SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>


For the years ended December 31
($ in thousands except earnings per share)

                                           1998            1997         1996          1995         1994
                                           ----            ----         ----          ----         ----
<S>                                       <C>             <C>            <C>          <C>           <C>    
Net sales                                 $244,890        $161,109       $157,068     $124,848      $94,186
Operating income                             3,655           3,262         10,989        6,795        2,951
Net income                                      85  (1)      2,304          6,815        3,735        1,995
Net income per share -- diluted               0.01  (1)       0.26           0.88         0.60         0.22

At year end:
Working capital                             15,777           7,739         17,178      (4,814)      (8,324)
Total assets                               126,129          56,589         58,793       30,143       29,275
Debt                                        54,930           3,148          1,662        6,216       15,553
Stockholders' equity                        34,412          34,210         36,236        4,833          936

INSTALLED HOME IMPROVEMENTS
Net Sales                                 $161,330        $161,109       $157,068     $124,848      $94,186
Operating Income (Loss)                      ( 668)          3,262         10,989        6,795        2,951
Number of sales associates                     547             631            678          631          496
Number of independent installers               984           1,577          1,300        1,315        1,003
Number of employees                          1,167           1,197          1,260        1,109          857

Number of jobs installed                    65,032          64,270         64,338       55,261       37,510
Net sales per employee                        $138            $135           $125         $113         $110

MANUFACTURING AND DISTRIBUTION(2)
Net Sales                                  $83,560    
Operating Income                             4,323    
Number of employees                            420    
Net sales per employee                        $199    

(1) Refer to quarterly  financial  information  elsewhere  herein.  
(2) Includes Reeves since April 20, 1998.

</TABLE>

<PAGE>


MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS

OVERVIEW

         On April 20, 1998, the Company  acquired all the issued and outstanding
stock  of  Reeves  Southeastern   Corporation  ("Reeves")  for  cash  and  notes
aggregating  $42.6 million  (including  transaction  costs of $1.5 million).  On
November 16, 1998, the Company  acquired  certain net assets and the call center
business of H.I., Inc. for cash and subordinated  convertible  notes aggregating
$2.4 million.  These  acquisitions were accounted for as purchases.  The Company
manages  and  operates  its  business  as  two  segments:   1)  Installed   home
improvements,  which includes the Company's  wholly-owned  subsidiaries  Diamond
Exteriors,   Inc.(R)   ("Exteriors"),    Marquise   Financial   Services,   Inc.
("Marquise"),   and  Solitaire  Heating  and  Cooling,   Inc.  d/b/a  KanTel(TM)
("KanTel") and 2) Manufacturing and wholesale  distribution,  which includes the
Company's wholly-owned  subsidiary Reeves and its subsidiary,  Foreline Security
Corp. ("Foreline").

         Net sales  increased  $87.8 million,  or 55.9%,  from $157.1 million in
1996 to $244.9 million in 1998.  Reeves,  acquired in April,  1998,  contributed
$83.6 million of the increase. Operating income decreased $7.3 million, or 66.7%
from $11.0 million in 1996 to $3.7 million in 1998.  After  adjustments for $1.5
million in  restructuring  charges and $2.3 million in large and unusual charges
in 1998, operating income was $7.5 million in 1998.

         Cost,  expenses  and  earnings  as a  percentage  of net sales  were as
follows:

                                                 1998         1997        1996
                                                 ----         ----        ----
Cost of Sales                                  63.86%       56.26%      55.86%
Gross Profit                                   36.14%       43.74%      44.14%
Selling, General and Administrative            33.37%       41.35%      36.80%
Restructuring                                   0.63%        0.00%       0.00%
Operating Interest                              0.12%        0.00%       0.00%
Amortization                                    0.53%        0.37%       0.34%
Operating Income                                1.49%        2.02%       7.00%
Interest Expense                                1.38%        0.00%       0.00%
Interest Income and Other                       0.21%        0.45%       0.12%
Net Income                                      0.03%        1.43%       4.34%

         Stockholders'  equity  increased  $29.6  million,  from $4.8 million at
December 31, 1995 to $34.4  million at December 31, 1998.  Total debt  increased
$48.7  million  from $6.2  million  at  December  31,  1995 to $54.9  million at
December  31,  1998.  The  increase in total debt was related  primarily  to the
Reeves  acquisition.  During the three-year period the Company 1) completed,  in
June 1996, its initial public  offering;  2) repurchased 6.3% of its outstanding
stock;  3)  acquired  Reeves  and  KanTel;  and 4)  launched  and funded its own
consumer  financing  company.  Operating cash flow during the three-year  period
aggregated $9.6 million.

RESULTS OF OPERATIONS
Fiscal 1998 Compared to Fiscal 1997

Net Sales

         Net sales  increased  $83.8 million,  or 52.0%,  from $161.1 million in
1997 to $244.9 million in 1998. Reeves contributed $83.6 million to net sales in
1998.

         Installed Home Improvements

         Net sales,  after a $5.9 million  increase in the fourth  quarter 1998,
increased  $221 thousand from $161.1  million in 1997 to $161.3 million in 1998.
Net sales  attributable  to roofing and gutter  products and services  increased
$5.3 million,  or 5.4%, to $107.7  million in 1998.  Net sales  attributable  to
fencing products and services decreased $1.2 million,  or 4.1%, to $25.7 million
in 1998. Net sales attributable to garage doors, entry doors, and other products
and services  decreased  $5.1 million,  or 17.5%,  to $24.1 million in 1998. Net
sales attributable to credit participation fee income increased $332 thousand to
$2.2  million  in 1998.  Net  sales  attributable  to  finance  interest  income
increased $544 thousand to $1.6 million in 1998 on  receivables  financed by the
Company's  finance  subsidiary   Marquise.  The  increase  in net  sales was due
primarily  to an  increase  in total  jobs  installed  and  increases  in credit
participation fee and finance interest income. Backlog, defined as jobs sold but
not installed,  increased $3.0 million from $10.9 million at the end of December
1997 to $13.9 million at the end of December 1998.

         Manufacturing and Wholesale Distribution

         Manufacturing  and  wholesale  distribution  sales are comprised of the
following major product lines:

           Chain link and accessories                            $56,356,000
           Wood                                                   13,637,000
           Ornamental/specialty                                    6,923,000
           Gate operators and access control                       3,849,000
           Security systems                                        6,944,000
                                                            -----------------
                                                                  87,709,000
           Less:  inter-segment sales                              4,149,000
                                                            =================
                                                                 $83,560,000
                                                            =================

         After  adjusting  for the  planned  discontinuation  of a pipe and tube
joint venture and a 12% increase in the fourth quarter 1998,  manufacturing  and
wholesale  distribution  sales were  comparable to the prior 8 1/2 month period.
Backlog,  defined as orders placed but not  delivered,  was  approximately  $3.1
million at December 31, 1998.

Gross Profit

         Gross profit increased $18.0 million,  or 25.5%, from $70.5 million, or
43.7%  of net  sales in 1997 to $88.5  million,  or 36.1% of net  sales in 1998.
Reeves contributed $20.0 million to gross profit in 1998.

         Installed Home Improvements

         Installed home improvement product gross profit decreased $2.0 million,
or 2.8%,  from $70.5  million,  or 43.7% of installed home  improvement  product
sales, in 1997 to $68.5 million,  or 42.5% of installed home improvement product
sales,  in 1998.  After a $2.7  million  increase in gross  profit in the fourth
quarter  1998,  the decrease in gross profit  amount was  attributable  to lower
sales  volume due  primarily  to the  decrease  in the first nine months in lead
count,  to a $4.4 million  decrease in door sales,  and to a decrease in average
unit sales price  during the year as a result of expanded and lower price points
throughout  the year.  Except  for the fourth  quarter,  the  decrease  in gross
profit,  expressed as a percentage of installed home improvement  product sales,
resulted from a decrease in average unit sales price as a result of expanded and
lower price points,  partially offset by a $328 thousand  increase in the fourth
quarter in credit  participation fee income and in finance interest income.  The
license fee  incurred to Sears  decreased  $639  thousand,  or 3.8%,  from $16.9
million,  or 10.7% of net installed home  improvement  product sales, in 1997 to
$16.3 million,  or 10.4% of net installed  home  improvement  product sales,  in
1998.  The  decrease in the license fee  incurred to Sears in 1998 was due to an
overall decrease in net installed home improvement  product sales and to a shift
in the balance of sales, primarily roofing repairs and pricing test programs, to
lower  license  fee  products  and  services.  On  January 1, 1996 Sears and the
Company entered into a license  agreement  which has been extended  through June
30, 1999. Among other things, the license agreement provides for a fixed license
fee, at the March 1995  license fee rate,  to be charged  during the term of the
license   agreement.   Gross  profit  before  the  Sears  license  fee,   credit
participation  fee and finance interest income decreased $3.4 million,  or 4.1%,
from $84.4 million, or 53.4% of net installed home improvement product sales, in
1997 to $81.0 million, or 51.4% of net installed home improvement product sales,
in 1998.  The decrease in gross profit  amount and gross profit index during the
first nine months 1998 was  attributable  to lower sales  volume,  including the
decrease  of $4.4  million in door sales for the year,  and lower  average  unit
sales  prices.  The unit costs of  materials,  installation  labor and  warranty
expense remained relatively constant during the year.

         Manufacturing and Wholesale Distribution

         Manufacturing and wholesale distribution gross profit was $20.0 million
or 22.8% of gross  manufacturing  and  wholesale  distribution  revenue  (before
inter-segment elimination).

Selling, General and Administrative Expenses

         Selling,  general and administrative  expenses increased $15.1 million,
or  22.7%,  from  $66.6  million  in 1997 to $81.7  million  in 1998  and,  as a
percentage of net sales, decreased from 41.3% to 33.4%. Reeves contributed $15.1
million in selling, general and administrative expense in 1998.

         Installed Home Improvements

         Selling, general and administrative expenses for this segment increased
$121 thousand, or 0.2%, from $66.6 million in 1997 to $66.7 million in 1998 and,
as a percentage of installed  home  improvement  sales,  increased from 41.3% to
41.4%.  Included  in the  fourth  quarter  1998 were large and  unusual  charges
approximating $2.3 million.  These charges included $750 thousand for provisions
for credit  losses on consumer  finance  receivables,  $250 thousand for medical
expenses  and not included in the fourth  quarter  1997,  $770  thousand for new
information  technology  systems and related  expenses and $500 thousand for new
advertising test programs.  Direct advertising  expense increased $252 thousand,
or 2.5%, from $10.3 million in 1997 to $10.5 million in 1998; as a percentage of
net segment sales,  direct  advertising  expense  increased from 6.4% in 1997 to
6.7%  in  1998,  reflecting  below-plan  lead  generating  effectiveness  of  ad
placements and $500 thousand in test programs,  offset by improved close ratios.
Lead-taking activities managed through KanTel increased $950 thousand, or 45.9%,
from  $2.1  million  in  1997  to  $3.0  million  in  1998.  This  increase  was
attributable  to  increased  telephone-answering  service  levels,  various test
programs for  monitoring  consumer  finance  activities,  and  customer  service
surveys.  Selling  commission  expense,   including  attendant   payroll-related
benefits,  decreased $1.1 million,  or 6.5%, from $16.6 million in 1997 to $15.5
million in 1998;  as a  percentage  of net  segment  sales,  selling  commission
expense decreased from 10.5% in 1997 to 9.9% in 1998. Sales  representatives are
compensated  on a variable  commission  basis  depending upon the type and gross
profit of product  sold.  Performance-based  compensation  paid to officers  and
field, sales and production managers decreased $483 thousand to $712 thousand in
1998,  reflecting  the  decrease in net  installed  home  improvement  sales and
operating  losses in 1998.  The balance of selling,  general and  administrative
expenses,  primarily  administrative,  field operations and Marquise and general
expenses,  decreased  $2.2 million,  or 6.1%,  from $36.4  million,  or 22.6% of
segment sales, in 1997 to $34.2 million, or 21.2% of segment sales, in 1998.

