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Item 1. Business

GENERAL DEVELOPMENT OF BUSINESS

Associated Estates Realty Corporation (the "Company") is a self-administered and self-managed equity real estate investment trust ("REIT"). The Company was formed in July 1993 to continue the business of the Associated Estates Group ("AEG") which was in the business of acquiring, developing and operating multifamily assets. The Company became a publicly traded company through an initial public offering ("IPO") of its common shares in November 1993 and is currently traded on the New York Stock Exchange ("NYSE") under the ticker symbol "AEC". The Company's headquarters is located at 5025 Swetland Court in Richmond Heights, Ohio. The headquarters is comprised of one office building of approximately 41,000 square feet and an adjacent 3.7 acre parcel of land suitable for further development or expansion, both of which are owned by the Company under a ground lease.

The Company is a fully integrated multifamily real estate company engaged in property acquisition, advisory, development, management, disposition, operation and ownership activities. The Company owns four taxable REIT subsidiaries which provide management and other services for the Company and third parties, (collectively the "Service Companies"). The Company currently owns or manages 109 apartment communities in twelve states consisting of 25,174 units and is a joint venture partner in a property currently under construction. The Company owns, either directly or through subsidiaries, or holds ownership interests in 79 of the 109 apartment communities containing 18,313 units in 10 states. Thirteen of those owned or partially owned apartment communities, consisting of 1,354 units, are affordable housing communities. The Company has under construction and lease-up one joint venture apartment community consisting of approximately 288 units. The Company, or one of its subsidiaries, also manages or serves as asset manager for 30 communities consisting of 6,861 units and five commercial properties containing in excess of 980,000 square feet which are owned by large pension funds, non-profit organizations or affiliated third party owners. (See Item 2 for a complete listing of the Company's Portfolio). The consolidated financial statements of the Company include the accounts of the Company, all subsidiaries and qualified REIT subsidiaries, which include but are not limited to, separate legal entities that were formed in connection with project specific, nonrecourse mortgage refinancing for which records, books of accounts and depository accounts must be maintained separately and apart from any other person or entity; the Service Companies which are taxed as a Taxable REIT Subsidiary ("TRS") under the REIT Modernization Act ("RMA") implemented in 1999, and an Operating Partnership structured as a DownREIT, which is 96.0% owned by the Company.

OVERVIEW OF BUSINESS SEGMENTS

The Company has four reportable segments: (1) Acquisition/Disposition multifamily properties, (2) Same Store Market Rate ("Market Rate") multifamily properties, (3) Affordable Housing multifamily properties, and (4) Management and Service Operations. The Company has identified these segments based upon how management makes decisions regarding resource allocation and performance assessment. All of the Company's segments are located in the United States.

The accounting policies of the reportable segments are the same as those described in Note 1, "Basis of Presentation and Significant Accounting Policies" of the Notes to the Financial Statements presented in Part II, Item 8 of this Form 10-K. The Company evaluates the performance of its reportable segments based on Net Operating Income ("NOI"). NOI is determined by deducting property operating and maintenance expenses from total revenues for the Acquisition/Disposition, Market Rate and Affordable Housing segments and deducting service companies expense, which is included within the general and administrative expenses in the Consolidated Statements of Income, direct property management expenses and painting service expense from total revenues for the Management and Service Operations segment. NOI should not be considered as an alternative to net income determined in accordance with Generally Accepted Accounting Principals ("GAAP"), or as an indicator of the Company's financial performance, cash flow from operating activities (determined in accordance with GAAP) or as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs. Other real estate companies may define NOI in a different manner.

See Note 19 of the Notes to the Financial Statements presented in Part II, Item 8 of this report on Form 10-K for the segment financial information.

Acquisition/Disposition. The Acquisition/Disposition properties represent acquired or developed properties which have not yet reached stabilization (the Company considers a property stabilized when its occupancy rate reaches 93.0% or one year following the purchase or delivery of the final units, whichever occurs first) and properties that have been sold. At December 31, 2002, three owned properties were classified to this segment. Additionally, five properties and a project which included land and an operational marina, which were sold by the Company during 2002, are also classified to this segment; however, the operating results and any gain or loss on the sale of five of these six properties are included in "Income from discontinued operations" on the Consolidated Statement of Operations. During 2002, approximately 5.5% of the total NOI of the Company was generated by this segment.

Market Rate. The Market Rate Properties are same store wholly owned conventional multifamily residential properties. Currently, the Company has 59 properties, two of which are congregate care facilities, classified to this segment. During 2002, approximately 85.6% of the total NOI of the Company was generated by this segment.

Affordable Housing. The Affordable Housing Properties are multifamily properties for which the rents are subsidized and certain aspects of the operations are regulated by U.S. Department of Housing and Urban Development ("HUD") pursuant to Section 8 of the National Housing Act of 1937. Currently, the Company has 12 wholly owned properties classified to this segment. During 2002, approximately 6.7% of the total NOI of the Company was generated by this segment.

Management and Service Operations. The Management and Service Operations provide management and advisory services to the Acquired, Market Rate and Affordable Housing properties owned or partially owned by the Company, as well as to non-owned properties managed by the Company. During 2002, approximately 2.2% of the total NOI of the Company was generated by this segment.

STRATEGY

Overall Portfolio Strategy. The Company's primary business objectives are to maximize NOI and to increase the value of the Company's owned and managed properties. The Company's operating strategy is intended to achieve these objectives. One focus of this operating strategy is to maximize funds from operations, thereby enhancing value through (i) rental rate increases to the extent that competitive conditions permit; (ii) emphasis on expense controls consistent with the proper maintenance of the properties; and (iii) strategic capital investments including changing the composition of the portfolio in order to increase the competitive position of the portfolio.

The Company's disciplined business planning for each property and its annual budgeting process, complemented by its capital expenditure program, allow the Company to identify opportunities across the portfolio, thereby maximizing long term wealth creation.

The Company's operating strategy has been to focus on pursuing co-investment development opportunities with various investors, including pension fund clients and local developers. This strategy allows the Company and its institutional partners to seek the higher yields anticipated from development. The expected equity investment is approximately 25-50% from the Company and approximately 50-75% from its co-investment partners. The Company believes this co-investment program has allowed it to increase operational efficiency in growth markets, at a more rapid pace, than direct individual investments because it allows the Company to apply its expertise in multifamily investments across both owned and advised assets.

The Company's operating strategy further focuses on the portfolio of advised clients. The Company's investment capabilities are expanded by increasing assets acquired and managed on behalf of pension fund clients. Furthermore, the advised assets increase the operational efficiency in markets where the Company may have limited penetration with its own assets.

Disposition/Acquisition. The Company has successfully disposed of over 19 properties and parcels of land during the last three years generating gross sales proceeds in excess of $100.0 million. Most of these were smaller properties located in Northeast or Central Ohio. Others were located in markets where the Company did not have a significant presence.

Financing and Leverage. As of December 31, 2002, conventional mortgages payable, which totaled $532.8 million, were comprised of 53 non-recourse loans, each of which was collateralized by the respective real estate and resident leases. Federally insured mortgage debt, which totaled $7.6 million, encumbered three of the properties at December 31, 2002 (including one property that was funded through Industrial Development Bonds). The Company's $14.0 million line of credit is secured by two properties. This line of credit was increased during 2002 from $12.0 million to $14.0 million. Outstanding letters of credit totaling $4.2 million and a $1.6 million credit risk sublimit relative to derivative transactions limit the amount available under this line of credit to $8.2 million. There were no borrowings outstanding under this line at December 31, 2002 or at December 31, 2001. The Company's $20.0 million revolving line of credit is secured by one property. The borrowings on the $20.0 million revolving line of credit are presently restricted up to an amount not to exceed $12.6 million. There were no borrowings outstanding at December 31, 2002 and $3.5 million of borrowings were outstanding under this line at December 31, 2001.

Additionally, the Company had one Medium-Term Note outstanding with a balance of $105,000 at December 31, 2002. This note is unsecured.

Market Rate Properties. The consistent goal for the owned portfolio of multifamily assets is income and value enhancement through reinvestment in these assets. Internal growth is achieved through realization of all marginal revenue opportunities, contained operating expenses and efficient management. Management believes development opportunities available to the Company will enhance the income potential to the Company. The general investment goals include institutional quality properties in rent growth locations of major metropolitan markets.

The Company plans to continue its ongoing practice of regular maintenance and periodic renovation.

Affordable Housing. The Company's wholly owned portfolio currently includes 12 Affordable Housing Properties (comprised of 1,246 units) that were part of the portfolio at the time of the IPO.

