Concurrent  with the
dividend payment, the Operating Partnership distributed $.465 per Unit.

     On November  26,  1996,  the Company  paid a dividend,  with respect to the
third quarter of 1996, of $.465 per share of common stock.  Concurrent  with the
dividend payment, the Operating Partnership distributed $.465 per Unit.

     On January 2, 1997,  the Company  declared a dividend,  with respect to the
fourth  quarter of 1996,  of $.465 per share of common  stock  which was paid on
January 23, 1997 to holders of record on January 13, 1997.  Concurrent  with the
dividend  announcement,  the Operating Partnership  authorized a distribution of
$.465 per Unit  which  was paid on  January  23,  1997 to  holders  of record on
January 13, 1997.

     On March 18,  1997,  the Company  declared a dividend,  with respect to the
first quarter of 1997,  of $.3136 per share of common  stock,  payable April 15,
1997 to  holders  of record  on March 31,  1997.  Concurrent  with the  dividend
announcement,  the Operating Partnership authorized a distribution of $.3136 per
Unit, payable April 15, 1997 to holders of record on March 31, 1997.

Results of  Operations - Comparison  of the year ended  December 31, 1996 to the
year ended December 31, 1995

     Net income for the year ended  December 31, 1996  increased  $11.1  million
compared to the year ended December 31, 1995 principally as a result of the gain
on sale of the commercial  property  services  business of $11.9 million and the
gain on sale of properties  of $9.2  million.  Net income was also affected by a
decrease in total revenue of $2.8 million, an increase in total expenses of $4.7
million,  an increase in equity in income of  ventures  of $.2  million,  and an
increase in minority interests in income of $2.7 million.

     Rental income increased $10.6 million, or 13.2%, for the year due primarily
to increases in the rental income on the Company's multifamily  residential same
community  portfolio and the addition of income  generated from the  acquisition
and  development of additional  apartment  units.  The  acquisition of apartment

                                       25
<PAGE>

units in the  fourth  quarter of 1995 and 1996  contributed  $5.3  million,  the
completion of apartment units developed by the Company  contributed $4.6 million
and  rental  income on the  Company's  multifamily  residential  same  community
portfolio increased $1.4 million.  The increases in rental income were offset by
a decrease in rental income of $.4 million  attributable  to the  disposition of
two residential  properties in December 1996 and to four residential  properties
excluded from the same community  portfolio whose 1996 operations were adversely
impacted by the Company's revenue enhancing  capital  expenditure  program and a
decrease in rental income of $.3 million  attributable to the disposition of the
Company's wholly-owned commercial properties in the fourth quarter of 1996.

     Property  management  income decreased $6.3 million,  or 56.0%, and leasing
and other  property  services  income  decreased  $7.1  million,  or 64.7%.  The
decreases  were due primarily to the sale of the  commercial  property  services
business as well as  terminated  management  contracts  that were not  replaced,
reduced rates charged for management  services on  third-party  contracts and to
reduced  transaction  volume on which  management,  leasing  and other  property
services' fees are earned.

     Property  operating and  maintenance  expense  increased  $5.2 million,  or
15.2%, due primarily to the acquisition and development of additional  apartment
units and to expense  increases in the Company's  multifamily  residential  same
community  portfolio.  Expenses  related to the apartment  units acquired in the
fourth  quarter of 1995 and 1996  increased  $2.33  million,  the  completion of
apartment  units  developed by the Company  accounted  for $2.17  million of the
increase and expenses on the Company's  multifamily  residential  same community
portfolio  increased  $.79  million,  or 2.8%.  Expenses on the two  residential
properties  disposed of in December 1996 and on the four residential  properties
excluded from the same community  portfolio whose 1996 operations were adversely
impacted by the Company's  revenue enhancing  capital  expenditure  program were
constant.  The increase in property  operating and  maintenance  expense of $5.2
million also included a decrease in expenses of $.09 million attributable to the
disposition of the Company's  wholly-owned  commercial  properties in the fourth
quarter of 1996.

     Depreciation and amortization  expense  increased $1.0 million or 5.3%, due
principally to the acquisition and  development of additional  apartment  units,
off-set by decreases in depreciation and amortization resulting from the sale of
the commercial property services business.

     Property   management  expenses  decreased  $5.8  million,  or  32.0%,  due
primarily to the sale of the commercial property services business.

     Interest  expense  increased $5.1 million,  or 29.7%, due to an increase in
operating debt  principally  associated  with the acquisition and development of
additional apartment units.

     General and administrative - property services  decreased $.70 million,  or
12.2%. The decrease resulted primarily from the sale of the commercial  property
services business,  off-set by additional consulting and implementation expenses
associated with the Company's new financial reporting and information system.

     Equity in income of ventures  increased $.24 million,  or 30.6%,  due to an
increase  in income  from the  Company's  commercial  ventures  and an  increase
resulting from the Company's investment in Paradim on April 1, 1996.

     During the year ended December 31, 1996, the Company  recognized a net gain
of $9.2 million from the sale of properties and a gain of $11.9 million from the
sale of its commercial property services business.

                                       26
<PAGE>

Results of Operations - Multifamily Residential Communities

Total Portfolio

     The results of operations of the Company's total consolidated  portfolio of
58 multifamily  residential  communities (as of December 31, 1996) for the years
ended  December 31, 1996 and 1995 is summarized in the following  table (dollars
in thousands).  For the period after April 1, 1996, the consolidated  results of
operations do not include the operations of the three properties  contributed to
Paradim,  which are now accounted for under the equity method. The operations of
these  properties  for the period  after April 1, 1996 are included in equity in
income of ventures.

<TABLE>
<CAPTION>
                                                                         Years Ended December 31,
                                                              -----------------------------------------------
                                                                                                    % of
                                                                    1996             1995          Change
                                                                    ----             ----          ------
     <S>                                                        <C>               <C>              <C>
     Rental and other revenue
        Same Community....................................      $    69,561       $    68,103        1.8%
        Development and Lease-Up..........................            5,535               821        5.9%
        Acquisitions......................................            6,377               919        6.8%
        Dispositions and Other............................            9,886            10,180       -0.3%
                                                              -------------     -------------      ------
                                                                     91,359            80,023       14.2%
                                                              -------------     -------------      ------
     Expenses
        Same Community....................................           28,799            28,004        2.4%
        Development and Lease-Up..........................            2,663               497        6.6%
        Acquisitions......................................            2,659               332        7.0%
        Dispositions and Other............................            4,117             4,120        0.0%
                                                              -------------     -------------      ------
                                                                     38,238            32,953       16.0%
                                                              -------------     -------------      ------

          Net operating income............................    $      53,121     $      47,070       12.9%
                                                              =============     =============      ======
</TABLE>

Same Community

     The results of operations of the Company's  multifamily  residential  "same
community"  portfolio  for  the  years  ended  December  31,  1996  and  1995 is
summarized in the  following  table  (dollars in  thousands,  except for average
monthly rental revenue per unit).  The Company defines same community  portfolio
as those communities that achieved stabilized  occupancy on or before January 1,
1995 that were owned by the Company throughout the years ended December 31, 1996
and 1995. The same  community  portfolio  consists of 43 communities  containing
11,577  apartment  units.  The  Company  has  excluded  from the same  community
portfolio  four  properties  containing  a  total  of  1,279  units  whose  1996
operations were adversely  impacted by the Company's  revenue  enhancing capital
expenditure  program.  The  Company  implemented  a  revenue  enhancing  capital
expenditure  program in late 1995 to upgrade selected same community  properties
which it  believed  would  generate  the best  long-term  yields  as a result of
incremental capital investment. Investment at four of the 39 properties included
in the program represent in excess of 50% of the overall budget. The substantial
"repositioning"   work  undertaken  at  these  properties  disrupted  normalized
occupancy and rental  efforts.  Accordingly,  the results of operations of these
four  properties  have been  excluded from the results of operations of the same
community portfolio.

                                       27
<PAGE>

<TABLE>
<CAPTION>
                                                                         Years Ended December 31,
                                                              -----------------------------------------------
                                                                                                      %
                                                                   1996             1995           Change
                                                                   ----             ----           ------
     <S>                                                        <C>              <C>               <C>
     Rental and other revenue
        Rental...............................................   $    67,241      $    65,876         2.1%
        Interest and other income............................         2,320            2,227         4.2%
                                                                -----------      -----------
                                                                     69,561           68,103         2.1%
                                                                -----------       ----------
     Expenses
        Property operating and maintenance expense...........        21,646           20,702         4.6%
        Real estate taxes and insurance......................         7,153            7,302        -2.0%
                                                                 ----------      -----------
                                                                     28,799           28,004         2.8%
                                                                 ----------      -----------

          Net operating income...............................   $    40,762      $    40,099         1.7%
                                                                ===========      ===========

     Average occupancy.......................................          93.5%            94.1%       -0.6%
                                                                ===========      ===========

     Average monthly rental revenue per unit.................   $       518      $       503         2.9%
                                                                ===========      ===========
</TABLE>

     Rental income increased $1.4 million,  or 2.1%, for the year ended December
31, 1996. For the year,  average monthly base revenue per leased  apartment unit
increased $15, or 2.9%, from $503 to $518 and average  occupancy  decreased from
94.1% to 93.5%.  The Company  believes that the increases in the average monthly
base revenue per leased  apartment  unit were achieved  primarily as a result of
the  implementation  of select  rental  increases  allowed by improved  economic
conditions in certain of the Company's markets.

Development and Lease-Up Properties

     The  results  of  operations  of  the  Company's  multifamily   residential
development and lease-up properties including completed  development  properties
not stabilized at January 1, 1995 for the years ended December 31, 1996 and 1995
is summarized in the following table (dollars in thousands). The development and
lease-up properties consist of the six consolidated  properties developed by the
Company  which,  when  completed,  will  contain a total of 1,584  units.  As of
December 31, 1996,  two of these  properties  (the 276 unit Heron Pointe and the
240  unit  Stone  Creek)  have  achieved  stabilized  occupancy  and  two of the
properties  containing  548  units  are  in  the  initial  lease-up  phase.  The
consolidated  development  and lease-up  properties  do not include the 336 unit
Brassfield  Park  property  which was under  development  during  1996 which the
Company contributed to Paradim.

<TABLE>
<CAPTION>
                                                                    Years Ended December 31,
                                                              ----------------------------------
     <S>                                                       <C>                  <C>
                                                                     1996               1995
                                                                     ----               ----
     Rental and other revenue
        Rental...............................................   $     5,375         $       802
        Interest and other income............................           160                  19
                                                                -----------         -----------
                                                                      5,535                 821
                                                                -----------         -----------
     Expenses
        Property operating and maintenance expense...........         2,059                 471
        Real estate taxes and insurance......................           604                  26
                                                              -------------         -----------
                                                                      2,663                 497
                                                              -------------         -----------

          Net operating income............................... $       2,872       $         324
                                                              =============       =============
</TABLE>

                                       28
<PAGE>

Acquisitions

     The consolidated  results of operations of the six multifamily  residential
communities containing 2,034 apartment units acquired by the Company in 1995 and
1996 for the  years  ended  December  31,  1996 and  1995 is  summarized  in the
following table (dollars in thousands). The 1995 and 1996 acquisition properties
include the four multifamily  residential communities containing 1,578 apartment
units  acquired by the  Company in the fourth  quarter of 1995 and the two North
Carolina  multifamily  residential  communities  containing 456 apartment  units
acquired by the Company in November 1996. The consolidated results of operations
for the period  after  April 1, 1996 do not include  the  operations  of the two
multifamily  residential  properties  acquired  in the  fourth  quarter  of 1995
(Overlook and Highpoint  containing 928 units) which were contributed to Paradim
and are now  accounted  for under the equity  method.  The  operations  of these
properties  for the period  after April 1, 1996 are included in equity in income
of ventures.
<TABLE>
<CAPTION>
                                                                    Years Ended December 31,
                                                              -------------------------------------
                                                                     1996               1995
                                                                     ----               ----
     <S>                                                      <C>                <C>
     Rental and other revenue
        Rental...............................................   $     6,144         $       870
        Interest and other income............................           233                  49
                                                                -----------         -----------
                                                                      6,377                 919
                                                                -----------         -----------
     Expenses
        Property operating and maintenance expense...........         1,902                 243
        Real estate taxes and insurance......................           757                  89
                                                              -------------         -----------
                                                                      2,659                 332
                                                              -------------         -----------

          Net operating income............................... $       3,718       $         587
                                                              =============       =============
</TABLE>

Dispositions and Other

     The results of  operations  for the years ended  December 31, 1996 and 1995
for the two multifamily  residential  properties  containing 384 apartment units
disposed of by the Company in December 1996 and the four multifamily residential
properties excluded from the same community portfolio whose 1996 operations were
adversely  impacted  by the  Company's  revenue  enhancing  capital  expenditure
program is summarized in the following table (dollars in thousands).

<TABLE>
<CAPTION>
                                                                    Years Ended December 31,
                                                              --------------------------------------
                                                                     1996               1995
                                                                     ----               ----
     <S>                                                        <C>                 <C>
     Rental and other revenue
        Rental...............................................   $     9,530         $     9,863
        Interest and other income............................           356                 317
                                                                -----------         -----------
                                                                      9,886              10,180
                                                                -----------         -----------
     Expenses
        Property operating and maintenance expense...........         3,076               3,042
        Real estate taxes and insurance......................         1,041               1,078
                                                              -------------         -----------
                                                                      4,117               4,120
                                                              -------------         -----------

          Net operating income............................... $       5,769       $       6,060
                                                              =============       =============
</TABLE>

                                       29
<PAGE>


Results of  Operations - Comparison  of the year ended  December 31, 1995 to the
year ended December 31, 1994

Presentation

     The  Company,  subsequent  to the  Initial  Offering  on July 27,  1994 and
through the third quarter of 1995,  accounted for its  investment in PGPSI under
the  cost  method  consistent  with  prior  regulatory  direction.  However,  in
September  1995,  the  Emerging  Issues Task Force of the  Financial  Accounting
Standards Board ("EITF")  reached a consensus in EITF 95-6 "Accounting by a Real
Estate  Investment  Trust for an investment in a Service  Corporation"  that the
cost method of accounting for such  investments was not  appropriate  and, based
upon  the  specific  facts  and  circumstances,  either  the  equity  method  or
consolidation  accounting  should be used. While the Company only held 1% of the
voting stock of PGPSI,  due to its 99% economic  interest and other  factors the
Company believes that the  consolidation  method should be used and provides for
the most meaningful financial statement presentation. Accordingly, in the fourth
quarter of 1995, the Company changed its method of accounting for PGPSI from the
cost method to consolidation of the financial position and results of operations
of PGPSI in the Company's  consolidated  financial statements.  Furthermore,  as
required by EITF 95-6, the 1994 financial statements  (specifically,  the period
from July 27, 1994 through  December 31, 1994) have been restated to consolidate
PGPSI.

Results of Operations

     Net income for the year ended  December  31, 1995  increased  $4.8  million
compared to the year ended  December 31, 1994 while income before  extraordinary
items  increased  $8.2 million.  Total revenue  increased $5.9 million and total
expenses decreased $5.1 million while minority interests increased $2.8 million,
extraordinary gain from forgiveness of debt, net of minority interests decreased
$8.6 million and  extraordinary  loss from early  extinguishment of debt, net of
minority interests decreased $5.2 million.

     Rental income  increased  $9.3  million,  or 13.1%,  principally  due to an
increase in rental revenue on the 48 projects owned by the Predecessors, revenue
generated  from three  apartment  projects,  totaling 697 units,  acquired  upon
formation of the Company and the  acquisition of a fourth project with 407 units
in  December of 1994.  In the fourth  quarter of 1995,  the Company  acquired an
additional four apartment  projects totaling 1,578 units. The increase in rental
revenue on the 48 projects owned by the Predecessors contributed $2.8 million to
the rental income  increase while the addition of apartment  units accounted for
$6.5 million.  Average monthly base revenue per leased  apartment unit increased
$20, or 4.1%,  from $485 to $505 from  December  31, 1994 to December  31, 1995,
respectively,  for those units owned in both periods.  The Company believes that
the increase in rental income per occupied apartment unit was achieved primarily
as a result of the implementation of select rental increases allowed by improved
economic  conditions in certain of the Company's markets.  Average occupancy for
those  residential  properties  increased  nominally from 93.6% to 93.7% for the
years ended December 31, 1994 and December 31, 1995, respectively.

     Property  management income decreased $1.5 million, or 12.0%, while leasing
and other services  income  remained flat. The reduction in property  management
income is due to  terminated  management  contracts  that were not  replaced  or
reduced rates charged for management services on third party contracts.

     Interest  income  decreased  $.1 million as a result of reduced  investment
interest earned on excess cash balances.


                                       30
<PAGE>

     Other income - properties  decreased $.4 million, or 12.3%, due principally
to a $.4 million real estate tax refund recorded in the first quarter of 1994.

     Other income - property  services  decreased  $1.5 million,  or 54.4%,  due
principally to decreased transaction activity on which such revenue is based.

     Property operating and maintenance expense increased $2.2 million, or 7.0%,
for the year ended  December  31, 1995 as compared to the  comparable  period in
1994. Of this increase, $2.7 million is principally attributable to the addition
of apartment  units offset by a reduction of $.5 million on properties  owned in
both  periods  principally  attributable  to reduced  real  estate tax and other
operating expenses on certain of those properties.

     Property   management  expenses  decreased  $3.2  million,  or  14.8%,  due
principally  to the  realignment  within PGPSI during 1995 and the effect of the
cost sharing  agreements  between PGI and PGPSI. That sharing was in place for a
full year in 1995 and only from August through December in 1994.

     Interest  expense  decreased $4.3 million,  or 20.2%, due to a reduction of
the Company's  outstanding  debt  concurrent  with the formation of the Company.
Additional  debt added in December  1995  caused a nominal  increase as most was
added late in the fourth quarter of 1995.

     General and  administrative  expenses - property  services  increased  $1.6
million  in 1995 over  1994  principally  due to  expenses  associated  with the
realignment of PGPSI mentioned above.  Severance and other realignment  expenses
totaled $.7 million in 1995, while other expenses including travel and temporary
services  increased by $.9 million due to the  implementation of the realignment
and a computer conversion.

     General and administrative  expenses - corporate  increased $1.2 million or
149% due  principally to the effect of the cost sharing  agreements  between PGI
and PGPSI. In addition, the public company costs existed for only four months in
1994 and for the entire year in 1995.

     Reorganization  costs decreased $7.8 million and represent costs associated
with the  formation  of the  company,  including  accounting,  legal,  and other
formation costs.

                                       31
<PAGE>

Liquidity and Capital Resources

     During the year the Company increased its total debt from $293.8 million at
December 31, 1995 to $297.3 million at December 31, 1996.  The Company  borrowed
additional  fixed-rate term debt of $7.4 million in November 1996 collateralized
by the 278 unit Schooner Bay  apartments in Tampa,  Florida.  This borrowing was
used to fund a portion of the  purchase of the  Habersham  Pointe and River Oaks
apartments in November  1996. In connection  with the purchase of the River Oaks
apartments,  the Company also  assumed  $6.36  million of mortgage  indebtedness
collateralized  by the property.  In July 1996, the Company  renewed its line of
credit facility. Under the terms of the new agreement, the Company may borrow up
to $85 million including up to $50 million related to development activities. At
December 31, 1996,  $42.7 million of debt is  represented  by advances under the
Company's  line of credit.  These  advances are in two contracts at fixed rates.
One  contract  in the amount of $30.7  million is priced at 7.63% and the second
contract in the amount of $12.0 million is priced at 7.69%.  During 1996,  $73.7
million of new borrowings  were drawn under the line of credit and $45.5 million
was repaid.

Mortgage Debt

     Mortgages  payable consist of 30 loans ($254.6 million principal amount) at
December 31, 1996,  each of which is  collateralized  by properties  included in
real estate  assets.  At December  31,  1996,  22 of the loans  ($219.1  million
principal  amount)  carry a fixed  interest  rate and  provide  for the  monthly
payment of interest only, and 8 loans ($35.5 million  principal  amount) provide
for monthly  payments of principal and interest at a fixed rate.  Interest rates
on the fixed rate mortgages  range from 5.75% to 8.52% at December 31, 1996 with
a  weighted  average  interest  rate of 7.75%.  During  1996,  $12.8  million of
principal was repaid on mortgage loans.

Line of Credit

     Concurrent with the Initial Offering, the Company obtained a line of credit
facility in the amount of $75 million. The commitment was subsequently increased
to $115  million and in December  1995 was reduced by the Company to $90 million
and under certain  conditions  could be increased to $150  million.  On July 27,
1996,  the  Company  executed a renewal and  modification  of the line of credit
facility. Under the terms of the new agreement, the Company may borrow up to $85
million including up to $50 million related to development activities.  The line
of credit  matures in July 1998,  but may be extended  through  July 1999 at the
Company's  option.  Borrowings  under the line of credit are  collateralized  by
specified  operating  properties and properties under development.  The interest
rate on the amounts  outstanding  under the line are based on, at the  Company's
election,  either (i) the  greater of the prime rate or the  Federal  Funds rate
plus .50% or, (ii) the London  Interbank Offer Rate ("LIBOR") plus 2.0% - 2.25%,
depending  on certain  financial  ratios  concerning  leverage  and debt service
coverage.  The line of credit reprices, at the Company's discretion,  in defined
intervals  ranging  from 1 to 360  days.  As the  line of  credit  is  drawn  or
reprices,  the  Company  enters  into a contract  and  selects  the term and the
interest rate option it desires.  If the Company  selects a contract  based upon
LIBOR  plus 2.0% - 2.25%,  then the  interest  rate  becomes  fixed for the term
selected. Otherwise, the contract rate varies based upon the appropriate index.

     At March 25, 1997,  $42.7 million was outstanding  under the line of credit
in two separate contracts. One contract in the amount of $30.7 million is priced
at 7.50% and the second  contract  in the  amount of $12.0  million is priced at
7.69%. Both contracts reprice on April 16, 1997.

     The Company  anticipates  that the line of credit will  continue to be used
primarily to fund  development or  acquisition of additional  properties and for
general working capital purposes.

                                       32
<PAGE>

     The scheduled  principal  payments  related to all debt  outstanding  as of
December 31, 1996 are as follows (dollars in thousands):

         Year                   Amount
         --------------------------------
         1997     .......... $        623
         1998     ..........       47,081
         1999     ..........       68,380
         2000     ..........        8,068
         2001     ..........       63,540
         Thereafter.........      109,600
                               ----------
         Total    .......... $    297,292
                             ============

     The  maturities  reflected  above for 1998 include $42.7 million of amounts
outstanding  under the line of credit.  The schedule above assumes (i) a balloon
payment may be  required on tax exempt  bonds that were issued to finance two of
the properties upon the expiration, in 2003, of the credit enhancement currently
securing  these  bonds and (ii) the  exercise of the  put/call  option on a loan
securing one of the properties in 1998. Since the Company  anticipates that very
little of the principal of its mortgage  indebtedness will be amortized prior to
maturity  and  the  Company  will  not  have  sufficient  funds  to  repay  such
indebtedness at maturity, it will be necessary for the Company to refinance such
debt either through  additional debt financing secured by individual  properties
or groups of properties,  through  unsecured private or public debt offerings or
through additional equity offerings.

     The Company expects to meet its short-term liquidity requirements generally
through  its initial  working  capital,  net cash  provided  by  operations  and
borrowings under the line of credit. The Company believes that net cash provided
by operations will be sufficient to allow the Company to make any  distributions
as required  for the Company to continue to qualify as a REIT.  The Company also
believes that the foregoing  sources of liquidity will be sufficient to fund its
short-term liquidity needs for the foreseeable future.

     The  Company  expects  to meet  certain  long-term  liquidity  requirements
relating to  developments,  property  acquisitions,  scheduled debt  maturities,
renovations,  expansions and other non-recurring  capital  improvements  through
long-term  secured and  unsecured  indebtedness  and the issuance of  additional
equity  securities.  The Company also expects to use funds  available  under the
line  of  credit  to  fund  acquisitions,  development  activities  and  capital
improvements  on an  interim  basis.  Borrowings  under the line are  subject to
periodic fluctuations in interest rates and, as such, may have a negative impact
on the amount of interest  incurred  should rates rise during  future  operating
periods.

