Continental Homes                                  Twelve Year Financial Summary

<TABLE>
<CAPTION>

Consolidated Income Statement Data              
(amounts in thousands, except per share amounts)     1997        1996        1995        1994        1993        1992   
------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>         <C>         <C>         <C>         <C>         <C>       
Revenues                                          $ 725,970   $ 600,608   $ 432,452   $ 348,620   $ 207,033   $ 170,424 

Gross profit from home sales                      $ 120,835   $ 107,975   $  75,430   $  62,153   $  38,052   $  29,674 

Net income                                        $  29,445   $  18,869   $  13,821   $  13,083   $   7,100   $   6,591 

Earnings per share:                                                                                                     
     Primary                                      $    4.24   $    2.71   $    1.99   $    2.11   $    1.38   $    1.39 
     Fully diluted                                $    3.10   $    2.27   $    1.82   $    1.88   $    1.30   $    1.34 

Cash dividends per share                          $    0.20   $    0.20   $    0.20   $    0.20   $    0.20   $    0.20 

Weighted average number                                                                                                 
of shares outstanding                                 6,938       6,960       6,948       6,203       5,144       4,747 

                                                                                                                        
Consolidated Balance Sheet
(amounts in thousands, except per share amounts)     1997        1996        1995        1994        1993        1992   
------------------------------------------------------------------------------------------------------------------------
Inventory                                         $ 392,540   $ 344,880   $ 291,331   $ 205,369   $ 142,589   $ 116,450 

Total assets                                      $ 508,256   $ 438,434   $ 386,833   $ 305,490   $ 187,525   $ 162,774 

Debt:                                                                                                                   
    Notes payable                                 $  24,547   $  19,108   $  54,729   $       0   $       0   $  32,907 

    Senior debt                                     159,966     139,641     111,430     111,753      74,248      16,811 

    Convertible Sub. debt                            86,250      86,250      32,655      32,295      31,935      31,575 

    Mortgage debt                                    15,662       5,359      34,011      24,271       8,604      20,448 
                                                     ------       -----      ------      ------       -----      ------ 

        Total debt                                $ 286,425   $ 250,358   $ 232,825   $ 168,319   $ 114,787   $ 101,741 

Stockholders' equity                              $ 154,899   $ 128,949   $ 110,479   $  98,560   $  51,550   $  44,428 

Number of shares outstanding                          6,853       6,993       6,925       6,963       5,189       5,101 

Book value per share                              $   22.60   $   18.44   $   15.95   $   14.15   $    9.93   $    8.71 

Return on beginning                                                                                                     
stockholders' equity                                   22.8%       17.1%       14.0%       25.4%       16.0%       23.1%


Housing Data
(amounts in thousands, except per share amounts)     1997        1996        1995        1994        1993        1992   
------------------------------------------------------------------------------------------------------------------------
Number of homes closed                                4,904       4,367       3,202       2,831       1,769       1,470 

Sales value of homes closed                       $ 681,838   $ 577,073   $ 414,718   $ 340,031   $ 200,012   $ 164,815 

Number of homes in backlog                            2,015       2,070       1,493       1,136         900         669 

Sales value of homes in backlog                   $ 271,131   $ 295,484   $ 198,126   $ 147,242   $ 107,499   $  76,215 
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Income Statement Data              
(amounts in thousands, except per share amounts)     1991        1990        1989        1988        1987        1986   
------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>         <C>         <C>         <C>         <C>         <C>       
Revenues                                          $ 138,615   $ 134,497   $ 123,088   $ 133,372   $ 128,486   $ 107,573 

Gross profit from home sales                      $  24,148   $  20,970   $  20,084   $  19,082   $  25,227   $  22,279 

Net income                                        $     116   $   3,551   $   2,015   $   3,128   $   4,501   $   2,755 

Earnings per share:                                                                                                     
     Primary                                      $    0.03   $    1.01   $    0.57   $    0.83   $    1.58   $    1.10 
     Fully diluted                                $      NA   $      NA   $      NA   $      NA   $      NA   $      NA 

Cash dividends per share                          $    0.20   $      NA   $      NA   $      NA   $      NA   $      NA 

Weighted average number                                                                                                 
of shares outstanding                                 3,515       3,515       3,564       3,757       2,859       2,500 
                                                                                                                        
                                                                                                                        
Consolidated Balance Sheet Data
(amounts in thousands, except per share amounts)     1991        1990        1989        1988        1987        1986   
------------------------------------------------------------------------------------------------------------------------
Inventory                                         $  93,739   $  94,890   $  76,009   $  88,635   $  88,928   $  67,273 

Total assets                                      $ 142,712   $ 147,144   $ 127,682   $ 142,277   $ 153,710   $ 109,211 

Debt:                                                                                                                   
    Notes payable                                 $  65,430   $  63,887   $  48,927   $  49,990   $  35,445   $  63,550 

    Senior debt                                      16,805      16,799      17,616      22,745      29,928           0 

    Convertible Sub. debt                                 0           0           0           0           0           0 

    Mortgage debt                                    22,146      26,221      24,720      26,675      43,926           0 
                                                     ------      ------      ------      ------      ------      ------ 

        Total debt                                $ 104,381   $ 106,907   $  91,263   $  99,410   $ 109,299   $  63,550 

Stockholders' equity                              $  28,562   $  29,166   $  25,615   $  24,080   $  22,067   $   2,855 

Number of shares outstanding                          3,512       3,515       3,515       3,652       3,880       2,500 

Book value per share                              $    8.13   $    8.30   $    7.29   $    6.59   $    5.69   $    1.14 

Return on beginning                                                                                                     
stockholders' equity                                    0.4%       13.9%        8.4%       14.2%      157.7%     2755.0%

                                                                                                                        
Housing Data                                                                                   
(amounts in thousands, except per share amounts)     1991        1990        1989        1988        1987        1986   
------------------------------------------------------------------------------------------------------------------------
Number of homes closed                                1,249       1,280       1,151       1,161       1,369       1,210 

Sales value of homes closed                       $ 130,611   $ 132,876   $ 117,912   $ 115,069   $ 126,142   $ 107,388 

Number of homes in backlog                              486         414         422         462         400         580 

Sales value of homes in backlog                   $  53,180   $  42,808   $  47,607   $  47,504   $  43,808   $  52,895 
</TABLE>
<PAGE> 
Management's 
Discussion and 
Analysis of Results 
of Operations and 
Financial Condition

RESULTS OF OPERATIONS
HOMEBUILDING

     The following table sets forth, for the periods  indicated,  unit activity,
average sales price and revenue from home sales for the Company:

                                                     Years ended May 31,

                                                 1997          1996         1995

Units delivered                                 4,904         4,367        3,202
Average sales price                        $  139,037    $  132,144   $  129,518
Revenue from home sales (000s)             $  681,838    $  577,073   $  414,718
Percentage increase from prior year              18.2%         39.2%
Change due to volume                             12.3%         36.4%
Change due to average sales price                 5.9%          2.8%

     The increase in volume in fiscal 1997 compared to fiscal 1996 resulted from
improved  deliveries  in Denver,  Texas,  South Florida and  California  and the
Company's expansion into the Dallas, Texas market. The volume increase in fiscal
1996 was  attributable  to improved  deliveries in each market.  The increase in
average sales price in fiscal 1997 was primarily due to an increase in volume in
the Denver market where the average sales price is approximately $200,000 and an
increase in the average sales price in the Phoenix and California markets.

