<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K


[X]  Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 for the fiscal year ended December 31, 1999.

[ ]  Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 for the transition period from _________ to _________.

Commission File Number 0-6087

                            LINDAL CEDAR HOMES, INC.
--------------------------------------------------------------------------------

             (Exact name of registrant as specified in its charter)


           Delaware                                    91-0508250
--------------------------------------------------------------------------------
        (State or other jurisdiction of             (I.R.S. Employer
         incorporation or organization)            Identification No)

  4300 South 104th Place, Seattle, Washington            98178
--------------------------------------------------------------------------------
    (Address of principal executive offices)           (Zip code)

Registrant's telephone number, including area code)           (206) 725-0900


Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:  Common stock, par
                                                             value $.01 per
                                                             share
                                                             -------------------
                                                              (Title of Class)

Aggregate market price of shares held by non-affiliates at March 10, 1999 was
$4,282,871 consisting of 1,756,715 shares.

The number of shares of common stock outstanding on March 10, 1999 was 4,131,277
shares.

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.

Yes      [X]      No       [ ]

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

The total number of pages in the Form 10-K is 47.

See index to exhibits on page 46.

<PAGE>   2
                                     PART I

ITEM 1.  BUSINESS

Lindal Cedar Homes, Inc. (the "Company") was incorporated under the laws of the
State of Washington in 1966. In 1986, the Company was reincorporated under the
laws of the State of Delaware.

The Company is primarily engaged in the manufacture and distribution of custom
cedar homes, windows and sunrooms. The Company re-manufactures most of its
standard dimensional cedar lumber needs. Remanufactured cedar lumber, that meets
the Company's quality standards, is combined with manufactured and/or purchased
windows, manufactured sunrooms, and other purchased forest products and building
materials into home packages which can be shipped nationally and internationally
to the home buyer's construction site. Remanufactured cedar lumber that is not
of a grade suitable for use in homes is sold on the open lumber market. The sale
of homes accounted for 79% of consolidated revenue in 1999, 78% of consolidated
revenue in 1998, and 76% of consolidated revenue in 1997.

In 1999, 96% of the Company's home sales were made through approximately 180
independent dealers. The balance of home sales was made from one
Company-operated sales court.

In 1998, 96% of the Company's home sales were made through approximately 170
independent dealers. The balance of home sales was made from one
Company-operated sales court.

The Company's dealers are subject to the economic conditions, weather
conditions, housing trends, and demographic influences existing in their locale.
As such, individual dealer sales may vary from year to year.

As non-exclusive independent businesses, the dealers may sell products or
services that compliment the products and services sold by the Company. It is
the Company's policy that dealers cannot sell competitive home products through
their Lindal dealership. The Company continually recruits new dealers to expand
sales into previously unserved locations and to replace dealers that have
retired or otherwise discontinued their dealership operations.

Traditionally, the Company has three classes of dealers: Commercial,
Storefront/Design Center and Home Sales Office. A Commercial dealer constructs a
model home in a commercial location and operates their business from the model.
The Storefront/Design Center dealer displays and operates from a retail
location. A Home Sales Office dealer uses a separate office in their Lindal
residence as their place of business. The Company encourages Commercial
dealerships as this class of dealer has consistently proven to be superior in
average sales volume. However, as the construction of a model home is
economically unfeasible in some urban or sparsely populated areas, the Company
developed the Storefront/Design Center concept. The Design Center, which is
professionally designed, is located in a shopping center environment. It relies
on in-store displays and point-of-sale materials, rather than a model home to
promote and sell the Company's products. The Storefront dealer incorporates many
of the features of the Design Center, but can be opened for a smaller
investment. Of the Company's approximate 180 dealers, approximately 40% are
Commercial dealers, 26% are Storefront/Design Centers and 5% are Home Sales
Offices. The majority of the remaining dealers operate from a Live-in Display.
The Home Sales Office was recently added as a new type of dealership.

The Company has four home products: The Cedar Frame, Cedar: Solid, Access and
Select. The Cedar Frame, Cedar: Solid and Access products predominantly utilize
post and beam design and construction. The Cedar Frame home utilizes a cavity
wall. The Cedar: Solid utilizes, predominantly, a solid cedar wall. The Access
home retains many of the features of the Cedar Frame home, including a cavity
wall. However, the base price of the Access product is approximately 25% to 30%
less than the traditional Cedar Frame home due to a less


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extensive package of materials and less expensive package components. The Select
product, introduced in January 1999, predominantly utilizes conventional design
and construction including a cavity wall. The Select product combines the
material savings of the Access product with the economy of conventionally framed
homes while using quality Lindal materials. In 1999, the Company introduced a
new planbook, containing 215 designs, called "Traditions" which uses the Select
specification for economy and addresses a broader range of home styles than
those included in the Company's "Originals" Planbook.

The Company sells homes both for year-round and seasonal occupancy. Most of the
purchasers of such homes are professional and business people with higher than
average incomes. In recent years approximately 70% of the Company's homes have
been purchased for use as primary residences.

The Company's principal competitor in its home market is the local custom
builder; however, in some circumstances it may also compete with other pre-cut,
pre-fab and modular building firms. The primary basis for competition is design
services, quality of materials, customer service and price.

The Company's revenues tend to be seasonal. Most home shipments traditionally
occur between April and October. It is the Company's policy to carry sufficient
amounts of inventory to respond to the needs of its customers. In 1999, 1998 and
1997, no single customer or dealer accounted for 10% or more of consolidated
revenue.

Besides being seasonal, the housing industry is cyclical. The Company follows
industry patterns, but believes that it is somewhat better positioned to weather
industry downturns than other manufacturers or builders with lower cost products
that appeal to a larger but less affluent market. Further, the Company also
believes that its target market is less affected by economic upturns. This
belief is based on the Lindal products' traditional appeal to middle and upper
income customers who historically have been less affected by economic downturns
and upturns.

The Company recognizes revenue from orders when the home is shipped. The total
backlog, expressed in dollars, approximated $32 million at December 31, 1999
compared to $26 million at December 31, 1998 and $25 million at December 31,
1997. Management expects the majority of the current backlog will ship within
the next 12 months. However, factors beyond the control of management, such as
weather conditions, customer financing, building permits or customer requested
delays, may affect the actual delivery date of some portion of backlog orders
beyond the twelve month period. Because the Company's business is seasonal, the
backlog data does not necessarily reflect the level of the Company's business on
an annual basis.

RAW MATERIALS

The primary raw material used by the Company in its manufacturing is western red
cedar, available in quantity only in British Columbia, Canada, Alaska and the
Pacific Northwest, United States. Pressures continue to be placed on the log and
lumber market in general by timber harvesting restrictions in the United States
and Canada. The Company is aware of the potential for shortages and/or
fluctuations in the price of cedar logs and green cedar lumber. The Company
experienced such conditions in 1997 when the price of cedar logs escalated
dramatically and cedar logs were temporarily in short supply. At December 31,
1999, management believes that the Company can meet the cedar requirements for
its home packages for a minimum of the next five years, as discussed below.

Although green cedar lumber is the primary raw material used in manufacturing,
the Company purchases substantial quantities of forest products on the commodity
market to ship in its home packages. Since 1993, the Company has experienced the
extreme volatility and record price levels that have been present throughout the
forest products industry. Presently, the Company does not anticipate any serious
long-term problems in securing


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the needed forest products in the foreseeable future. The Company does expect
that there may be occasional temporary shortages of some forest products and
that price volatility of forest products may occur for some time. For this
reason, the Company hedges a portion of its non-cedar lumber needs using lumber
options and futures contracts. The Company may also make selected strategic
purchases, when relatively favorable prices exist in the market, of larger
quantities than it has historically purchased. These purchases are not expected
to be in excess of anticipated needs.

Management is working to secure the Company's cedar raw material needs on a
long-term basis. The Province of British Columbia established a program that
sets aside a portion of the allowable annual harvest of timber for smaller
companies. The harvesting rights are sold, through timber sales, to companies
that can demonstrate the highest value added to the raw lumber through efforts
made in British Columbia. In 1994, the Company was first granted rights to
harvest approximately 50,000 cubic meters of timber between 1994 and 1997.

On September 30, 1996, the Company was granted a second timber sale. This grant
is for 327,000 cubic meters to be harvested within a five-year period. As of
December 31, 1999, it is expected that this timber sale will allow the Company
to secure a cedar supply for a minimum of the next five years. Further,
management believes this timber sale will greatly facilitate the procurement of
cedar logs and/or cedar lumber. No timber from the second timber sale has been
harvested.

As a condition of the grant of the second timber sale, the Company committed to
consolidating its home shipment operation in, and transferring a considerable
amount of its lumber re-manufacturing to its facilities located in Surrey,
British Columbia. Transfer of the home shipment operations was completed in
1997. The transfer of lumber re-manufacturing to its Surrey, British Columbia
facility would require the Company to invest $5 to $6 million to construct and
equip a new re-manufacturing facility.

In late 1997, based on then current and prevailing economic conditions in the
forest products industry, management concluded that the financial statement
carrying value of the Company's sawmill would not be recovered from future cash
flows. As a result the Company recorded a $595,000 before and after tax write
down in the carrying value of the sawmill and related equipment. Management
believes it can ensure a supply of cedar without operating its sawmill.

In 1998, based on the same prevailing economic conditions in the forest products
industry, management re-evaluated the Company's financial commitments related to
the second timber sale. Management determined that it was no longer in the best
interests of the Company or it shareholders to invest the capital required to
construct and equip a new re-manufacturing facility. As a result, the Company
proposed certain modifications to the terms and conditions of the second timber
sale originally approved by Canadian regulatory authorities.

As part of its modified proposal the Company, in December 1998, entered into
several agreements with Mill and Timber Products Ltd. (Mill & Timber), a forest
products company located in British Columbia. Under the terms of these
agreements, an affiliate of Mill and Timber purchased the Company's closed
sawmill, which it will operate. Mill & Timber entered into a conditional 5-year
agreement to provide the Company a guaranteed supply of cedar at market prices.
Further, Mill and Timber and the Company entered into a contractual agreement
whereby Mill and Timber will provide services related to the planning,
management of timber harvesting, and marketing of the logs from the second
timber sale. The quantity of cedar to be provided under the terms of the cedar
supply agreement is conditioned by the transfer, to the subsidiary of Mill &
Timber, of the primary lumber quota associated with the sawmill previously owned
by the Company. Once the sawmill has been restarted, management believes that
Canadian regulatory authorities will approve the transfer of quota.

In January 2000, the Company was notified by the British Columbia Ministry of
Forests that its proposed modifications to the terms and conditions of the
second timber sale had been approved. Under the modified


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terms and conditions of the second timber sale the Company and Mill & Timber
have committed to the following:

o    The Company will immediately begin transferring the re-manufacturing of
     lumber for its homes from its Tacoma, Washington facility to facilities
     owned by an affiliate of Mill & Timber, with the entire transfer to be
     completed by July 2001,

o    The Company will invest approximately $200,000 in new re-manufacturing
     equipment to facilitate the re-manufacturing of its lumber by the affiliate
     of Mill & Timber, and

o    Mill & Timber, through another affiliate, will upgrade and operate the
     Company's previously owned sawmill.

All other terms and conditions of the original proposal remain unchanged.

Based on the Company's completed consolidation of shipping operations into its
Surrey, British Columbia facility, the Province of British Columbia has given
the Company authorization to begin limited harvesting of timber. Management
expects timber harvesting to begin the second or third quarter of 2000.

As the re-manufacturing of its lumber is transferred to the subsidiary of Mill &
Timber, the Company's facility in Tacoma, Washington will sell its services to
third parties. In 1999 and 1998, approximately 14% and 5%, respectively, of the
revenues from this facility were from third party customers.

Also, in response to receiving the second timber sale, the Company negotiated a
10-year labor agreement with the union for Canadian plant employees in the
second quarter of 1997. This agreement provides that the new jobs created/moved
to British Columbia will be at wage rates starting at 60% of the present British
Columbia Master Agreement and increasing, over the next 10 years to a maximum of
80% of that agreement. The Company cannot determine the impact, if any, that the
agreements with Mill & Timber and the modifications to the original terms of the
second timber sale might have on its contract with the union representing its
Canadian plant employees, but believes the changes, if any, will be minor and/or
procedural.

In 1996, the Canadian government implemented a lumber quota system. This quota
was part of a negotiated settlement related to the United States government's
allegation that Canada was subsidizing the Canadian forest products industry.
Under the quota system, each company can import to the United States a limited
quantity of lumber. The Company believes that this constraint on the supply of
lumber has been, and continues to be, a significant factor in the volatility
experienced in the lumber market.