Capital Expenditures

     Under the  Company's  policy  regarding  repairs,  maintenance  and capital
expenditures,  ordinary repairs and maintenance are expensed as incurred.  Major
replacements  and betterments are capitalized and depreciated on a straight-line
basis over the estimated  useful lives of the properties  (buildings and related
land  improvements--10 to 40 years;  furniture,  fixtures and equipment--3 to 10
years; and tenant improvements--over the life of the related tenant lease). With
respect to the apartment  properties,  the Company  capitalizes floor and window
coverings  and  depreciates  such items over 5 years;  appliances  and  heating,
ventilating and air conditioning  equipment are capitalized and depreciated over
10 years.

                                       33
<PAGE>

     During 1994, the Company incurred an average of $226 per apartment unit for
capital  expenditures  prior to, and $162 per apartment unit  subsequent to, the
Initial Offering.  During 1995 and 1996, the Company incurred a per unit average
of $392 and $939,  respectively,  for normalized and revenue  enhancing  capital
expenditures.  Included in the per unit  average  for 1996 is $477  representing
revenue  enhancing  capital  expenditures  on 39 of  the  Company's  multifamily
properties.  The Company  implemented a program in late 1995 to upgrade selected
properties  which it  believed  would  generate  the best long term  yields as a
result of incremental capital investment. Properties were generally selected due
to locational and submarket outlook and the property's  competitive  position in
the  submarket.  This  "repositioning"  plan is expected to be  completed in the
first quarter of 1997.

     Also  included  in the 1996 per unit  average is $1.07  million of deferred
maintenance  and  acquisition   enhancement   expenditures  on  four  properties
purchased  in December  1995.  These costs  represent a portion of $2.6  million
originally  contemplated  to  be  spent  on  these  properties  when  they  were
underwritten for purchase by the Company.

     After taking into  consideration  these factors,  the "normalized"  capital
expenditures  on the properties  during 1995 and 1996 averaged $392 and $387 per
unit, respectively. Capital expenditures in the future are expected to be funded
from Company  operations,  existing  cash  balances,  and  borrowings  under the
Company's line of credit.

Inflation

     Substantially all of the residential  property leases are for a term of one
year or less,  which may enable the Company to seek increased rents upon renewal
of  existing  leases or  commencement  of new  leases.  Such  short-term  leases
generally  minimize the risk to the Company of the adverse effects of inflation,
although as a general rule, these leases permit residents to leave at the end of
the lease term without penalty.  Commercial property leases range in length from
1 to 25 years and most have expense pass-through provisions.



                                       34
<PAGE>

Funds from Operations

     Funds from  Operations  ("FFO") is defined by the National  Association  of
Real  Estate  Investment  Trusts  ("NAREIT")  to mean net  income,  computed  in
accordance with generally accepted  accounting  principles  ("GAAP"),  excluding
gains (or  losses)  from debt  restructuring  and sales of  property,  plus real
estate  depreciation and amortization,  and after adjustments for unconsolidated
partnerships  and joint ventures.  In addition,  extraordinary or unusual items,
along  with  significant   non-recurring  events  that  materially  distort  the
comparative measure of FFO, should be disregarded in its calculation. Management
generally  considers FFO to be a useful measure of the operating  performance of
an equity REIT because,  together  with net income and cash flows,  FFO provides
investors  with an  additional  basis to evaluate the ability of a REIT to incur
and service debt and to fund  acquisitions and other capital  expenditures.  FFO
does not  represent  cash flows from  operating  activities  as defined by GAAP,
should not be considered as an  alternative to net income as an indicator of the
Company's operating  performance and is not indicative of cash available to fund
all cash flow needs, including principal amortization,  capital improvements and
distributions to stockholders.  Further, FFO as disclosed by other REITs may not
be comparable to the Company's calculation of FFO.

     Consistent with the interpretive  guidance by NAREIT,  in 1996, the Company
changed  its method of  calculating  FFO.  The change  primarily  results in the
Company no longer adding back to net income certain non-cash and non-real estate
depreciation and amortization  charges, such as deferred loan cost amortization,
in determining FFO. For purposes of comparison,  the calculation of FFO for 1995
has been  prepared  under the new  definition.  The  impact of the  change was a
reduction in FFO of approximately  $2.7 million and $2.4 million,  respectively,
for the years ended December 31, 1996 and December 31, 1995. The following table
represents  the Company's  calculation  of FFO for the years ended  December 31,
1996 and December 31, 1995, (dollars in thousands):
<TABLE>
<CAPTION>
                                                                                          Years Ended December 31,
                                                                                          ------------------------
                                                                                            1996           1995
                                                                                            ----           ----
    <S>                                                                               <C>             <C>
    Net income.....................................................................   $     21,215    $    10,063
    Adjustments to net income:
      Minority interests in income.................................................          5,338          2,612
      Minority interests in cash flow..............................................           (219)          (287)
      Gain on sale of properties (1)...............................................         (8,590)             -
      Gain on sale of commercial property services business........................        (11,930)             -
      Post-Measurement Date FFO from commercial property
          services business........................................................            674              -
      Real estate depreciation/amortization........................................         17,783         15,377
      Real estate depreciation/amortization from unconsolidated ventures...........            891            542
      Amortization of management and leasing contracts.............................            598          2,231
      Grants/amortization of employee restricted stock.............................          1,525          1,462
      Other cash reorganization expenses...........................................              -            553
                                                                                      ------------    -----------
          Funds from Operations....................................................   $     27,285    $    32,553
                                                                                      ============    ===========

    Supplemental information:
      Adjustment for straight-lining of rents......................................   $        (47)   $      (128)
                                                                                      =============   ============
</TABLE>

(1)  Excludes $619 of gain on the sale of the Post and Paddock  office/warehouse
     development which the Company's property services subsidiary  developed for
     sale.


                                       35
<PAGE>

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements of the Company are listed under Item 14(a) and are
filed as part of this report on the pages indicated.  The supplementary  data is
included in Note 16 in the  Consolidated and Combined  Financial  Statements and
Notes thereto.

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

     None.

                                       36
<PAGE>

                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors of the Company

     RICHARD J. HAAYEN.  Mr. Haayen,  72, has been a director of the Company and
Paragon GP Holdings  since the Initial  Offering.  He is a retired  chairman and
chief executive officer of The Allstate Insurance Company and a retired director
of Sears,  Roebuck and Company.  Mr. Haayen  joined  Allstate in 1951 and held a
number of  management  positions  with the company,  culminating  his service by
serving as chairman  and chief  executive  officer  from  October 1986 until his
retirement in June 1989. Mr. Haayen is Executive-in-Residence and a professor at
Southern  Methodist  University.  He is a member  of the board of  directors  of
Guaranty  Federal Bank of Dallas,  RLI Insurance  Company,  and the Dallas Opera
(and the  associate  board of the Edwin L. Cox School of  Business  at  Southern
Methodist  University).  Mr.  Haayen  earned  a  B.S.  degree  from  Ohio  State
University.  Mr. Haayen is a member of the Executive  Compensation  Committee of
the Board of Directors.

     THOMAS R.  DELATOUR,  JR. Mr.  Delatour,  43,  has been a  director  of the
Company and Paragon GP Holdings since the Initial Offering. He has over 18 years
of experience  providing  financial  advice to  participants  in the real estate
industry.  Mr.  Delatour  joined RMB  Realty,  Inc.,  a real  estate  investment
company,  in 1988 and  presently  serves as an officer and a  director.  He also
serves as president and a director of FW Genpar,  Inc.,  the general  partner of
FWP, L.P., a Texas limited  partnership  and a substantial  equityholder  in the
Company.  Mr. Delatour served as the Vice President - Finance,  Southeast Region
for Lincoln  Property Company from 1981 to 1987. He is a director of Carr Realty
Corporation,  a publicly traded real estate  investment  trust  headquartered in
Washington, D.C. ( and is Chairman - Urban Development/Mixed Use Council for The
Urban Land Institute).  Mr. Delatour earned a B.B.A.  degree from the University
of Texas.  Mr.  Delatour is a member of the Executive  Committee of the Board of
Directors.

     JOHN H. MASSEY.  Mr.  Massey,  57, has been a director of the Company since
the Initial  Offering.  Mr. Massey has most  recently  served as Chairman of the
Board of Directors and Chief Executive  Officer of Life Partners Group,  Inc. an
insurance  and  financial  holding  corporation  listed  on the New  York  Stock
Exchange,  whose principal  operating  subsidiaries  are the  Philadelphia  Life
Insurance Company and Massachusetts  General Life Insurance Company.  Mr. Massey
served  as  Chairman  and  Chief  Executive  Officer  of First  Southwest  Asset
Management,  Inc., an asset management services company, from 1992 to 1994. From
1986 to 1992,  Mr. Massey served as President and a director of  Gulf-California
Broadcast  Company,  a  Dallas-based  privately-owned  investment  and operating
holding company,  and prior to that as President of Gulf United  Corporation,  a
diversified  holding  company with interests in  broadcasting,  insurance,  data
processing and real estate, and Gulf Broadcasting Company, a national network of
television and radio stations.  He currently  serves as a director of Chancellor
Broadcasting,  Inc., The Sunrise Television Group, Inc.,  Columbine/JDS Systems,
Inc., The Bank of The Southwest, and the Brazos Mutual Fund Group, Inc. In 1982,
Mr.  Massey was  honored  with a  Distinguished  Alumnus  Award from the Johnson
School of  Management at Cornell  University,  and in 1993, he received the Most
Distinguished Alumnus Award from the Edwin L. Cox School of Business at Southern
Methodist  University.  He  earned  a  B.B.A.  degree  from  Southern  Methodist
University,  an M.B.A. degree from Cornell University and a J.D. degree from the
University  of Texas  School of Law.  Mr.  Massey  is a member of the  Executive
Committee of the Board of Directors.

     DON M. SHINE. Mr. Shine, 59, has been a director of the Company and Paragon
GP Holdings since the Initial Offering. He was the President and Chief Operating
Officer of the Company and Paragon GP Holdings from February 1995 until February
1996 and a Managing Director of the Company's  Southwest Region from the Initial
Offering  until  February  1995.  Mr.  Shine  also was the  President  and Chief
Operating  Officer of PGPSI from December  1994 until  January  1996,  and was a
Managing  Director of PGPSI from the Initial Offering until December 1994. Prior
to the Initial  Offering,  Mr. Shine was with Paragon or its  predecessor for 26
years,  serving as a general  partner  from 1969 until 1994 and as the  Managing
Director of the Southwest  Region from 1980 until 1994. As Managing  Director of
the Southwest Region for Paragon.  Mr. Shine was responsible for supervising all
aspects of Paragon's multifamily residential operations in Texas and Utah. He is
an advisory  director of Texas  Commerce Bank N.A., and past board member of the
University of Texas at Dallas Business School,  the Texas Heart  Association and
the Dallas Alliance of Mental Illness. Mr. Shine also is a past president of the
Dallas  Apartment  Association  and the Texas Apartment  Association.  Mr. Shine
earned a B.B.A. degree and an M.B.A. degree from the University of Texas.


                                       37
<PAGE>

     JOSEPH R. MUSOLINO.  Mr.  Musolino,  60, has been a director of the Company
since the Initial Offering. Mr. Musolino has been a vice-chairman of NationsBank
of Texas,  N.A.  since August 1988 and a director of the bank since 1990. He has
also been a director of Justin Industries,  Inc., a manufacturing company, since
1986 and a director of Pool Energy  Services,  Co. since July 1994. Mr. Musolino
is a former president of the Dallas Bankers  Association,  and a former director
of the Texas  Bankers  Association  and the  University  of Oklahoma  College of
Business Administration.  Mr. Musolino earned a B.S. degree and an M.B.A. degree
from the University of Oklahoma. Mr. Musolino is a member of the Audit Committee
of the Board of Directors.

     DOUGLAS D. HAWTHORNE. Mr. Hawthorne, 49, has been a director of the Company
and Paragon GP Holdings  since the Initial  Offering.  Mr.  Hawthorne  currently
serves as the President and Chief Executive  Officer of Presbyterian  Healthcare
System and of the  Presbyterian  Hospital of Dallas,  two  positions he has held
since 1983. He has served this  organization  in a variety of  capacities  since
1970.  Mr.  Hawthorne  is also  currently a member of the board of trustees  for
Presbyterian  Healthcare System and Hospital  Receivables,  Inc. and a member of
the board of directors of  Helicopter  Ambulance  Services,  Inc. He is a former
chairman of the  Facilities & Standards  Policy Panel for the American  Hospital
Associate  and former  chairman  of the  Committee  on Ethics  for the  American
College  of  Healthcare  Executives.  He is a member of the  Board for  American
Hospital Association. Mr. Hawthorne earned a B.S. degree and an M.S. degree from
Trinity  University.  Mr.  Hawthorne  is a member of the Audit  Committee of the
Board of Directors.

     WILLIAM S. JANES.  Mr. Janes,  44, has been a director of the Company since
the Initial  Offering.  He has over 20 years of experience  providing  advice to
participants in the real estate industry. Mr. Janes is an officer and a director
of RMB Realty,  Inc., a real estate investment company, as well as a director of
CapStar Hotel Company,  a publicly  traded  C-Corporation.  Prior to joining RMB
Realty,  Inc.,  Mr. Janes was with Lincoln  Property  Company from 1984 to 1989,
serving as Regional General Partner and overseeing development operations in the
mid-Atlantic region. Mr. Janes maintains  professional  affiliations as a member
of  NAREIT,  SIOR,  and the Urban Land  Institute  and the  Washington  Board of
Realtors.  He also is on the Advance Gifts Committee of the Washington  National
Cathedral.  Mr. Janes earned a B.A. degree from Bowdoin College.  Mr. Janes is a
member of the Executive Compensation Committee of the Board of Directors.

Executive Officers of the Company

     The following is a biographical  summary of the experience of the executive
officers of the Company as of March 31, 1997:

     WILLIAM  R.  COOPER.  Mr.  Cooper,  60, has been  Chairman  of the Board of
Directors  and Chief  Executive  Officer of the  Company and Paragon GP Holdings
since the  Initial  Offering  in July  1994.  In  addition,  Mr.  Cooper was the
President of the Company and Paragon GP Holdings from the Initial Offering until
February  1995.  He also has been  Chairman of the Board of Directors  and Chief
Executive Officer of PGPSI from the Initial Offering to June of 1996 and was the
President of PGPSI from the Initial Offering until December 1994. Mr. Cooper has
also been Chairman of the Board of Directors and Chief Executive Officer of PRSI
since its inception in June of 1996. Prior to the Initial  Offering,  Mr. Cooper
had been with  Paragon  or its  predecessor  for 27 years,  serving as a general
partner or principal  executive  officer from 1967 to 1994 and its President and
Chief  Executive  Officer  from 1979 to 1994.  In such  capacities,  he has been
actively engaged in the acquisition,  development,  management, leasing and sale
of multifamily, office, retail and industrial properties. Mr. Cooper is or was a
member of the board of directors of the Edwin Cox School of Business at Southern
Methodist University, the Advisory Board of the Society of Industrial and Office
Realtors,  the  Dallas  County  Advisory  Board  of the  Salvation  Army and the
Presbyterian  Healthcare System. He also is a member of the Urban Land Institute
and the board of directors of the National Realty Committee. Mr. Cooper earned a
B.A. degree from Southern Methodist University.

                                       38
<PAGE>

     LEWIS A. LEVEY.  Mr. Levey,  54, has been the Vice Chairman of the Board of
Directors  of the  Company and Paragon GP  Holdings  since  February  1995 and a
director of the Company  and Paragon GP Holdings  since the Initial  Offering in
July 1994. He was a Managing  Director of the Company's  Midwest Region from the
Initial  Offering until February 1995. Mr. Levey also has been the Vice Chairman
of the Board of  Directors of PGPSI since  December  1994 to June 1996 and was a
Managing  Director of PGPSI from the Initial  Offering  until December 1994. Mr.
Levey  has also  been  Vice-Chairman  of the Board of  Directors  of PRSI  since
September of 1996. Prior to the Initial Offering,  Mr. Levey was with Paragon or
its predecessor for 23 years, serving as a general partner from 1971 to 1994 and
as the Managing  Director of the Midwest  Region from 1980 to 1994.  As Managing
Director  of the Midwest  Region for  Paragon,  Mr.  Levey was  responsible  for
supervising  all  aspects of  Paragon's  real  estate  operations  in  Illinois,
Indiana, Kansas, Kentucky and Missouri. He is currently a member of the board of
directors of the National  Multi-Housing  Council,  and a Council  member of the
Urban Land  Institute.  Mr. Levey earned a B.S.  degree from the  University  of
Wisconsin and an M.B.A. degree from Washington University (St. Louis).

     ROBERT H. GIDEL.  Mr. Gidel,  45, has been the President,  Chief  Operating
Officer of the Company and Paragon GP Holdings since January 1996. He has served
as a director of the Company and Paragon GP Holdings  since  February  1996.  As
President  and  Chief  Operating  Officer,  Mr.  Gidel  is  responsible  for the
management of the day-to-day affairs of the Company. Mr. Gidel also has been the
President and Chief  Operating  Officer of PGPSI from January 1996 to June 1996,
and a director of PGPSI from March 1996 to June 1996. In addition, Mr. Gidel has
been  President of PRSI since its formation in June of 1996 and a director since
September of 1996. Mr. Gidel has been the President, Chief Operating Officer and
a director (and a member of the  compensation  committee) of the general partner
of Brazos Partners, L.P., a partnership that was formed to acquire and liquidate
a $3 billion  portfolio of real estate assets  previously owned by failed banks,
since July 1993. The portfolio of assets has been substantially liquidated,  and
Mr. Gidel does not have any significant  managerial  responsibilities  remaining
with  respect to this  partnership.  He also was Chief  Operating  Officer and a
director of Brazos Fund, L.P., a real estate investment fund, from March 1994 to
January 1996,  and currently  remains as a director of that fund.  Mr. Gidel was
Managing  Director and a director of Alex Brown Kleinwort Benson Realty Advisors
("ABKB"), a real estate investment management firm based in Baltimore, Maryland,
from 1986 to 1993. Mr. Gidel was Chairman of ABKB's Investment Committee and had
responsibility  for portfolio  management  and strategy for over $3.2 billion of
direct equity  ownership,  participating  debt,  joint venture equity,  and real
estate  securities owned by ABKB's domestic and foreign  institutional  clients.
Mr.  Gidel  earned a  B.S.B.A.  degree in real  estate  from the  University  of
Florida.  Mr.  Gidel is a member  of the  Executive  Committee  of the  Board of
Directors.

     JERRY J. BONNER.  Mr.  Bonner,  57, has been Secretary and Treasurer of the
Company  and Paragon GP Holdings  since the Initial  Offering  and a Senior Vice
President of the Company and Paragon GP Holdings since February 1995. Mr. Bonner
also has been  Secretary,  Treasurer  and a director  of PGPSI since the Initial
Offering and a Senior Vice  President of PGPSI from March 1995 to June 1996. Mr.
Bonner has also been the  Treasurer  and  Secretary and a director or PRSI since
its  formation in June of 1996.  Prior to the Initial  Offering,  Mr. Bonner was
with Paragon or its predecessor for 24 years, serving as Secretary and Treasurer
from 1979 to 1994. As Treasurer,  Mr. Bonner is responsible  for supervising all
treasury,  controllership and management  information systems of the Company. He
had similar  responsibilities while serving as Treasurer of Paragon. He is a CPA
and a member of the Real Estate Council.  Mr. Bonner earned a B.B.A. degree from
Louisiana  Tech  University  and  an  M.B.A.   degree  from  Southern  Methodist
University.

                                       39
<PAGE>

     LYNN T. CALDWELL.  Ms.  Caldwell,  37, has been a Senior Vice President and
Chief  Investment  Officer of the Company and Paragon GP Holdings since February
1995 and was a Vice  President  of the Company and Paragon GP Holdings  from the
Initial  Offering in July 1994 to February 1995. She has also been a Senior Vice
President  and Chief  Investment  Officer of PGPSI from March 1995 to June 1996,
was Vice President and Chief  Investment  Officer of PGPSI from December 1994 to
March 1995 and was Vice  President  of PGPSI  from the  Initial  Offering  until
December 1994.  Ms.  Caldwell has been a director of PRSI since its formation in
June of 1996. She also served as Vice President from June 1996 to September 1996
and Senior Vice President since September 1996.  Prior to the Initial  Offering,
Mr.  Caldwell  was with  Paragon for five years,  serving as Vice  President  --
Finance.  Ms.  Caldwell is a licensed Texas real estate broker and earned B.B.A.
and B.A. degrees from Southern Methodist University.

     THOMAS D. FERGUSON.  Mr. Ferguson, 43, has been a Senior Vice President and
Chief  Financial  Officer of the Company and Paragon GP Holdings  since February
1995,  and was a Vice  President of the Company and Paragon GP Holdings from the
Initial  Offering in July 1994 to February  1995. He also has been a Senior Vice
President and Chief Financial Officer of PGPSI from March 1995 to June 1996, was
Vice President and Chief Financial  Officer of PGPSI from December 1994 to March
1995 and was a Vice President of PGPSI from the Initial  Offering until December
1994. Mr.  Ferguson served as Vice President of PRSI from June 1996 to September
1996 and Senior Vice President and Chief Financial Officer since September 1996.
He has been a  director  of PRSI  since  September  1996.  Prior to the  Initial
Offering,  Mr. Ferguson was with Paragon for 10 years, serving as Vice President
-- Finance. Mr. Ferguson earned a B.A. degree from the University of Arkansas.

     BRIAN F. LAVIN.  Mr. Lavin,  43, has been President of Paragon  Residential
and a Senior Vice  President of Paragon GP Holdings since February 1995. He also
has been President of Paragon  Residential and a director of PGPSI from December
1994 to June 1996, and was a Vice  President of PGPSI from the Initial  Offering
until December 1994. Mr. Lavin has been a director of PRSI since September 1996.
Prior to the Initial Offering, Mr. Lavin was Vice President of Paragon's Midwest
Region, where he directed the development,  marketing,  leasing,  management and
maintenance  operations for Paragon's Kentucky and Indiana portfolio.  Mr. Lavin
is  a  frequent  participant  and  instructor  in  various  property  management
seminars. He has served as guest lecturer at the University of Louisville School
of Business and is a past Director of the Louisville  Apartment  Association Old
Kentucky  Home Council of the Boy Scouts of America,  Louisville  Ballet and the
Louisville Science Center.  Mr. Lavin is CPM certified,  a Council Member of the
Urban Land Institute (ULI),  holds a Board of Directors  position on the Greater
Louisville Economic  Development  Partnership and the Board of Overseers for the
University  of  Louisville.  Mr.  Lavin  earned a B.S.  of B.A.  degree from the
University of Missouri.


                                       40
<PAGE>

Item 11.      EXECUTIVE COMPENSATION

                           Summary Compensation Table
<TABLE>
<CAPTION>
                                                                                                Long Term
                                                                                              Compensation
                                                Annual Compensation (1)                          Awards
                                         ----------------------------------------------------------------------------
                                   Restricted
                                           Salary                   Other Annual        Stock          Options          All Other
   Name and Principal Position     Year    ($)(2)    Bonus ($)    Compensation ($)   Granted ($)     Granted (#)    Compensation ($)
   ---------------------------     ----    ------    ---------    ----------------   -----------     -----------    ----------------
<S>                               <C>    <C>         <C>             <C>               <C>             <C>              <C>
William R. Cooper.............    1996   $ 45,673    $       0        $   0            $   0           $     0          $   750 (5)
     Chairman of the Board and    1995    200,000            0            0                0            10,000              750 (5)
     Chief Executive Officer (3)  1994     79,231            0            0                0            10,000              525 (5)


Robert H. Gidel...............    1996    180,769            0            0                0                 0          781,000 (5)
     President and                1995        N/A          N/A          N/A              N/A               N/A              N/A
     Chief Operating Officer (3)  1994        N/A          N/A          N/A              N/A               N/A              N/A


Brian F. Lavin................    1996    173,269       50,000            0                0                 0          111,688 (5)
     President - Residential      1995    170,000       44,666            0                0            15,000                0
     Group (3)                    1994     19,808       63,832            0          425,000 (4)             0                0


Thomas D. Ferguson............    1996    139,423       20,000            0                0                 0          231,500 (5)
     Chief Financial Officer      1995    125,000            0            0                0            10,000              750 (5)
     Senior Vice President (3)    1994     35,654            0            0          425,000 (4)             0                0


Lynn T. Caldwell..............    1996    132,212       18,705            0                0                 0          144,969 (5)
     Chief Investment Officer     1995        N/A          N/A          N/A              N/A               N/A              N/A
     Senior Vice President (3)    1994        N/A          N/A          N/A              N/A               N/A              N/A
</TABLE>


1.   Pursuant to an Executive Services Sharing Agreement entered into as of July
     27, 1994 by and among the Company, Paragon GP Holdings and PGPSI, the total
     compensation  costs  incurred  in  connection  with the  employment  of the
     Company's  executive  officers  are  allocated  among the various  entities
     pursuant to an agreed-upon  formula.  Douglas A. Knaus  formerly  served as
     President of the Company's  commercial division up until his resignation in
     connection  with the sale of the  Company's  commercial  property  services
     subsidiary in June of 1996.  During the first six months of 1996, Mr. Knaus
     was paid a salary of $91,538 and a bonus of $135,000 in connection with his
     activities at the Company.