Although rent growth in these properties is limited due to regulatory restrictions, these properties have provided a stabilizing influence on the portfolio. Additionally, the Company has developed detailed systems and processes to effectively operate these properties, which by their nature, exist within a complex, highly regulated environment. Economic efficiencies are realized in conjunction with the management of another 17 affordable housing properties (3,434 units), owned by third parties.

Fee Management/Advisory Business. Over the years, the Company has applied its management approach to the management of properties for third parties. The Company believes that third party property management broadens the Company's knowledge of a market, creates opportunities for future acquisitions, enhances purchasing power and provides a network for new personnel while generating fee income.

INCOME TAXES

See Note 1 of the Notes to the Financial Statements presented in Part II, Item 8 of this Form 10-K.

COMPETITIVE CONDITIONS

See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K.

CUSTOMERS

The business of the Company, taken as a whole, is not dependent upon any single customer or a few customers.

EMPLOYEES

At March 3, 2003, the Company employed approximately 785 people. Satisfactory relations have generally prevailed between the Company and its employees.

AVAILABLE INFORMATION

The Company's SEC filings may be read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally, the Company's filings can be accessed from the SEC's Internet site at http://www.sec.gov or from the Company's Internet site at http://www.aecrealty.com, as soon as reasonably practicable after filing with the SEC.

REPORTS TO SECURITY HOLDERS

The Company issues annual reports to its security holders which contain financial statements.

Item 2. The Properties

Company's Portfolio. The following table represents the Company's current portfolio which consists of properties owned, directly or indirectly, by the Company or by a subsidiary of the Company, properties in which the Company is a joint venture partner and properties managed by the Company and its subsidiaries.

Noteholder Interest. The Company acquired a Noteholder Interest in connection with its IPO in 1993 in which one of the principals of the Company has a general partnership interest. The Note was placed on the Company's books at a value of zero. Therefore, the Company has not recorded any interest income as the noteholder. Additionally, should the Company foreclose on the Note, there would be no effect on the Company's books as the Note has a zero value. The Company is effectively entitled to all cash flow from the property by virtue of its Noteholder Interest. The Company placed the property on its books as a result of having full economic benefit and control of the property's operations. For further information concerning this property, reference is made to Note 11 of the Notes to Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

Indebtedness Encumbering the Properties. The Company financed and, in many cases, refinanced the acquisition, development and rehabilitation of its properties with a variety of sources of mortgage indebtedness. Certain of the mortgage indebtedness is insured by HUD under programs administered pursuant to Section 221(d)(4) of the National Housing Act. (Reference is made to Affordable Housing in Item 1). Currently, the Company has 56 properties (all Market Rate properties) which are encumbered by debt totaling $540.4 million, three properties which secure lines of credit and 15 properties (3 Market Rate properties and 12 Affordable Housing properties) which are unencumbered.

Item 3. Legal Proceedings

For information concerning current legal proceedings, reference is made to Note 12 of the Notes to Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

Item 4. Submission of Matters to a Vote of Security Holders

None

Executive Officers of the Registrant and Other Key Employees

The Executive Officers of the Company as of March 3, 2003 are:

Jeffrey I. Friedman has served as Chairman of the Board and Chief Executive Officer of the Company since its organization in 1993 and served as the Company's President from the Company's organization until February 24, 2000. In August 2002, Mr. Friedman reassumed the role of the Company's President. Mr. Friedman is also the CEO and President of MIG II Realty Advisors, Inc. ("MIG"). Mr. Friedman joined AEG in 1974 and was the Chief Executive Officer and President of Associated Estates Corporation, a company in the AEG group, from 1979 to 1993.

Martin A. Fishman has been Vice President, General Counsel and Secretary of the Company since its organization. Mr. Fishman joined AEG in 1986 as Vice President - General Counsel of Associated Estates Corporation, a position he held until the formation of the Company.

Lou Fatica joined the Company in 1999 as Controller, and was promoted to Vice President-Controller during 2000. Mr. Fatica is a Certified Public Accountant (CPA), member of the American Institute of Certified Public Accountants (AICPA), the Ohio Society of CPA's. On March 15, 2001, Mr. Fatica became Vice President, Treasurer and Chief Financial Officer of the Company and effective September 30, 2002, Mr. Fatica assumed the role of Chief Financial Officer for MIG.

In addition to the executive officers named in the table above, the following persons have been appointed as officers of the Company and hold positions in senior management with the Company as indicated:

Barbara E. Hasenstab, Vice President of Investor Relations and Corporate Communications, joined the Company in 1996 as Director of Investor Relations and was elected Vice President of Investor Relations in 1998. Ms. Hasenstab has 24 years of experience in investor relations, is a member of the National Investor Relations Institute and is 49 years old.

JoAnn C. Hirsh joined the Company in 1997 as Director of Government Housing and is currently a Vice President of Operations, Northeast Ohio Region. Ms. Hirsh has supervisory responsibility for the Northeast Ohio region which includes the Affordable Housing Properties. Ms. Hirsh is responsible for compliance with HUD regulations. Ms. Hirsh has over 24 years of real estate experience and is a CPA, member of the AICPA, the Ohio Society of CPA's, the National Network of Commercial Real Estate Women and is 46 years old.

Daniel L. Powers joined the Company in 1998 through the acquisition of MIG. He is currently a Vice President of Operations, Western Region with supervisory responsibility for properties in Arizona, Colorado, Florida, Georgia, Illinois, Indiana, Maryland, Michigan, North Carolina, Central and Western Ohio, Pennsylvania and Texas and has been involved in multifamily property management for 23 years. Mr. Powers is a Certified Property Manager and is 49 years old.

Charles J. Stone joined the Company in 1998 through the acquisition of MIG. He is currently Vice President of Portfolio, East. Mr. Stone is 56 years old and has over 29 years of real estate experience.

Steven C. Thrower joined the Company in 1998 through the acquisition of MIG. He is currently Vice President of Portfolio, West. Mr. Thrower is 47 years old and has more than 17 years of real estate experience.

Nan R. Zieleniec joined AEG in 1990 and was elected Vice President of Human Resources in 1998, having responsibility for all areas of human resource planning and administration and national training. Ms. Zieleniec is a member of the Society of Human Resource Management and American Compensation Association and is 44 years old.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

The Company's common shares are traded on the New York Stock Exchange under the trading symbol "AEC".

The following table sets forth for the periods indicated the high and low closing sale prices per common share as reported on the New York Stock Exchange (composite tape) and the dividends declared per common share.

(1) The Company declared dividends of $.25 per share on January 3, 2001 and March 26, 2001. The timing of this declaration came about as a result of the fourth quarter 2000 dividend declaration being deferred to January 3, 2001.

On March 3, 2003, there were 862 holders of record of the Company's common shares.

The Company maintains a dividend reinvestment plan under which shareholders may elect to reinvest their dividends automatically in common shares of the Company. Under the plan, the plan agent purchases common shares in the open market on behalf of participating shareholders.

Item 6. Selected Financial and Other Data

The following tables set forth selected financial and other data for the Company on a consolidated basis. The historical financial information contained in the tables has been derived from and should be read in conjunction with (i) the financial statements and notes thereto of the Company and (ii) Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company both included elsewhere herein.

(a) The Company considers Funds From Operations ("FFO"), as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), to be one of the measures of the performance of an equity REIT.

The Company defines FFO as the inclusion of all operating results applicable to common shareholders, both recurring and non-recurring, except those defined as "Extraordinary Items" or "Cumulative Effect of a Change in Accounting Principle" under GAAP, adjusted for depreciation on real estate assets and amortization of intangible assets and gains and losses from the disposition of properties and land. Adjustments for joint ventures are calculated to reflect FFO on the same basis. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. Certain other real estate companies may define FFO in a different manner.

(b) Management uses Net Operating Income ("NOI") as its evaluation measure of the reportable segments' activity. NOI is determined by deducting property operating and maintenance expenses from total revenues for the Acquisition/Disposition, Market Rate and Affordable Housing segments and deducting service companies expense, which is included within the general and administrative expense in the Consolidated Statements of Income, direct property management expenses and painting service expense from total revenues for the Management and Service Operations segment. NOI should not be considered as an alternative to net income (determined in accordance with GAAP), as an indicator of the Company's financial performance, cash flow from operating activities (determined in accordance with GAAP) or as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs. Other real estate companies may define NOI in a different manner.

(c) Physical Occupancy represents the actual number of units leased divided by the total number of units available at the end of the period.

(d) Amount excludes the Company's share of mortgage indebtedness relating to the unconsolidated joint ventures of approximately $32,659, $42,245, $24,986, $17,249 and $17,453 at December 31, 2002, 2001, 2000, 1999 and 1998, respectively.

(e) These amounts do not include an adjustment to reflect the change in the Company's accounting policy for accounting for certain replacements and improvements which was effective January 1, 1999.