With the consolidation of the Company's home shipments in Surrey, British
Columbia, all home packages that are not sold in Canada or overseas are imported
into the United States. U.S. Customs ruled that a Lindal home package is not a
"home" as defined by the applicable customs regulations, rather it constitutes a
shipment of assorted building and forest products. This forces the Company to
use its assigned quota for the lumber component of each home package. The
Company believes that when a home package is imported into the United States, it
constitutes a "home" under the applicable custom regulations. As such, the
lumber component of the home should not be applied against its allowable lumber
quota. The Company vigorously contested the matter through the appeal process
with U.S. Customs and the Company's appeal has been denied. The Company
continues to contest the decision. Separate from the Company's lumber quota to
be transferred to Mill & Timber in connection with their purchase of the
Company's previously owned sawmill, the Company has additional lumber quota
associated with its home distribution operation. Despite the appeal ruling, the
Company believes it has or will be able to obtain sufficient quota, at
foreseeable sales levels, for the term of the United States/Canadian
governments' agreement, which expires in 2001.

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<PAGE>   6
FOREIGN OPERATIONS

The Company's Canadian operations supply home packages to the U.S. operations
and engage in sales outside the United States. Sales to unaffiliated customers
of the Canadian operations during 1999, 1998 and 1997 were as follows (in
thousands of U.S. dollars):

<TABLE>
<CAPTION>
                                                    1999        1998        1997
                                                  ------      ------      ------
<S>                                               <C>          <C>         <C>
Home Sales - Canadian                          $   1,536       1,894       1,848
Other operating revenue                              422         799       4,238
                                                  ======      ======      ======

           Total foreign sales                 $   1,958       2,693       6,086
                                                  ======      ======      ======
</TABLE>

The decline in other operating revenue in 1998 was primarily due to the
reduction in green lumber sales to third parties following the closure of the
Surrey, British Columbia sawmill.

The U.S. parent company had export sales, primarily to Japan, totaling $1.9
million in 1999, $2 million in 1998 and $4.4 million in 1997.

EMPLOYEES

At the end of February 2000, the Company had 214 employees.

A significant number of the Company's Surrey, British Columbia employees are
covered by a collective bargaining agreement with the IWA - Canada. In June
1997, a 10-year agreement was signed with this union. The agreement provides
that the new jobs created through the consolidation of distribution and the
transfer of remanufacturing operations will be at wage rates starting at 60% of
the present British Columbia Coast Master Agreement and increasing, over the
next 10 years, to a maximum of 80% of that agreement. The Company cannot
determine the impact, if any, that the agreements with Mill & Timber or its
modifications to the original terms of the second timber sale might have on its
contract with the union representing its Canadian plant employees, but believes
the changes, if any, will be minor and/or procedural.

ITEM 2.  PROPERTIES

Information with respect to the location of the Company's principal locations,
which are owned unless otherwise stated, at December 31, 1999 is as follows:

o    Seattle, Washington head office complex on two acres, with 13,000 square
     foot office building and two display models.

o    Seattle, Washington business park adjacent to the head office complex on
     five acres, with 86,000 square feet of concrete tilt-up warehouse. The
     Company is using approximately 15,000 square feet for storage and office
     space. The balance of the facility is leased to third parties. At December
     31, 1999, approximately 71,000 square feet was under lease to third
     parties.

o    Surrey, British Columbia warehouse and office space on 10 acres of leased
     land with approximately 51,000 square feet under roof. All home shipments
     originate from this facility. Also located on the leased land is the
     sawmill, formerly owned by the Company, which is presently owned by an
     affiliate of Mill & Timber. The Company leases the land from the Fraser
     River Harbour Commission and the Canadian National Railway Company. The
     leases for this land are currently on a year to year basis,


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     expiring in January 2001 and June 2000, and are expected to be renewed in
     the ordinary course of business. These leases have been renewed regularly
     since the early 1970's. Until the existing land leases can be bifurcated,
     the Company will sublet the land, upon which the sawmill is situated, to
     the affiliate of Mill & Timber.

o    Renfrew, Ontario facility on 21 acres with 110,000 square feet under roof.
     The Company is using approximately 7,000 square feet for office and
     warehouse facilities. Approximately 97,000 square feet of the facility is
     leased to third parties.

o    Tacoma, Washington leased remanufacturing facility (including dry kilns) on
     four acres of leased land with approximately 47,000 square feet under roof.
     Leases on the land and building were renewed in January 2000 and expire in
     the year 2003. An additional 24,000 square feet of covered storage is
     currently being rented on a month-to-month basis.

o    Burlington, Washington manufacturing facility on approximately five acres
     with 88,000 square feet of tilt-up concrete manufacturing, warehouse and
     office space for the manufacture of windows and sunrooms. The land lease
     expires in 2024 and is renewable for two consecutive ten-year periods.

o    Land for 7 sales locations, including the head office display court. Five
     parcels are owned (four in Washington, one in Michigan) and two parcels are
     leased (one each in Hawaii and Ontario, Canada.) The Company also owns two
     parcels of undeveloped land (one each in Washington and Ontario, Canada)
     that it intends to use for future sales locations.

     The Company has accepted offers to sell the locations in Michigan and
     Ontario. These sales are not expected to have a negative impact on the
     Company's results of operations. The sale of the Ontario location is
     expected to close in June 2000 and the sale of the Michigan location is
     expected to close in the second quarter of 2000.

     In March 2000, the Company took possession of a sales display court (land
     and model home) located in British Columbia, Canada in exchange for
     forgiving the mortgage it holds on the property and other debt owing to the
     Company by the previous owner. The Company intends to operate this display
     court as a Company owned sales location.

o    Office space, ranging from 150 square feet to 1,800 square feet per
     location, is leased in Michigan (one location) for use as regional sales
     office, and in Washington (one location) for general office and warehouse
     use. The leases are either month to month or expire in 2001.

In 1998, the Central Puget Sound Regional Transit Authority (RTA), a
governmental agency, notified the Company that the site occupied by the
Company's head office, display court and adjacent business park, in Seattle,
Washington, had been identified as the preferred site for the location of a
light rail maintenance base. Based on the resolutions adopted by the Board of
the Central Puget Sound Regional Transit Authority and documents submitted by
the RTA to the U.S. Federal Government, a different site has been selected as
the final location of the light rail maintenance base. Although the Company has
not received official notification from the RTA, management believes the site
occupied by the Company's head office, display court and adjacent business park
is no longer under consideration as the location for the light rail maintenance
base.

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<PAGE>   8
ITEM 3.  LEGAL PROCEEDINGS

The Company is routinely involved in a number of legal proceedings and claims
covering a wide range of matters. In the opinion of management, the outcome of
these routine matters is not expected to have any material adverse effect on the
consolidated financial position or results of operations of the Company.

On February 1, 2000, six current and former dealers brought suit against Lindal
Cedar Homes and two of its officers and directors in the U.S. District Court for
the Western District of Washington for damages arising from the Company's
termination or threatened termination of their dealership agreements. In late
1998 and early 1999, the Company terminated or threatened to terminate the
dealership agreements of these individuals on the grounds that the dealers had
breached their agreements by selling competitive products. The dealership
contract, signed by each of these claimants, strictly prohibits a dealer from
selling competitive products.

The complaint alleges: (a) the failure of the Company to register as a franchise
in certain states, including Washington, (b) numerous violations of the
Washington Franchise Investment Protection Act, and (c) illegal tie-in
requirements in violation of the Sherman Act and Washington Consumer Protection
Act, including treble damages. The complaint does not specify the damages
sought. However, in a mediation which preceded the filing of the lawsuit, the
plaintiffs claimed damages, including trebling, of approximately $10 million
(prior to attorneys fees).

The Company's dealer agreement provides that, following unsuccessful mediation,
a dealer may pursue claims under the agreement only through an arbitration
proceeding binding on the dealer and the Company. The Company expects to take
the steps necessary to have the matter referred to arbitration before the
American Arbitration Association.

The Company believes that neither the Washington Franchise Investment Protection
Act nor the Federal Sherman Act is applicable nor were there any violations of
either act. The Company will vigorously defend the lawsuit. The Company has not
accrued any amounts relating to these claims


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

There were no matters submitted to a vote of security holders during the fourth
quarter of 1999.


                                     PART II

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

         (a)  Market Information:

              The Company's common stock is traded on the NASDAQ Small Cap
              Market under the symbol LNDL. In August 1998, the Company
              received notification from NASDAQ that its stock no longer met
              the listing requirements of the NASDAQ National Market. In
              December 1998, the Company applied to transfer its stock to the
              NASDAQ Small Cap Market. The transfer was approved in early 1999.


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<PAGE>   9
              The following table sets forth the reported high and low activity
              for each quarter of 1999 and 1998 as reported by NASDAQ.

<TABLE>
<CAPTION>
                                                     HIGH           LOW
                                                    ------         -----
              1999
              <S>                                   <C>            <C>
              First Quarter                         $3.000         1.250
              Second Quarter                         2.563         1.500
              Third Quarter                          3.125         2.000
              Fourth Quarter                         3.156         1.000

              1998
              First Quarter                         $3.875         3.000
              Second Quarter                         3.375         2.875
              Third Quarter                          3.250         1.500
              Fourth Quarter                         2.375         1.438
</TABLE>

         (b)  Approximate number of shareholders of record, including
              beneficial shareholders:

                      TITLE OF CLASS                   DECEMBER 31, 1999
                      --------------                   -----------------
              Common Stock of $.01 par value                  351

              At March 16, 2000, the Company had approximately 436 round lot
              shareholders of beneficial interest.

         (c)  No cash dividends were paid in 1999, 1998 or 1997, and the
              Company does not expect to pay a cash dividend in 2000.


ITEM 6.  SELECTED FINANCIAL DATA
         (In thousands, except ratios and per share amounts)

<TABLE>
<CAPTION>
                                                   1999       1998        1997        1996       1995
                                                 --------   --------    --------    --------   --------

         <S>                                     <C>        <C>         <C>         <C>        <C>
         Revenue .............................   $ 39,505   $ 37,719      48,848      46,635     42,311

         Operating income (loss) .............      1,180     (1,784)     (3,860)      1,224        653

         Net earnings (loss) .................      1,020       (936)     (2,447)      1,506      1,337

         Net basic and diluted earnings (loss)
             per common share ................        .25       (.23)       (.60)        .37        .33

         Total assets ........................     31,879     28,142      31,027      28,900     26,755

         Working capital .....................     10,346      8,957       9,915      10,814      8,840

         Long-term debt ......................      4,418      4,604       4,787       1,164      1,216

         Current ratio .......................     2.18:1     2.39:1      2.33:1      2.59:1     2.44:1
</TABLE>

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<PAGE>   10
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

The Company's policy is that a cash deposit accompanies all home and sunroom
orders and that units be paid in full before shipment or shipped on a C.O.D.
basis. The majority of home and sunroom sales are prepaid. Window and material
sales are made on terms common to the industry.

The Company pays its vendors within terms and takes advantage of discounts for
early payment. Customer deposits for home and sunroom orders and cash from
operations are the Company's primary sources of cash.

Traditionally, operations have been the primary source of funds for working
capital as well as expansion and facilities acquisitions. The Company maintains
a $1.5 million line of credit that bears interest at the rate of prime plus 1%.
The line of credit is secured by a pledge of specific assets. The Company's line
of credit expired on December 31, 1999 and was renewed subsequent to year end.
The renewed line of credit expires on March 30, 2001. The Company does not
anticipate the need to borrow on its line of credit in 2000.

In 1997, the Company invested approximately $3.7 million to acquire, expand and
equip its new Burlington, Washington manufacturing facility. To partially
finance the project, the Company, in November 1997, issued $3.3 million of
tax-exempt and $425,000 of taxable Industrial Revenue Bonds. Interest paid on
the tax-exempt Industrial Revenue Bonds is tax free to the bondholders and
provides preferential interest rates to the Company. The principal of the
taxable bonds matures in approximately equal amounts between 1998 and 2001, with
the principal of the tax exempt bonds maturing between 2002 and 2017. In 1999,
$100,000 of taxable Industrial Revenue Bonds matured. Bond principal (taxable
and tax-exempt) matures on an annual basis in amounts which, when combined with
interest on the outstanding principal, results in approximately equal annual
cash payments of principal and interest.

Under the terms of the Loan Agreement between the Company and the Washington
Economic Development Finance Authority, the Company is required to maintain an
irrevocable letter of credit. To secure the letter of credit, the Company
pledged property, with an aggregate book value at December 31, 1999 of $3.46
million, as collateral. Under the terms of the Reimbursement Agreement between
the Company and the issuer of the letter of credit, the Company is obligated to
make equal monthly payments each year, the total of which equals the scheduled
annual maturities of bond principal plus interest and associated fees for the
year. Under the terms of the Reimbursement Agreement and the Company's line of
credit, the Company is obligated to meet certain financial and operational
covenants. At December 31, 1999 the Company was in compliance with all such
covenants.

CASH FLOW

Cash and cash equivalents increased $750,000 (22%) to $4.21 million at December
31, 1999 from $3.46 million at December 31, 1998. This increase is primarily due
to cash provided by operating activities of $4.62 million and the effect of
changes in currency rates of $310,000, which was offset by cash used in
investing and financing activities of $4.02 million and $160,000 respectively.

