FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

[X]  Annual  Report  Pursuant  to  Section  13 or 15(d)  of the  Securities
     Exchange Act of 1934. For the fiscal year ended September 30, 1996

[ ]  Transition  Report  Pursuant to Section 13 or 15(d) of the  Securities
     Exchange Act of 1934. For the transition period from to _____ to _____.

                         Commission File Number 1-11416

                                 UDC HOMES, INC.
             (Exact name of Registrant as specified in its charter)

        Delaware                                          86-0702254
(State of Incorporation)                   (I.R.S.  Employer Identification No.)

4812 South Mill Avenue, Tempe, Arizona                      85282
(Address of principal executive offices)                  (Zip Code)

       Registrant's telephone number, including area code: (602) 820-4488

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

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

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

The  aggregate   market  value  of  the   Registrant's   Common  Stock  held  by
non-affiliates  as of  December  27, 1996 was $0.00 as all such stock is held by
affiliates.  As of December 27, 1996,  the Registrant had 1,000 shares of Common
Stock outstanding.

Indicate  by check mark  whether  the  Registrant  has filed all  documents  and
reports  required  to be  filed by  Section  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. Yes  X      No
                         -----      -----

                    Documents incorporated by reference: None
                                       1
<PAGE>
                        UDC HOMES, INC. AND SUBSIDIARIES
                             FORM 10-K ANNUAL REPORT
                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
                                TABLE OF CONTENTS

                                                                            Page

                                     PART I

Item 1.   Business.............................................................1
Item 2.   Properties..........................................................11
Item 3.   Legal Proceedings...................................................11
Item 4.   Submission of Matters to a Vote of Security Holders.................13

                                   PART II

Item 5.   Market for Registrant's Common Equity and Related Stockholder
          Matters.............................................................14
Item 6.   Selected Financial Data.............................................14
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...........................................17
Item 8.   Financial Statements and Supplementary Data.........................27
Item 9.   Changes in and Disagreements with Accountants on 
          Accounting and Financial Disclosure.................................28

                                  PART III

Item 10.  Directors and Executive Officers of the Registrant..................29
Item 11.  Executive Compensation..............................................31
Item 12.  Security Ownership of Certain Beneficial Owners and Management......36
Item 13.  Certain Relationships and Related Transactions......................37

                                   PART IV

Item 14.  Exhibits. Financial Statement Schedules, and Reports on Form 8-K....39
                                       i
<PAGE>
                                     PART I

Item 1.   Business
-------   --------

General

         UDC Homes, Inc. and its subsidiaries  ("UDC" or the "Company") designs,
builds and markets  single  family  attached and detached  homes  primarily  for
move-up family and retirement home buyers in Arizona and California. The Company
builds  most of its  move-up  family  homes and all of its  retirement  homes in
master-planned  communities  on sites  selected for their  attractive  locations
which provide home buyers with  amenities  such as  recreational  facilities and
parks.

         During  the  quarter  ended  March 31,  1995,  the  Company  decided to
discontinue its operations in the Southeast  markets of North Carolina,  Florida
and  Georgia.  Subsequent  to that time,  the Company has been  liquidating  all
remaining  assets of its  Southeast  operations.  Unless  otherwise  noted,  the
information  presented in this Form 10-K describes only the Company's continuing
operations located in Arizona and California.

         The Company commenced proceedings under Chapter 11 of the United States
Bankruptcy  Code on May 17, 1995 in order to restructure  its  indebtedness  and
other  liabilities.  The  Company's  plan of  reorganization  (the  "Plan")  was
confirmed  on  October  3, 1995 by the United  States  Bankruptcy  Court for the
District of Delaware and was  consummated  on November  14, 1995.  Pursuant to a
stock purchase  agreement (the "Stock  Purchase  Agreement")  dated May 16, 1995
between the Company and DMB Property Ventures Limited Partnership ("DMBLP"), DMB
Residential  L.L.C.  ("DMB"),  an  affiliate  of  DMBLP  on  November  14,  1995
("Acquisition  Date") purchased from the Company (the "Equity  Purchase") for an
aggregate  purchase  price of $108  million  all of the new common  stock of the
Company  (the "Common  Stock") and $30 million in  principal  amount of Series C
Subordinated Notes. The Company used $83 million of the proceeds from the Equity
Purchase to repay a portion of the claims of certain  unsecured  creditors under
the Plan.  The balance of the cash  payments  required by the Plan have been and
will continue to be funded from cash-on-hand,  cash flow from operations and the
Company's financing facilities. For additional information, see Notes 1 and 2 to
Consolidated Financial Statements.

         On the  Acquisition  Date, the Company also issued pursuant to the Plan
$70  million  principal  amount  of 12.5%  Series A Senior  Notes  due 2000 (the
"Series A Senior Notes") and 12.5% Series B Senior Notes due 2000 (the "Series B
Senior  Notes").  The Series A Senior  Notes and the  Series B Senior  Notes are
referred to collectively as the "Senior Notes".

         On March 15, 1996, the Company issued $10 million  principal  amount of
14.5% Series D  Subordinated  Notes to DMB.  See  "Management's  Discussion  and
Analysis of  Financial  Condition  and  Results of  Operations  - Liquidity  and
Capital Resources - Subordinated Notes".
<PAGE>
         On May 6, 1996,  pursuant  to an option  agreement  between DMB and AEW
Partners,  L.P.  ("AEW"),  Eastrich No. 184 LLC (as to all interests  except the
Westbrook  Village Joint Venture  ("WBV"),  and Eastrich No. 185, LLC (as to the
WBV interest),  as assignees of AEW,  acquired from DMB 500 shares of the Common
Stock owned by DMB, $15 million  principal  amount of the Series C  Subordinated
Notes owned by DMB,  $5 million  principal  amount of the Series D  Subordinated
Notes  owned  by DMB  and  50% of the  general  partner  interest  held by a DMB
affiliate  in WBV.  See  "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations."

         The Plan effected a recapitalization  of the Company and did not result
in a reduction in the scope or any other major  restructuring  of the  Company's
operations.  During the  pendency  of the  Chapter 11  proceeding,  the  Company
continued  its home building  operations  in the ordinary  course in its housing
markets.  The Company  believes that it maintained,  throughout the proceedings,
its  relationship  with its  customers,  subcontractors  and  suppliers  and the
confidence of its employees.

         At September 30, 1996, the Company's  management reviewed the status of
the Company's operations, including: (1) 1996 operating losses, which losses are
anticipated to continue into fiscal 1997; (2) the Company's overhead  structure,
which will require an expansion of current volume in order to generate  adequate
operating margins;  (3) lenders' waivers of covenant  violations which have been
required due to the Company's inability to meet operating  projections;  and (4)
additional capital  contributions  required in fiscal 1996 and anticipated to be
required  in fiscal 1997 in order for the  Company to have  adequate  liquidity.
Based on this review,  management  concluded that the Company's long-term assets
may be  impaired.  In  accordance  with SFAS No.  121,  the  Company  tested its
long-term assets held,  including  allocated  goodwill,  for  recoverability and
determined  that an impairment  loss of $42.8 million should be recognized.  The
impairment loss is comprised of $3.5 million and $4.2 million applicable to land
inventory and land held for sale, respectively,  located in Phoenix and Northern
California and $35.1 million applicable to goodwill.

         UDC seeks to be a leading  homebuilder  in each of the markets in which
it operates. The Company's Arizona operations,  which are located principally in
the Phoenix  metropolitan  area,  generated 68% of the Company's revenues in the
fiscal  year ended  September  30, 1996  ("fiscal  1996").  In the  metropolitan
Phoenix  market,  the second  largest  housing market in the United States based
upon single family  housing  permits  issued in calendar year 1995,  UDC was the
fifth largest  homebuilder  based on housing permits  issued.  For calendar year
1996, the Company  expects to be the fourth  largest  homebuilder in the Phoenix
metropolitan area based on permits issued. The Company's  California  operations
are located in the southern  California markets of Los Angeles and San Diego and
the San  Francisco  Bay  Area  of  northern  California.  In the  immediate  San
Francisco  Bay Area of northern  California,  the Company has  targeted a market
niche  consisting  of active adult home buyers  seeking gate guarded golf course
communities.  California  operations  accounted for 32% of the Company's  fiscal
1996  revenues.  The Company's  geographic  concentration  and limited number of
projects may make the Company vulnerable to regional economic downturns or other
adverse project-specific matters.
                                        2
<PAGE>
         The Company has  extensive  experience  in the  homebuilding  business,
having built and closed more than 28,500 homes since its  formation in 1968.  In
fiscal  1996,  UDC closed  1,951  homes at an average  sales  price of  $206,000
compared to 1,844 homes at an average sales price of $199,000 in the fiscal year
ended September 30, 1995 ("fiscal 1995").  The fiscal 1996 closings  resulted in
$401.8  million in housing  revenues,  a 9% increase  from housing  revenues for
fiscal 1995. At September 30, 1996, the Company had a backlog of 762 sold homes,
representing an aggregate sales value of $161.1 million and a 5.8% decrease from
the sales value of the Company's backlog at September 30, 1995.

         As of September 30, 1996, the Company was developing  and/or  marketing
for  sale  housing  products  in  43  different   subdivisions  in  Arizona  and
California.  During fiscal 1996,  the Company  received  1,897 net sales orders,
representing  an aggregate  sales value of $389.2  million,  an increase of 7.7%
from the aggregate sales value achieved in fiscal 1995. New home construction is
generally tied to a sales order being received,  which is generally  accompanied
by a deposit  which  varies in size  relative to the price of the home,  options
requested  and the  Company's  ability to remarket the  constructed  home if the
buyer  fails to close.  Upon  completion  of  construction  and  receipt  of the
remaining  purchase  price,  the  home  is  transferred  to the  buyer  and  the
transaction is recorded as a sale. See "Business - Sales Activities."

         UDC currently  focuses on providing homes primarily for two demographic
markets:  move-up  family  buyers and  retirees.  By  developing  master-planned
communities designed  specifically for these population markets, the Company has
targeted  what it believes to be among the fastest  growing home buyer  markets.
UDC's sales in its family market, which is comprised primarily of move-up homes,
accounted in fiscal 1996 for approximately 79% of the Company's revenues. In the
family  market,  UDC offers homes which range in size from 1,342 to 3,861 square
feet with base prices which range from  $90,490 to $323,990.  UDC's sales in the
retirement  market  accounted  in  fiscal  1996  for  approximately  21%  of the
Company's  revenues.  In the retirement  market, UDC offers homes which range in
size from 1,354 to 3,021  square feet with base prices  which range from $99,900
to $385,900.  The Company believes that its strategy of concentrating on move-up
and retirement homes is consistent with national demographic trends projected by
the U.S.  Department of Commerce-Bureau  of the Census,  which indicate that the
portion  of the  population  age 45 and over,  which  constitute  the  principal
purchasers of the Company's move-up and retirement homes, will grow at a greater
rate   than  the   general   population   through   2003  and  will   control  a
disproportionate amount of the nation's disposable income.

         The Company also arranges  mortgage  financing for customers who choose
to finance  their home  purchases.  In fiscal 1996,  the Company  arranged  such
financing  for 39% of its  customers  who financed  their home  purchases.  This
mortgage origination activity enhances the Company's ability to market and close
its homes. UDC's mortgage  activities,  which are conducted through UDC Mortgage
Corporation  ("UDC  Mortgage"),  an  indirect,  wholly-owned  subsidiary  of the
Company, consist solely of arranging financing, primarily for the Company's home
buyers, and selling those mortgages through national financial institutions such
as the Federal National Mortgage  Association ("FNMA") and the Federal Home Loan
Mortgage
                                        3
<PAGE>
Corporation ("FHLMC"). UDC currently sells the servicing rights to the mortgages
which it originates to third parties. In December 1996, the Company entered into
a joint venture agreement with Norwest Mortgage.  The joint venture will provide
mortgage related  services to the Company when regulatory  approval is obtained.
Regulatory approval is projected to be completed in February 1997. See "Business
- UDC Mortgage Related Operations."

The Housing Industry

         Home builders,  including the Company,  have  historically  experienced
periodic  cycles  driven  by  numerous  factors  beyond  the  control  of market
participants, such as general economic conditions,  inflation rates and the cost
and availability of financing. In addition, the homebuilding business is subject
to numerous inherent risks such as adverse local and national real estate market
conditions,  supply of and demand for particular  types of properties,  changing
environmental,  zoning  and  other  governmental  regulation,  the level of real
estate  taxes,  changes in federal tax laws,  the cost of  materials  and labor,
availability of financing,  the need to expend significant amounts of capital on
communities before significant revenues are generated,  overbuilding,  increased
competition and changes in interest rates.

UDC's Markets

         The  total  number  of homes  closed  by the  Company  in  Arizona  and
California  for each of the 12-month  periods  ended  September 30, 1992 through
1996 are set forth in the following table.
<TABLE>
<CAPTION>
                                                   Years Ended September 30,
                 ---------------------------------------------------------------------------------------
                      1992               1993                1994               1995               1996
                 ---------------------------------------------------------------------------------------
<S>                  <C>                 <C>                <C>                <C>                 <C>  
Arizona.........     1,301              1,673               1,621              1,385              1,444
California......       353                517                 641                459                507
                     -----              -----               -----              -----              -----
TOTAL...........     1,654              2,190               2,262              1,844              1,951
                     =====              =====               =====              =====              =====
</TABLE>

         Arizona  -   Metropolitan   Phoenix  is  UDC's  largest   market,   and
historically  has  generated  greater  than  65% of its  housing  revenues.  UDC
commenced  homebuilding  activities in the Phoenix retirement market in 1975 and
expanded into the move-up family market in 1980. Single family housing starts in
Phoenix were 28,543 in calendar year 1995, and are expected to be  approximately
29,000 for calendar year 1996. For calendar year 1995,  Phoenix was the nation's
second  largest  housing  market  measured  by  housing  starts  and  Phoenix is
projected to have retained this position in calendar year 1996.

         UDC has sold  retirement  homes  in its two  current  major  retirement
communities,  Westbrook Village and MountainBrook  Village, since 1982 and 1989,
respectively.  At these  communities,  which total six subdivisions,  UDC builds
detached and attached stucco homes with tile roofs ranging in size from 1,354 to
2,578  square feet,  with base sales  prices from  $99,900 to $212,990.  At both
communities,  active  adult home buyers  have access to social and  recreational
                                        4
<PAGE>
amenities,  including  championship  golf courses,  tennis courts,  recreational
centers and scenic views.  Westbrook  Village is expected to have  approximately
3,800 homes (505  homesites  were  remaining  at  September  30, 1996) and 7,000
residents  upon  completion,  and  MountainBrook  Village  is  expected  to have
approximately 1,700 homes (1,026 homesites were remaining at September 30, 1996)
and 3,000 residents upon completion.

         In  Phoenix,   UDC  currently  sells  primarily  move-up  homes  in  24
communities  geographically dispersed in each of the Phoenix metropolitan area's
strongest  housing markets.  UDC builds detached stucco homes with tile roofs in
the  Phoenix  metropolitan  area.  These homes range in size from 1,354 to 3,861
square feet, with base sales prices from $90,490 to $323,990. UDC builds in both
selected  individual  subdivisions and in master-planned  communities that offer
various amenities including championship golf courses,  tennis courts, parks and
scenic views.

         California - The Company  sells homes in three  California  markets:  a
predominantly   retirement   home   market  in  northern   California   and  two
predominantly  family  home  markets in San Diego and Los  Angeles.  The Company
acquired  land for its first  California  community in north San Diego County in
1980, and expanded into northern  California in 1984 with the acquisition of two
age-restricted  master-planned retirement communities,  Rossmoor in Walnut Creek
and The Villages in San Jose.

         Both Northern  California  communities  offer  24-hour  gated  security
features  and a full  range  of  amenities  for  their  home  buyers,  including
championship golf courses, tennis courts, recreational centers and scenic views.
UDC builds  retirement  homes  ranging in size from 2,032 to 3,021  square feet,
with base sales prices from  $189,900 to $385,900 at The Villages and  Rossmoor.
Rossmoor  is  expected  ultimately  to  provide  housing  for more  than  10,000
residents in 7,000 homes (326  homesites  were remaining at September 30, 1996).
The  Villages,  a 1,200-acre  master-planned  community,  is expected to provide
housing  for more than  5,000  residents  in 3,000  homes  (285  homesites  were
remaining at September 30, 1996) upon completion.  In fiscal 1996, approximately
12% of the Company's  revenues from  continuing  operations  were generated from
northern California.

         In San Diego and Los Angeles, the Company is currently selling detached
and attached  move-up family homes in the counties of Riverside,  San Bernadino,
Orange and San Diego. In San Diego,  the Company builds in two communities  with
homes  ranging in size from 2,485 to 3,025 square  feet,  with base sales prices
from  $271,990  to  $306,990.  In Los  Angeles,  the  Company  builds  in  seven
communities  with homes  ranging in size from 1,342 to 3,073 square  feet,  with
base sales prices from $133,990 to $296,990.  In fiscal 1996,  approximately 20%
of the  Company's  revenues  from  continuing  operations  were  generated  from
southern California.

UDC Mortgage Related Operations

     UDC Mortgage is a wholly-owned subsidiary of UDC Corporation, which in turn
is a  wholly-owned  subsidiary of UDC. UDC Mortgage  serves an important role in
the Company's sale of its homes by assisting  purchasers in obtaining  financing
when necessary to purchase their
                                        5
<PAGE>
homes.  During  fiscal  1996,approximately  84% of  the  Company's  home  buyers
purchased their home with the assistance of mortgage financing and approximately
39% of home  buyers who  financed  their  housing  purchases  did so through UDC
Mortgage.  UDC  Mortgage's  average  loan amount  during 1996 was  approximately
$155,000. As a mortgage banker, UDC Mortgage underwrites its mortgages to comply
with secondary market mortgage  underwriting  standards.  Accordingly,  its loan
criteria  are  consistent  with  those of  traditional  mortgage  lenders in its
respective  markets.   Based  upon  UDC  Mortgage's  continued   eligibility  to
participate in federally  sponsored  secondary  mortgage  market  programs,  the
Company believes that home purchasers  obtaining  mortgage financing through UDC
Mortgage  are  as  credit-worthy  as  those  who  apply  for  mortgages  through
traditional  lenders  and that it  offers  mortgages  on terms  and  eligibility
equivalent to that offered by traditional  lenders.  The Company's  policy is to
qualify its subdivisions for FNMA and/or Federal Housing Administration/Veterans
Administration ("FHA/VA") financing, where appropriate.

         The mortgage loans are originated by UDC Mortgage at prevailing  market
interest  rates and normally are sold by UDC Mortgage into the secondary  market
when UDC Mortgage issues an interest rate commitment to the buyer or immediately
following  the loan  closing  (where  there  is no  interest  rate  commitment).
Accordingly,  UDC Mortgage limits its risk of interest fluctuations prior to the
sale of the mortgage in the secondary market.

         In December  1996, the Company  entered into a joint venture  agreement
with Norwest  Mortgage  whereby the joint venture will provide  mortgage related
services to the Company's home buyers.  The joint venture,  which is expected to
be operational by February 1997, will allow the Company access to the technology
and  mortgage  programs  of one of the  largest  mortgage  bankers in the United
States.