(f) Reconciliation of Funds From Operations to Net Income:

(g) Reconciliation of Net Operating Income to Net income:

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the financial statements and notes thereto included in Part II, Item 8 of this Report on Form 10-K. Historical results and percentage relationships set forth in the Consolidated Statements of Income contained in the financial statements, including trends which might appear, should not be taken as indicative of future operations. This discussion may also contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to vary from those projected. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. These forward-looking statements are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that the Company's forward-looking statements involve risks and uncertainty, including without limitation the following:

• changes in economic conditions in the markets in which the Company owns properties, including interest rates, the overall level of economic activity, the availability of consumer credit and mortgage financing, unemployment rates and other factors;

• risks of a lessening of demand for the multifamily units owned or managed by the Company;

• competition from other available multifamily units and change in market rental rates;

• increases in property and liability insurance costs;

• changes in government regulations affecting the Affordable Housing Properties;

• changes in or termination of contracts relating to third party management and advisory business;

• inability to renew current Housing Assistance Payment ("HAP") contracts at existing rents;

• weather and other conditions that might adversely affect operating expenses;

• expenditures that cannot be anticipated such as utility rate and usage increases, unanticipated repairs, additional staffing, and real estate tax valuation reassessments;

• changes in market conditions that may limit or prevent the Company from selling properties identified for disposition, which may impede the Company's ability to continue to diversify its portfolio; and

• risks of construction including cost overruns, contractor defaults and contractor delays.

Overview. The Company is engaged primarily in the ownership and operation of multifamily residential units. Additionally, the Company and its subsidiaries provide asset and management services to third party owners of multifamily residential units for which the Company is paid fees.

Federal Income Taxes . The Company has elected to be taxed as a Real Estate Investment Trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with its taxable year ending December 31, 1993. REITs are subject to a number of organizational and operational requirements including a requirement that 90.0% (95.0% prior to January 1, 2001) of the income that would otherwise be considered as taxable income be distributed to shareholders. Providing the Company continues to qualify as a REIT, it will generally not be subject to federal income tax on net income. However, the Company's Service Companies are subject to federal income tax.

On December 17, 1999, as part of a larger bill, the REIT Modernization Act ("RMA") was signed into law. Effective beginning January 1, 2001, the RMA has amended the tax rules relating to the composition of a REIT's assets. Under prior law, REIT's were precluded from owning more than 10.0% of the outstanding voting securities of any one issuer, other than a wholly owned subsidiary or another REIT. Beginning in 2001, a REIT will generally remain subject to this current restriction and will also be precluded from owning more than 10.0% of the value of all securities of any one issuer.

As an exception to this prohibition, a REIT will be allowed to own up to 100% of the securities of a Taxable REIT Subsidiary ("TRS") that can provide non-customary services to REIT tenants and others without disqualifying the rents that a REIT receives from its tenants. However, no more than 20.0% of the value of a REIT's total assets can be represented by securities of one or more TRS's. The amount of intercompany interest and other expenses between a TRS and a REIT are subject to arms length allocations. The Company has elected TRS status for all of its Service Companies.

Critical Accounting Policies and Estimates. The consolidated financial statements of the Company include accounts of the Company, all subsidiaries, the Service Companies and the Operating Partnership structured as a DownREIT. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. In preparing these financial statements, management has utilized information available including industry practice and its own past history in forming its estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by management in formulating its estimates inherent in these financial statements may not materialize. However, application of the accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact comparability of the Company's results of operations to those of companies in similar businesses.

Real Estate and Depreciation. Real estate assets are stated at the lower of cost or fair value, as appropriate, less accumulated depreciation. Costs related to the acquisition, development, construction and improvement of properties are capitalized including interest, internal wages and benefits, real estate taxes and insurance. Capitalization usually begins with commencement of development activity and ends when the property is ready for leasing.

Replacements and improvements, such as HVAC equipment, structural replacements, windows, appliances, flooring, carpeting and kitchen/bath replacements and renovations are capitalized and depreciated over their estimated useful lives as follows:

Buildings and improvements 5-30 years

Furniture, fixtures and equipment 5-10 years

The Company is required to make subjective assessments as to the useful lives of its properties and improvements for purposes of determining the amount of depreciation to reflect on an annual basis. These assessments have a direct impact on the Company's net income.

Ordinary repairs and maintenance, such as unit cleaning and painting and appliance repairs are expensed.

The Company generally classifies properties as "Properties held for sale" when all significant contingencies surrounding the closing have been resolved. In most transactions, these contingencies are not satisfied until the actual closing of the transaction and, accordingly, the property is not identified as held for sale until the closing actually occurs. However, each potential transaction is evaluated based on its separate facts and circumstances.

The Company follows a practice of discontinuing the depreciation of assets specifically identified by management as held for sale. A valuation allowance is established for any asset so identified if in management's opinion, the net sales price of the asset is less than its net book value.

When there is an impairment indicator, the Company determines whether a real estate asset is impaired. In performing this analysis, the Company determines the range of potential alternatives and assigns a probability of the various alternatives under consideration by management. Should the alternatives considered or the probability of the occurrence thereof change, an impairment may result which could materially impact the results of operations of the Company.

Revenue Recognition. The Company's residential property leases are for terms of generally one year or less. Rental income is recognized on the straight-line basis. Retroactive revenue increases related to budget based Affordable Housing Properties are generally recognized based on rental applications submitted and approved by HUD.

Acquisition, management and disposition fees, and other fees are recognized when the related services are performed and the earnings process is complete. Servicing fee income related to pension fund loans is recognized when earned and is included in other income in the Consolidated Statements of Operations.

Rent concessions, including free rent and leasing commissions paid to third parties, incurred in connection with residential property leases are capitalized and amortized on a straight-line basis over the terms of the related leases (generally one year) and are charged as a reduction of rental revenues.

Accrued Liabilities. The Company's policy for the establishment and maintenance of a "reserve" for liabilities is as follows: A reserve will be established for existing matters based on the criteria established in FAS 5 "Accounting for Contingencies" as defined: (a) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements, and (b) the amount of loss can be reasonably estimated. Finally, once a reserve has been established, it will not be reversed until such time that the event or circumstances that resulted in the reserve being established have been resolved. Quarterly, each reserve will be reviewed to determine if additional reserves are required based on new information or whether the event that triggered the reserve has now been removed.

Liquidity and Capital Resources. The Company anticipates that it will meet its liquidity requirements for the upcoming year generally through its net cash provided by operations, secured borrowings (primarily through the use of the Company's two lines of credit, which had $20.8 million available at December 31, 2002), property sales' proceeds and possible issuance of debt or equity securities. The Company believes that these sources will be sufficient to meet operating requirements, capital additions, mortgage amortization payments and the payment of dividends in accordance with REIT requirements.

The Company anticipates the following commitments for capital expenditures for 2003:

. $9.5 million for recurring capital expenditures. This includes replacement of worn carpet and appliances and property common area parking lots, roofs and similar matters in accordance with the Company's current property expenditure plan. This commitment is expected to be funded largely from cash flow from operating activities.

. $6.7 million for investment/revenue enhancing expenditures. This commitment is expected to be funded largely from borrowings on the Company's lines of credit.

. $460,000 for non-recurring capital expenditures. This commitment is expected to be funded largely from cash flow from operating activities.

The Company has a shelf registration statement on file with the Securities and Exchange Commission relating to a possible offering of up to $368.8 million of debt securities, preferred shares, depositary shares, common shares and common share warrants. Although $62.5 million of MTN's remain available under the shelf registration, it's unlikely that the Company will have access to the market for MTN securities in the near future due to the current value of the Company's shares and its current financial condition.

While the Company currently estimates that its net cash from operations for 2003 should approximate 2002, certain factors could adversely impact the Company's results of operations in 2003 including, but not limited to, low mortgage interest rates, continuation of a recessionary economy (primarily employment levels) and higher than anticipated insurance costs. If mortgage interest rates remain low, tenants may elect to purchase their own home rather than rent, thereby adversely impacting occupancy levels. Occupancy levels could also be adversely impacted if the economy continues to remain weak or further deteriorates as tenants may lose their jobs, default on their leases, and defer renting an apartment. The Company's total rental revenue collections are impacted by a combination of rental rates, rent concessions and occupancy levels, which the Company may attempt to adjust from time to time in order to maintain projected revenues. Additionally, rising property insurance costs could dramatically increase the Company's property operating expenses in 2003 impacting the Company's net cash provided by operations and net income. The Company believes that if net cash is below 2003 projections, the other sources of cash previously mentioned will be sufficient to cover the liquidity requirements of the Company.