Cash flow from operating activities in 1999 was $4.62 million compared to $1.77
million in 1998. In 1999, cash was provided by the decrease in accounts
receivable of $1.48 million, primarily the refund of prior year taxes, increases
in current liabilities, primarily customer deposits and accounts payable of
$1.89 million, non-cash operating charges of $1.31 million, net income of $1.02
million and decreases in prepaid expenses, primarily promotional materials, of
$240,000. Cash was used to increase inventory by $800,000 and other items,

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<PAGE>   11
principally new planbook development costs, by $520,000. Cash flow from
operating activities for 1998 was $1.77 million compared to $2.58 million cash
used by operations in 1997. In 1998, cash was provided by decreases in inventory
of $2.69 million and non-cash charges of $1.42 million, while cash was used by
the decrease in current liabilities of $1.1 million, the net loss of $940,000,
increases in account and notes receivable of $270,000 and other items of
$30,000.

Cash flows from investing activities used $4.02 million in 1999 compared to
$550,000 in 1998. In 1999, $470,000 was used to purchase fixed assets, and $3.96
million, net, was used to increase short-term investments. Repayments of
long-term notes receivable provided $380,000 and sales of used equipment
provided $40,000. Cash flows from investing activities used $550,000 in 1998
compared to using $780,000 of in 1997. In 1998, $660,000 was used to purchase
fixed assets, while other investing activities provided cash of $110,000.

Cash flows from financing activities used $160,000 in 1999 compared to using
$170,000 in 1998. In 1999, repayment of long-term debt used $200,000 while other
financing activities provided $40,000 of cash. In 1998, repayment of long-term
debt used $180,000, while other financing activities provided $10,000 of cash.

Currency fluctuation increased cash by $310,000 and $120,000 in 1999 and 1998,
respectively.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments embedded in other contracts and
for hedging activities. The Statement requires that entities recognize all
derivatives as either assets or liabilities on the balance sheet and measure
these derivatives at fair value. SFAS No. 133 also specifies a new method of
accounting for hedging transactions, prescribes the type of items and
transactions that may be hedged, and specifies detailed criteria to be met to
qualify for hedge accounting. This Statement is effective for financial
statements for years beginning after June 15, 2000. The Company does not expect
the adoption of this Statement to have a material impact on the consolidated
financial statements.

In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. The Company will adopt the provisions of SAB 101 in the first
quarter of 2000 and anticipates that such adoption will not have a material
impact on the Company's financial statements.

YEAR 2000

The Company completed its Year 2000 remediation plan by the end of 1999 and has
not experienced any significant disruptions to its financial or operating
activities caused by failure of its computerized systems resulting from Year
2000 issues. Furthermore, the Company has no information that indicates a
significant vendor or service provider has experienced any significant
disruptions to their financial or operating activities such that they would be
unable to provide goods or services to the Company.


                                       11
<PAGE>   12
RESULTS OF OPERATIONS

                     YEARS ENDED DECEMBER 31, 1999 AND 1998

GENERAL

Overall, Company operations continued to improve in 1999. Home revenues
increased 5% from 1998 levels. Orders for new homes exceeded 1998 unit and
dollar value levels by 12%. The introduction of the new Select product line has
been very successful and sales of the new product have been steadily increasing.
The Company's dollar backlog of house orders at December 31, 1999, increased 23%
over December 31, 1998. Material costs have remained in check throughout most of
1999, rising modestly in the fourth quarter. The Company has received approval
of the modifications to terms and conditions of its timber sale license from
Canadian regulatory authorities, thus securing a supply of cedar for at least
the next five years. The Company achieved additional reductions in sales,
general and administrative costs over and above the significant reductions
achieved in 1998. The Central Puget Sound Regional Transit Authority did not
select the Company's head office location and adjacent business park and sales
courts as the final location for the light rail maintenance base. The Company
strengthened its sales and marketing abilities by hiring new Vice-Presidents of
Marketing and Sales. Finally, in 1999 the Company completed the development of
its exciting new planbook, which will be introduced in the spring of 2000.

NEW HOME ORDERS

The dollar value of new orders received increased 12% in 1999 compared to 1998.
The number of new order units also increased 12% in the same time period. The
increase in the number of new orders in 1999 is primarily due to the new order
activity generated from the second quarter sales contest, which ended in early
July and a second sales contest which ended on December 31, 1999.

The following table illustrates the percentage change in the number and dollar
value of new orders for 1999 and each of the previous two years:

<TABLE>
<CAPTION>
            % CHANGE IN              1999            1998            1997
         ------------------          ----            ----            ----
         <S>                         <C>            <C>             <C>
         Units                         12%            (12)%           (12)%
         Dollar Value                  12%             (6)%           (11)%
</TABLE>

The Access and Select products represented 61% of new order units in 1999 while
the Access product represented 53% of new order units in 1998. The dollar value
of Access and Select product new orders was 53% of the total dollar value of new
orders in 1999 while Access new orders represented 46% of the total dollar value
of new orders in 1998. The Select product was not available in 1998. Size and
value of a home is a function of customer preference and may change somewhat
from period to period.

REVENUE

Overall, revenue increased $1.79 million (5%) to $39.51 million in 1999 from
$37.72 million in 1998. Home and sunroom revenue increased $1.14 million (4%) to
$32.52 million in 1999 from $31.38 million in 1998. Home revenue increased $1.55
million (5%) to $31.07 million in 1999 from $29.52 million in 1998, while
sunroom revenue decreased $410,000 (22%) to $1.45 million in 1999 from $1.86
million in 1998. The number of home units shipped increased 14 (4%) to 389 units
in 1999 from 375 units in 1998. The average revenue per completed home shipment
increased 3% to $80,000 in 1999 from $78,000 in 1998. Size and value of a home
is a

                                       12
<PAGE>   13
function of customer preference and may change somewhat from period to period.
The Access and Select product lines (the base price of which are 25% - 30% less
than the traditional Cedar Frame product) accounted for 52% of home revenue and
60% of home units shipped in 1999 compared to 46% of home revenue and 54% of
home units shipped in 1998. The Select product was not available in 1998.

Management believes the increase in home units shipped is primarily related to
the home delivery promotion in the first quarter of 1999 and the milder than
usual winter weather experienced throughout most of the country during the
winter of 1999. The increase in the sales value of home units shipped reflects
an increase in the average size of new homes shipped in 1999. Size and value of
a home is a function of customer preference and may change somewhat from period
to period.

In 2000, the Company announced a 3.5% price increase, which will become fully
effective in the second quarter of 2000. The price increase is intended to
offset the higher material costs experienced in the fourth quarter of 1999.

All other revenue sources, primarily material sales, increased $650,000 (10%) to
$6.99 million in 1999 from $6.34 million in 1998.

MATERIAL COSTS

Throughout most of 1999, the Company experienced a softening of costs for lumber
and wood products, especially for cedar, the primary material used in the
Company's homes. In the fourth quarter of 1999, the Company experienced an
increase in costs for lumber and wood products over the levels experienced
earlier in the year.

As a percent of revenue, material costs decreased to 48.6% of revenue in 1999
from 51.3% of revenue in 1998. In the fourth quarter of 1999 material costs
increased to 50.5% of revenue compared to 48.6% of revenue in third quarter of
1999 and 47.7% of revenue in the fourth quarter of 1998.

The mix of home units sold also impacts material costs as a percentage of
revenue. The Access and Select products (the base price of which is 25% - 30%
less than the Cedar Frame home) have lower material costs than the Cedar Frame,
but the dollar and percentage gross margin is lower as well. In the fourth
quarter of 1999, the Company experienced an unusual mix of home units sold,
which resulted in a slight increase in material costs measured as a percentage
of revenue. The Access and Select products accounted for 67% of the home units
delivered and 62% of home revenue in the fourth quarter of 1999 compared to 60%
of home units delivered and 51% of home revenue in the third quarter of 1999.
The Access product accounted for 58% of home units and 49% of home revenue in
the fourth quarter of 1998. The Select product was not available in 1998.

Material costs decreased $150,000 (1%) to $19.21 million in 1999 from $19.36
million in 1998 with 14 additional home shipments.

OTHER COSTS OF GOODS SOLD

Non-material costs included in the cost of goods, sold increased $220,000 (2%)
to $10.96 million in 1999 from $10.74 million in 1998. This increase is
primarily related to the expansion of the Company's engineering capacity in
response to the increase in new orders and to accrued profit sharing amounts.
These increases were partially offset by reductions in plant labor, plant
supervision and labor related expenses, a decrease in customer service costs,
and net decreases in other non-material manufacturing costs. These reductions
are primarily due to improvements in the Company's operational efficiency and
continuation of the Company's cost containment program. There were no profit
sharing amounts in 1998.

                                       13
<PAGE>   14
GROSS PROFIT

The general softening of costs in the wood supply market, which was partially
offset by the increase in other costs of goods sold, increased gross profit to
23.6% of revenue in 1999 compared to 20.2% of revenue in 1998. In the fourth
quarter of 1999, gross profit declined to 20.5% of revenue from 26.4% of revenue
in the fourth quarter of 1998 and 24.8% of revenue in the third quarter of 1999.

The mix of home units sold also impacts gross profit. The Access and Select
products (the base price of which is 25% - 30% less than the Cedar Frame home)
have lower material costs than the Cedar Frame, but the dollar and percentage
gross margin is lower as well. In 1999, the Access and Select products accounted
for 60% of the home units delivered and 52% of home revenue, while the Access
product accounted for 54% of the home units delivered and 46% of home revenue in
1998. The Access and Select products accounted for 67% of the home units
delivered and 62% of home revenue in the fourth quarter of 1999 compared to 60%
of home units delivered and 51% of home revenue in the third quarter of 1999.
The Access product accounted for 58% of the home units delivered and 49% of home
revenue in the fourth quarter of 1998. The Select product was not available in
1998.

OPERATING EXPENSES

Total operating expenses, including sawmill costs and display court expenses,
decreased $1.24 million (13%) to $8.16 million in 1999 from $9.4 million in
1998. Of this decrease $770,000 relates to costs recorded in 1998 associated
with the sale of the Company's sawmill.

Selling and general and administrative expenses decreased $490,000 (6%) to $7.67
million in 1999 from $8.16 million in 1998. Selling and general and
administrative expenses were 19.4% of revenue in 1999 compared to 21.6% of
revenue in 1998.

Selling expenses decreased $350,000 (8%) to $3.83 million in 1999 from $4.18
million in 1998. This is primarily due to decreases in payroll, commissions and
payroll related expenses, reductions in advertising costs, recruitment expenses
and other net reductions, which were partially offset by an increase in profit
sharing. There were no profit sharing amounts in 1998. Selling expense were 9.7%
of revenue in 1999 compared to 11.1% of revenue in 1998.

General and administrative expenses decreased $150,000 (4%) to $3.84 million in
1999 from $3.99 million in 1998. This reduction is primarily due to reductions
in payroll and payroll related expenses, professional fees, communication costs,
bad debts and other net reductions, which were partially offset by an increase
in profit sharing. There were no profit sharing amounts in 1998. General and
administrative expenses were 9.7% of revenue in 1999 compared to 10.6% of
revenue in 1998.

Display court expenses increased $10,000 (2%) to $480,000 in 1999 from $470,000
in 1998.

OTHER INCOME (EXPENSE)

Other income (expense) decreased $130,000 (26%) to $370,000 in 1999 from
$500,000 in 1998. This decrease was primarily due to the decrease in foreign
currency transaction gain or loss of $420,000 and decreased rental income of
$150,000, which were offset by increased interest income of $340,000, an
increase in the gain from the sale of assets of $40,000 and an increase in
miscellaneous income of $60,000. The decrease in rental income is primarily due
to Company owning fewer model homes or land that are being leased to dealers and
that the lease on a design center the Company was subletting to a dealer had
expired. The increase in interest income is due to the increase in cash balances
available for investment.

                                       14
<PAGE>   15
INCOME TAX BENEFIT

In 1999, Company operations in both the United States and Canada were
profitable. Profits, before income tax expense, from operations in the United
States totaled $1.35 million, which resulted in a tax expense of $490,000 (36%).
Profits, before income tax expense, from Canadian subsidiary operations totaled
$200,000, which resulted in a tax expense of $40,000 (20%). The Company did not
recognize a tax benefit in 1999 for individual Canadian Company net operating
losses due to the inability to carryback the net operating losses and the
uncertainty of utilizing the net operating loss carryforward against future
taxable Canadian income.

In 1999, the overall income tax expense was $530,000 for an effective tax rate
of 34% compared to an overall income tax benefit of $350,000 for an effective
tax rate of 27% in 1998.

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

REVENUE

Overall, revenue decreased $11.13 million (23%) to $37.72 million in 1998 from
$48.85 million in 1997. Home and sunroom revenue decreased $7.84 million (20%)
to $31.38 million in 1998 from $39.22 million in 1997. Home revenue decreased
$7.42 million (20%) to $29.52 million in 1998 from $36.94 million in 1997, while
sunroom revenue decreased $420,000 (18%) to $1.86 million in 1998 from $2.28
million in 1997. The number of home units shipped decreased 134 (26%) to 375
units in 1998 from 509 units in 1997. The average revenue per completed home
shipment increased 7% to $78,000 in 1998 from $73,000 in 1997. Size and value of
a home is a function of customer preference and may change somewhat from period
to period. The Access home (the base price of which is 25% - 30% less than the
traditional Cedar Frame product) accounted for 46% of home sales revenue and 54%
of home units shipped in 1998 compared to 34% of home sales revenue and 43% of
home units shipped in 1997.