     Revenues from land sales were  $33,404,000  in fiscal 1997,  $11,844,000 in
fiscal 1996 and  $10,658,000  in fiscal  1995.  Land sale revenue in fiscal 1997
included  sales of three  separate  parcels to other  homebuilders  in  Phoenix,
California  and  South  Florida.  A  portion  of  fiscal  1997  land  sales  and
substantially  all of fiscal 1996 and 1995 land sales were transactions in which
the Company sold lots to unrelated  third  parties and retained an option to buy
the lots back at fixed prices within specified periods of time.

     The following table summarizes information related to the Company's backlog
at the dates indicated:

                                                May 31,

                              1997               1996               1995
                                         (Dollars in thousands)
                         Units    Dollars   Units    Dollars   Units    Dollars

Phoenix                    831   $109,079     832   $110,530     821   $102,503
Texas                      772     85,431     652     71,791     396     43,140
Denver                     183     36,556     292     57,746      98     18,185
South Florida              172     22,368     189     24,597      86     12,228
Southern California         57     17,697     105     30,820      92     22,070
                         -----   --------   -----   --------   -----   --------
                         2,015   $271,131   2,070   $295,484   1,493   $198,126
                         =====   ========   =====   ========   =====   ========
<PAGE>
     The decrease in backlog at May 31, 1997 compared to the prior year resulted
primarily  from lower sales volume in the Austin,  Denver,  California and South
Florida markets during the six months ended May 31, 1997 partially offset by the
Company's  expansion into the Dallas,  Texas market.  The increase in backlog in
fiscal 1996 resulted  from  improved  sales in each market during the six months
ended May 31, 1996. The aggregate sales value of new contracts  signed decreased
4% for fiscal 1997 to  $640,576,000  representing  4,770 homes as compared  with
$669,205,000 representing 4,944 homes for fiscal 1996.

     The  following  table  summarizes  information  related to the cost of home
sales, selling,  general and administrative  ("SG&A") expenses and interest, net
for homebuilding:

                                           Years ended May 31,
                                  1997              1996             1995
                           Dollars    %      Dollars     %      Dollars     %
                                          (Dollars in thousands)

Revenue from home sales   $681,838  100.0%  $577,073   100.0%  $414,718   100.0%
Cost of home sales         561,003   82.3    469,098    81.3    339,288    81.8 
                          --------  -----   --------   -----   --------   ----- 
Gross profit               120,835   17.7    107,975    18.7     75,430    18.2 
SG&A expenses               71,590   10.5     62,247    10.8     46,308    11.2 
                          --------  -----   --------   -----   --------   ----- 
Operating income from                                                           
   homebuilding             49,245    7.2     45,728     7.9     29,122     7.0 
Interest, net                4,596     .7      5,510      .9      4,993     1.2 
                          --------  -----   --------   -----   --------   ----- 
Pre-tax profit from                                                             
   homebuilding           $ 44,649    6.5%  $ 40,218     7.0%  $ 24,129     5.8%
                          ========  =====   ========   =====   ========   ===== 
                                                               
     Gross profit from home sales was 17.7% in fiscal 1997 compared to 18.7% and
18.2% in fiscal 1996 and 1995,  respectively.  The decline in gross  profits was
primarily  due to lower margins in the Austin and  California  markets where the
Company has used sales  incentives  and lowered  sales  prices due to  increased
competition in those markets. In addition,  the Company's highest margins are in
Phoenix and  Austin.  As  deliveries  increase  in other  markets,  the mix will
continue to put downward pressure on margins.

     The increase in total SG&A  expenses  for fiscal 1997 was due  primarily to
higher variable marketing costs (sales commissions,  advertising,  sales expense
and model  furniture  amortization)  due to the  increase in the number of homes
delivered.  In addition,  fiscal 1997 included  $3,549,000 of SG&A expenses from
the Dallas  division.  The  increase in total SG&A  expenses for fiscal 1996 was
also due  primarily  to  higher  variable  marketing  costs  as a result  of the
increase in the number of homes  delivered,  higher salaries and higher customer
service costs.  Additionally,  fiscal 1996 included  $3,249,000 of SG&A expenses
from South Florida  compared with $2,227,000  during the period from November 1,
1994  (acquisition)  through May 31, 1995. SG&A expenses for each home delivered
were $14,598,  $14,254 and $14,462 in fiscal 1997, 1996 and 1995,  respectively.
The Company  capitalizes  certain SG&A expenses for  homebuilding.  Accordingly,
total SG&A expenses incurred for homebuilding were $83,218,000,  $70,117,000 and
$53,109,000 in fiscal 1997, 1996 and 1995, respectively.

     The  Company  capitalizes  certain  interest  costs  for  its  homebuilding
operations and includes such capitalized interest in cost of home sales when the
related units are delivered. Accordingly, total interest incurred by the Company
was $25,702,000, $22,422,000 and $19,528,000 in fiscal
<PAGE>
Continental Homes

1997,  1996  and  1995,   respectively.   Interest,  net  for  homebuilding  was
$4,596,000,   $5,510,000  and   $4,993,000  in  fiscal  1997,   1996  and  1995,
respectively. The increase in interest incurred during fiscal 1997 was primarily
due to an increase in debt as a result of the 14%  increase  in  inventory  this
year.  The  decrease  in  interest,  net  during  fiscal  1997  was  due  to the
capitalization of interest on the Company's  Carlsbad,  California project which
began development in October 1996, as well as additional  interest income earned
during the year.  The increase in interest,  both incurred and expensed,  during
fiscal 1996 was due to higher  debt levels  which  resulted  primarily  from the
South Florida acquisition.

     The  Company's  pre-tax  profit  from  homebuilding  for  fiscal  1997  was
$44,649,000  compared  to  $40,218,000  for the  year  ended  May 31,  1996  and
$24,129,000  for the year ended May 31, 1995.  The increase in pre-tax profit in
fiscal 1997 was due primarily to improved  operating results in Phoenix,  Denver
and South Florida  partially offset by the negative impact from the inclusion of
Dallas results.  The increase in pre-tax profit in fiscal 1996 was due primarily
to improved results in Texas,  Southern  California and Phoenix partially offset
by the  negative  impact from the  inclusion  of South  Florida  results.  South
Florida's  pre-tax loss in fiscal 1996 was primarily  caused by weather  related
delays in the  opening of a new  subdivision  and  delays in the  municipalities
issuing  permits.  These delays resulted in fewer  deliveries from South Florida
through October 1995.