Land Inventory

         The following  table describes the number of homesites at September 30,
1996 by location:
<TABLE>
<CAPTION>
                                                 Affiliated     
                                        UDC       Land Bank        Land           Joint
                                       Owned    Partnerships      Options        Ventures         Total
                                ------------------------------------------------------------------------
<S>                                    <C>           <C>          <C>            <C>            <C>  
Family:
   Arizona.....................        1,874            --        1,578              --         3,452
   California..................          290            --          119              --           409
                                       -----          ----        -----           -----         -----
Family Total...................        2,164            --        1,697              --         3,861
                                       -----          ----        -----           -----         -----

Retirement:
   Arizona.....................           92            --           88           1,351         1,531
   California..................          561            50           --              --           611
                                       -----          ----        -----           -----         -----
Retirement Total...............          653            50           88           1,351         2,142
                                       -----          ----        -----           -----         -----

Family and Retirement Total            2,817            50        1,785           1,351         6,003
                                       =====          ====        =====           =====         =====
</TABLE>
                                        6
<PAGE>
         Between  1977  and  1988,   UDC   established   affiliated   land  bank
partnerships  ("Affiliated Land Bank Partnerships") (which historically were not
consolidated  for financial  reporting  purposes) to enable it to obtain control
over land inventory for future  development.  These  partnerships  acquired land
inventory at the direction of the Company and held that land  inventory  subject
to options  granted to the Company to purchase the  property at formula  prices.
During  a time  when  the  prices  of land  inventory  were  increasing  and the
availability of land suitable for development by the Company was decreasing, the
Company  believed that such affiliated  partnerships  were useful in stabilizing
land inventory costs and availability. No such affiliated partnerships have been
formed  since  1988 and the  Company  does  not  anticipate  forming  additional
affiliated land bank partnerships in the foreseeable future. More recently,  the
Company has acquired  control of land through direct purchases of land from land
holders. UDC Advisory Services, Inc. ("UDC Advisory"), a wholly-owned subsidiary
of UDC  which  has no  substantial  assets  other  than  its  investment  in the
Affiliated  Land  Bank  Partnerships,  is the  general  partner  of  each of the
Affiliated Land Bank  Partnerships.  Limited partner investors in the Affiliated
Land  Bank   Partnerships,   who  made  their  investments   separate  from  any
relationship to or investment in UDC,  provided funds to allow these  Affiliated
Land Bank  Partnerships  to acquire  property  subject to formula price purchase
rights.

         At September 30, 1996,  there were four existing  Affiliated  Land Bank
Partnerships,  Sunbelt  Properties  Limited  Partnership ("New Sunbelt"),  Terra
California   Limited   Partnership   ("Terra"),   Sunrise  Limited   Partnership
("Sunrise"),  and  Sunbelt  Properties,  Ltd.  ("Old  Sunbelt").  Subsequent  to
September 30, 1996,  UDC  purchased  the  remaining  interest in New Sunbelt and
dissolved the  partnership.  On November 14, 1996, the limited partners of Terra
agreed to a proposal  that resulted in the  dissolution  of the  partnership  on
January 2, 1997.  On  December  11,  1996,  a proposal  was sent to the  limited
partners of Sunrise that, if approved,  would result in the  dissolution  of the
partnership.  UDC is  negotiating  a proposal  with the limited  partners of Old
Sunbelt that would result in the  assignment of UDC  Advisory's  interest in the
partnership to the limited partners.

         The Company has also entered into land option  agreements with entities
(including DMB LP) having available  sources of capital.  These entities acquire
land and grant purchase options to the Company.

         At September 30, 1996, the Company's Arizona retirement operations were
conducted  under the  following  joint  venture  agreements:  Westbrook  Village
Venture (a joint  venture in which UDC and an affiliate of DMB and AEW owned 75%
and 25% equity interests,  respectively) and MountainBrook Village Joint Venture
(a joint venture in which UDC owns a 50% equity interest).  On December 6, 1996,
UDC purchased  the  remaining  equity  interest in  MountainBrook  Village Joint
Venture and dissolved the partnership.
                                        7
<PAGE>
Sales Activities

         At September  30, 1996,  the Company had sales backlog  represented  by
signed  contracts with deposits from buyers of $161.1  million  comprised of 762
housing units. At September 30, 1995, the Company had sales backlog  represented
by signed contracts with deposits from buyers of $171.1 million representing 816
units.

         A sale becomes part of backlog upon the  Company's  receipt of a signed
contract and a deposit.  However,  UDC's sales  strategy and marketing  program,
which provide  buyers the right to cancel their  purchase  contracts  based upon
specified   contingencies,   contemplates   a   certain   amount   of   contract
cancellations.  In the Company's continuing operations,  the percentage of gross
sales contracts which were canceled was approximately 31% in fiscal 1996 and 37%
in fiscal 1995. The Company believes that the higher cancellation rate in fiscal
1995 was  primarily  attributable  to home buyer  concerns  about the  Company's
ability to complete  construction  of homes and  subdivisions in a timely manner
and to honor its post-sale  warranty  obligations  as a result of its Chapter 11
Case. Generally,  canceled sales contracts are replaced with new sales contracts
within a relatively short time after cancellation. The Company believes that the
inability  of home  buyers  to sell  their  existing  homes  or to  qualify  for
mortgages  historically  have  been the  primary  causes of  cancellations.  The
Company also believes that  cancellations are sometimes  attributable to buyers'
personal or employment-related changes in circumstances.

         Except in instances  where  substantial  expenditures  on buyer options
have been  made by the  Company  in  construction,  the  Company  generally  has
released  canceling  buyers  from their  contracts  at  minimal  or no cost.  In
connection with the Company's  marketing to move-up buyers,  the Company accepts
sales  contracts  where the buyers  retain the right to cancel  their  purchases
subject to certain  contingencies,  including  the sale of the buyers'  existing
homes and/or  qualification for financing.  Although this approach results in an
increased  number of  cancellations,  the  Company  believes  that the  strategy
increases the overall number of homes sold and closed.

         Management  expects that substantially all units included in backlog as
of  September  30, 1996 will close and result in revenues to the Company  during
fiscal 1997,  either under the sales contract in backlog or a subsequent sale of
the home to a different buyer. See "Business - Competition and Market Factors."

         The  following  table sets forth  information  regarding  the Company's
closings  for the prior  five  years by (i) the  geographical  locations  of the
Company's operations, and (ii) family and retirement sales.
                                        8
<PAGE>
<TABLE>
<CAPTION>
                                                                       Homes Closed - Units
                                                      ----------------------------------------------------
                                                                     Years Ended September 30,
                                                      ----------------------------------------------------
                                                         1992       1993       1994       1995       1996
                                                         ----       ----       ----       ----       ----
<S>                                                     <C>        <C>        <C>        <C>        <C>  
Family:
   Arizona.........................................       938      1,253      1,194      1,071      1,117
   California......................................       211        352        514        349        344
                                                        -----      -----      -----      -----      -----
Family Total.......................................     1,149      1,605      1,708      1,420      1,461
                                                        -----      -----      -----      -----      -----

Retirement:
   Arizona.........................................       363        420        427        314        327
   California......................................       142        165        127        110        163
                                                        -----      -----      -----      -----      -----
Retirement Total...................................       505        585        554        424        490
                                                        -----      -----      -----      -----      -----

Family and Retirement Total........................     1,654      2,190      2,262      1,844      1,951
                                                        =====      =====      =====      =====      =====       
</TABLE>
         The following  table  reflects the percentage of UDC revenues from home
sales  for the  prior  five  years by (i) the  geographical  locations  of UDC's
operations, and (ii) family and retirement sales.
<TABLE>
<CAPTION>
                                                                       Housing Revenues
                                                -----------------------------------------------------------
                                                                   Years Ended September 30,
                                                -----------------------------------------------------------
                                                  1992          1993         1994         1995        1996
                                                  ----          ----         ----         ----        ----
<S>                                               <C>           <C>          <C>          <C>         <C>
Location:
   Arizona...................................      72%           72%          65%          70%         68%
   California................................      28            28           35           30          32
                                                  ---           ---          ---          ---         --- 
Total........................................     100%          100%         100%         100%        100%
                                                  ===           ===          ===          ===         === 
Type of Development:
   Family....................................      74%           76%          76%          80%         79%
   Retirement................................      26            24           24           20          21
                                                  ---           ---          ---          ---         --- 
Total........................................     100%          100%         100%         100%        100%
                                                  ===           ===          ===          ===         === 
</TABLE>

Construction

         The Company functions as its own general  contractor.  At all stages of
production,  the  Company's  management  personnel  and on-site  superintendents
coordinate  the  activities  of  subcontractors,  consultants  and suppliers and
subject their work to quality,  cost and production  time  controls.  Consulting
firms are engaged to assist in project planning. Independent subcontractors, who
are generally  selected on a competitive  basis,  are employed to perform all of
the site development and  construction  work at the Company's  communities.  UDC
contracts for  prescribed  periods with  qualified  subcontractors  to construct
homes on a fixed cost basis.

         Construction  time for the Company's homes depends on the time of year,
local labor
                                        9
<PAGE>
situations,   availability   of  materials  and  supplies  and  other   factors.
Construction  of homes is  generally  completed  within four to six months after
construction commences.  Although the construction of homes is generally tied to
home  sales  orders  to  minimize  the costs and risk of  completed  but  unsold
inventory,  some  construction may commence prior to UDC's receipt of a purchase
contract in order to maintain an inventory for quick delivery or to continue the
construction  sequence.  At  September  30, 1996,  there were 242 housing  units
(excluding  model  homes)  for which a purchase  contract  was not in effect and
homes were under construction.

         The Company provides all home buyers standardized warranties subject to
specified  limitations.  The Company's  experience has been that the majority of
warranty claims are made within the six-month  period following the close of the
home sale.

Competition and Market Factors

         The residential housing industry is highly competitive. UDC competes in
each of its markets with numerous housing producers including regional, national
and small custom  homebuilders,  as well as with the resale of existing housing.
UDC's housing products compete on the basis of quality, price, design, location,
reputation and amenities. In certain markets and at times when housing demand is
high, UDC also competes with other homebuilders in the hiring of subcontractors.
Further,  UDC  competes  with other  homebuilders,  some of which  have  greater
financial resources than UDC, in the acquisition of land and financing.  In each
of the markets for its continuing  operations,  UDC believes that there is ample
room for growth.  The market for new housing has historically  been cyclical and
UDC's business is affected by changes in that market.

         UDC's  business  focus  is on  the  customer  and  UDC  makes  customer
satisfaction a key goal. UDC's  organization  and its compensation  programs are
structured  to promote this goal.  UDC projects  and  reinforces  its image as a
quality homebuilder that stands behind its products.

         There can be no assurance that an increase in competition from existing
competitors  or the entry of new  competitors  will not have a material  adverse
effect on the Company's  business,  operating  results and financial  condition.
There can be no assurance that the Company will be able to compete  successfully
in the future with existing or new competitors.

Governmental Regulation and Environmental Considerations

         The Company's business is subject to extensive federal, state and local
regulatory requirements and the broad discretion that governmental agencies have
in  administering  those  requirements,  all of which can prevent,  delay,  make
uneconomic or  significantly  increase the cost of the  Company's  developments.
Numerous  governmental   approvals  and  permits  are  required  throughout  the
development  process, and no assurance can be given as to the receipt (or timing
of  receipt)  of such  approvals  or permits.  Further,  third  parties can file
lawsuits challenging approvals or permits received,  which may cause substantial
uncertainties  and material  delays for projects  involved  and, if  successful,
could result in approvals or permits being voided.
                                        10
<PAGE>
         The Company's  business is subject to a variety of  environmental  laws
applicable to owners of real estate.  Before  acquiring a property,  the Company
obtains an environmental  study for soil  contamination and other conditions for
which  remediation  may be  required.  The Company has been advised that certain
environmental  contamination  exists at one of its southern  California projects
and has  recorded a reserve  for  estimated  remediation  costs.  Subject to the
foregoing,  the Company  believes  that its property is generally in  compliance
with existing  environmental laws and regulations.  However,  the Company cannot
predict the nature,  scope or effect of legislation  or regulatory  requirements
that could be imposed or how  existing  or future  laws or  regulations  will be
administered  or  interpreted  with respect to conditions or activities to which
they have not previously  been applied.  Compliance  with more stringent laws or
regulations,  as  well as  more  vigorous  enforcement  policies  of  regulatory
agencies,  could  require  substantial  expenditures  by the  Company  and could
adversely affect its financial condition and results of operations.

Employees

         At  December  23,  1996,  the  Company  and its  subsidiaries  employed
approximately  444  persons,   including   corporate  staff,   sales  personnel,
construction  personnel and mortgage staff.  None of the Company's  employees is
covered by a collective  bargaining  agreement and the Company believes that its
employee relations are excellent. Certain of UDC's subcontractors employ workers
who are represented by labor unions.  Such  subcontractors  have not experienced
any   significant   work  stoppages  or  slowdowns  to  date  at  the  Company's
developments.

Item 2.   Properties
-------   ----------

         UDC's  business is  administered  from its executive  offices in Tempe,
Arizona and three regional offices. These locations are general business offices
which are leased by the  Company and the  Company  does not require  specialized
quarters   for  its   operations.   See  "Certain   Relationships   and  Related
Transactions."

Item 3.   Legal Proceedings
-------   -----------------

         The  Arizona  Actions - On June 5, 1995,  June 14, 1995 and October 25,
1995,  lawsuits were filed on behalf of a purported  class of present and former
shareholders of the Company in the Superior Court of the State of Arizona in and
for Maricopa County (the "Court") against, among others, certain former officers
and  directors  of the Company  (the  "Director/Officer  Defendants"),  entitled
Michael A. Isco v.  Richard C.  Kraemer,  et al. (Case No. CV  95-08941),  Larry
Alexander  et al. V. Arthur  Andersen  LLP, et al. (Case No. CV  95-09509),  and
Crandon Capital Partners v. Kraemer,  et al.,  respectively  (collectively,  the
"Arizona  Actions").  Subsequently,  the Arizona Actions were consolidated.  The
Arizona Actions seek, among other things,  unspecified money damages and contain
allegations which include violations of Arizona securities law, fraud, negligent
misrepresentation,  breach of fiduciary duty,  negligence and gross  negligence.
Although  the Company is not a defendant  in the  Arizona  Actions,  the Company
could  nevertheless  be required to  indemnify  certain of the  Director/Officer
Defendants  in the  
                                       11
<PAGE>
Arizona  Actions in the event that such  defendants  incur expenses or liability
and seek  indemnification  from the Company.  With respect to the advancement of
defense  costs,  the  Company  and  National  Union  Fire  Insurance  Company of
Pittsburgh,  PA.  ("National  Union"),  the  issuer  of  the  Company's  primary
directors' and officers'  insurance and Company  reimbursement  policy,  agreed,
among other things,  that (i) National  Union would advance all  reasonable  and
necessary  defense  costs  incurred  by most of the  covered  defendants  in the
Arizona Actions during the pendency of the Company's bankruptcy proceeding, (ii)
upon  consummation of a reorganization  plan, the Company would repay up to $1.5
million of defense costs actually advanced by National Union,  (iii) the Company
would not be obligated to repay an amount  greater than $1.5 million of advanced
defense costs and (iv) National Union would have no duty to defend.

         An  agreement  (the  "Settlement  Agreement")  was  previously  reached
pursuant to which the plaintiffs and the  Director/Officer  Defendants agreed to
settle and compromise  the Arizona  Actions in their  entirety,  as such actions
relate to the  Director/Officer  Defendants  and the Company,  in exchange  for,
among  other  things,  $12.75  million.  Of such  amount,  $1.5  million,  which
represents the self-insured  retention under the Company's applicable directors'
and officers' insurance policies, has been paid by the Company. In addition, the
Company  paid  $250,000  on  behalf of DMB.  Certain  issuers  of the  Company's
directors' and officers'  insurance  policies,  together with the Company,  have
agreed to fund the balance of the settlement.  The Company does not believe that
its  remaining  obligations  to directors and officers will exceed its insurance
coverage.  The Settlement Agreement was filed with the Court on January 19, 1996
and after  amendment  was  primarily  approved by the Court.  The Court now must
determine  whether,  after notice to class  members,  to approve the  Settlement
Agreement and to enter a bar order designed to limit the ability of non-settling
defendants to seek contributions,  indemnification,  equitable  apportionment or
similar equitable remedies from the Company or the Director/Officer Defendants..
The Court approved the form of notice to be provided to the class,  ordered that
the class be given notice,  and set a final settlement hearing date for February
14, 1997. Notice to the class and proofs of claim have been mailed and the class
members have until January 31, 1997, to opt out of or object to the settlement.

         UDC Homes, Inc. v. Mann & Smith, Inc. and Cooney, Rikard & Curtin, Inc.
- This case was pending in Arizona  Superior  Court,  Maricopa  County (Case No.
CV94-10637).  In  connection  with  several  lawsuits in which the Company was a
defendant and for which the primary policy limits had been exhausted, the excess
liability  insurance  carriers to whom the  defense of the actions was  tendered
asserted that their  policies did not provide  coverage or  indemnification  for
such  lawsuits  because the  policies  neither  "follow the form" of the primary
policies nor contain  "broad form"  coverage.  The carriers  expressly  reserved
their  rights  with  respect to the defense of the  lawsuits.  In  addition,  in
connection  with the settlement of certain claims,  one of the Company's  excess
liability  insurance carriers reserved its right to be reimbursed  $275,000 paid
in  settlement  for the same  reasons.  On July 8,  1994,  the  Company  filed a
complaint against the Company's  insurance agent and its insurance  broker.  The
complaint,  as amended,  alleged that from April 1, 1985 through  April 1, 1988,
the commercial  umbrella  liability  policies procured by the defendants for the
Company  failed to either  "follow  
                                       12
<PAGE>
the form" of the primary  liability  polices  procured by the defendants for the
Company for those years or contain "broad form" general liability coverage.  The
complaint sought special damages in the amount of $275,000,  general and special
damages up to the limits of the excess liability insurance policies,  attorneys'
fees and costs.  The defendants  filed separate answers denying any liability to
the Company, Mann & Smith, Inc. filed a crosscomplaint  against Cooney, Rikard &
Curtin,  Inc. and the Company  filed a motion to  bifurcate  the  liability  and
damage issues.  On March 7, 1996, the parties filed a stipulation  for dismissal
without  prejudice  wherein the Company retained the right to refile the case up
to and including  September 1, 1997,  after an assessment of potential  exposure
and damages. On March 11, 1996, the case was dismissed without prejudice.

         Shadow Moss Homeowners  Association Inc. v. UDC-Universal  Development,
L.P., dba UDC Homes Limited  Partnership,  Course View Properties,  Inc., Newman
Bower Architects,  James M. Taylor,  and Mulvaney Builders and Associates - This
case,  which was  filed on March 5,  1993,  is  currently  pending  in the Horry
County,  South  Carolina  Court of Common  Pleas.  The  plaintiff  alleges  that
numerous   construction/design  defects  exist  at  the  Company's  Shadow  Moss
condominium project in North Myrtle Beach, South Carolina. The complaint alleges
breach of  contract,  breach of  implied  warranties,  negligence,  strict  tort
liability and unfair trade  practices.  The plaintiff seeks $2,500,000 in actual
and  consequential  damages,  punitive  damages,  costs and attorneys'  fees and
treble the actual damages as a result of the unfair trade practices  claim.  The
Company is unable at this time to determine  the  likelihood  of an  unfavorable
outcome  or the  amount or range of  potential  loss,  if any.  CIGNA  Insurance
Company is defending the Company under a reservation of rights.