Management believes the decrease in home units shipped and home sales dollar
volume is primarily due to the cumulative effect of price increases implemented
in 1997 and 1998 which depressed the quantity of new orders received in 1998.
The price increases implemented in 1997 and 1998 only partially offset the
elevated material prices experienced in late 1996, 1997 and early 1998. The
increase in average revenue per home is primarily due to the price increases
implemented in 1998 and, to a lesser degree, the price increases implemented in
1997 and to an increase in the average size of new homes shipped.

During 1998, the Company announced one price increase that became fully
effective in the third quarter of 1998.

All other revenue sources, primarily material sales, decreased $3.29 million
(34%) to $6.34 million in 1998 from $9.63 million in 1997. This was primarily
due to decreased sales of green cedar lumber and wood chips, which resulted from
the closure in 1997 and the sale of the Company's sawmill in 1998. The sawmill
operated for approximately a three-week period in 1998 compared to approximately
11 months in 1997. Since most of the sawmill output was sold on the open lumber
market, there was less lumber and wood chips sold during 1998 than in 1997.

MATERIAL COSTS

In general, the Company continued to experience elevated costs for lumber and
wood products, especially for cedar, the primary material used in the Company's
homes over historic levels. The elevated lumber and wood product costs,
including the cost of cedar, were not fully offset by the price increases
implemented in 1997 and 1998.

                                       15
<PAGE>   16
However, during 1998, the Company experienced a gradual softening of costs for
many of the forest products included in its home packages, including premium
framing lumber. While there was softening of costs for green cedar lumber, the
cost decreases experienced in 1998 did not fully offset the dramatic cost
increases experienced in 1997 for cedar logs and green cedar lumber.

As a percent of revenue, material costs decreased to 51.3% of revenue in 1998
from 57% of revenue in 1997. Material costs peaked in the fourth quarter of 1997
at 61% of revenue. The decrease in material costs as a percentage of revenue was
due to softening of wood costs, decreased lumber sales due to the closure of the
sawmill and the cumulative effect of the price increases implemented in 1997 and
1998. Overall, the elevated material costs were only partially offset by the
price increases.

Material costs decreased $8.47 million (30%) to $19.36 million in 1998 from
$27.83 million in 1997 on 134 fewer home shipments and, due to the closure and
sale of the sawmill, a decrease in the amount of cedar lumber sold on the open
market. Since most of the sawmill output was sold on the open lumber market,
there was less lumber sold during 1998 than in 1997.

OTHER COSTS OF GOODS SOLD

Non-material costs included in the cost of goods sold, decreased $3.53 million
(25%) to $10.74 million in 1998 from $14.27 million in 1997. This was largely
due to the cost reductions related to closure of the sawmill and the
classification of certain 1998 sawmill holding costs as operating expenses,
which reduced non-material cost of goods sold by $2.42 million (27%). In
addition, plant labor, plant supervision and related expenses decreased from
1997 levels primarily due to the reduced volume of sales and the Company's cost
containment program. Customer service costs and other charges in non-material
costs of goods sold also decreased. The decrease in customer service costs
reflected the improved efficiency in the Company's operational performance.

GROSS PROFIT

The cumulative effect of price increases, lower non-material costs of goods
sold, and general softening of costs in the wood supply market increased gross
profit to 20.2% of revenue in 1998 compared to 13.8% of revenue in 1997.

The mix of home units sold also impacts gross profit. The Access product
accounted for 54% of home shipments and 46% of home revenue in 1998 compared to
43% of home shipments and 34% of home revenue in 1997.

Although the Access home (the base price of which is 25% - 30% less than the
Cedar Frame home) has lower material costs than the Cedar Frame, the dollar and
percentage gross margin is lower as well.

OPERATING EXPENSES

The Company's sawmill, located in Surrey, British Columbia, was closed and did
not operate during the majority of 1998. However, during the closure, the
Company incurred costs associated with maintaining the sawmill in a state of
operational readiness. Such costs included fixed expenses, such as land rents,
utilities, maintenance, storage costs, maintaining a skeleton crew and certain
union related obligations. In addition, the Company incurred certain costs
associated with the sale of the sawmill and its related assets. In 1998, the
Company recorded pre-tax sawmill charges of $770,000. In 1997, the Company
recorded pre-tax restructuring and valuation charges of $810,000. Of this
amount, $600,000 related to the write-down of the financial statement carrying
value of the sawmill. The remainder related to the costs associated with the
consolidation of window and sunroom operations into the Burlington, Washington
facility.

                                       16
<PAGE>   17
Including 1998 sawmill charges and 1997 restructuring and valuation charges,
total operating expenses decreased $1.21 million (11%) to $9.4 million in 1998
from $10.61 million in 1997.

Selling and general and administrative expenses decreased $1.03 million (11%) to
$8.16 million in 1998 from $9.19 million in 1997. Selling and general and
administrative expenses were 21.6% of revenue in 1998 compared to 18.8% of
revenue in 1997.

Selling expenses decreased $190,000 (4%) to $4.18 million in 1998 from $4.37
million in 1997. This was primarily due to decreases in payroll, commissions and
payroll related expenses, travel expenses, recruitment expenses and seminar and
related expenses. Selling expenses were 11.1% of revenue in 1998 compared to
8.9% of revenue in 1997.

General and administrative expenses decreased $830,000 (17%) to $3.99 million in
1998 from $4.82 million in 1997. This reduction was primarily due to reductions
in payroll and related expenses and in the provision for doubtful accounts.
These reductions were the result of the aggressive cost containment program
implemented by the Company in 1998. General and administrative expenses were
10.6% of revenue in 1998 compared to 9.9% of revenue in 1997.

Display court expenses decreased $150,000 (24%) to $470,000 in 1998 from
$620,000 in 1997. This was largely due to reductions in payroll and compensation
related expenses and reductions in certain amortization costs.

OTHER INCOME (EXPENSE)

Other income (expense) decreased $220,000 (31%) to $500,000 in 1998 from
$720,000 in 1997. In 1997, the Company recorded a pre-tax gain of $470,000 from
the sale of its Kent, Washington distribution facility. Exclusive of this gain,
other income increased $250,000 (100%) from $250,000 in 1997. This increase was
primarily due to gains from foreign currency transactions of $320,000 and
increased rental income of $50,000, which were offset by increased interest
expense of $190,000. The increased interest expense is primarily due to
increased 1998 interest expense from the Industrial Revenue Bonds issued in
November 1997.

INCOME TAX BENEFIT

In 1998, the Company incurred losses from operations in both the United States
and Canada. Losses, before income tax benefit, from operations in the United
States totaled $1.1 million, which provided a tax benefit of $340,000. Losses,
before income tax benefit, from Canadian subsidiary operations totaled $190,000,
which provided a tax benefit of $10,000. The Company did not recognize a tax
benefit from the 1998 Canadian losses due to the inability to carryback the net
operating losses and the uncertainty of utilizing the net operating loss
carryforward against future taxable Canadian income.

In 1998, the overall income tax benefit was $350,000 for an effective tax rate
of 27% compared to an overall income tax benefit of $690,000 for an effective
tax rate of 22% in 1997.

OTHER MATTERS

Statements contained in this report that are not based on historical facts are
forward looking statements subject to uncertainties and risks including but not
limited to: the consolidation of operations, trade and governmental actions,
changing economic conditions, trends in the housing industry, availability of
raw materials, material cost fluctuations, labor costs, product acceptance, the
ability to obtain new orders and recruit new dealers, and demographic
influences.

                                       17
<PAGE>   18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. The primary
market risks to which the Company is exposed are commodity lumber prices,
interest rates and foreign currency exchange rates.

The Company, from time to time, enters into futures contracts to hedge future
purchases of specific types and grades of non-cedar lumber with the objective of
reducing risk due to market fluctuations. At December 31, 1999, the Company had
30 futures contracts with broker-dealers of approximately $1,091,000 maturing
through July 2000 with a net deferred gain of $25,000. Such gains in fair value,
if realized, would be offset by higher costs of lumber purchased at market
value. At December 31, 1998 the aggregate commitment underlying the Company's
futures contracts and deferred gains from hedged lumber were not material.

The Company is subject to foreign currency exchange rate exposure, primarily
related to Canadian operations and the sale of homes to Canadian customers.
Historically, this exposure has had a minimal impact on the Company. Home sales
into countries other than Canada are made in U.S. dollars. At the present time,
the Company does not hedge foreign currency risk, but may hedge known
transaction exposures in the future.

The Company's exposure to changes in interest rates is minimal. Interest on
short-term investments of less than 90 days is based on market interest rates.
At December 31, 1999, the Company's investment in fixed rate instruments was
approximately $4.0 million. Of this amount approximately $3.92 million is
invested in the United States and approximately $80,000 is invested in Canada.
Interest rates on the U.S. investments range from 5.7% to 5.8% and mature from
January 19, 2000 through April 7, 2000. Interest rates on the Canadian
investments are 3.65%, and mature from February 24, 2000 through March 23, 2000.
Because of the relative short-term nature of these investments, the Company's
exposure to interest rate fluctuation is greatly reduced. At December 31, 1998,
the Company's investment in fixed rate instruments was not material. All of the
Company's long-term debt is fixed rate. The Company's line of credit is based on
the prime rate. During 1999, the Company had no amounts owing on its line of
credit.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The financial statements are listed in the index to the consolidated financial
statements and schedule on page 20 of this report.

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

None.

                                       18
<PAGE>   19
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required under this item is contained in the Registrant's 2000 Proxy
Statement, and is incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information required under this item is contained in the Registrant's 2000 Proxy
Statement, and is incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required under this item is contained in the Registrant's 2000 Proxy
Statement, and is incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required under this item is contained in the Registrant's 2000 Proxy
Statement, and is incorporated by reference. See also note 10 to the
consolidated financial statements on page 40 of this report for information
regarding related party transactions.

                                     PART IV

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

         (a)  Financial Statements and Financial Statement Schedule: See page
              20 for the index to consolidated financial statements and
              schedule.

         (b)  No reports on Form 8-K were filed during the last quarter of the
              period covered by this report

         (c)  Exhibits:


                                       19
<PAGE>   20
                            LINDAL CEDAR HOMES, INC.
            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

                        Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                    PAGES
                                                                   -------

<S>                                                                <C>
Independent Auditors' Report                                            21

Consolidated Balance Sheets as of December 31, 1999 and 1998            22

Consolidated Statements of Operations for each of the years in
   the three-year period ended December 31, 1999                        23

Consolidated Statements of Stockholders' Equity for each of the
   years in the three-year period ended December 31, 1999               24

Consolidated Statements of Cash Flows for each of the years in
   the three-year period ended December 31, 1999                        25

Notes to the Consolidated Financial Statements                     26 - 43

SCHEDULE

II       Valuation and Qualifying Accounts                              44
</TABLE>

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


                                       20
<PAGE>   21
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Lindal Cedar Homes, Inc.:

We have audited the accompanying consolidated balance sheets of Lindal Cedar
Homes, Inc. and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lindal Cedar Homes,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.