MORTGAGE BANKING AND TITLE OPERATIONS

     The  Company's  mortgage  banking  operations  are  conducted  through  its
wholly-owned  subsidiary CH Mortgage Company ("CHMC"). The Company also conducts
title  operations in Austin,  Texas through its wholly-owned  subsidiary  Travis
County Title Company. The following table summarizes  operating  information for
the Company's mortgage banking and title operations:

                                                        Years ended May 31,
                                                     1997      1996      1995
                                                      (Dollars in thousands)

Number of loans originated                           2,965     2,916     1,949

Loan origination fees                              $ 2,904   $ 2,758   $ 1,845
Sale of servicing and marketing gains                4,688     6,177     2,744
Title policy premiums, net                           1,572     1,541     1,180
Other revenues                                       1,454     1,005       938
                                                   -------   -------   -------
Total revenues                                      10,618    11,481     6,707
General and administrative expenses                  8,185     7,028     5,639
                                                   -------   -------   -------
Operating income from mortgage banking and title     2,433     4,453     1,068
Interest, net                                          734       316       199
                                                   -------   -------   -------
Pre-tax profit from mortgage banking and title     $ 3,167   $ 4,769   $ 1,267
                                                   =======   =======   =======
<PAGE>
     Revenues from  mortgage  banking and title  operations  decreased in fiscal
1997 primarily as a result of the sale of approximately $47,705,000 in servicing
rights from the  servicing  portfolio  resulting  in  approximately  $932,000 of
income recognized in fiscal 1996.  Revenues increased in fiscal 1996 over fiscal
1995 primarily as a result of the aforementioned sale of servicing as well as an
increase  in the  percentage  of  Phoenix  and Texas  homebuyers  utilizing  the
Company's  mortgage banking operations  resulting in higher volume.  General and
administrative  expenses  increased  in fiscal  1997  compared  to  fiscal  1996
primarily  as a result of the  expansion  into the  Denver,  South  Florida  and
Southern  California  markets  during  fiscal 1997.  General and  administrative
expenses  increased in fiscal 1996 compared to fiscal 1995 primarily as a result
of increased volume.

CONSOLIDATED OPERATIONS

     Net income was $29,445,000 ($4.24 per share, $3.10 fully diluted) in fiscal
1997  compared  to  $18,869,000  ($2.71  per share,  $2.27  fully  diluted)  and
$13,821,000  ($1.99 per share,  $1.82  fully  diluted)  in fiscal 1996 and 1995,
respectively.  Net income for the fiscal year ended May 31, 1996  included a net
extraordinary loss of $6,918,000 due to the extinguishment of debt.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's  financing  needs depend  primarily upon sales volume,  asset
turnover,  land acquisitions and inventory  balances.  The Company has financed,
and expects to continue to finance,  its working  capital  needs  through  funds
generated by operations and borrowings.  Funds for future land  acquisitions and
construction  costs are  expected  to be provided  primarily  by cash flows from
operations  and  future   borrowings  as  permitted  under  the  Company's  loan
agreements.  The Company has a $140 million unsecured  revolving credit facility
("Credit Agreement") with four banks. Borrowings under the Credit Agreement bear
interest at LIBOR plus 1.75% or prime plus .125% at the  Company's  election and
subject to the rating on its senior debt.  Available borrowings under the Credit
Agreement  are limited to certain  percentages  of housing unit costs,  finished
lots, land under development and receivables as defined in the Credit Agreement.
As a result of this formula,  the borrowing base at May 31, 1997 was $92,657,000
and  $12,000,000  was  outstanding.   In  addition,  the  Company  had  borrowed
$12,547,000 in other  financing,  which is secured by land, at various  interest
rates  and  maturities.   The  Company  believes  that  amounts  generated  from
operations and such additional borrowings will provide funds adequate to finance
its homebuilding activities and meet its debt service requirements.  The Company
does not have any current commitments for capital expenditures.

     In order to provide funds for the origination of mortgage loans, CHMC has a
warehouse  line of credit for  $25,000,000  which is  guaranteed by the Company.
Pursuant to the warehouse line of credit,  the Company issues drafts to fund its
mortgage loans. The amount represented by a draft is drawn on the warehouse line
of credit when the draft is presented for payment.  At May 31, 1997,  the amount
outstanding  under the warehouse line of credit and the amount of funding drafts
that had not been presented for payment was  $15,662,000.  The Company  believes
that this line is sufficient for its mortgage banking operations.

     On  November  10,  1995,  the  Company  completed  the sale of  $75,000,000
principal amount of its 6-7/8% Convertible Subordinated Notes due November 2002.
On December 5, 1995,  the Company sold an additional  $11,250,000 of such notes.
The  net  proceeds  were  used  to  redeem  the  Company's  6-7/8%   Convertible
Subordinated Notes due March 2002 and to reduce temporarily  outstanding amounts
under certain of the Company's revolving lines of credit (including
<PAGE>
Continental Homes

the warehouse line of credit).  In connection  with the redemption of the notes,
the Company  recorded,  in the third  quarter of fiscal 1996,  an  extraordinary
loss, net of taxes of approximately $859,000 due to the write-off of unamortized
discount  and  debt  issuance  costs.  The  Convertible  Notes  are  immediately
convertible into shares of the Company's common stock at a rate of 42.105 shares
for each $1,000 principal amount of Convertible Notes.

     On April 18, 1996 the Company completed the sale of $130,000,000  principal
amount of its 10% Senior Notes due April 2006.  The Company  used  approximately
$107,542,000 of the net proceeds to repurchase  $98,500,000  aggregate principal
amount of its 12% Senior Notes due 1999.  The  remaining  proceeds  were used to
reduce temporarily  outstanding amounts under certain of the Company's revolving
lines of credit.  In connection with the repurchase of the 12% Senior Notes, the
Company recorded,  in the fourth quarter of fiscal 1996, an extraordinary  loss,
net of taxes of approximately  $6,059,000  related primarily to the tender offer
premium.  On January 30,  1997,  the Company  issued an  additional  $20,000,000
principal  amount of its 10% Senior Notes due April 2006.  The net proceeds were
used to reduce  temporarily  outstanding  amounts under the Company's  revolving
line of  credit.  On  August 1,  1997 the  Company  will  redeem  the  remaining
$11,500,000  principal  amount  outstanding  of its 12% Senior  Notes due August
1999, at a redemption price of 104%.

     Pursuant to a stock  repurchase  plan approved by the Board of Directors on
December 22, 1994,  the Company  repurchased  162,000 shares of its common stock
during the year at an average price of $16.22.

INFLATION AND EFFECTS OF CHANGING PRICES

     Real estate and residential housing prices are affected by inflation, which
can cause  increases  in the prices of land,  raw  materials  and  subcontracted
labor. In the past three years,  the Company has not experienced any significant
inflationary  pressure  on land,  raw  materials  or  labor.  Unless  costs  are
recovered  through higher sales prices,  gross profit margins will decrease.  As
interest rates increase, construction and financing costs as well as the cost of
borrowing  funds  also  increase,  which  can  result  in lower  gross  profits.
Relatively low interest  rates during fiscal 1997 have made the Company's  homes
more  affordable in each of its markets.  High mortgage  interest  rates make it
more difficult for the Company's  customers to qualify for home mortgage  loans.
These factors have a much more  significant  effect on the Company's  operations
than does seasonality, in part because homes can be constructed year-round.

CAUTIONARY DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

     The Company  desires to take  advantage of the "safe harbor"  provisions of
the  Private  Securities  Litigation  Reform Act of 1995 and is  including  this
disclosure  in order to do so.  Certain  statements  in this report that are not
historical  facts are, or may be considered to be,  forward-looking  statements.
Given the risks,  uncertainties and contingencies of the Company's business, the
actual  results may differ  materially  from those  expressed or implied by such
forward-looking  statements.  Further,  certain  forward-looking  statements are
based  on  assumptions  concerning  future  events  which  may not  prove  to be
accurate.