         The  Company  is also  involved  in  various  legal  proceedings  which
generally represent ordinary routine litigation  incident to its business,  some
of which are covered in whole or in part by insurance. In the Company's opinion,
none of the pending  litigation matters will have a material adverse effect upon
the Company's financial position, results of operations or cash flows.

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

         No matter was  submitted  during the fourth  quarter of the fiscal year
covered by this report to a vote of the Company's security holders.
                                       13
<PAGE>
                                     PART II

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

         There  is  currently  no  established  public  trading  market  for the
Company's  Common Stock. No assurance can be given as to whether any such market
will develop or, if one does develop,  as to the price at which such  securities
will trade.  As of December 27, 1996,  the Company had two record  owners of its
Common Stock.

         The Company has not paid  dividends  on its common  equity in either of
its last two fiscal years.  Certain  provisions of the Company's  indentures and
debt agreements  materially  restrict the Company's  ability to pay dividends on
the Common  Stock.  See  "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations."

Item 6.   Selected Financial Data
-------   -----------------------

         As of September 30, 1992,  the Company's  predecessor,  UDC - Universal
Development L.P. ("UDC L.P."),  converted from limited  partnership to corporate
form and commenced  operations as UDC Homes, Inc. The following table sets forth
selected consolidated  financial information regarding the financial position of
the Company and UDC L.P.  for each of the five years  ended  September  30, 1992
through  1996  (including  Southeast  operations).  The  consolidated  financial
information  has been  derived from UDC L.P.' s and the  Company's  consolidated
financial  statements.  This information  should be read in conjunction with the
consolidated financial statements and notes thereto and "Management's Discussion
and  Analysis  of  Financial  Condition  and  Results of  Operations,"  included
elsewhere herein.
                                       14
<PAGE>
                      SELECTED CONSOLIDATED FINANCIAL DATA
                             (Dollars in Thousands)
<TABLE>
<CAPTION>
                                            Successor
                                             Company                               Predecessor Company
                                           ----------- -----------------------------------------------------------------------------
                                              Period       Period          Twelve          Twelve         Twelve          Twelve    
                                               from         from           Month           Month         Month           Month      
                                            November 14,  October 1,       Period          Period         Period          Period    
                                              1995 to        to            Ended            Ended         Ended           Ended     
                                           September 30,  November 13,  September 30,   September 30,   September 30,  September 30 
                                               1996          1995           1995            1994            1993           1992     
                                                                                                                    (As Restated)(1)
                                           -------------  ------------  -------------   -------------   -------------  -------------
<S>                                        <C>                           <C>             <C>            <C>             <C>         
STATEMENTS OF                                                                                                                       
  OPERATIONS DATA:                                                                                                                  
  Housing sales                            $ 387,455      $  29,624      $ 444,815       $ 508,800      $ 482,343      $ 370,069    
  Housing gross margin                        46,829          2,354         40,807          65,861         53,618         41,958    
  (Loss) income before extraordinary gain    (62,217)       (10,241)      (134,774)        (22,783)         5,038          4,603    
  Net (loss) income (2)                      (62,217)        25,954       (134,774)        (22,783)         5,038          4,603    
                                                                                                                                    
OPERATING DATA:                                                                                                                     
  New sales orders (dollars) (3)           $ 362,300      $  31,372      $ 408,109       $ 540,473      $ 454,308      $ 413,558    
  New sales orders (units)                     1,755            165          2,034           2,796          2,564          2,423    
  Home closings (units)                        1,886            140          2,238           2,713          2,822          2,212    
  Average revenue per home closing         $     206      $     212      $     199       $     188      $     171      $     167    
  Dollar amount of homes under contract                                                                                             
    at period-end (backlog)                $ 161,110      $ 185,148      $ 181,838       $ 218,927      $ 180,897      $ 209,522    
  Homes (units) under contract at                                                                                                   
    period-end (backlog)                         762            893            868           1,072            990          1,248    
                                                                                                                                    
                                         September 30,                                          September 30,
                                         -------------                   ------------   -------------   -------------  -------------
                                             1996                            1995           1994           1993            1992     
                                         -------------                   ------------   -------------   -------------  -------------
                                                                                                                                    
BALANCE SHEET DATA:                                                                                                                 
  Total assets                             $ 296,343                     $ 436,425       $ 583,250      $ 590,995       $ 568,358   
                                           =========                     =========       =========      =========       =========   
                                                                                                                                    
  Debt:                                                                                                                             
    Notes payable                          $  73,062                     $ 153,957       $ 154,636      $ 121,605       $ 201,191   
    Senior and subordinated debt             120,262                          --           191,406        194,811          91,663   
    Liabilities subject to compromise (4)       --                         205,264            --             --              --     
    Collateralized mortgage obligations                                                                                             
      and mortgage lines of credit             6,299                        28,450          33,836         61,612          97,237   
                                           ---------                     ---------       ---------      ---------       ---------   
    Total debt                             $ 199,623                     $ 387,671       $ 379,878      $ 378,028       $ 390,091   
                                           =========                     =========       =========      =========       =========   
                                                                                                                                    
Redeemable preferred stock                 $    --                       $    --         $    --        $    --         $   2,870   
                                           =========                     =========       =========      =========       =========   
                                                                                                                                    
Total stockholders' equity (deficit)       $  15,783                     $ (22,954)      $ 111,820      $ 134,603       $ 124,194   
                                           =========                     =========       =========      =========       =========   
                                                                                                                                    
                                                                                                                       
</TABLE>

(1)   The Company  changed its fiscal  year-end from December 31 to September 30
      in connection  with the conversion  from  partnership to corporate form in
      September 1992.

(2)   Net loss for the period  from  November  14,  1995 to  September  30, 1996
      includes a noncash loss from impairment of certain real estate inventories
      and  goodwill  in the  amount  of $42.8  million  which  was  recorded  in
      accordance with Statement of Financial  Accounting  Standards ("SFAS") No.
      121. Net (loss) income for the periods ended  September 30, 1995, 1994 and
      1992 includes land  write-downs of $67.2 million,  $24.1 million and $30.7
      million,  respectively.  Net loss for the period 
                                       15
<PAGE>
      from November 14, 1995 to September  30, 1996,  the period from October 1,
      to November 13, 1995 and the period ended September 30, 1995 includes $6.6
      million, $7.1 million and $15.4 million,  respectively,  of reorganization
      items (primarily  professional  fees and severance  payments).  Net (loss)
      income for the periods ended  September  30, 1995,  1994 and 1993 includes
      income tax  expense  of $26.8  million,  $3.4  million  and $3.3  million,
      respectively.  Net income for the period ended September 30, 1992 includes
      an income tax benefit of $33.5 million.

(3)   Home sales orders are net of cancellations  received during the applicable
      period.  Revenue from the sale of homes is  recognized at the time risk of
      ownership is transferred which occurs at the close of the home sale.

(4)   Fiscal 1995 includes $168 million of unsecured Senior Notes payable, $20.4
      million of  Convertible  Subordinated  Notes  payable and $16.9 million of
      accrued  interest on  liabilities  subject to  compromise at September 30,
      1995 as a result of the Company's Chapter 11 filing.
                                       16
<PAGE>
Item 7.   Management's Discussion and Analysis of Financial Condition and
-------   ---------------------------------------------------------------
          Results of Operations
          ---------------------

Introduction

         On  November   14,   1995,   the  Company   consummated   its  plan  of
reorganization  and emerged from its Chapter 11  bankruptcy  proceeding as a new
reporting  entity.  The  following  discussion  and  analysis  of the  Company's
operations  includes  only the  Company's  continuing  operations in Arizona and
California  except as  otherwise  indicated.  The  Company  is  liquidating  all
remaining  assets of its  Southeast  operations,  and  management  believes that
discussion of such operations is no longer  material to obtain an  understanding
of the Company's operations.

Revenues

         The following  table presents  comparative  fiscal 1996,  1995 and 1994
housing revenues, deliveries and average sales price:

                                               1996         1995          1994
                                               ----         ----          ----
  Arizona and California:

    Family revenue (000s) ...............   $ 315,604    $ 294,665     $ 329,979

    Retirement revenue (000s) ...........   $  86,229    $  73,086     $  92,287

    Units delivered .....................       1,951        1,844         2,262

    Average sales price .................   $ 205,963    $ 199,431     $ 186,678

    Change from prior year ..............         9.3%       (12.9)%

    Change due to volume ................         5.8%       (18.5)%

    Change due to average sales price ...         3.5%         5.6%



  Southeast:

    Family revenue (000s) ...............   $  14,625    $  56,151     $  59,548

    Retirement revenue (000s) ...........   $     621    $  20,913     $  26,986

    Units delivered .....................          75          394           451

    Average sales price .................   $ 203,280    $ 195,594     $ 191,871

         The increase in volume in fiscal 1996  compared to fiscal 1995 resulted
from  improved  sales in each market  during the fiscal  year.  The  increase in
average  sales price in fiscal  1996 was  primarily  the result of higher  sales
prices in  California  due to  changes  in the mix of product  types  sold.  The
Company  experienced  decreases  in housing  revenues and units  closed,  and an
increase in average sales prices, during fiscal 1995 as compared to fiscal 1994.
The decrease in units closed was consistent with an overall decrease in closings
for the homebuilding industry, which the Company believes was largely the result
of higher mortgage interest rates during the first six months of fiscal 1995. In
addition, the Company believes that its closings were adversely affected by home
buyer concerns about the Company's  financial  condition and restrictions on the
Company's ability to finance construction during its Chapter 11 proceedings (the
"Chapter 11 Case").  The 1995  increases in average sales prices were  primarily
due to price  increases  
                                       17
<PAGE>
implemented  in the first  quarter  of fiscal  1995,  the  introduction  of new,
higher-priced  projects in  California  and changes in the mix of product  types
sold.

Net Orders

         The following table presents comparative fiscal 1996, 1995 and 1994 net
orders by region (dollars in thousands):

                                              1996          1995          1994
                                              ----          ----          ----  
   Arizona:

     Dollars .........................      $268,053      $257,397      $292,951

     Units ordered ...................         1,434         1,375         1,656

     Average sales price .............      $    187      $    187      $    177



   California:

     Dollars .........................      $121,175      $103,986      $152,625

     Units ordered ...................           463           418           653

     Average sales price .............      $    262      $    249      $    234



   Southeast:

     Dollars .........................      $  4,445      $ 46,726      $ 94,897

     Units ordered ...................            23           241           487

     Average sales price .............      $    193      $    194      $    195



   Company total:

     Dollars .........................      $393,673      $408,109      $540,473

     Units ordered ...................         1,920         2,034         2,796

     Average sales price .............      $    205      $    201      $    193

         Net orders  represents  the aggregate  dollar value and number of homes
for which the Company has received  purchase deposits and signed sales contracts
during the period, net of cancellations.

         The  Company  believes  that  relatively  low  interest  rates  and the
economic  strength  of the  Phoenix  market and  improvement  in the  California
economy  resulted in new orders  increasing  in fiscal  1996  compared to fiscal
1995.  Additionally,  the Company completed its reorganization and therefore was
able to alleviate home buyer  concerns  about the Company's  ability to complete
construction  of homes  and  subdivisions  and  honor  its  post-sales  warranty
obligations.  The Company  experienced  decreases in net orders and increases in
average sales prices during fiscal 1995 as compared to fiscal 1994. The decrease
in net  orders  is  consistent  with  an  overall  decrease  in  orders  for the
homebuilding  industry,  which the  Company  believes  was largely the result of
higher  mortgage  interest  rates  during the first six  months of fiscal  1995.
Additionally,  as a result of its Chapter 11 Case, the Company believes that the
decrease was partially  attributable  to home buyer concerns about the Company's
ability to complete  construction  of homes and  subdivisions in a timely manner
and to honor its post-sale warranty obligations. The
                                       18
<PAGE>
1995  increases in average  sales prices in Arizona and  California  were due to
price  increases  implemented  in the  first  quarter  of  fiscal  1995  and the
introduction of new projects in California  with higher sales prices,  offset by
price  reductions  implemented  in the third  fiscal  quarter  of 1995 to entice
potential  home buyers who may have been hesitant to purchase a UDC home because
of the Chapter 11 Case.

Net Sales Backlog

         Net sales backlog  represents the aggregate  dollar value and number of
homes ordered, net of cancellations, pending delivery at September 30, for which
the Company had  received  purchase  deposits and signed  sales  contracts.  The
following  table  presents  comparative  fiscal  1996,  1995 and 1994 net  sales
backlog by region (dollars in thousands):

                                            1996           1995           1994
                                            ----           ----           ----

Arizona:

   Dollars ........................       $120,883       $122,296       $123,154

   Units in backlog ...............            629            639            649

   Average sales price ............       $    192       $    191       $    190



California:

   Dollars ........................       $ 40,227       $ 48,813       $ 54,670

   Units in backlog ...............            133            177            218

   Average sales price ............       $    302       $    276       $    251



Southeast:

   Dollars ........................       $   --         $ 10,729       $ 41,103

   Units in backlog ...............           --               52            205

   Average sales price ............       $   --         $    206       $    201



Company total:

   Dollars ........................       $161,110       $181,838       $218,927

   Units in backlog ...............            762            868          1,072

   Average sales price ............       $    211       $    209       $    204


         The decrease in backlog at September 30, 1996 resulted from fewer homes
available  for sale in  California  as a result of the  Company's  inability  to
acquire land for homesites  during its Chapter 11 Case. The Company  experienced
decreases in backlog during fiscal 1995 compared to fiscal 1994 primarily due to
reduced  net  orders  and  continued  closings  of  units in  backlog.  Further,
difficulty in obtaining financing for new construction starts during the Chapter
11 Case  delayed  construction  of many  homes,  resulting  in lower  levels  of
inventory under construction at September 30, 1995.
                                       19
<PAGE>
Gross Margins, Selling and Administrative Expenses and Interest, Net

         The following  table presents  comparative  fiscal 1996,  1995 and 1994
information  related to the cost of housing  sales,  selling and  administrative
expenses ("S&A") and interest, net for home building (dollars in thousands):

<TABLE>
<CAPTION>
                                                                        Years Ending September 30,
                                              -----------------------------------------------------------------------
                                                        1996                    1995                    1994
                                              ------------------------ ----------------------- ----------------------
                                                 Dollars     Percent     Dollars     Percent     Dollars     Percent  
                                                 -------     -------     -------     -------     -------     ------- 
<S>                                             <C>           <C>       <C>           <C>       <C>           <C>     
Revenue from                                                                                                         
  housing sales .............................   $ 417,079     100.0 %   $ 444,815     100.0 %   $ 508,800     100.0 %
Cost of housing sales .......................     367,896      88.2       404,008      90.8       442,939      87.1  
                                                ---------     -----     ---------     -----     ---------     -----  
Gross margin ................................      49,183      11.8        40,807       9.2        65,861      12.9  
S&A expenses (including                                                                                              
  cost of Company                                                                                                    
  reorganizations) ..........................      60,232      14.4        69,468      15.6        57,684      11.3  
                                                ---------     -----     ---------     -----     ---------     -----  
Operating income (loss) from                                                                                         
  home building .............................     (11,049)     (2.6)      (28,661)     (6.4)        8,177       1.6  
Interest, net ...............................      17,455       4.2         6,161       1.4          (983)     (0.2) 
                                                ---------     -----     ---------     -----     ---------     -----  
Pre-tax (loss) income from                                                                                           
  home building .............................   $ (28,504)     (6.8)%   $ (34,822)     (7.8) %  $   9,160       1.8 %   
                                                =========     =====     =========     =====     =========     =====  
</TABLE>

         Generally  Accepted  Accounting  Principles  require  that the purchase
accounting  principles  of  APB  No.  16 be  applied  in  the  valuation  of the
reorganized  Company's  balance sheet as of the  Acquisition  Date (the "Opening
Balance  Sheet").  APB No. 16  requires  that the basis  assigned  to  purchased
inventories  include a portion of the profit  ("Purchased  Profit")  which would
otherwise  have been  recognized  upon the  closing  of the  related  home sale,
consistent  with the concept that the earnings  process  occurs  throughout  the
construction process. The further the construction process has been completed on
a given home,  the more profit is  capitalized  in the  Opening  Balance  Sheet.
Accordingly,  as a result of the application of purchase  accounting  margins on
homes held at the Acquisition Date and closed in subsequent  fiscal periods will
generally be depressed  relative to prior periods and relative to homes not held
at the Acquisition Date and closed later in the fiscal year. Further,  all homes
under  construction as of the Acquisition  Date will generally have margins less
than those on homes on which  construction began after the Acquisition Date. The
impact  of  Purchased  Profit  on  gross  margin  is  partially  offset  by  the
elimination of capitalized interest in inventory in the Opening Balance Sheet as
well as by less  interest  being  capitalized  as a result of the  change in the
Company's method of applying the  capitalization of interest  principles of SFAS
No. 34 to housing inventory  discussed in Note 12 to the accompanying  financial
statements.

         Gross  margins  increased  during  fiscal 1996  compared to fiscal 1995
primarily due to the  revaluation  of the Company's  housing  inventory and land
inventory to fair values at the Acquisition  Date,  which resulted in lower land
basis and higher gross margins, and the effect of
                                       20
<PAGE>
reduced interest capitalization and corresponding absorption. These higher gross
margins  were  offset by the  amortization  of  approximately $11.2  million  of
Purchased Profit. Gross margins before housing land write-downs decreased during
fiscal 1995 as compared to fiscal 1994 largely due to the  spreading of interest
and other  fixed  indirect  construction  costs  over a  reduced  number of home
closings,   price  reductions   implemented  to  close  a  number  of  homes  in
substantially  complete but unsold inventory and price reductions implemented to
entice  potential  home buyers who may have been hesitant to purchase a UDC home
because of the Chapter 11 Case. The decline in gross margin  percentage also was
due in part to excessive  warranty costs,  which the Company  believes  resulted
from numerous  requests for warranty work from  homeowners  concerned  about the
Company's  ability to meet its future  warranty  obligations  as a result of the
Chapter 11 Case and, in one southern  California  division,  defective materials
supplied by certain subcontractors.

         The  following  table  presents  selling  and  administrative  expenses
(dollars in thousands):
<TABLE>
<CAPTION>
                                                       Years ended September 30,
                                                 ----------------------------------
                                                     1996         1995        1994
                                                     ----         ----        ----
<S>                                               <C>          <C>          <C>    
Selling and administrative expenses:

   Variable components ........................   $  16,468    $  19,253    $21,283

   Fixed components ...........................      30,138       34,777     36,401

   Cost of company reorganizations ............      13,626       15,438       --
                                                  ---------    ---------    -------

Total selling and administrative expenses .....   $  60,232    $  69,468    $57,684
                                                  =========    =========    =======



As a percentage of revenues from housing sales:

   Variable components ........................         4.0%         4.4%       4.2%

   Fixed components ...........................         7.2          7.8        7.1
                                                                               
   Cost of company reorganizations ............         3.2          3.4        0.0
                                                  ---------    ---------    -------

                                                                            
Total selling and administrative expenses .....        14.4%        15.6%      11.3%
                                                  =========    =========    =======
</TABLE>

         The variable component of selling and administrative  expenses includes
sales  commissions,  model furniture  amortization  and closing costs.  Variable
selling and  administrative  expenses as a percentage of housing sales decreased
in fiscal 1996 as compared to fiscal 1995 due to a decrease in sales commissions
paid to third party sales agents.  Variable selling and administrative  expenses
as a percentage of housing sales  increased in fiscal 1995 as compared to fiscal
1994 due to higher average sales  commissions  resulting from changes in the mix
of product types sold and increased sales  commissions paid to third party sales
agents.