                                               /s/ KPMG LLP

Seattle, Washington
February 28, 2000


                                       21
<PAGE>   22
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES

                           Consolidated Balance Sheets

                           December 31, 1999 and 1998

             (Dollar amounts in thousands, except per share amounts)

<TABLE>
<CAPTION>

                                         ASSETS                                                  1999               1998
                                                                                            ----------------   ----------------
<S>                                                                                         <C>                <C>
Current assets:
    Cash and cash equivalents                                                            $        4,213              3,457
    Short-term investments                                                                        4,039                 72
    Receivables:
       Trade                                                                                      1,680              1,839
       Current installments of long-term notes receivable                                           147                204
       Refundable income taxes                                                                       --              1,420
                                                                                            ----------------   ----------------
                                                                                                  1,827              3,463
       Less allowance for doubtful receivables                                                      259                320
                                                                                            ----------------   ----------------
                 Net receivables                                                                  1,568              3,143
    Inventories                                                                                   8,098              7,120
    Promotional materials                                                                           510                844
    Prepaid expenses                                                                                220                358
    Deferred income taxes                                                                           430                386
                                                                                            ----------------   ----------------
                 Total current assets                                                            19,078             15,380
Long-term notes receivable, excluding current installments and
    net of allowance of $164 in 1999 and $169 in 1998                                               455                697
Property, plant and equipment, net                                                               10,956             11,426
Other assets, at cost less accumulated amortization
    of $37 in 1999 and $665 in 1998                                                               1,390                639
                                                                                            ----------------   ----------------
                                                                                         $       31,879             28,142
                                                                                            ================   ================

                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Current installments of long-term debt                                               $          213                190
    Accounts payable                                                                              2,770              1,437
    Accrued salaries and wages                                                                      418                 85
    Other accrued expenses                                                                          530                771
    Income taxes payable                                                                            126                 --
    Customer deposits                                                                             4,675              3,940
                                                                                            ----------------   ----------------
                 Total current liabilities                                                        8,732              6,423
Long-term debt, excluding current installments                                                    4,418              4,604
Deferred income taxes                                                                               294                325
Commitments and contingencies
Stockholders' equity:
    Common stock, $.01 par value.  Authorized 10,000,000 shares; issued and
       outstanding 4,131,227 shares in 1999 and 4,126,011 shares in 1998                             41                 41
    Additional paid-in capital                                                                   16,061             16,049
    Accumulated other comprehensive loss                                                           (837)            (1,450)
    Retained earnings                                                                             3,170              2,150
                                                                                            ----------------   ----------------
                 Total stockholders' equity                                                      18,435             16,790
                                                                                            ----------------   ----------------
                                                                                         $       31,879             28,142
                                                                                            ================   ================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       22
<PAGE>   23
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Operations

                  Years ended December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                             1999               1998               1997
                                                                        ----------------   ----------------   ----------------
<S>                                                                     <C>                <C>                <C>
Revenue                                                              $       39,505             37,719             48,848
Cost of goods sold                                                           30,167             30,100             42,097
                                                                        ----------------   ----------------   ----------------
               Gross profit                                                   9,338              7,619              6,751
Operating expenses:
    Selling, general and administrative expenses                              7,674              8,163              9,186
    Display court expenses                                                      484                472                618
    Sawmill costs                                                                --                768                 --
    Restructuring and valuation charges                                          --                 --                807
                                                                        ----------------   ----------------   ----------------
               Total operating expenses                                       8,158              9,403             10,611
                                                                        ----------------   ----------------   ----------------
               Operating income (loss)                                        1,180             (1,784)            (3,860)
Other income (expense):
    Rental income                                                               201                356                307
    Interest income                                                             505                165                177
    Interest expense                                                           (322)              (337)              (152)
    Other, net                                                                  (18)               314                387
                                                                        ----------------   ----------------   ----------------
               Other income, net                                                366                498                719
                                                                        ----------------   ----------------   ----------------
               Earnings (loss) before income tax expense (benefit)            1,546             (1,286)            (3,141)
Income tax expense (benefit)                                                    526               (350)              (694)
                                                                        ----------------   ----------------   ----------------
               Net earnings (loss)                                   $        1,020               (936)            (2,447)
                                                                        ================   ================   ================


Net earnings (loss) per common share - basic and diluted             $             .25               (.23)              (.60)
                                                                        ================   ================   ================

</TABLE>

See accompanying notes to consolidated financial statements.


                                       23
<PAGE>   24
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES

                 Consolidated Statements of Stockholders' Equity

                  Years ended December 31, 1999, 1998 and 1997

                          (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                   ACCUMULATED
                                      NUMBER                       ADDITIONAL        OTHER                           TOTAL
                                    OF SHARES        COMMON         PAID-IN      COMPREHENSIVE      RETAINED     STOCKHOLDERS'
                                   OUTSTANDING       STOCK          CAPITAL         EARNINGS        EARNINGS        EQUITY
                                                                                    (LOSS)
                                  -------------  -------------   -------------  ---------------   -------------  -------------
<S>                               <C>            <C>             <C>            <C>               <C>            <C>
Balances at December 31, 1996        4,081,830    $       41          15,916             (748)          5,533         20,742
    Stock options exercised and
      shares issued through the
      Employee Stock Purchase
      Plan                              32,616            --             102               --              --            102
    Issuance of restricted
    stock                                4,000            --              15               --              --             15
    Comprehensive loss:
      Net loss                              --            --              --               --          (2,447)        (2,447)
      Other comprehensive earnings-
        foreign currency
        translation adjustment              --            --              --               36              --             36
                                   ------------  -------------   -------------  ---------------   -------------  -------------
          Total comprehensive
            loss                            --            --              --               36          (2,447)        (2,411)
                                   ------------  -------------   -------------  ---------------   -------------  -------------

Balances at December 31, 1997        4,118,446            41          16,033             (712)          3,086         18,448
    Stock options exercised and
      shares issued through the
      Employee Stock Purchase
      Plan                               2,565            --               5               --              --              5
    Issuance of restricted
    stock                                5,000            --              11               --              --             11
    Comprehensive loss:
      Net loss                              --            --              --               --            (936)          (936)
      Other comprehensive loss-
        foreign currency
        translation adjustment              --            --              --             (738)             --           (738)
                                   ------------  -------------   -------------  ---------------   -------------  -------------
          Total comprehensive
            loss                            --            --              --             (738)           (936)        (1,674)
                                   ------------  -------------   -------------  ---------------   -------------  -------------

Balances at December 31, 1998        4,126,011            41          16,049           (1,450)          2,150         16,790
    Shares issued through the
      Employee Stock Purchase
      Plan                               1,216            --               3               --              --              3
    Issuance of restricted
    stock                                4,000            --               9               --              --              9
    Comprehensive earnings:
      Net earnings                          --            --              --               --           1,020          1,020
      Other comprehensive earnings-
        foreign currency
        translation adjustment              --            --              --              613              --            613
                                   ------------  -------------   -------------  ---------------   -------------  -------------
          Total comprehensive
            earnings                        --            --              --              613           1,020          1,633
                                   ------------  -------------   -------------  ---------------   -------------  -------------

Balances at December 31, 1999        4,131,227    $       41          16,061             (837)          3,170         18,435
                                   ============  =============   =============  ===============   =============  =============
</TABLE>

See accompanying notes to consolidated financial statements.


                                       24
<PAGE>   25
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                  Years ended December 31, 1999, 1998 and 1997

                          (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                                                        1999         1998         1997
                                                                                     -----------  -----------  -----------
<S>                                                                                  <C>          <C>          <C>
Cash flows from operating activities:
    Net earnings (loss)                                                           $     1,020         (936)      (2,447)
    Adjustments to reconcile net earnings (loss) to net cash provided by
      (used in) operating activities:
         Depreciation and amortization                                                  1,396        1,337        2,023
         Loss (gain) on disposal of property, plant and equipment                         (30)           6         (442)
         Deferred income tax expense (benefit)                                            (64)          69          121
         Compensation expense related to restricted stock                                   9           11           15
         Change in operating assets and liabilities:
           Net receivables                                                              1,479         (521)        (903)
           Inventories                                                                   (798)       2,688          116
           Prepaid expenses and promotional materials                                     238          110           36
           Current liabilities other than current installments of long-term debt        1,892       (1,104)        (508)
         Other                                                                           (518)         110         (587)
                                                                                     -----------  -----------  -----------
                Net cash provided by (used in) operating activities                     4,624        1,770       (2,576)
Cash flows from investing activities:
    Purchase of short-term investments                                                 (7,979)         (74)        (139)
    Maturity of short-term investments                                                  4,016           --           --
    Sale of short-term investments                                                         --           74        2,838
    Cash received for repayment of non-operating notes receivable                         379          166          127
    Cash received from sale of property, plant and equipment                               35           --        1,499
    Purchase of property, plant and equipment                                            (466)        (659)      (5,053)
    Other                                                                                  --          (57)         (48)
                                                                                     -----------  -----------  -----------
                Net cash used in investing activities                                  (4,015)        (550)        (776)
Cash flows from financing activities:
    Proceeds from exercise of stock options and stock purchased
      through the Employee Stock Purchase Plan                                              3            5          102
    Repayment of long-term debt                                                          (200)        (182)         (59)
    Additions to long-term debt                                                            35           10        3,810
                                                                                     -----------  -----------  -----------
                Net cash provided by (used in) financing activities                      (162)        (167)       3,853
Effect of exchange rates on cash and cash equivalents                                     309          118          523
                                                                                     -----------  -----------  -----------
                Net increase in cash and cash equivalents                                 756        1,171        1,024
Cash and cash equivalents at beginning of year                                          3,457        2,286        1,262
                                                                                     ===========  ===========  ===========
Cash and cash equivalents at end of year                                          $     4,213        3,457        2,286
                                                                                     ===========  ===========  ===========

Supplemental disclosures of cash flow information:
    Net cash paid (received) during the year for:
      Interest                                                                    $       313          331          121
      Income taxes                                                                       (957)          62           30
                                                                                     ===========  ===========  ===========

Noncash investing and financing activities:
    Acquisition of model home in exchange for receivable and liability
      assumption                                                                  $       --           393           --
                                                                                     ===========  ===========  ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       25
<PAGE>   26

                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)


(1)    DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


       (a)    DESCRIPTION OF BUSINESS

              Lindal Cedar Homes, Inc. and subsidiaries (collectively, the
              Company) manufactures and distributes high quality, custom cedar
              home packages and sunrooms to customers, domestically and
              internationally, through its network of approximately 180
              independent dealers. In addition, the Company re-manufactures
              standard dimensional cedar lumber. A portion of the cedar lumber
              is combined with other purchased forest products and building
              materials into home packages. The remaining cedar lumber is sold
              to third parties. The Company generally requires cash deposits
              upon placement of an order and final payment upon shipment of the
              home package or sunroom.


       (b)    PRINCIPLES OF CONSOLIDATION

              The consolidated financial statements include the accounts of the
              Company and its Canadian and domestic wholly-owned subsidiaries.
              All significant intercompany balances and transactions have been
              eliminated in consolidation.


       (c)    USE OF ESTIMATES

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


       (d)    CONCENTRATIONS

              The Company extends credit on the sale of windows and other
              materials in the normal course of business. One customer accounts
              for 12% of accounts receivable at December 31, 1999. There were no
              individual customers that accounted for greater than 10% of
              accounts receivable at December 31, 1998.

              Notes receivable consist primarily of loans to dealers and are
              generally secured by property, primarily model homes. Loans to
              four dealers at December 31, 1999 and five dealers at December 31,
              1998 make up approximately 79% and 67% of the net notes receivable
              balance at December 31, 1999 and 1998, respectively. There are no
              other individual balances greater than 10% of the net notes
              receivable balance.

              The Company can obtain its materials from several sources and is
              not dependent on any individual supplier.

                                                                     (Continued)
                                       26
<PAGE>   27
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)

       (e)    FOREIGN CURRENCY

              Assets and liabilities denominated in foreign currencies are
              translated at year-end exchange rates, stockholders' equity at
              historical rates, and revenue and expenses at weighted-average
              rates during the year. The resulting translation adjustment is
              reported as a component of other comprehensive earnings or loss.
              Foreign exchange transaction gains (losses) were $(105) in 1999,
              $319 in 1998 and $(56) in 1997 and are included in other income
              and expense.


       (f)    CASH EQUIVALENTS

              The Company considers all short-term investments with a maturity
              at date of purchase of three months or less to be cash
              equivalents. Cash equivalents consisted primarily of an investment
              sweep account of $3,210 in 1999 and $2,464 in 1998.


       (g)    SHORT-TERM INVESTMENTS

              Short-term investments at December 31, 1999 consist of securities
              maturing in January through March 2000, and are classified as
              available-for-sale. Accordingly, these investments are carried at
              fair value, and the Company records any unrealized holding gains
              and losses, net of income taxes, as a separate component of
              stockholders' equity. There were no unrealized holding gains or
              losses in 1999, 1998 or 1997.


       (h)    FINANCIAL INSTRUMENTS

              The estimated fair value of the Company's financial instruments,
              using available market information, approximates their recorded
              value. The estimates of fair value are not necessarily indicative
              of the amounts that the Company could realize in a current market
              exchange. The use of different market assumptions may have a
              material effect on the estimated fair value amounts.

              The Company has only limited involvement with derivative financial
              instruments and does not use them for trading purposes. Futures
              and option contracts are used to manage well-defined commodity
              price risks on non-cedar lumber used in home packages.

              Deferred gains or losses under futures and option contracts are
              included on a net basis in the carrying amounts of inventories in
              the consolidated balance sheets.

              At December 31, 1999, the Company had 30 futures contracts with
              broker-dealers of approximately $1,091 maturing through July 2000
              with a net deferred gain of $25. The Company is exposed to, but
              does not anticipate, credit loss in the event of nonperformance by
              the other parties to the contracts. The Company does not obtain or
              provide collateral or other security to support the contracts.

                                                                     (Continued)
                                       27
<PAGE>   28
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)

       (i)    INVENTORIES

              Inventories are stated at the lower of cost (principally first-in,
              first-out) or market (net realizable value).

              The Company has erected display homes in various metropolitan and
              recreational areas for display to the public and has adopted the
              policy of charging the original cost (net of 20% estimated
              residual value) of such homes against income over five years. It
              is also the Company's policy to offer for sale and to sell the
              display homes at prices below normal retail, but generally
              approximating recorded valuations plus a normal gross profit;
              therefore, the display homes are included in inventories at the
              lower of amortized cost or net realizable value. At the time of
              sale, any remaining unamortized amounts are charged to cost of
              goods sold.


       (j)    PROMOTIONAL MATERIALS

              Promotional materials consist primarily of the Company's plan book
              and are stated at the lower of cost (principally first-in,
              first-out) or market (net realizable value). Development costs
              related to future plan books are recorded in other assets.