Cash Flows. Significant sources and uses of cash in the past three years are summarized as follows:

Cash Sources (Uses):

Cash Flows from Operating Activities. For 2002, cash flows from operating activities were $29.4 million as compared with $26.0 million in 2001 and $31.6 million in 2000. The variances were primarily due to the net activity of the following:

(i) For 2002, the net loss before the gain on disposition of properties and land and the loss on extinguishment of debt was $8.3 million compared to a net loss of $2.0 million for 2001, a decline of approximately $6.3 million. This decline was primarily the result of a decrease in revenues of $6.5 million. When comparing 2001 to 2000, there was an increase of $1.1 million. This increase was primarily the net result of an increase in revenues of $2.0 million net of an increase in expense of $877,000 and an increase in the net loss in equity of joint ventures of $164,000.

(ii) For 2002, accounts and notes receivable and accounts and notes receivable of affiliates and joint ventures decreased $743,000, while for 2001, they decreased $5.5 million. This results in a decrease to cash flow from operations of $4.8 million which was primarily due to the reimbursements made in 2001 by the partners of several joint ventures properties for funds that the Company had previously advanced to these properties. For 2000, they decreased approximately $1.2 million, which results in 2001 having an increase to cash flow from operations of $4.3 million when comparing 2001 to 2000.

(iii) For 2002, accounts payable and accrued expenses decreased cash flow from operations $304,000, an increase of approximately $1.9 million when compared to 2001's decrease of $2.2 million. This variance was primarily due to a decrease in accrued expenses due to the sale of seven properties in 2001 compared to the sale of six properties in 2002. When comparing 2001 to 2000, there was a decrease of $552,000 for primarily the same reason.

(iv) For 2002, restricted cash increased operating cash flow $1.7 million, while for 2001, there was a decrease of $7.8 million, a variance of $9.5 million. This variance was primarily due to the Company placing in escrow $6.0 million from the funding of a new mortgage loan on the Gates Mills III property. The Gates Mills III property was one of the properties involved in the exchange of joint venture properties in 2002 and, as such, the escrow was assigned to the new owners. This property was 66.7% owned by the Company and the Company had controlling interest in the operations of the property and, as such, the property was fully consolidated by the Company. This deposit to escrow in 2001 was also the primary reason for the variance of $7.2 million when comparing 2001 to 2000.

Cash Flows Provided by (Used For) Investing Activities. Cash provided by investing activities was $16.4 million in 2002 while cash used for investing activities was $7.6 million in 2001 and $16.9 million in 2000. Included in 2002 was $16.2 million used for asset additions acquired or developed and $1.3 million used for advances to fund investment in certain joint venture properties net of $33.9 million received from the sale of real estate. Included in 2001 was $14.3 million used for asset additions acquired or developed and $5.1 million used for advances to fund investment in certain joint venture properties net of $11.8 million of net proceeds from the sale of real estate. Included in 2000 was $29.3 million used for asset additions acquired or developed and $4.1 million used for investment in certain joint venture properties, net of $16.5 million of net proceeds from the sale of real estate.

Cash Flows Used For Financing Activities. Cash used for financing activities was $48.0 million in 2002, $15.8 million in 2001 and $50.5 million in 2000. For 2002, cash flows used for financing activity were primarily $24.9 million used to pay dividends on the Company's common and preferred shares and $23.4 million net decrease in debt borrowings. For 2001, cash flows used for financing activity were primarily $24.9 million used to pay dividends on the Company's common and preferred shares, net of a $9.2 million increase in debt borrowings. For 2000, cash flows used for financing activity was primarily $30.5 million used to pay dividends on the Company's common and preferred shares, $17.8 million for the purchase of treasury shares, a $5.5 reduction in total indebtedness net of $3.2 million received from an interest rate swap termination payment.

Financing and Other Commitments. At December 31, 2002, the Company had 53 conventional mortgages payable aggregating $532.8 million, each collateralized by the respective real estate and resident leases having a net book value of $617.2 million. These nonrecourse project specific loans accrue interest at fixed rates ranging from 3.40% to 9.63%. Additionally, the Company had three HUD mortgage payables aggregating $7.6 million, each collateralized by the respective real estate and residential leases having a net book value of $7.8 million. These loans accrue interest at rates ranging from 3.76% to 7.50%. On February 1, 2002, the Company completed the refinancing of a $10.9 million nonrecourse loan encumbering a Market Rate Property located in Cleveland, Ohio. The new loan matures February 1, 2005 and the interest rate is currently at a floating rate of 3.40% which is less than the rate on the previous loan of 9.61%. The maturities of the remaining loans range from 2004 to 2022. The Company currently intends to refinance each loan as it matures.

The Company currently has 15 properties which are unencumbered, 12 of which are Affordable Housing Properties. These 15 properties had net income of $4.2 million for the year ended December 31, 2002, and a net book value of $9.2 million at December 31, 2002. The Company believes that it should be able to obtain financing on these properties should the need arise; however, certain financing vehicles may be unavailable or limited because many of these properties are ground leased and one is subject to a right of reverter.

The Company currently has two lines of credit. The first line of credit is a $20.0 million line secured by one of the Company's properties. Borrowings under this line are currently restricted up to an amount of $12.6 million. Borrowings under this line of credit bear interest at a rate of LIBOR plus 1.5% or approximately 2.9% at December 31, 2002. There were no borrowings outstanding under this line of credit at December 31, 2002 and $3.5 million outstanding under this line at December 31, 2001. This line of credit matures in July 2003. The Company intends to renew or replace this line of credit.

The second line of credit is a $14.0 million line secured by two of the Company's properties. In April 2002, the maximum borrowings available under this line of credit were increased from $12.0 million to $14.0 million. The maturity of this line of credit was extended from December 31, 2002 to December 31, 2003. The Company intends to obtain an extension upon maturity. The Company's borrowings under this line of credit bear interest at either the prime rate or LIBOR plus 2.0% at the Borrower's option. There were no borrowings outstanding at either December 31, 2002 or December 31, 2001; however, the amount currently available under this line of credit is limited to $8.2 million because of outstanding letters of credit and a credit risk sublimit relative to derivative transactions.

At December 31, 2002, the Company had one Medium-Term Note outstanding in the amount of $105,000. This loan bears interest at 6.88%, is unsecured and matures in December 2004. The Company intends to repay this loan in full at maturity.

The Company leases certain equipment under capital leases. The Company also leases certain equipment and facilities under operating leases. Future minimum lease payments under all capital and noncancellable operating leases in which the Company is the lessee, principally for ground leases, for each of the next five years and thereafter, are as follows: $257,000 - 2003, $247,000 - 2004, $208,000 - 2005, $110,000 - 2006, $101,000 - 2007 and $3.8 million thereafter.

The ground lease agreements contain provisions which, upon expiration of the lease, require reversion of the land and building to the lessor. Such provisions exist for nine properties included in the financial statements and expire at various dates from 2021 to 2086. Total revenues derived from such properties were $10.1 million, $10.3 million and $10.0 million for the years ended December 31, 2002, 2001 and 2000, respectively. Furthermore, at the end of the term of the lease, any remaining replacement reserves revert to the lessor. Management believes that the replacement reserves will be utilized for their intended purpose prior to the end of the lease term. Such cash reserves included in restricted cash were $615,000 and $717,000 at December 31, 2002 and 2001, respectively. With respect to such leases, the Company incurred ground rent expense of $101,000 for each of the years ended December 31, 2002, 2001 and 2000.

The Company owns one property which is subject to a warranty deed reversion provision. This provision requires that the land and real estate assets revert to the deed holder at expiration, which is September 2037. The net book value of this property was $1.2 million at December 31, 2002. The property generated revenues and net income of $943,000 and $378,000 for 2002, $958,000 and $449,000 for 2001 and $950,000 and $435,000 for 2000.

In connection with the refinancing of the Watergate Apartments, a 949-unit multifamily community located in Euclid, Ohio, the Company has guaranteed completion of certain improvements totaling approximately $7.0 million. This obligation is secured by a $3.5 million letter of credit.

Insurance. The September 11, 2001 terrorist attack on New York's World Trade Center and its aftermath has created a number of uncertainties for the Company concerning the management of its insurance risks. The Company renewed its blanket insurance policy for the period April 1, 2002 to March 31, 2003 at greater cost with less protection. The Company is not alone in facing these dilemmas. Since September 11, 2001 insurance costs have risen dramatically across the industry, many insurers have significantly reduced their capacity positions and many others have refused to insure against acts of terrorism.