         Manufacturing and Wholesale Distribution

         Selling, general, and administrative expenses for this segment includes
selling expenses of $12.3 million representing the operations, primarily payroll
and related  costs,  and  facilities  and equipment  costs,  of 32  distribution
centers and $2.8 million of general and administrative expenses.

Restructuring Expense

         During the fourth  quarter  1998,  the Company  recorded a $1.5 million
pre-tax charge for  restructuring  and related  activities in its installed home
improvements  segment.  The $1.5 million charge was comprised of a $460 thousand
charge for the search and retention of a president and chief operating  officer,
a $330 thousand charge for restructuring consulting and related expenses, a $550
thousand  charge for the  wind-down  and  termination  of the captive  insurance
company and a $200  thousand  charge for  severance.  At December 31, 1998,  the
allowance  for  restructuring  expenses  was  approximately  $200  thousand.  In
addition,  in the  first  quarter  1999 the  Company  expects  to incur up to an
additional  $1.0 million  pre-tax  charge for incurred and known  severance  and
other related restructuring expenses.

Operating Interest Expense

         Operating  interest expense  increased from $0 in 1997 to $295 thousand
in 1998. The increase in operating  interest  expense resulted from the increase
in the Company's finance subsidiary's borrowings during the year.

Amortization of Intangibles

         Amortization of intangibles  increased $701 thousand,  including a $546
thousand increase in the fourth quarter 1998, from $595 thousand in 1997 to $1.3
million in 1998.  The  amortization  expense  relates  primarily to goodwill and
other  intangibles   incurred  in  connection  with  the  September  1994  stock
repurchase from  management and the Reeves  acquisition in April 1998, and, to a
lesser extent, the KanTel acquisition in November 1998.

Interest Expense

         Interest  expense  increased  from $0 in 1997 to $3.4  million in 1998.
This  increase  reflects  working  capital  borrowings  and debt  related to the
acquisition  of Reeves  and  capitalized  leases  related to the  Company's  new
information technology systems.

Interest Income and Other

         Interest  income  decreased $222 thousand from $725 thousand in 1997 to
$503  thousand in 1998,  primarily due to decreased  interest  income from lower
average invested cash balances.

Income Tax Provision

         The Company's income tax provision  decreased from $1.7 million,  or an
effective  rate of 42.2%,  in 1997 to $698  thousand,  or an  effective  rate of
89.1%, in 1998. The difference in the effective  income tax rate and the federal
statutory  rate (34%) is due primarily to  amortization  of  intangibles  (which
increased  in 1998) which are not  deductible  for income tax  purposes  and the
effect of state income taxes.


Fiscal 1997 Compared to Fiscal 1996

Net Sales

         Net sales  increased $4.0 million,  or 2.6% from $157.1 million in 1996
to $161.1 million in 1997. Net sales attributable to roofing and gutter products
and services  decreased $590  thousand,  or 0.6%, to $102.2 million in 1997. Net
sales attributable to fencing products and services increased $442 thousand,  or
1.7%, to $26.8 million in 1997. Net sales  attributable  to garage doors,  entry
doors,  and other  products and services  increased $5.4 million,  or 22.9%,  to
$29.2 million in 1997. Net sales attributable to credit participation fee income
decreased  $415  thousand to $1.9  million in 1997.  Net sales  attributable  to
finance  interest income  decreased $833 thousand to $1.1 million on receivables
financed by the  Company's  finance  subsidiary,  Marquise.  The increase in net
sales was due primarily to a) higher  percentage  of higher  priced  proprietary
products, b) an increase in the number of installations as the Company increased
the  number  of  installation   crews  operated  by  the  increasing  number  of
independent  installers,  and c) an  increase  in the  average  number  of sales
associates  during the comparative years from 707 to 773.  Partially  offsetting
these increases was a decrease in credit  participation fee and finance interest
income. Backlog, defined as jobs sold but not installed,  decreased $3.9 million
from $14.8  million at the end of December  1996 to $10.9  million at the end of
December 1997.

Gross Profit

         Gross profit  increased $1.2 million,  or 1.6%, from $69.3 million,  or
44.1% of net sales,  in 1996 to $70.5 million,  or 43.7% of net sales,  in 1997.
The decrease in gross profit,  expressed as a percentage of net sales,  resulted
from a $1.2 million decrease in credit  participation  fee income and in finance
interest  income,  partially  offset  by  an  increase  in  proprietary  product
offerings and an increase in the balance of sales to higher margin  products and
services.  The license fee incurred to Sears  increased $539 thousand,  or 3.3%,
from $16.4 million,  or 10.7% of net installed  sales, in 1996 to $16.9 million,
or 10.7% of net  installed  sales,  in 1997.  The  increase  in the  license fee
incurred to Sears in 1997 was  commensurate  with the overall increase in sales.
The shift in the  balance  of sales,  primarily  doors,  to higher  license  fee
products and  services  was offset by  increases in new test program  sales with
reduced license fees.  Sears and the Company  entered into a three-year  license
agreement  effective January 1, 1996. Among other things,  the license agreement
provides  for a fixed  license  fee, at the March 1995  license fee rate,  to be
charged during the term of the license agreement.  Gross profit before the Sears
license fee, credit participation fee and finance interest income increased $2.9
million,  or 3.6%, from $81.5 million,  or 53.3% of net installed sales, in 1996
to $84.4 million,  or 53.4% of net installed  sales,  in 1997. The unit costs of
materials,  installation labor and warranty expense remained relatively constant
during the period.

Selling, General and Administrative Expenses

         Selling, general and administrative expenses increased $8.8 million, or
15.2%,  from $57.8 million in 1996 to $66.6 million in 1997 and, as a percentage
of net sales,  increased from 36.8% to 41.3%.  The increase in selling,  general
and  administrative  expenses resulted  primarily from expenses  associated with
increased  net sales,  the increased  number of and the cost of  recruiting  and
training new sales  associates and expenses  related to the hiring of additional
personnel to support the expansion of the  infrastructure  of the Company's core
sales and  installation  business  including the  expansion of Marquise.  Direct
advertising  expense increased $2.5 million, or 31.8%, from $7.8 million in 1996
to $10.3  million in 1997;  as a  percentage  of net sales,  direct  advertising
expense   increased  from  4.9%  in  1996  to  6.4%  in  1997,   reflecting  the
de-leveraging  effect  created by increased  direct  advertising  placements and
below  plan lead  generating  effectiveness  of ad  placements  during the year.
Selling  commission  expense,   including  attendant  payroll-related  benefits,
increased $850 thousand, or 5.4%, from $15.8 million in 1996 to $16.6 million in
1997;  as a  percentage  of net  installed  sales,  selling  commission  expense
increased from 10.3% to 10.5% in 1997. Sales  representatives are compensated on
a variable  commission basis depending upon the type and gross profit of product
sold.  Performance-based  compensation  paid to  officers  and field,  sales and
production managers decreased $2.9 million, or 71%, from $4.1 million in 1996 to
$1.2 million in 1997,  primarily  due to the decrease in operating  income.  The
balance  of  selling,  general  and  administrative  expenses,  primarily  sales
lead-generation  activities,   administrative,  field  operations  and  Marquise
payrolls and related costs and general  expenses,  increased  $8.4  million,  or
27.9%, from $30.1 million,  or 19.2% of net sales, in 1996 to $38.5 million,  or
23.9% of net  sales,  in 1997.  The  increase  was  primarily  due to  increased
expenses  related to recruiting  and training new sales  associates  and support
personnel and services required to manage the Company's anticipated sales volume
increases,  expanding  infrastructure  and  finance  subsidiary,  Marquise.  The
increase in selling, general and administrative expenses, as a percentage of net
sales, was caused, in large part, by the aforementioned  up-front investments in
infrastructure required to generate future sales and installation activity.

Amortization of Intangibles

         Amortization  of  intangibles  increased  from $534 thousand in 1996 to
$595 thousand in 1997. The  amortization  expense relates  primarily to goodwill
incurred in connection with the September 1994 stock repurchase from management.

Interest Income and Other

         Net interest income  increased $542 thousand from $183 thousand in 1996
to $725  thousand  in 1997,  primarily  due to  increased  interest  income from
invested cash balances and the  elimination of interest  expense  related to the
notes payable to certain of the Company's senior managers in connection with the
September 1994 stock repurchase from management.  $4 million of notes payable to
senior managers was repaid during the first six months of 1996.

Income Tax Provision

         The Company's income tax provision  decreased from $4.4 million,  or an
effective rate of 39.0%, in 1996 to $1.7 million, or an effective rate of 42.2%,
in 1997.  The  difference  in the  effective  income  tax  rate and the  federal
statutory rate (34%) is due primarily to amortization  of intangibles  which are
not deductible for income tax purposes and the effect of state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's primary capital needs have been to fund the growth of the
Company, to fund the September 1994 stock repurchase from management,  and, more
recently,  to fund  acquisitions  and the  operations of the  Company's  finance
subsidiary,  Marquise. The Company's primary sources of liquidity have been cash
flow from operations,  borrowings under its bank credit facilities, and, in June
1996, the net proceeds of its initial public offering.  Generally, the Company's
businesses are not capital intensive.  Capital  expenditures for 1998, 1997, and
1996  were  approximately  $3.8  million,   $4.3  million,  and  $461  thousand,
respectively.  Capital  expenditures  for 1999 are expected to approximate  $3.2
million,  primarily  related to ongoing new  equipment  purchases  and  software
development   for  the  Company's   information   technology   systems.   Future
requirements for new information  technology and other capital  expenditures are
expected to be funded by cash flow from operations and capital leases.  On April
30, 1997, the Company  announced a stock repurchase  program to repurchase up to
500,000 shares of its common stock and on August 12, 1997, the Company increased
the number of shares it is  authorized  to  repurchase  by 500,000 to  1,000,000
shares.  During the second and third quarters 1997 the Company purchased 572,300
shares  of its  common  stock for $4.7  million.  In April,  1998,  the  Company
acquired  all of the issued and  outstanding  stock of Reeves for  approximately
$42.6 million. In November 1998, the Company acquired certain net assets and the
business  of KanTel for  approximately  $2.4  million.  In  connection  with the
acquisitions,  the Company obtained a $42 million secured syndicated bank credit
facility.  At December 31, 1998,  pursuant to the terms of the  syndicated  bank
credit  facility,  the Company had in place interest rate swap agreements on $10
million in principal amount with members of its syndicated bank credit facility.
The  Company's  financial  instrument  holdings  at  year-end  were  analyzed to
determine their sensitivity to interest rate changes, noting that a 10% increase
in  interest  rates would not be  material.  The  Company  believes  that it has
sufficient  operating cash flow,  working capital base, and available bank lines
of credit to meet all of its obligations for the foreseeable  future,  including
ongoing  funding for Marquise,  for investments in information  technology,  for
service of debt obligations, and for the acquisition, development, and expansion
of complementary new products and services and markets.