     Forward-looking  statements by the Company  regarding results of operations
and,  ultimately,  financial  condition,  are  subject  to  numerous  risks  and
assumptions,   including  but  not  limited  to,  changes  in  general  economic
conditions, fluctuations in interest rates or labor and material costs, consumer
confidence,   competition,   government  regulations,   financing  availability,
geographic concentration and risks associated with new and future communities.
<PAGE>
                                                                     Report of
                                                                     Independent
                                                                     Public
                                                                     Accountants

To Continental Homes Holding Corp.:

We have audited the  accompanying  consolidated  balance  sheets of  CONTINENTAL
HOMES HOLDING CORP. (a Delaware corporation) and subsidiaries as of May 31, 1997
and 1996,  and the  related  consolidated  statements  of income,  stockholders'
equity  and cash flows for each of the three  years in the period  ended May 31,
1997.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Continental Homes Holding Corp.
and  subsidiaries  as of May 31,  1997  and  1996,  and  the  results  of  their
operations  and their cash flows for each of the three years in the period ended
May 31, 1997, in conformity with generally accepted accounting principles.


                                                         /s/ Arthur Andersen LLP
Phoenix, Arizona,
June 18, 1997.
<PAGE>
                               Continental Homes

                          Consolidated Balance Sheets
<TABLE>
<CAPTION>
                                                                              May 31,
                                                                        1997         1996
                                                                          (in thousands)
<S>                                                                  <C>          <C>      
ASSETS
HOMEBUILDING
    Cash and cash equivalents                                        $  23,759    $  25,236
    Receivables                                                         27,894       16,693
    Homes, lots and improvements in production                         392,540      344,880
    Property and equipment, net                                          3,656        2,271
    Prepaid expenses and other assets                                   20,868       16,797
    Excess of cost over related net assets acquired                      9,565       11,715
    Deferred income tax asset                                            2,471           --
                                                                     ---------    ---------
                                                                       480,753      417,592
                                                                     ---------    ---------
MORTGAGE BANKING
    Mortgage loans held for sale                                        27,229       20,350
    Other assets                                                           274          492
                                                                     ---------    ---------
                                                                        27,503       20,842
                                                                     ---------    ---------
    Total assets                                                     $ 508,256    $ 438,434
                                                                     =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY
HOMEBUILDING
    Accounts payable and other liabilities                           $  62,163    $  52,240
    Notes payable, senior and convertible subordinated debt            270,763      244,999
    Deferred income tax liability                                           --        1,236
                                                                     ---------    ---------
                                                                       332,926      298,475
                                                                     ---------    ---------
MORTGAGE BANKING
    Notes payable                                                       15,662        5,359
    Other liabilities                                                      560          854
                                                                     ---------    ---------
                                                                        16,222        6,213
                                                                     ---------    ---------
    Total liabilities                                                  349,148      304,688
                                                                     ---------    ---------

Minority interest                                                        4,209        4,797
                                                                     ---------    ---------
Commitments and contingencies
Stockholders' equity:
      Preferred stock, $.01 par value:
         Authorized - 2,000,000 shares, Issued - None                       --           --
      Common stock, $.01 par value:
         Authorized - 20,000,000 shares, Issued - 7,080,900 shares          71           71
      Treasury stock, at cost - 228,320 and 88,265 shares               (2,973)        (384)
      Capital in excess of par value                                    60,878       60,396
      Retained earnings                                                 96,923       68,866
                                                                     ---------    ---------
      Total stockholders' equity                                       154,899      128,949
                                                                     ---------    ---------
      Total liabilities and stockholders' equity                     $ 508,256    $ 438,434
                                                                     =========    =========
</TABLE>
       The accompanying notes to consolidated financial statements are an
               integral part of these consolidated balance sheets.
<PAGE>
                               Continental Homes

                        Consolidated Statements of Income
<TABLE>
<CAPTION>
                                                                    Years ended May 31,
                                                            1997           1996          1995
                                                            (in thousands, except share data)
<S>                                                    <C>            <C>            <C>        
REVENUES
Home sales                                             $   681,838    $   577,073    $   414,718
Land sales                                                  33,404         11,844         10,658
Mortgage banking and title operations                       10,618         11,481          6,707
Other income, net                                              110            210            369
                                                       -----------    -----------    -----------
        Total revenues                                     725,970        600,608        432,452
                                                       -----------    -----------    -----------

COSTS AND EXPENSES
Homebuilding:
        Cost of home sales                                 561,003        469,098        339,288
        Cost of land sales                                  32,167         11,907         10,958
        Selling, general and administrative expenses        71,590         62,247         46,308
        Interest, net                                        4,596          5,510          4,993
        Minority interest                                     (588)          (248)            -- 

Mortgage banking and title operations:
        Selling, general and administrative expenses         8,185          7,028          5,639
        Interest, net                                         (734)          (316)          (199)
                                                       -----------    -----------    -----------
        Total costs and expenses                           676,219        555,226        406,987
                                                       -----------    -----------    -----------

Income before income taxes and extraordinary loss           49,751         45,382         25,465
Income taxes                                                20,306         19,595         11,644
                                                       -----------    -----------    -----------
Income from operations                                      29,445         25,787         13,821
Extraordinary loss:
        Loss on extinguishment of debt; net of
        income taxes of $4,807 in 1996                          --         (6,918)            --
                                                       -----------    -----------    -----------
Net income                                             $    29,445    $    18,869    $    13,821
                                                       ===========    ===========    ===========
Earnings per common share
        Income from operations                         $      4.24    $      3.71    $      1.99
        Net income                                            4.24           2.71           1.99
Earnings per common share assuming full dilution
        Income from operations                         $      3.10    $      3.00    $      1.82
        Net income                                            3.10           2.27           1.82

Cash dividends per share                               $       .20    $       .20    $       .20
                                                       ===========    ===========    ===========

Weighted average number of shares outstanding            6,938,489      6,959,736      6,947,719
                                                       ===========    ===========    ===========
</TABLE>
        The accompanying notes to consolidated financial statements are
               an integral part of these consolidated statements.
<PAGE>
                               Continental Homes

                 Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
                                                              Years ended May 31, 1997, 1996 and 1995
                                                                       (Dollars in thousands)

                                                                               Capital in
                                            Common Stock          Treasury     Excess of     Retained
                                        Shares       Amount         Stock      Par Value     Earnings      Total

<S>                                   <C>          <C>           <C>           <C>          <C>          <C>       
Balance, May 31, 1994                 7,080,900    $       71    $      (83)   $   59,610   $   38,962   $   98,560
Net income                                   --            --            --            --       13,821       13,821
Repurchase of common stock                   --            --          (556)           --           --         (556)
Cash dividends                               --            --            --            --       (1,394)      (1,394)
Exercise of employee stock options           --            --            48            --           --           48
                                      ---------    ----------    ----------    ----------   ----------   ----------

Balance, May 31, 1995                 7,080,900            71          (591)       59,610       51,389      110,479
Net income                                   --            --            --            --       18,869       18,869
Cash dividends                               --            --            --            --       (1,392)      (1,392)
Exercise of employee stock options           --            --           207           786           --          993
                                      ---------    ----------    ----------    ----------   ----------   ----------

Balance, May 31, 1996                 7,080,900            71          (384)       60,396       68,866      128,949
Net income                                   --            --            --            --       29,445       29,445
Repurchase of common stock                   --            --        (2,628)           --           --       (2,628)
Cash dividends                               --            --            --            --       (1,388)      (1,388)
Exercise of employee stock options           --            --            39           482           --          521
                                      ---------    ----------    ----------    ----------   ----------   ----------