       (k)    PROPERTY, PLANT AND EQUIPMENT

              Property, plant and equipment are stated at cost. Depreciation of
              property, plant and equipment is provided over the estimated
              useful lives of the respective assets on the straight-line basis.
              Leasehold improvements are amortized on the straight-line basis
              over the terms of the respective leases, if shorter than their
              estimated useful lives. Improvements and additions are
              capitalized; maintenance and repairs are charged to expense.

              The estimated useful lives for buildings and leasehold
              improvements range from 3 to 30 years; and for equipment,
              furniture and fixtures 3 to 10 years.


       (l)    IMPAIRMENT OF LONG-LIVED ASSETS

              The Company assesses the recoverability of long-lived assets and
              certain identifiable intangibles whenever events or changes in
              circumstances indicate that the carrying amount of an asset may
              not be recoverable. Recoverability of assets to be held and used
              is measured by a comparison of the carrying amount of an asset to
              future undiscounted net cash flows expected to be generated by the
              asset. If such assets are considered to be unrecoverable, the
              write-down to be recognized is measured by the amount by which the
              carrying amount of the assets exceeds the fair value of the
              assets. Assets to be disposed of are reported at the lower of the
              carrying amount or the fair value less costs to sell.


                                                                     (Continued)
                                       28
<PAGE>   29
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)

       (m)    INCOME TAXES

              The Company computes income taxes using the asset and liability
              method, under which deferred income taxes are provided for the
              temporary differences between the financial reporting basis and
              the tax basis of the Company's asset and liabilities and operating
              loss and tax credit carryforwards. Deferred tax assets and
              liabilities are measured using currently enacted tax rates that
              are expected to apply to taxable income in the years in which
              those temporary differences are expected to be recovered or
              settled. A valuation allowance is established when necessary to
              reduce deferred tax assets to the amounts that will more likely
              than not be realized.

              No provision has been made for U.S. federal income taxes on the
              undistributed earnings of the Company's foreign subsidiaries as it
              is management's intention to reinvest such earnings indefinitely
              or to distribute them in a manner which will not generate
              significant additional taxes. At December 31, 1999, the Company's
              cumulative undistributed earnings of the subsidiaries for which
              federal income taxes have not been provided were $173.


       (n)    ADVERTISING

              The Company expenses advertising costs when the related
              advertising first takes place. The Company recognized advertising
              expense of $1,149 in 1999, $1,306 in 1998 and $1,206 in 1997.


       (o)    NET EARNINGS (LOSS) PER SHARE

              Basic net earnings (loss) per share is computed using the weighted
              average number of common shares outstanding. Diluted net earnings
              per share is computed using the weighted average number of common
              shares plus dilutive common share equivalents outstanding during
              the period using the treasury stock method.


       (p)    STOCK BASED COMPENSATION

              The Company applies the provisions of Accounting Principles Board
              (APB) Opinion No. 25 and related interpretations in accounting for
              its stock option and stock purchase plans for employees.
              Accordingly, the Company does not recognize compensation expense
              for options and stock purchase rights granted to employees with an
              exercise price equal to or in excess of the fair value of the
              related common stock at the date of grant. Note 6 to the
              consolidated financial statements contains a summary of pro forma
              results of operations for 1999, 1998 and 1997 as if the Company
              had recognized compensation expense based on the fair value of the
              options and stock purchase rights granted at grant date as
              required by Statement of Financial Accounting Standards (SFAS) No.
              123, Accounting for Stock Based Compensation.

                                                                     (Continued)
                                       29
<PAGE>   30
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)

       (q)    COMPREHENSIVE INCOME (LOSS)

              Comprehensive income (loss) measures all changes in equity of an
              enterprise that do not result from transactions with owners and is
              reported separately in stockholders' equity.


        (r)   RECLASSIFICATIONS

              Certain reclassifications have been made to the prior period
              financial statements to conform with the current year
              presentation.


(2)    INVENTORIES

       A summary of inventories at December 31 follows:

<TABLE>
<CAPTION>
                                                                   1999                   1998
                                                            --------------------   -------------------

                  <S>                                       <C>                    <C>
                  Raw materials                          $         1,822                  1,639
                  Work-in-process                                  2,879                  2,474
                  Finished goods                                   2,707                  2,226
                  Display homes                                      690                    781
                                                            --------------------   -------------------

                                                         $         8,098                  7,120
                                                            ====================   ===================
</TABLE>


 (3)   PROPERTY, PLANT AND EQUIPMENT

       Property, plant and equipment at December 31 consists of the following:

<TABLE>
<CAPTION>
                                                                                  1999                   1998
                                                                           -------------------    -------------------
              <S>                                                          <C>                    <C>
              Buildings and leasehold improvements                      $          10,455                 10,286
              Equipment                                                             3,496                  3,349
              Furniture and fixtures                                                4,655                  4,372
                                                                           -------------------    -------------------

                                                                                   18,606                 18,007
              Less accumulated depreciation and amortization                        9,832                  8,745
                                                                           -------------------    -------------------

                                                                                    8,774                  9,262
              Land                                                                  2,182                  2,164
                                                                           ===================    ===================

                            Property, plant and equipment, net          $          10,956                 11,426
                                                                           ===================    ===================
</TABLE>

       Due to the unfavorable cedar market conditions that existed in 1997,
       management temporarily closed its Surrey, British Columbia, Canada
       sawmill operations in the fourth quarter of 1997. Management also

                                                                     (Continued)

                                       30
<PAGE>   31
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)


       concluded that the carrying value of the sawmill and related equipment
       exceeded the estimated future positive cash flows from the sawmill. As a
       result, the Company recorded, as a part of its restructuring and
       valuation charge, a $595 write-down in the carrying value of the sawmill
       and related equipment to their estimated fair values of zero in the
       fourth quarter of 1997.

       As a result of the continuing unfavorable market conditions for cedar
       lumber, the Company in the fourth quarter of 1998 sold the sawmill,
       related equipment and other related assets in exchange for a long-term
       cedar supply contract and cash of $426. The holding costs of the sawmill
       during 1998 and the loss on the sale of the sawmill and related assets
       totaled $768 and is included as operating expense in the 1998
       consolidated statement of operations.


 (4)   LONG-TERM DEBT

       Long-term debt at December 31 consists of the following:

<TABLE>
<CAPTION>
                                                                                        1999                  1998
                                                                                 -------------------   --------------------
         <S>                                                                     <C>                   <C>
         Industrial revenue bonds                                             $             3,525                 3,625
         First mortgage note payable,  due in monthly  installments  of $13,
             including  interest at 9.5%; final payment due 2009; secured by
             property with a net book value of $3,105                                       1,013                 1,075
         Other                                                                                 93                    94
                                                                                 -------------------   --------------------

                       Total long-term debt                                                 4,631                 4,794

         Less current installments                                                            213                   190
                                                                                 ===================   ====================

                       Long-term debt, excluding current installments         $             4,418                 4,604
                                                                                 ===================   ====================
</TABLE>

       The Industrial Revenue Bonds are divided into two tranches, Series A
       Bonds ($225) and Series B Bonds ($3,300), (collectively, the Bonds), with
       portions of the Series A bonds maturing annually through November 2001
       and portions of the Series B bonds maturing annually from November 2002
       through November 2017. The Series A bonds bear an interest rate of 6.45%
       and Series B bonds bear fixed rates from 4.65% to 5.80% on various
       principal amounts with an approximate effective interest rate of 5.70%.
       The Bonds are redeemable at a premium in years 2003 through 2007 and at
       par thereafter.

       In connection with the issuance of the Bonds, the Company has entered
       into a "Reimbursement Agreement" with a bank pursuant to which the bank
       issued to the Trustee an irrevocable letter of credit in an amount equal
       to the aggregate principal amount of the Bonds outstanding plus 210 days
       of interest. The letter of credit will be automatically reinstated
       following the drawing in the amount of the interest draws. The letter of
       credit expires on November 15, 2002. The Company has an option to replace
       or extend the letter of credit at that time; however, if it does not
       exercise that option, the Bonds become redeemable by the trustee. The
       Company pays annually a 1% fee of the stated amount of the letter of
       credit.
                                                                     (Continued)
                                       31
<PAGE>   32
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)

       At December 31, 1999, certain properties having an aggregate net book
       value of approximately $3,465 are pledged as collateral for the
       irrevocable letter of credit guaranteeing the bonds.

       The Reimbursement Agreement requires the Company to maintain certain
       financial and non-financial covenants. The financial covenants relate
       primarily to working capital, tangible net worth, capital expenditure
       limitations and debt service coverage ratio. At December 31, 1999, the
       Company was in compliance with all such covenants.

       Long-term debt matures as follows:
<TABLE>
       <S>                                    <C>

       2000                                $           213
       2001                                            217
       2002                                            206
       2003                                            227
       2004                                            241
       Thereafter                                    3,527
                                              ---------------
                                            $        4,631
                                              ===============
</TABLE>


(5)    LINE OF CREDIT

       The Company had a $1,500 line of credit with a bank at December 31, 1998.
       The line of credit was secured by inventory and receivables and bore
       interest at the prime rate plus 1%. The line of credit expired December
       31, 1999.


(6)    STOCKHOLDERS' EQUITY


       (a)    EMPLOYEE STOCK OPTION PLANS

              The Company grants stock options to employees under the 1997 Stock
              Option Plan (the 1997 Plan). The Company has also granted stock
              options under the 1988 Combined Incentive Stock Option and
              Non-Qualified Stock Option Plan, which plan expired on May 26,
              1998, and the 1984 Incentive Stock Option Plan, which plan expired
              on December 21, 1994. No future options can be granted under the
              1988 or 1984 plans. All three plans are administered by the
              Compensation Committee of the Board of Directors (Committee).

              Under the terms of the 1997 Plan, options to purchase shares of
              the Company's common stock may be designated as incentive or
              nonqualified at the discretion of the Committee. The exercise
              price of the options granted under these plans are set at the time
              of grant, but may not be less than the fair market value of the
              Company's common stock at the date of grant. There are 250,000
              shares of common stock authorized for grants under the terms of
              the 1997 Plan, and at December 31, 1999, there were 197,800
              available for grant.

                                                                     (Continued)
                                       32
<PAGE>   33
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)

              Generally, options under these plans vest and may be exercised
              over either a five-year period in cumulative increments of 20%
              each year beginning one year from the date of grant, or as
              determined at the discretion of the Committee.

              Options granted, other than incentive options to 10% stockholders,
              expire ten years from the date of grant. Incentive options to 10%
              stockholders expire five years from the date of grant.


       (b)    DIRECTORS AND DISTRIBUTORS STOCK OPTION PLAN

              Outside directors, when first appointed to the Board, receive an
              initial grant of options to purchase 10,000 shares of the
              Company's common stock. Additional options to purchase 5,000
              shares of the Company's common stock are to be granted to outside
              directors each October 1. The exercise price of each option is the
              fair market value on the date of grant.

              The options granted to directors who are not a Lindal distributor
              vest and are exercisable six months after the grant. Options
              granted to a director, who is also a Lindal distributor, vest and
              become exercisable over a four-year period beginning with 20%
              after six months and in annual cumulative increments of 20%
              beginning from the date of grant.

              On February 1 of each year, every distributor who serves on the
              Distributor Advisory Council (Council) is granted options to
              purchase 100 shares of common stock for each year of service on
              the Council. The options vest and are exercisable over a four-year
              period beginning with 20% after six months and in annual
              cumulative increments of 20% beginning from the date of grant. The
              exercise price of each option is the fair market value on the
              grant date.

              Options granted to outside directors who are not Lindal
              distributors expire at the earlier of 10 years from the date of
              grant or one year after the option holder ceases to be a director.
              Options granted to distributors, including outside directors who
              are Lindal distributors, expire at the earlier of 10 years from
              the date of grant or 90 days after the option holder ceases to be
              a distributor for any reason other than death or one year after
              death.

              There are 210,000 shares of common stock authorized for grants
              under the directors and distributors plan, and at December 31,
              1999, there were 73,308 options available for grant.