2.   The Company commenced operations on July 27, 1994. The amounts set forth as
     "Salary" for 1994  represent  actual  salary paid to such  officers for the
     period from July 27, 1994 to December  31,  1994.  The  salaries of Messrs.
     Cooper, Lavin and Ferguson for 1994 on an annualized basis at year-end were
     $200,000,  $170,000 and  $125,000,  respectively.  The amounts set forth as
     "Salary" for 1996  represent  the actual  salary paid to such  officers for
     1996. Mr. Gidel joined the Company on January 29, 1996 and Mr. Ferguson and
     Ms. Caldwell received salary  adjustments during the year. The salaries for
     Messrs.  Gidel,  Ferguson and Ms. Caldwell for 1996 on an annualized  basis
     were $200,000, $150,000 and $135,000, respectively.

3.   Each of Messrs.  Cooper,  Gidel,  Ferguson and Ms. Caldwell are officers of
     the Company,  Paragon GP Holdings and PRSI. Mr. Lavin is an officer of PRSI
     and Paragon GP Holdings.

4.   Restricted  Stock Granted to each of Mr. Lavin and Mr. Ferguson  represents
     20,000 shares  granted to each as of August 23, 1994 with a value of $21.25
     per share on such date. No  consideration  was paid for any of such shares.
     None of Mr. Lavin's or Mr. Ferguson's shares of restricted stock vest prior
     to the  third  anniversary  of  the  grant  date.  Beginning  on the  third
     anniversary of the grant date, the shares vest over a three-year period (33
     1/3% on each of the third,  fourth,  and fifth  anniversaries  of the grant
     date), with vesting conditioned upon the continued  employment of Mr. Lavin
     or Mr. Ferguson as applicable, on the vesting date. Vesting of these shares
     will  accelerate  if the  merger is  completed.  Dividends  are paid on the
     restricted  stock  granted  to each of Mr.  Lavin  or Mr.  Ferguson.  As of
     December 31, 1996, each of Mr. Lavin and Mr. Ferguson held 20,000 shares of
     unvested restricted stock with a value of $355,000 or $17.75 per share.

5.   Pursuant to the Paragon Senior  Management  Amended and Restated  Incentive
     Compensation  Plan,  each of Mr.  Gidel,  Mr. Lavin,  Mr.  Ferguson and Ms.
     Caldwell  received a restricted  stock right pursuant to which each has the
     right to receive  shares of Company  Common  Stock upon the  occurrence  of
     certain   triggering   events   including  the  merger,   consolidation  or
     reorganization  of the  Company.  The merger will  constitute  a triggering
     event.  Messrs.  Gidel, Lavin,  Ferguson and Ms. Caldwell have the right to
     receive  44,000  shares,  6,250  shares,  13,000  shares and 8,125  shares,
     respectively.  The  values  are  based on a  closing  price of $17.75 as of
     December 31, 1996. All Other  Compensation  for Messrs.  Cooper,  Lavin and
     Ferguson  also consists of a $750  employer  contribution  to each of their
     401K Plans for both 1995 and 1996 and a $525  contribution  to Mr. Cooper's
     401K Plan in 1994. All Other  Compensation for Ms. Caldwell also includes a
     $750 employer contribution to her 401K Plan for 1996.


                                       41

<PAGE>

                 Aggregated Option Exercises in Last Fiscal year
                            and FY-End Option Values
<TABLE>
<CAPTION>
                                                                                             Value of Unexercised
                             Shares                      Number of Unexercised                   In-the-Money
                            Acquired      Value            Options at FY-End                  Options at FY-End
          Name            on Exercise   Realized     Exercisable     Unexercisable     Exercisable    Unexercisable (1)
          ----            -----------   --------     -----------     -------------     -----------    -----------------
<S>                         <C>           <C>           <C>              <C>                <C>         <C>
William R. Cooper.....         0            0             10,000           10,000             0           $ 5,000

Robert H. Gidel.......         0            0                  0                0             0           $     0

Brian F. Lavin........         0            0                  0           15,000             0           $ 7,500

Thomas D. Ferguson....         0            0                  0           10,000             0           $ 5,000

Lynn T. Caldwell......         0            0                  0            7,000             0           $ 3,500
</TABLE>

Based on a closing  price of $17.75 per share of Common  Stock on  December  31,
1996.


                                       42
<PAGE>

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Voting Securities and Principal Holders

     The following table sets forth the beneficial ownership of shares of Common
Stock as of February 24, 1997 (the record date for the Special  Meeting) for (1)
each person  known by the Company to be the  beneficial  owner of more than five
percent of the Company's  outstanding  shares of Common Stock, (2) each director
of the Company  and each Named  Executive  Officer,  and (3) the  directors  and
executive  officers of the Company as a group.  Unless otherwise indicted in the
footnotes, all of such interests are owned directly, and the indicated person or
entity has sole voting and investment  power.  The number of shares  reported as
beneficially  owned by a person  represents the number of shares of Common Stock
the person  holds plus the number of shares  into which Units held by the person
are  redeemable (if the Company elects to issue shares rather than pay cash upon
such  redemption).  The extent to which a person holds shares of Common Stock or
Units is set forth in the footnotes.

<TABLE>
<CAPTION>
                                                 Number of                                    Percent of
            Name and Address                 Shares and Units          Percent of             All Shares
         of Beneficial Owner (1)            Beneficially Owned       All Shares (2)          and Units (3)
         -----------------------            ------------------       --------------          -------------
<S>                                             <C>                       <C>                  <C>
William R. Cooper (4).................          3,113,099                 17.8%                  16.9%
PGI Associates, L.P. (5)..............          2,207,838                 13.0%                  12.0%
Thomas R. Delatour, Jr.(6)............          1,499,622                  9.6%                   8.1%
FWP, L.P. (7).........................          1,487,622                  9.5%                   8.1%
Public Employees Retirement System
   of Ohio (8)........................            960,000                  6.5%                   5.2%
Lewis A. Levey (9)....................            495,835                  3.3%                   2.7%
Don M. Shine (10).....................             86,741                   *                      *
Thomas D. Ferguson (11)...............             21,000                   *                      *
Brian F. Lavin (12)...................             20,080                   *                      *
John H. Massey (13)...................             13,207                   *                      *
Lynn T. Caldwell (14).................             12,039                   *                      *
Richard J. Haayen (15)................             12,000                   *                      *
William S. Janes (16).................             11,000                   *                      *
Joseph R. Musolino (17)...............             10,500                   *                      *
Douglas D. Hawthorne (18).............             10,000                   *                      *
Robert H. Gidel (19)..................              4,000                   *                      *
All directors and executive officers
   as a group (14 persons) (20).......          4,967,941                 26.9%                  26.8%

</TABLE>

*    Less than 1%

1.   The address for FWP, L.P. and Messrs. Delatour and Janes is c/o RMB Realty,
     Inc.,  2501 Main  Street,  Fort  Worth,  Texas  76102.  The address for PGI
     Associates, L.P. and Messrs. Cooper, Levey, Gidel, Ferguson, Shine, Massey,
     Haayen,  Musolino,  Hawthorne and Ms. Caldwell is c/o Paragon Group,  Inc.,
     7557 Rambler Road,  Suite 1200,  Dallas,  Texas 75231.  The address for the
     Public  Employees  Retirement  System  of Ohio  is 277  East  Town  Street,
     Columbus, Ohio 43215.

2.   For  purposes  of this  calculation,  the number of shares of Common  Stock
     deemed  outstanding  includes  14,791,165  shares of Common Stock currently
     outstanding  and the number of shares of Common Stock issuable to the named
     person upon redemption of Units held by such person or upon the exercise of
     options  exercisable  within  60  days  held  by  such  person.  All of the
     outstanding  Units (other than those held by Paragon GP Holdings or Paragon
     LP Holdings) are redeemable, at the option of the holder, for cash equal to
     the value of an equal  number of shares of Common Stock or, at the election
     of the  Company,  for an equal  number  of shares  of  Common  Stock.  This
     calculation  assumes  that all Units held by the named  person are redeemed
     for shares of Common Stock and all options  exercisable within 60 days held
     by such person are exercised.

3.   For purposes of this calculation,  the number of shares of Common Stock and
     Units  deemed  outstanding  includes  14,791,165  shares  of  Common  Stock
     currently  outstanding,  3,675,258 Units currently  outstanding  (excluding
     Units  held by the  Company),  and the  number of  shares  of Common  Stock
     issuable  to the named  person  upon the  exercise  of options  exercisable
     within 60 days held by such person. This calculation assumes that all Units
     held by the named  person are  redeemed  for shares of Common Stock and all
     options exercisable within 60 days held by such person are exercised.

4.   Includes  448,555  shares of Common Stock owned by Mr. Cooper  directly and
     2,207,838 Units which are held by PGI Associates, L.P., the general partner
     of which is a company controlled by Mr. Cooper. Also includes 376,471 Units
     held by a partnership  in which Mr.  Cooper serves as a general  partner of
     the  general  partner.  Also  includes  70,235  Units  owned by Mr.  Cooper
     directly or through a wholly-owned subsidiary,  as well as 10,000 shares of
     Common Stock that Mr. Cooper has an exercisable  option to acquire and that
     are deemed  outstanding  pursuant to Rule 13d-3(d)(1)  under the Securities
     Exchange Act of 1934 ("Rule 13d-3(d)(1)").

                                       43
<PAGE>

5.   PGI Associates, L.P. is a Texas limited partnership, the general partner of
     which is a company  controlled  by Mr.  Cooper and the limited  partners of
     which consist of Messrs.  Cooper,  Levey, Shine, Bonner and Lavin, entities
     wholly  owned by them and five other  officers  or former  officers  of the
     Company or its affiliates. PGI Associates, L.P. owns 2,207,838 Units.

6.   Includes 595,000 shares of Common Stock and 892,622 Units, all of which are
     held by FWP, L.P., the general partner of which is a company  controlled by
     Mr.  Delatour.  Also includes 2,000 shares of Common Stock owned indirectly
     by Mr.  Delatour  through  trusts for his  children  (of which he disclaims
     beneficial  ownership),  as well as 10,000  shares of Common Stock that Mr.
     Delatour  has  an  exercisable  option  to  acquire  and  that  are  deemed
     outstanding pursuant to Rule 13d-3(d)(1).

7.   Includes 595,000 shares of Common Stock and 892,622 Units, all of which are
     owned  directly by FWP,  L.P.,  the  general  partner of which is a company
     controlled by Mr. Delatour.

8.   Represents 960,000 shares of Common Stock reported as owned directly by the
     Public Employees Retirement System of Ohio pursuant to a Schedule 13G filed
     on January 25, 1996 .

9.   Includes  96,658 shares of Common Stock and 12,706 Units owned  directly by
     Mr.  Levey,  as well as 376,471  Units held by a  partnership  in which Mr.
     Levey serves as a general  partner of the general  partner.  Also  includes
     10,000 shares of Common Stock that Mr. Levey has an  exercisable  option to
     acquire and that are deemed outstanding pursuant to Rule 13d-3(d)(1).

10.  Includes  40,847 shares of Common Stock and 35,894 Units owned  directly by
     Mr.  Shine as well as 10,000  shares of Common  Stock that Mr. Shine has an
     exercisable option to acquire and that are deemed  outstanding  pursuant to
     Rule 13d-3(d)(1).

11.  Includes  1,000  shares of Common Stock owned  directly by Mr.  Ferguson as
     well as 20,000  restricted  shares of Common Stock granted to Mr.  Ferguson
     pursuant to the Company's Employee  Restricted Stock Plan, which shares are
     subject to forfeiture in the event Mr. Ferguson's  employment is terminated
     within a specified period.

12.  Includes 80 shares of Common Stock owned  indirectly  by Mr. Lavin  through
     his children,  as well as 20,000  restricted shares of Common Stock granted
     to Mr. Lavin  pursuant to the  Company's  Employee  Restricted  Stock Plan,
     which shares are subject to forfeiture in the event Mr. Lavin's  employment
     is terminated within a specified period.

13.  Includes 707 shares of Common Stock owned directly by Mr.  Massey,  as well
     as 2,500 shares of Common Stock owned  indirectly by Mr. Massey through his
     wife,  as well as 10,000  shares of Common  Stock  that Mr.  Massey  has an
     exercisable option to acquire and that are deemed  outstanding  pursuant to
     Rule 13d-3(d)(1).

14.  Includes  2,039  shares of Common Stock owned  directly by Ms.  Caldwell as
     well as 10,000  restricted  shares of Common Stock granted to Ms.  Caldwell
     pursuant to the Company's Employee  Restricted Stock Plan, which shares are
     subject to forfeiture in the event Ms. Caldwell's  employment is terminated
     within a specified period.

15.  Includes  2,000 shares of Common Stock that Mr.  Haayen owns  directly,  as
     well as 10,000  shares of Common Stock that Mr.  Haayen has an  exercisable
     option  to  acquire  and  that  are  deemed  outstanding  pursuant  to Rule
     13d-3(d)(1).

16.  Includes 1,000 shares of Common Stock owned indirectly by Mr. Janes through
     trusts for his children,  as well as 10,000 shares of Common Stock that Mr.
     Janes has an exercisable  option to acquire and that are deemed outstanding
     pursuant to Rule 13d-3(d)(1).

17.  Includes 500 shares of Common Stock owned directly by Mr. Musolino, as well
     as 10,000  shares of Common  Stock  that Mr.  Musolino  has an  exercisable
     option  to  acquire  and  that  are  deemed  outstanding  pursuant  to Rule
     13d-(d)(1).

18.  Represents  shares of Common Stock that Mr.  Hawthorne  has an  exercisable
     option  to  acquire  and  that  are  deemed  outstanding  pursuant  to Rule
     13d-3(d)(1).

19.  Includes 4,000 shares of Common Stock owned directly by Mr. Gidel.

20.  Includes  1,270,180  shares of Common  Stock,  3,597,761  Units and 100,000
     shares of Common Stock  subject to options  exercisable  within 60 days and
     that are deemed  outstanding  pursuant to Rule  13d-3(d)(1).  Shares and/or
     Units beneficially owned by more than one individual have been counted only
     once for this purpose.

Section 16(a) Beneficial Ownership Reporting Compliance

     Mr. Massey was late in filing two Forms 4 reporting two separate  purchases
of common  stock in  February  and July of 1996,  respectively.  Each of Messrs.
Delatour,  Ferguson, Gidel, Haayen Hawthorne,  Janes, Lavin, Massey and Musolino
and Ms.  Caldwell  were late in filing a Form 5 Annual  Statement  of Changes in
Beneficial Ownership for the year ended December 31, 1996.

                                       44
<PAGE>

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Paragon Group Property Services, Inc. (PGPSI) and
Paragon Residential Services, Inc. (PRSI)

     In May 1996,  the Company  executed  an  agreement  to sell its  commercial
property  services  business  to  an  affiliate  of  Insignia   Financial  Group
("Insignia").  In order to accomplish  the sale,  PGPSI's  residential  property
services  business was transferred to PRSI immediately  prior to the sale, which
was  effective  as of June 30,  1996.  Prior to the sale of PGPSI,  the Company,
through the Operating Partnership, owned a 99% economic interest in PGPSI. Since
June 1996, the Company,  through the Operating Partnership,  owns a 95% economic
interest in PRSI. The Company did not control the voting stock of PGPSI and does
not control the voting stock of PRSI.  The following  transactions  were entered
into with PGPSI or PRSI in 1996.

     *    Prior to June 1996, PGPSI provided  property  management,  leasing and
          other property services with respect to each of the properties.  Since
          June,  PRSI  has  provided  property  management  and  other  property
          services with respect to each of the  residential  properties.  In the
          first six  months of 1996,  the  Company  paid  PGPSI  $1,423,290  and
          $130,250 in management fees and leasing and other fees,  respectively.
          Since  June,  the  Company  has paid PRSI  $1,385,050  and  $74,874 in
          management and leasing and other fees, respectively.

     *    Through June 1996, PGPSI provided development, construction management
          and  acquisition  services to the  Company.  PRSI has  provided  those
          services  since  June.  Both  PGPSI  and PRSI were  reimbursed  by the
          Company for the cost of providing  such  services.  During  1996,  the
          costs allocated to the Company by PGPSI for development,  construction
          management  and  acquisition  services  were  $474,554,  $3,761 and 0,
          respectively.  In the last six months of 1996, the costs  allocated to
          the  Company by PRSI for  development,  construction  management,  and
          acquisition services were $316,277, 0 and $100,000, respectively.

     *    In connection  with the sale of PGPSI,  Insignia paid  $18,200,000 and
          acquired all of the outstanding  stock of PGPSI and a $12,432,000 note
          receivable from PGPSI held by the Company. Certain related parties and
          predecessors that owned the 1% economic interest in PGPSI that was not
          owned by the  Company  received  $57,000 in  exchange  for the sale of
          their stock to Insignia.

     *    In  connection   with  the  Formation   Transactions,   the  Operating
          Partnership  acquired  a note  payable  from  PGPSI in the  amount  of
          $17,000,000.  The note,  with a stated  maturity date of July 31, 2004
          bears  interest  at 12% per annum and  requires  monthly  payments  of
          principal and interest of $174,864,  based upon a 30 year amortization
          schedule.  Payments in the amount of  $1,049,184  were made during the
          first six months of 1996.

     *    In  connection  with the  transfer  of  PGPSI's  residential  property
          services  business to PRSI, PGPSI also transferred  $4,444,759 of debt
          associated with the original  $17,000,000 PGPSI Formation  Transaction
          note.  The terms are  consistent  with those of the original  note and
          payments in the amount of $322,294 were made in the last six months of
          1996.

     *    Effective  July 1, 1996,  PGPSI  transferred  to PRSI the  outstanding
          balance  borrowed  under  the Line of  Credit  agreement  between  the
          Operating  Partnership and PGPSI.  All borrowings bear interest at 12%
          per annum and are payable upon  demand.  Borrowings  at December  1996
          totaled  $4,614,234.  Interest  payments in the amount of $239,097 and
          $217,022  were made by PGPSI in the  first  six  months of 1996 and by
          PRSI in the last six months, respectively.

     *    Effective  June 1, 1996,  the  Operating  Partnership  entered into an
          installment loan for the purpose of financing the PGPSI accounting and
          management  information  system. The outstanding balance of $3,482,914
          was  transferred to PRSI effective July 1, 1996. The note matures June
          1, 2001, bears interest at 10% per annum and requires monthly payments
          of principal and interest of $46,253 based upon a 30 year amortization
          schedule.  Payments in the amount of $46,253 were made by PGPSI in the
          first six months of 1996 and in the amount of  $231,265 by PRSI in the
          last six months of 1996.

                                       45
<PAGE>

     *    Effective  July 27, 1994,  the Company and the  Operating  Partnership
          entered  into  two  separate  cost-sharing  arrangements  with  PGPSI.
          Immediately  prior  to  the  sale  of  PGPSI,  these  agreements  were
          transferred to PRSI. Pursuant to an Administrative Services Agreement,
          PRSI  (and  previously   PGPSI)  provides  the  Company  with  certain
          administrative   and  office  services  and  makes  available  certain
          facilities and equipment.  Pursuant to an Executive  Services  Sharing
          Agreement,  the time devoted by certain  senior  officers of PRSI (and
          previously  PGPSI) who also are  officers of the Company is  allocated
          among the entities pursuant to an agreed-upon formula. Both agreements
          call for the  Company to  reimburse  PRSI (and  previously  PGPSI) for
          amounts  which  management  believes  approximate  the  cost it  would
          otherwise  incur if it contracted  similar  services from an unrelated
          third party.  PGPSI and PRSI each charged the Company  $460,420 during
          1996 under these agreements.

     *    The Company,  through PRSI (and previously PGPSI),  uses a centralized
          disbursement and receipt system whereby, for certain of the Properties
          and for other  properties  owned by  affiliates  of the  Company,  all
          project  deposits are transferred to a central  operating  account and
          all expenses and other  disbursements  are paid from that account.  In
          other cases,  certain properties  maintain a separate cash account for
          recording  project  receipts  and  disbursements,  but certain  common
          operating  expenses are paid through the  centralized  account and are
          subsequently  reimbursed by the  appropriate  properties.  Pursuant to
          these arrangements, PRSI had advanced funds totaling $1,521,338 to the
          Operating Partnership at December 31, 1996.

Other Transactions

     In December 1995, the Company purchased the Overlook  Apartments  (formerly
the  Phoenix  Apartments)  from a  partnership  in which  William R. Cooper is a
partner of such partnership's  general partner.  The total consideration paid in
connection  with the purchase was $8.1  million,  including  approximately  $5.8
million  paid  directly  to the  lender  to pay down  debt on the  property.  In
addition,  the Company assumed approximately $300,000 in debt of the partnership
payable to its general partner. Affiliates of the Company did not receive any of
the cash portion of the purchase  price. In January 1996, the Company repaid the
affiliated debt it had assumed,  paying cash to unaffiliated  parties and paying
4,694 Units to Mr. Cooper. The purchase price of the apartment project was based
on a multiple of net operating income and was approved by the Board of Directors
of the Company,  with Mr. Cooper  recusing  himself from  consideration  of this
transaction.

                                       46
<PAGE>

Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

     14(a)(1)     Financial Statements and Schedules
     and (2)

                  Index to Financial Statements and Schedules

     The following  Consolidated and Combined Financial  Statements and Schedule
of Paragon Group,  Inc. and  Predecessors  and the Independent  Auditors' Report
thereon are filed as part of this report on the pages indicated.
<TABLE>
<CAPTION>

Financial Statements                                                                        Page
--------------------                                                                        ----
     <S>                                                                                     <C>
     Independent Auditors' Report                                                            52

     Consolidated Balance Sheets as of December 31, 1996 and 1995                            53

     Consolidated  and Combined  Statements  of  Operations  for the years ended
     December 31, 1996 and 1995, the period July 27 to December 31, 1994,
     as restated, and the period January 1 to July 26, 1994                                  54

     Consolidated and Combined Statements of Stockholders' Equity (Partners' and
     Owners' Deficit) for the years ended December 31, 1996 and 1995, the period
     ended December 31, 1994, as restated, and the period
     ended July 26, 1994                                                                     55

     Consolidated  and  Combined  Statements  of Cash Flows for the years  ended
     December 31, 1996 and 1995, the period July 27 to December 31, 1994,
     as restated, and the period January 1 to July 26, 1994                                  56

     Notes to Consolidated and Combined Financial Statements                                 57

     Schedules:

     Schedule III:  Real Estate and Accumulated Depreciation as
     of December 31, 1996                                                                    82
</TABLE>

     All other schedules have been omitted  because the required  information of
such other schedules is not present in amounts  sufficient to require submission
of  the  schedule  or  because  the  required  information  is  included  in the
Consolidated and Combined Financial Statements.

                                       47
<PAGE>

         14(a)(3) Exhibits

          2.1  Agreement  and Plan of  Merger  dated as of  December  16,  1996,
               between  Camden  Property  Trust,  Camden  Subsidiary,  Inc.  and
               Paragon Group, Inc.  Incorporated by reference to Exhibit 99.2 to
               the  Company's  Form  8-K  dated  December  16,  1996  (File  No.
               1-13220).