Balance, May 31, 1997                 7,080,900    $       71    $   (2,973)   $   60,878   $   96,923   $  154,899
                                      =========    ==========    ==========    ==========   ==========   ==========
</TABLE>
       The accompanying notes to consolidated financial statements are an
                 integral part of these consolidated statements.
<PAGE>
                                Continental Homes

                      Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                             Years ended May 31,
                                                                       1997         1996         1995
                                                                               (in thousands)

<S>                                                                 <C>          <C>          <C>      
Cash flows from operating activities:
   Net income                                                       $  29,445    $  18,869    $  13,821
   Adjustments to reconcile net income to net cash provided
           (used) by operating activities:
           Depreciation and amortization                                3,228        3,190        3,050
           Minority interest                                             (588)        (248)          --
           Increase (decrease) in deferred income taxes                (3,707)          95       (1,209)
           Tax benefit of employee stock options exercised                295          404           --
           Extraordinary loss on extinguishment of debt                    --       11,725           --
           Decrease (increase) in assets:
                   Homes, lots and improvements in production         (39,863)     (48,504)     (52,973)
                   Receivables                                        (17,923)       8,458        2,304
                   Prepaid expenses and other assets                   (4,173)       4,826       (6,987)
           Increase in liabilities:
                   Accounts payable and other liabilities               8,185       11,445        1,022
                                                                    ---------    ---------    ---------
   Net cash provided (used) by operating activities                   (25,101)      10,260      (40,972)
                                                                    ---------    ---------    ---------

Cash flows from investing activities:
   Net additions to property and equipment                             (2,279)        (581)      (1,038)
   Cash paid for acquisitions, net of cash acquired                    (1,205)        (705)     (18,874)
   Adjustment to purchase price                                         1,700           --           --
                                                                    ---------    ---------    ---------
   Net cash used by investing activities                               (1,784)      (1,286)     (19,912)
                                                                    ---------    ---------    ---------

Cash flows from financing activities:
   Increase (decrease) in notes payable to financial institutions       9,191      (46,424)      49,852
   Retirement of Convertible Subordinated Notes                            --      (33,250)          --
   Retirement of 12% Senior Notes                                          --     (107,542)          --
   Retirement of bonds payable                                           (168)     (17,771)      (3,027)
   Issuance of Convertible Subordinated Notes                              --       83,279           --
   Issuance of 10% Senior Notes                                        20,175      125,925           --
   Repurchase of stock                                                 (2,628)          --         (556)
   Stock options exercised                                                226          589           48
   Dividends paid                                                      (1,388)      (1,392)      (1,394)
                                                                    ---------    ---------    ---------
   Net cash provided by financing activities                           25,408        3,414       44,923
                                                                    ---------    ---------    ---------
Net increase (decrease) in cash and cash equivalents                   (1,477)      12,388      (15,961)
Cash and cash equivalents at beginning of year                         25,236       12,848       28,809
                                                                    ---------    ---------    ---------
Cash and cash equivalents at end of year                            $  23,759    $  25,236    $  12,848
                                                                    =========    =========    =========

Supplemental  disclosures  of cash flow  information:
   Cash paid during the year for:
           Interest, net of amounts capitalized                     $   6,207    $   7,767    $   7,780
           Income taxes                                             $  24,870    $  16,430    $  16,539
</TABLE>
       The accompanying notes to consolidated financial statements are an
                integral part of these consolidated statements.
<PAGE>
                               Continental Homes

Notes to
Consolidated
Financial 
Statements

A.      ACCOUNTING POLICIES

NATURE OF OPERATIONS

     The Company designs,  constructs and sells high quality single-family homes
targeted primarily to entry-level and first-time move-up homebuyers. The Company
is geographically diversified,  currently operating in Phoenix, Arizona; Austin,
San Antonio and Dallas,  Texas;  Denver,  Colorado;  South Florida; and Southern
California.

PRINCIPLES OF CONSOLIDATION

     The consolidated  financial  statements include the accounts of the Company
and  all  wholly-owned   subsidiaries   after  elimination  of  all  significant
intercompany balances and transactions.

INCOME TAXES

     The  Company  accounts  for  income  taxes  using  Statement  of  Financial
Accounting  Standards No. 109 "Accounting  for Income Taxes" ("FAS 109").  Among
other  things,  FAS 109  requires  the  liability  method and that  current  and
deferred  tax balances be  determined  based on tax rates and laws enacted as of
the balance sheet date rather than the historical tax rates. See Note F.

CASH AND CASH EQUIVALENTS

     Cash  equivalents  include amounts with initial  maturities of less than 90
days. In the normal course of business,  the Company receives  deposits from its
customers and maintains certain escrow funds.

CONSOLIDATED STATEMENTS OF CASH FLOWS

     Supplemental schedule of non-cash investing and financing activities:

     On November 18, 1994, the Company  acquired  Heftler Realty Co. As a result
of the  acquisition,  the  Company  recorded  additional  assets of  $51,116,000
(primarily  homes,  lots and  improvements  in  production)  and  liabilities of
$22,616,000 (primarily notes payable to financial institutions).

     During fiscal 1996,  the Company  entered into a joint venture  whereby the
Company  contributed  cash and the  joint  venture  partner  contributed  assets
(primarily land) valued at $5,045,000.
<PAGE>
HOMES, LOTS AND IMPROVEMENTS IN PRODUCTION

     Homes,  lots,  and  improvements  in production  are stated at the lower of
accumulated  cost or estimated net  realizable  value.  Interest  costs incurred
during  construction  or  development  activities  related  to  homes,  lots and
improvements in production and certain indirect project costs (employee  related
costs) are  capitalized  and  subsequently  charged to cost of home sales as the
units  associated with such costs are sold. See Note C. The components of homes,
lots and improvements in production are as follows:

                                                                  May 31,
                                                             1997         1996
                                                              (in thousands)

Homes and lots in production                               $183,410     $169,615
Land and developed lots held for housing                    187,282      137,676
Unimproved land held for development or sale                 12,407       30,839
Capitalized interest                                          9,441        6,750
                                                           --------     --------
                                                           $392,540     $344,880
                                                           ========     ========


MINORITY  INTEREST 

     During fiscal 1996, the Company  entered into a joint venture to develop an
age restricted  community.  The Company  contributed  cash and the joint venture
partners  contributed assets (primarily land). The Company is entitled to 55% of
the profits and/or losses and is the managing partner of the joint venture.  Due
to the control that the Company  exercises,  it has  consolidated  the financial
position and results of operation of the joint  venture.  The  partners'  equity
position is disclosed as a minority  interest in the  accompanying  consolidated
balance sheets.

PROPERTY AND EQUIPMENT

     Property and  equipment is stated at cost and consists  primarily of office
furniture,  equipment and vehicles.  Depreciation  expense is provided using the
straight-line  method over the  estimated  useful  lives  (three to five years).
Depreciation expense was $894,000, $773,000 and $535,000 in 1997, 1996 and 1995,
respectively.  The costs of  maintenance  and  repairs are charged to expense as
incurred.

EXCESS OF COST OVER RELATED NET ASSETS ACQUIRED

     The excess of cost over related net assets acquired of $17,349,000 is being
amortized   over   periods   ranging  from  three  to  twenty  years  using  the
straight-line  method.  Amortization  expense  was  $1,451,000,  $1,401,000  and
$1,459,000 in 1997, 1996 and 1995, respectively.