         In November  1995,  the Company  commenced the  operations of Marquise.
Marquise's  primary  objective  is  to  support,  along  with  other  designated
third-party finance companies, the Company's requirement for providing financing
to its installed home  improvement  segment's  customers.  In the fourth quarter
1996,  as a follow-on  objective  to  expanding  Marquise's  consumer  financing
markets and products,  Marquise  introduced a new finance  product -- fixed rate
loans  secured  by  developed  residential  real  estate -- to a segment  of its
creditworthy  customers that cannot obtain unsecured consumer loans.  During the
second  quarter  1997,  Marquise  expanded its scope of  operations,  in part to
leverage its consumer finance  infrastructure  to i) purchase from third parties
portfolios of secured  receivables,  and ii) originate secured  receivables from
customers of, and/or  purchase  individual  secured  receivables  originated by,
entities  other than the  Company  and its  affiliates.  These  entities  do not
necessarily  engage in  business in any of the  Company's  product  lines.  As a
general  proposition,  these  entities  are all  expected to operate  businesses
related to installed home improvement products and services,  although from time
to  time  Marquise  may  also  originate  or  purchase  receivables  secured  by
commercial  real  estate or  otherwise  acquire or  originate  loans that do not
constitute obligations arising from installed home improvements. The outstanding
principal amount of individual  receivables  purchased by Marquise from entities
other  than  Exteriors  may  significantly  exceed  the  average  amount  of all
receivables owned by Marquise.  The Company is continually  mindful of the risks
associated  with consumer  financing and plans to increase its consumer  finance
receivable  portfolio  at  a  measured  pace  commensurate  with  its  available
resources and acceptable levels for losses on finance receivables.  Marquise has
been  capitalized and funded with the Company's  excess  operating cash flow and
secured  borrowings  under  a $15  million  bank  line  of  credit,  which  were
subsequently  paid down with a portion of the proceeds from the  Company's  June
1996 initial public offering.  In December 1997, Marquise obtained a $10 million
secured line of credit and, at December 31, 1998, had borrowed $4.5 million. The
secured line of credit for Marquise  expires April 1, 1999.  The bank has agreed
to extend  the  expiration  date  until  such  time as  Marquise  can  secure an
alternative  credit facility.  At December 31, 1998,  Marquise has approximately
$10.0 million in net finance  receivables.  During 1998,  Marquise originated or
purchased  approximately  $5.3 million of fixed rate, secured loans. At December
31, 1998, Marquise had approximately $1.7 million in outstanding  commitments of
the fixed rate,  secured loans.  The Company  anticipates that its existing cash
balances, the bank lines of credit, the sale of Marquise's consumer loan finance
receivables  as market  conditions may warrant from time to time and excess cash
flow from operations will be sufficient to satisfy the Company's  financing cash
requirements in the foreseeable future.

         In June 1996,  the  Company  issued  2,824,950  shares of Common  Stock
(including underwriters'  over-allotment option) at $13 per share in its initial
public offering. Proceeds from the offering, net of underwriting commissions and
related  expenses  totaling $3.8 million,  were $33.0 million.  A portion of the
offering   proceeds  was  used  to  pay  a  $8.6  million  special  dividend  to
pre-offering stockholders,  repay all borrowings aggregating $11.9 million under
the bank line of credit (used to finance  Marquise  receivables)  and repay $3.2
million  of notes  to  senior  managers  related  to the  September  1994  stock
repurchase. From its inception in June 1993, the Company has generated cash flow
from operations of approximately  $27.0 million.  The Company used $12.5 million
of cash in  connection  with the  repurchase  of 42.2%  of its  Common  Stock in
September 1994, $6.5 million for capital  expenditures  and $5.0 million for the
initial funding of Marquise's financing  activities and start-up operations.  At
December 31, 1998, the Company had approximately  $27.2 million in cash and cash
equivalents and trade  receivables and net working capital of $15.8 million.  At
December 31, 1998, the Company had $54.9 million in total debt  including  $41.3
million borrowed under its $52 million in bank lines of credit.

Year 2000

         The  information  provided  below  constitutes  a "Year 2000  Readiness
Disclosure" for purposes of the Year 2000  Information  Readiness and Disclosure
Act. The Year 2000 ("Y2K") problem is believed to affect virtually all companies
and organizations.  The Company's Y2K initiatives are focusing primarily on four
areas of potential impact: 1) internal information technology ("IT") systems; 2)
internal non-IT systems including services and embedded chips (controllers);  3)
Company  products and services;  and 4) readiness of  significant  third-parties
with which the Company has material business relationships.

         The  Company  expects  to  implement   successfully   the  systems  and
programming  changes  necessary to address Y2K internal IT and non-IT  readiness
issues.  While the  Company  does not  believe  that the costs  associated  with
preparing for Y2K readiness will have a material adverse affect on the Company's
results of operations and financial  condition,  there can be no assurances that
there  will  be  no  delay  in,  or  increased   costs   associated   with,  the
implementation of such changes required for readiness.

         The Company has hired a dedicated Y2K readiness  manager to oversee the
Company's Y2K readiness  activities.  The Y2K manager has senior  management and
Board of Director  sponsorship  and provides  semi-monthly  progress  reports to
senior  management  and  quarterly  reports to the Board of  Directors.  The Y2K
manager,  assisted by the IT department,  is responsible  for raising  awareness
throughout the Company,  developing tests and  methodologies  for addressing Y2K
readiness,  monitoring  the  development  and  implementation  of  business  and
infrastructure  plans to bring  non-compliant  applications into compliance on a
timely basis, and identifying and assisting in resolving high-risk issues.

         The Company has organized its Y2K readiness  program into the following
four  phases:  assessment;   planning;  preparation;  and  implementation.   The
assessment  phase  involves  taking an  inventory of the  Company's  internal IT
applications  to  prioritize  risk;  identifying  failure  dates;  developing  a
solution strategy; estimating costs; and communicating among all businesses. The
planning  consists  of  identifying  the tasks  necessary  to ensure  readiness,
scheduling  remediation plans for applications and infrastructure and delivering
resource requirements and allocations.  The third phase,  preparation,  involves
readying the  development and testing  environments  and testing the remediation
process. The fourth phase,  implementation,  consists of executing the Company's
plans  to  fix,  test,  and  implement  critical   applications  and  associated
infrastructure,  and establishing  contingency  plans for processes that have an
impact on the Company's businesses.

         The  Company's  target  is to  ensure  that  all  applications  are Y2K
compliant by June 30, 1999. The assessment, planning, and preparation phases are
substantially  complete.  As of March  15,  1999,  the  implementation  phase is
approximately  75%  complete  and  costs  incurred  through  December  31,  1998
approximate $200,000.  Total costs for Y2K readiness are estimated to range from
$300,000 to  $400,000.  The  Company's  programs  for  purchasing  hardware  and
software,  which  began in early  1997,  have  addressed  many Y2K  issues.  The
Company's IT initiatives have replaced  substantially  all key software with new
industry  software,  such as Oracle ERP applications and Vantive for lead-taking
activities,  and have  installed or replaced new hardware such as Compaq and Bay
Networks.  Reeves,  a key subsidiary,  has completed the upgrading of its AS/400
BPCS system to a Y2K-certified revision of the software.

         The Company  also is assessing  its non-IT  system  readiness,  such as
telephone   systems,   fax  machines,   facilities'   alarms,   fire  detectors,
manufacturing equipment and other non-high-risk systems. While Y2K readiness for
non-IT  systems is the  responsibility  of each business unit, the Company's Y2K
manager monitors the progress of the efforts to ensure operational continuity.

         The low-tech  nature of the Company's  products and services  minimizes
the  risk of Y2K  compliance  except  for  the  Company's  Foreline  subsidiary.
Foreline,  with $10.0 million in annual sales, installs,  services, and monitors
highly  sophisticated  equipment used in its security  systems and solutions and
security monitoring  services.  Some of the products could be deemed critical in
security   applications  and   non-performance   to  these  customers  could  be
significant. Foreline believes that its customers are responsible for assessment
and costs  attendant to achieving their Y2K compliance.  Foreline,  however,  is
taking  steps to preserve  customer  satisfaction  and has taken steps to notify
customers of known  non-compliant  standards.  Foreline has an internet  website
dedicated  to  communicating  Y2K issues to its customer  base.  The cost of the
readiness  program  for  security  products  is not  significant  nor are future
readiness  product  costs,  including  customer  satisfaction,  expected  to  be
significant.

         The Company has developed a Y2K process for dealing with key suppliers,
third-party  finance companies,  distributors and other business  partners.  The
process  generally  involves the following steps: 1) initial supplier survey; 2)
risk assessment, risk mitigation and contingency planning; 3) follow-up supplier
reviews and additional  procedures,  if necessary;  and 4) testing. To date, the
majority of critical  suppliers,  such as Sears, and other  third-party  finance
companies,  material  suppliers,  and distributors  have responded that they are
addressing  all their Y2K issues on a timely  basis.  The Company  continues  to
follow-up with those  suppliers who have not responded and whose  responses were
unsatisfactory.  As part of its Y2K  readiness,  the  Company  is  preparing  to
replace suppliers or eliminate  suppliers from consideration for new business if
the supplier is not prepared for Y2K.

         The  Company  is  working  to  identify  and  analyze  the most  likely
worst-case  scenarios  for  third-party  relationships  affected  by Y2K.  These
scenarios could include possible  infrastructure  collapse. The failure of power
and water supplies, transportation disruptions, unforeseen product shortages due
to hoarding of products and failure of  communications  and financial  systems -
any of which could have a material  effect on the  Company's  ability to deliver
its products and services to its  customers.  While the Company has  contingency
plans  for most  issues  under its  control,  however,  infrastructure  problems
outside its control,  such as product  supplies and third-party  financing could
result in delays in  delivering  its product  and  services.  The Company  would
expect  that most  utilities  and  service  providers  would be able to  restore
service  within days although more pervasive  system  problems for suppliers and
finance  companies  could  last for two to four weeks or more  depending  on the
completion of the systems and the effectiveness of their contingency plans.

         There is no  assurance,  despite its Y2K  readiness  efforts,  that the
Company  will be  successful  in its  efforts to  identify  and  address all Y2K
issues.  Even if the  Company  were to  complete  all  its  assessment  efforts,
implement  remediation  plans  believed to be adequate  and develop  contingency
plans  believed to be adequate,  problems may not be  identified or corrected in
time to prevent adverse consequences to the Company.  The foregoing  discussions
regarding  estimated  completion dates,  costs, risks and other  forward-looking
statements  regarding  Y2K are  based  on the  Company's  best  estimates  given
information that is currently available and is subject to change. Actual results
may differ materially from these estimates.