          3.1* Articles   of   Amendment   and   Restatement   of   Articles  of
               Incorporation of Paragon Group, Inc.

          3.2  Amended and Restated Bylaws of Paragon Group,  Inc.  Incorporated
               by reference to Exhibit 3.1 to the Company's  Quarterly Report on
               Form 10-Q for the three months ended March 31, 1995.

         10.1* Second Amended and Restated  Agreement of Limited  Partnership of
               the Operating Partnership.

         10.2* Articles of Incorporation and Bylaws of Paragon GP Holdings.

         10.3* Articles of Incorporation and Bylaws of Paragon LP Holdings.

         10.4* Articles of Incorporation and Bylaws of PGPSI.

         10.5* Employment  Agreement  among  William  R.  Cooper,  the  Company,
               Paragon GP Holdings, the Operating Partnership and PGPSI.

         10.6* Employment  Agreement among Lewis A. Levey, the Company,  Paragon
               GP Holdings, the Operating Partnership and PGPSI.

         10.7* Registration  Rights and  Lock-up  Agreement  between the Company
               and the persons named therein.

         10.8* First Amended and Restated Employee Restricted Stock Plan.

         10.9  Third  Amended and Restated  1994  Employee  Stock  Option,  Unit
               Option,  Restricted  Stock,  Restricted Unit and Restricted Stock
               Right Plan.

        10.10* Non-Employee Director Stock Option Plan.

        10.11* Supplemental Representations and Warranties Agreement among the
               Company, the Operating Partnership,  PGPSI, FWP, L.P. and certain
               other parties named therein.

        10.12* Paragon Group,  Inc. First Amended and Restated  Employee Stock
               Purchase Plan.

        10.13* Paragon  Group  Property  Services,  Inc.  First  Amended  and
               Restated Employee Stock Purchase Plan.

        10.14  Fifth Amended and Restated  Credit  Agreement among Paragon Group
               L.P. and various lenders.

        10.15* Mortgage and Security  Agreement relating to the Pool A Loan by
               Paragon-Ott  Apartments  II, Ltd.,  Lookout Pointe II Associates,
               Ltd., Lookout Pointe Associates, Ltd., Lake George II Associates,
               Ltd. and Paragon Group L.P. to the Prudential  Insurance  Company
               of America.

        10.16+ Letter  Agreement,  dated January 23, 1996,  between  Robert H.
               Gidel and the Company.

        10.17+ Mortgage Note (Texas) dated December 5, 1995 from Paragon Group
               L.P. to Nationwide Life Insurance Company.

        10.18+ Deed of Trust,  Mortgage and Security Agreement (Texas) made by
               Paragon Group L.P. to secure Nationwide Life Insurance Company.

        10.19+ Mortgage Note  (Missouri)  dated  December 5, 1995 from Paragon
               Group L.P. to Nationwide Life Insurance Company.

        10.20+ Deed of Trust and Security Agreement (Missouri) made by Paragon
               Group L.P. to secure Nationwide Life Insurance Company.

        10.21+ Mortgage  Note  (North  Carolina)  dated  December 5, 1995 from
               Paragon Group L.P. to Nationwide Life Insurance Company.

        10.22+ Deed of Trust and Security  Agreement  (North Carolina) made by
               Paragon Group L.P. to secure Nationwide Life Insurance Company.

        10.23# Stock and Note Purchase  Agreement dated as of May 31, 1996, as
               modified by an Addendum  thereto dated as of June 26, 1996, among
               Insignia  Commercial Group,  Inc., PGPSI,  Paragon Group L.P. and
               Texas Paragon Management Partners L.P.

                                       48
<PAGE>

        10.24# Warrant  Agreement  dated as of June 30, 1996  between  Paragon
               Group, Inc. and Insignia Commercial Group, Inc.

        10.25  Form  of  Third   Amended  and  Restated   Agreement  of  Limited
               Partnership  of  the  Operating   Partnership.   Incorporated  by
               reference   to  Exhibit  10.1  to  the  Camden   Property   Trust
               Registration  Statement on Form S-4 filed February 26, 1997 (File
               No. 333-22411)

        10.26  Voting  Agreement,   dated  December  16,  1996,  between  Camden
               Property   Trust,   Paragon   Group,   Inc.  and  certain   major
               securityholders   of  Camden  Property  Trust.   Incorporated  by
               reference   to  Exhibit  10.7  to  the  Camden   Property   Trust
               Registration  Statement on Form S-4 filed February 26, 1997 (File
               No. 333-22411).

        10.27  Voting  Agreement,   dated  December  16,  1996,  between  Camden
               Property   Trust,   Paragon   Group,   Inc.  and  certain   major
               securityholders of Paragon Group, Inc.  Incorporated by reference
               to  Exhibit  10.8  to  the  Camden  Property  Trust  Registration
               Statement  on  Form  S-4  filed   February  26,  1997  (File  No.
               333-22411).

         21.1  List of Subsidiaries of Paragon Group, Inc.

         23.1  Consent of Ernst & Young LLP.

         24.1  Powers of Attorney.

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

          *    Incorporated by reference to the same titled and numbered exhibit
               to the  Company's  Annual Report on Form 10-K for the fiscal year
               ended December 31, 1994.

          +    Incorporated by reference to the same titled and numbered exhibit
               to the  Company's  Annual Report on Form 10-K for the fiscal year
               ended December 31, 1995.

          #    Incorporated by reference to the same titled and numbered exhibit
               to the Company's  Annual Report on Form 10-K/A  (Amendment No. 1)
               for the fiscal year ended December 31, 1995.

     14(b)        Reports on Form 8-K

               The Company  filed a Form 8-K dated  December  16, 1996 which (i)
               reported under Item 5, the execution of the Agreement and Plan of
               Merger with Camden Property Trust,  and (ii) included as exhibits
               under Item 7, the press  release  relating  to the merger and the
               Agreement and Plan of Merger.

     14(c)        Exhibits

               The list of  exhibits  filed  with  this  report  is set forth in
               response to Item  14(a)(3).  The required  exhibit index has been
               filed with the exhibits.

     14(d)        Financial Statements

               None.

                                       49
<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, as amended,  the Registrant has duly caused this report to
be signed on its behalf by the undersigned,  thereunto duly  authorized,  in the
State of Texas on March 31, 1997.


                                                 PARAGON GROUP, INC.,
                                                 a Maryland corporation




                                                 By: /s/William R. Cooper
                                                     --------------------
                                                     William R. Cooper
                                                     Chief Executive Officer and
                                                      Chairman of the Board of
                                                      Directors


                                       50
<PAGE>

     Pursuant to the  requirements  of the  Securities  Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 31, 1997.

     Signature                                     Title

/s/ William R. Cooper                 Chief Executive Officer and Chairman
-----------------------                 of the Board of Directors
William R. Cooper

       *                              Vice Chairman of the Board of Directors
-----------------------
Lewis A. Levey

/s/ Robert H. Gidel                   President and Chief Operating Officer
-----------------------                 and Director
Robert H. Gidel

/s/ Thomas D. Ferguson                Chief Financial Officer and Senior
----------------------                  Vice President
Thomas D. Ferguson

/s/ J.C. Lowenberg, III               Sr. Vice President (chief accounting
-----------------------                 officer)
J.C. Lowenberg, III

       *                              Director
-----------------------
Thomas R. Delatour, Jr.

       *                              Director
-----------------------
Richard J. Haayen

       *                              Director
-----------------------
Douglas D. Hawthorne

                                      Director
-----------------------
William S. Janes

                                      Director
-----------------------
John H. Massey

                                      Director
-----------------------
Joseph R. Musolino

       *                              Director
-----------------------
Don M. Shine

*  By:  /s/Thomas D. Ferguson
           Thomas D. Ferguson
           Attorney-in-Fact
           (See Exhibit 24.1)


                                       51
<PAGE>

INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------



To the Board of Directors and
Stockholders of Paragon Group, Inc.

     We have audited the  accompanying  consolidated  balance  sheets of Paragon
Group,  Inc. and  subsidiaries as of December 31, 1996 and 1995, and the related
consolidated  and  combined  statements  of  operations,   stockholders'  equity
(partners'  and owners'  deficit),  and cash flows of Paragon  Group,  Inc.  and
Predecessors  for the years ended  December  31, 1996 and 1995,  the period from
July 27, 1994  through  December  31,  1994,  as  restated,  and the period from
January 1, 1994 through July 26, 1994.  Our audits also  included the  financial
statement  schedule listed in the index at Item 14(a)1 and 2. These consolidated
and combined  financial  statements and schedule are the  responsibility  of the
management of Paragon Group,  Inc. and  Predecessors.  Our  responsibility is to
express an opinion on these consolidated and combined  financial  statements and
schedule based on our audits.

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

     In our opinion, the consolidated and combined financial statements referred
to above present fairly,  in all material  respects,  the financial  position of
Paragon Group,  Inc. and  subsidiaries as of December 31, 1996 and 1995, and the
results of Paragon Group, Inc. and  Predecessors'  operations and cash flows for
the years  ended  December  31,  1996 and 1995,  the period  from July 27,  1994
through  December  31, 1994,  as  restated,  and the period from January 1, 1994
through  July  26,  1994,  in  conformity  with  generally  accepted  accounting
principles.  Also, in our opinion, the related financial statement schedule when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents fairly in all material respects the information set forth therein.

     As discussed in Note 2, the Company,  since its initial public  offering on
July 27, 1994, accounted for the investment in its property services subsidiary,
Paragon  Group  Property  Services,  Inc.  ("PGPSI"),   under  the  cost  method
consistent  with prior  regulatory  direction.  However,  in September 1995, the
Emerging  Issues Task Force of the Financial  Accounting  Standards Board (EITF)
reached a  consensus  in EITF 95-6 that the cost method of  accounting  for such
investments was not appropriate.  Accordingly,  in 1995, the Company changed its
method of  accounting  for PGPSI from the cost  method to  consolidation  of the
financial  position  and  results  of  operations  of PGPSI  with  the  Company.
Furthermore,   as  required  by  EITF  95-6,  the  1994   financial   statements
(specifically,  the period from July 27, 1994  through  December  31, 1994) have
been  restated  to  consolidate  PGPSI.  The  effect of the  restatement  was to
decrease stockholders' equity at December 31, 1994 by approximately  $20,456,000
and to decrease net income for the period from July 27 through December 31, 1994
by approximately $120,000. The effect on earnings per share was nominal.




Ernst & Young LLP
Dallas, Texas
March 21, 1997

                                       52
<PAGE>


PARAGON GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                         December 31,     December 31,
                                                                                            1996              1995
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>               <C>
                                                       ASSETS

Real estate assets:
     Land                                                                             $     81,214      $     86,602
     Buildings and improvements                                                            441,921           459,129
     Furniture, fixtures and equipment                                                      60,657            57,796
                                                                                      ------------      ------------
                                                                                           583,792           603,527
     Less:  Accumulated depreciation                                                      (127,829)         (126,437)
                                                                                      ------------      ------------
         Operating real estate assets                                                      455,963           477,090
     Construction in process                                                                13,339            27,944
     Real estate held for sale                                                              20,604                 -
                                                                                      ------------      ------------
         Net real estate assets                                                            489,906           505,034
Cash and cash equivalents                                                                    7,087             6,583
Restricted cash                                                                              4,241             3,909
Accounts receivable, including amounts due from affiliates of
     $212 and $1,424, respectively in 1996 and 1995                                          1,437             4,716
Advances to affiliates                                                                       1,532               186
Investment in ventures                                                                      15,164             7,401
Notes receivable from venture                                                                9,839                 -
Deferred charges, net                                                                        5,774             9,254
Deferred rent receivable                                                                         -               260
Deferred tax asset                                                                              93               863
Other assets                                                                                 1,794             1,405
                                                                                      ------------     -------------
         Total assets                                                                 $    536,867     $     539,611
                                                                                      ============     =============

                                 LIABILITIES AND STOCKHOLDERS' EQUITY

Notes payable                                                                         $    297,292     $     293,780
Accrued interest payable                                                                     1,363             1,106
Accrued real estate taxes payable                                                            1,741             2,030
Accounts payable and accrued liabilities, including amounts due to
     affiliates of $10 in 1996                                                              10,019            10,883
Tenant security deposits                                                                     2,205             2,273
Deferred tax liability                                                                          93               863
Deferred gain on sale of commercial property services business                               1,100                 -
                                                                                      ------------     -------------
         Total liabilities                                                                 313,813           310,935
                                                                                      ------------     -------------

Minority interests                                                                          48,548            50,210
                                                                                      ------------     -------------
Commitments and contingencies
Stockholders' equity:
     Common stock $.01 par value, authorized 100,000,000 shares,
         issued 14,791,165 shares                                                              148               148
     Additional paid-in capital                                                            204,617           204,537
     Unamortized employee restricted stock compensation                                     (1,053)           (4,085)
     Accumulated deficit                                                                   (27,411)          (21,236)
                                                                                      ------------     -------------
                                                                                           176,301           179,364
      Less: Cost of 84,486 treasury shares (42,266 in 1995)                                 (1,795)             (898)
                                                                                      ------------     -------------
         Total stockholders' equity                                                        174,506           178,466
                                                                                      ------------     -------------
         Total liabilities and stockholders' equity                                   $    536,867     $     539,611
                                                                                      ============     =============

</TABLE>

See accompanying notes.

                                       53
<PAGE>



PARAGON GROUP, INC. AND PREDECESSORS
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                Company                           Predecessors
                                                            ---------------------------------------------------   --------------
                                                             For the Year      For the Year    For the Period     For the Period
                                                                Ended             Ended          July 27 to        January 1 to
                                                             December 31,      December 31,      December 31,        July 26,
                                                                1996              1995        1994, as Restated        1994
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>               <C>               <C>               <C>
Revenue
    Rental                                                   $   91,037        $   80,437        $   32,099        $   39,018
    Property management services - third party                    2,406             6,859             3,729             4,693
    Property management services - affiliates                     2,573             4,454             1,688             2,751
    Leasing and other property services - third party             2,646             8,847             3,437             4,445
    Leasing and other property services - affiliates              1,226             2,136               967             1,986
    Interest - third party                                          559               537               445               156
    Interest - affiliates                                           161                 -                 -                 -
    Other - properties                                            3,285             3,023             1,222             2,225
    Other - property services                                       836             1,275             1,125             1,668
                                                             ----------        ----------        ----------        ----------
       Total revenue                                            104,729           107,568            44,712            56,942
                                                             ----------        ----------        ----------        ----------
Expenses
    Property operating and maintenance:
       Personnel                                                 10,685             9,385             3,767             4,748
       Advertising and promotion                                  1,924             1,621               625               860
       Utilities                                                  5,694             4,911             1,927             2,649
       Building repair and maintenance                            7,648             6,463             2,259             3,510
       Real estate taxes and insurance                            9,951             8,932             3,759             4,923
       Other operating expenses                                   3,555             2,950               909             2,092
                                                             ----------        ----------        ----------        ----------
                                                                 39,457            34,262            13,246            18,782
    Depreciation and amortization                                19,552            18,561             7,019             6,499
    Property management, net of amounts reimbursed by
       affiliates of $92, $114, $235 and $316 for 1996,
       1995, the period July 27 to December 31, 1994,
       and the period January 1 to July 26, 1994,
       respectively                                              12,336            18,141             8,705            12,587
    Interest - third party                                       22,066            17,011             6,448            14,057
    Interest - affiliates                                             -                 -                 -               801
    General and administrative - property services, net of
       amounts reimbursed by affiliates of $179, $216, $182
       and $945 for 1996, 1995, the period July 27 to
       December 31, 1994, and the period January 1 to
       July 26, 1994, respectively                                4,997             5,693             2,052             2,006

    General and administrative - corporate                        1,919             1,979               795                 -
    Reorganization costs                                              -                 -             7,796                 -
                                                             ----------        ----------        ----------        ----------
       Total expenses                                           100,327            95,647            46,061            54,732
                                                             ----------        ----------        ----------        ----------
Income (loss) before equity in income of ventures,
    gain (loss) on sale of properties, income taxes,
    minority interests and extraordinary items                    4,402            11,921            (1,349)            2,210
Equity in income of ventures                                      1,012               775               317               429
Gain (loss) on sale of properties                                 9,209               (21)                -                 -
Gain on sale of commercial property services business            11,930                 -                 -                 -
                                                             ----------        ----------        ----------        ----------
Income (loss) before income taxes,
    minority interests and extraordinary items                   26,553            12,675            (1,032)            2,639
Income taxes                                                          -                 -                 -                 -
                                                             ----------        ----------        ----------        ----------
Income (loss) before minority interests and extraordinary        26,553            12,675            (1,032)            2,639
items
Minority interests                                               (5,338)           (2,612)              207                 -
                                                             ----------        ----------        ----------        ----------
Income (loss) before extraordinary items                         21,215            10,063              (825)            2,639
Extraordinary gain from forgiveness of debt,
    net of minority interests                                         -                 -             6,832             1,776
Extraordinary loss from early extinguishment of debt,
    net of minority interests                                         -                 -            (5,196)                -
                                                             ----------        ----------        ----------        ----------
       Net income                                            $   21,215        $   10,063        $      811        $    4,415
                                                             ==========        ==========        ==========        ==========
Per share data:
    Income (loss) before extraordinary items                 $     1.43        $     0.68        $    (0.06)
                                                             ==========        ==========        ==========
    Net income                                               $     1.43        $     0.68        $     0.06
                                                             ==========        ==========        ==========
</TABLE>

See accompanying notes.


                                       54
<PAGE>

PARAGON GROUP, INC. AND PREDECESSORS
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(PARTNERS' AND OWNERS' DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995, THE PERIOD
ENDED DECEMBER 31, 1994, AS RESTATED, AND THE PERIOD ENDED JULY 26, 1994
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                Unamortized
                                                                                 Employee                    Less:
                                                                    Additional  Restricted                  Cost of
                                                        Common       Paid-in       Stock      Accumulated   Treasury
                                                         Stock       Capital   Compensation     Deficit      Shares        Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>          <C>          <C>          <C>            <C>        <C>
PARTNERS' AND OWNERS' DEFICIT AT DECEMBER 31, 1993     $      -     $      -     $      -     $  (40,031)    $     -    $  (40,031)
     Contributions                                            -            -            -          3,202           -         3,202
     Distributions                                            -            -            -         (7,912)          -        (7,912)
     Net Income                                               -            -            -          4,415           -         4,415
                                                       --------     --------     --------     ----------     -------    ----------
PARTNERS' AND OWNERS' DEFICIT AT JULY 26, 1994                -            -            -        (40,326)          -       (40,326)
     Paragon Group, Inc. formation transactions               -            -            -         13,391           -        13,391
     Reclassification of accumulated deficit at
        date of initial offering                              -      (26,935)           -         26,935           -             -
     Proceeds of initial offering, net of
        underwriting discount and offering costs
        of $24,813                                          137      266,069            -              -           -       266,206
     Shares issued in exchange for note
        receivable from property services
        corporation                                           7       14,393            -              -           -        14,400
     Shares issued pursuant to employee
        restricted stock plan                                 3        6,890       (6,136)             -        (757)            -
     Adjustment for minority interests at date
        of initial offering                                   -      (56,786)           -              -           -       (56,786)
     Net income                                               -            -            -            811           -           811
     Amortization of employee restricted stock
        compensation                                          -            -          577              -           -           577
     Dividends paid                                           -            -            -         (4,839)          -        (4,839)
                                                       --------     --------     --------     ----------     -------    ----------
STOCKHOLDERS' EQUITY AT DECEMBER 31, 1994,
     AS RESTATED                                            147      203,631       (5,559)        (4,028)       (757)      193,434
     Acquisition of land for Units                            -        1,251            -              -           -         1,251
     Acquisition of partnership interest for
        Units                                                 -       (1,559)           -              -           -        (1,559)
     Conversion of Units to common stock                      1        1,214            -              -           -         1,215
     Net income                                               -            -            -         10,063           -        10,063
     Amortization of employee restricted
        stock compensation                                    -            -        1,333              -           -         1,333
     Redemption of employee restricted stock,
        net of additional grants                              -            -          141              -        (141)            -
     Dividends paid                                           -            -            -        (27,271)          -       (27,271)
                                                       --------     --------     --------     ----------     -------    ----------
STOCKHOLDERS' EQUITY AT DECEMBER 31, 1995                   148      204,537       (4,085)       (21,236)       (898)      178,466
     Partial repayment of note payable to
        affiliates with Units                                 -           80            -              -           -            80
     Net income                                               -            -            -         21,215           -        21,215
     Amortization of employee restricted
        stock compensation                                    -            -        2,135              -           -         2,135
     Redemption of employee restricted stock,
        net of additional grants                              -            -          897              -        (897)            -
     Dividends paid                                           -            -            -        (27,390)          -       (27,390)
                                                       --------     --------     --------     ----------     -------    ----------
STOCKHOLDERS' EQUITY AT DECEMBER 31, 1996              $    148     $204,617     $ (1,053)    $  (27,411)    $(1,795)   $  174,506
                                                       ========     ========     ========     ==========     =======    ==========
</TABLE>

See accompanying notes.


                                       55
<PAGE>

PARAGON GROUP, INC. AND PREDECESSORS
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

<TABLE>
<CAPTION>

                                                                                Company                              Predecessors
                                                           -----------------------------------------------------    --------------
                                                            For the Year       For the Year       For the Period    For the Period
                                                               Ended              Ended             July 27 to       January 1 to
                                                             December 31,       December 31,        December 31,       July 26,
                                                                1996               1995          1994, as Restated       1994
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>              <C>                   <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                               $    21,215      $     10,063          $     811        $     4,415
    Adjustments to reconcile net income to net cash
         provided by operating activities:
       Depreciation                                               18,859            16,182              6,471              6,455
       Amortization                                                  693             2,379                548                 44
       Amortization of deferred financing costs                    1,473             1,559                602                472
       Amortization of employee restricted stock                   1,368             1,333                577                  -
       compensation
       Equity in income of ventures                                    -                 -               (122)              (171)
       Loss (gain) on sale of properties                          (9,209)               21                  -                  -
       Gain on sale of commercial property services              (11,930)                -                  -                  -
       business
       Post-Measurement Date cash flow of commercial
         property services business                                  167                 -                  -                  -
       Minority interests in income (loss)                         5,338             2,612               (207)                 -
       Gain on forgiveness of debt, net of minority                    -                 -             (6,832)            (1,776)
       interests
       Loss on early extinguishment of debt, net of                    -                 -              5,196                  -
       minority interests
    Changes in assets and liabilities:
       Decrease (increase) in restricted cash                       (383)              367              3,019               (695)
       Decrease (increase) in accounts receivable                  3,261            (1,860)            (2,415)               345
       Decrease (increase) in deferred rent receivable                 7               (18)                25                 19
       Increase in prepaid leasing costs                             (62)             (136)               (55)                 -
       Decrease (increase) in other assets                          (523)           (1,614)              (472)                63
       Increase (decrease) in accrued interest payable               386               463               (619)               898
       Increase (decrease) in accrued real estate taxes              (90)              861               (930)             2,572
       Increase (decrease) in accounts payable and                (1,707)            4,052              4,089               (678)
       accrued liabilities
       Increase in tenant security deposits                           73               258              1,412                 32
                                                             -----------      ------------          ---------        -----------
         Net cash provided by operating activities                28,936            36,522             11,098             11,995
                                                             -----------      ------------          ---------        -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Additions to operating real estate assets                    (29,018)          (56,082)          (183,554)            (3,229)
    Additions to construction in process, net of                 (36,740)          (43,560)            (3,217)                 -
    payables
    Additions to investment in ventures                              (95)           (3,624)               (60)                 -
    Purchase of working capital assets, net                            -              (553)                 -                  -
    Purchase of management and leasing contracts                       -                 -             (5,600)                 -
    Payments of organization costs                                     -               (22)               (82)                 -
    Distributions received from ventures                           6,835               462                 36                 89
    Increase in note receivable from venture                      (9,723)                -                  -                  -

    Proceeds from sale of properties, net of selling              37,018                13                  -                  -
    costs of $782 in 1996
    Proceeds from sale of commercial property services
       business, net of selling costs paid of $947                17,289                 -                  -                  -
                                                             -----------      ------------          ---------        -----------
         Net cash used in investing activities                   (14,434)         (103,366)          (192,477)            (3,140)
                                                             -----------      ------------          ---------        -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Net proceeds from sale of common stock                             -                 -            266,206                  -
    Dividends                                                    (27,390)          (27,271)            (4,839)                 -
    Contributions from minority interests                              -                 -                100                  -
    Distributions to minority interests                           (7,020)           (7,063)            (1,235)                 -
    Capital contributions                                              -                 -                  -              3,202
    Capital distributions                                              -                 -                  -             (7,912)
    Deemed distributions at formation                                  -                 -            (11,442)                 -
    Payments of deferred financing costs                            (777)           (1,139)            (4,336)              (115)
    Proceeds from notes payable                                   81,100           174,080            129,248              8,300
    Payments on notes payable                                    (58,162)          (72,512)          (182,902)            (9,507)
    Payment of participation fees and prepayment                       -                 -             (5,778)                 -
    penalties
    Distributions to repay off-balance sheet debt                      -                 -             (2,600)                 -
    Decrease (increase) in advances to affiliates                 (1,749)            1,419             (1,450)                 -
    Proceeds from partner loans                                        -                 -                  -                283
    Payments on partner loans                                          -                 -             (1,463)              (178)
                                                             -----------      ------------          ---------        -----------
         Net cash provided by (used in) financing                (13,998)           67,514            179,509             (5,927)
         activities                                          -----------      ------------          ---------        -----------

Net increase (decrease) in cash and cash equivalents                 504               670             (1,870)             2,928
Cash and cash equivalents, beginning of period                     6,583             5,913              7,783              4,855
                                                             -----------      ------------          ---------        -----------
Cash and cash equivalents, end of period                     $     7,087      $      6,583          $   5,913        $     7,783
                                                             ===========      ============          =========        ===========

Cash paid for interest                                       $    22,023      $     16,556          $   6,475        $    13,305
                                                             ===========      ============          =========        ===========
</TABLE>

See supplemental non-cash disclosures at Note 15.
See accompanying notes.