USE OF ESTIMATES

     The  preparation  of financial  statements  in  accordance  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect  the  reported  amounts  of  assets  and  liabilities,
disclosures  of contingent  assets and  liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates.
<PAGE>
                               Continental Homes

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying  amounts of cash and cash  equivalents,  receivables and trade
payables approximate fair value because of the short maturity of these financial
instruments.  The homebuilding  notes payable bear interest at a rate indexed to
LIBOR or the prime rate,  therefore,  the  carrying  amounts of the  outstanding
borrowings  at May 31,  1997  approximate  fair  value.  The  fair  value of the
Company's  senior and  subordinated  debt is  estimated  based on quoted  market
prices.  At May 31, 1997 and 1996,  the  estimated  fair value of the  Company's
senior and subordinated debt was $251,052,000 and $233,157,000, respectively.

     Mortgage  loans  held for sale are  stated  at the  lower of cost or market
which  approximates  the fair value.  The mortgage  banking  notes  payable bear
interest at a rate indexed to the prime rate, therefore, the carrying amounts of
the outstanding borrowings at May 31, 1997 and 1996 approximate fair value.

     Fair  value  estimates  are made at a  specific  point  in  time,  based on
relevant  market  information and  information  about the financial  instrument.
These estimates are subjective in nature and involve  uncertainties  and matters
of significant  judgment,  and therefore,  cannot be determined  with precision.
Changes in assumptions could significantly affect estimates.

NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS

     During  fiscal  1996,  the  Company  elected to early  adopt  Statement  of
Financial  Accounting  Standards  No.  121  "Accounting  for the  Impairment  of
Long-Lived  Assets and for  Long-Lived  Assets to Be  Disposed  of" ("FAS  121")
retroactive  to June 1,  1995.  The  adoption  of FAS  121  did not  impact  the
Company's results of operations or financial position for the fiscal years ended
May 31, 1997 and 1996.  The Company  believes  the adoption of FAS 121 would not
have had a material effect in fiscal 1995 had FAS 121 been applied to that year.
Under FAS 121 real estate  assets are to be  reviewed  for  possible  impairment
whenever  events or  circumstances  indicate the carrying amount of an asset may
not be  recoverable.  If indications  are that the carrying amount of the assets
may not be recoverable,  FAS 121 requires an estimate of the future undiscounted
cash  flows  expected  to  result  from the use of the  asset  and its  eventual
disposition. If these cash flows are less than the carrying amount of the asset,
an  impairment  loss must be recognized to write down the asset to its estimated
fair value less costs to sell.  The fair value  calculation  under FAS 121 would
result in a lower  valuation  of the asset than under the net  realizable  value
method previously required.

     Statement  of  Financial  Accounting  Standards  No.  123  "Accounting  for
Stock-Based  Compensation"  ("FAS  123"),  issued in October  1995,  establishes
financial   accounting  and  reporting   standards  for   stock-based   employee
compensation plans. FAS 123 requires either the recognition of compensation cost
in the financial  statements  for those  companies that adopt the new fair value
based  method or expanded  disclosure  of pro forma net income and  earnings per
share  information  for those companies that retain the current method set forth
in APB Opinion 25,  "Accounting for Stock Issued to Employees".  The Company has
not adopted the expense recognition  provisions of this standard;  therefore the
new standard has no effect on the  Company's  financial  condition or results of
operations. See Note G for the required disclosure under FAS 123.

     In March 1997, the Financial Accounting Standards Board issued Statement of
Financial  Accounting Standards No. 128 "Earnings Per Share", ("FAS 128"), which
supersedes  Accounting  Principal  Board Opinion 15, the existing  authoritative
guidance.  FAS 128 is effective  for financial  statements  for both interim and
annual periods  ending after  December 15, 1997 and requires  restatement of all
prior-period  earnings  per share  ("EPS")  data  presented.  The new  statement
modifies the  calculations  of primary and fully  diluted EPS and replaces  them
with basic and  diluted  EPS.  The  adoption of FAS 128 will not have a material
impact on the Company's previous or current reported EPS data. 
<PAGE>
SALES RECOGNITION

     The Company  recognizes  income from home and land sales in accordance with
Statement of Financial  Accounting  Standards No. 66,  "Accounting  for Sales of
Real Estate." The Company includes the discounts incurred in obtaining permanent
financing for its customers in cost of home sales.

MORTGAGE BANKING FEE RECOGNITION

     Loan   origination  fees  are  recognized  as  income  in  accordance  with
Statements of Financial  Accounting  Standards Nos. 65,  "Accounting for Certain
Mortgage Banking  Activities," and 91,  "Accounting for  Nonrefundable  Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases."

INTEREST, NET

     The summary of the components of interest, net is as follows:

                                                     Years ended May 31,
                                              1997          1996          1995
                                                      (in thousands)
Homebuilding:
        Interest expense                    $ 5,699       $ 5,982       $ 5,420
        Interest income                      (1,103)         (472)         (427)
                                            -------       -------       -------
                                            $ 4,596       $ 5,510       $ 4,993
                                            =======       =======       =======
Mortgage Banking:
        Interest expense                    $   508       $ 1,785       $ 2,360
        Interest income                      (1,242)       (2,101)       (2,559)
                                            -------       -------       -------
                                            $  (734)      $  (316)      $  (199)
                                            =======       =======       ======= 



EARNINGS PER COMMON SHARE

     Earnings per common  share has been  computed  using the  weighted  average
number of common shares outstanding during the period. Earnings per common share
assuming  full  dilution  has  been  computed  assuming  the  conversion  of the
Convertible Subordinated Notes due November 2002.

B.      RECEIVABLES

     Notes and accounts receivable are as follows:


                                                                    May 31,
                                                              1997         1996
                                                               (in thousands)

Proceeds receivable arising from home sales                 $11,646      $10,361
Municipal Utility District receivables                        2,236        2,788
Other notes and accounts receivable                          14,012        3,544
                                                            -------      -------
                                                            $27,894      $16,693
                                                            =======      =======



C.      INTEREST CAPITALIZATION

     The Company  follows  the  practice of  capitalizing  for its  homebuilding
operations  certain interest costs incurred on land under  development and homes
under construction.  Such capitalized interest is included in cost of home sales
when the units are delivered.  The Company capitalized interest in the amount of
$20,003,000,  $16,440,000 and $14,108,000 and expensed as a component of cost of
home sales  $17,488,000,  $16,233,000  and  $10,687,000 in fiscal 1997, 1996 and
1995, respectively.
<PAGE>
                               Continental Homes

D.      CONSOLIDATED MORTGAGE SUBSIDIARY

     The Company's  consolidated  financial  statements include its wholly-owned
mortgage banking subsidiary.  Financial data of the mortgage banking subsidiary,
prior to intercompany eliminations, is summarized as follows:

<TABLE>
<CAPTION>
                                                                                      May 31,
                                                                                1997          1996      
                                                                                  (in thousands)    
<S>                                                                           <C>             <C>    
Current assets, principally mortgage loans held for sale                      $28,685         $21,066
Total assets, principally mortgage loans and mortgage-backed securities        29,333          21,451
Current liabilities, principally notes payable                                 21,182          13,063
Total liabilities, principally  notes and bonds payable                        21,182          14,715
Stockholder's equity                                                            8,151           6,736
</TABLE>