Accordingly, for the current policy periods, the Company was faced with an approximate 80.0% increase in property and liability insurance premiums coupled with reduced insurance protection. When the Company renewed its current property insurance policy, the Company was unable to obtain quotes for terrorism insurance at any price. In August 2002, the Company was successful in obtaining $25.0 million of insurance protection for terrorist-related risks for the Company's owned and managed portfolio, which was approved by the Company's major lenders.

Insurance coverage issues are a matter of concern not only for the Company and its shareholders, but also the Company's lenders who may assert their own concerns over increased risk exposure brought about by reduced insurance coverage. The Company believes that its current insurance coverage is representative of what is commercially available and reasonably acceptable in today's often chaotic insurance environment.

Off-Balance Sheet Investments. The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting as the Company exercises significant influence, but does not control these entities. These investments are initially recorded at cost, as investments in joint ventures and subsequently adjusted for equity in earnings and cash contributions and distributions.

Summarized financial information at 100% for these joint ventures is as follows:

Joint Venture Financing Commitments. The Company has guaranteed the construction cost overruns and the payment of a $30.0 million construction loan in connection with Idlewylde Apartments Phase II, a 535-unit multifamily community located in Atlanta, Georgia completed in 2002 by the Company and its pension fund joint venture partner. This loan matures December 10, 2003 with two one-year options to extend that are conditioned upon the satisfaction of various conditions and requirements. The Company has recorded no liability in relation to this guarantee at December 31, 2002. The Company also guaranteed the payment of a $15.8 million construction loan in connection with the development of Courtney Chase Apartments, a 288-unit multifamily community located in Orlando, Florida, which is being developed by the Company and its pension fund joint venture partner. This loan matures June 1, 2005, with an option to extend the maturity for two additional years. The Company has recorded no liability in relation to this guarantee at December 31, 2002. The Company also has guaranty obligations under a $220,000 letter of credit for purposes of guaranteeing certain equity contributions required by the construction lender in connection with Berkley Manor, a 252-unit multifamily community located in Cranberry Township, Pennsylvania, of which construction was completed in 2002 by the Company and its joint venture partner. The Company has recorded no liability in relation to this guarantee at December 31, 2002.

At December 31, 2002, five of the Company's joint venture investments were encumbered by debt. The Company's share of this debt was $32.7 million.

Operating Partnership. As provided in the AERC HP Investors Limited Partnership Agreement ("DownREIT Partnership"), the Company, as general partner, has guaranteed the obligation of the DownREIT Partnership to redeem OP units held by the limited partners. The DownREIT Partnership was formed in 1998 in connection with the MIG merger transactions. Under the terms of the DownREIT Partnership Agreement, the DownREIT Partnership is obligated to redeem OP units for common shares of the Company or cash, at the Company's discretion, at a price per OP unit equal to the 20 day trailing price of the Company's common shares for the immediate 20 day period preceding a limited partner's redemption notice. After giving effect to the transactions described in the following paragraphs, there are 128,056 OP units remaining having a carrying value of $3.0 million. Through December 31, 2002, 393,976 OP units have been redeemed. These transactions had the effect of increasing the Company's interest in the DownREIT Partnership from 85.0% to 96.0%. These redemption transactions are more fully described in the following paragraphs.

In 2002, 335,000 of the OP units were purchased for cash in the amount of $3.1 million. These units had a recorded amount of $7.6 million when issued. The difference of the cash paid and the recorded amount was $4.5 million which reduced the recorded amount of the underlying real estate.

In 2001, 39,314 of the OP units were purchased for cash in the amount of $393,000. These units had a recorded amount of $929,000 when issued. The difference of the cash paid and the recorded amount was $536,000 which reduced the recorded amount of the underlying real estate.

Acquisitions, Dispositions and Development. Any future multifamily property acquisitions or developments would be financed with the most appropriate sources of capital, which may include the assumption of mortgage indebtedness, bank and other institutional borrowings, through the exchange of properties, undistributed earnings, secured debt financings, or the issuance of shares or units exchangeable into common shares.

Acquisitions: On April 19, 2002, the Company and its joint venture partners completed the exchange of five Market Rate properties located in Northeast Ohio. Under the terms of the agreement, the Company became the 100% fee owner of three of the properties, the Americana Apartments (738 units) which was subsequently sold (see Dispositions below), College Towers (458 units) and the Watergate Apartments (949 units). The Company relinquished its 66.67% ownership interest in Gates Mills III (320 units) and its 33.33% ownership interest in Gates Mills Towers (757 units). There was no gain or loss recorded in connection with this transaction as the exchange was not the culmination of the earnings process. See Note 9 of the Notes to the Financial Statements presented in Part II, Item 8 of this report on Form 10-K for further information concerning this transaction. Prior to the exchange, financial results for Gates Mills III were consolidated. As a result, the operating results for Gates Mills III included in discontinued operations totaled $(3,000) for 2002, $45,000 for 2001 and $393,000 for 2000.

Dispositions: The Company and its joint venture partners are marketing two joint venture properties. One property is located in Ohio in which the Company is a 50.0% partner and the other property is located in Pennsylvania in which the Company is a 49.0% partner. The following is a summary of acquisition and disposition transactions completed this year.

On January 18, 2002, the Company completed the sale of Muirwood Village at London, a property located in Central Ohio. The property was sold for $4.0 million and the Company recorded a gain of $255,000. Since this property was held for sale as of December 31, 2001, the financial results are excluded from the discontinued operations presentation.

On April 24, 2002, the Company completed the sale of Americana Apartments, which is located in Northeast Ohio. The property was sold for $18.5 million. The Company paid off the existing debt of $11.6 million and received net cash proceeds of $6.2 million which resulted in the Company recording a gain of $7.9 million. This gain is included in "Income from discontinued operations". Additionally, the operating results of $(33,000) for 2002 are included in "Income from discontinued operations".

On July 29, 2002, the Company completed the sale of Jennings Commons, a 50-unit Affordable Housing Property located in Northeast Ohio. The property was sold for $1.9 million. The sale resulted in a gain of $945,000. This gain is included in "Income from discontinued operations". Additionally, the operating results of $85,000 for 2002, $161,000 for 2001 and $198,000 for 2000 are included in "Income from discontinued operations".

On November 25, 2002, the Company completed the sale of Bolton Estates, a 196-unit property located in Central Ohio. The property was sold for $6.4 million and the Company recorded a gain of $1.4 million. This gain is included in "Income from discontinued operations". Additionally, the operating results of $(137,000) for 2002, $28,000 for 2001 and $(57,000) for 2000 are included in "Income from discontinued operations".

On December 31, 2002, the Company recorded a loss of $632,000 following the sale of a project located in Boynton Beach, Florida, for $8.0 million which included land under development and an operational marina. The Company had originally purchased this land for $5.2 million with future plans of development. The Company incurred approximately $3.4 million of development and other costs that were capitalized, that included the cost of finalizing the development of the marina. The Company's internal analysis indicated that the land and marina were not impaired based upon the Company's plan to continue the development of the property on its own or with a partner and retain it as an asset held for investment. The Company received an offer to purchase the property during the fourth quarter of 2002, and made a business decision to sell the property and, as such, recorded a loss of $632,000. This loss is included in "Income from discontinued operations". Additionally, the operating results of $(78,000) for 2002 are included in "Income from discontinued operations".

See Note 2 of the Notes to the Financial Statements presented in Part II, Item 8 of this Form 10-K for information concerning discontinued operations for properties sold during 2002.

Development. For the year ended December 31, 2002, two joint venture partnerships in which the Company is a 49.0% partner, completed the construction and commenced leasing the final 112 units of the scheduled 252 units at Berkley Manor (140 units were completed during 2001) and the final 455 units of the scheduled 535 units for Idlewylde-Phase II (80 units were completed during 2001).

On May 8, 2002, the Company entered into a joint venture agreement to develop a 288-unit multifamily Market Rate Property located in Orlando, Florida. The Company contributed land of $1.3 million in exchange for a 24.0% interest in this joint venture. Currently, the Company estimates that this project will be completed in late 2003.

Management and Service Operations. MIG's investment advisory business was significantly impacted by a decision of a major MIG client to transfer its investment advisory contract with MIG to another advisor effective October 1, 2002. Under that agreement, the Company and MIG had provided property and asset management services for eleven client owned properties which generated approximately $2.1 million in annual fees. The contribution of MIG's investment advisory business to the Company's annual overall revenues are expected to decrease because of the transferred contract from approximately 3.5% to approximately 2.5%. It is anticipated that the advisory business' contribution to the Company's NOI should remain constant at approximately 2.0%. In the third and fourth quarters of 2002, the Company executed a restructuring plan concerning the advisory business and recorded a charge of $686,000 primarily related to severance benefits. Furthermore, the Company wrote off the related asset and management portion of the intangible asset associated with the aforementioned contract in the amount of $312,000. See Note 5 of the Notes to the Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

Management Contract Cancellation. During 2002, the Company's management contracts associated with the following properties were terminated or transferred:

⁽¹⁾ In connection with the April 19, 2002 joint venture swap transaction, the Company became the 100% owner of these three properties and as such, no longer will report management fee income for them.