                                       56
<PAGE>


PARAGON GROUP, INC. AND PREDECESSORS

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
December 31, 1996
(Dollars in thousands, except per share or share/unit data)

1.   ORGANIZATION AND FORMATION OF THE COMPANY

     Paragon  Group,  Inc.  (together  with its  subsidiaries,  the  "Company"),
qualifies as a real estate  investment  trust  ("REIT")  for Federal  income tax
purposes  and was  incorporated  in the state of  Maryland  on March 23, 1994 to
continue the operations of certain  entities  involved in  management,  leasing,
construction,  development and ownership of real estate assets (collectively the
"Predecessors").  On July 27,  1994,  the Company  completed  an initial  public
offering  (the  "Initial   Offering")  of  13,000,000  shares  of  common  stock
(including   1,000,000   shares  issued  upon  exercise  of  the   underwriters'
over-allotment option), a sale of 695,000 shares of common stock to the sponsors
(the "Private Placement") and a business combination with the Predecessors.  The
offering  price of all  shares  sold was  $21.25  per  share,  resulting  in net
proceeds (less the  underwriters'  discount and offering costs) of approximately
$266,206.  Additionally,  in August 1994,  the Company  issued 324,400 shares of
common stock for use in the Employee Restricted Stock Plan.

     Upon  completion  of  the  Initial  Offering,  the  Company,   through  its
wholly-owned  subsidiary,  Paragon  Group LP  Holdings,  Inc.,  acquired a 79.1%
limited partner  interest in Paragon Group L.P. (the  "Operating  Partnership").
The Operating Partnership succeeded to substantially all of the interests of the
Predecessors and certain others in certain properties.  The Company, through its
wholly-owned  subsidiary,  Paragon Group GP Holdings,  Inc., is the sole general
partner  and the  holder  of a 1%  interest  in the  Operating  Partnership.  In
consideration  for the sale of certain  properties  and  partnership  interests,
certain owners of the Predecessors, including affiliates of the Company, elected
to receive limited partnership units ("Units") in the Operating Partnership. The
3,648,546 Units received by such owners at formation  represented an approximate
19.9% equity interest in the Operating Partnership.

     Proceeds  from  the  Initial  Offering,   the  Private  Placement  and  new
borrowings  totaled $408.5  million.  The Company and the Operating  Partnership
used these proceeds to (i) purchase certain  properties and interests in certain
other properties,  (ii) retire existing debt associated with certain properties,
(iii) pay expenses of the offering including underwriting discounts, accounting,
legal, and other formation costs, (iv) pay prepayment penalties, purchase lender
participation  interests,  buy down interest rates on certain mortgage loans and
pay loan costs on new indebtedness,  (v) make distributions to certain owners of
the  Predecessors  to repay  off-balance  sheet debt  associated with one of the
properties,  (vi) purchase the property  services  businesses  from  affiliates,
(vii) pay real  estate  taxes and fund  interest  and tax  escrows,  and  (viii)
establish working capital reserves.

     During 1995,  the  Operating  Partnership  issued  116,136 Units to acquire
additional property and partnership interests from affiliates of the Company and
94,118 Units were  redeemed for shares of common stock in the Company  (with the
Company  acquiring  such Units in  exchange  for a like  number of  shares).  On
January  3,  1996,  the  Operating  Partnership  issued  4,694  Units in partial
settlement  of debt  assumed on the  purchase  of the  Overlook  Apartments.  At
December 31, 1996, the Company's ownership interest in the Operating Partnership
was 80.1%.

     Subsequent  to the business  combination  and prior to June 30,  1996,  the
Company's  management,  leasing,  construction  and development  businesses were
conducted through Paragon Group Property Services, Inc. ("PGPSI").  The Company,
through the Operating Partnership,  owned 100% of the non-voting stock and 1% of
the voting stock of PGPSI  (collectively  representing 99% of the total equity).
As discussed in Note 4,  effective  June 30, 1996, the Company sold its interest
in PGPSI (after  spin-off of the  residential  property  services  business) and
formed Paragon  Residential  Services,  Inc.  ("PRSI") to continue the Company's
residential  property services business previously  conducted through PGPSI. The
Company has a 95%  economic  interest in PRSI  through  ownership of 100% of the
nonvoting  common stock and 1% of the voting  stock.  The  remaining  99% of the
voting stock, which represents a 5% economic interest, is owned by a partnership
controlled by certain current and former executive officers of the Company.

                                       57
<PAGE>

2.   BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation for Periods after the Initial Offering

     For the periods after the Initial Offering,  the accompanying  consolidated
financial  statements  include the  accounts of the  Company,  Paragon  Group GP
Holdings,  Inc.,  Paragon Group LP Holdings,  Inc.,  Paragon  Group L.P.,  PGPSI
(through the date of sale), Paragon Residential  Services,  Inc., 8 wholly-owned
partnerships  and one limited  liability  company,  and  partnerships  owning 13
properties  where  the  Company,  through  the  Operating  Partnership,   has  a
controlling  interest.  All significant  intercompany  accounts and transactions
have been eliminated in consolidation.

     The  Company,  subsequent  to the  Initial  Offering  on July 27,  1994 and
through the third quarter of 1995,  accounted for its  investment in PGPSI under
the  cost  method  consistent  with  prior  regulatory  direction.  However,  in
September  1995,  the  Emerging  Issues Task Force of the  Financial  Accounting
Standards Board ("EITF")  reached a consensus in EITF 95-6 "Accounting by a Real
Estate  Investment  Trust for an investment in a Service  Corporation"  that the
cost method of accounting for such  investments was not  appropriate  and, based
upon  the  specific  facts  and  circumstances,  either  the  equity  method  or
consolidation  accounting  should be used. While the Company only held 1% of the
voting stock of PGPSI,  due to its 99% economic  interest and other  factors the
Company believes that the  consolidation  method should be used and provides for
the most meaningful financial statement presentation. Accordingly, in the fourth
quarter of 1995, the Company changed its method of accounting for PGPSI from the
cost method to consolidation of the financial position and results of operations
of PGPSI in the Company's  consolidated  financial statements.  Furthermore,  as
required by EITF 95-6, the 1994 financial statements  (specifically,  the period
from July 27, 1994 through  December 31, 1994) have been restated to consolidate
PGPSI.  The effect of the  restatement was to decrease  stockholders'  equity at
December 31, 1994 by $20,456 and to decrease income before  extraordinary  items
and net income by $120. The effect on net income per share was nominal.

     The business combination was structured to allow the partners and owners of
the  entities  in the  Predecessors  to  receive  either  cash or  Units  in the
Operating Partnership.  (Units can be exchanged, with certain restrictions,  for
cash or common stock in the Company, at the Company's election, on a one-for-one
basis.) Purchase accounting was applied to the acquisition of all non-controlled
interests  from  persons  who  received  either  cash or Units in the  Operating
Partnership as  consideration  as well as controlled  interests from persons who
received  cash. The  acquisition  of all other  interests was accounted for as a
reorganization of entities under common control and, accordingly,  was reflected
at  historical  cost  in a  manner  similar  to  that of  pooling  of  interests
accounting.  Acquisitions subsequent to the Initial Offering have been accounted
for in a similar manner.

Basis of Presentation for Periods prior to the Initial Offering

     For  periods  prior to the  Initial  Offering,  the  accompanying  combined
financial statements of the Predecessors include the accounts of 45 partnerships
owning  multifamily  apartment  communities,   two  partnerships  owning  retail
properties,  one  partnership  owning an office  property  and various  entities
engaged in property  management,  leasing,  construction  and  development  on a
contractual basis. Additionally included are the accounts of a partnership which
owns a 20% interest in an office  property and is therefore  accounted for using
the  equity  method.  The  Predecessors  is not a  legal  entity  but  rather  a
combination  for  financial  reporting  purposes.   The  accompanying   combined
financial  statements  are  presented  on a  combined  basis  because  of common
ownership and management. All significant inter-entity accounts and transactions
have  been  eliminated  in  combination.  The  accompanying  combined  financial
statements prior to the business combination exclude or carve out certain assets
and  liabilities  that were not  contributed  to the  Operating  Partnership  or
transferred to PGPSI.

                                       58
<PAGE>

Real Estate Assets and Depreciation

     Real estate assets are stated at cost. Ordinary repairs and maintenance are
expensed as incurred;  major  replacements  and  betterments are capitalized and
depreciated  on a  straight-line  basis over the  estimated  useful lives of the
properties (buildings and related land improvements - 10 to 40 years; furniture,
fixtures, and equipment - 3 to 10 years; and tenant improvements - over the life
of  the  related  tenant  lease).   With  respect  to  the  operating  apartment
properties,  the Company  capitalizes floor and window coverings and depreciates
such  items  over  5  years;   appliances  and  heating,   ventilating  and  air
conditioning  equipment are  capitalized  and  depreciated  over 10 years.  With
respect to construction in process, the Company capitalizes all costs associated
with development activities, including interest and taxes, until each project is
complete.  Capitalized  interest for the years ended December 31, 1996, 1995 and
1994 aggregated to $1,687, $1,608 and $47, respectively.

     In March 1995, the Financial Accounting Standards Board issued Statement of
Financial  Accounting  Standards No. 121  "Accounting for the Impairment of Long
Lived  Assets" ("FAS 121").  FAS 121  establishes  accounting  standards for the
impairment  of long lived  assets and is effective  for fiscal  years  beginning
after December 15, 1995, with early adoption encouraged. The Company adopted FAS
121 in 1995.  Accordingly,  the Company records  impairment losses on long lived
assets used in operations when events and circumstances indicate that the assets
may be impaired  and the  undiscounted  cash flows  estimated to be generated by
those  assets  are less  than the  carrying  amount  of  those  assets.  No such
impairment  losses with respect to real estate  assets used in  operations  have
been recognized to date. Real estate assets to be disposed of are carried at the
lower of the carrying  amount or estimated fair value less selling costs and are
classified as real estate held for sale in the accompanying consolidated balance
sheets.

Cash and Cash Equivalents

     For purposes of the  statements  of cash flows,  the Company  considers all
investments  purchased  with an original  maturity of three months or less to be
cash equivalents.

Restricted Cash

     Restricted cash is comprised of tenant security  deposits,  real estate tax
and insurance escrows,  required reserves for property  replacements,  and other
cash restricted pursuant to loan or other agreements.

Investment in Ventures

     The Company's 20% interest in Gateway One Office Venture  ("Gateway"),  its
10% interest in Fair Grove Properties, L.L.C. ("Fair Grove") and its approximate
44% interest in Paradim,  Inc. and it's subsidiaries  (collectively,  "Paradim")
are accounted for using the equity method of accounting.

Deferred Charges

     Deferred charges include costs incurred in connection with the formation of
each entity which are  generally  amortized on a  straight-line  basis over five
years;  deferred  financing costs which are amortized on a  straight-line  basis
over the life of the  related  loan;  prepaid  leasing  costs on the  office and
retail properties which are amortized on a straight-line  basis over the life of
the related  tenant lease;  and management  and leasing  contracts  purchased at
formation which are amortized on a straight-line basis over five years.

                                       59
<PAGE>

Revenue Recognition

     Rental income attributable to residential leases is recognized when earned.
Minimum  rental  income  related to retail and office  leases is recognized on a
straight-line basis over the terms of the leases.  Certain of the leases include
scheduled rent increases and  provisions  whereby the tenant is not  responsible
for rental payments during specified  initial occupancy  periods.  Rental income
recognized in excess of payments due is reflected as a deferred rent  receivable
in the  accompanying  balance sheets.  The retail and office leases also provide
for reimbursement of actual operating expenses in excess of base amounts.

     Management  fees are  based  on a  percentage  of the  rental  receipts  of
properties managed and are recognized when earned. Leasing fees are based on the
gross value of leases signed and are recognized as earned under the terms of the
various  contracts.  Construction  and development fees are generally based on a
fixed percentage of costs and are recognized as the project costs are incurred.

Stock Compensation

     In October 1995, The Financial  Accounting Standards Board issued Statement
of  Financial   Accounting  Standards  No.  123,  "Accounting  for  Stock  Based
Compensation" ("FAS 123") which establishes  financial accounting and disclosure
standards  for stock based  employee  compensation  plans and is  effective  for
fiscal years  beginning after December 15, 1995. FAS 123 provides an alternative
of adopting the new accounting standards of the statement or remaining under the
existing requirements of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees"  ("APB 25").  The Company has decided to continue
accounting for its stock  compensation  arrangements under the provisions of APB
25.

Per Share Data and Dividends

     Earnings  per share with  respect to the Company for the periods  following
the Initial  Offering are computed  based upon the  weighted  average  number of
shares outstanding during the respective period.  Historical per share data with
respect to the periods prior to the Initial  Offering is not relevant  since the
Predecessors' financial statements are a presentation of the combined operations
of partnerships and S corporations.

     For the years ended December 31, 1996 and 1995 and the period from July 27,
1994 through  December 31, 1994, the Company paid dividends of $27,390,  $27,271
and  $4,839,   respectively.   For  income  tax  purposes,   dividends  paid  to
stockholders  consist of ordinary income,  short-term  capital gains,  long-term
capital gains or return of capital. The following is a summary of the income tax
treatment of the dividends paid by the Company:

<TABLE>
<CAPTION>

                                                                                                   Period
                                                            Year Ended December 31,              July 27 to
                                                    ----------------------------------------    December 31,
                                                           1996                 1995               1994
                                                    -------------------- ------------------- ------------------
          <S>                                             <C>                 <C>                 <C>
          Ordinary income.......................           53.24%              47.41%                   -
          Short-term capital gain...............            0.89%                   -                   -
          Long-term capital gain................           16.51%                   -                   -
          Return of capital.....................           29.36%              52.59%             100.00%
                                                           ------              ------             -------
             Total                                        100.00%             100.00%             100.00%
                                                          =======             =======             =======

</TABLE>

                                       60
<PAGE>

Use of Estimates

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

Concentrations

     At December 31, 1996 and 1995, there were cash and restricted cash balances
with  banks  in  excess  of the FDIC  insured  limits  by  $5,188,  and  $3,376,
respectively.  The Company has not  experienced any losses in its cash accounts,
and believes it is not exposed to any  significant  credit risk on cash and cash
equivalents.

     As of December 31, 1996, certain apartment units are leased to tenants that
have common  employers  and may be  dependent  on one related  source of income.
Management  believes that any possible loss resulting  from the  above-mentioned
concentrations  would not be material as the apartment  units could be re-leased
if the current tenants fail to perform under their obligations.

3.   REAL ESTATE INVESTMENTS

Real Estate

     As of December 31, 1996,  the Company,  through the Operating  Partnership,
controls,  either  through  direct  ownership  or in some  instances  through an
investment in a  partnership  or a limited  liability  company,  58  multifamily
residential properties in Florida,  Kentucky,  Missouri,  North Carolina,  South
Carolina and Texas. The Company, through the Operating Partnership, also owns an
interest in Paradim which owns 3 multifamily  residential  properties  that were
previously  wholly-owned by the Company,  and has a minority interest in Gateway
and Fair Grove which own three  office  properties;  one in Missouri  and two in
suburban  Washington,   D.C.  In  addition,  the  Company  has  entered  into  a
non-recourse  ground  lease,  which  commenced on October 24,  1996,  related to
approximately 27.47 acres in Louisville, Kentucky for potential development of a
multifamily residential community in 1997.

     At December 31, 1996, the 58 multifamily  residential properties controlled
by the Company  include 55  operating  properties  containing  15,026  apartment
units,  two properties  under  development for which 520 units are planned and a
12.6  acre  tract of land for which 320  units  are  planned  which the  Company
acquired  in  December  1996  for  future  development.  Two  of  the  operating
properties  containing 548 units are in the initial  lease-up  phase.  The three
multifamily  residential  properties  owned by  Paradim  include  two  operating
properties containing 928 apartment units and one property under development for
which 336 units are planned.

                                       61
<PAGE>

The following is a summary of the Company's real estate  investments at December
31, 1996:
<TABLE>
<CAPTION>

                                            Number of Properties                      Number of Apartment Units
                                     ----------------------------------         ----------------------------------
                                                     Under                                      Under
Location                             Operating    Development     Total         Operating    Development     Total
--------                             ---------    -----------     -----         ---------    -----------     -----
<S>                                     <C>         <C>           <C>            <C>         <C>             <C>

Multifamily Properties
Florida
Tampa/St. Petersburg.............         13           -            13             4,013           -          4,013
Orlando (1)......................          7           1             8             1,802         320          2,122
Winterhaven......................          1           -             1               192           -            192
                                         ---         ---           ---            ------    --------         ------
                                          21           1            22             6,007         320          6,327
                                          --          --            --             -----       -----          -----
Kentucky
Louisville.......................          5           -             5             1,142           -          1,142
                                         ---         ---           ---             -----    --------          -----

Missouri
St. Louis........................         12           -            12             3,142           -          3,142
Kansas City......................          1           1             2               308         288            596
                                          --         ---           ---            ------      ------         ------
                                          13           1            14             3,450         288          3,738
                                          --         ---            --             -----      ------          -----

North Carolina
Charlotte (2)....................          6           1             7             1,647         232          1,879
Greensboro (3)...................          2           1             3               520         336            856
                                         ---         ---           ---            ------      ------         ------
                                           8           2            10             2,167         568          2,735
                                         ---         ---            --             -----      ------          -----
South Carolina
Charleston.......................          1           -             1               352           -            352
                                         ---         ---           ---            ------    --------         ------

Texas
Dallas (4).......................          9           -             9             2,836           -          2,836
                                         ---         ---           ---           -------      ------        -------
    Total Residential............         57           4            61            15,954       1,176         17,130
                                          ==         ===            ==            ======       =====         ======

                                           Number of Properties                       Number of Square Feet
                                     ----------------------------------         ----------------------------------
                                                     Under                                     Under
                                     Operating    Development     Total         Operating    Development     Total
                                     ---------    -----------     -----         ---------    -----------     -----
Office Properties
Missouri
St. Louis (5)....................          1           -             1           401,625           -        401,625

Washington, D.C. (6).............          2           -             2           322,845           -        322,845
                                         ---         ---           ---           -------    --------        -------
    Total Office.................          3           -             3           724,470           -        724,470
                                         ===         ===           ===           =======    ========        =======
</TABLE>

(1)  Operating  information  includes a 272 unit  project that is in the initial
     lease-up phase.  Development information includes 320 units related to land
     purchased in December 1996 for future development.

(2)  Operating information includes a 220 unit project owned by Paradim in which
     the Company holds an approximate 44% interest.

(3)  Development  information  includes a 336 unit  project  owned by Paradim in
     which the Company holds an approximate 44% interest.

(4)  Operating  information  includes a 276 unit  project that is in the initial
     lease-up phase and a 708 unit project owned by Paradim in which the Company
     holds an approximate 44% interest.

(5)  Represents an office building owned by Gateway in which the Company holds a
     20% interest.

(6)  Represents  two office  buildings  owned by Fair Grove in which the Company
     holds a 10% interest.


                                       62
<PAGE>

Development

     On January 29, 1996, the Company, through PGPSI, acquired a 5.15 acre tract
of land in suburban  Dallas,  Texas and  commenced  construction  on the 108,600
square  feet Post and Paddock  office/warehouse  development.  Construction  was
completed  in November  1996 and the  property  was sold on December 4, 1996 for
$3,700.

     The Company has entered into a non-recourse  ground lease,  which commenced
on  October  24,  1996,  related to  approximately  27.47  acres in  Louisville,
Kentucky for potential  development in 1997. The ground lease allows the Company
to  develop,  at its'  discretion,  a one or two phase  multifamily  residential
community  on the  leased  acreage.  The  lease has a term of 40 years and under
certain  conditions,  the Company  has the option to acquire  the land.  Monthly
lease  payments  which are  estimated to range from $7 to $14 have been deferred
until July 1, 1997.

      On December  13, 1996,  the Company  acquired a 12.6 acre tract of land in
Orlando,  Florida for $2,007.  A 320 unit multifamily  residential  community is
planned  for the site which,  when  developed,  will be the second  phase of the
completed 272 unit Renaissance Pointe apartments.

     During  1996,  the  Company  completed  construction  of three  multifamily
residential  properties  containing a total of 824 apartment  units. At December
31, 1996, an additional 856 apartment  units were under  construction  which are
scheduled for completion in the first and second quarters of 1997, including 336
units owned by Paradim. The three multifamily  residential  properties completed
in 1996 include the 276 unit Heron Pointe apartments in Tampa, Florida completed
in February 1996, the 272 unit Renaissance Pointe apartments in Orlando, Florida
completed  in July 1996 and the 276 unit  Stone  Gate  apartments  completed  in
August 1996. At December 31, 1996,  the  Renaissance  Pointe  apartments and the
Stone Gate apartments were in the initial lease-up phase.

Acquisitions

     On November 8, 1996, the Company  purchased two North Carolina  multifamily
residential  communities (the 240 unit Habersham Pointe apartments in Charlotte,
North  Carolina  and the 216 unit River Oaks  apartments  in  Greensboro,  North
Carolina) from a single seller for a total purchase price of $20,900,  including
the assumption of mortgage  indebtedness in the amount of $6,357  collateralized
by the River Oaks apartments.

Dispositions

     As a  result  of the  sale of its  commercial  property  services  business
discussed in Note 4, the Company  disposed of its three  wholly-owned  operating
commercial  properties in the fourth  quarter of 1996. The Company also sold the
Turtle Creek I and the Turtle Creek II apartments in Asheville,  North  Carolina
in the fourth  quarter of 1996.  The 1996 property  sales are  summarized in the
following table:

                                       63
<PAGE>

<TABLE>
<CAPTION>
                                                                                     SF/
                Date Sold                 Property              Location          # of Units      Sales Price
                ---------                 --------              --------          ----------      -----------
      <S>                           <C>                        <C>                 <C>             <C>
       Commercial Properties
       October 1, 1996               Southwood Mall            Bradenton, FL        113,949         $  3,170
       October 31, 1996              Westgate Centre           St. Louis, MO         58,935            7,130
       December 19, 1996             The Paragon               St. Louis, MO        102,486           10,000

       Multifamily Properties
       December 12, 1996             Turtle Creek I            Asheville, NC            208            7,075
       December 12, 1996             Turtle Creek II           Asheville, NC            176            6,725
                                                                                                    --------

       Total                                                                                        $ 34,100
                                                                                                    ========
</TABLE>

     In accordance  with FAS 121,  properties held for sale are to be carried at
the lower of the  carrying  amount or estimated  fair value less selling  costs.
Accordingly,  at June 30, 1996, the Company recognized an impairment  adjustment
of $1,143,  all of which  related to Southwood  Mall,  which is included in gain
(loss) on sale of properties in the accompanying statements of operations.