                                                     Years ended May 31,

                                               1997          1996         1995
                                                       (in thousands)

Total revenues                                $8,703        $9,948       $5,217
Net interest income                              734           316          199
Net income                                     1,415         2,596          396


     Mortgage  loans  held for sale are  stated  at the  lower of cost or market
determined in the aggregate. Mortgage loans held for sale consist of:

                                                                 May 31, 
                                                            1997         1996
                                                             (in thousands)

Single-family first mortgage loans                        $ 28,061     $ 20,877
Market discount and loss reserve                              (832)        (527)
                                                          --------     --------
                                                          $ 27,229     $ 20,350
                                                          ========     ========

E.      NOTES, BONDS AND SENIOR AND CONVERTIBLE SUBORDINATED DEBT

HOMEBUILDING

     Notes payable, senior and convertible subordinated debt consist of:

<TABLE>
<CAPTION>
                                                                                     May 31, 
                                                                               1997            1996 
                                                                                  (in thousands)
<S>                                                                          <C>             <C>     
Notes payable                                                                $ 24,547        $ 19,108
10% senior notes, due 2006, net of discount of $1,599 and $1,972              148,401         128,028 
12% senior notes due 1999, net of premium of $65 and $113                      11,565          11,613 
6-7/8% convertible subordinated notes, due 2002                                86,250          86,250 
                                                                             --------        -------- 
                                                                             $270,763        $244,999 
                                                                             ========        ======== 
</TABLE>
<PAGE>                                                                     
     At May 31, 1997, the Company had available an unsecured bank line of credit
for borrowings  (excluding the mortgage  warehouse line) of up to  $140,000,000.
Available borrowings under the credit line are limited to certain percentages of
housing unit costs,  finished  lots,  land under  development  and  receivables.
Borrowings  bear  interest  at  LIBOR  plus  1-3/4%  to prime  plus  1/8% at the
Company's  election and subject to the rating on its Senior  debt.  This line of
credit  matures in November  1999.  During  fiscal 1997,  the  weighted  average
interest  rate on the  average  month  end  balance  was  7.8%  and the year end
weighted average rate was 8.6%. The average month end outstanding balance during
the year was $23,183,000 and the maximum amount outstanding at any month end was
$41,500,000.  At May 31, 1997,  $12,000,000 was  outstanding  under this line of
credit.  In addition,  the Company had borrowed  $12,547,000 in other financing,
which is secured by land,  at interest  rates  ranging  from 8% to prime plus 1%
with maturities ranging from October 1997 to February 2000.

     In April 1996,  the Company  issued  $130,000,000  principal  amount of 10%
Senior Notes due April 15, 2006. The Company used approximately  $107,542,000 of
the net proceeds to repurchase $98,500,000 aggregate principal amount of its 12%
Senior Notes due 1999.  The remaining  proceeds were used to reduce  temporarily
outstanding amounts under certain of the Company's revolving lines of credit. In
connection with the repurchase of the 12% Senior Notes, the Company recorded, in
the fourth  quarter of fiscal 1996,  an  extraordinary  loss,  net of taxes,  of
approximately  $6,059,000  related  primarily  to the tender offer  premium.  In
January 1997, the Company issued an additional  $20,000,000  principal amount of
its 10% Senior  Notes due April 15, 2006.  The net proceeds  were used to reduce
temporarily outstanding amounts under the Company's revolving line of credit. On
August 1, 1997 the  Company  will  redeem the  remaining  $11,500,000  principal
amount  outstanding  of its 12% Senior  Notes due August  1999,  at a redemption
price of 104%.  The 10%  Senior  Notes will be  redeemable  at the option of the
Company,  in whole  or in  part,  at any  time on or  after  April  15,  2001 at
redemption  prices  decreasing from 105%. The Senior Notes are senior  unsecured
obligations of the Company and are guaranteed,  on a joint and several basis, by
all of the Restricted Subsidiaries (as defined in the indenture).

     The  indentures  relating to the Company's 10% and 12% Senior Notes contain
certain covenants which impose certain limitations on the ability of the Company
to, among other things,  incur  additional  indebtedness,  pay dividends or make
certain other  restricted  payments and  investments,  consummate  certain asset
sales,  enter into certain  transactions with affiliates,  incur liens, merge or
consolidate with any other person or sell, assign,  transfer,  lease,  convey or
otherwise dispose of all or substantially all of its assets. As of May 31, 1997,
approximately  $23,356,000  was available  for making  restricted  payments.  In
addition, the indentures provide that in the event of defined changes in control
or if the consolidated tangible net worth of the Company falls below a specified
level or, in  certain  circumstances,  upon  sales of  assets,  the  Company  is
required to make an offer to repurchase certain specified amounts of outstanding
Senior Notes.

     In November and December  1995, the Company  issued  $86,250,000  principal
amount of 6-7/8% Convertible  Subordinated Notes due November 1, 2002. The Notes
are convertible at a rate of 42.105 shares of Common Stock per $1,000  principal
amount of Notes at any time prior to maturity. The Notes are redeemable in whole
or in part at the  option of the  Company  at any time on or after  November  1,
1998, at redemption prices decreasing from 103.438%.  The Notes are subordinated
to all senior indebtedness of the Company.  The net proceeds were used to redeem
the Company's 6-7/8% Convertible Subordinated Notes due March 2002 and to reduce
temporarily  outstanding  amounts under certain of the Company's revolving lines
of credit  (including  the warehouse  line of credit).  In  connection  with the
redemption of the notes,  the Company  recorded an  extraordinary  loss,  net of
taxes, of  approximately  $859,000 due to the write-off of unamortized  discount
and debt issuance costs.  
<PAGE>
                               Continental Homes

MORTGAGE BANKING 

     Mortgage  warehousing  notes payable enable CH Mortgage Company ("CHMC") to
perform its loan  origination and warehousing  functions.  At May 31, 1997, CHMC
had a  warehouse  line of  credit  of  $25,000,000  which is  guaranteed  by the
Company.  Borrowings are secured by the mortgage loans held for sale,  mature on
December  1, 1997 and bear  interest  at LIBOR  plus  1-3/4%.  At May 31,  1997,
$5,502,000 was outstanding  under this line of credit and $10,160,000 of funding
drafts were issued  thereunder.  At May 31, 1996,  no amounts  were  outstanding
under  this  line of  credit  and  $5,359,000  of  funding  drafts  were  issued
thereunder.