Additionally, the Company anticipates that a management contract on a joint venture property in which the Company is a 50.0% owner, which generated property management fees of $12,000 in 2002, may be canceled during 2003 because of a proposed sale of the property.

Dividends. On December 17, 2002, the Company declared a dividend of $0.17 per common share which was paid on February 1, 2003 to shareholders of record on January 15, 2003. On February 13, 2003, the Company declared a dividend of $0.60938 per Depositary Share on its Class A Cumulative Preferred Shares (the "Perpetual Preferred Shares") which will be paid on March 17, 2003 to shareholders of record on March 3, 2003.

RESULTS OF OPERATIONS FOR 2002 COMPARED WITH 2001 AND 2001 COMPARED WITH 2000

In the following discussion of the comparison of the year ended December 31, 2002 to the year ended December 31, 2001 and the year ended December 31, 2001 to the year ended December 31, 2000, Market Rate properties refers to the Same Store Market Rate property portfolio. Market Rate properties represent 59 wholly owned properties. Acquired/Disposed properties represent one recently constructed property that has not yet reached stabilization, two acquired properties and properties which have been sold. Affordable Housing represents 12 properties subject to HUD regulations.

The Company uses Net Operating Income ("NOI") as a measure of the performance of its properties. NOI is determined by deducting property operating and maintenance expenses from total revenues for the Acquisition/Disposition, Market Rate and Affordable Housing segments and deducting service companies expense, which is included within the general and administrative expense in the Consolidated Statements of Income, and painting service expense from total revenues for the Management and Service Operations segment. For the year ended December 31, 2002, NOI was $75.9 million, a decrease of $5.7 million when compared to the NOI of $81.6 million for the year ended December 31, 2001. The NOI for 2001 was $1.5 million lower than the NOI of $83.1 million for the year ended December 31, 2000. The NOI for each of the four segments of the Company for the years ended December 31, 2002, 2001 and 2000 was as follows: Acquisition/Disposition $4.2 million, $4.0 million and $6.6 million, Market Rate $64.9 million, $69.1 million and $67.8 million, Affordable Housing $5.1 million, $5.3 million and $5.5 million and Management and Service Operations $1.7 million, $3.1 million and $3.2 million, respectively. The following table reconciles NOI to Net Income:

Overall, total revenues decreased $6.5 million or 3.8% when comparing 2002 to 2001 and increased $2.0 million or 1.2% when comparing 2001 to 2000. Total expenses decreased $1.7 million or 1.0% when comparing 2002 to 2001 and increased $877,000 or 0.5% when comparing 2001 to 2000. Net (loss) income applicable to common shares after deduction for the dividends on the Company's preferred shares decreased $3.4 million or 594.3% when comparing 2002 to 2001 and decreased $35,000 or 6.5% when comparing 2001 to 2000.

Rental Revenues. Rental revenues decreased $2.1 million or 1.5% when comparing 2002 to 2001 and decreased $1.4 million or 1.0% when comparing 2001 to 2000. Rental revenues from the Acquired/Disposed properties decreased $987,000 or 12.4% when comparing 2002 to 2001. The rental revenues from the construction property were $3.3 million for 2002 compared to $3.2 million for 2001, an increase of $100,000. The rental revenues from the two acquired properties were $5.3 million. Also, rental revenues for 2001 included $4.0 million for properties sold in 2001. When comparing this segment for 2001 compared to 2000, the construction property contributed $3.2 million compared to $2.0 million, an increase of $1.2 million or 60.0%. Additionally, properties sold in 2001 contributed $4.0 million compared to $6.4 million for those properties in 2000. Also, 2000 included rental revenues of $3.0 million for properties sold in 2000.

Rental revenues for the Market Rate properties decreased $3.0 million or 2.4% when comparing 2002 to 2001 and increased $2.0 million or 1.7% when comparing 2001 to 2000. The average rental rate per unit was $816 at the end of 2002 compared to $796 at the end of 2001 an increase of 2.5%. The Company anticipates that due to the slowing economy that rental rates for 2003 may grow at a much slower rate of 1.0% to 2.0%. At the end of 2002 and 2001, physical occupancy was 87.3% and 90.8%, respectively. Additionally, the average economic occupancy was 85.1% at the end of 2002 compared to 88.8% at the end of 2001. In addition to a $2.7 million increase in vacancies, concessions given in 2002 were $2.9 million higher than concessions given in 2001. The Company anticipates that concessions to be recorded during 2003 will increase over those recorded during 2002. When comparing 2001 to 2000, the average rental rate increased $38 per unit or 5.0% from the $758 per unit in 2000. Also, physical occupancy decreased 0.8% from 91.5% in 2000.

Rental revenues for the Affordable Housing Properties decreased approximately $81,000 when comparing 2002 to 2001 and increased $73,000 when comparing 2001 to 2000. These revenues are primarily dependent upon the Company being entitled to receive rental assistance subsidies from HUD via monthly housing assistance payments ("HAP Payments"). The amount of each monthly HAP Payment is equal to the rent amount (the "Contract Rent") stated in the HAP Contract with HUD, less the amount payable by the Eligible Resident for such month.

Below is a table setting forth the current expiration dates of the HAP Contracts and the HAP revenue recognized for the Company's Affordable Housing Properties:

(A) Amounts shown represents 100% payment.

All thirteen properties shown in the above table had positive cash flow during 2002 and are anticipated to have positive cash flow for the remaining contract terms. Therefore, none of the HAP contracts are considered to be loss contracts.

Contract Rents may be adjusted at least annually in accordance with the annual adjustment factor method for some of the properties. Generally, these types of adjustments are only permitted if current rents are below the HUD published Fair Market Rent ("FMR") threshold. If current rents exceed FMRs, a rent comparability study must be completed to demonstrate that the property's rents are below "market".

Prior to HAP Contract expiration, "Contract Renewal Request Forms" must be submitted by the Company 120 days prior to the HAP anniversary date to HUD (or its corresponding contract agent) in order to renew the existing HAP contract. Current options available to the Company for the expiring HAP contracts are as follows: (i) renew at current rents plus an operating cost adjustment factor that is set by HUD on an annual basis. These rents are below the market comparisons for properties that have a mortgage; (ii) renew at current rents plus an operating cost adjustment factor for properties without a mortgage; or, (iii) opt out of the Section 8 program. Opting out of the Section 8 program requires an additional one-year notice to HUD (or the contract agent) and the affected residents.

The Company believes, that upon expiration of the contracts, the contracts will be renewed, or the Company will enter into another government subsidized or mortgage restructuring program, or that the properties will be operated as conventional, market-rate properties.

The following represents the Company's current expectations concerning those HAP contracts which expire in 2003.

Shaker Park Gardens II. On November 13, 2000, the Company requested a referral to OMHAR (Office of Multifamily Housing and Restructuring) for the restructuring of the mortgage and reduction of Section 8 rents to comparable market rents, and to renew the HAP Contract which was extended at current rents until June 30, 2002 to allow for completion of restructuring negotiations. The Company did not accept the terms of the mortgage restructure agreement, as written by HUD, and chose not to accept the commitment. On June 27, 2002, the Company paid the existing mortgage note in full. The mortgage pre-payment provided exemption from OMHAR and eligibility for an Operating Cost Adjustment Factor (OCAF) increase, based on the Company's interpretation of HUD regulations. However, HUD rejected this proposal and reduced contract rents to those stipulated in the mortgage restructure agreement. The Company is currently engaged in a formal appeal of these actions.

Lakeshore Village. On October 7, 2002, the Company requested a referral to OMHAR for the full restructuring of the mortgage and reduction of Section 8 rents to comparable market rents, and to renew the HAP Contract which was extended at current rents until October 2003. On February 20, 2003, the partnership was notified by HUD that the property is eligible for the full restructuring of the mortgage and that the property has been assigned to a participating administrative entity for further processing. In the event that the partnership and HUD fail to reach an agreement on the Restructuring Application, the current contract rents most likely would be reduced to market rents. The Company anticipates that the contract will be renewed and that any reduction of rents to current market rents would be partially offset by a reduction in debt service payments. Currently, the estimated annual market rents for this property are approximately $695,000, while the current annual rents are approximately $866,000, a difference of $172,000. This property is a joint venture property in which the Company has a 50.0% investment accounted for using the equity method. Therefore, a reduction in rents, without a corresponding reduction in debt service payments, would decrease net income to the Company by approximately $86,000. This reduction would be reflected in the Consolidated Statements of Income in the line item "Equity in net (loss) income of joint ventures."