         The fixed component of selling and administrative expenses includes all
other  selling and  administrative  expenses  which  generally  do not vary with
housing sales volume.  Fixed selling and  administrative  expenses  decreased in
fiscal 1996 as compared to fiscal 1995 primarily due to
                                       21
<PAGE>
reductions  in salaries and  advertising  expenses  arising  from the  Company's
continuing  efforts to reduce costs partially  offset by goodwill  amortization.
Additionally,  valuation  adjustments  were  recorded  on certain  assets of the
Company  based on purchase  accounting  principles  resulting  in a reduction in
amortization  of  these  assets.  Fixed  selling  and  administrative   expenses
decreased in fiscal 1995 as compared to fiscal 1994  primarily due to reductions
in salaries,  legal and other miscellaneous  expenses arising from the Company's
efforts to reduce costs.

         The Company  capitalizes  certain  interest costs for its home building
operations and includes such capitalized interest in cost of home sales when the
related  units  are  delivered.  Accordingly,  total  interest  incurred  by the
Company's home building operations was $31,035,000,  $34,041,000 and $36,335,000
in fiscal 1996, 1995 and 1994,  respectively.  Interest,  net for home building,
was  $17,455,000,  $6,161,000  and  $(983,000)  in fiscal  1996,  1995 and 1994,
respectively.  Interest  incurred  decreased  in  fiscal  1996 as a result  of a
reduction in debt levels upon the Company's  emergence from its Chapter 11 Case.
Interest, net increased in fiscal 1996 due to the Company changing its method of
applying  SFAS No. 34 in order to better  match the  capitalization  of interest
with actual construction and development efforts.

Loss From Asset Impairment

         At September 30, 1996, the Company's  management reviewed the status of
the Company's operations, including: (1) 1996 operating losses, which losses are
anticipated to continue into fiscal 1997; (2) the Company's overhead  structure,
which will require an expansion of current volume in order to generate  adequate
operating margins;  (3) lenders' waivers of covenant  violations which have been
required due to the Company's inability to meet operating  projections;  and (4)
additional capital  contributions  required in fiscal 1996 and anticipated to be
required  in fiscal 1997 in order for the  Company to have  adequate  liquidity.
Based on this review,  management  concluded that the Company's long-term assets
may be  impaired.  In  accordance  with SFAS No.  121,  the  Company  tested its
long-term assets held,  including  allocated  goodwill,  for  recoverability and
determined  that an impairment  loss of $42.8 million should be recognized.  The
impairment loss is comprised of $3.5 million and $4.2 million applicable to land
inventory and land held for sale, respectively,  located in Phoenix and Northern
California and $35.1 million applicable to goodwill.

         In an effort to improve its liquidity,  in the second quarter of fiscal
1995 the  Company  announced  its  intention  to actively  market its  Southeast
homebuilding  operations which were under-performing in relation to management's
expectations.  In  connection  with its  restructuring  (and related  Chapter 11
Case), in May 1995 the Company also began marketing two residential  projects in
California for bulk sale along with certain commercial and mixed-use real estate
parcels in Arizona  not  previously  identified  for sale.  As a result of these
decisions,  the Company  wrote down the  carrying  amounts of such  projects and
parcels to the  amounts  expected  to be  realized  from their  immediate  sale,
reduced for costs to be incurred prior to and in connection with such sales. The
write-downs included the immediate amortization of all deferred costs associated
with the Company's Southeast operations.  In addition, based on new information,
the Company  revised  downward  its  estimate  of  proceeds to be received  from
certain parcels
                                       22
<PAGE>
identified  for sale in fiscal 1994 based on efforts to  accelerate  the sale of
those  parcels  and the effect of the  Chapter 11 Case on offers  received.  The
total charge to operations in fiscal 1995  resulting from such  write-downs  was
$67.2 million ($47.5  million in the  Southeast,  $9.8 million in California and
$9.9 million in Arizona).

Mortgage Operations

         The Company's  mortgage  banking  operations are conducted  through its
wholly-owned  subsidiary UDC Mortgage.  The following  table presents  operating
information for the Company's  mortgage banking  operations  (excluding  finance
operations) (dollars in thousands):

                                                   1996       1995       1994
                                                   ----       ----       ----
Number of loans originated ....................       895        725      1,127
Revenues ......................................  $  2,665   $  1,764   $  3,185
General and administrative expenses ...........     1,840      2,193      2,827
                                                 --------   --------  ---------
Operating income from mortgage banking ........       825       (429)       358
Interest - net ................................      (233)       (65)      (234)
                                                 --------   --------  ---------
Pre-tax profit from mortgage banking ..........  $  1,058   $   (364) $     592
                                                 ========   ========  =========


         Revenues from mortgage banking  increased in fiscal 1996 primarily as a
result of higher servicing  release  premiums  received on the sale of servicing
and an  increase in mortgage  originations  related to the  increase in closings
recorded by the Company. General and administrative expenses decreased in fiscal
1996  compared to fiscal 1995  primarily as a result of the  elimination  of UDC
Mortgage's  goodwill  based on purchase  accounting  principles  resulting  in a
reduction in amortization  expense and  additionally,  a reduction in legal fees
paid.  These  decreases were  partially  offset by an increase in salary expense
(relating to severance  payments to  employees  due to the Company  entering the
joint venture  agreement) and an increase in foreclosure  expense.  Revenues and
general and  administrative  expenses from mortgage banking  decreased in fiscal
1995  compared to fiscal 1994  primarily  as a result of the adverse  impact the
Company's Chapter 11 Case had on unit closings.

Liquidity and Capital Resources

         The Company's financing needs depend primarily upon sales volume, asset
turnover,  land acquisitions and inventory  balances.  The Company has financed,
and expects to continue to finance,  its working  capital  needs  through  funds
generated by operations,  borrowings and capital  contributions  by AEW and DMB.
Funds for future land  acquisitions  and  construction  costs are expected to be
provided primarily by cash flows from operations, future borrowings as permitted
under the Company's loan  agreements and capital  contributions  by AEW and DMB.
The  Company  believes  that  amounts  generated  from  operations,   additional
borrowings and capital  contributions will provide funds adequate to finance its
homebuilding activities and meet its debt service requirements.

         In fiscal  1996 and on November 7, 1996,  the Company  completed  asset
sale transactions
                                       23
<PAGE>
in which it sold to DMB/AEW Land Holdings One, LLC, an affiliate of DMB and AEW,
for cash $28.6 million and $25.5  million,  respectively,  of assets the Company
had  previously  designated as land held for sale.  Proceeds from the sales were
used to retire four of the Company's term facilities,  reduce the  loan-to-value
ratio to 60% on one other term facility,  and reduce the outstanding  balance on
the Company's principle revolving facility.  These sales also created additional
acquisition  and development  fund  availability  under the Company's  principle
revolving credit facility.  The Company has entered into a management  agreement
with the DMB/AEW  affiliate  pursuant to which the Company  will receive a fixed
monthly  fee for the  management  and  marketing  of the  assets to third  party
buyers. To the extent the cash proceeds from the sale of the property to a third
party  exceeds  certain  thresholds,  the  Company  will  participate  in excess
profits.

         At September 30, 1996,  the Company  finances its home  building,  land
development and mortgage operations as discussed below:

         Construction and Acquisition and Development  Financing - The Company's
largest  credit  facility is a $150 million  revolving  facility with a group of
banks.  The facility is available  for both  construction  and  acquisition  and
development  ("A&D") activities in Arizona and California.  The amount available
for A&D  activities  is  limited  to a maximum of $37.5  million.  The  facility
accrues interest at prime plus 1% or, at the Company's option, LIBOR plus 3.25%,
payable monthly, and requires payment of a commitment fee of 1% per annum of the
commitment  amount,  an unused  commitment  fee of .25% per annum of the average
unused  commitment  amount,  and  syndication  and agency fees.  The facility is
secured  by  portions  of the  Company's  housing  inventory  and land  held for
development and matures on March 31, 1999. At September 30, 1996,  $34.2 million
was outstanding under the facility.

         Additionally,  the Company has a $23.3 million  revolving  construction
and A&D facility for  Westbrook  Village  ("WBV").  The WBV facility  includes a
$12.5 million  construction  facility and a $10.8  million A&D  facility.  These
facilities accrue interest at prime plus 1.5%, payable monthly,  require payment
of a commitment fee of 1% per annum and are secured by WBV housing inventory and
land held for  development.  The A&D facility  matures on July 1, 1997,  and the
construction  facility  matures on January 1, 1998. At September 30, 1996,  $4.3
million was  outstanding  under the  construction  facility  and no amounts were
outstanding under the A&D facility.

         The  construction  and A& D facilities  described above contain various
covenants,  including but not limited to, covenants regarding: (i) encumbrances;
(ii)  minimum  available  liquidity;  (iii)  maximum  total debt to tangible net
worth; (iv) minimum tangible net worth; (v) minimum  cumulative net cash flow to
total debt  service;  (vi) minimum  ratio of earnings  before  interest,  taxes,
depreciation and amortization ("EBITDA") to interest paid; (vii) restrictions on
mergers,  consolidations and acquisitions;  (viii)  restrictions on asset sales;
and (ix)  restrictions  on incurrence of  additional  indebtedness.  Among other
things,  such  covenants  may limit the Company's  ability to obtain  additional
financing  when needed and on terms  acceptable  to the  Company.  Further,  the
availability of funds under the revolving facilities is
                                       24
<PAGE>
dependent upon  compliance  with such covenants,  certain  loan-to-value  ratios
stated in each facility and the levels of pre-sold and speculative construction.
Accordingly,  all of the committed credit may not be available to the Company at
a particular  time. Any inability of the Company to obtain financing when needed
in amounts or on terms  favorable to the Company  could have a material  adverse
effect on the Company's business, operating results and financial condition.

         As a result of applying  purchase  accounting at the Acquisition  Date,
costs in excess of amounts allocable to identifiable assets was determined to be
an  amount  greater  than  contemplated  under  the debt  covenants  which  were
negotiated prior to the  determination of such amounts.  As a result,  as of the
Acquisition  Date and  subsequent  thereto,  the Company was in violation of the
tangible net worth and debt to tangible net worth covenants.  Additionally,  the
Company was in violation of certain minimum available  liquidity  covenants from
February 21, 1996  through  March 14,  1996.  In  response,  the Company and the
lenders  agreed to a waiver of the  violations  and a  modification  of the debt
covenants,  and on March 15,  1996,  DMB  invested $10 million in the Company in
exchange for 14.5% Series D Subordinated  Notes.  In addition,  at September 30,
1996,  the Company was in violation of the tangible net worth,  debt to tangible
net worth,  cumulative net cash flow to debt service and EBITDA to interest paid
covenants.  On  December  23,  1996,  waivers of the  covenant  violations  were
obtained.

         Other  Secured  Borrowings  - In  addition  to  the  credit  facilities
described  above,  the  Company  has various  notes  outstanding  collateralized
primarily by land held for development. The notes bear interest at rates ranging
from 9.5% to 15% and are due at various  dates.  At September  30,  1996,  $34.6
million was outstanding under these notes.

         Senior  Unsecured Notes - On the  Acquisition  Date, the Company issued
Series A Senior  Notes in a principal  amount of $60 million and Series B Senior
Notes in a principal amount of $10 million. Interest on the Senior Notes accrues
at a rate of 12.5% per  annum,  commencing  September  1,  1995,  and is payable
semi-annually  beginning May 1, 1996.  Both series of Senior Notes mature on May
1, 2000. The Series B Senior Notes further require prepayments from the proceeds
of certain asset sales in excess of $10 million,  subject to certain limitations
related to the  Company's  new  construction  and  acquisition  and  development
financing.  The Senior Notes contain  numerous  covenants which may, among other
things,  limit the Company's ability to obtain additional  financing when needed
and on terms acceptable to the Company.

         Subordinated Notes - On the Acquisition Date, the Company issued Series
C  Subordinated  Notes in a principal  amount of $35 million  ($30  million were
issued to DMB in connection  with its acquisition of the equity of the Company).
Interest  on the Series C  Subordinated  Notes  accrues at the rate of 14.5% per
annum and is payable  semi-annually  beginning  November  1, 1996.  The Series C
Subordinated  Notes mature  November 1, 2000. The payment of interest in cash on
the Series C Subordinated Notes is restricted by certain  limitations related to
the Company's construction and acquisition and development financing.  On May 6,
1996,  Eastrich No. 184,  LLC acquired $15 million of the Series C  Subordinated
Notes from DMB.  The  November 1, 1996  payment of interest  was paid in-kind in
additional Series C Subordinated Notes.
                                       25
<PAGE>
         On March 15, 1996,  DMB invested $10 million in the Company in exchange
for $10  million  Series  D  Subordinated  Notes.  The  terms  for the  Series D
Subordinated  Notes are  identical  to the terms for the  Series C  Subordinated
Notes discussed above,  except that payments on the Series D Subordinated  Notes
are subordinate to payments on the Series C Subordinated  Notes. On May 6, 1996,
Eastrich  No. 184, LLC  acquired $5 million of the Series D  Subordinated  Notes
from  DMB.  The  November  1, 1996  payment  of  interest  was paid  in-kind  in
additional Series D Subordinated Notes.

         Common Stock - In connection  with the  consummation  of the Plan,  the
Company  sold  all  1,000  of the  authorized  shares  of  Common  Stock  of the
reorganized  Company, par value $.01 per share, to DMB. DMB then entered into an
option agreement with AEW which, as amended,  gave AEW the right to purchase 500
shares  of  the  Common  Stock  owned  by  DMB,  $15  million  of the  Series  C
Subordinated  Notes issued to DMB, $5 million of the Series D Subordinated Notes
issued to DMB and 50% of the general partner interest held by a DMB affiliate in
WBV for an aggregate purchase price of $61.25 million,  plus interest.  On April
21,  1996,  AEW  notified  DMB that it elected to exercise  the option,  and the
purchase by Eastrich No. 184, LLC (as to all interests  except the WBV interest)
and  Eastrich  No.  185,  LLC (as to the WBV  interest),  as  assignees  of AEW,
pursuant to the exercise of the option was completed on May 6, 1996.

         Mortgage Debt - The Company finances its mortgage operations with a $10
million  committed  revolving  credit facility which matures on August 30, 1997.
This facility is secured by residential  mortgages  originated in the closing of
the Company's  residential  home sales.  At September 30, 1996, $6.3 million was
outstanding under the facility.

Inflation

         The  homebuilding  industry is affected by movements in interest rates.
Due to its highly leveraged  condition,  the Company is more sensitive than less
leveraged  companies to increases in interest rates which affect the cost of the
Company's  borrowings  and  impact  the  Company's  margins  and  profitability.
Further,   the  Company  may  have  difficulty  expanding  its  operations  when
opportunities  are  available  or  securing  financing  during a downturn in the
homebuilding  market.  While the Company  believes  that the move-up  family and
active  adult home buyers to whom the Company  provides  housing  have been less
sensitive  to  increasing  interest  rates  than the  industry  as a whole,  the
Company's business is nonetheless affected.  Residential homebuilding companies,
including the Company,  can be adversely  affected by inflation  through  higher
mortgage rates and increased costs for materials and  subcontractors,  resulting
in higher  prices,  both of which  adversely  affect  buyer  demand.  Management
believes  that the impact of  inflation  on its  revenues and costs has not been
material.

         Changes  in  interest  rates  have  several  impacts  on the  Company's
homebuilding operations.  Higher interest rates will increase the carrying costs
of inventory,  thereby  increasing  costs of housing sales and decreasing  gross
margins. Generally, higher interest rates tend to create a reduction in consumer
demand and reduce the  consumer's  ability to qualify  for  mortgage  financing.
Correspondingly,  lower  interest  rates will  decrease  the  carrying  costs of
inventory,  thereby  decreasing  costs of  housing  sales and  increasing  gross
margins.  Generally,  lower interest rates tend to increase  consumer demand and
the consumers' ability to qualify for mortgage financing.
                                       26
<PAGE>
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

         The  statements  contained  herein which are not  historical  facts may
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended,  and Section 21E of the Securities  Exchange
Act of 1934, as amended,  and are subject to the safe harbors  created  thereby.
These forward-looking statements involve risks and uncertainties, including, but
not limited to, the Company's success in overcoming negative  perceptions on the
part of home buyers as a result of its  Chapter 11 Case,  the effect of interest
rates on demand for the Company's homes, and fluctuating  margins as a result of
product mix and other factors. In addition,  the Company's business,  operations
and financial  condition are subject to substantial risks which are described in
the Company's reports and statements filed from time to time with the Securities
and Exchange Commission.

Item 8.   Financial Statements and Supplementary Data
-------   -------------------------------------------

1A.      Financial Statements

         The  following  financial  statements,  together  with the  reports  of
independent public accountants thereon are included as follows:
<TABLE>
<CAPTION>
                                                                                                       Page Number
                                                                                                       -----------
         UDC HOMES, INC. AND SUBSIDIARIES
<S>                                                                                                       <C>
         Reports of Independent Public Accountants..................................................F - 1, F-1a

         Consolidated Balance Sheets as of September 30, 1996 and 1995....................................F - 2

         Consolidated Statements of Operations for the Periods Ended
           September 30, 1996, November 13, 1995, September 30, 1995 and 1994.............................F - 3

         Consolidated  Statements of Changes in  Stockholders'  Equity (Deficit)
           for the Periods Ended September 30, 1996, November 13, 1995,
           September 30, 1995 and 1994....................................................................F - 4

         Consolidated Statements of Cash Flows for the Periods Ended
           September 30, 1996, November 13, 1995, September 30, 1995 and 1994.............................F - 5

         Notes to Consolidated Financial Statements.......................................................F - 6
</TABLE>
2A.      Financial Statement Schedules of UDC Homes, Inc. and Subsidiaries

         No  schedules  have been filed  because  they are not  required  or the
information is included elsewhere in the financial statements or notes thereto.
                                       27
<PAGE>
INDEPENDENT AUDITORS' REPORT


Board of Directors
UDC Homes, Inc.
Tempe, Arizona

We have audited the accompanying  consolidated  balance sheet of UDC Homes, Inc.
and  subsidiaries  as of  September  30,  1996,  and  the  related  consolidated
statements of operations,  stockholders'  equity,  and cash flows for the period
from November 14, (date of acquisition) through September 30, 1996.  ("Successor
Company financial statements"). We have also audited the consolidated statements
of operations,  stockholders'  equity and cash flows of the Predecessor  Company
under Fresh Start reporting for the period from October 1, 1995 through November
13, 1995.  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.

As  discussed in Note 1 to the  financial  statements,  on October 3, 1995,  the
Bankruptcy  Court entered an order confirming the plan of  reorganization  which
became effective after the close of business on November 13, 1995.  Accordingly,
the accompanying  financial statements for the period of October 1, 1995 through
November  13, 1995 have been  prepared in  conformity  with AICPA  Statement  of
Position  90-7,  Financial  Reporting for Entities in  Reorganization  Under the
Bankruptcy  Code,  for  the  Successor  Company  as a new  entity  with  assets,
liabilities,  and a capital structure having carrying values not comparable with
prior periods as described in Note 2.