Seasonality

         The Company's  results of operations may fluctuate from year to year or
quarter to quarter due to a variety of factors. The Company expects lower levels
of  sales  and  profitability   during  the  period  from  mid-November  through
mid-March,  impacting  the first and fourth  quarter of each year.  The  Company
believes  that this  seasonality  is caused by winter  weather in certain of the
Company's  markets  located in the  northeastern  and north  central U.S. and by
rainy weather,  each of which limits the Company's  ability to install  exterior
home improvement products including demand for commercial and industrial fencing
and related products.

Inflation

         Although  inflation has slowed in recent years, it is still a factor in
the U.S. economy and the Company  continues to seek ways to reduce its costs. To
date, inflation has not had a material impact upon the operating results and the
Company  does not expect it to have such an impact in the  future.  To date,  in
those instances where the Company has  experienced  cost increases,  it has been
able to increase  selling prices to offset such increases in cost.  There can be
no assurances,  however, that the Company's business will not be affected in the
future by  inflation  or that it can  continue  in the  future to  increase  its
selling prices to offset increased costs.

Forward-looking Statements

         This Annual Report  contains  forward-looking  statements  that involve
risks and uncertainties  regarding the Company's  operations and future results.
In  accordance  with the "safe  harbor"  provisions  of the  Private  Securities
Litigation  Reform Act of 1995,  the  Company  provides  cautionary  statements,
detailed in the Company's  Securities and Exchange Commission filings including,
without  limitation,  the Company's current reports on Form 10-K and Form 10-Qs,
which identify some of the specific  factors which could cause actual results or
events  to  differ  materially  from  those  described  in  the  forward-looking
statements.


<PAGE>


FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS
                                                        DECEMBER 31
                                                        -----------
                                                  1998              1997
                                            ------------------------------------
ASSETS                                                (In Thousands)
Current assets:
   Cash and cash equivalents                        $5,104           $9,966
   Accounts receivable                              22,138            6,630
   Inventories                                      15,771               --
   Refundable income taxes                           1,297              986
   Prepaids and other current assets                 3,994            1,959
   Deferred income taxes                             1,500              872
                                            ------------------------------------
Total current assets                                49,804           20,413

Finance receivables                                 10,011            8,758

Property, plant and equipment                       23,461            6,469
Less:  Accumulated depreciation                     (2,649)            (923)
                                            ------------------------------------
                                            ------------------------------------
Net property, plant and equipment                   20,812            5,546

Intangible assets, net                              38,981           16,514
Deferred income taxes                                   --            1,892
Other                                                6,521            3,466

                                            ====================================
Total assets                                      $126,129          $56,589
                                            ====================================



<PAGE>

<TABLE>
<CAPTION>


                                                                                   DECEMBER 31
                                                                                   -----------
                                                                             1998              1997
                                                                       ------------------------------------
<S>                                                                           <C>               <C>   
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY (In Thousands) Current liabilities:
   Due to bank and current portion of long-term debt                          $10,225           $2,604
   Accounts payable and accrued liabilities                                    22,181           10,070
   Deferred revenue                                                             1,621               --
                                                                       ------------------------------------
Total current liabilities                                                      34,027           12,674

Long-term liabilities:
   Long-term debt                                                              44,705              544
   Warranty and retention                                                      10,851            9,161
   Deferred income taxes                                                          267               --
   Other                                                                        1,867               --
                                                                       ------------------------------------
Total long-term liabilities                                                    57,690            9,705

Commitments and contingencies (Notes 10 and 11)                                    --               --

Common stockholders' equity:
   Preferred stock, $.001 par value; 4,000,000 shares authorized;                  --               --
       none issued and
outstanding
   Common stock, $.001 par value; 25,000,000 shares authorized;                     9                9
     9,079,675 shares issued in 1998 and 1997
   Additional paid-in capital                                                  34,040           34,040
   Officer notes receivable                                                      (104)            (221)
   Retained earnings                                                            5,155            5,070
   Treasury stock (at cost); 572,300 shares                                    (4,688)          (4,688)
                                                                       ------------------------------------
Total common stockholders' equity                                              34,412           34,210
                                                                       ------------------------------------
                                                                       ====================================
Total liabilities and common stockholders' equity                            $126,129          $56,589
                                                                       ====================================
See accompanying notes.



</TABLE>

<PAGE>

<TABLE>

CONSOLIDATED STATEMENTS OF OPERATIONS

<CAPTION>

                                                                     YEARS ENDED DECEMBER 31
                                                            1998             1997              1996
                                                     ------------------------------------------------------
                                                                (In Thousands, except per share)

<S>                                                        <C>               <C>              <C>     
Net sales                                                  $244,890          $161,109         $157,068
Cost of sales                                               156,375            90,633           87,739
                                                     ------------------------------------------------------
Gross profit                                                 88,515            70,476           69,329
Operating expenses:
   Selling, general, and administrative expenses             81,729            66,619           57,806
   Restructuring charges                                      1,540                --               --
   Operating interest expense                                   295                --               --
   Amortization expense                                       1,296               595              534
                                                     ------------------------------------------------------
Operating profit                                              3,655             3,262           10,989
Interest expense                                              3,375                --               --
Interest income and other                                       503               725              183
                                                     ------------------------------------------------------
Income before income taxes                                      783             3,987           11,172
Income tax provision                                            698             1,683            4,357
                                                     ======================================================
                                                     ======================================================
Net income                                               $       85         $   2,304       $    6,815
                                                     ======================================================

Net income per share:
    Basic                                                     $0.01             $.26              $.88
    Diluted                                                   $0.01             $.26              $.88
Weighted average number of common shares outstanding:
    Basic                                                     8,507            8,833             7,713
    Diluted                                                   8,510            8,833             7,778

See accompanying notes.

</TABLE>

<PAGE>

<TABLE>


CONSOLIDATED  STATEMENTS OF CHANGES IN COMMON  STOCKHOLDERS'  EQUITY

<CAPTION>

Years ended December 31, 1998, 1997, and 1996
                                                            ADDITIONAL     OFFICER
                                                COMMON       PAID-IN        NOTES        TREASURY       RETAINED
                                                STOCK        CAPITAL      RECEIVABLE       STOCK        EARNINGS        TOTAL
                                            ---------------------------------------------------------------------------------------
                                                                                (In Thousands)

<S>                                                     <C>         <C>          <C>              <C>         <C>           <C>   
December 31, 1995                                       $6          $983         $(707)           $--         $4,551        $4,833
Issuance of common stock                                 3        32,948             --            --             --        32,951
Common stock special dividend                           --            --             --            --        (8,600)       (8,600)
Repayment of officer notes                              --            --            197            --             --           197
Exercise of common stock options and other              --            40             --            --             --            40
Net income - 1996                                       --            --             --            --          6,815         6,815
                                              ------------- ------------- -------------- ------------- -------------- -------------
December 31, 1996                                        9        33,971          (510)            --          2,766        36,236
Purchase of common stock for treasury                   --            --             --       (4,688)             --       (4,688)
Repayment of officer notes                              --            --            289            --             --           289
Exercise of common stock options and other              --            69             --            --             --            69
Net income - 1997                                       --            --             --            --          2,304         2,304
                                              ------------- ------------- -------------- ------------- -------------- -------------
December 31, 1997                                        9        34,040          (221)       (4,688)          5,070        34,210
Repayment of officer notes                              --            --            117            --             --           117
Net income - 1998                                       --            --            --             --             85            85
                                              ------------- ------------- -------------- ------------- -------------- -------------
December 31, 1998                                       $9       $34,040         ($104)      ($4,688)         $5,155       $34,412
                                              ============= ============= ============== ============= ============== =============
See accompanying notes.

</TABLE>

<PAGE>

<TABLE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>


                                                                               YEARS ENDED DECEMBER 31,
                                                                              1998      1997       1996
                                                                           ---------------------------------
                                                                                    (In Thousands)
<S>                                                                           <C>               <C>   
OPERATING ACTIVITIES
Net income                                                                      $85   $  2,304    $  6,815
Adjustments to reconcile net income to net cash provided by (used in)
   operating activities:
     Depreciation and amortization                                            3,022        932         825
     Deferred income taxes                                                      422       (657)        (652)
     Provision for credit losses                                              1,239      1,259         767
     Other                                                                      482         --         (78)
     Changes in operating assets and liabilities:
       Accounts receivable                                                  (1,750)      1,991      (5,232)
       Inventories                                                            1,535         --          --
       Refundable income taxes                                                 (78)        739      (1,725)
       Prepaids and other assets                                            (1,786)    (1,120)      (1,762)
       Accounts payable and accrued expenses                                (1,736)    (3,897)         499
       Deferred revenue                                                         536         --          --
       Warranty and retention                                                 1,690      2,233       2,702
                                                                           ---------------------------------
Net cash provided by operating activities                                     3,681      3,784       2,159
INVESTING ACTIVITIES
Capital expenditures                                                        (3,759)    (4,276)        (461)
Loans originated and purchased                                              (5,306)    (5,468)     (23,606)
Loans repaid                                                                  3,140        763       5,362
Acquisitions, net of cash acquired                                         (32,998)      (270)         (58)
Proceeds from sale of finance receivables                                        --         --      12,707
Advances to "captive" insurance company                                          --      (484)        (448)
Other                                                                         (232)      (221)         (22)
                                                                           ---------------------------------
Net cash used in investing activities                                      (39,155)    (9,956)      (6,526)
FINANCING ACTIVITIES
Advances under revolving credit agreement, net                               11,451         --          --
Proceeds on issuance of term debt                                            18,000         --          --
Borrowings on finance company bank line of credit                             2,475      2,050          --
Payments of long-term debt and capital leases                                 (877)         --          --
Payments to stockholders                                                      (554)      (564)      (4,554)
Payments on notes receivable from officers for treasury stock and               117        358         237
   other
Preferred Stock redemption                                                       --         --      (1,400)
Payments for purchase of common stock                                            --    (4,688)           -
Issuance of Common Stock, net of offering                                        --         --      32,951
  expenses
Common Stock special dividend                                                    --         --      (8,600)
                                                                           ---------------------------------
Net cash provided by (used in) financing activities                          30,612    (2,844)      18,634
                                                                           ---------------------------------
Net increase (decrease) in cash and cash equivalents                        (4,862)    (9,016)      14,267
Cash and cash equivalents at beginning of period                              9,966     18,982       4,715
                                                                           ---------------------------------
Cash and cash equivalents at end of period                                   $5,104    $ 9,966     $18,982
                                                                           =================================
Supplemental cash flow disclosure:
   Interest paid                                                             $2,047   $    344   $     377
                                                                           =================================
   Income taxes paid                                                         $1,462    $ 1,601    $  6,734
                                                                           =================================
   Investing and financing activities exclude the following activities:
          Acquisition of Reeves and KanTel through notes payable            $12,021         --          --
          Capital lease obligations                                          $1,545         --          --
                                                                           =================================
See accompanying notes.