Statesman II. In July 2002, the Company requested a renewal of the current contract for a one-year term with an increase in rents of 4.0%, as calculated using the OCAF published on February 11, 2002. The Company's request for the OCAF increase was granted and the contract was renewed for a one-year term through November 30, 2003. At the appropriate time, during 2003, the Company anticipates requesting another extension. The Company anticipates the extension will be granted.

West High Apartments. In July 2002, the Company requested a renewal of the current contract for a one-year term with an increase of 4.0%, as calculated using the OCAF published on February 11, 2002. The Company's request for the OCAF increase was granted and the contract was renewed for a one-year term through November 30, 2003. At the appropriate time, during 2003, the Company anticipates requesting another extension. The Company anticipates the extension will be granted.

Fees. The management and service operations recognized fee income of $8.6 million for 2002 compared to $10.3 million for 2001, a decrease of $1.7 million or 16.5%. The decrease was primarily due to the transfer of 11 properties by one of MIG's clients to another investment adviser, as previously discussed under Management and Service Operations and the loss of five other advised properties during 2002. In 2001, management was terminated on six properties. Finally, the Company lost the fees generated by the five joint venture properties included in the April 2002 exchange, as previously discussed. When comparing the $10.3 million for 2001 to the $9.7 million for 2000, there was an increase of $600,000 or 6.2% primarily due to an increase in painting services. It should be noted that the management and advisory fees attributed to properties owned by pension fund clients are earned pursuant to contracts that are generally terminable upon 30 days notice.

Reimbursements. In accordance with EITF 01-14 "Income Statement Recharacterization of Reimbursements Received for Out-of-Pocket Expenses Incurred", the Company has reclassified to revenue certain expense reimbursements that the Company had previously recorded as a reduction to the expense. These revenue amounts are included in property management fees and reimbursements. The corresponding expenses are shown as direct property management expenses. For each of the three years ended December 31, 2002, 2001 and 2000, the revenues equal the expenses shown of $13.2 million, $15.3 million and $13.6 million, respectively.

Other Revenues. Other income decreased $580,000 or 14.1% when comparing 2002 to 2001 and increased $931,000 or 29.2% when comparing 2001 to 2000. The decrease in 2002, when compared to 2001, was primarily due to the management and service companies segment including a one-time $363,000 supervisory fee which was earned upon the sale of a non-owned Affordable Housing Property in 2001. Also, it should be noted that interest income decreased $166,000 or 33.2% when comparing 2002 to 2001 as a result of less funds available to invest. This decrease was primarily related to the Acquisition/Disposition segment. The $930,000 increase when comparing 2001 to 2000 was primarily due to the Residential Utility Billings ("RUBS") program net of a decline in interest income. The RUBS program primarily was recorded on the market rate segment while the decline in interest income related to the management and service companies segment.

Property Operating and Maintenance Expenses. Property operating and maintenance expenses increased $2.2 million or 3.5% when comparing 2002 to 2001. These expenses increased $1.3 million or 2.2% when comparing 2001 to 2000. With regards to the acquisition/disposition properties, these expenses increased $782,000 or 196.1% when comparing 2002 to 2001 primarily due to the acquisition of two properties during 2002. When comparing 2001 to 2000, they decreased $1.0 million or 12.7%. The increase, when comparing 2002 to 2001, was primarily the result of the addition of two properties in 2002 that had expenses of $3.5 million. The decrease, when comparing 2001 to 2000, was primarily the net result of these expenses decreasing approximately $2.1 million when comparing the expenses recorded for the properties sold in 2001 to the properties sold in 2000, net of an increase in expenses for the construction properties of approximately $1.1 million.

For the Market Rate properties, these expenses increased approximately $1.3 million or 2.3% when comparing 2002 to 2001. The increase was primarily due to an increase in property and liability insurance and also payroll and related expenses, as a result of increased benefit costs and merit raises. When comparing 2001 to 2000, these expenses increased $2.1 million or 4.0%. The increase in these expenses, when comparing 2001 to 2000, was primarily due to an increase in personnel expense and utilities.

Other Expenses. The Company allocates general and administrative expenses to its four segments based on an internal cost analysis. An amount equal to 85.0% of the Management and Service Companies' revenues is classified as Service Companies' expense ($5.8 million for 2002, $6.3 million for 2001 and $6.5 million for 2000). The balance of the general and administrative expenses is allocated to the other three segments on a per unit basis (number of units in the segment divided by the total units in the portfolio). Since the general and administrative expenses are allocated as described above, the Company believes that a comparative analysis of the total expenses is more meaningful than by segments. General and administrative expenses decreased $499,000 or 3.8% when comparing 2002 to 2001 and decreased $1.2 million or 8.2 % when comparing 2001 to 2000. The decrease, when comparing 2002 to 2001, was primarily attributable to a decrease in professional services, primarily legal fees and administrative expenses. Offsetting these decreases was an increase in payroll and related expenses primarily due to increased benefit costs and merit raises. This increase was primarily due to the recording of $686,000 of severance benefits in connection with the restructuring plan the Company undertook with regards to the management and service operations. For further information concerning the restructuring, reference is made to the discussion of the Management and Service Operations presented previously in this Item 7. The decrease, when comparing 2001 to 2000, was primarily attributable to a decrease in payroll and related expenses, mainly because of the refinement of certain estimates used by the Company that resulted in allocating certain payroll and related expenses to the properties and the elimination of certain corporate level positions. Additionally, there was a decrease in consulting and professional fees incurred by the Company in 2001.

Interest Expense. Interest expense decreased $1.5 million or 3.5% when comparing 2002 to 2001 and decreased $1.6 million or 3.7% when comparing 2001 to 2000. The decrease when comparing 2002 to 2001 was attributable to both the Market Rate segment which declined approximately $840,000 as a result of amortization of existing loans and the February 2002 refinancing of an $11.0 million loan whose interest rate dropped to 3.40% from 9.61% and the Management and Service Operations segment which declined approximately $371,000. This decline was due to the Company recording in 2001 additional interest expense in connection with the additional loan fundings on two joint venture properties that were guaranteed by the Company and borrowed by the Company for major refurbishment at the properties. These two properties were two of the three properties of which the Company became the 100% owner as a result of the previously discussed joint venture exchange. Interest expense for the Acquired/Disposed properties decreased $933,000 when comparing 2001 to 2000. Since the Company capitalizes interest costs on funds used in construction, the related reduction of interest expense is recorded in the Acquired/Disposed properties segment as this is the segment to which development properties are classified. For 2001, capitalized interest was $1.3 million compared to $1.0 million for 2000. For the Market Rate properties, interest expense decreased $841,000 or 2.0% when comparing 2001 to 2000. This decrease was primarily a result of lower outstanding balances as the majority of the first mortgages secured by Market Rate properties require monthly principal amortization payments. Also, there were fewer loans outstanding as a result of the sale of properties in 2001 in which the loans were assumed by the buyer.

Gain on Sales. The net gain on the disposition of properties and land of $227,000 for 2002 was primarily due to the sale of a Market Rate Property which was classified as held for sale at December 31, 2001. The net gain on disposition of properties and land of $7.0 million for 2001 resulted from the sale of seven Market Rate operating properties. For 2000, the Company recorded a net gain of $7.5 million which resulted from the sale of six Market Rate operating properties net of a loss of $990,000 recorded in connection with the contribution of a land parcel located in Cranberry Township, Pennsylvania to a joint venture partnership. For further information concerning the loss recorded in connection with the contribution of this land parcel, reference is made to Note 2 of the Notes to Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

Equity in Net (Loss) Income of Joint Ventures. The combined equity in net (loss) income of joint ventures decreased $1.3 million or 396.0% for 2002 compared to 2001, and decreased $164,000 or 100.0% for 2001 compared to 2000. The decrease when comparing 2002 to 2001 was primarily due to two properties in which the Company is a 49.0% owner, completing construction and having available all of their units for leasing by the end of 2002. One of these properties, with 252 units, was approximately 79.0% leased at the end of 2002 and the other was approximately 49.0% leased. The Company's share of the net loss for 2002 for these two properties was $1.2 million, while for 2001 the Company's share was $29,000. It should also be noted that the Company's equity in the net (loss) income for the four joint venture properties involved in the previously referenced exchange was approximately the same for 2002 and 2001. For further information concerning this transaction, see Note 9 of the Notes to the Financial Statements presented in Part II, Item 8 of this report on Form 10-K. The decrease, when comparing 2001 to 2000, was primarily due to increased depreciation expense in connection with three 49.0% investments made by the Company.