In our opinion,  the Successor  Company financial  statements  referred to above
present fairly, in all material  respects,  the financial position of UDC Homes,
Inc. and subsidiaries at September 30, 1996, and the results of their operations
and their cash flows for the period of November 14, 1995 through  September  30,
1996 in conformity with generally accepted  accounting  principles.  Further, in
our opinion,  the Predecessor  Company  financial  statements  under Fresh Start
reporting  referred to above  present  fairly,  in all  material  respects,  the
results of operations and cash flows of the  Predecessor  Company for the period
October 1, 1995 through November 13, 1995 in conformity with generally  accepted
accounting principles.

DELOITTE & TOUCHE LLP
Phoenix, Arizona

December 23, 1996
                                      F-1
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To UDC Homes, Inc.:


We have audited the accompanying  consolidated  balance sheet of UDC Homes, Inc.
(a Delaware  corporation)  and  subsidiaries  as of September 30, 1995,  and the
related consolidated  statements of operations,  changes in stockholders' equity
(deficit)  and cash flows for the two years in the period  ended  September  30,
1995. These  consolidated  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 audits 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.

As described more fully in Note 2 to the accompanying  financial statements,  on
May 17, 1995, the Company filed a voluntary petition for relief under Chapter 11
of  the   U.S.   Bankruptcy   Code   and   was   operating   its   business   as
debtor-in-possession   under  the  supervision  of  the  Bankruptcy  Court.  The
Company's plan of reorganization  was confirmed on October 3, 1995, and the plan
was consummated on November 14, 1995, upon the DMB purchase described in Note 2.
Consummation of the plan of  reorganization  materially  changed certain amounts
recorded in the accompanying September 30, 1995, consolidated balance sheet.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material   respects,   the  financial  position  of  UDC  Homes,  Inc.  and
subsidiaries  as of September 30, 1995, and the results of their  operations and
their cash flows for the two years in the period ended  September  30, 1995,  in
conformity with generally accepted accounting principles.

                                                 ARTHUR ANDERSEN LLP


Phoenix, Arizona,
   December 6, 1995.
                                      F-1a
<PAGE>
UDC HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                               Successor  Predecessor
                                                                                Company     Company
                                                                              ----------- -----------
ASSETS                                                                            1996        1995
                                                                              ----------- -----------
                                                                                  (In thousands)
<S>                                                                            <C>          <C>      
HOMEBUILDING:
  Cash and cash equivalents                                                    $   2,782    $   4,591
  Receivables                                                                        985        4,193
  Housing inventory                                                              116,555      142,947
  Land inventory                                                                 115,286      179,476
  Land held for sale                                                              28,332       48,603
  Property and equipment - net                                                    13,216       11,286
  Investments in and receivables from unconsolidated affiliated partnerships        --          5,213
  Goodwill                                                                         3,545         --
  Other assets                                                                     4,497        9,215
                                                                               ---------    ---------
          Total homebuilding assets                                              285,198      405,524
                                                                               ---------    ---------
MORTGAGE BANKING:
  Residential mortgages                                                           10,248       11,951
  Mortgage-backed securities                                                        --         17,415
  Other assets                                                                       897        1,535
                                                                               ---------    ---------
          Total mortgage assets                                                   11,145       30,901
                                                                               ---------    ---------
TOTAL                                                                          $ 296,343    $ 436,425
                                                                               =========    =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

HOMEBUILDING:
  Accounts payable                                                             $  35,079    $  35,179
  Accrued interest                                                                17,478       23,863
  Accrued liabilities and expenses                                                23,624        7,657
  Notes payable                                                                   73,062      153,957
  Senior unsecured notes payable                                                  70,000         --
  Subordinated notes payable ($44,628 due to related parties)                     50,262         --
                                                                               ---------    ---------
          Total homebuilding liabilities                                         269,505      220,656
                                                                               ---------    ---------
MORTGAGE BANKING:
  Mortgage line of credit                                                          6,299       11,389
  Collateralized mortgage obligations                                               --         17,061
  Accrued liabilities and expenses                                                   308          366
                                                                               ---------    ---------
          Total mortgage liabilities                                               6,607       28,816
                                                                               ---------    ---------
          Total liabilities not subject to compromise                            276,112      249,472
                                                                               ---------    ---------
LIABILITIES SUBJECT TO COMPROMISE                                                   --        205,264
                                                                               ---------    ---------
          Total liabilities                                                      276,112      454,736
                                                                               ---------    ---------
MINORITY INTERESTS                                                                 4,448        4,643
                                                                               ---------    ---------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIT):
  Common stock, $.01 par value - authorized, 1,000 shares; issued and
    outstanding at September 30, 1996                                               --           --
  Predecessor preferred stock                                                       --            100
  Predecessor common stock, authorized, 50,000,000 shares; issued and
    outstanding, 11,392,059 at September 30, 1995                                   --            114
  Additional paid-in capital                                                      78,000      118,390
  Accumulated deficit                                                            (62,217)    (141,558)
                                                                               ---------    ---------
          Total stockholders' equity (deficit)                                    15,783      (22,954)
                                                                               ---------    ---------
TOTAL                                                                          $ 296,343    $ 436,425
                                                                               =========    =========
</TABLE>
See notes to consolidated financial statements 
                                      F - 2
<PAGE>
UDC HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                          Successor
                                           Company                  Predecessor Company
                                        -------------- ----------------------------------------------
                                            Period        Period           Twelve          Twelve
                                             from          from            Month           Month
                                          November 14,   October 1,        Period          Period
                                            1995 to         to             Ended           Ended
                                         September 30,   November 13,   September 30,   September 30,
                                             1996           1995            1995            1994
                                        -------------- --------------  ---------------  -------------
                                                               (In thousands)
<S>                                       <C>            <C>             <C>            <C>        
REVENUES:
  Housing sales                           $ 387,455      $  29,624       $ 444,815      $ 508,800  
  Mortgage and finance operations             3,042            305           2,154          3,981  
  Other                                        --             --             1,026          1,370  
                                          ---------      ---------       ---------      ---------  
          Total revenues                    390,497         29,929         447,995        514,151  
                                          ---------      ---------       ---------      ---------  
COSTS AND EXPENSES:                                                                                
  Homebuilding:                                                                                    
    Cost of housing sales                   340,626         27,270         404,008        442,939  
    Selling and administrative expenses      41,637          4,969          54,030         57,684  
    Loss from asset impairment               42,815           --            67,177         17,099  
    Interest - net                           16,887            568           6,161           (983) 
    Other                                       971             35           6,176          5,111  
  Mortgage and finance operations:                                                                 
    General and administrative expenses       2,037            277           2,602          3,048  
    Interest - net                               (6)          --               135            134  
  Equity in losses of unconsolidated                                                               
    partnerships                              1,172           --               223          8,502  
  Cost of company reorganizations             6,575          7,051          15,438           --    
                                          ---------      ---------       ---------      ---------  
          Total costs and expenses          452,714         40,170         555,950        533,534  
                                          ---------      ---------       ---------      ---------  
LOSS BEFORE INCOME TAXES                                                                           
  AND EXTRAORDINARY ITEMS                   (62,217)       (10,241)       (107,955)       (19,383) 
INCOME TAXES                                   --             --            26,819          3,400  
                                          ---------      ---------       ---------      ---------  
LOSS BEFORE EXTRAORDINARY                                                                          
  ITEMS                                     (62,217)       (10,241)       (134,774)       (22,783) 
EXTRAORDINARY ITEMS:                                                                               
  Gain on debt discharge                       --           50,264            --             --    
  Fresh start reporting adjustment             --          (14,069)           --             --    
                                          ---------      ---------       ---------      ---------  
NET (LOSS) INCOME                         $ (62,217)     $  25,954       $(134,774)     $ (22,783) 
                                          =========      =========       =========      =========  
</TABLE>
See notes to consolidated financial statements.                          
                                      F - 3
<PAGE>
UDC HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                         Total
                                         Preferred        Common          Additional      Retained    Stockholders'
                                       Stockholders'   Stockholders'        Paid-In       Earnings       Equity
                                          Equity          Equity            Capital       (Deficit)    (Deficit)
                                       -------------   -------------      ----------      ---------   -------------

                                                                         (In thousands)
<S>                                   <C>               <C>                <C>            <C>          <C>          
PREDECESSOR COMPANY
  BALANCE, OCTOBER 1, 1993            $      83         $     114          $ 106,369      $  28,037    $ 134,603    
                                                                                                                    
  Preferred stock in-kind dividends          11              --               10,281        (10,292)        --      
                                                                                                                    
  Net loss                                 --                --                 --          (22,783)     (22,783)   
                                      ---------         ---------          ---------      ---------    ---------    
                                                                                                                    
BALANCE, SEPTEMBER 30, 1994                  94               114            116,650         (5,038)     111,820    
                                                                                                                    
  Preferred stock in-kind dividends           6              --                1,740         (1,746)        --      
                                                                                                                    
  Net loss                                 --                --                 --         (134,774)    (134,774)   
                                      ---------         ---------          ---------      ---------    ---------    
                                                                                                                    
BALANCE, SEPTEMBER 30, 1995                 100               114            118,390       (141,558)     (22,954)   
                                                                                                                    
  Issuance of subordinated notes            (93)             --               (2,907)          --         (3,000)   
                                                                                                                    
  Cancellation of common and                                                                                        
    preferred stock                          (7)             (114)          (115,483)       115,604         --      
                                                                                                                    
  Net income                               --                --                 --           25,954       25,954    
                                      ---------         ---------          ---------      ---------    ---------    
                                                                                                                    
PREDECESSOR COMPANY                                                                                                 
  BALANCE, NOVEMBER 13, 1995               --                --                 --             --           --      
                                                                                                                    
  Common stock issued for cash             --                --               78,000           --         78,000    
                                                                                                                    
  Net loss                                 --                --                 --          (62,217)     (62,217)   
                                      ---------         ---------          ---------      ---------    ---------    
                                                                                                                    
 SUCCESSOR COMPANY BALANCE,                                                                                         
  SEPTEMBER 30, 1996                  $    --           $    --            $  78,000      $ (62,217)   $  15,783    
                                      =========         =========          =========      =========    =========    
</TABLE>
See notes to consolidated financial statements.
                                      F - 4
<PAGE>
UDC HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                    Successor
                                                                     Company                 Predecessor Company              
                                                                   -------------  ----------------------------------------- 
                                                                      Period        Period         Twelve        Twelve     
                                                                       from          from           Month        Month      
                                                                   November 14,   October 1,       Period        Period     
                                                                     1995 to          to            Ended        Ended      
                                                                   September 30,  November 13,  September 30, September 30, 
                                                                       1996          1995           1995          1994      
                                                                   -------------  ------------  ------------- ------------- 
                                                                                        (In thousands)
<S>                                                                <C>            <C>            <C>          <C>           
OPERATING ACTIVITIES:
  Net (loss) income                                                $ (62,217)     $  25,954      $(134,774)   $ (22,783)    
  Adjustments to reconcile net (loss) income to net cash                                                                    
    provided by (used in) operating activities:                                                                             
      Depreciation and amortization                                    5,810            536          7,274        7,405     
      Fresh start reporting adjustment                                  --           14,069           --           --       
      Gain on debt discharge                                            --          (50,264)          --           --       
      Equity in losses of unconsolidated affiliated partnerships       1,172           --              223        8,502     
      Loss from asset impairment                                      42,815           --           67,177       17,099     
      Income taxes                                                      --             --           26,772        3,400     
  Changes in assets and liabilities:                                                                                        
    Receivables                                                        2,884            259          1,070        4,872     
    Other assets                                                         517         (1,015)         1,233        3,437     
    Housing inventory                                                 17,690         10,890        146,848       40,188     
    Land inventory and land held for sale                             42,634          4,328       (112,517)    (107,278)    
    Receivables from affiliated partnerships                           3,081             95         22,571        7,725     
    Accounts payable                                                   2,863         (2,963)       (28,363)      11,042     
    Accrued liabilities and expenses                                  (9,021)         4,655         24,117        2,146     
                                                                   ---------      ---------      ---------    ---------     
          Net cash provided by (used in) operating activities         48,228          6,544         21,631      (24,245)    
                                                                   ---------      ---------      ---------    ---------     
INVESTING ACTIVITIES:                                                                                                       
  Decrease in mortgage-backed securities                              12,728          6,390          4,898       26,872     
  Net additions to property and equipment                             (7,243)            13         (2,404)      (3,977)    
                                                                   ---------      ---------      ---------    ---------     
          Net cash provided by investing activities                    5,485          6,403          2,494       22,895     
                                                                   ---------      ---------      ---------    ---------     
FINANCING ACTIVITIES:                                                                                                       
  (Decrease) increase in notes payable to financial institutions     (75,088)       (11,492)       (12,299)      33,031     
  Proceeds from issuance of subordinated notes                        15,262         30,000           --           --       
  Proceeds from issuance of common stock                                --           78,000           --           --       
  Payment of liabilities subject to compromise                          --          (83,000)        (3,000)      (4,000)    
  Payments on collateralized mortgage obligations                    (16,814)          (247)        (3,592)     (17,862)    
  Decrease in mortgage line of credit                                    709         (5,799)        (1,794)      (9,914)    
                                                                   ---------      ---------      ---------    ---------     
          Net cash (used in) provided by financing activities        (75,931)         7,462        (20,685)       1,255     
                                                                   ---------      ---------      ---------    ---------     
NET (DECREASE) INCREASE IN CASH                                      (22,218)        20,409          3,440          (95)    
CASH, BEGINNING OF PERIOD                                             25,000          4,591          1,151        1,246     
                                                                   ---------      ---------      ---------    ---------     
CASH, END OF PERIOD                                                $   2,782      $  25,000      $   4,591    $   1,151     
                                                                   =========      =========      =========    =========     
                                                                                                                            
SUPPLEMENTAL DISCLOSURE OF CASH FLOW                                                                                        
  INFORMATION - Cash paid for interest, net of amounts                                                                      
  capitalized                                                      $   8,171      $     254      $   5,221    $   2,755     
                                                                   =========      =========      =========    =========     
                                                                                                                            
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING                                                                                
  AND FINANCING ACTIVITIES:                                                                                                 
    Additional debt and land inventory due to consolidation                                                                 
      of partnership                                               $   7,067      $    --        $    --      $    --       
                                                                   =========      =========      =========    =========     
    See Note 2 for a discussion of the Company's                                                                            
      reorganization under Chapter 11                                                                                  
</TABLE>
See notes to consolidated financial statements.
                                      F - 5
<PAGE>
UDC HOMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
--------------------------------------------------------------------------------

1.    BASIS OF PRESENTATION

      On May 17, 1995,  UDC Homes,  Inc.  (the  "Predecessor  Company")  filed a
      voluntary  petition  for  reorganization  under  Chapter  11 of the United
      States Bankruptcy Code (the "Bankruptcy Proceedings"). On October 3, 1995,
      the   Predecessor   Company's   reorganization   plan,   as  amended  (the
      "Reorganization  Plan"),  was  approved  by the United  States  Bankruptcy
      Court.  Under the  Reorganization  Plan,  which is more fully described in
      Note 2, DMB Property Ventures Limited  Partnership  ("DMBLP") entered into
      an  agreement  to acquire  100% of the equity (the  "Acquisition")  of the
      company that emerged from Bankruptcy Proceedings (the "Predecessor Company
      under Fresh Start reporting").  On November 14, 1995 ("Acquisition Date"),
      DMB  Residential  LLC  ("DMB"),  an  affiliate  of  DMBLP,  completed  the
      acquisition  and as of that date, the financial  statements of the Company
      reflect  the cost of  DMB's  acquisition  of the  Company,  utilizing  the
      purchase  method of  accounting  ("Acquisition  Cost  Basis")  ("Successor
      Company"). Accordingly, the statements of operations and the statements of
      cash flows for the year ended September 30, 1996 reflect the operations of
      the  Predecessor  Company under Fresh Start  reporting for the period from
      October 1, 1995 to November  13, 1995,  and the accounts of the  Successor
      Company on the Acquisition  Cost Basis from November 14, 1995 to September
      30,  1996  (the  "Company").  Financial  statements  for the  years  ended
      September 30, 1994 and 1995 are those previously issued by the Predecessor
      Company.

      The  Company  designs,  builds and  markets  single  family  attached  and
      detached homes  primarily for move-up  family and retirement  home buyers.
      The Company has  historically  operated  in  Arizona,  California  and the
      Southeast  (Florida,  Georgia and North  Carolina);  however,  the Company
      ceased operations in the Southeast and has sold or is currently  marketing
      its Southeast assets.  The percentage of housing revenues in each of these
      geographic regions was as follows:


                                            1996            1995            1994

       Arizona                               65%             58%             54%
       California                            31%             25%             29%
       Southeast                              4%             17%             17%


      The following are the accounting  policies  utilized in the preparation of
      these financial statements:

      a.    Principles of Consolidation - The consolidated  financial statements
            include   the   accounts  of  UDC  Homes,   Inc.   and  all  of  its
            majority-owned  subsidiaries,  joint ventures and partnerships.  All
            material intercompany balances and transactions have been eliminated
            in  consolidation.   Investments  in  affiliated   partnerships  are
            recorded using the equity method of accounting.

      b.    Housing inventory  includes housing  construction  costs and related
            land  acquisition,  land  development  and other costs  (principally
            capitalized   interest   and   property   taxes)  for  homes   under
            construction.  The  inventory  is  carried  at  the  lower  of  cost
            (specific identification) or estimated net realizable value ("NRV").
            NRV is the price  obtainable  in the future  reduced by disposal and
            future  development and holding costs,  without provision for future
            profit and  without  discounting  future  cash  receipts  to present
            value.  In estimating  NRV, the underlying  assumptions  reflect the
            intent to dispose of the Company's  real estate assets in an orderly
            process on an ongoing  basis in the normal  course of the  Company's
            homebuilding operations.
                                       F-6
<PAGE>
      c.    Land Inventory - Land acquisition,  land development and other costs
            (principally   capitalized   interest   and   property   taxes)  are
            accumulated  by specific  area and  allocated on a  parcel-by-parcel
            basis within the respective area. The areas are carried at the lower
            of cost or,  prior to 1996,  NRV on an ongoing  basis.  Beginning in
            1996,  the areas are  carried at the lower of cost or fair value (to
            the extent an asset is  impaired,  the asset is written  down to its
            fair value).  Upon commencement of housing  construction,  allocated
            land costs are  transferred  to housing  inventory  on a  lot-by-lot
            basis.

      d.    Assets Held for Sale - Properties  which are currently  marketed for
            sale have been segregated on the accompanying  consolidated  balance
            sheets as assets held for sale.  Debt related to such properties has
            been  included  in notes  payable on the  accompanying  consolidated
            balance sheets.  Losses attributable to the holding and operation of
            such properties are expensed as incurred.

      e.    Property  and  equipment  are  carried at cost,  net of  accumulated
            depreciation.  Depreciation  of property and equipment is calculated
            using the  straight-line  method over the estimated  useful lives of
            the assets.  Maintenance and repairs are charged against  operations
            in the year  incurred and major  additions to property and equipment
            are capitalized.  When assets are retired or otherwise  disposed of,
            the related costs and accumulated  depreciation are removed from the
            appropriate  accounts and the resulting  gain or loss is included in
            results of operations.

      f.    Cash and Cash  Equivalents - Cash  equivalents  include amounts with
            initial maturities of less than 90 days.

      g.    Goodwill,  which represents the excess of the Acquisition Cost Basis
            over the fair value of net assets acquired,  is being amortized on a
            straight-line basis over 25 years (Note 5).

      h.    Income Taxes - Income taxes are accounted for using the Statement of
            Financial  Accounting  Standards  ("SFAS") No. 109,  Accounting  for
            Income Taxes,  which requires an asset and liability  method.  Under
            this tax  basis,  assets  and  liabilities  are  measured  using the
            enacted tax rates.

      i.    Sales Recognition - Income from housing sales is recognized when the
            homes are delivered and title passes to the new homeowners. Revenues
            from the sale of other real estate are recognized when a significant
            down payment is received,  the earnings process is complete, and the
            collection of any remaining receivables is reasonably assured.

      j.    Mortgage  Banking  Fee  Recognition  -  Loan  origination  fees  are
            recognized as income in accordance with SFAS Nos. 65 and 91.