</TABLE>

<PAGE>



1.  BUSINESS AND ORGANIZATION

         Diamond Home Services, Inc., formerly Diamond Exteriors, Inc.(R) ("Home
Services" or the "Company"),  was incorporated on May 13, 1993.  Effective April
18,  1996,  the  Company  transferred   substantially  all  of  its  assets  and
liabilities to its newly-formed,  wholly-owned  subsidiary,  Diamond  Exteriors,
Inc.(R) ("Exteriors") as a capital contribution and Exteriors made a dividend to
the Company of all of the capital  stock of its two  wholly-owned  subsidiaries,
Marquise  Financial  Services,  Inc.  ("Marquise"),  which was  incorporated  in
Delaware on July 14,  1995,  and  Solitaire  Heating  and  Cooling,  Inc.  d/b/a
KanTel(TM) ("KanTel"),  which was incorporated in Delaware on November 27, 1995.
On April 20, 1998 the Company acquired all of the issued and outstanding capital
stock  of  Reeves   Southeastern   Corporation   ("Reeves").   The  accompanying
consolidated   financial  statements  include  the  accounts  of  the  Company's
wholly-owned subsidiaries, Reeves, Exteriors, Marquise, and KanTel, collectively
referred to as the Company.

         The  Company  operates  in  two  industry   segments:   installed  home
improvements and  manufacturing and wholesale  distribution.  The installed home
improvement  segment  provides  in-home direct sales and marketing for installed
home improvement  products,  primarily through direct consumer marketing under a
license between Exteriors and Sears,  Roebuck and Co.  ("Sears"),  for the sale,
furnishing,  and installation of roofing,  gutters,  doors, fencing, and related
installed exterior home improvement  products.  Exteriors commenced its roofing,
gutter,  door, and related exterior home  improvement  business on June 1, 1993,
and entered into its first license with Sears on that date.

         Exteriors  negotiated a license  agreement with Sears effective January
1, 1996, and extended the current agreement through June 30, 1999.  License fees
are  based  on gross  sales  and  vary by  product  and  service.  License  fees
approximated $16,311,000, $16,950,000, and $16,400,000, in 1998, 1997, and 1996,
respectively.

         On September 23, 1994,  the Company and its  stockholders  approved and
adopted a Stock  Purchase  Agreement.  The  agreement  resulted in the Company's
purchase of  4,018,800  shares of common  stock in  exchange  for cash and notes
payable   totaling   $10.9   million,   non-interest-bearing   agreements   with
stockholders  providing $2,770,100 in equal monthly installments over five years
beginning  January  1995  and  performance  notes  payable  to the  stockholders
totaling  $4,000,000 and bearing  interest at 9% per annum effective  January 1,
1995. The performance notes were fully paid in June 1996.

         The stock  acquisitions  described  above  have been  reflected  in the
accompanying  financial statements using the purchase method of accounting as if
Globe Building  Materials,  Inc.  ("Globe"),  the former  majority holder of the
Company's  common stock,  made the acquisitions and pushed-down its basis to the
Company.  The cost of the shares  purchased in excess of their par value and the
direct  costs  incurred  by the  Company  were  assigned  to  goodwill  which is
classified  on the balance  sheet as  intangible  assets.  The  Company  retired
3,750,050 of the acquired  shares of common stock in 1994. The remaining  shares
(268,750) were sold on a subscription  basis to employees on January 2, 1995, in
exchange for $5,000 in cash and stock  subscription  notes  receivable  totaling
approximately $864,000. The notes bear interest at 7% payable annually.

         At December  31, 1998 and 1997,  approximately  40.2% of the  Company's
outstanding  common stock was owned by a wholly-owned  subsidiary of Globe.  The
preferred  stock of the Company,  which was redeemed in June 1996,  was owned by
Globe.

         In June 1996,  the  Company  issued  2,824,950  shares of common  stock
(including underwriters'  over-allotment) at $13 per share in its initial public
offering. Proceeds from the offering, net of underwriting commission and related
expenses totaling $3.8 million, were $33.0 million.  Following the offering, the
Company had 9,074,900 common shares issued and  outstanding.  In September 1996,
Globe sold 750,000  shares of the  Company's  common stock at $29 per share in a
public  offering.  The  Company did not  receive  any  proceeds  from the public
offering.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

         The  consolidated  financial  statements  include  the  accounts of the
Company  and  its  wholly-owned   subsidiaries  after  eliminating   significant
inter-company accounts and transactions.

CASH AND CASH EQUIVALENTS

         Cash and cash equivalents  consist of cash and short-term  investments.
The Company  considers  all highly liquid  investments  with a maturity of three
months or less when purchased to be cash equivalents.

INVENTORIES

         Inventories  are  stated  at the lower of cost or  market.  Cost of raw
materials and the raw materials  content of work in progress and finished  goods
and certain  purchased  finished goods for Reeves are determined on the last-in,
first-out  method  (LIFO)  representing  33% of total  inventory at December 31,
1998.  Cost for the  remainder of the  inventory is  determined on the first-in,
first-out method (FIFO).

PROPERTY, PLANT AND EQUIPMENT

         Property and equipment are stated at cost. Depreciation is based on the
straight-line  method over the  estimated  useful lives of five to twenty years.
The cost to  acquire  and  develop  internal-use  software  is  capitalized  and
depreciated  over its  estimated  useful  lives  ranging  between five and seven
years.

REVENUE RECOGNITION

         Exteriors  recognizes  revenue upon completion of each installation and
receipt from the customer of a signed  certificate of completion.  Revenues from
manufactured and purchased product sales are recognized upon shipment.  Security
installations,  maintenance  and  monitoring  services are  recognized  over the
contractual period or as services are rendered and accepted by the customer. The
Company  receives  credit  participation  fee income on receivables  financed by
third-party finance companies.  Credit participation fees are earned,  following
contractual agreement,  generally,  commensurate with the income stream implicit
in the  receivable.  For the  years  1998,  1997,  and 1996 the  Company  earned
$2,185,000, $1,853,000, and $2,268,000 respectively, in credit participation fee
income.  Included in the balance  sheet under the  captions  prepaids  and other
current assets are  $1,568,000  and $960,000 and in other assets  $1,037,000 and
$1,187,000 of credit  participation fee income due from Sears and its affiliates
at December 31, 1998 and 1997, respectively.

         Interest  income  from  finance  receivables  is  recognized  using the
interest  method.  Loan  origination  fees and costs on finance  receivables are
deferred and recognized in interest  income using the  level-yield  amortization
method.  Accrual of interest  income on finance  receivables is suspended when a
loan is  contractually  delinquent for 90 days or more and resumes when the loan
becomes contractually current.

ALLOWANCE FOR LOSS ON FINANCE RECEIVABLES

         Marquise  maintains  an allowance  for losses on secured and  unsecured
finance  receivables at an amount  sufficient to protect for estimated losses of
principal and interest in the current portfolio.  Additions to the allowance are
charged to the  provision  for credit  losses on  finance  receivables.  Finance
receivables  are charged to the allowance for credit losses when they are deemed
uncollectable.  Additionally,  Marquise  provides  for the  full  charge-off  of
finance   receivables  when  the  receivable   becomes  180  days  contractually
delinquent.

INTANGIBLES

         The  components  of  intangibles  at December  31, 1998 and 1997 are as
follows:

                                            1998               1997
                                            ----               ----
Goodwill                                    $32,901,000        $17,831,000
Trademarks                                    6,500,000                 --
Covenant not to compete                       2,225,000                 --
Organizational costs                                 --            259,000
                                     ------------------- ------------------
                                             41,626,000         18,090,000
Accumulated amortization                    (2,645,000)        (1,576,000)
                                     =================== ==================
                                            $38,981,000        $16,514,000
                                     =================== ==================

         The Company amortizes intangibles over five to forty years. The Company
at each balance sheet date evaluates for recognition of potential  impairment of
its  recorded   intangibles,   including  goodwill,   against  the  current  and
un-discounted expected future cash flows.  Impairment in recorded intangibles is
charged to income when identified.

WARRANTY AND RETENTION

         The Company  warrants  its  installed  home  improvement  products  and
services to meet certain  manufacturing  and material and labor  specifications.
The warranty  policy is unique for each  installed  product and service,  ranges
generally from 2 to 10 years, is generally for the material cost and labor,  and
requires the owner to meet certain preconditions such as proof of purchase.  The
Company accrues for estimated  warranty costs based on an analysis of historical
claims data. In addition, to secure performance by its independent installers of
any  labor-related  warranty  claims,  the Company  requires most  installers to
deposit a retention  which is held in reserve by the  Company.  At December  31,
1998 and 1997,  the Company  had  retention  reserves  of $2.0  million and $1.7
million, respectively.

EARNINGS PER SHARE

         Basic and diluted  earnings per share are calculated in accordance with
FASB No. 128, "Earnings per Share".

CONCENTRATIONS OF CREDIT RISK

         Financial   instruments  which  potentially   subject  the  Company  to
concentrations of credit risk consist  principally of trade  receivables.  These
concentrations  are  limited  due to the large  number of  customers  comprising
Reeves customer base and their dispersion  across a large geographic area of the
United States.  See Note 11 for information on concentration of consumer finance
receivables.

USE OF ESTIMATES

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

3.  ACQUISITIONS

         On April 20, 1998, the Company purchased all the outstanding  shares of
Reeves  for  an  aggregate   consideration  of  $42,621,000  consisting  of:  1)
$30,000,000 cash at closing; 2) $3,413,000 non-interest bearing notes payable in
installments  through June 2000;  3)  $7,708,000 in 7% notes payable (to be paid
into an escrow account for future possible  environmental  expenses, as defined)
in installments  through June 2005; and 4) $1,500,000 in transaction  costs (the
"Reeves Acquisition").

         On November  16, 1998 the Company  acquired  certain net assets and the
telephone  lead-taking  operation and  telemarketing  business of H.I.,  Inc., a
related party,  for an aggregate  purchase price of $2,398,000  (including  $100
thousand in transaction  costs) consisting of $1,498,000 net cash at closing and
$900 thousand in 5% contingent convertible subordinated notes due October 2005.

         Based on the terms of the transactions,  the acquisitions are accounted
for as a purchase,  in accordance with Accounting  Principles  Board Opinion No.
16. Accordingly,  the accompanying consolidated statements of operations include
Reeves's and KanTel's results of operations  since the date of acquisition.  The
Company revalued the basis of Reeves's and KanTel's  acquired assets and assumed
liabilities to fair value at the date of purchase. The purchase prices of Reeves
and  KanTel  are  calculated  as the cash plus fair value of notes paid plus the
Company's  transaction  costs. The difference between the purchase price and the
fair value of  identifiable  tangible  and  intangible  assets  acquired and the
liabilities  assumed and incurred is recorded as goodwill and  amortized  over a
period of 40 years  for  Reeves  and 7 years for  KanTel.  The  Company  has not
completed  its  valuation  of the net assets  acquired  and the  purchase  price
allocation  is subject  to change  which is not  expected  to be  material.  The
tentative allocation of acquisition purchase price is as follows:

                   Purchase price                               $43,419,000
                   Transaction costs                              1,600,000
                                                         -------------------
                   Total purchase price                         $45,019,000
                                                         ===================

                   Fair value of assets acquired                $58,613,000
                   Goodwill                                      15,070,000
                   Liabilities assumed                         (28,664,000)
                                                         -------------------
                   Total                                        $45,019,000
                                                         ===================

         The following  unaudited pro forma information  reflects the results of
the Company's  operation as if the acquisitions had occurred at the beginning of
the period presented  adjusted,  in the case of Reeves, for 1) the effect of the
recurring  charges  related to the  acquisition,  primarily the  amortization of
goodwill,  interest  expense on  borrowings to finance the  acquisition,  and an
increase in  depreciation  expense due to the  write-up to fair market  value of
fixed assets;  and 2) the elimination of compensation  for prior  management and
directors, certain benefit plans, and non-recurring charges.