The following table presents the historical statements of operations of the Company's beneficial interest in the operations of the joint ventures for the years ended December 31, 2002, 2001 and 2000.

Income From Discontinued Operations. Effective January 1, 2002, in accordance with FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company presents the results of operations and the gains/(losses) for operating properties sold, which became held for sale after January 1, 2002, as "Income from discontinued operations". In 2002, five properties were disposed of whose operating results and gains/(losses) were classified as discontinued operations. The operating (loss) income for these five properties was $(167,000) for 2002, $239,000 for 2001 and $534,000 for 2000. The gain on disposition of properties, net, included gains on the sales of three of these properties of $10.3 million and a loss of $632,000 on the sale of a fourth property. This property was purchased in November 2000 as a 6.9 acre parcel of land for $5.2 million. The Company was developing this property as a multi-use property to include apartments, commercial building and a marina. The Company had recorded $3.4 million of costs in developing the property and had completed and was operating the marina. In November 2002, the Company received an unsolicited offer to purchase the property for $8.0 million. The Company accepted the offer and completed the sale on December 31, 2002 resulting in the above reported loss. The fifth property disposed of was Gates Mills III which was involved in the previously discussed joint venture swap and for which no gain or loss was recorded.

For further details on "Income from discontinued operations", reference is made to Note 2 of the Notes to Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

Extraordinary Items. The extraordinary item of $(76,000) in 2002 represents the write-off of deferred financing costs related to the prepayment of a HUD mortgage. The extraordinary item of $(179,000) in 2001 represents the write-off of deferred finance costs related to the refinancing of a mortgage loan. There were no extraordinary items in 2000.

Inflation. Management's belief is that the effects of inflation would be minimal on the operational performance of its portfolio primarily due to the high correlation between inflation and housing costs combined with the short term nature, typically one year, of the leases. The Company also faces limited exposure to interest rate fluctuations due to its high proportion of fixed rate financing.

Quantitative and Qualitative Disclosures About Market Risk

At December 31, 2002, the Company had $12.6 million of variable rate debt. Additionally, the Company has interest rate risk associated with fixed rate debt at maturity. Management has and will continue to manage interest rate risk as follows: (i) maintain a conservative ratio of fixed rate, long term debt to total debt such that variable rate exposure is kept at an acceptable level; (ii) consider hedges for certain long term variable and/or fixed rate debt through the use of interest rate swaps or interest rate caps; and (iii) use treasury locks where appropriate to hedge rates on anticipated debt transactions. Management uses various financial models and advisors to assist them in analyzing opportunities to achieve those objectives.

From time to time, the Company may enter into hedge agreements to minimize its exposure to interest rate risks. In April and May 2002, the Company completed two interest rate swaps. The notional amounts of the swaps are approximately $31.2 million. These swaps were executed to hedge the fair market value of certain fixed rate loans. Both swaps terminate at the maturity of the related loans, that is, October 2005 for the $14.0 million swap and August 2004 for the $17.2 million swap. For the year ended December 31, 2002, the Company recognized a reduction to interest expense of $442,000 with respect to these two swaps. The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates.

*One LIBOR based credit facility matures in July 20, 2003 and the second LIBOR based credit facility matures in December 31, 2003. At December 31, 2002, there were no borrowings outstanding

on either facility.

Sensitivity Analysis. At December 31, 2002 and 2001, the Company estimates that a 100 basis point decrease in market interest rates would have changed the fair value of fixed rate debt to a liability of $674.7 million and $600.0 million, respectively. The sensitivity to changes in interest rates of the Company's fixed rate debt was determined with a valuation model based upon changes that measure the net present value of such obligation which arise from the hypothetical estimate as discussed above.

CONTINGENCIES

Environmental. There are no recorded amounts resulting from environmental liabilities and there are no known material contingencies with respect thereto. Future claims for environmental liabilities are not measurable given the uncertainties surrounding whether there exists a basis for any such claims to be asserted and, if so, whether any claims will, in fact, be asserted. Furthermore, no condition is known to exist that would give rise to a material liability for site restoration, post closure and monitoring commitments, or other costs that may be incurred with respect to the sale or disposal of a property. Phase I environmental audits have been completed on all of the Company's wholly owned and joint venture properties.

Pending Litigation. For a discussion of the pending litigation, see Note 12 of the Notes to the Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

For a discussion of the Quantitative and Qualitative Disclosure about Market Risk and the associated interest rate sensitivity, reference Management's Discussion and Analysis.

Item 8. Financial Statements and Supplementary Data

The response to this item is included in Item 15 of this report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information regarding the Company's Directors contained in the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2003, is incorporated by reference in this Annual Report on Form 10-K. Such information will be filed with the SEC no later than 120 days after the year covered by this report.

The information regarding executive officers and other key employees is set forth in Part I of this Form 10-K under the heading "Executive Officers of the Registrant and Other Key Employees."

Item 11. Executive Compensation

The information on Executive Compensation contained in the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2003 is incorporated by reference in this Annual Report on Form 10-K. Such information will be filed with the SEC no later than 120 days after the year covered by this report.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table summarizes information about the Company's common stock that may be issued upon exercise of options outstanding and the total number of securities available for future issuance under all of the existing equity compensation plans as of December 31, 2002. The equity compensation plans approved by security holders include the AERC Share Option Plan and the Equity-Based Incentive Compensation Plan. The equity compensation plans not approved by security holders include the Year 2001 Equity Incentive Plan and the options granted to outside Directors. For more information regarding these plans, reference is made to Note 17 in the Notes to Financial Statements presented in Part II, Item 8 of this Form 10-K.

Additionally, the information on Security Ownership of Certain Beneficial Owners and Management contained in the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2003 is incorporated by reference in this Annual Report on Form 10-K. Such information will be filed with the SEC no later than 120 days after the year covered by this report.

Item 13. Certain Relationships and Related Transactions

The information on Certain Relationships and Related Transactions contained in the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2003 is incorporated by reference in this Annual Report on Form 10-K. Such information will be filed with the SEC no later than 120 days after the year covered by this report.

Item 14. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, the Company has investments in certain unconsolidated entities. As the Company does not control these entities, the disclosure controls with respect to such entities are necessarily substantially more limited than those maintained with respect to the Company's consolidated subsidiaries.

The Chief Executive Officer and Chief Financial Officer have within 90 days of the filing date of this annual report, evaluated the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) and have determined that such disclosure controls and procedures are adequate. There have been no significant changes in the internal controls or in other factors that could significantly affect the internal controls since the date of evaluation. The Company does not believe any significant deficiencies or material weaknesses exist in its internal controls. Accordingly, no corrective actions have been taken.

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) The following documents are filed as part of this Report.

1. Financial Statements: The following documents are filed as part of this report.

Report of Independent Accountants - Associated Estates Realty

Corporation.

Consolidated Balance Sheets at December 31, 2002 and 2001.

Consolidated Statements of Income for the three years ended December 31, 2002, 2001 and 2000.

Consolidated Statements of Shareholders' Equity for the three years ended December 31, 2002, 2001 and 2000.

Consolidated Statements of Cash Flows for the three years ended December 31, 2002, 2001 and 2000.

Notes to Financial Statements.

2. Financial Statement Schedules: The following financial statement schedules of Associated Estates Realty Corporation are filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Associated Estates Realty Corporation.

Schedules Page

II Valuation and Qualifying Accounts F-38

III Real Estate and Accumulated Depreciation F-39

Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.

(3) Exhibits: The Exhibits listed on the accompanying Index to Exhibits immediately following the financial statement schedules are filed as part of, or incorporated by reference into, this Report.

(b) Reports on Form 8-K.

None.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 7th day of March, 2003.

ASSOCIATED ESTATES REALTY CORPORATION

By /s/ Jeffrey I. Friedman

Jeffrey I. Friedman, Chairman of the Board,

and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 7th day of March, 2003.

I, Jeffrey I. Friedman, certify that:

1. I have reviewed this annual report on Form 10-K of Associated Estates Realty Corporation;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 7, 2003 /s/ Jeffrey I. Friedman

Jeffrey I. Friedman, Chief Executive Office

I, Lou Fatica, certify that:

1. I have reviewed this annual report on Form 10-K of Associated Estates Realty Corporation;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 7, 2003 /s/ Lou Fatica

Lou Fatica, Chief Financial Officer

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

To the Board of Directors and Shareholders of

Associated Estates Realty Corporation:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Associated Estates Realty Corporation and its subsidiaries (the "Company") at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Notes 1 and 2 to the consolidated financial statements, in 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". In addition, as discussed in Notes 1 and 5 to the consolidated financial statements, in 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".

/s/ PricewaterhouseCoopers LLP

Cleveland, Ohio

February 7, 2003