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

      l.    Adoption  of  SFAS  No.  121,   Accounting  for  the  Impairment  of
            Long-Lived  Assets and for Long-Lived  Assets to be Disposed Of - As
            of the  Acquisition  Date,  the Company  adopted SFAS No. 121, which
            requires that long-lived assets be reviewed for impairment  whenever
            events or changes in circumstances indicate that the carrying amount
            of the  asset  may not be  recoverable.  If the sum of the  expected
            future cash flows  (undiscounted  and without interest charges) from
            an asset to be held and used is less than the carrying amount of the
            assets,  an impairment  loss must be recognized  for the  difference
            between the carrying amount and fair value. Assets to be disposed of
            must be  valued at the lower of the  carrying  amount or fair  value
            less costs to sell. In accordance  with reporting on the Acquisition
            Cost Basis (Note 2), the Company  recorded  its assets at fair value
            at the Acquisition 
                                      F-7
<PAGE>
            Date. Therefore, at the date of adoption, SFAS No. 121 had no impact
            on the Company's consolidated  financial statements.  As required by
            SFAS No. 121,  after the adoption  date,  long-lived  assets will be
            reviewed for impairment at financial statement dates (Note 5).

      m.    Reclassifications - Certain  reclassifications have been made to the
            1995 and 1994 amounts in the  consolidated  financial  statements to
            conform to the 1996 presentation.

2.    BANKRUPTCY PROCEEDINGS AND ACQUISITION BY DMB

      On May 17, 1995, the  Predecessor  Company filed a voluntary  petition for
      reorganization  under Chapter 11 of the United States Bankruptcy Code (the
      "Bankruptcy  Code") in the United States Bankruptcy Court for the District
      of Delaware (the "Bankruptcy  Court").  On October 3, 1995, the Bankruptcy
      Court entered an order confirming the Predecessor Company's second amended
      reorganization  plan dated as of August 3, 1995, as amended by an addendum
      dated as of August 31,  1995,  and as  further  amended by such order (the
      "Plan"). On November 14, 1995, the Plan was substantially consummated and,
      pursuant  to a stock  purchase  agreement  dated as of May 16,  1995  with
      DMBLP,  DMB made a cash  investment  of  $108,000,000  in the  Company  in
      exchange  for  1,000  shares  of  common  stock  representing  100% of the
      Successor  Company's  equity and $30,000,000 of subordinated  notes of the
      Successor Company.

      Pursuant to the Plan,  holders of the Predecessor  Company's  Senior Notes
      received $83,000,000 in cash and $64,100,000 principal amount of unsecured
      senior notes ("Senior  Notes") in satisfaction of existing  obligations to
      such holders.  Pursuant to the Plan, holders of the Predecessor  Company's
      Convertible  Subordinated  Notes  received  $5,900,000 of Senior Notes and
      $2,000,000 of  subordinated  notes ("Series C Subordinated  Notes") of the
      Successor  Company.  Under the Plan,  holders of other allowed secured and
      unsecured  claims  generally  were  paid in  full  and  substantially  all
      executory  contracts  and unexpired  leases were  assumed.  Holders of the
      Predecessor  Company's Prime  Preferred Stock received trust  certificates
      representing a pro rata interest in $3,000,000  principal amount of Series
      C Subordinated Notes of the Successor Company.  Holders of the Predecessor
      Company's  Series A Preferred  Stock,  Series B Preferred Stock and Common
      Stock did not receive any  consideration  for their claims or interest and
      their shares were canceled.

      As of September 30, 1995, and during the bankruptcy case through  November
      13,   1995,   the   Predecessor   Company   managed  its   business  as  a
      debtor-in-possession, subject to the provisions of the Bankruptcy Code and
      control  and  supervision  of  the  Bankruptcy   Court.   Therefore,   the
      Predecessor  Company has  accounted  for all  transactions  related to the
      bankruptcy case in accordance with American  Institute of Certified Public
      Accountants  Statement of Position 90-7 ("SOP 90-7"),  Financial Reporting
      by Entities in  Reorganization  Under the  Bankruptcy  Code.  Accordingly,
      liabilities  which were subject to compromise in the  bankruptcy  case are
      segregated on the September  30, 1995  consolidated  balance sheet and are
      recorded at the amounts that were allowed on known claims  rather than the
      amounts those claims received under the Plan. In accordance with SOP 90-7,
      no interest was accrued on pre-petition, unsecured debt.
                                      F-8
<PAGE>
      Liabilities subject to compromise  consisted of the following at September
      30:


                                                                      1995
                                                                 (In thousands)

        Senior notes                                              $  168,000
        Convertible subordinated notes                                20,406
        Accrued interest                                              16,858
                                                                  ----------

        Total                                                     $  205,264
                                                                  ==========

      Pursuant  to the  provisions  of the  Bankruptcy  Code,  all  attempts  at
      collection or enforcement of the Predecessor  Company's  liabilities as of
      May 17, 1995 were  automatically  stayed  upon the Chapter 11 filing,  and
      interest on unsecured,  pre-petition  obligations of the Company ceased to
      accrue as of such date.

      The Acquisition Cost Basis, as explained above,  reflects the November 14,
      1995  acquisition  of the  Company by DMB under  which it  acquired  1,000
      shares  of  common  stock  and  $30,000,000  principal  amount of Series C
      Subordinated Notes for $108,000,000 cash. The excess of this cost over the
      fair value of net assets acquired was $40,036,000 which has been allocated
      to goodwill.  The majority of the fair value of net assets arises from the
      Company's  housing and land  inventories  and land held for sale. The fair
      value  of  the   Company's   housing   inventory   was   calculated  on  a
      house-by-house  basis by determining  an estimated  selling price for each
      home and deducting  costs to complete,  costs of disposal and a reasonable
      profit,  considering  the stage of completion of each home. The fair value
      of the  Company's  land  inventory  and land  held for sale was  generally
      determined by independent third party appraisals.  Although all assets and
      liabilities  were revalued,  no significant  adjustments  were made to the
      Company's  other assets and  liabilities,  as their fair values  generally
      approximated historical cost.

      The  statement  of  operations  for the  period  from  October  1, 1995 to
      November 13, 1995 contains a $50,264,000  gain on debt  discharge  arising
      from  reorganization  of  the  Predecessor  Company  under  the  Plan.  In
      addition,  a fresh start reporting adjustment of $14,069,000 was recorded.
      The cost of company  reorganizations  of  $13,626,000  and  $15,438,000 in
      fiscal 1996 and 1995, respectively, is comprised primarily of professional
      fees and costs related to employee severance agreements.

3.    FAIR VALUE OF FINANCIAL INSTRUMENTS

      The  following  disclosure  of  the  estimated  fair  value  of  financial
      instruments is made in accordance  with the  requirements of SFAS No. 107,
      Disclosures About Fair Value of Financial Instruments.  The estimated fair
      value  amounts have been  determined  by the Company at September 30, 1996
      using available market information and valuation  methodologies  described
      below.  Considerable  judgment is required in interpreting  market data to
      develop the estimates of fair value. Accordingly,  the estimates presented
      below may not be  indicative of the amounts that the Company could realize
      in a current market exchange.  The use of different market  assumptions or
      valuation methodologies could have a material effect on the estimated fair
      value amounts.

      The carrying values of cash and cash  equivalents,  receivables,  accounts
      payable,  accrued interest,  accrued liabilities and expenses and mortgage
      lines of credit  approximate fair values due to the short-term  maturities
      of these instruments.
                                      F-9
<PAGE>
      Residential  mortgages and  mortgage-backed  securities  are stated at the
      lower of cost or market which approximates fair value.

      At September  30, 1996,  the carrying  amounts of the other notes  payable
      approximate  fair value  because the  majority of the notes  payable  have
      variable interest rates based on the prime rate.

      At  September  30,  1996,  the  estimated  fair  value of the  senior  and
      subordinated notes payable was $106,208,000.

4.    DEBT

      At September 30, notes payable consisted of the following:


                                                           1996        1995
                                                            (In thousands)

       Revolving credit facility                        $  34,165   $     --  
       Westbrook Village facility                           4,266         --   
       Transoccidental note                                13,011         --  
       Other                                               21,620         --  
       Debtor-in-possession notes payable                    --        101,362
       Pre-petition notes payable                            --         52,595
                                                        ---------   ----------

       Total notes payable                              $  73,062   $  153,957
                                                        =========   ==========

      Revolving  Credit  Facility - The Company's  largest credit  facility is a
      $150,000,000  revolving  facility  with a group of banks.  The facility is
      available for both  construction  and acquisition and development  ("A&D")
      activities in Arizona and  California,  with the amount  available for A&D
      activities limited to a maximum of $37,500,000. Interest is due monthly at
      prime (8.25% at September 30, 1996) plus 1% or, at the  Company's  option,
      LIBOR (5.4% at September  30,  1996) plus 3.25% and requires  payment of a
      commitment  fee of 1%  per  annum  of the  commitment  amount,  an  unused
      commitment fee of .25% per annum of the average unused commitment  amount,
      and syndication and agency fees. At September 30, 1996, the unused portion
      of the credit facility was approximately $35,458,000 based on availability
      under the  borrowing  base.  The  facility  is secured by  portions of the
      Company's  housing  inventory  and property in course of  development  and
      matures on March 31, 1999.

      Westbrook  Village  Facility - The Company has a $23,300,000  construction
      and A&D facility consisting of a $12,500,000  construction  facility and a
      $10,800,000 A&D facility for Westbrook  Village  ("WBV").  Interest is due
      monthly at prime  (8.25% at  September  30,  1996) plus 1.5% and  requires
      payment of a commitment fee of 1% per annum. The facilities are secured by
      WBV housing  inventory  and land held for  development.  At September  30,
      1996, there was no additional  availability for these facilities under the
      borrowing  base.  The  A&D  facility  matures  on July  1,  1997,  and the
      construction facility matures on January 1, 1998.

      The  construction  and A&D  facilities  described  above  contain  various
      covenants,   including  but  not  limited  to,  covenants  regarding:  (i)
      encumbrances;  (ii) minimum available liquidity;  (iii) maximum total debt
      to  tangible  net worth;  (iv)  minimum  tangible  net worth;  (v) minimum
      cumulative  net cash flow to total debt  service;  (vi)  minimum  ratio of
      EBITDA to interest paid; (vii) restrictions on mergers, consolidations and
      acquisitions; (viii) restrictions on asset sales; and (ix) restrictions on
      incurrence of additional indebtedness.  Among other things, such covenants
      may limit the Company's ability to obtain additional financing when needed
      and on terms acceptable to the Company.
                                      F-10
<PAGE>
      As result of applying  purchase  accounting at the Acquisition Date, costs
      in excess of amounts allocable to identifiable assets was determined to be
      an amount greater than  contemplated  under the debt covenants  which were
      negotiated prior to the determination of such amounts.  As a result, as of
      the Acquisition Date and subsequent thereto,  the Company was in violation
      of the  tangible net worth and debt to tangible  net worth  covenants  and
      certain  minimum  available  liquidity  covenants  from  February 21, 1996
      through March 14, 1996. In response, the Company and the lenders agreed to
      a waiver of the violations and a modification of the debt  covenants,  and
      on March 15, 1996, DMB invested $10,000,000 in the Company in exchange for
      a 14.5% Series D Subordinated  Notes. In addition,  at September 30, 1996,
      the Company was in violation  of the tangible net worth,  debt to tangible
      net worth, cumulative net cash flow to debt service and EBITDA to interest
      paid covenants.  On December 23, 1996, waivers of the covenant  violations
      were obtained.

      The  Transoccidental   Note  represents  a  mortgage  note  related  to  a
      development  in Phoenix.  Such note bears interest at 10.25% due quarterly
      plus a profit participation based upon revenues in excess of defined costs
      and is due through 2002.

      Other Secured Borrowings - In addition to the credit facilities  described
      above, the Company has various notes outstanding, collateralized primarily
      by land held for  development.  The notes bear  interest at rates  ranging
      from 9.5% to 15% and are due at various dates through 2001.

      Senior  Unsecured  Notes - On the  Acquisition  Date,  the Company  issued
      Series A Senior Notes in a principal  amount of  $60,000,000  and Series B
      Senior  Notes in a  principal  amount of  $10,000,000  (collectively,  the
      "Senior  Notes").  Interest on the Senior Notes accrues at a rate of 12.5%
      per annum,  commencing  September  1, 1995,  and is payable  semi-annually
      beginning May 1, 1996.  The Senior Notes mature on May 1, 2000. The Series
      B Senior Notes further  require  prepayments  from the proceeds of certain
      asset  sales in excess of  $10,000,000,  subject  to  certain  limitations
      related to the Company's  construction  and  acquisition  and  development
      financing.  The Senior Notes contain  numerous  covenants which may, among
      other things,  limit the Company's ability to obtain additional  financing
      when needed and on terms acceptable to the Company.

      Subordinated  Notes - At September 30, 1996 subordinated  notes consist of
      the following:


                                                                 (In thousands)

        Series C Subordinated Notes                                $  35,000
        Series D Subordinated Notes                                   10,000
        Interest to be paid-in-kind                                    5,262
                                                                   ---------
        Total                                                      $  50,262
                                                                   =========

      On the Acquisition Date, the Company issued Series C Subordinated Notes in
      a principal  amount of $35,000,000.  Interest on the Series C Subordinated
      Notes accrues at the rate of 14.5% per annum and is payable  semi-annually
      beginning  November  1,  1996.  The  Series C  Subordinated  Notes  mature
      November  1,  2000.  The  payment  of  interest  in cash on the  Series  C
      Subordinated  Notes is  restricted by certain  limitations  related to the
      Company's  construction  and acquisition and  development  financing.  The
      November 1, 1996 payment of interest was paid in-kind in additional Series
      C Subordinated Notes.

      On March 15, 1996, DMB invested $10,000,000 in the Company in exchange for
      a $10,000,000  principal amount Series D Subordinated Notes. The terms for
      the Series D Subordinated  Notes are identical to the terms for the Series
      C Subordinated Notes discussed above, except that payments on the Series D
      Subordinated   Notes  are   subordinate   to  payments  on  the  Series  C
      Subordinated  Notes.  The  November 1, 1996  payment of interest  was paid
      in-kind in additional Series D Subordinated Notes.
                                      F-11
<PAGE>
      The mortgage line of credit  ("MLC")  consists of a $10,000,000  revolving
      credit  facility  ($6,299,000  outstanding  at  September  30,  1996) with
      interest at prime  (8.25% at  September  30,  1996) plus .25%.  The MLC is
      secured by residential  mortgages receivable  originated in the closing of
      the  Company's  residential  home sales and matures on August 31, 1997. In
      December  1996,  the Company  entered into a joint venture  agreement with
      Norwest Mortgage whereby the joint venture will provide mortgage  services
      to the  Company's  home  buyers.  The  joint  venture  is  expected  to be
      operational by February 1997. Collateralized mortgage obligations ("CMOs")
      are collateralized by mortgage-backed  securities issued by FNMA, GNMA and
      FHLMC and  residential  mortgages  receivable.  During  fiscal  1996,  the
      Company  sold  its  remaining   interests  in  the  CMOs  for  a  loss  of
      approximately $200,000.

      Debt maturities for the five years ending September 30 are as follows:


                                                        (In thousands)  
                                                                        
         1997                                            $    71,019    
         1998                                                  3,178    
         1999                                                    276    
         2000                                                 70,276    
         2001                                                 50,848    
         Thereafter                                            4,026    
                                                          ----------    
                                                                        
         Total                                            $  199,623    
                                                          ==========    
                                                                        
         
5.    ASSET IMPAIRMENT

      1996 - At September 30, 1996, the Company  concluded that, on the basis of
      1996 operating losses and projected 1997 operating  losses,  its long-term
      assets  may not be  recoverable.  In  accordance  with SFAS No.  121,  the
      Company tested its long-term  assets currently held,  including  allocated
      goodwill,  for  recoverability  and determined  that an impairment loss of
      $42,815,000  should be  recognized.  The  impairment  loss is comprised of
      $3,527,000 and  $4,151,000  applicable to land inventory and land held for
      sale,  respectively,  located  in  Phoenix  and  Northern  California  and
      $35,137,000  applicable to goodwill.  Therefore,  the goodwill  balance of
      $38,682,000  (net of accumulated  amortization  of $1,354,000) was written
      down to $3,545,000 at September 30, 1996. Fair value of land inventory was
      determined  based upon an evaluation  of comparable  market prices and the
      present value of estimated realizable values of such property.  Fair value
      of  property  held for sale was based upon  estimated  sales  prices  less
      selling  costs and the fair value of mortgage  assets was  estimated to be
      net carrying values.

      1995 and 1994 - In an effort to improve  its  liquidity,  the  Predecessor
      Company  announced in the second  quarter of fiscal 1995 its  intention to
      actively  market  its  Southeast  homebuilding  operations  which had been
      under-performing in relation to management's  expectations.  In connection
      with the Bankruptcy Proceedings, in May 1995, the Predecessor Company also
      identified two residential  projects in California and certain  commercial
      and mixed-use real estate parcels in Arizona to actively  market for sale.
      As a result of these decisions, in 1995 the Predecessor Company wrote down
      the carrying  amounts of the projects and parcels referred to above to the
      amounts  expected to be realized from their  immediate  sale,  reduced for
      costs to be  incurred  prior to and in  connection  with such  sales.  The
      write-downs  included the  immediate  amortization  of all deferred  costs
      associated  with  the  Predecessor  Company's  Southeast  operations.   In
      addition,  based  on new  information,  the  Predecessor  Company  revised
      downward  its  estimate of proceeds to be received  from  certain  parcels
      identified for sale in the year ended September 30, 1994, based on efforts
      to accelerate the sale of those parcels. The total charge to operations in
      the year
                                      F-12
<PAGE>
      ended September 30, 1995 resulting from such  write-downs was $67,177,000.
      In 1994,  the  Predecessor  Company  elected  to market  for sale  certain
      non-residential  properties  which had  previously  been  held for  future
      development in the normal course of business. As a result, the Predecessor
      Company  wrote  down the  properties  to their  net  realizable  value and
      recorded losses of $17,099,000 and an additional $6,974,000 on investments
      in partnerships.

6.    COMMITMENTS AND CONTINGENCIES

      In the  normal  course  of  business,  the  Company  enters  into  certain
      contracts and  commitments for real estate  development and  construction.
      Certain of these contracts  relate to options to purchase land under which
      the  Company  would  lose or  abandon  assets  if such  options  were  not
      exercised.

      The Company is obligated  under  various  operating  leases  through 2007.
      Total  rental  expense  under  such  operating   leases  was   $1,200,000,
      $1,200,000  and  $1,400,000 in fiscal 1996,  1995 and 1994,  respectively.
      Included  in rental  expense in fiscal  1996,  1995 and 1994 is  $593,000,
      $551,000  and  $658,000,   respectively,  paid  to  entities  among  whose
      principals were certain former officers of the Company.