     In addition, in an effort to maximize the long term growth potential of the
portfolio,  management intends to regularly evaluate the possible disposition of
targeted  multifamily  residential  assets where a  redeployment  of capital can
increase  geographic  efficiencies or improve operating results. At December 31,
1996,  three  multifamily  properties  (the 232 unit  Brookfield  apartments  in
Dallas, Texas; the 352 unit Westchase Apartments in Charleston,  South Carolina;
and the 251 unit San Miguel Apartments in St. Louis, Missouri) are classified as
held for sale. The Company expects to sell these  properties at prices in excess
of carrying amounts.

Joint Venture

     On April 1, 1996, the Company  entered into a joint venture  (Paradim) with
Careit Investments  Limited  Partnership  ("Careit"),  an affiliate of Caisse de
depot  et  placement  du  Quebec,  to  acquire,  develop  and  operate  selected
multifamily residential properties in markets in which the Company operates. The
Company  and  Careit  each have  committed  to invest up to  $22,500,  primarily
through a newly formed Maryland  corporation,  Paradim,  Inc.,  which intends to
qualify as a REIT for Federal income tax purposes.  Each  investment by Paradim,
Inc. is to be made  through  separate  limited  liability  companies  or limited
partnerships  in which  Paradim,  Inc.  will own an 89% interest as the managing
member or general  partner,  the Company  will own a 1% interest and a number of
private investors will own the remaining interests.  In connection with Paradim,
Inc.'s initial capitalization,  the Company effectively contributed its interest
in three  properties  (Overlook,  formerly  known  as The  Phoenix,  a  220-unit
multifamily  residential  complex in Charlotte,  North  Carolina;  Highpoint,  a
708-unit multifamily  residential complex in Dallas, Texas; and Brassfield Park,
a 336-unit  multifamily  residential  complex under  development  in Greensboro,
North Carolina) and Careit contributed $7,926 in cash. At formation, the Company
also received a distribution of  approximately  $6,618,  which was used to repay
existing indebtedness under the line of credit. The Company recorded the initial
contribution  of these  properties at their net carrying value on April 1, 1996,
which was  approximately  $14,726 (net book value of $41,842 subject to existing
indebtedness of $27,116).  The Company's investment,  which includes a direct 1%
interest in two limited liability  companies and one limited  partnership and an
approximate  43% indirect  interest in such  entities  through its  ownership in
Paradim,  Inc.  (collectively,  approximately 44%), is being accounted for under
the equity method. As of December 31, 1996, the Company's  aggregate  investment
in Paradim was approximately $7,954.

                                       64
<PAGE>

4.   PROPERTY SERVICES

     Subsequent  to the business  combination  on July 27, 1994 and through June
30, 1996,  the  Company's  management,  leasing,  construction  and  development
businesses  were  conducted  through  PGPSI.  PGPSI  provided   residential  and
commercial  property  services  to the  Company,  affiliates  of the Company and
unrelated third parties.  PGPSI was originally  capitalized  with $3,000 of cash
and the issuance of a $17,000 note.

     During 1995, PGPSI was realigned from a regional multi-product organization
to two national  product  groups - one for  residential  operations  and one for
commercial  operations.   As  a  result  of  the  realignment,   PGPSI  incurred
non-recurring  charges  totaling  $748 related to employee  severance  and other
costs,  including  $195 of  non-cash  charges  associated  with the  accelerated
vesting of outstanding restricted stock made available to certain employees (See
Note 9). At December 31, 1995,  PGPSI  managed over 26.4 million  square feet of
commercial space and 22,085 apartment units.

     In May 1996,  the Company  executed  an  agreement  to sell its  commercial
property  services  business to an affiliate of Insignia  Financial Group,  Inc.
("Insignia").  In order to accomplish  the sale,  PGPSI's  residential  property
services business was transferred to PRSI.  Immediately  following the transfer,
as of June 30, 1996, Insignia acquired all of the outstanding stock of PGPSI and
a $12,432 note receivable from PGPSI held by the Company.  The acquisition price
included  initial  cash  consideration  of $18,200  and two  potential  earn-out
payments  totaling up to $4,000 which are contingent  upon PGPSI revenue meeting
certain  specified  targets over the next three years. The earn-out payments may
be reduced by as much as $2,900 in the event  certain  management  contracts are
terminated  within a two-year  period after  closing.  In addition,  the initial
acquisition  price may be reduced by up to $1,100 in the event the employment of
certain  employees  of PGPSI is  terminated  within  one year  after  closing or
certain existing  management  contracts are terminated within a five-year period
after closing.

     In connection with the sale, the Company  received  warrants to purchase up
to 50,000 shares of Insignia  Financial  Group,  Inc. stock at a price of $28.96
per share and  Insignia  received  warrants  to  purchase  50,000  shares of the
Company's  stock at $18.25 per share and may  receive  warrants  to  purchase an
additional  238,000 shares at $18.25 per share,  depending on the termination of
certain management contracts during the two-year period after closing.

     As a result of the sale,  the Company  recognized  a gain of $11,930  which
does not consider potential  earn-out payments,  the value of warrants issued or
received,  or $1,100 of the initial  acquisition  price which is  contingent  on
future events. The contingent  portion of the initial  acquisition price and the
earn-out payments,  if any, will be recognized when earned. The gain on sale was
determined  in  accordance  with  Accounting  Principles  Board  Opinion No. 30,
"Reporting the Results of Operations",  whereby the commercial  property service
business  net loss of $843 from the date (May 7, 1996)  management  committed to
the disposal of the  commercial  property  services  business (the  "Measurement
Date")  through the date of sale (June 30,  1996) was treated as a reduction  of
the gain on sale. The post-Measurement Date net loss is summarized as follows:

                                       65
<PAGE>

<TABLE>
<CAPTION>

           <S>                                                                         <C>
           Revenue
              Property management services - third party.....................          $     724
              Property management services -affiliates.......................                471
              Leasing and other property services - third party..............              1,318
              Leasing and other property services - affiliates...............                376
              Other..........................................................                430
                                                                                       ---------
                                                                                           3,319
                                                                                       ---------

           Expenses
              Property management............................................              3,348
              General and administrative.....................................                570
              Interest.......................................................                  1
              Depreciation and amortization..................................                243
                                                                                       ---------
                                                                                           4,162
                                                                                       ---------
         Net Loss............................................................          $    (843)
                                                                                       ==========
</TABLE>

     Included in property management expenses is $767 of amortization  primarily
related to the June 30, 1996  accelerated  vesting of employee  restricted stock
granted to certain employees of the commercial property services business.

     The closing of the sale occurred on July 2, 1996, at which time the Company
received net  proceeds  from the sale of $18,072  (net of  prorations  of $165).
Proceeds from the sale were used to reduce borrowings outstanding under the line
of credit.

     PRSI will continue the Company's residential property services business and
will provide all residential  property service functions  previously provided by
PGPSI,  including property  management,  leasing,  development,  acquisition and
disposition for its owned residential  communities as well as for affiliated and
third party residential  owners.  As of December 31, 1996, the Company,  through
PRSI, managed 77 multifamily  residential  communities located across the United
States,  totaling  approximately 21,696 apartment units (of which 57 communities
and 15,954  apartment units were for the Company,  including two communities and
928 apartment units for Paradim).


5.   DEFERRED CHARGES

     Deferred charges consist of the following:
<TABLE>
<CAPTION>
                                                       December 31,            December 31,
                                                           1996                    1995
                                                        ---------             ------------
         <S>                                            <C>                   <C>
         Deferred financing costs....................   $   7,229             $      8,378
         Organization costs..........................         249                      249
         Prepaid leasing costs.......................           -                      421
         Management and leasing contracts............       1,356                    4,044
                                                        ---------             ------------
                                                            8,834                   13,092
         Less: Accumulated amortization..............      (3,060)                  (3,838)
                                                        ---------             ------------
                                                        $   5,774             $      9,254
                                                        =========             ============
</TABLE>

     Amortization of organization  costs and prepaid leasing costs was $94, $148
and $110 for the years ended December 31, 1996, 1995 and 1994, respectively.

     Amortization  of deferred  financing  costs,  which is included in interest
expense in the  accompanying  statements of operations,  was $1,473,  $1,559 and
$1,074 for the years  ended  December  31,  1996,  1995 and 1994,  respectively.
During 1996, an additional $204 of construction  period amortization of deferred
financing   costs  related  to  multifamily   residential   developments   under
construction was capitalized.

                                       66
<PAGE>

     Amortization of management and leasing contracts purchased at formation was
$797,  $2,231 and $482 for the years  ended  December  31, 1996 and 1995 and the
period from July 27, 1994 through  December 31, 1994,  respectively.  Management
has  estimated the useful life of the  contracts  initially  acquired to be five
years, based upon historical experience with other contracts with similar terms.
During 1996 and 1995, certain of the contracts were terminated, and as a result,
the Company recognized impairment adjustments of $258 and $1,111,  respectively,
which are included in  amortization  expense in the  accompanying  statements of
operations.  The impairment  adjustments,  determined on a prorata  basis,  were
based upon the  percentage  of contracts  terminated  during 1996 and 1995.  The
contracts  terminated in 1996 and 1995 were  allocated  gross values of $359 and
$1,556 and  related  accumulated  amortization  of $101 and $445,  respectively.
Management  intends  to  periodically   evaluate  the  carrying  amount  of  the
management  and  leasing  contracts  in the future  and,  if  necessary,  record
additional impairment adjustments.

     In 1996, the Company  wrote-off $2,329 of management and leasing  contracts
(and $941 of related  accumulated  amortization) which related to the commercial
property  services  business  sold in 1996 which is  included in gain on sale of
commercial  property  services  business  in  the  accompanying   statements  of
operations.  In  addition,  $462 of prepaid  leasing  costs (and $185 of related
accumulated  amortization)  which related to the commercial  properties  sold in
1996 was  written-off  in 1996 and is  included  in the gain  (loss)  on sale of
properties in the accompanying  statements of operations.  In 1996 and 1995, the
Company also wrote-off certain fully amortized deferred charges including $1,841
of  deferred  financing  costs in 1996 and $206 of  organization  costs,  $86 of
prepaid leasing costs and $730 of deferred  financing costs in 1995. As a result
of loan  repayments in 1994, $970 of deferred  financing costs were  written-off
and are reflected as an  extraordinary  loss in the  accompanying  statements of
operations.

6.   INCOME TAXES

Periods after the Initial Offering

     The Company has elected to be taxed as a real estate investment trust under
the Internal Revenue Code of 1986, as amended,  commencing with its taxable year
ended December 31, 1994. As a result,  the Company will generally not be subject
to  Federal  income  tax on its  taxable  income to the  extent  it  distributes
annually at least 95% of its taxable  income to its  shareholders  and  complies
with certain other  requirements.  Accordingly,  no provision for Federal income
taxes has been made for the  Company  and  certain  of its  subsidiaries  in the
accompanying consolidated financial statements. State, local and other taxes are
not significant for the Company or its subsidiaries.

     As of  December  31,  1996  and  1995,  the  net  assets  reported  in  the
consolidated  financial  statements  for the Company exceed the tax basis in net
assets by approximately $39,000 and $44,000, respectively.

     PGPSI and PRSI file  separate  tax  returns  and are subject to income tax.
Accordingly,  the  provision for income taxes for PGPSI through the date of sale
on June 30, 1996 and for PRSI for the period from July 1, 1996 through  December
31, 1996 has been  calculated  in  accordance  with the  Statement  of Financial
Accounting  Standards 109,  "Accounting for Income Taxes" ("FAS 109"). Under the
provisions  of FAS 109,  deferred  tax assets and  liabilities  are provided for
certain  temporary  differences  between  the  carrying  amounts  of assets  and
liabilities  for  financial  reporting  purposes  and the  amounts  used for tax
purposes,  computed  based on  provisions  of the enacted  tax law.  Significant
components of deferred tax assets and  liabilities  for PGPSI as of December 31,
1995 and PRSI as of December 31, 1996 are as follows:


                                       67
<PAGE>
<TABLE>
<CAPTION>
                                                                       PRSI            PGPSI
                                                                   December 31,     December 31,
                                                                       1996             1995
                                                                   ------------     ------------
       <S>                                                         <C>              <C>
       Deferred tax assets:
          Intangible assets...................................     $     1,266      $      4,189
          Net operating loss..................................             819             1,284
          Employee restricted stock compensation..............             388               561
          Other   ............................................             225               133
                                                                   -----------      ------------
                                                                         2,698             6,167
          Valuation allowance.................................          (2,605)           (5,304)
                                                                   -----------      ------------
                                                                   $        93      $        863
                                                                   ===========      ============

       Deferred tax liabilities:
          Depreciable assets..................................     $        87      $        858
          Other   ............................................               6                 5
                                                                   -----------      ------------
                                                                   $        93      $        863
                                                                   ===========      ============
</TABLE>

     Deferred tax assets relate  primarily to (i) the difference in the carrying
amount of intangible assets recognized at formation of each entity for financial
reporting  purposes  and the  amount  recognized  for  tax  purposes;  (ii)  the
amortization of employee  restricted stock compensation for financial  reporting
purposes;  and (iii) tax net operating  losses,  which for PRSI expires in 2011.
Deferred tax  liabilities  relate  primarily to the  difference  in the carrying
amount of certain  depreciable assets for financial reporting purposes which are
deducted for tax purposes.  A valuation  allowance has been recognized to offset
the net deferred tax assets, due to the uncertainty of the ultimate  realization
of those deferred tax assets in future years.

Periods prior to the Initial Offering

     The  entities  included  in  the  combined  financial   statements  of  the
Predecessors  were either limited  partnerships  or S corporations  and were not
subject to Federal and state income taxes. Accordingly,  no recognition has been
given to income taxes in the combined  financial  statements of the Predecessors
since the income or loss of the  entities  are to be included in the tax returns
of the individual owners.

7.   NOTES PAYABLE

Debt Restructuring

     During 1994, net proceeds from the Initial Offering,  the Private Placement
and new  borrowings  were  utilized to retire 28 loans (26 of which were retired
prior to maturity) with outstanding balances of $174,449,  including seven loans
which were repaid at a discount.  In order to retire certain loans,  the Company
was  required to pay lender  participation  interests  of $2,577 and  prepayment
penalties of $3,201.

     In connection with the Initial Offering,  the Company paid $680 and entered
into an interest  rate swap  agreement  in the  notional  amount of $6,760.  The
agreement,  which  expires on January 27,  2000,  effectively  reduces the fixed
interest rate on one mortgage note from 9.5% to 7.5%. Additionally,  the Company
reduced the outstanding principal balances of seven loans by $4,229 and utilized
$755 to reduce the interest rates on four loans.

     During 1994, debt restructuring  resulted in an extraordinary gain from the
forgiveness of debt (before minority  interests) of $10,675 and an extraordinary
loss from early  extinguishment  of debt (before minority  interests) of $6,748.

                                       68
<PAGE>

Mortgages Payable

     Concurrent with the Initial Offering,  the Company obtained new debt in the
amount of $108,540 which is collateralized by certain  properties.  The new debt
is structured in two pools;  Pool A, in the amount of $61,710,  requires monthly
payments of interest only at 8.36% per annum and matures in July 2001;  and Pool
B, in the amount of $46,830, requires monthly payments of interest only at 8.52%
per annum and matures in July 1999.

     Effective October 1, 1995, the Company assumed debt in the amount of $9,856
associated with the acquisition of partnership interests related to the 372 unit
Spanish  Trace  apartments  in St. Louis,  Missouri.  The loan requires  monthly
payments of principal and interest,  bears interest at 7.35% per annum,  matures
in September 2028 and is insured by the United States  Department of Housing and
Urban Development ("HUD").  There are no restrictions on the use or operation of
this property.

     In December  1995,  the Company  obtained new debt in the amount of $69,000
collateralized  by various  properties.  The new debt requires  monthly interest
only  payments  at 7.29% per annum for three  years and  monthly  principal  and
interest  payments  for years four  through ten based on a 25 year  amortization
schedule and matures  December  2005.  Net proceeds of the new debt were used to
repay existing borrowings under the Company's line of credit.

     Additionally, in December 1995, in conjunction with the purchase of the 220
unit Overlook apartments in Charlotte,  North Carolina, the Company obtained new
debt in the amount of $5,400 which is collateralized  by the property.  The loan
requires  monthly  payments and bears interest at 7.5% fixed throughout the term
with  interest  only payments for the first two years and principal and interest
payments for the last 5 years based on a 25 year amortization schedule. The note
matures in January 2003. On April 1, 1996, the loan was assumed by Paradim.

     Also in December 1995,  concurrent  with the acquisition of two properties,
the Company borrowed $20,250 and $7,930.  The notes required monthly payments of
interest only at interest rates of 7.66% and 7.63% respectively.  The notes were
collateralized  by various  properties  and had maturity dates of June and March
1996, respectively. The $7,930 loan was repaid at maturity on March 28, 1996 and
on April 1, 1996, the $20,250 loan was assumed by Paradim.

     On November 6, 1996, the Company  obtained new debt in the amount of $7,400
collateralized  by the 278 unit Schooner Bay apartments in Tampa,  Florida.  The
new debt requires  monthly  payments of principal and interest at 7.7% per annum
for seven years and matures in November  2003. Net proceeds of the new debt were
used  to  fund a  portion  of the  purchase  of the 240  unit  Habersham  Pointe
apartments in Charlotte,  North Carolina and the 216 unit River Oaks  apartments
in Greensboro, North Carolina on November 8, 1996.

     On November 8, 1996, in conjunction with the purchase of the 216 unit River
Oaks  apartments in Greensboro,  North Carolina,  the Company  assumed  mortgage
indebtedness in the amount of $6,357  collateralized  by the property.  The loan
requires  monthly  payments  of  principal  and  interest at 8.44% per annum and
matures on October 15, 1999.

     Mortgages  payable  consist  of 30 loans  ($254,592  principal  amount)  at
December 31, 1996 and 33 loans ($279,280 principal amount) at December 31, 1995,
each of which is collateralized by properties included in real estate assets. At
December 31, 1996,  22 of the loans  ($219,134  principal  amount) carry a fixed
interest rate and provide for the monthly  payment of interest only, and 8 loans
($35,458  principal  amount)  provide for  monthly  payments  of  principal  and
interest at a fixed rate.  Interest rates on the fixed rate mortgages range from
5.75% to 8.52% at December  31, 1996 with a weighted  average  interest  rate of
7.75%.  At December 31, 1995,  27 of the loans carry a fixed  interest  rate and
provide  for the  monthly  payment of  interest  only,  and 6 loans  provide for
monthly  payments of principal and interest at a fixed rate.  Interest  rates on
the fixed rate  mortgages  range from 5.75% to 10% at  December  31, 1995 with a
weighted average interest rate of 7.71%.  During 1996,  $12,762 of principal was
repaid on mortgage loans.

                                       69
<PAGE>

     At December 31, 1996 and 1995, two of the mortgage loans  collateralize tax
exempt  housing  revenue  bonds and two  related  mortgage  loans  collateralize
taxable housing revenue bonds. The Predecessors  obtained these mortgages during
1993.  As additional  security for these loans,  the  Predecessors  entered into
reimbursement  agreements,  paid premiums of $1,587, and agreed to pay an annual
servicing fee of .1% of the original loan balances.  The  underlying  collateral
for the bonds is subject to land use  restrictions  which  provide,  among other
things,  that at least 20% of the multifamily  housing units be leased to low or
moderate  income families as established by HUD. On July 27, 1994, the Operating
Partnership  assumed the  aforementioned  mortgage  loans and  succeeded  to the
agreements and restrictions thereto.

     At December  31, 1996,  the Company  owned one other  multifamily  property
which was previously financed with the proceeds of multifamily revenue bonds and
remains  subject  to  similar  HUD  restrictions   which  expire  under  certain
conditions in 1997.

Line of Credit

     Concurrent with the Initial Offering, the Company obtained a line of credit
facility in the amount of $75,000. The commitment was subsequently  increased to
$115,000  and in  December  1995 was reduced by the Company to $90,000 and under
certain conditions could be increased to $150,000. On July 27, 1996, the Company
executed a renewal and  modification of the line of credit  facility.  Under the
terms of the new agreement, the Company may borrow up to $85,000 including up to
$50,000  related to development  activities.  The line of credit matures in July
1998, but may be extended through July 1999 at the Company's option.  Borrowings
under the line of credit are  collateralized by specified  operating  properties
and properties under development.  The interest rate on the amounts  outstanding
under the line are based on, at the Company's  election,  either (i) the greater
of the prime  rate or the  Federal  Funds  rate plus  .50% or,  (ii) the  London
Interbank Offer Rate ("LIBOR") plus 2.0% - 2.25%, depending on certain financial
ratios  concerning  leverage  and debt  service  coverage.  The  line of  credit
reprices,  at the Company's  discretion,  in defined intervals ranging from 1 to
360 days. As the line of credit is drawn or reprices,  the Company enters into a
contract  and selects the term and the interest  rate option it desires.  If the
Company selects a contract based upon LIBOR plus 2.0% - 2.25%, then the interest
rate becomes fixed for the term  selected.  Otherwise,  the contract rate varies
based upon the appropriate index.

     At December 31, 1996,  $42,700 is  outstanding  under the line of credit in
two separate contracts. One contract in the amount of $30,700 is priced at 7.63%
and the second contract in the amount of $12,000 is priced at 7.69%. At December
31,  1996 the prime rate,  Federal  Funds rate and three month LIBOR were 8.25%,
5.02%,  and 5.56%,  respectively.  During 1996,  $73,700 of new borrowings  were
drawn under the line of credit and $45,500 of principal was repaid.

     The scheduled  principal  payments  related to all debt  outstanding  as of
December 31, 1996 are as follows:

         Year                   Amount
         -----------------------------
         1997     .......... $        623
         1998     ..........       47,081
         1999     ..........       68,380
         2000     ..........        8,068
         2001     ..........       63,540
         Thereafter.........      109,600
                               ----------
         Total    .......... $    297,292
                             ============

                                       70
<PAGE>

The maturities  reflected above for 1998 include $42,700 of amounts  outstanding
under the line of credit which reprice in 1997.

Pledged Assets

     The  aggregate  net book value at  December  31,  1996 and 1995 of property
pledged as collateral for indebtedness  amounted to  approximately  $470,126 and
$441,564, respectively.

8.   MINORITY INTERESTS

     In  connection  with  the  formation  of  the  Company  and  the  Operating
Partnership,  certain  persons  received  either  common stock of the Company or
Units in the Operating  Partnership.  A Unit in the Operating  Partnership and a
share of common stock of the Company have the same economic  characteristics  in
as much as they  effectively  share  equally  in the net  income  or loss of the
Operating  Partnership  and any  distributions  from the Operating  Partnership.
Beginning one year after the closing of the Initial Offering,  which occurred on
July 27, 1994,  each Unit may be redeemed by holders of the Units for either one
share of common stock or, at the option of the  Company,  cash equal to the fair
market value of a share at the time of the redemption. When a unitholder redeems
a Unit  for a  share,  minority  interests  will be  reduced  and the  Company's
investment in the Operating  Partnership will be increased.  During 1995, 94,118
Units were  exchanged  for shares of common stock of the Company.  The number of
Units held by minority  interest  unitholders  were  3,675,258  and 3,670,564 at
December 31, 1996 and 1995, respectively. At December 31, 1996, the unitholders'
minority interest ownership percentage in the Operating Partnership was 19.9%.

     Minority interests in the accompanying  consolidated  financial  statements
relate to holders of Units in the Operating  Partnership,  the minority interest
in PRSI and the ownership of certain partnership interests in various properties
where the  Operating  Partnership  holds a controlling  interest.  The Operating
Partnership acquired its controlling  partnership interests by contributing cash
for,  in most  instances,  an agreed  upon  cumulative  preferred  return in the
existing property partnerships.