                                                                     (Continued)
                                       33
<PAGE>   34
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)

              A summary of the combined status of the employee and director and
              distributor plans as of December 31, 1999, 1998 and 1997 and
              changes during the years then ended is presented below:

<TABLE>
<CAPTION>
                                               1999                          1998                           1997
                                    ---------------------------   ---------------------------    --------------------------
                                                     WEIGHTED-                     WEIGHTED-                     WEIGHTED-
                                                      AVERAGE                       AVERAGE                       AVERAGE
                                                     EXERCISE                      EXERCISE                      EXERCISE
                                       SHARES          PRICE         SHARES          PRICE         SHARES          PRICE
                                    ------------    -----------   ------------    -----------    -----------    -----------
             <S>                    <C>             <C>           <C>             <C>            <C>            <C>
             Outstanding at
                 beginning of
                 year                 502,024          $3.85        494,154         $ 3.95         594,480        $ 4.00
             Granted                   90,800           1.75         47,300           2.89          33,200          4.05
             Exercised                     --            --              --            --          (30,219)         3.13
             Relinquished             (94,952)          3.67        (39,430)          4.02        (103,307)         4.45
                                    ------------                  ------------                   -----------

             Outstanding at end
                 of year              497,872          $3.51        502,024         $ 3.85         494,154        $ 3.95
                                    ============    ===========   ============    ===========    ===========    ===========

             Options
                 exercisable at
                 year-end             387,012          $3.86        403,764          $3.97         366,954         $3.95
                                    ============    ===========   ============    ===========    ===========    ===========
</TABLE>


              The following table summarizes information about these plans at
December 31, 1999:

<TABLE>
<CAPTION>
                                                          WEIGHTED
                                                          AVERAGE           WEIGHTED                             WEIGHTED
                      RANGE                              REMAINING          AVERAGE                              AVERAGE
                   OF EXERCISE          NUMBER          CONTRACTUAL      EXERCISE PRICE         NUMBER        EXERCISE PRICE
                      PRICE          OUTSTANDING            LIFE                             EXERCISABLE
             --------------------   ---------------    ---------------   ---------------    ---------------   ---------------

              <S>                   <C>                <C>               <C>                <C>               <C>
              $      1.56-2.25           99,700             9.2       $        1.84               17,500   $       2.17
                     3.16-4.36          348,080             5.4                3.72              319,420           3.72
                     4.87-6.36           50,092             3.7                5.37               50,092           5.37
                                    ---------------                                         ---------------

                     1.56-6.36          497,872             6.0                3.51              387,012           3.86
                                    ===============    ===============   ===============    ===============   ===============
</TABLE>

        (c)   EMPLOYEE STOCK PURCHASE PLAN

              The Company's 1993 Employee Stock Purchase Plan provides for
              110,000 shares of the Company's common stock to be reserved for
              issuance upon exercise of purchase rights granted to participating
              employees of the Company. The purchase rights are exercisable
              annually on October 1 of each year at a price equal to the lesser
              of 85% of the fair market value of the Company's stock at the
              beginning


                                                                     (Continued)
                                       34
<PAGE>   35
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)

              or end of the annual period. In 1999, 1998 and 1997, 1,216, 2,565
              and 2,397, shares respectively, for the amounts of $3, $5 and $8,
              respectively, were issued under the plan.


        (d)   ISSUANCE OF RESTRICTED STOCK

              Pursuant to a revised compensation program for non-employee
              directors, a total of 4,000, 5,000 and 3,000 shares of the
              Company's common stock were issued in 1999, 1998 and 1997,
              respectively. The stock issued to the non-employee directors was
              valued at the fair market value at the date of grant. As the stock
              issued was not registered, all certificates bear the appropriate
              restrictive legend. Compensation expense of $9, $11 and $11 was
              recorded in 1999, 1998 and 1997, respectively.

              Pursuant to pre-employment negotiations, in June 1997, 1,000
              shares of common stock were issued, and valued at the fair market
              value at the date of grant, to the person who became the chief
              financial officer of the Company. As the stock has not been
              registered, the certificate bears the appropriate restrictive
              legend. A charge of $4 was recorded as compensation expense in
              1997.


        (e)   PRO FORMA OPTION COMPENSATION EXPENSE

              The Company applies APB Opinion No. 25 in accounting for its stock
              options in the consolidated financial statements. Had the Company
              determined compensation cost based on the fair value at the date
              of grant for its stock options under SFAS No. 123, the Company's
              net earnings (loss) and basic and diluted earnings (loss) per
              common share would have been the pro forma amounts indicated
              below:

<TABLE>
<CAPTION>
                                                                          1999               1998              1997
                                                                     ---------------    ---------------   ----------------
              <S>                                                    <C>                <C>               <C>
              Net earnings (loss):
                  As reported                                  $         1,020                (936)           (2,447)
                  Pro forma                                                965              (1,014)           (2,499)
              Basic and diluted earnings (loss) per common shares:
                    As reported                                            .25               (.23)             (.60)
                    Pro forma                                              .23               (.25)             (.61)
</TABLE>

              The pro forma amounts reflect only options granted since January
              1, 1995. Therefore, the full impact of calculating compensation
              cost for stock options under SFAS No. 123 is not reflected in the
              1998 and 1997 pro forma amounts presented above. Compensation cost
              is recorded over the options' vesting period of five years.

                                                                     (Continued)
                                       35
<PAGE>   36
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)

              The fair value of each option grant was estimated on the date of
              grant using the Black-Scholes option-pricing model with the
              following assumptions for 1999, 1998 and 1997.

<TABLE>
<CAPTION>
                                                                     1999               1998               1997
                                                                ----------------   ---------------    ---------------
                        <S>                                     <C>                <C>                <C>
                        Expected dividend yield                        --                 --                 --
                        Risk free interest rate range                4.7-5.9%          4.4-5.4%           5.9-6.3%
                        Expected term (years)                          4.6                4.6                4.6
                        Expected volatility                           68.0%              37.7%              31.8%
</TABLE>

              The weighted average fair value of options granted in 1999, 1998
and 1997 were $1.02, $1.06 and $1.52, respectively.


        (f)   NET EARNINGS (LOSS) PER SHARE

              The following table reconciles the numerator and the denominator
              of the basic and diluted per share computations for net earnings
              (loss) per share:
<TABLE>
<CAPTION>
                                                                NET EARNINGS        WEIGHTED AVERAGE       NET EARNINGS
                                                                   (LOSS)                SHARES             (LOSS) PER
                                                                 (NUMERATOR)          (DENOMINATOR)            SHARE
                                                            -------------------    -------------------    --------------
                   <S>                                      <C>                    <C>                    <C>
                   1999:
                       Basic earnings per share          $          1,020                 4,127,311            $.25
                       Effect of dilutive stock options                --                    20,184              --
                                                            -------------------    -------------------

                       Diluted earnings per share        $          1,020                 4,147,495            $.25
                                                            ===================    ===================
                   1998:
                       Basic loss per share              $           (936)                4,120,332           $(.23)
                       Effect of dilutive stock options                --                        --
                                                            -------------------    -------------------

                       Diluted loss per share            $           (936)                4,120,332           $(.23)
                                                            ===================    ===================
                   1997:
                       Basic loss per share              $         (2,447)                4,103,432           $(.60)
                       Effect of dilutive stock options                --                        --
                                                            -------------------    -------------------

                       Diluted loss per share            $         (2,447)                4,103,432           $(.60)
                                                            ===================    ===================
</TABLE>

              Outstanding options to purchase 398,172, 502,024, and 494,154
              shares of common stock were not included in the computation in
              1999, 1998 and 1997, respectively, as they were anti-dilutive.

                                                                     (Continued)
                                       36
<PAGE>   37
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)


(7)    INCOME TAXES

       The components of earnings (loss) before income tax expense (benefit) are
       as follows:

<TABLE>
<CAPTION>
                                                                   1999               1998               1997
                                                             ----------------   ----------------   ----------------
                     <S>                                     <C>                <C>                <C>
                     U.S.                                 $         1,348             (1,095)            (2,455)
                     Canada                                           198               (191)              (686)
                                                             ----------------   ----------------   ----------------

                                                          $         1,546             (1,286)            (3,141)
                                                             ================   ================   ================

       Total income tax expense (benefit) is allocated as follows:

                                                                    1999               1998               1997
                                                               ---------------    ---------------    ---------------

              Current:
                  U.S. federal                              $           560               (492)              (881)
                  Canadian                                               30                 73                 66
                                                               ---------------    ---------------    ---------------

                                                                        590               (419)              (815)
              Deferred:
                  U.S. federal                                          (69)               157                121
                  Canadian                                                5                (88)                --
                                                               ---------------    ---------------    ---------------

                                                                        (64)                69                121
                                                               ---------------    ---------------    ---------------

                            Total                           $           526               (350)              (694)
                                                               ===============    ===============    ===============
</TABLE>

       The income tax expense (benefit) in the consolidated financial statements
       differs from the amount of income tax determined by applying the
       applicable U.S. federal statutory income tax rate to pretax income as
       follows:

<TABLE>
<CAPTION>
                                                                    1999               1998               1997
                                                               ----------------   ----------------   ----------------
              <S>                                              <C>                <C>                <C>

              Statutory tax rate                                       34%               (34)%             (34)%
              Valuation allowance                                       5                 14                 9
              Effect of Canadian taxes                                 (5)                (7)               --
              Other, net                                               --                 --                 3
                                                               ----------------   ----------------   ----------------

                                                                       34%               (27)%             (22)%
                                                               ================   ================   ================
</TABLE>

                                                                     (Continued)

                                       37
<PAGE>   38
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)

       The tax effects of temporary differences that give rise to significant
       portions of the deferred income tax assets and liabilities at December 31
       are as follows:

<TABLE>
<CAPTION>
                                                                                          1999                   1998
                                                                                   -------------------    -------------------
      <S>                                                                          <C>                    <C>
      Deferred income tax assets:
          Receivables, due to the allowance for doubtful receivables            $            155                    147
          Capitalization for tax purposes                                                    199                    229
          Accrued expenses deductible in different years for tax                              82                     53
          Net operating loss carryforwards                                                   481                    372
          Foreign tax credit carryforwards                                                   152                    135
                                                                                   -------------------    -------------------

                    Deferred income tax assets                                             1,069                    936

      Valuation allowance                                                                   (639)                  (550)
                                                                                   -------------------    -------------------

                                                                                             430                    386
      Deferred income tax liabilities - property, plant and equipment,
          principally due to differences in basis of assets and depreciation                 294                    325
                                                                                   ===================    ===================

                    Net deferred income tax asset                               $            136                     61
                                                                                   ===================    ===================
</TABLE>

       The net change in the total valuation allowance for the years ended
       December 31, 1999, 1998 and 1997 was an increase of $89, $162 and $388,
       respectively. In assessing the realizability of deferred income tax
       assets, management considers whether it is more likely than not that some
       portion or all of the deferred income tax assets will not be realized.
       The ultimate realization of deferred income tax assets is dependent upon
       the generation of future taxable income during the periods in which those
       temporary differences become deductible. Management considers the
       scheduled reversal of deferred income tax liabilities, projected future
       taxable income, and tax planning strategies in making this assessment.
       Based upon the level of historical taxable income and projections for
       future taxable income over the period which the deferred tax assets are
       deductible, management believes it is more likely than not the Company
       will realize the benefits of these deferred income tax assets, net of
       valuation allowance.

       The Company's Canadian subsidiaries have net operating loss carryforwards
       of $1,235 which expire in 2000 through 2006.

                                                                     (Continued)

                                       38
<PAGE>   39
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)

(8)    LEASES

       The Company leases certain properties under operating leases, some of
       which are subleased to dealers. In addition, the Company leases certain
       production facilities and equipment.

       A summary of rent expense follows:

<TABLE>
<CAPTION>
                                                                  1999               1998               1997
                                                             ---------------    ---------------    ---------------
       <S>                                                   <C>                <C>                <C>
       Gross rent expense                                 $           282                348                451
       Less sublease rental income                                     32                 48                 46
                                                             ---------------    ---------------    ---------------

                     Net rent expense                     $           250                300                405
                                                             ===============    ===============    ===============
</TABLE>

       Noncancelable long-term operating lease commitments are as follows:

<TABLE>
<CAPTION>
                                                 AGGREGATE MINIMUM
                  YEARS ENDING DECEMBER 31           RENTALS
                  -------------------------   ----------------------

                  <S>                         <C>
                     2000                  $               160
                     2001                                   30
                     2002                                   18
                     2003                                   13
                     2004                                   13
                     Thereafter                            247
                                              ----------------------
                                           $               481
                                              ======================
</TABLE>


(9)    RETIREMENT PLANS


       (a)    SALARY SAVINGS PROFIT SHARING PLAN

              The Company's Salary Savings Profit Sharing Plan under Section
              401(k) of the Internal Revenue Code covers substantially all
              full-time nonunion employees. Plan participants may contribute up
              to 15% of their annual salary to the plan. The Company makes a
              matching contribution in the amount of 25% of employee
              contributions. Plan administration costs and the Company's costs
              of matching employees' contributions to the plan totaled $80 in
              1999, $71 in 1998, and $78 in 1997. The Company may also
              contribute to the plan such additional amounts as the Board of
              Directors may determine at its sole discretion. There were no such
              contributions in 1999, 1998, or 1997.

                                                                     (Continued)

                                       39
<PAGE>   40
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)

       (b)    PENSION PLAN

              The Company contributes to various trusteed defined benefit
              pension plans under industry-wide agreements. These contributions
              are based on the hours worked by employees covered under
              collective bargaining agreements. Pension expense for these plans
              was $56 in 1999, $102 in 1998 and $193 in 1997.


(10)   RELATED PARTY TRANSACTIONS

       In 1998 and 1997, the Company made payments to a private company
       controlled by Sir Walter Lindal and certain other members of the Lindal
       family who are officers and directors of the Company of $34 in each of
       the years as consideration for the use of various patents. The agreement
       under which these payments were made was terminated in 1999.