      Aggregate  minimum rentals under  noncancellable  operating leases for the
      next five years ending September 30 are as follows:


                                                            (In thousands) 
                                                                           
               1997                                           $  1,006     
               1998                                                959     
               1999                                                861     
               2000                                                627     
               2001                                                550     
               

      During 1995, three lawsuits were filed against certain former officers and
      directors of the  Predecessor  Company  alleging  violation of  securities
      laws,  fraud and  negligence.  These former  directors and officers may be
      entitled  to  indemnification  by  the  Company.  A  settlement  has  been
      proposed,  which  has  received  preliminary  approval  from  the  Arizona
      Superior  Court,  under which the Company is obligated for the  $1,500,000
      deductible under its directors and officers policies. Such amount was paid
      in December 1995. In addition, the Company paid $250,000 on behalf of DMB.
      The Company  does not believe that any other  obligations  to officers and
      directors under its bylaws will exceed its coverage under its officers and
      directors insurance policies.

      The  Company is a  defendant  in several  lawsuits  that arise from or are
      related to the conduct of the  Company's  business.  The Company  does not
      believe that the ultimate resolution of these cases will materially effect
      the  financial  position,  results  of  operations  or cash  flows  of the
      Company.

      Minority  interest at September 30, 1996 includes  $1,270,000 that will be
      payable to the  Predecessor  Company's  former chairman in connection with
      the  acquisition of his 1% profit interest in a fully  consolidated  joint
      venture.
                                      F-13
<PAGE>
7.    RELATED PARTIES

      As explained  in Note 2, on November  14, 1995 DMB  acquired  1,000 shares
      (100%) of the Company's  common stock.  At that time DMB issued a purchase
      option to AEW to acquire 500 of such shares. On May 6, 1996, AEW exercised
      its  option and  acquired  500 shares of common  stock.  As a result,  the
      Company is now 50% owned by DMB and 50% owned by AEW. Transactions between
      DMB and AEW and the Company during 1996 are as follows:

      1.    Prior to its  acquisition by DMB, the Company had option  agreements
            with DMB under  which the  Company  acquires  lots in certain of its
            subdivisions.  During 1996,  the Company paid DMB  $9,780,000  under
            such options. Further, DMB paid the Company $2,727,400 during fiscal
            1996 for infrastructure and other work on property subject to option
            agreements.  The  Company  believes  that  lot  prices  under  these
            agreements  approximated  fair value at the date the agreements were
            entered into.

      2.    During  fiscal 1996 and on November 7, 1996, a  partnership  between
            DMB  and  AEW   ("DMB/AEW   Partnership")   acquired   approximately
            $28,607,000 and $25,519,000,  respectively, of land at the Company's
            cost,  which is believed to approximate the fair value of such land.
            The Company  continues  to market the land  purchased by the DMB/AEW
            Partnership   in  exchange  for  a  $150,000   management   fee  and
            commissions.  To the extent the cash  proceeds  from the sale of the
            property to a third party exceeds  certain  thresholds,  the Company
            will participate in excess profits.  Additionally,  the Company will
            receive  additional  proceeds  from a parcel of such land if certain
            lot zoning changes can be obtained.

      3.    At  September  30,  1996  AEW and DMB  each  owned  $15,000,000  and
            $5,000,000   principal   amount  of  the   Series  C  and  Series  D
            Subordinated Notes, respectively.  Interest expense of $4,628,000 on
            the  Subordinated  Notes held by AEW and DMB was  recorded in fiscal
            1996.  Subsequent to September 30, 1996,  DMB acquired an additional
            $2,000,000 principal amount of Series C Subordinated Notes.

      4.    An affiliate of DMB and AEW owns 25% of  Westbrook  Village  Venture
            one of the Company's Arizona retirement operations.

      Other - At September 30, 1994, the Predecessor Company was owed $4,400,000
      by UDC Key Employee  Investment  Limited  Partnership  ("UDC KEILP").  The
      funds were  advanced by the  Predecessor  Company and used by UDC KEILP to
      make  principal  and interest  payments on bank debt  incurred to purchase
      shares  of the  Predecessor  Company's  Common  Stock  in  1988  from  the
      Predecessor  Company's former Chairman.  The shares were held by UDC KEILP
      as an incentive for certain executive officers of the Company, the limited
      partners of UDC KEILP, to remain in the employ of the Predecessor Company.
      The advances  were to be repaid from the proceeds to be received  from the
      eventual sale of the shares of Common Stock,  after  repayment of the bank
      debt for  which  such  shares  served  as  collateral.  As a result of the
      significant  decline  in the  market  price of the  Predecessor  Company's
      Common  Stock in 1994,  the  Predecessor  Company  recorded  a reserve  of
      approximately  $4,600,000  in 1994 to reduce  the  carrying  amount of its
      receivable from UDC KEILP to the amount the Predecessor  Company  believed
      would be due the bank if the shares were sold at  then-current  prices and
      used to  partially  repay debt of UDC KEILP  which was  guaranteed  by the
      Predecessor  Company.  In 1995, as a result of the  Predecessor  Company's
      Chapter 11 filing and imminent  cancellation  of its Common Stock  without
      payment  of  any  consideration,   the  Predecessor  Company  recorded  an
      additional reserve of approximately  $838,000. The amounts are included in
      other expenses in the accompanying  consolidated statements of operations.
      As part of the Plan, the  Predecessor  Company repaid the bank debt of UDC
      KEILP.
                                      F-14
<PAGE>
8.    RECEIVABLES

      Receivables consist of the following at September 30:


                                                                1996    1995
                                                              -------  -------
                                                               (In thousands)

        Notes receivable - employees                          $ --     $  584
        Notes receivable - other                                 940      727
        Escrow funds due from home sales                          45    2,882
                                                              ------   ------

        Total                                                 $  985   $4,193
                                                              ======   ======


9.    PROPERTY AND EQUIPMENT

      Property and equipment are as follows at September 30:


                                                              1996     1995
                                                            -------   -------
                                                              (In thousands)

        Model furnishings and sales offices                 $ 8,521   $15,064
        Golf courses                                          3,823        30
        Office furniture and equipment                          907     3,893
        Sewer plant                                           2,930     3,036
        Other                                                    29       386
                                                            -------   -------

        Total                                                16,210    22,409
        Less accumulated depreciation                         2,994    11,123
                                                            -------   -------

        Property and equipment - net                        $13,216   $11,286
                                                            =======   =======


10.   ACCURED LIABILITIES AND EXPENSES

      Accrued liabilities and expenses consist of the following at September 30:


                                                              1996      1995
                                                            --------  --------
                                                               (In thousands)

        Accrued compensation                                $  6,531   $ 1,231 
        Accrued warranty                                       6,507     1,984 
        Restructuring reserves                                 6,050       --
        Other                                                  4,536     4,442 
                                                            --------   ------- 
                                      
        Total                                               $23,624    $ 7,657 
                                                            =======    ======= 
                                    
      At September 30, 1996 accrued compensation includes severance accruals and
      restructuring  reserves  include fees from the bankruptcy  proceedings and
      costs to exit the southeast market.
                                      F-15
<PAGE>
11.   INCOME TAXES

      The components of deferred taxes are as follows at September 30:
<TABLE>
<CAPTION>
                                                                             1996        1995
                                                                           ---------------------
                                                                               (In thousands)

<S>                                                                        <C>         <C>       
        Differences between financial reporting and tax basis of housing                         
          and land inventories                                             $ 39,797    $ 24,797  
                                                                                                 
        Differences between financial reporting and tax basis in                                 
          affiliated land bank partnerships                                   6,315      13,774  
                                                                                                 
        Net operating loss carryforward                                      32,991      24,004  
                                                                                                 
        Other - net                                                           7,453       2,836  
                                                                           --------    --------  
                                                                                                 
        Total                                                                86,556      65,411  
        Valuation allowance                                                 (86,556)    (65,411) 
                                                                           --------    --------  
                                                                                                 
        Total deferred taxes                                               $   --      $   --    
                                                                           ========    ========  
</TABLE>

      During 1995, the Predecessor  Company increased its valuation allowance to
      reduce the balance of its net deferred tax asset to zero,  in  recognition
      of  the   uncertainties   surrounding  its   restructuring  and  statutory
      limitations  which may affect  the  Company's  ability to utilize  its net
      operating  losses and built-in losses resulting from the change in control
      which took place upon DMB's  acquisition  of the Company on  November  14,
      1995.

      The  acquisition of the Company by DMB on November 14, 1995  constitutes a
      change in control for income tax purposes.  The Company will be limited in
      the  utilization  of its net operating  loss  carryovers  and net built-in
      losses that existed at the time of the change in control.  The  limitation
      on utilization is approximately  $4.5 million per year. The carryovers and
      the net built-in losses subject to the limitation are  approximately  $162
      million.

      The Company has approximately $83 million of net operating loss carryovers
      at September 30, 1996 (including  approximately $30 million subject to the
      limitation described above).

      The following  table  summarizes the  approximate  carryovers and built-in
      losses, and their expiration dates:


                                                                        Year of
                                                       (In thousands) Expiration

         Pre-change net operating loss                    $ 30,000   2007 - 2011
         Post-change net operating loss                   $ 53,000       2011
         Net built-in loss                                $132,000   2011 - 2015

                                      F-16
<PAGE>
      The following is a reconciliation of income taxes at the federal statutory
      rate with  income  taxes  recorded  by the  Company  for the  years  ended
      September 30:
<TABLE>
<CAPTION>
                                                              1996        1995        1994
                                                            --------   ---------    ---------
                                                                     (In thousands)
<S>                                                         <C>         <C>         <C>        
       Computed income tax benefit at statutory rate        $(12,692)   $(36,705)   $ (6,590)  
       State income tax benefit                               (1,741)     (6,369)     (1,144)  
       Fresh start accounting adjustment and                                                   
         reorganization costs                                (14,437)       --          --     
       Goodwill amortization and write-off                     4,873        --          --     
       Other                                                   2,852        --          --     
       Increase in deferred tax asset valuation allowance     21,145      69,893      11,134   
                                                            --------    --------    --------   
                                                                                               
       Total taxes                                          $   --      $ 26,819    $  3,400   
                                                            ========    ========    ========   
</TABLE>

12.   HOUSING INTEREST

      Property taxes and housing interest  incurred are capitalized and expensed
      through  cost of  housing  sales,  as they  relate  to  housing  and  land
      inventories.  The  components  of housing  interest are as follows for the
      years ended September 30:
<TABLE>
<CAPTION>
                                                   The
                                                 Company           Predecessor Company
                                                --------- ----------------------------------
                                                   1996        1996       1995       1994
                                                --------- ----------- ----------- -----------
                                                                (In thousands)
<S>                                             <C>         <C>         <C>         <C>       
         Interest costs incurred                $ 27,856    $  3,179    $ 34,041    $ 36,335  
         Less interest capitalized                (9,845)     (2,473)    (26,846)    (36,335) 
                                                --------    --------    --------    --------  
                                                                                              
         Interest expensed                      $ 18,011    $    706    $  7,195    $   --    
                                                ========    ========    ========    ========  
                                                                                              
         Amortization of capitalized interest                                                 
           included in cost of sales            $  5,461    $  1,117    $ 28,550    $ 28,371  
                                                ========    ========    ========    ========  
                                                                                              
         Interest income                        $  1,124    $    138    $  1,034    $    983  
                                                ========    ========    ========    ========  
</TABLE>

      As of the Acquisition Date, the Company changed its method of applying the
      principles of SFAS No. 34,  Capitalization  of Interest  Cost, in order to
      better match the  capitalization of interest with actual  construction and
      development  efforts as defined  by SFAS No. 34. In  connection  with such
      change, the Company also significantly  narrowed its definition of housing
      under  construction and land under  development to exclude land undergoing
      only periodic  entitlement efforts, the effect of which is to decrease the
      amount of interest  capitalized and ultimately  charged to expense through
      cost of sales, and increase interest expense in the period incurred.

      As  discussed  in Note 2,  interest on  pre-petition,  unsecured  debt was
      suspended  subsequent to the  commencement of the Bankruptcy  Proceedings.
      Had the accrual of interest  not been  suspended,  interest  incurred  and
      interest  expense  for the  year  ended  September  30,  1995  would  have
      increased by approximately $9,200,000 and $1,000,000, respectively.
                                      F-17
<PAGE>
13.   EMPLOYEE BENEFIT PLANS

      On November 14, 1995,  upon the Company's  acquisition by DMB,  holders of
      options to purchase the Predecessor Company's Common Stock did not receive
      any  consideration  for their claims or interests  and their  options were
      canceled.

      Employees Savings and Investment Plan - Substantially all employees of the
      Company are eligible to participate in an employee  savings and investment
      plan  which,  pursuant to Section  401(k) of the  Internal  Revenue  Code,
      permits deferral of a portion of their income into trusteed investments in
      third-party  managed  investment funds.  Matching  contributions  from the
      Company to the plan  amounted  to  approximately  $285,000,  $284,000  and
      $335,000  in  the  years  ended   September  30,  1996,   1995  and  1994,
      respectively.

      Profit Sharing Plan - All full-time  employees of the Company are eligible
      to participate in a qualified trusteed profit sharing plan.  Contributions
      to the  plan,  which  are  related  to the  prior  year,  are  made at the
      discretion  of the  Company's  board  of  directors  and  amounted  to $0,
      $227,000  and $300,000 for the years ended  September  30, 1996,  1995 and
      1994,  respectively.   Effective  January  1,  1997,  this  plan  will  be
      consolidated with the Employees Savings and Investment Plan.

14.   QUARTERLY RESULTS OF OPERATIONS (Unaudited)

      The unaudited quarterly results of operations are as follows for the years
      ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
                                                            December 31,           March 31,       June 30,   September 30,
                                                    --------------------------   -----------     ----------   -------------
                                                                                  (In thousands)

<S>                                                  <C>            <C>          <C>              <C>          <C>      
       Year ended September 30, 1996:
           Housing sales                             $ 29,624       $   50,358   $   81,845       $ 116,148    $ 139,104
           Gross margin                                 2,354            2,914        8,229          13,410       22,276
           Net loss before extraordinary items        (10,241)          (4,991)      (6,498)         (2,671)     (48,057)
           Net income (loss)                           25,954 (1)       (4,991)      (6,498)         (2,671)     (48,057)(2)

                                                                                  Predecessor Company
                                                                 -----------------------------------------------------------
                                                                                     Quarter Ended
                                                                 -----------------------------------------------------------
                                                                  December 31,    March 31,       June 30,     September 30,
                                                                 -------------   -----------     ----------    -------------
                                                                                (In thousands)

       Year ended September 30, 1995:
           Housing sales                                             $ 112,394   $   98,874      $  111,984       $ 121,563
           Gross margin                                                 14,378        9,397           8,153           8,879
           Net loss                                                       (129)     (94,659)(3)     (13,034)        (26,952)
</TABLE>
     (1)  Includes  gain of $50,264  arising from gain on debt  discharge  and a
          charge of $14,069 due to fresh start reporting adjustments (Note 2).


     (2)  Includes charge of $42,815 from asset impairment (Note 5).

     (3)  See Note 11 for an  explanation  of a write-off of the  Company's  net
          deferred tax asset.

                                   * * * * * *

                                      F-18
<PAGE>
Item 9.   Changes in and Disagreements with Accountants on Accounting and 
-------   --------------------------------------------------------------- 
          Financial Disclosure
          --------------------

         On  September 3, 1996,  the Company  dismissed  its former  independent
accountants, Arthur Andersen LLP ("Andersen") and engaged Deloitte & Touche LLP,
as independent accountants.

         The reports of Andersen on the financial  statements of the Company for
fiscal 1995 and fiscal 1994 did not contain an adverse  opinion or disclaimer of
opinion,  nor were such reports  qualified or modified as to uncertainty,  audit
scope,  or  accounting  principles  except for the report dated October 20, 1995
related to the audit of the  Company's  August  31,  1995  consolidated  balance
sheet.  The balance sheet was prepared  assuming that the Company would continue
as a going  concern.  The  appropriateness  of using the going concern basis was
dependent upon, among other things,  consummation of the plan of  reorganization
as confirmed  by the  Bankruptcy  Court,  success of future  operations  and the
Company's  ability to meet its  obligations  as they became  due.  The report of
Andersen stated there was uncertainty with respect to certain  litigation claims
and the appropriateness of using the going concern assumption because of factors
which raised substantial doubt about the ability of the Company to continue as a
going concern.

         During fiscal 1995 and fiscal 1994 and each  subsequent  interim period
preceding the dismissal,  the Company believes there were no disagreements  with
Andersen  on  any  matter  of  accounting  principles  or  practices,  financial
statement disclosure,  or auditing scope or procedure,  which disagreements,  if
not  satisfactorily  resolved,  would  have  caused  them to make  reference  in
connection  with  their  reports  to the  subject  matter of the  disagreements.
Andersen has informed the Company that the  following  two items,  in Andersen's
opinion, did constitute disagreements:

      With respect to a contingent interest arrangement for one of the Company's
      debt  instruments,  the Company inquired whether such contingent  interest
      could be recorded when due. Andersen believed that the contingent interest
      should be  recorded  as each house was sold on an  estimated  basis.  This
      issue  was   resolved   through  the   recording  by  the  Company  of  an
      approximately  $1 million  adjustment in connection with fiscal year ended
      September  30,  1995,  for which Form 10-K was filed on December 28, 1995.
      Neither the Company's Audit Committee nor its Board of Directors discussed
      this matter with Andersen.

      In  connection  with the  Company's  bankruptcy  proceeding,  the  Company
      inquired  whether  it would be able to  continue  to carry on its  balance
      sheet the deferred tax assets of  approximately  $26.9 million as a result
      of likely debt  forgiveness  and related  income under the  reorganization
      plan then being formulated.  Andersen could find no support for continuing
      to carry this asset.  Andersen and the Company's Board of Directors agreed
      to  increase  the  valuation  allowance  to reduce the  balance of the net
      deferred tax asset to zero at March 31, 1995.

         The  decision  to  change  accountants  was  recommended  by the  Audit
Committee  of the Board of  Directors of the  Company.  The  Company's  Board of
Directors approved the decision to change independent accountants. 
                                       28
<PAGE>
                                    PART III

Item 10.  Directors and Executive Officers of the Registrant
--------  --------------------------------------------------

         Directors of the Company  hold office until the next annual  meeting of
stockholders  and until their  successors  are elected and  qualified,  or until
their earlier resignation or removal. All officers are appointed by and serve at
the  discretion  of the Board of  Directors.  There are no family  relationships
among any directors or officers of the Company.

         The  following  table sets forth the names,  ages and  positions of the
directors  and  executive  officers of the Company as of December  27,  1996.  A
summary of the  background  and  experience of each of these  individuals is set
forth after the table.