F.      INCOME TAXES

     The Company files a consolidated  Federal income tax return.  Components of
current and deferred income taxes follow:

                                           Current       Deferred        Total
                                                    (In thousands)
Year ended May 31, 1997:
Federal                                   $ 21,011       $ (3,244)      $ 17,767
State and other                              3,002           (463)         2,539
                                          --------       --------       --------
                                          $ 24,013       $ (3,707)      $ 20,306
                                          ========       ========       ========
Year ended May 31, 1996:
Federal                                   $ 17,484       $     81       $ 17,565
State and other                              2,016             14          2,030
                                          --------       --------       --------
                                          $ 19,500       $     95       $ 19,595
                                          ========       ========       ========
Year ended May 31, 1995:
Federal                                   $ 10,126       $   (952)      $  9,174
State and other                              2,727           (257)         2,470
                                          --------       --------       --------
                                          $ 12,853       $ (1,209)      $ 11,644
                                          ========       ========       ========


     The effective  income tax rate differs from the Federal  statutory tax rate
for the following reasons:

                                                           Years ended May 31,
                                                         1997     1996     1995

U.S. statutory tax rate                                   35%      35%      35%
State income taxes, net of Federal tax benefit             5        6        6
Amortization and other, net                                1        2        5
                                                          --       --       --
                                                          41%      43%      46%
                                                          ==       ==       == 
<PAGE>
     The components of the net deferred taxes are as follows:

                                                                  May 31,
                                                            1997           1996
                                                             (In thousands)

Deferred tax liabilities:
        Capitalized interest                              $   637        $ 1,903
        Receivable basis differences                           26          1,043
                                                          -------        -------
                                                              663          2,946
                                                          -------        -------
Deferred tax assets:
        Inventory basis differences                         2,005            759
        Other, net                                          1,129            951
                                                          -------        -------
                                                            3,134          1,710
                                                          -------        -------
Net deferred tax (asset) liability                        ($2,471)       $ 1,236
                                                          =======        =======

G.      STOCK INCENTIVE PLANS

     The Company has two stock  incentive  plans (the  "Plans").  The 1988 Stock
Incentive  Plan was  approved by the Board of Directors on July 29, 1988 and the
stockholders  on August 26, 1988 and amended by the Board of  Directors  on July
23, 1992 and the  stockholders on August 26, 1992. The 1986 Stock Incentive Plan
was approved by the Board of Directors  and the  stockholders  of the Company on
July 26,  1986.  The Plans are  intended to provide an incentive to officers and
key  employees of the Company and its  subsidiaries  to remain with the Company.
The Board of Directors has authorized  the  reservation of 700,000 shares of the
Company's common stock for issuance under the Plans. Options may be granted at a
price equal to the market value on the date of the grant (or 85% of market value
in the case of non-qualified options) and may not be exercised for one year (six
months in the case of non-qualified  options) from the date of the grant.  Under
the Plans,  options must be exercised within 10 years (5 years for a 10% holder)
from the date the option was granted.

     The following  summarizes the stock option  transactions  for the two years
ended May 31, 1997:

                                    Number         Option       Weighted Avg.
7                                  of shares        Price           Price

Outstanding at May 31, 1995        244,635    $4.000 - $21.375   $   12.43
        Granted                     35,000              18.250       18.25
        Canceled                    (8,000)   12.500 -  21.375       16.10
        Exercised                  (67,865)    4.000 -  21.375        8.65
                                   -------
Outstanding at May 31, 1996        203,770     6.500 -  21.375       14.54
        Granted                    139,800    15.875 -  18.750       17.22
        Canceled                   (21,500)   12.500 -  21.375       17.72
        Exercised                  (21,945)    7.750 -  13.750       10.84
                                   -------
Outstanding at May 31, 1997        300,125     6.500 -  21.375       15.83
                                   =======
Exerciseable at May 31, 1997       118,425     6.500 -  21.375       13.83
                                   =======

At May 31, 1997, there were 44,695 shares reserved for future grants.
<PAGE>
                               Continental Homes

     During 1995, the Financial  Accounting  Standards Board issued Statement of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation" ("FAS 123"), which defines a fair value based method of accounting
for an employee  stock option or similar  equity  instrument  and encourages all
entities  to adopt that method of  accounting  for all of their  employee  stock
compensation  plans.  However,  it also  allows an entity to continue to measure
compensation cost related to stock options issued to employees under these plans
using the method of accounting  prescribed by the  Accounting  Principles  Board
Opinion  No.  25,  "Accounting  for Stock  Issued to  Employees"  (APB No.  25).
Entities  electing  to remain  with the  accounting  in APB No. 25 must make pro
forma  disclosures  of net income and earnings  per share,  as if the fair value
based method of accounting defined in FAS 123 has been applied.

     The Company has elected to account for its stock-based  compensation  plans
under APB No. 25; however,  the Company has computed,  for pro forma  disclosure
purposes,  the value of all  options  granted  during  1997 and 1996,  using the
following weighted average assumptions used for grants:

                                                             Years ended May 31,
                                                              1997         1996 
                                                                                
        Risk free interest rate                               6.41%        5.56%
        Expected dividend yield                               1.16%        1.10%
        Expected lives                                      4 years      4 years
        Expected volatility                                  39.52%       43.48%
                                                                 
     Options were assumed to be exercised  over the four-year  expected life for
the purpose of this valuation. Adjustments were made for options forfeited prior
to vesting.  The total value of options granted was computed to be the following
approximate  amounts,  which would be amortized on the straight-line  basis over
the vesting period of the options (dollars in thousands):

        Year ended May 31, 1997                                            $881
        Year ended May 31, 1996                                            $243

     If the Company had accounted for stock options issued to employees  using a
fair value based method of accounting,  the Company's  year end net income,  net
income per common share and net income per common share  assuming  full dilution
would have been reported as follows:

                                                           Years ended May 31,
                                                             1997        1996
Net income:
        Income from operations                           $   29,445  $   25,787
        Pro forma                                            29,270      25,751
        Net Income                                           29,445      18,869
        Pro forma                                            29,270      18,833
Earnings per common share:
        Income from operations                                 4.24        3.71
        Pro forma                                              4.21        3.67
        Net Income                                             4.24        2.71
        Pro forma                                              4.21        2.68
Earnings per common share 
assuming full dilution:
        Income from operations                                 3.10        3.00
        Pro forma                                              3.09        3.00
        Net Income                                             3.10        2.27
        Pro forma                                              3.09        2.27

<PAGE>
     The effects of applying FAS 123 for  providing  pro forma  disclosures  for
1997 and 1996 are not likely to be representative of the effects on reported net
income and net income per common share for future  years,  because  options vest
over several years and additional awards are made each year.

H.      CONTINGENCIES

     In  management's  opinion,  the  Company  is  not  involved  in  any  legal
proceedings  which  will  have a  material  effect  on the  Company's  financial
position or operating results.

I.      SELECTED UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION

     Unaudited quarterly  consolidated financial information for the years ended
May 31, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
                                                              Three months ended
                                               August 31   November 30  February 28     May 31
                                                       (In thousands, except share data)
<S>                                           <C>          <C>          <C>          <C>       
1997
  Revenues                                    $  187,536   $  180,061   $  172,809   $  185,564
  Gross profit from home sales                    33,990       29,907       29,203       27,735
  Net income                                       9,236        7,792        6,758        5,659
  Earnings per share:
      Primary:
           Net income                               1.32         1.12          .98          .82
      Fully diluted:                                                                           
           Net income                                .95          .81          .72          .62
      Weighted average shares outstanding      7,003,206    6,978,297    6,897,402    6,874,591
                                               
1996
  Revenues                                    $  146,405   $  138,244   $  140,996   $  174,963
  Gross profit from home sales                    24,520       24,953       25,270       33,232
  Net income                                       5,224        5,315        5,301        3,029
  Earnings per share:
      Primary:
           Income from operations                    .75          .77          .88         1.30
           Net income                                .75          .77          .76          .43
      Fully diluted:                                                                           
           Income from operations                    .66          .64          .65          .93
           Net income                                .66          .64          .57          .36
      Weighted average shares outstanding      6,927,672    6,946,666    6,974,427    6,990,196
</TABLE>