       Sales of homes to certain members of the Board of Directors who are also
       dealers totaled approximately $491 in 1999, $296 in 1998 and $715 in
       1997. All sales were made under normal trade terms.


(11)   SEGMENT INFORMATION

       The Company has two reportable segments: Homes -- United States and Homes
       -- Canada. Homes -- United States performs functions associated with
       engineering, custom design, drafting, customer service, logistics,
       special order materials and distribution planning for home sales
       worldwide. Homes -- Canada performs functions associated with inventory
       management of stock materials, materials staging, and house shipping for
       home sales worldwide. Homes -- United States primarily sells homes, at
       wholesale, to independent dealers while Homes -- Canada primarily sells
       homes, at wholesale, to Homes -- United States for resale to independent
       dealers. Prior to 1998, Homes -- Canada also operated the Company's
       sawmill, which produced a majority of the cedar used in houses. The
       Company's sawmill operated only for a brief period of time in February
       1998 and was sold in December 1998.

       The accounting policies of the segments are the same as those described
       in the summary of significant accounting policies.

       The Company accounts for intersegment sales and transfers as if the sales
       or transfers were to third parties, that is at current prices where
       available, or on a cost plus basis when actual market prices are not
       available. Lindal Cedar Homes, Inc. evaluates segment performance based
       on gross profit from operations. Information on segment assets is not
       reported to the Chief Operating Decision Maker.

       The Company only reports home revenue for completed home shipments, its
       primary product, by geographic location, as it is impractical to report
       total revenue by geographic location. Geographic location is determined
       by the shipping destination of the home.

       No single customer accounts for more than 10% of the revenues of the
       Company.

                                                                     (Continued)

                                       40
<PAGE>   41
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)

       Information regarding the Company's reportable segments, including other
       significant items, for the years ended December 31 follows:

<TABLE>
<CAPTION>
                                                                                                  OTHER
                                   U.S.          CANADIAN                       INTERSEGMENT    RECONCILING
               1999                HOMES           HOMES        ALL OTHER       ELIMINATIONS      ITEMS         CONSOLIDATED
                                ------------    -----------    -----------    ---------------  ------------    --------------
      <S>                       <C>             <C>            <C>            <C>              <C>             <C>
      Revenues from
          external customers $    33,401            1,939          4,145               --             20            39,505
      Intersegment revenues       11,456           31,740          6,084          (49,280)            --                --
      Gross profit                 7,345           10,994          1,603          (10,581)           (23)            9,338
      Interest income                467               39             --             (293)           293               505
      Interest expense               106              294            208             (293)             7               322
      Depreciation and
          amortization               780              128            402               --             86             1,396

               1998

      Revenues from
          external customers $    30,975            2,467          4,051               --            226            37,719
      Intersegment revenues       11,512           30,632          5,440          (47,922)           338                --
      Gross profit                 6,637           10,877            633          (10,500)           (28)            7,619
      Interest income                124               39              2             (296)           296               165
      Interest expense               105              307            215             (296)             6               337
      Depreciation and
          amortization               743              128            408               --             58             1,337
      Sawmill costs                   --              768             --               --             --               768

               1997

      Revenues from
          external customers $    38,765            5,883          3,956               --            244            48,848
      Intersegment revenues       14,002           47,778          7,373          (72,956)         3,803                --
      Gross profit                 4,794           11,371          1,916          (11,144)          (186)            6,751
      Interest income                135               41              1             (316)           316               177
      Interest expense               117              318             30             (316)             2               152
      Depreciation and
          amortization               852              224            285               --             67             1,428
      Restructuring and
          valuation charges           --              595            212               --             --               807
</TABLE>

       Other reconciling items in 1997 consist primarily of amounts related to
log sales among the Company's Canadian subsidiaries.

                                                                     (Continued)

                                       41
<PAGE>   42
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)

       The following table presents the approximate percentage of home sales
       revenue for completed home shipments by the geographic shipping
       destination for the years ended December 31:

<TABLE>
<CAPTION>
                                                  1999                   1998                   1997
                                           -------------------    -------------------    -------------------
       <S>                                 <C>                    <C>                    <C>
       United States                    $           89%                     87%                    83%
       Canada                                        5%                      6%                     5%
       Other countries                               6%                      7%                    12%
                                           -------------------    -------------------    -------------------

                                        $          100%                    100%                   100%
                                           ===================    ===================    ===================
</TABLE>

       Additional geographic information is as follows at December 31:

<TABLE>
<CAPTION>
                                                 1999                   1998
                                          -------------------    -------------------
       <S>                                <C>                    <C>
       Long-lived assets:
           United States                $        10,810                 10,782
           Canada                                 1,991                  1,980
                                          -------------------    -------------------

                    Total               $        12,801                 12,762
                                          ===================    ===================

       Net assets:
         United States                  $        11,272                  9,287
         Canada                                   7,163                  7,503
                                          -------------------    -------------------

                   Total                $        18,435                 16,790
                                          ===================    ===================
</TABLE>


(12)   RESTRUCTURING CHARGES

       In 1997, the Company recorded a restructuring charge of $212 related to
       the consolidation of the window and sunroom operations into the
       Burlington, Washington facility. The Company paid all these costs in
       1997.


(13)   LITIGATION

       The Company is routinely involved in a number of legal proceedings and
       claims that cover a wide range of matters. In the opinion of management,
       the outcome of these matters is not expected to have any material adverse
       effect on the consolidated financial position or results of operations of
       the Company.

       On February 1, 2000, six current and former dealers brought suit against
       Lindal Cedar Homes and two of its officers and directors in the U.S.
       District Court for the Western District of Washington for damages arising
       from the Company's termination or threatened termination of their
       dealership agreements. In late 1998 and early 1999, the Company
       terminated or threatened to terminate the dealership agreements of these
       individuals on the grounds that the dealers had breached their agreements
       by selling competitive

                                                                     (Continued)

                                       42
<PAGE>   43
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

                        December 31, 1999, 1998 and 1997

             (Dollar amounts in thousands, except per share amounts)

       products. The dealership contract, signed by each of these claimants,
       strictly prohibits a dealer from selling competitive products.

       The complaint alleges: (a) the failure of the Company to register as a
       franchise in certain states, including Washington, (b) numerous
       violations of the Washington Franchise Investment Protection Act, and (c)
       illegal tie-in requirements in violation of the Sherman Act and
       Washington Consumer Protection Act, including treble damages. The
       complaint does not specify the damages sought. However, in a mediation
       which preceded the filing of the lawsuit, the plaintiffs claimed damages,
       including trebling, of approximately $10 million (prior to attorneys
       fees).

       The Company's dealer agreement provides that, following unsuccessful
       mediation, a dealer may pursue claims under the agreement only through an
       arbitration proceeding binding on the dealer and the Company. The Company
       expects to take the steps necessary to have the matter referred to
       arbitration before the American Arbitration Association.

       The Company believes that neither the Washington Franchise Investment
       Protection Act nor the Federal Sherman Act is applicable, nor were there
       any violations of either act. The Company will vigorously defend the
       lawsuit. Any amount owing as a result of this lawsuit is currently not
       estimatable and as such, the Company has not accrued any amount relating
       to these claims.

(14)   SUBSEQUENT EVENT

       In January 2000, the Company was notified by the British Columbia
       Ministry of Forests that its proposed modifications to the terms and
       conditions of a timber sale agreement had been approved. Under the
       modified terms and conditions of the timber sale, the Company has
       committed to the following:

          o    The Company will immediately begin transferring the
               re-manufacturing of lumber for its homes from its Tacoma,
               Washington facility to facilities owned by an affiliate of Mill
               and Timber Products Ltd. (Mill & Timber), with the entire
               transfer to be completed by July 2001, and

          o    The Company will invest approximately $200,000 in new
               re-manufacturing equipment to facilitate the re-manufacturing of
               its lumber by the affiliate of Mill & Timber.


                                       43
<PAGE>   44
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES

                 Schedule II - Valuation and Qualifying Accounts

                  Years ended December 31, 1999, 1998, and 1997

                                 (In thousands)


<TABLE>
<CAPTION>
<S>     <C>

    Column A                Column B                        Column C                       Column D               Column E
    --------                --------                        --------                       --------               --------
                                                           Additions

                                                  CHARGED              CHARGED
                           BALANCE AT            TO COSTS             TO OTHER                                     BALANCE
                            BEGINNING               AND               ACCOUNTS-                                    AT END
DESCRIPTION                  OF YEAR             EXPENSES             DESCRIBE            DEDUCTIONS               OF YEAR
---------------------   ------------------   ------------------   ------------------   ------------------     ------------------

1999

Allowance for
    doubtful
    receivables                                                                                   (3)    (a)
    and notes        $            489              --                    --                       69     (b)            423
                        ==================   ==================   ==================   ==================     ==================


1998

Allowance for
    doubtful
    receivables
    and notes        $            461                   46               --                       18     (a)            489
                        ==================   ==================   ==================   ==================     ==================


1997

Allowance for
    doubtful
    receivables                                                                                    3     (a)
    and notes        $             394                  123              --                       53     (b)            461
                        ==================   ==================   ==================   ==================     ==================
</TABLE>

(a)     Change due to fluctuations in the Canadian dollar exchange rate.
(b)     Deductions represent the write-off of uncollectible accounts receivable.

                                       44
<PAGE>   45
                                   SIGNATURES

     Pursuant to the requirements of Section 13 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.


                            LINDAL CEDAR HOMES, INC.

March 30, 2000
                             /s/ ROBERT W. LINDAL
                            -----------------------------------------
                            Robert W. Lindal, Chairman


     Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.

<TABLE>
<S>     <C>

Date        3/28/00              /s/ SIR WALTER LINDAL           Date    3/28/00             /s/ ROBERT W. LINDAL
          ------------------    ---------------------------            ---------------     -------------------------
                                    Sir Walter Lindal                                          Robert W. Lindal
                                    Chairman Emeritus                                       Director, Chairman and
                                  Director and Secretary                                   Chief Executive Officer



Date       3/28/00              /s/ DOUGLAS F. LINDAL           Date    3/28/00            /s/ MARTIN J. LINDAL
          ------------------    ---------------------------            ---------------     -------------------------
                                    Douglas F. Lindal                                          Martin J. Lindal
                                 Director, President and                                      Director and Vice
                                 Chief Operating Officer                                    President Information
                                                                                            Systems and Assistant
                                                                                                  Secretary




Date       3/28/00              /s/    DENNIS GREGG             Date    3/28/00            /s/CHARLES W. WIDMAN
          ------------------    ---------------------------            ---------------     -------------------------
                                       Dennis Gregg                                           Charles W. Widman
                                 Chief Financial Officer                                           Director
                                 (Principal Financial and
                                   Accounting Officer)



Date       3/28/00              /s/WILLIAM M. WEISFIELD         Date    3/28/00            /s/  STEVEN CONLEY
          ------------------    ---------------------------            ---------------     -------------------------
                                   William M. Weisfield                                         Steven Conley
                                         Director                                                  Director


Date
          ------------------    ---------------------------
                                    Charles T. Collins
                                         Director
</TABLE>


                                       45
<PAGE>   46
                            LINDAL CEDAR HOMES, INC.

                                  EXHIBIT INDEX

         Exhibits are numbered in accordance with Item 601 of Regulation S-K.

EXHIBIT
NUMBERS                                                       DESCRIPTION

(3.1)          Certificate of incorporation  (a)

(3.2)          Bylaws  (a)

(3.3)          1993 Amendment to the Certificate of Incorporation  (d)

(10.1)         1984 Incentive Stock Option Plan  (b)

(10.3)         1998 Combined Incentive Stock Option Plan and Non-Qualified Stock
               Option Plan (c)

(10.4)         Directors' and Distributors' Stock Option Plan  (d)

(10.5)         1993 Employee Stock Purchase Plan  (d)

(10.6)         Amendment to the Directors' and Distributors' Stock Option Plan
               (e)

(10.7)         1997 Stock Option Plan (g)

(21)           Subsidiaries of the registrant  (f)

(23)           Consent of Independent Certified Public Accountants

(27)           Financial Data Schedule

(a)            Incorporated herein by reference from registration on Form 8B of
               Lindal Cedar Homes, Inc., a Delaware corporation dated March 14,
               1987.

(b)            Incorporated herein by reference from the Registrant's Form 10-K
               filed for the fiscal year ended December 31, 1986.

(c)            Incorporated herein by reference from the Registrant's Form 10-K
               filed for the fiscal year ended December 31, 1989.

(d)            Incorporated herein by reference from the Registrant's Form 10-K
               filed for the fiscal year ended December 31, 1993.

(e)            Incorporated herein by reference from the Registrant's Proxy
               Statement dated April 27, 1994.

(f)            Incorporated herein by reference from the Registrant's Form 10-K
               filed for the fiscal year ended December 31, 1996.

(g)            Incorporated herein by reference from the Registrant's Proxy
               Statement dated May 9, 1997.

Copies of the above exhibits may be obtained from the Securities and Exchange
Commission or the Registrant by request.


                                       46