9.   STOCKHOLDERS' EQUITY

Capital Stock

     The Company is  authorized  to issue up to  100,000,000  shares of $.01 par
value common stock. On July 27, 1994, the Company completed the Initial Offering
of 13,000,000 shares of common stock and the Private Placement of 695,000 shares
of common stock at the offering price for all shares of $21.25. In addition,  on
July 27, 1994, the Company issued 677,047 shares of common stock and paid $2,600
in cash in exchange for the $17,000 note  receivable from PGPSI which was issued
as part of the initial capitalization of PGPSI.

     Effective  July 27, 1994,  the Company also issued 324,400 shares of common
stock pursuant to the Employee  Restricted Stock Plan discussed below. The value
of the employee restricted stock ($6,893,  representing 324,400 shares valued at
the  Initial  Offering  price  of  $21.25  per  share)  is being  amortized  and
recognized  as  compensation  expense  ratably over a three to five year vesting
period.  Amortization of employee  restricted stock  compensation for 1996, 1995
and 1994 was $2,135, $1,333 and $577, respectively,  and is included in property
management  expense in the accompanying  consolidated  statements of operations,
except for $767 in 1996 of post-Measurement Date amortization  primarily related
to the June 30, 1996 accelerated vesting of employee restricted stock granted to
certain employees of the commercial property services business which is included
in gain on  sale of  commercial  property  services  business.  The  unamortized
portion of the  employee  restricted  stock has been  classified  for  financial
reporting purposes as a reduction to stockholders'  equity. At December 31, 1996
and 1995, 84,486 and 42,266 shares,  respectively,  of employee restricted stock
were held by the Company  and had not been  granted to  employees.  Accordingly,
such shares are classified as treasury shares for financial  reporting  purposes
in the accompanying consolidated balance sheets.

                                       71
<PAGE>

     During 1996 and 1995, the Company paid quarterly dividends, with respect to
the fourth quarter of 1994 through the third quarter of 1996, of $.465 per share
of common stock.  Concurrent with the quarterly dividend payments, the Operating
Partnership distributed $.465 per Unit.

Stock Plans

     In connection  with the Initial  Offering,  the Company adopted an Employee
Restricted  Stock Plan (the  "Initial  Plan")  which was  designed to retain and
motivate officers and other employees. In August 1994, a total of 324,400 shares
of the  Company's  common  stock  were  issued  for  use in  the  Initial  Plan.
Initially, 288,800 shares of restricted stock issued under the Initial Plan were
granted to 81  employees  at no cost to the  employees.  The  restricted  shares
pursuant to the Initial Plan were treated as  outstanding  shares in  connection
with the Initial Offering.  As such, the issuance of the restricted stock had no
dilutive effect on the Company's stockholders. Generally, the Initial Plan calls
for vesting in three annual installments beginning on the third anniversary date
and  ending on the  fifth  anniversary  date.  During  the  vesting  period  the
restricted shares are non-transferable but entitle the participants to all other
rights of a  stockholder,  including  the right to vote and  receive  dividends.
During 1995, 10,000 shares originally issued under the Initial Plan were granted
to  certain  employees.  Additionally,  management  redeemed  16,666  shares and
eliminated  the vesting  requirements  for 10,134  shares  granted to  employees
terminated  in  connection  with  the  realignment  of  PGPSI.  In  1996,  9,525
additional shares were granted to employees and 51,745 shares were redeemed. The
vesting was  accelerated  and  eliminated  on 129,380  shares in 1996  including
90,643 shares on which the vesting was  accelerated in connection  with the sale
of the  commercial  property  services  business on June 30,  1996.  The related
amortization of compensation expense in 1996 and 1995 was adjusted  accordingly.
At December 31, 1996,  100,400 shares of restricted stock issued to 18 employees
under the Initial Plan were outstanding.

     The Company has  established  the 1994 Employee Stock Option,  Unit Option,
Restricted  Stock,  Restricted Unit and Restricted  Stock Right Plan, as amended
and restated,  (the "Employee  Plan") for the purpose of attracting,  retaining,
and motivating  officers and other  employees.  The Employee Plan authorizes the
issuance of up to 1,460,000  shares of common  stock  and/or  Units  pursuant to
options or  restricted  shares or Units  granted or issued  under the plan.  The
Employee  Plan limits the number of shares of  restricted  stock,  stock  rights
and/or Units, which are eligible for grant at no cost, to 485,000  shares/Units.
Options  granted under the Employee Plan have a ten year term and will have such
pricing,  vesting  and other  terms as the  committee  approving  the grant will
determine.  Effective  August 23,  1994,  options to purchase  80,000  shares of
common  stock were granted to eight  officers  under the  Employee  Plan.  These
options are at a price of $21.25 per share and are fully vested. Effective April
4, 1995,  options to purchase an  additional  283,000  shares were granted to 64
officers and employees under the Employee plan.  These options are at a price of
$17.25 and vest over periods ranging from three to five years.  Effective August
22, 1995,  options to purchase an  additional  4,000 shares were granted to four
officers and  employees  under the Employee  Plan at a price of $17.50 under the
same vesting  provisions.  During 1996, no additional  options were granted.  On
September  11,  1996,  restricted  stock  rights  to  receive  79,500  shares of
restricted stock upon the occurrence of certain  triggering events including the
merger,  consolidation  or  reorganization  of the  Company  were issued to five
officers  of the  Company.  The  proposed  merger  with  Camden  Property  Trust
discussed in Note 17 will  constitute a triggering  event. At December 31, 1996,
no shares of  restricted  stock and/or Units had been granted under the Employee
Plan.

                                       72
<PAGE>

     The Company  has adopted a  Non-Employee  Director  Stock  Option Plan (the
"Director  Plan").  Under the Director  Plan,  each  non-employee  director,  in
connection  with the Initial  Offering,  was granted  options to purchase  5,000
shares of common stock.  The Director  Plan also  provides for automatic  annual
grants  of 2,500  shares  of common  stock  following  the  annual  election  of
directors.  The exercise price of all options granted under the Director Plan is
the fair  market  value of the common  stock on the date of grant.  Each  option
granted has a term of ten years and vests six months after the date of grant. At
December 31, 1996,  options to purchase  60,000  shares of common stock had been
granted under the Director Plan.

     The Company has  elected to follow APB 25 and  related  Interpretations  in
accounting  for its employee  stock options  because,  as discussed  below,  the
alternative  fair value  accounting  provided  for under FAS 123 requires use of
option  valuation  models that were not  developed  for use in valuing  employee
stock  options.  Under  APB 25,  because  the  exercise  price of the  Company's
employee stock options  equals the market price of the  underlying  stock on the
date of grant, no compensation expense is recognized.

     Pro forma  information  regarding  net  income  and  earnings  per share is
required by FAS 123,  which also requires that the  information be determined as
if the Company has accounted for its employee stock options  granted  subsequent
to December  31, 1994 under the fair value  method of that  Statement.  The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following  weighted-average  assumptions  for 1996
and 1995, respectively:  risk-free interest rates of 6.22% and 5.39%; a dividend
yield of approximately 10.5%;  volatility factor of the expected market price of
the Company's common stock of .171; and a weighted-average  expected life of the
options of 5 years.

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

     For  purposes of pro forma  disclosures,  the  estimated  fair value of the
options is amortized to expense over the options' vesting period.  The Company's
pro forma net income for 1996 and 1995 was  $21,201 and  $10,034,  respectively,
with no impact on reported  earnings  per share.  Because FAS 123 is  applicable
only to options  granted  subsequent to December 31, 1994,  its pro forma effect
will not be fully reflected until 1997.

     A summary of the Company's stock option activity,  and related  information
for the years ended December 31 follows:

<TABLE>
<CAPTION>
                                            1996                       1995                        1994
                                 -------------------------  -------------------------   ------------------------
                                 Options  Weighted-Average  Options  Weighted-Average   Options Weighted-Average
                                  (000)    Exercise Price    (000)    Exercise Price     (000)   Exercise Price
                                  -----    --------------    -----    --------------     -----   --------------
<S>                              <C>       <C>              <C>        <C>               <C>       <C>
Outstanding-beginning of year..      396      $ 18.38           110       $ 21.25            -      $    -
Granted........................       15        17.75           302         17.27          110       21.25

Exercised......................        -            -             -             -            -           -
Forfeited......................     (134)       17.26           (16)        17.25            -           -
                                 -------     --------       -------       -------       ------      ------


Outstanding-end of year........      277     $  18.89           396       $ 18.38          110      $21.25
                                 =======     ========       =======       =======       ======      ======

Exercisable at end of year.....      140     $  20.49           125       $ 20.82          110      $21.25

Weighted-average fair value of
options granted during the year   $  .67                     $  .51
</TABLE>

     Exercise prices for options outstanding as of December 31, 1996 ranged from
$17.25 to  $21.25.  The  weighted-average  remaining  contractual  life of those
options is 8.06 years.


                                       73
<PAGE>

10.  EARNINGS PER SHARE

     Per share  amounts are  computed  based on the weighted  average  number of
shares outstanding during the period (14,791,165 in 1996, 14,698,336 in 1995 and
14,513,503 in 1994). Earnings per share will be unaffected by partners who elect
to convert Units in the Operating  Partnership  to shares of common stock in the
Company as unitholders  and  stockholders  effectively  share equally in the net
income of the Operating  Partnership.  The assumed exercise of outstanding stock
options, using the treasury stock method, is not dilutive and therefore,  is not
considered in determining shares outstanding.

     For the years ended December 31, 1996 and 1995, the Company had earnings of
$1.43 and $.68 per share, respectively.

     For the period  July 27,  1994  through  December  31,  1994,  the  Company
incurred a loss before  extraordinary  items of $(.06) per share.  The effect of
the extraordinary gain from the forgiveness of debt, net of minority  interests,
increased  earnings  per share by $.47,  while the  extraordinary  loss from the
early extinguishment of debt, net of minority interests,  decreased earnings per
share by $(.36),  resulting in net income per share of $.06.  During the period,
the Company incurred $7,796 in non-recurring  reorganization costs,  principally
legal, accounting,  and other costs incurred in connection with the formation of
the Company. The effect of these costs, net of minority interests of $1,668, was
to reduce the income (loss) before the extraordinary items by $(.42) per share.

11.  RELATED PARTY TRANSACTIONS

     On August 8, 1994, the Company exercised an option to purchase a 19.05 acre
tract of partially  developed  land from a corporation  whose sole  shareholders
were three  executive  officers  (including  two who are also  directors) of the
Company. The option agreement required  consideration of $128 in cash, and Units
with a value of $1,568,  as well as reimbursement of all  pre-development  costs
totaling $367. The Unit portion of the purchase price was paid one year from the
date of purchase, based on the value of Units at the election date of the option
(August 8, 1994) and totaled 73,783 Units.

     Effective  October 1, 1995, the Company issued 42,353 Units with a value of
$900 (based on the price of the Company's stock at the Initial Offering date) to
an entity whose sole shareholders  were two executive  officers and directors of
the Company.  The Units  represented  partial  consideration for the purchase of
partnership interests.

     In December 1995, the Company purchased the Overlook  Apartments,  formerly
known as The Phoenix,  from a  partnership  which was owned by affiliates of the
Company and outside  investors.  As consideration for the purchase,  the Company
paid cash of $8,500 and assumed $300 of debt payable to  affiliates.  Affiliates
of the Company did not receive any of the cash  portion of the  purchase  price.
However,  on  January  3, 1996,  the $300 of  affiliated  debt was repaid by the
Company with cash of $200 and the issuance of 4,694 Units.

     The  Company,  through  PRSI (and  previously  PGPSI),  uses a  centralized
disbursement  and receipt system whereby,  for certain  properties  owned by the
Company and other affiliated properties, all project deposits are transferred to
a central  operating  account and all expenses and other  disbursements are paid
therefrom.  In other cases,  certain properties maintain a separate cash account
for  recording  project  receipts and  disbursements;  however,  certain  common
operating expenses are paid through the centralized account and are subsequently
reimbursed  by the  appropriate  properties.  Additionally,  cash of  PRSI  (and
previously PGPSI) is periodically  transferred to the Operating  Partnership for
short term investment purposes.

                                       74
<PAGE>

     PRSI (and previously PGPSI) provides services to affiliated partnerships on
a contractual  basis.  The related party fees and expenses for such services are
reflected in the accompanying consolidated financial statements.

     At December 31, 1996, the Company has three notes  receivable  from Paradim
in the total outstanding  amount of $9,839.  One note, in the outstanding amount
of $9,723 at December 31, 1996,  represents  amounts advanced to Paradim to fund
construction  of Brassfield  Park, a planned  336-unit  multifamily  residential
complex under development in Greensboro,  North Carolina. Under the terms of the
loan agreement  effective  April 1, 1996,  Paradim may borrow up to $11,500 from
the Company. The loan bears interest at a variable rate based on the non-default
rate of interest charged to the Company under its line of credit. For the period
April 1 through  December 31, 1996,  the interest  rate  averaged  approximately
7.41% per annum.  Monthly  payments of interest  only are due until  maturity on
September 30, 1997 at which time the outstanding  principal and accrued interest
will be due and payable.  The loan is  collateralized  by Brassfield  Park.  The
other two notes,  in the total amount of $116,  were executed in connection with
the  formation  of  Paradim  and  relate to the  redemption  of  certain  of the
Company's  interests in the properties  contributed to Paradim.  These two notes
bear interest at 8% per annum and mature on June 30, 1997.

12.  COMMITMENTS AND CONTINGENCIES

Commitments

     PRSI is a party to office and  equipment  leases with  varying  terms which
expire  over  the  next  eight  years.   Future   minimum  lease   payments  for
noncancelable   office  and  equipment  leases  for  the  next  five  years  and
thereafter, as of December 31, 1996, are as follows:

<TABLE>
<CAPTION>
         Year                                                 Capital         Operating
         ----                                                 -------         ---------
         <S>                                                <C>                <C>
         1997     .......................................   $       35         $    793
         1998     .......................................           10              459
         1999     .......................................            5              458
         2000     .......................................            -              473
         2001     .......................................            -              391
         Thereafter......................................            -            1,135
                                                             ---------         --------
         Total minimum lease payments....................           50         $  3,709
                                                                               ========
         Amounts representing interest...................           (3)
                                                             ---------
         Present value of net minimum lease payments.....    $      47
                                                             =========
</TABLE>

     In addition,  the Company has entered  into a  non-recourse  ground  lease,
which  commenced on October 24, 1996,  related to  approximately  27.47 acres in
Louisville,  Kentucky for potential development in 1997. The ground lease allows
the  Company to  develop,  at its'  discretion,  a one or two phase  multifamily
residential  community on the leased  acreage.  The lease has a term of 40 years
and under certain  conditions,  the Company has the option to purchase the land.
Monthly  lease  payments are required  based upon the number of apartment  units
developed and include certain  scheduled  payment  increases,  some of which are
tied to the Consumer Price Index ("CPI").  The Company believes that the monthly
lease payments will range between $7 and $14 over the lease term, subject to CPI
adjustments. The monthly lease payments have been deferred until July 1, 1997.

     The eligible  employees of PRSI (and previously PGPSI) and the Predecessors
participate in a contributory  employee  savings plan.  Under the plan, PRSI may
make  matching  contributions  with  respect to  contributions  made by eligible
employees.  Expenses under the plan for the years ended December 31, 1996,  1995
and 1994 were not material.


                                       75
<PAGE>


Contingencies

     The Company is subject to various legal  proceedings  and claims that arise
in the  ordinary  course of business.  These  matters are  generally  covered by
insurance.  While the  resolution  of these  matters  cannot be  predicted  with
certainty,  management  believes that the final outcome of such matters will not
have a  material  adverse  effect  on  the  financial  position  or  results  of
operations of the Company.

     In connection with the Initial  Offering,  environmental  consultants  were
engaged to perform  environmental  assessments  on each of the  properties.  The
environmental  assessments  identified  certain  properties with  underground or
above ground storage tanks,  pipelines,  asbestos containing  materials or radon
levels in excess of the Environmental Protection Agency standards and noted that
one property is located within  one-half mile of a site included on the National
Priorities List issued  pursuant to the  Comprehensive  Environmental  Response,
Compensation  and  Liability  Act, as  amended.  The  environmental  assessments
revealed only one property,  Knollwood I, that had  contamination in significant
amounts requiring remediation. Remediation was successfully completed in 1994 at
a cost of $70.  Management  intends  to  monitor  all  properties  for  possible
environmental  impact. As of December 31, 1996 no remedial actions are currently
considered necessary.

13.  SEGMENT OPERATIONS

     The  Operating  Partnership  is  engaged  in the  ownership  and  rental of
residential  apartment  communities,  office buildings and retail properties and
PRSI  (and  previously  PGPSI)  provides  property   management,   construction,
development  and other  services  to both  related  and  unrelated  parties.  As
discussed  in Note 3, the Company  sold its  wholly-owned  office  building  and
retail  properties  in  the  fourth  quarter  of  1996.  Revenue  from  property
management  and  other  services  provided  to  affiliated  partnerships,  which
collectively  represent a major  customer of PRSI (and  previously  PGPSI),  was
approximately  39%, 28%, 24% and 30% of total property  services revenue for the
years ended  December 31, 1996 and 1995, the period July 27 to December 31, 1994
and the period January 1 to July 26, 1994,  respectively.  Revenue from property
management and other services provided to the consolidated  group are recognized
in the  period  in  which  the  services  are  provided  and are  eliminated  in
consolidation.  The following  table  presents  operating and other  information
divided among the two primary lines of the Company's and Predecessors' business.

<TABLE>
<CAPTION>
                                                                            Property
                                                                           Management
                                                                            and Other
                                                              Rental        Services                        Combined
                                                            Operations     Operations    Elimination          Total
                                                            ----------     ----------    -----------          -----
<S>                                                       <C>             <C>             <C>             <C>
YEAR ENDED DECEMBER 31, 1996:

      Revenue - third party.........................      $      94,792   $     5,977     $       -       $   100,769

      Revenue - affiliates..........................                161         3,799             -             3,960

      Intersegment revenue..........................              2,074         3,150        (5,224)                -
                                                          -------------   -----------     ---------       -----------

          Total revenue.............................             97,027        12,926        (5,224)          104,729

      Operating expenses............................            (44,430)      (17,183)        2,904           (58,709)
                                                          -------------   -----------     ---------       -----------

          Operating profit..........................      $      52,597   $    (4,257)    $  (2,320)      $    46,020
                                                          =============   ===========     =========       ===========

      Depreciation and amortization.................      $      17,826   $     1,726     $       -       $    19,552
                                                          =============   ===========     =========       ===========

      Identifiable assets at December 31, 1996......      $     561,473   $     9,866     $ (34,472)      $   536,867
                                                          =============   ===========     =========       ===========

      Capital expenditures and investments..........      $      70,039   $     3,664     $       -       $    73,703
                                                          =============   ===========     =========       ===========

</TABLE>


                                       76
<PAGE>

<TABLE>
<CAPTION>
                                                                            Property
                                                                           Management
                                                                            and Other
                                                              Rental        Services                      Combined
                                                            Operations     Operations    Elimination        Total
                                                            ----------     ----------    -----------        -----
<S>                                                       <C>             <C>             <C>             <C>
YEAR ENDED DECEMBER 31, 1995:

      Revenue - third party.........................      $      83,902   $    17,076     $       -       $   100,978

      Revenue - affiliates..........................                  -         6,590             -             6,590

      Intersegment revenue..........................              2,342         2,840        (5,182)                -
                                                          -------------   -----------     ---------       -----------

          Total revenue.............................             86,244        26,506        (5,182)          107,568

      Operating expenses............................            (39,092)      (23,684)        2,701           (60,075)
                                                          -------------   -----------     ---------       -----------

          Operating profit..........................      $      47,152   $     2,822     $  (2,481)      $    47,493
                                                          =============   ===========     =========       ===========

      Depreciation and amortization.................      $      15,447   $     3,114     $       -       $    18,561
                                                          =============   ===========     =========       ===========

      Identifiable assets at December 31, 1995......      $     552,186   $    20,422     $ (32,997)      $   539,611
                                                          =============   ===========     =========       ===========


      Capital expenditures and investments..........      $     115,495   $     2,258     $       -       $   117,753
                                                          =============   ===========     =========       ===========


              PERIOD JULY 27 TO DECEMBER 31, 1994:

      Revenue - third party.........................      $      33,731   $     8,326     $       -       $    42,057

      Revenue - affiliates..........................                  -         2,655             -             2,655

      Intersegment revenue..........................                877         1,057        (1,934)                -
                                                          -------------   -----------     ---------       -----------

          Total revenue.............................             34,608        12,038        (1,934)           44,712

      Operating expenses............................            (15,146)      (10,671)        1,019           (24,798)
                                                          -------------   -----------     ---------       -----------

          Operating profit .........................      $      19,462   $     1,367     $    (915)      $    19,914
                                                          =============   ===========     =========       ===========

      Depreciation and amortization.................      $       6,393   $       626     $       -       $     7,019
                                                          =============   ===========     =========       ===========

      Identifiable assets at December 31, 1994......      $     455,461   $    21,437     $ (34,350)      $   442,548
                                                          =============   ===========     =========       ===========

      Capital expenditures and investments..........      $     197,577   $     3,505     $       -       $   201,082
                                                          =============   ===========     =========       ===========

            PERIOD JANUARY 1 TO JULY 26, 1994:

      Revenue - third party.........................      $      41,359   $    10,846     $       -       $    52,205

      Revenue - affiliates..........................                  -         4,737             -             4,737

      Intersegment revenue..........................                  -         2,185        (2,185)                -
                                                          -------------   -----------     ---------       -----------

           Total revenue............................             41,359        17,768        (2,185)           56,942

      Operating expenses............................            (20,811)      (14,593)        2,029           (33,375)
                                                          -------------   -----------     ---------       -----------

           Operating profit ........................      $      20,548   $     3,175     $    (156)      $    23,567
                                                          =============   ===========     =========       ===========

      Depreciation and amortization.................      $       6,448   $       258     $    (207)      $     6,499
                                                          =============   ===========     =========       ===========

      Identifiable assets at July 26, 1994..........      $     264,538   $     3,717     $  (5,579)      $   262,676
                                                          =============   ===========     =========       ===========

      Capital expenditures and investments..........      $       3,029   $       314     $    (114)      $     3,229
                                                          =============   ===========     =========       ===========
</TABLE>

                                       77
<PAGE>

14.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     Statement of Financial  Accounting  Standards  No. 107 requires  disclosure
about fair value for all financial instruments,  whether or not recognized,  for
financial  statement   purposes.   Disclosure  about  fair  value  of  financial
instruments  is based on pertinent  information  available to  management  as of
December 31, 1996 and December 31, 1995.  Considerable  judgment is necessary to
interpret  market  data and  develop  estimated  fair  value.  Accordingly,  the
estimates  presented  herein are not  necessarily  indicative of the amounts the
Company could realize on  disposition of the financial  instruments.  The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.

     Management  estimates that the fair value of (i) cash and cash equivalents,
accounts receivable,  accounts payable and accrued expenses approximate carrying
value  due to the  relatively  short  maturity  of these  instruments;  (ii) the
interest rate swap agreement approximates carrying value based upon the terms of
the  agreement  relative to current  interest  rates;  and (iii)  notes  payable
approximate carrying value based upon the Company's effective borrowing rate for
issuance of debt with similar terms and remaining maturities.

15.  SUPPLEMENTAL CASH FLOW INFORMATION

     In  connection  with the business  combination  on July 27,  1994,  certain
non-cash  transactions  were  recorded  by the  Company,  including:  (i)  basis
adjustments  for the purchase of  partnership  interests  for cash or Units,  or
assumption  of debt,  (ii)  elimination  of historical  basis of certain  assets
purchased  for  cash,  (iii)  adjustments  resulting  from the  transfer  of the
property  management,  leasing,  construction and development  businesses of the
Predecessors to PGPSI, (iv) elimination of net working capital due to/from prior
owners at closing,  (v) issuance of stock in exchange for note  receivable  from
PGPSI,  (vi) issuance of stock pursuant to the Employee  Restricted  Stock Plan,
(vii)  recognition  of mortgage  principal and accrued  interest  concessions by
lenders,  (viii)  write-off of deferred  financing  costs  associated  with debt
repaid at closing,  (ix)  write-off of fully  amortized  deferred  charges,  (x)
elimination  of partner  loans,  and (xi)  allocation  of  capital  to  minority
interests.  These  transactions,  with respect to the  elimination of historical
basis on assets  purchased for cash, the adjustments  resulting from transfer of
the property  management,  leasing,  construction and development  businesses to
PGPSI  and the net  working  capital  adjustments,  also  include  certain  cash
components.  These cash  adjustments  are presented as deemed  distributions  at
formation in the accompanying consolidated statements of cash flows.