                                             Year Ended December 31,
                                                          1998            1997
           Revenues                               $275,364,000    $279,069,000
           Net income (loss)                         (198,000)       2,536,000
           Net income per share - diluted              ($0.02)           $0.29

         The pro forma results have been prepared for comparative  purposes only
and do not purport to be  indicative of the results  which  actually  would have
been attained if the  acquisitions  had been  consummated on the dates indicated
above,  nor does it  purport to  indicate  or  suggest  what the  results of the
operations of the Company will be for any future period.

4.  INVENTORIES

         The components of inventories at December 31 are as follows:

                                                1998             1997
                                          ----------------- ----------------
           Raw materials                          $449,000            $  --
           Work-in-progress                        861,000               --
           Finished goods                       14,461,000               --
                                          ================= ================
                                               $15,771,000            $  --
                                          ================= ================

5.  PROPERTY, PLANT AND EQUIPMENT

         The  costs of  property,  plant and  equipment  at  December  31 are as
follows:

<TABLE>
<CAPTION>

                                                                                         Ranges of Useful
                                                            1998             1997             Lives
                                                     ------------------------------------------------------

<S>                                                       <C>               <C>           <C>     
Land                                                      $1,792,000            $  --         --
Buildings and improvements                                 4,246,000          454,000     10-20 years
Machinery and manufacturing equipment                      5,234,000               --     5-10 years
Computer equipment and software                            9,507,000        5,660,000      5-7 years
Furniture and fixtures                                     1,137,000          355,000      3-7 years
Assets under capital lease                                 1,545,000               --      5-7 years
                                                     ------------------------------------
                                                         $23,461,000       $6,469,000
                                                     ====================================

</TABLE>

6.  ADVERTISING

         The  Company  expenses  the  cost  of  advertising  as such  costs  are
incurred,  except for  direct-response  advertising,  which is  capitalized  and
expensed  over  its  expected   period  of  future   benefits.   Direct-response
advertising  consists  primarily  of  newspaper  and radio  advertisements  that
require the use of designated  phone  numbers for  responding.  The  capitalized
costs of  direct-advertising  are expensed  when the jobs are  completed and the
revenue related thereto is recognized,  generally  within one to three months of
the date of sale.

         At December 31, 1998 and 1997, $947,000 and $757,000,  respectively, of
deferred  direct-response  advertising costs was reported as non-current assets.
Net advertising  expense was $10,478,000,  $10,244,000,  and $7,772,000 in 1998,
1997, and 1996, respectively.

7.  ACCRUED LIABILITIES

         The components of accrued liabilities at December 31 are as follows:

                                               1998             1997
                                        ------------------------------------

Payroll and payroll-related                  $2,346,000       $2,537,000
Interest                                      1,077,000               --
Warranty                                      1,000,000        1,000,000
Workers' compensation insurance                 737,000               --
Environmental                                   576,000               --
Other                                           517,000            4,000
                                        ====================================
                                             $6,253,000       $3,541,000
                                        ====================================

8.  BORROWINGS

         Due to Bank and  Current  Portion  of  Long-Term  Debt and the  related
average interest rates at December 31 are as follows:

<TABLE>
<CAPTION>

                                                       AVERAGE                        Average
                                               1998     RATE                  1997     Rate
                                      -------------- ------------    -------------- ------------
<S>                                      <C>                <C>           <C>                <C>
Current portion of long-term debt        $5,700,000         8.1%          $554,000           0%
Due to bank                               4,525,000         7.9%         2,050,000           8%
                                      ============== ============    ============== ============
                                        $10,225,000                     $2,604,000
                                      ============== ============    ============== ============
</TABLE>

         At December 31, 1998, the Company had $4.5 million  outstanding under a
$10,000,000  bank  secured line of credit for Marquise  which  expires  April 1,
1999. The bank has agreed to extend the  expiration  date until such time as the
Company can secure an alternative credit facility.  Interest on the secured line
of credit is prime  plus .75% or LIBOR  plus  3.00% and is  secured  by  finance
receivables owned by Marquise and supported by a capital  maintenance  agreement
from Home Services and Exteriors.

         Long-term debt and related maturities and interest rates at December 31
are as follows:

<TABLE>
<CAPTION>

                                                       1998                1997
                                                       ----                ----
          <S>                                          <C>                  <C>  
           Term notes                                  $18,000,000               $  --
           Revolver                                     18,829,000                  --
           7% Acquisition notes payable                  7,708,000                  --
           0% Acquisition notes payable                  3,063,000                  --
           Due to stockholders                             544,000           1,098,000
           Capital leases and other                      1,475,000                  --
           5% Convertible subordinated notes             1,200,000                  --
           Discounts                                     (414,000)                  --
                                                ------------------- -------------------
                                                        50,405,000           1,098,000
           Less:  current portion                      (5,700,000)           (554,000)
                                                =================== ===================
                                                       $44,705,000            $544,000
                                                =================== ===================
</TABLE>

         In connection with the Reeves  acquisition,  in April 1998, the Company
replaced its  $15,000,000  unsecured bank line of credit with a $42,000,000  (as
amended)  secured  syndicated  bank credit  facility.  The credit  facility,  as
amended,  is for a term of five years  expiring  April 2003.  As of December 31,
1998,  the Company was not in  compliance  with certain of the  original  credit
facility's  cash flow and  restrictive  financial  covenants.  The  Company  has
amended its  original  credit  facility to include,  in  significant  part,  the
reduction  of the term  note  facility  from $30  million  to $18  million,  the
increase  of the  revolving  line of credit  facility  from $12  million  to $24
million,  the increase in interest  rate spread on the term note  facility,  the
establishment of minimum cash flow threshold,  as defined, for each of the first
three quarters of 1999 and the re-setting,  at original credit facility  levels,
of restrictive  financial covenants  commencing at December 31, 1999. The credit
facility, as amended, provides, among other things: 1) $18,000,000 in term notes
(to be used solely for the Reeves acquisition) with quarterly principal payments
of $1,125,000  commencing in June 1999;  and 2) a $24,000,000  revolving line of
credit  (to be used  for  Reeves's  working  capital  requirements  and  general
corporate purposes).  Through December 31, 1998, the interest rates are fixed as
follows:  1) term  notes:  LIBOR plus 3.00% or prime plus .75% (8.1% at December
31, 1998); and 2) revolving line of credit:  LIBOR plus 3.00% or prime plus .75%
(8.1% at December 31, 1998).  The interest  rates on the term note was increased
by .50% to LIBOR plus 3.50% or prime plus 1.25% and the amount the  Company  can
borrow  on the  revolving  line of credit is the  aggregate  of 85% of  eligible
receivables and 55% of eligible  inventories.  The interest rate spread is based
on a matrix keyed to cash flow  coverage  ratios and ranges  between  LIBOR plus
1.00% to LIBOR plus 3.50% or prime to prime plus 1.25%. The credit facility also
provides  for  interest  rate  protection  on at least $10 million in  principal
amount of the term  notes.  At  December  31,  1998,  the  Company  had in place
interest rate swap agreements on $10 million in principal amount with members of
its  syndicated  bank  credit  facility.  The terms of the credit  facility,  as
amended,   contain,  among  other  provisions,   restrictive   requirements  for
maintaining cash flow and debt coverage ratios, minimum net worth,  restrictions
on incurring  additional debt,  dividends,  acquisitions and stock  repurchases.
Deferred loan fees and costs are amortized over the term of the credit  facility
(5 years).

         Non-interest-bearing  agreements  with  stockholders  provide  for  the
payment of $2,770,100 in equal monthly  installments  over five years  beginning
January 1995. All amounts due to stockholders  are subordinate to the bank lines
of credit.

         Capitalized leases include computer and manufacturing  equipment leases
with  interest  rates  ranging  between 6.5% and 10%,  payable in equal  monthly
installments through December 2000.

         The 5% convertible  subordinated  notes due April 2005 are  convertible
into the  Company's  common stock only if KanTel's  operations  achieve  certain
pre-determined  cost-per-lead thresholds in any one year in 1999, 2000 and 2001.
The number of shares issuable upon  conversion  decreases from 300,000 shares to
75,000  shares,  based  upon the year in which the  cost-per-lead  threshold  is
attained.  The shares are issuable three months  following the year in which the
threshold is met. The  Company's  debt  approximates  fair value at December 31,
1998.

         The aggregate  maturities for all long-term debt and capitalized leases
for each of the five years following December 31, 1998 are:

                                                    OTHER
                                   CREDIT      LONG-TERM DEBT
                                  FACILITY
                                -------------- ----------------
                   1999            $3,375,000       $2,325,000
                   2000             4,500,000        2,532,000
                   2001             4,500,000        1,588,000
                   2002             4,500,000        1,544,000
                   2003            19,954,000        1,541,000
                   Thereafter              --        4,460,000

9.  INCOME TAXES

         For the period January 1, 1996, through June 30, 1996, and for the year
ended  December 31,  1995,  the Company was  included in the  consolidated  U.S.
federal  income tax return of Globe.  For the period  indicated,  a  tax-sharing
agreement  existed  between the Company and Globe  specifying the allocation and
payment of  liabilities  and benefits  arising from the filing of a consolidated
tax return.  The operation of the tax allocation  method required the Company to
pay its  share of the  consolidated  U.S.  federal  tax  liability  as if it had
taxable  income,  and to be compensated for losses or credits for benefits which
were  utilized  to reduce the  consolidated  tax  liability.  There  would be no
difference,  in the  indicated  period,  in the  Company's  tax  liability  if a
tax-sharing agreement did not exist. For the period subsequent to June 30, 1996,
the Company was no longer included in Globe's  consolidated  U.S. federal income
tax return.

         The provision (benefit) for the year ended December 31 is as follows:

                             1998             1997              1996
                      ------------------------------------------------------
Current:
   Federal                    $90,000       $2,025,000        $4,324,000
   State                       57,000          315,000           685,000

Deferred:
   Federal                    476,000        (598,000)         (567,000)
   State                       75,000         (59,000)          (85,000)
                      ======================================================
                             $698,000       $1,683,000        $4,357,000
                      ======================================================

         A reconciliation  of the Company's  provision for income taxes based on
the federal statutory income tax rate to the Company's  effective tax rate is as
follows:

<TABLE>
<CAPTION>

                                                                      1998           1997           1996
                                                                -----------------------------------------------

     <S>                                                               <C>             <C>            <C>  
     Federal statutory income tax rate                                 34.0%           34.0%          34.0%
     Increase (decrease) resulting from:
        State income tax, net of federal tax benefit                   11.2             4.2            3.5
        Goodwill amortization                                          36.3             3.2            1.1
        Other, net                                                      7.6              .8             .4
                                                                -----------------------------------------------
     Effective tax rate                                                89.1%           42.2%          39.0%
                                                                ===============================================

</TABLE>

         Deferred tax assets and  liabilities  are  recognized  for the expected
future tax impact of temporary  differences between the carrying amounts and the
tax basis of assets and liabilities.

         The  significant  components of deferred tax assets and  liabilities at
December 31 are as follows:

<TABLE>
<CAPTION>

                                                            1998             1997
                                                     ------------------------------------
<S>                                                       <C>              <C>       
Deferred tax assets:
   Warranty, environmental and benefits                   $5,121,000       $3,973,000
   Valuation allowances                                    1,100,000          337,000
   Other                                                     577,000          461,000
                                                     ------------------------------------
                                                     ------------------------------------
Total deferred tax assets                                  6,798,000        4,771,000

Deferred tax liabilities:
   Valuation allowances                                  (1,626,000)               --
   Depreciation                                          (2,357,000)        (198,000)
   Advertising and other                                 (1,582,000)      (1,809,000)
                                                     ------------------------------------
                                                     ------------------------------------
Total deferred tax liabilities                           (5,565,000)      (2,007,000)
                                                     ------------------------------------
                                                     ====================================
Net deferred tax assets                                   $1,233,000       $2,764,000
                                                     ====================================

</TABLE>

10.  EMPLOYEE BENEFITS

DEFINED CONTRIBUTION PLAN

         The Company has two defined-contribution plans that cover substantially
all employees. Annual contributions are determined by formula based on earnings.
Contributions  to the plans for 1998 were $126,000.  There were no contributions
to the plans in 1997 and 1996.

INCENTIVE STOCK OPTION PLAN

         In connection with the Diamond Home Services, Inc. 1996 Incentive Stock
Option Plan (the "Employee Stock Option Plan"),  620,000 shares of the Company's
Common Stock were  reserved for  issuance.  At December 31, 1998,  45,085 shares
were  available  for future grant.  The Employee  Stock Option Plan provides for
issuance  of  incentive  stock  options,   non-qualified  stock  options,  stock
appreciation rights and stock awards to employees.  All options granted have ten
year terms and  generally  vest  ratably  over three to five years of  continued
employment.  At December 31, 1998,  there were no stock  appreciation  rights or
awards  attached to stock options.  Also, in 1996, the Company  adopted the 1996
Non-Employee  Director  Stock Option Plan and reserved  50,000 shares for future
issuance.  At December 31, 1998,  44,000 shares were available for future grant.
The Non-Employee Director Stock Option Plan provides for the automatic issuance,
after one year from date of  election  as a  director,  of  non-qualified  stock
options  that are  exercisable  over a 10 year term and vest  ratably over three
years of continued service.

         A  summary  of  the  Company's  stock  option  activity,   and  related
information for the three years ended December 31, 1998, is set forth below. The
Company did not have incentive stock option plans prior to 1996.

<TABLE>
<CAPTION>

                                                                              Weighted Average
                                                           Shares              Exercise Price
                                                   ----------------------- ------------------------
<S>                                                               <C>                       <C>  
Outstanding, December 31, 1995                                         --                       --
Granted                                                           275,000                   $13.00
Exercised                                                           (525)                    13.00
Forfeited                                                         (1,950)                    13.00
                                                   ----------------------- ------------------------
Outstanding, December 31, 1996                                    272,525                    13.00
Granted                                                           217,405                    10.68
Exercised                                                         (4,250)                    13.00
Forfeited                                                        (34,825)                    13.00
                                                   ----------------------- ------------------------
Outstanding, December 31, 1997                                    450,855                    11.88
Granted                                                           186,000                    10.11
Exercised                                                              --                       --
Forfeited                                                        (60,715)                    11.61
                                                   ----------------------- ------------------------
Outstanding, December 31, 1998                                    576,140                   $11.34
                                                   ======================= ========================
Exercisable, December 31, 1996                                     68,131                   $13.00
                                                   ======================= ========================
Exercisable, December 31, 1997                                    166,925                   $12.20
                                                   ======================= ========================
Exercisable, December 31, 1998                                    269,575                   $12.00
                                                   ======================= ========================

</TABLE>

<TABLE>
<CAPTION>

                                          Outstanding                                Exercisable
                       --------------------------------------------------- ---------------------------------
                                          Weighted      Weighted Average                  Weighted Average
   Range of Option                        Average        Exercise Price                    Exercise Price
   Exercise Prices        Shares       Remaining Life                         Shares
---------------------- -------------- ----------------- ------------------ ------------- -------------------
         <S>                 <C>             <C>                   <C>          <C>                  <C>       
               $20.00         20,000         9.7 years             $20.00            --                  --
        $13.00-$18.50        374,370         8.1 years             $13.13       211,705              $13.08
          $5.94-$8.75        131,770         9.1 years             $7.125        57,870               $7.14
               $3.875         50,000         9.7 years             $3.875            --                  --
                       --------------                                      -------------
                             576,140                                            269,575
</TABLE>

         The Company has elected to follow  Accounting  Principles Board Opinion
No. 25,  "Accounting  for Stock Options  Issued to  Employees"  (APB No. 25) and
related Interpretations in accounting for its employee stock options because, as
discussed  below,  the  alternative  fair value  accounting  provided  for under
Financial  Accounting  Standards  Board No.  123,  "Accounting  for  Stock-Based
Compensation"  (SFAS No. 123), requires use of option valuation models that were
not  developed  for use in valuing  employee  stock  options.  Under APB No. 25,
because the exercise  price of the Company's  employee  stock options equals the
market  price of the  underlying  stock on the date of  grant,  no  compensation
expense is recognized.

         Disclosure of pro forma information regarding net income and net income
per common share is required by SFAS No. 123, and has been  determined as if the
Company had accounted for its stock options granted in 1998, 1997 and 1996 using
SFAS No. 123. The options  granted in 1998,  1997 and 1996 were valued using the
Black-Scholes  option  pricing  model.  The  weighted  average  value of options
granted during 1998, 1997 and 1996 was $2.16, $3.02 and $7.35, respectively. The
Black-Scholes  option  valuation  model requires the input of highly  subjective
assumptions  and,  because  changes  in the  subjective  input  assumptions  can
materially affect the fair value estimate,  in management's  opinion,  the model
cannot  necessarily  provide  a single  measure  of the fair  value of its stock
options. The following assumptions were utilized in the valuation:

                                               December 31
                                   ------------------------------------
                                       1998         1997        1996
                                       ----         ----        ----
Risk-free interest rate               5.50%        6.20%       6.22%
Expected dividend yield                  0%           0%          0%
Expected stock price volatility       70.4%        50.0%       58.8%
Expected life options               5 years      5 years     5 years

         Had  compensation  cost for the Company's  stock  options  granted been
determined based on the fair value at the dates of the grants, the Company's net
income and net income per common share would have been as follows on a pro forma
basis (in thousands, except per share data):

<TABLE>
<CAPTION>

                                                                               Years Ended December 31,
                                                                                1998      1997       1996
<S>                                                                              <C>    <C>        <C>   
Net income (loss) applicable to common stock holders:     As reported            $85    $2,304     $6,815
                                                          Pro forma            (494)     1,886      6,535
Basic earnings (loss) per common share:                   As reported           0.01      0.26       0.88
                                                          Pro forma           (0.06)      0.21       0.85
Diluted earnings (loss) per common share:                 As reported           0.01      0.26       0.88
                                                          Pro forma           (0.06)      0.21       0.84

</TABLE>

11.  CONSUMER FINANCING

         The following summarized  financial  information for Marquise is before
elimination of inter-company transactions in consolidation.

Financial position at December 31:

<TABLE>
<CAPTION>

                                                                         1998                   1997
                                                               -----------------------------------------------
    <S>                                                                    <C>                    <C>    
    ASSETS
    Cash                                                                     $343,000               $23,000
    Finance receivables, net of allowances of $832,000 and
       $569,000 in 1998 and 1997                                           10,011,000             8,758,000
    Other assets                                                            1,237,000             1,046,000
                                                               -----------------------------------------------
    Total assets                                                          $11,591,000            $9,827,000
                                                               ===============================================

    LIABILITIES AND STOCKHOLDER'S EQUITY
    Due to bank                                                            $4,525,000            $2,050,000
    Due to Exteriors                                                        6,724,000             7,388,000
    Other liabilities                                                          74,000               147,000
                                                               -----------------------------------------------
    Total liabilities                                                      11,323,000             9,585,000
    Stockholder's equity                                                      268,000               242,000
                                                               -----------------------------------------------
    Total liabilities and stockholder's equity                            $11,591,000            $9,827,000
                                                               ===============================================

</TABLE>

Operations for the period ended December 31:

<TABLE>
<CAPTION>

                                                                                   1998           1997            1996
                                                                             -----------------------------------------------

                  <S>                                                           <C>             <C>             <C>       
                  Total finance income                                          $1,652,000      $1,108,000      $1,811,000
                  Interest expense                                                 696,000         400,000         668,000
                  Provision for credit losses                                      913,000       1,259,000         767,000
                                                                             -----------------------------------------------
                  Net interest income                                               43,000       (551,000)         376,000
                     (loss)
                  Other income                                                      13,000              --         130,000
                  Other expenses                                               (1,252,000)       (894,000)       (807,000)
                                                                             -----------------------------------------------
                  Loss before income tax benefit                               (1,196,000)     (1,445,000)       (301,000)
                  Income tax benefit                                               432,000         539,000         115,000
                                                                             -----------------------------------------------
                  Net loss                                                      ($764,000)      $(906,000)     $ (186,000)
                                                                             ===============================================
</TABLE>

Cash flows for the period ended December 31:

<TABLE>
<CAPTION>

                                                                                   1998           1997            1996
                                                                             -----------------------------------------------
                  <S>                                                           <C>          <C>              <C>
                  Cash, at beginning of                                         $   23,000   $      50,000    $  --
                  Net cash provided by (used in) operating activities             (89,000)         272,000     (115,000)
                  Net cash used in investing activities                        (2,192,000)     (5,224,000)   (5,016,000)
                  Net cash provided by financing activities                      2,601,000       4,925,000     5,181,000
                                                                            -----------------------------------------------
                  Cash, at end of year                                            $343,000   $      23,000    $   50,000
                                                                             ===============================================

</TABLE>

         Interest  expense  includes  $401,000,  $400,000 and  $668,000  paid to
Exteriors in 1998, 1997, and 1996, respectively.  At December 31, 1998, Marquise
had  approximately  $1,700,000 in approved but not funded loan  commitments.  At
December 31, 1998, 18.6% of finance receivables in the portfolio were originated
to residents of Florida (8.5%) and Texas (10.1%).

12.  COMMITMENTS

         The Company leases certain real property,  vehicles and equipment under
long-term  non-cancelable  leases expiring at various dates through 2008. Future
minimum lease payments under non-cancelable  operating leases with initial terms
of one year or more consisted of the following at December 31, 1998:

       1999                                 $3,227,000
       2000                                  2,108,000
       2001                                  1,254,000
       2002                                    592,000
       2003                                    467,000
       Thereafter                              829,000
                                          ==================
       Total minimum lease payments         $8,477,000
                                          ==================

         Rent expense was $3,472,000, $1,323,000, and $1,127,000, in 1998, 1997,
and 1996, respectively.

         During 1994, the Company entered into agreements with certain employees
providing for the payment of $4,230,000 in equal monthly  installments over five
years beginning in January 1995,  contingent on the continued employment of each
employee. During 1998 and 1997, payments of $481,000 and $696,000, respectively,
were made to the related employee group and $184,000 and $0, respectively,  were
forfeited due to change in employment  status of  respective  employees.  During
1996,  payments of $769,000 were made to the related employee group and $614,000
were forfeited due to change in employment status of respective  employees.  The
remaining liability of $409,000 for such contingent payments is not reflected in
the consolidated financial statements at December 31, 1998.