     Certain non-cash  transactions were also recorded effective October 1, 1995
in connection with the acquisition of partnership  interests  related to Spanish
Trace for a  combination  of cash and  Units and on April 1, 1996 in  connection
with the formation of Paradim and the Company's  corresponding  contribution  of
certain  properties that were previously  wholly-owned.  The aggregate effect of
the non-cash  transactions  recorded in connection with the business combination
in 1994, the  acquisition of  partnership  interest  related to Spanish Trace in
1995 and the formation of Paradim in 1996 are summarized as follows:


                                       78
<PAGE>

<TABLE>
<CAPTION>
                                                                                                     Period
                                                                                                    July 27 to
                                                               Year Ended December 31,             December 31,
                                                                1996             1995            1994, as Restated
                                                          --------------- -----------------     -------------------
<S>                                                        <C>              <C>                   <C>
Operating real estate assets.......................        $    (35,461)    $     15,968          $    (39,575)
Accumulated depreciation...........................                   -           (8,280)               26,973
Construction in process............................              (6,293)               -                     -
Accounts receivable................................                 (18)               -                  (171)
Advances to affiliates.............................                (403)               -                   155
Investment in ventures.............................              14,452                -                 7,289
Notes receivables from venture.....................                 116                -                     -
Deferred charges, net..............................                 (85)             222                (1,342)
Other assets.......................................                 (36)               -                  (749)
                                                           ------------     ------------          ------------
                                                           $    (27,728)    $      7,910          $     (7,420)
                                                           ============     ============          ============

Notes payable......................................        $    (25,650)    $      9,856          $    (28,956)
Accrued interest payable...........................                (166)               -               (10,822)
Accrued real estate taxes..........................                (205)               -                (2,875)
Accounts payable and accrued liabilities...........              (1,566)              13                (2,647)
Partners loans.....................................                   -                -               (10,650)
Tenant security deposits...........................                (141)               -                (1,231)
Minority interests.................................                   -                -                56,886
Stockholders' equity...............................                   -           (1,959)               (7,125)
                                                           ------------     ------------          ------------
                                                           $    (27,728)    $      7,910          $     (7,420)
                                                           ============     ============          ============
</TABLE>

     Other non-cash  investing and financing  activities  during 1996,  1995 and
1994 are as follows:

<TABLE>
<CAPTION>
                                                                                       Company                   Predecessor
                                                                           ----------------------------------   ------------
                                                                                                      Period
                                                                                                    July 27 to      Period
                                                                                                     December      January 1
                                                                            Year Ended December 31,  31, 1994,        to
                                                                            -----------------------     as          July 26,
                                                                               1996        1995      Restated        1994
                                                                             --------   ---------    --------     ----------
<S>                                                                          <C>        <C>          <C>          <C>
Construction in process payables........................................     $  3,537   $   2,053    $    214     $        -
Additions to operating real estate assets
   transferred from construction........................................       43,656      22,546           -              -
Accrual of distributions from unconsolidated ventures...................            -           -         242              -
Accrual of liability associated with the acquisitions
   of land for Units....................................................            -      (1,568)      1,568              -
Mortgage principal concessions recognized prior to
   the business combination.............................................            -           -           -          1,776
Debt assumed in connection with the acquisition of property.............        6,357         300           -              -
Conversion of Units to common stock.....................................            -       1,215           -              -
Partial repayment of note payable to affiliates with Units..............          100           -           -              -
Accrued net selling costs related to sale of commercial
   property services business...........................................        1,216           -           -              -
Deferred gain on sale of commercial property
   services business....................................................        1,100           -           -              -

</TABLE>

                                       79
<PAGE>


16.  QUARTERLY FINANCIAL INFORMATION (Unaudited)

     The following is a summary of quarterly results of operations for the years
ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
                                                           First          Second         Third
                                                          Quarter,       Quarter,       Quarter,
                                                        as Restated    as Restated    as Restated    Fourth
                                                          for 1995       for 1995      for 1995      Quarter       Total
                                                          --------       --------      --------     ----------    -------
<S>                                                      <C>            <C>           <C>          <C>          <C>
Year Ended December 31, 1996:
   Revenues  ..........................................  $  28,538      $  26,145     $  25,202    $  24,844    $  104,729
   Net income  ........................................      1,378          9,203         1,137        9,497        21,215
   Per share data:
     Net income  ......................................       0.09           0.62          0.08         0.64          1.43

Year Ended December 31, 1995:
   Revenues  ..........................................  $  25,303      $  26,266     $  26,897    $  29,102    $  107,568
   Net income  ........................................      2,054          2,677         3,091        2,241        10,063
   Per share data:
     Net income  ......................................       0.14           0.18          0.21         0.15          0.68
</TABLE>

     As described in Note 2, the Company, in the fourth quarter of 1995, changed
its method of  accounting  for its  investment  in PGPSI from the cost method to
consolidation.  Accordingly,  all previously reported periods have been restated
to reflect this change in  accounting  method.  The effect of this change on the
reported  results of operations for the first quarter,  second quarter and third
quarter of 1995 was an increase  in revenue of $5,056,  $5,089,  and  $5,069,  a
decrease  in net income of  $(889),  $(229),  and  $(163),  and a  corresponding
decrease in net income per share of $(.06), $(.02), and $(.01), respectively.

17.  PROPOSED MERGER

     On December 16, 1996 the Company  executed an Agreement  and Plan of Merger
(the  "Agreement")  with Camden  Property Trust  ("Camden")  which provides for,
among other things, the merger of the Company into a wholly-owned  subsidiary of
Camden through a tax-free  exchange of each share of the Company's  common stock
for .64 common shares of beneficial interest of Camden,  whereby stockholders of
the Company will become shareholders of Camden.

     The  Company has the option to  terminate  the  Agreement  in the event the
average  closing price of Camden common shares  ("Average  Closing Price") falls
below $25.67 during a specified pricing period prior to a special meeting of the
stockholders  of the Company.  In the event the Company  elects to terminate the
Agreement, Camden has the option of adjusting the exchange ratio of .64 to equal
a number obtained by dividing $16.43 by the Average Closing Price.

     An affirmative  vote of holders of two-thirds of the outstanding  shares of
the  Company's  common  stock is required to approve  the  Agreement.  A special
meeting of the Company's stockholders is scheduled for April 15, 1997 to vote on
the Agreement.

                                       80
<PAGE>

18.  SUBSEQUENT EVENTS (Unaudited)

     On January 2, 1997,  the Company  declared a dividend,  with respect to the
fourth  quarter of 1996,  of $.465 per share of common  stock  which was paid on
January 23, 1997 to holders of record on January 13, 1997.  Concurrent  with the
dividend  announcement,  the Operating Partnership  authorized a distribution of
$.465 per Unit  which  was paid on  January  23,  1997 to  holders  of record on
January 13, 1997.

     In January  1997,  the Company sold the 232 unit  Brookfield  apartments in
Dallas, Texas for $5,459, the 352 unit Westchase apartments in Charleston, South
Carolina  for  $11,130  and the 251 unit San  Miguel  apartments  in St.  Louis,
Missouri for $6,875. Net proceeds from the sale of these properties were used to
repay  borrowings   under  the  Company's  line  of  credit,   fund  multifamily
development expenditures and for general working capital purposes.

     On March 18,  1997,  the Company  declared a dividend,  with respect to the
first quarter of 1997,  of $.3136 per share of common  stock,  payable April 15,
1997 to  holders  of record  on March 31,  1997.  Concurrent  with the  dividend
announcement,  the Operating Partnership authorized a distribution of $.3136 per
Unit, payable April 15, 1997 to holders of record on March 31, 1997.

                                       81
<PAGE>
                                                                    Schedule III
                               PARAGON GROUP, INC.
                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                December 31, 1996
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                                      Gross Amount at which
                                          Initial Costs                            Carried at December 31, 1996
                                       --------------------    Costs    --------------------------------------------------
                                                Buildings   Capitalized            Buildings
                           Notes                   and     Subsequent to              and          Construction
Property Name             Payable       Land   Improvements Acquisition   Land    Improvements      in Process     Total
-------------------      ---------     ------- ------------ ----------- --------- ------------     ------------   --------
<S>                     <C>            <C>        <C>      <C>          <C>        <C>            <C>             <C>
       Florida
4th St. Station I       $  5,120 (3)   $   800    $    -   $ 12,989     $ 1,499    $  12,290      $      -        $ 13,789
4th St. Station II         5,070 (3)       656         -     11,706       1,643       10,719             -          12,362
Broadmoor                  4,660 (2)     1,536     5,265      4,118       2,080        8,839             -          10,919
Chasewood                  2,850 (2)       992     4,534      1,739       1,182        6,083             -           7,265
Citrus Lakes I                 -           208     2,942        276         208        3,218             -           3,426
Coco West I                2,670 (3)        68         -      8,450         630        7,888             -           8,518
Coco West II               3,780 (3)       111         -     11,766         589       11,288             -          11,877
Dolphin Pointe             7,250 (2)     1,456        25     15,416       1,919       14,978             -          16,897
Greenhouse                 3,580 (3)       808         -      9,797       1,146        9,459             -          10,605
Grove                      2,700 (2)     1,431     4,269        355       1,431        4,624             -           6,055
Heron Pointe                   - (11)      990         -     12,412         990       12,412             -          13,402
Landtree                   3,780 (3)       624         -      8,261       1,277        7,608             -           8,885
Lookout Pointe             6,700 (2)     1,563         -     13,906       1,823       13,646             -          15,469
Parsons Run                3,840 (3)       902         -      9,325       1,424        8,803             -          10,227
Renaissance Pointe             - (11)    1,564         -     13,209       1,564       13,209             -          14,773
Renaissance Pointe II          -         2,067         -          8           -            -         2,075           2,075
The Reserve                3,100 (2)     1,060         -      6,374       1,093        6,341             -           7,434
Schooner Bay               7,392 (7)     1,518     8,966        393       1,518        9,359             -          10,877
Summerplace I & II         6,330 (3)     1,016         -     13,140       1,729       12,427             -          14,156
Summerplace III            3,720 (3)       753         -      7,489       1,117        7,125             -           8,242
Summerset Bend             4,500 (3)       779         -      9,499       1,141        9,137             -          10,278
The Vineyard              10,500 (9)     2,602         -     15,211       3,118       14,695             -          17,813
      Kentucky
Copper Creek               9,130 (8)       649         -      6,760         649        6,760             -           7,409
Deerfield                  9,886 (8)     1,610         -     18,981       2,421       18,170             -          20,591
Glenridge                  3,695 (9)       970         -      6,634       1,119        6,485             -           7,604
Post Oak                   2,450 (2)         -         -      3,806         339        3,467             -           3,806
Sundance                   2,800 (2)       447         -      6,027         738        5,736             -           6,474
      Missouri
Camden Passage             7,350 (9)     1,345     9,455      2,658       1,817       11,641             -          13,458
Camden Passage II              - (11)    1,169         -     10,748       1,169        6,817         3,931          11,917
The Cove                  12,480 (5)     2,308    10,418      6,564       3,505       15,785             -          19,290
Knolls                         - (11)      978     3,778        363         980        4,139             -           5,119
Knollwood I                7,215 (5)     1,764     7,928        407       1,764        8,335             -          10,099
Knollwood II               7,027 (5)     1,272     9,328        148       1,272        9,476             -          10,748
Pear Tree                      - (11)      366     2,684        212         366        2,896             -           3,262
Spanish Trace              9,764 (4)     2,445    15,508        785       2,445       16,293             -          18,738
Sunswept                       - (11)    1,813     5,496        375       1,813        5,871             -           7,684
Tempo                      6,205 (5)     2,168     5,982        814       2,168        6,796             -           8,964
Westchase Park             4,900 (2)         -         -     11,763       1,024       10,739             -          11,763
Westgate I                 4,500 (2)       380     3,165      3,561         615        6,491             -           7,106
Westgate II                8,200 (2)       790         -     17,115       2,131       15,774             -          17,905

</TABLE>

                                                                    Schedule III

<TABLE>
<CAPTION>
                                        Net           Date of
                    Accumulated     Real Estate     Construction/   Depreciable
Property Name       Depreciation       Assets        Acquisition    Lives-Years
------------------  ------------    ------------    -------------   -----------
<S>                    <C>          <C>            <C>              <C>
       Florida
4th St. Station I      4,896           8,893            1982          5-40 Years
4th St. Station II     3,555           8,807            1983          5-40 Years
Broadmoor              2,650           8,269          1986/1987       5-40 Years
Chasewood              2,052           5,213          1985/1987       5-40 Years
Citrus Lakes I           234           3,192            1976          5-40 Years
Coco West I            2,615           5,903            1983          5-40 Years
Coco West II           4,108           7,769            1985          5-40 Years
Dolphin Pointe         3,956          12,941            1989          5-40 Years
Greenhouse             4,180           6,425            1982          5-40 Years
Grove                    354           5,701            1973          5-40 Years
Heron Pointe             999          12,403            1996          5-40 Years
Landtree               2,948           5,937            1983          5-40 Years
Lookout Pointe         5,770           9,699            1987          5-40 Years
Parsons Run            3,175           7,052            1986          5-40 Years
Renaissance Pointe       278          14,495            1996(1)       5-40 Years
Renaissance Pointe II      -           2,075              (1)         -
The Reserve            1,528           5,906            1991          5-40 Years
Schooner Bay             274          10,603            1995          5-40 Years
Summerplace I & II     4,992           9,164            1984          5-40 Years
Summerplace III        2,714           5,528            1986          5-40 Years
Summerset Bend         3,756           6,522            1984          5-40 Years
The Vineyard           3,655          14,158            1990          5-40 Years
      Kentucky
Copper Creek           3,126           4,283            1987          5-40 Years
Deerfield              4,901          15,690            1987          5-40 Years
Glenridge              1,786           5,818            1990          5-40 Years
Post Oak               1,940           1,866            1981          5-30 Years
Sundance               2,671           3,803            1975          5-40 Years
      Missouri
Camden Passage         2,251          11,207            1989          5-40 Years
Camden Passage II         32          11,885              (1)         5-40 Years
The Cove               2,950          16,340            1990          5-40 Years
Knolls                   329           4,790          1973/1974       5-40 Years
Knollwood I              586           9,513            1981          5-40 Years
Knollwood II             673          10,075            1985          5-40 Years
Pear Tree                221           3,041            1967          5-40 Years
Spanish Trace          9,175           9,563          1972/1995       5-40 Years
Sunswept                 469           7,215          1971/1994       5-40 Years
Tempo                    592           8,372            1975          5-40 Years
Westchase Park         3,288           8,475            1986          5-40 Years
Westgate I             2,675           4,431            1973          5-40 Years
Westgate II            6,561          11,344            1980          5-40 Years
</TABLE>

                                       82
<PAGE>

                               PARAGON GROUP, INC.
                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                December 31, 1996
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                                                  Gross Amount at which
                                                  Initial Costs           Costs                Carried at December 31, 1996
                                             -----------------------   Capitalized   ----------------------------------------------
                                 Notes                 Buildings and  Subsequent to            Buildings and  Construction
Property Name                   Payable       Land     Improvements    Acquisition     Land    Improvements    in Process    Total
------------------------      -----------    -------   -------------  -------------  --------  -------------  -------------  -----
<S>                           <C>            <C>         <C>            <C>          <C>         <C>          <C>           <C>
         North Carolina
Copper Creek                  $ 2,600 (2)    $   930     $     -        $ 6,628      $   928     $  6,630     $     -       $ 7,558
Eastchase                       2,949 (9)      1,265           -          6,116        1,352        6,029           -         7,381
Falls                           5,700 (2)      1,010           -         11,308        1,475       10,843           -        12,318
Glen                            6,572 (9)      1,713       6,808            196        1,713        7,004           -         8,717
Habersham Pointe                    -          1,124      10,273              3        1,124       10,276           -        11,400
Pinehurst                      14,000 (5)      3,591      15,213            356        3,591       15,569           -        19,160
The Park                            - (11)       906           -          8,568        1,110        1,031       7,333         9,474
River Oaks                      6,350 (6)      1,056       8,635              5        1,056        8,640           -         9,696
             Texas
Chesapeake                      3,300 (2)      1,061       4,939          3,633        1,471        8,162           -         9,633
Fairlane                        3,461 (9)        710           -          9,149        1,449        8,410           -         9,859
Highland Trace                      - (11)     1,450       2,871            835        1,539        3,617           -         5,156
Los Rios                        9,000 (5)      1,494           -          9,572        1,517        9,549           -        11,066
Nob Hill                        9,050 (5)      2,944       5,714          6,787        3,462       11,983           -        15,445
Stone Creek                         - (11)     1,696         367         10,182        1,696       10,549           -        12,245
Stone Gate                          - (11)     2,275           -         13,521        2,275       13,521           -        15,796

Miscellaneous Assets                3 (10)         -           -          4,946            -        4,946           -         4,946
                              -------         ------     -------        -------      -------       ------     -------        ------
                              246,129         67,203     154,563        375,365       81,214       502,578     13,339       597,131
                              -------         ------     -------        -------      -------       ------     -------        ------

Real estate held for sale:
San Miguel (Missouri)               - (11)     1,321       5,487            390        1,321        5,877           -         7,198
Westchase (South Carolina)      4,440 (3)      1,496           -         11,631        1,895       11,232           -        13,127
Brookfield (Texas)              4,023 (5)      1,481       2,643          1,904        1,578        4,450           -         6,028
                                -----          -----       -----          -----        -----        -----      ------         -----
                                8,463          4,298       8,130         13,925        4,794       21,559           -        26,353

                            ---------        -------    --------       --------      -------     --------     -------      --------
Total                       $ 254,592        $71,501    $162,693       $389,290      $86,008     $524,137     $13,339      $623,484
                            =========        =======    ========       ========      =======     ========     =======      ========

</TABLE>

<TABLE>
<CAPTION>
                                                  Net           Date of
                           Accumulated        Real Estate    Construction/     Depreciable
Property Name              Depreciation         Assets        Acquisition      Lives-Years
---------------------      ------------        -----------   -------------     -----------
<S>                         <C>                <C>             <C>             <C>
     North Carolina
Copper Creek                $ 1,637              5,921           1989            5-40 Years
Eastchase                     2,675              4,706           1986            5-40 Years
Falls                         4,338              7,980           1984            5-40 Years
Glen                            488              8,229           1980            5-40 Years
Habersham Pointe                146             11,254           1986            5-40 Years
Pinehurst                       843             18,317         1967/1994         5-40 Years
The Park                          3              9,471            (1)            5-40 Years
River Oaks                       43              9,653           1985            5-40 Years
             Texas
Chesapeake                    2,925              6,708           1982            5-40 Years
Fairlane                      3,847              6,012           1980            5-40 Years
Highland Trace                1,142              4,014         1985/1987         5-40 Years
Los Rios                      1,744              9,322           1992            5-40 Years
Nob Hill                      2,676             12,769         1986/1987         5-40 Years
Stone Creek                     484             11,761           1995            5-40 Years
Stone Gate                      241             15,555           1996(1)         5-40 Years

Miscellaneous Assets          1,682              3,264         1994/1995            5 Years
                            -------            -------
                            127,829            469,302
                            -------            -------

Real estate held for sale:      433              6,765         1970/1994         5-40 Years
San Miguel (Missouri)         4,162              8,965           1986            5-40 Years
Westchase (South Carolina)    1,154              4,874         1986/1987         5-40 Years
Brookfield (Texas)          -------             ------
                              5,749             20,604

                            -------             ------
Total                      $133,578            489,906
                           ========            =======

</TABLE>


     (1)  Construction  still  in  process  and/or  property  still  in  initial
          lease-up phase at December 31, 1996.

     (2)  These  properties  serve as collateral  for the "Pool A" mortgage note
          payable obtained concurrent with the Initial Offering in the amount of
          $61,710.

     (3)  These  properties  serve as collateral for the "Pool B" mortgage notes
          payable obtained concurrent with the Initial Offering in the amount of
          $46,830.

     (4)  This  property  serves as  collateral  for the  mortgage  note payable
          insured by HUD assumed  effective  October 1, 1995 in the  outstanding
          amount of $9,764 at December 31, 1996.

     (5)  These  properties  serve as  collateral  for  mortgage  notes  payable
          obtained in December 1995 in the amount of $69,000.

     (6)  This  property  serves as  collateral  for the  mortgage  note payable
          assumed effective November 8, 1996 in the outstanding amount of $6,350
          at December 31, 1996.

     (7)  This property serves as collateral for mortgage notes payable obtained
          in  November 6, 1996 in the  outstanding  amount of $7,392 at December
          31, 1996.

     (8)  These properties serve as collateral for housing revenue bonds assumed
          at the  Initial  Offering  in the  outstanding  amount of  $19,016  at
          December 31, 1996.

     (9)  These  properties  serve as  collateral  for  mortgage  notes  payable
          assumed at the Initial  Offering in the outstanding  amount of $34,527
          at December 31, 1996.

     (10) A portion of these  assets with a net book value at December  31, 1996
          of $5 serve as collateral for a vehicle loan in the outstanding amount
          of $3 at December 31, 1996.

     (11) These  properties  serve as collateral for the line of credit facility
          in the outstanding amount of $42,700 at December 31, 1996.


                                       83
<PAGE>



PARAGON GROUP INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
--------------------------------------------------------------------------------
December 31, 1996
(Dollars in thousands)

     A summary of activity for real estate and  accumulated  depreciation  is as
follows:
<TABLE>
<CAPTION>
                                                                          December 31,
                                                 --------------------------------------------------------------
                                                                                                   1994,
                                                       1996                   1995              as Restated
---------------------------------------------------------------------------------------------------------------
<S>                                               <C>                    <C>                   <C>
Real Estate:
   Balance at beginning of year................   $    631,471           $    513,761          $     361,554
   Additions and basis adjustments.............         73,703                117,753                204,311
   Dispositions and other......................        (81,690)(3)                (43)               (52,104) (1)
                                                  ------------           ------------          -------------

   Balance at end of year......................   $    623,484           $    631,471          $     513,761
                                                  ============           ============          =============

Accumulated Depreciation:
   Balance at beginning of year................   $    126,437          $     101,984          $     116,031
   Depreciation and basis adjustments..........         18,904                (24,462                (12,926
   Dispositions and other......................        (11,763)                    (9)               (26,973) (1)
                                                  ------------          -------------          -------------

   Balance at end of year......................   $    133,578          $     126,437          $     101,984
                                                  ============          =============          =============
</TABLE>

(1)  Represents the non-cash effect of the  elimination of the historical  basis
     of certain  assets  purchased for cash and  adjustments  resulting from the
     transfer of the property management,  leasing, construction and development
     businesses of the  Predecessors  to PGPSI  pursuant to the formation of the
     Company on July 27, 1994.

(2)  Includes an $8,280  adjustment to accumulated  depreciation  related to the
     acquisition of a partnership interest (Spanish Trace) for Units.

(3)  Includes a $41,754  adjustment  related to the  contribution of property to
     Paradim.

(4)  Includes  $45  of  Post-Measurement   Date  depreciation   related  to  the
     commercial property services business.

     Depreciation and  amortization in buildings and  improvements  reflected in
the statements of operations are  calculated on a  straight-line  basis over the
estimated   useful  lives  of  the   properties   (buildings  and  related  land
improvements - 10 to 40 years;  furniture,  fixtures and equipment - three to 10
years;  and tenant  improvements  - over the life of the related  tenant lease).
With respect to the  apartment  properties,  the Company  capitalizes  floor and
window  coverings and  depreciates  such items over five years;  appliances  and
heating,   ventilating  and  air  conditioning  equipment  are  capitalized  and
depreciated over ten years.

     As of December  31, 1996,  1995 and 1994,  the  aggregate  cost for federal
income  tax  purposes  was  approximately   $525,000,   $532,000  and  $414,000,
respectively.


                                       84