13.  CONTINGENCIES

         One of Reeves's Tampa  facilities  has been listed,  since 1982, on the
federal  Environmental   Protection  Agency's  (the  "EPA")  Superfund  National
Priorities  List; and both that facility and a nearby facility have been subject
to remedial  actions under Superfund law. After several years of  investigations
and studies to determine the nature and extent of the  contamination of soil and
groundwater  alleged to be  attributable to pre-1982 plant  operations,  the EPA
issued  records of decision  ("ROD") for three  separate  operable  units ("OU")
prescribing the EPA's selected methods of monitoring and remedial action for the
soil and  surficial  aquifer  groundwater.  These OUs and related RODs have been
included in a consent  decree which was approved by the U.S.  District  Court in
July 1995. OU1, which addresses the remediation of certain soils,  was completed
in October 1997 with the EPA issuance of a memorandum of acceptance. OU2 and OU3
initially required the monitoring of surficial aquifer groundwater and wetlands,
respectively.  Depending on the results of the monitoring,  the Company may need
to provide for contingent  remediation solutions.  In addition,  Reeves has been
named  a  potential   responsible   party   ("PRP")  or  has  been  involved  in
environmental  investigations  of  remediation  at a number of other sites.  The
terms of the Reeves acquisition  agreement provide for the selling  shareholders
("Sellers") to pay up to $8 million in environmental and remediation expenses in
excess of $2.5  million.  At December  31,  1998,  the Company had  reserves for
future  contingent  liabilities of $2.4 million  including $1.9 million in other
non-current  liabilities.  For the period  since  acquisition,  the  Company had
incurred  $149,000 in environmental and related expenses which have been charged
to the reserve.  Based on  information  available  to the  Company,  the Company
believes that,  when  considering the aggregate of its reserves and its right to
offset the long-term  Sellers' notes,  additional  environmental and remediation
costs,  if any,  will not have a  materially  adverse  effect  on the  Company's
results of operations, financial condition or long-term liquidity.

         The  Company  is  involved  in  various  legal  actions  arising in the
ordinary  course of business.  Although  management  cannot predict the ultimate
outcome  of these  matters  with  certainty,  it  believes,  after  taking  into
consideration  legal counsel's  evaluation of such actions,  that the outcome of
these  matters  will not have a material  effect on the  financial  position  or
operations of the Company.

14.  RELATED PARTY TRANSACTIONS

         It is the Company's practice to have all related party transactions and
arrangements discussed and reviewed by the Company's Board of Directors. 

         For the period  January 1, 1996 through June 23, 1996, and for the year
1995,  the Company had an agreement  with Globe for the  performance  of various
administrative  services.  In consideration for such services,  the Company paid
management fees based on annual net sales, as defined. The Company believes that
the cost of such services,  on a stand-alone basis,  approximates the management
fees incurred by the Company during the indicated  period.  The Company incurred
management  fees of $311,000 for the  indicated  period in 1996. No amounts were
due to Globe at December 31, 1998 or 1997.

         During 1996, the Company, in an informal arrangement,  leased a portion
of its  headquarters'  office space and services to a division of H.I., Inc., at
cost, in the aggregate  amount of $126,000.  In addition,  in 1996,  the Company
began a program  to  centralize  and  outsource  its four  regional  lead-taking
activities to H.I., Inc.'s Lawrence,  Kansas,  facility. The aggregate amount of
lead-taking  activities expenses incurred to H.I., Inc. in 1998 (through date of
acquisition),  1997 and 1996 approximated $2,600,000,  $2,230,000,  and $302,000
respectively.  On November 16, 1998, the Company acquired certain net assets and
the  lead-taking  and  call-center  business  of H.I.,  Inc.  for  $2.4  million
including  transaction  costs.  At  December  31,  1998 and 1997,  approximately
$400,000 and $88,500,  respectively, was due to H.I., Inc. In 1998 and 1997, the
Company contracted with Alexander & Walsh, Inc. to provide advertising and other
marketing  and  communications  services  to the  Company.  The  total  expenses
incurred  to  Alexander  & Walsh in 1998 and 1997  was  $397,000  and  $110,000,
respectively.  The quoted  rates for the various  activities  performed by H.I.,
Inc. and Alexander & Walsh,  in the opinion of  management of the Company,  have
been obtained at a cost and on terms no more favorable than if it were to obtain
them from a non-related party.

15.  INCOME PER SHARE

         The following table  summarizes the information used in computing basic
and diluted income per share.

<TABLE>
<CAPTION>

                                                                    Years Ending December 31,
                                                                 1998            1997              1996
<S>                                                             <C>            <C>               <C>       
Numerator for both basic and diluted income per
share - Net Income                                              $85,000        $2,304,000        $6,815,000
                                                       ----------------- ----------------- -----------------
Denominator for basic income per share -
     Weighted shares outstanding                              8,507,375         8,832,840         7,712,795
Effect of employee stock options
     (dilutive potential of common shares)                        3,003               570            64,900
                                                       ================= ================= =================
Denominator for diluted income per share -
     Diluted shares                                           8,510,378         8,833,410         7,777,695
                                                       ================= ================= =================
</TABLE>

         The  computation  of  diluted  earnings  per share did not  assume  the
conversion of the 5% contingent,  convertible subordinated notes issued November
20, 1998 because their inclusion would have been anti-dilutive.

16.  SEGMENT DATA

         The Company has adopted FASB No. 131, "Disclosures about Segments of an
Enterprise  and Related  Information".  With the  acquisition of Reeves in April
1998,  the Company  operates in two  industry  segments  and solely in the U.S.:
installed home improvements,  and manufacturing and wholesale distribution.  The
Company operated in one industry segment and solely in the U.S.,  installed home
improvements, in 1997 and 1996.

         The industry segments are defined as follows:

Installed home improvements

         Selling,  furnishing and arranging the installation of roofing systems,
gutters,   fencing,  doors  and  related  installed  exterior  home  improvement
products;   financing  of  installed  home  improvement,   and  lead-taking  and
telemarketing operations.

Manufacturing and wholesale distribution

         Manufacturing  of  chain-link   fencing;   wholesale   distribution  of
chain-link, wood, PVC and ornamental fencing and related products; installation,
maintenance and monitoring of perimeter security products and services.

         Inter-segment  sales are  generally  recorded at market.  Income (loss)
from  operations  by  segment  consists  of net sales less  operating  costs and
expenses  including  costs of  borrowed  funds,  income  and  general  corporate
expenses that are traceable to the business segment.

         Income from operations for the installed home  improvement  segment for
1998  includes a pretax  charge of  $1,540,000  for  restructuring  and  related
expenses and  $2,270,000  in large and unusual  charges  incurred  in the fourth
quarter  1998,  including  $750  thousand for  provisions  for credit  losses on
consumer  finance  receivables,  $250  thousand  for  medical  expenses  and not
included  in  the  fourth  quarter  1997,  $770  thousand  for  new  information
technology  systems and related  expenses and $500 thousand for new  advertising
test programs.

         Identifiable  assets by business segment are those assets that are used
in the Company's operations in each segment and do not include general corporate
assets. General corporate assets consist primarily of cash and cash equivalents,
deferred taxes and corporate property and equipment.  The accounting policies of
each  operating  segment  are the  same as those  described  in the  Summary  of
Significant Accounting Policies footnote.

                                                         1998
NET SALES
     Installed Home Improvements                       $161,330,000
     Manufacturing and Distribution                      83,560,000
                                                    ----------------
                                                        244,890,000
Inter-segment sales:
     Manufacturing and Distribution                       4,149,000
     Eliminations                                       (4,149,000)
                                                    ================
     Net Sales                                         $244,890,000
                                                    ================

PRE-TAX INCOME
     Installed Home Improvements                         ($680,000)
     Manufacturing and Distribution                       1,463,000
                                                    ================
                                                           $783,000
                                                    ================

IDENTIFIABLE ASSETS AT DECEMBER 31:
                                                         1998
     Installed Home Improvements                        $58,264,000
     Manufacturing and distribution                      68,434,000
     General corporate                                    7,901,000
     Eliminations                                        (8,470,000)
                                                    ----------------
                                                       $126,129,000
                                                    ================

DEPRECIATION AND AMORTIZATION EXPENSE
     Installed Home Improvements                         $1,394,000
     Manufacturing and distribution                       1,628,000
                                                    ================
                                                         $3,022,000
                                                    ================

ADDITIONS TO PROPERTY, PLANT, AND EQUIPMENT
     Installed home improvements                         $3,208,000
     Manufacturing and distribution                         551,000
                                                    ================
                                                         $3,759,000
                                                    ================

17.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

         Selected  quarterly  financial data for 1998 and 1997 is as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>

                                           First         Second         Third         Fourth
                                          Quarter        Quarter       Quarter        Quarter         Total
-------------------------------------- -------------- -------------- ------------- -------------- --------------
                1998
<S>                                          <C>            <C>           <C>            <C>           <C>     
Net sales                                    $28,876        $65,615       $76,505        $73,894       $244,890
Gross profit                                  12,687         23,664        26,492         25,672         88,515
Net income (loss)                                185            623           566     (1,289)(1)             85
Basic earnings per common share                 0.02           0.07          0.07         (0.15)           0.01
Diluted earnings per common share               0.02           0.07          0.07         (0.15)           0.01
Range of Stock Prices                        5 3/4-7 1/24   3/8-6 1/8    3 1/4-5 1/8   2 9/16-4 1/4   2 9/16-7 1/2

                1997
Net sales                                    $30,175        $43,787       $48,301        $38,846       $161,109
Gross profit                                  13,363         19,722        21,245         16,146         70,476
Net income                                       155            651         1,350            148          2,304
Basic earnings per common share                 0.02           0.07          0.16           0.02           0.26
Diluted earnings per common share               0.02           0.07          0.16           0.02           0.26
Range of Stock Prices                     $16 3/4-28 3/4     $5 - 18      $6 3/4- 10    $6 5/8 - 10       $5 - 28 3/4

Note:  The  earnings per common  share  computation  for the year is a separate,
annual  calculation.  Accordingly,  the sum of the quarterly earnings per common
share amounts do not necessarily equal the earnings per common share amounts for
the year.

(1)  Includes $1,540 in restructuring  costs and expenses,  or $0.11 per diluted
     share, and $2,270 in unusual charges, or $0.16 per diluted share. (Refer to
     Management's  Discussion and Analysis of Financial Condition and Results of
     Operations included elsewhere herein.)


</TABLE>

<PAGE>


REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Diamond Home Services, Inc. and Subsidiaries


We have audited the  accompanying  consolidated  balance  sheets of Diamond Home
Services,  Inc.  and  Subsidiaries  as of December  31,  1998 and 1997,  and the
related consolidated  statements of operations,  changes in common stockholders'
equity,  and cash flows for each of the three years in the period ended December
31, 1998.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Diamond
Home  Services,  Inc. and  Subsidiaries  at December 31, 1998 and 1997,  and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity  with generally
accepted accounting principles.




/s/ Ernst & Young LLP

Chicago, Illinois
February 19, 1999