Name                         Age          Position(s) with Company              
----                         ---          ------------------------              
                                                                                
Garth R. Wieger              38           Chief Executive Officer, President and
                                          Director                              
Dean Bloxom                  35           President UDC Mortgage                
Kenda B. Gonzales            39           Senior Executive Vice President and   
                                          Chief Financial Officer               
James J. Grogan              42           Senior Executive Vice President       
Jay D. Johnson               37           Executive Vice President and Chief    
                                          Information Officer                   
Drew M. Brown                47           Director, Chairman                    
Joseph F. Azrack             49           Director                              
Bennett Dorrance             50           Director                              
Gadi Kaufmann                41           Director                              
James L. McCabe              53           Director                              
Thomas H. Nolan, Jr.         39           Director                              
Mark Sklar                   48           Director                              
                                          
         Mr.  Wieger  has been  President  and Chief  Executive  Officer  of the
Company  since May 1996.  Prior to  joining  the  Company,  Mr.  Wieger  was the
President of the Arizona  Division of Shea Homes from 1991.  Prior to 1991,  Mr.
Wieger was employed by Continental Homes Holding Corp. as Vice President of Land
Acquisition and Development.

         Mr. Bloxom has been President of UDC Mortgage since August 1996.  Prior
to joining UDC  Mortgage,  Mr.  Bloxom was Regional  Builder  Sales  Manager for
Directors/Norwest  Mortgage  for more  than  five  years.  His  responsibilities
included managing production of mortgage products for homebuilders.

         Ms.  Gonzales  has been  Senior  Executive  Vice  President  and  Chief
Financial  Officer of the Company since July 1996. Prior to joining the Company,
Ms.  Gonzales  served as Senior Vice  President and Chief  Financial  Officer of
Continental Homes Holding Corp. for 11 years.

         Mr.  Grogan has been Senior  Executive  Vice  President  of the Company
since July 1996.  Prior to joining  the  Company,  Mr.  Grogan was the  Managing
Attorney of Gallagher & Kennedy, a Phoenix, Arizona law firm, for more than five
years.
                                       29
<PAGE>
         Mr. Johnson has been  Executive  Vice  President and Chief  Information
Officer of the  Company  since June 1996.  Prior to  joining  the  Company,  Mr.
Johnson  worked for 12 years in the quick  service  restaurant  business with 10
years at Taco Bell and most recently two years at Arby's Inc. Mr. Johnson served
in a variety of positions within these organizations.

         Mr. Brown has been a Director  since  November  1995.  Since 1984,  Mr.
Brown has served as President of DMB  Associates,  an investment and real estate
development  company.  Mr. Brown also serves as a director of Bank One, Arizona,
N.A. and Royal Grip, Inc., a manufacturer of golf grips and accessories.

         Mr.  Azrack has been a Director  since  June  1996.  Mr.  Azrack is the
President and Chief Executive Officer of AEW, a real estate investment and asset
management  company for institutional  investors.  He joined AEW in 1983 and has
over twenty years of  experience  in the real estate  investment  industry.  Mr.
Azrack  also  serves as a director  of Evans  Withycombe  Residential,  Inc.,  a
multi-family housing real estate investment trust.

         Mr.  Dorrance has been a Director since November 1995. Mr. Dorrance has
been a private investor and Chairman and Managing Director of DMB Associates, an
investment and real estate  development  company,  for more than five years. Mr.
Dorrance  also has served as the Vice  Chairman of Campbell  Soup Company  since
November 1993 and serves as a director of Banc One Corporation.

         Mr.  Kaufmann  has  been a  Director  since  November  1995.  He is the
Managing Director of Robert Charles Lesser & Co., a California-based real estate
advisory firm, having joined that firm in 1979.

         Mr. McCabe has been a Director since November 1995. Mr. McCabe has been
the President of McCabe Capital  Managers,  a registered  advisory  firm,  since
1982.

         Mr. Nolan has been a Director  since June 1996. Mr. Nolan is a Director
of Portfolio  Management  for AEW. He joined AEW in 1984 and has  responsibility
for AEW's high-yield equity investment portfolios.

         Mr. Sklar has been a Director  since January 1996. Mr. Sklar has been a
Managing Director of DMB Associates,  an investment and real estate  development
company, for more than five years.

Board Meetings and Committees

         Regular meetings of the Board of Directors of the Company are conducted
quarterly.  From time to time  special  meetings of the Board of  Directors  are
conducted as required. The Board of Directors has established an Audit Committee
and a Compensation Committee.

         The Audit Committee is composed of Messrs.  Kaufmann, Nolan and McCabe.
The 
                                       30
<PAGE>
Compensation Committee is composed of Messrs. Azrack and Dorrance.

         Directors are reimbursed for out-of-pocket expenses incurred by them in
connection with attendance at Board and committee  meetings.  No compensation is
currently  paid to  directors  for  their  service;  the  Board  is  considering
establishing compensation to be paid to the non-employee members of the Board.

Item 11.  Executive Compensation
--------  ----------------------

         The following table sets forth information  concerning the compensation
for  services  in all  capacities  to the  Company  for the fiscal  years  ended
September 30, 1996, 1995 and 1994, of the Chief Executive Officer of the Company
and the other four most  highly  compensated  executive  officers of the Company
(collectively,  the  "Named  Officers"),  and for  the  Company's  former  Chief
Executive Officer.
<TABLE>
<CAPTION>
     
                                                                             SUMMARY COMPENSATION TABLE
                                    ------------------------------------------------------------------------------------------
Name and Principal Position                                                                Other Annual         All Other
                                          Year            Salary            Bonus         Compensation(1)     Compensation
                                    ------------------------------------------------------------------------------------------
<S>                                       <C>             <C>              <C>              <C>                    <C>     
Garth R. Wieger                           1996            117,000          283,000              --                 --
  Chief Executive Officer and             1995              --                --                --                 --
  President(2)                            1994              --                --                --                 --

Dean Bloxom                               1996            23,942            23,000              --                 --
  President UDC Mortgage(3)               1995              --                --                --                 --
                                          1994              --                --                --                 --

Kenda B. Gonzales                         1996            40,497           130,000              --                 --
  Senior Executive Vice President         1995              --                --                --                 --
  and Chief Financial Officer(4)          1994              --                --                --                 --

James J. Grogan                           1996            39,151            75,000              --                 --
  Senior Executive Vice                   1995              --                --                --                 --
  President(5)                            1994              --                --                --                 --

Jay D. Johnson                            1996            47,335            33,000              --                 --
  Executive Vice President and            1995              --                --                --                 --
  Chief Information Officer (6)           1994              --                --                --                 --

Richard C. Kraemer                        1996            314,723          292,206          269,103(7)             --
  Chief Executive Officer and             1995            570,194             --            283,209(8)             --
  President(9)                            1994            522,635             --            279,840(10)            --
</TABLE>

(1)      Other  annual  compensation  is not included in the table for any Named
         Officer for any year in which the aggregate amount of such compensation
         does not exceed the lesser of $50,000 or 10% of the total annual salary
         and bonus for that year as reported herein.

(2)      Mr. Wieger has served as Chief  Executive  Officer and President of the
         Company since May 1996; he did not serve in any other  capacity for the
         Company prior to such date.
                                       31
<PAGE>
(3)      Mr.  Bloxom has served as President of UDC Mortgage  since August 1996;
         he did not serve in any other  capacity  for the Company  prior to such
         date.

(4)      Ms.  Gonzales has served as Senior  Executive  Vice President and Chief
         Financial  Officer of the Company since July 1996; she did not serve in
         any other capacity for the Company prior to such date.

(5)      Mr. Grogan has served as Senior Executive Vice President of the Company
         since July 1996; he did not serve in any other capacity for the Company
         prior to such date.

(6)      Mr.   Johnson  has  served  as  Executive   Vice  President  and  Chief
         Information Officer of the Company since June 1996; he did not serve in
         any other capacity for the Company prior to such date.

(7)      Includes a $3,750 car allowance,  a $4,515 Company  contribution to the
         Savings and Investment Plan, a $644 Company  contribution to the Profit
         Sharing Plan,  $25,504 of reimbursements for financial  planning,  life
         insurance  and   automobile   expenses,   $174,690  of  forgiveness  of
         indebtedness  and  $60,000  in  severance   payments.   See  "Executive
         Compensation  - Employment  Contracts,  Termination  of Employment  and
         Change-in Control Agreements."

(8)      Includes a $4,200 car allowance,  a $4,620 Company  contribution to the
         Savings and  Investment  Plan,  a $3,199  Company  contribution  to the
         Profit Sharing Plan,  $38,590 of reimbursement for financial  planning,
         life insurance and automobile expenses,  and $232,600 of forgiveness of
         indebtedness.  See  "Executive  Compensation  -  Employment  Contracts,
         Termination of Employment and Change-in-Control Agreements."

(9)      Mr.  Kraemer  served as Chief  Executive  Officer and  President of the
         Company from October  1985 to March 1996.  He is no longer  employed by
         the Company.

(10)     Includes a $4,200 car allowance,  a $4,500 Company  contribution to the
         Savings and  Investment  Plan,  a $5,632  Company  contribution  to the
         Profit Sharing Plan,  $32,908 of reimbursement for financial  planning,
         life insurance and automobile expenses,  and $232,600 of forgiveness of
         indebtedness.  See  "Executive  Compensation  -  Employment  Contracts,
         Termination of Employment and Change-in-Control Agreements."

Employment Contracts, Termination of Employment and Change-in-Control Agreements

         The Company has no employment  agreements or agreements with respect to
"change  in  control"  of the  Company  with any of the Named  Officers  who are
currently officers of the Company.

         The Company and Mr. Kraemer entered into a written employment agreement
(the "Kraemer Employment Agreement") effective November 14, 1995 which continued
Mr. Kraemer's  employment with the Company.  The term of the Kraemer  Employment
Agreement was three years with automatic one year extensions unless terminated.

         Mr.  Kraemer's base salary under the Kraemer  Employment  Agreement was
$350,000,  
                                       32
<PAGE>
and the Company  agreed to pay Mr.  Kraemer an automobile  allowance of not less
than $500 per month and  automobile  expenses;  pay the premiums on certain life
insurance policies;  and reimburse certain  professional fees in an amount of up
to $20,000 per year.

         In addition, the Company agreed to adopt an annual incentive bonus plan
for Mr. Kraemer based upon the Company's  financial  performance for each fiscal
year,  pursuant to which Mr.  Kraemer could achieve a bonus of up to 150% of his
base salary. The Company also agreed to adopt a long-term incentive compensation
plan pursuant to which executive officers of the Company (including Mr. Kraemer)
had  the  opportunity  to  earn  additional  cash  compensation   and/or  equity
participation  in the Company  based on the extent to which the internal rate of
return earned by the Company's  stockholders  on their total capital  investment
over a specified period  commencing on November 14, 1995 exceeded 12% per annum.
The aggregate  bonus could have been up to 15% of the Company's  total profit in
excess of such base  return.  Mr.  Kraemer  was  entitled  to receive 50% of all
bonuses awarded under the long-term incentive plan.

         If Mr. Kraemer's employment terminated for any reason other than death,
the Company  agreed to pay to Mr. Kraemer a lump sum amount equal to 200% of the
sum of (i) the base salary in effect on the termination date plus (ii) an agreed
annual bonus under his annual  incentive plan for the fiscal year which included
the  termination  date  equal  to 100% of such  base  salary.  In the  event  of
termination because of Mr. Kraemer's disability, this severance payment would be
reduced by any amount payable to Mr. Kraemer under disability insurance policies
maintained by the Company for him.

         The Kraemer  Employment  Agreement  continued the Company's  obligation
under a previous agreement to pay to Mr. Kraemer a "Stay-on Bonus" of 50% of his
base salary  following  substantial  consummation  of the  reorganization  Plan.
Accordingly,  the  Company  paid Mr.  Kraemer a "Stay-on  Bonus" of  $292,206 in
December 1995.

         Pursuant to a prior employment  agreement with Mr. Kraemer, the Company
made a  revolving  loan (the  "Kraemer  Loan") to Mr.  Kraemer  in the amount of
$2,010,000  with  annual  interest  at the rate of 8.57% on the unpaid  balance.
Since October 1, 1994,  the largest amount of the Kraemer Loan  outstanding  was
$657,235.  The principal of the Kraemer Loan was due December 31, 1996,  but was
reduced by $637.26  per day (and  included as  compensation)  for each day after
January 1, 1991 on which Mr.  Kraemer  remained  employed  with the Company.  If
there were not sufficient  amounts due to the Company to accommodate  such daily
reduction,  such amounts were to be paid to Mr.  Kraemer.  The terms of the loan
were revised on May 1, 1995, and a new promissory  note (the "New Kraemer Note")
in the principal amount of $561,258.37 was issued by Mr. Kraemer to evidence the
loan as revised.  The New Kraemer Note required that interest on the New Kraemer
Note continue at an annual rate of 8.57%; the principal maturity was extended to
April 30, 1998, with principal reductions  continuing at $637.26 for each day on
which Mr.  Kraemer  remained in the employ of the Company.  The New Kraemer Note
provides that Mr.  Kraemer  shall not be  personally  liable for any amounts due
thereunder unless Mr. Kraemer's  employment is terminated by Mr. Kraemer for any
reason other 
                                       33
<PAGE>
than Good  Reason  (as  defined  in the prior  employment  agreement)  or by the
Company for  Misconduct  (as  defined in the prior  employment  agreement).  Mr.
Kraemer's employment agreement was terminated in March 1996 and the Company paid
Mr. Kraemer $60,000 in severance  payments and forgave  indebtedness of $174,690
in connection  therewith in fiscal 1996.  Mr. Kraemer will receive an additional
$1,340,000 in severance payments and $315,408 of debt forgiveness in fiscal 1997
such amounts were included in the accruals established at the Acquisition Date.

         Other  Severance   Agreements  -  In  contemplation  of  the  Company's
negotiations  to sell  all or a  portion  of the  Company,  in  addition  to the
agreements with Mr. Kraemer,  the Company entered into severance agreements (the
"Severance Agreements") with certain individuals,  including executive officers,
whose continued  employment  management  believed was important to the Company's
continued  operations.  Under the Severance  Agreements (and the agreements with
Mr.  Kraemer  discussed  above),  the  Company  would have been  required to pay
aggregate  severance  benefits of  approximately $7 million if all employees who
had Severance Agreements terminated employment for any reason (other than death)
within six months following a change in control.

         Pursuant to the terms of the Stock  Purchase  Agreement  with DMB,  the
severance   agreements  were  amended  (as  amended,   the  "Amended   Severance
Agreements").   The  Amended  Severance  Agreements  generally  provide  to  the
employees  the  benefits  described  below  in  the  case  of a  termination  of
employment  (a) on the part of the  Company  for  reason  other  than  Cause (as
defined in the  agreement)  and (b) on the part of the  employee  for  voluntary
termination of employment for Good Reason (as defined in the  agreement),  for a
one year period  after a Change in Control (as  defined in the  agreement),  or,
under certain circumstances,  if the employee has been terminated by the Company
within six months  prior to a Change in Control.  A Change in Control  includes,
among other things, the commencement of a bankruptcy  proceeding followed by the
confirmation  and substantial  consummation of a plan of  reorganization  (which
occurred on November 14, 1995).

         Upon  satisfaction of the conditions  specified above, the employee was
entitled to receive from the Company in a single payment an amount equal to such
employee's  annual  base  salary in effect at  termination  plus a target  bonus
ranging from 10% to 25% of the employee's base salary.  The aggregate  amount of
such payments would be the same under the Amended Severance  Agreements as under
the Prior  Severance  Agreements.  The  amount of any  other  severance  payment
actually paid to any employee under any separate agreement between such employee
and the Company would be deducted  from the Company's  payment under the Amended
Severance  Agreements.  The Amended  Severance  Agreements  also  required  that
regular employee  insurance benefits continue to be provided for a period of one
year.

         If any  severance  payments  are made,  a portion of such  payments may
constitute  an "excess  parachute  payment,"  as defined in Section  280G of the
Internal  Revenue Code of 1986,  as amended  (the "Tax Code"),  and would not be
deductible by the Company for federal income tax purposes.
                                       34
<PAGE>
         The Amended  Severance  Agreements also provided for "Stay-On  Bonuses"
for each of the employee parties who continued his or her employment through the
substantial  Consummation  of the Plan.  The  amount of the  Stay-On  Bonuses is
generally 25% of the employee's base salary,  with one employee  entitled to 41%
of the employee's  base salary.  The Company has paid an aggregate of $1,068,126
in Stay-On Bonuses to date (including the Stay-On Bonus paid to Mr. Kraemer).

Board  Compensation  Committee  Report on Executive  Compensation;  Compensation
Committee Interlocks and Insider Participation

         The Compensation Committee of the Board of Directors was established on
June 6, 1996.  The  Compensation  Committee  did not  function  with  respect to
compensation matters for fiscal 1996.
                                       35
<PAGE>
Item 12.  Security Ownership of Certain Beneficial Owners and Management
--------  --------------------------------------------------------------

         The  following  table  sets forth  certain  information  regarding  the
Company's  outstanding  shares of Common Stock beneficially owned as of December
27, 1996 by (i) each person who is known by the Company to beneficially own more
than 5% of the  outstanding  shares of Common  Stock,  (ii) each director of the
Company,  (iii) each Named Officer, and (iv) directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
                                                               Amount and
                                                               Nature of
Name and Address of 5% Stockholders,                           Beneficial
Names of Directors and Officers (1)                           Ownership(2)     Percentage(2)
-----------------------------------                           ------------     -------------
<S>                                                               <C>               <C>
DMB Residential L.L.C.                                            500               50%
   4201 North 24th Street, Suite 120
   Phoenix, Arizona  85016

AEW Partners, L.P.                                                500               50
   225 Franklin Street
   Boston, Massachusetts  02110

Garth R. Wieger                                                    0                 0

Dean Bloxon                                                        0                 0

Kenda B. Gonzales                                                  0                 0

James J. Grogan                                                    0                 0

Jay D. Johnson                                                     0                 0

Drew M. Brown                                                     500(3)            50

Joseph F. Azrack                                                   0                 0

Bennett Dorrance                                                  500(3)            50

Gadi Kaufmann                                                      0                 0

James L. McCabe                                                    0                 0

Thomas H. Nolan, Jr.                                               0                 0

Mark Sklar                                                        500(3)            50

Richard C. Kraemer                                                 0                 0

All directors and executive officers as a group (12 persons)      500               50
</TABLE>

(1)  Except as set forth below, the address for each beneficial owner is c/o UDC
     Homes, Inc., 4812 South Mill Avenue, Tempe, Arizona 85282.

(2)  Unless  otherwise  indicated,  all parties have both  exclusive  voting and
     investing power or hold shares in joint tenancy with their spouses.

(3)  Includes  500 shares of Common Stock owned by DMB, of which  Messrs.  Brown
     and Sklar and a company  controlled  by Mr.  Dorrance  and  trusts  for the
     benefit of his children are members.
                                       36
<PAGE>
Item 13.  Certain Relationships and Related Transactions
--------  ----------------------------------------------

         During fiscal 1995,  but prior to the  acquisition by DMB of all of the
Company's  Common Stock, the Company sold land containing 188 lots to DMB LP, an
affiliate of DMB, and in connection  therewith  acquired  options from DMB LP to
repurchase  the 188 lots.  The purchase price for the property paid by DMB LP to
the Company was $1,880,139.  The Company paid no independent  consideration  for
the option rights as the appraised  value of the property  exceeded the purchase
price paid by DMB LP. During fiscal 1996,  the Company  acquired from DMB LP 234
lots pursuant to option rights for an aggregate  amount of $9,780,000.  Further,
DMB paid the Company  $2,727,400 during fiscal 1996 for infrastructure and other
work on property  subject to option  agreements.  These option  agreements  were
entered into before DMB purchased the Company's  Common Stock and at a time when
no DMB associate was on the Board of  Directors.  The Company  believes that the
terms of these option agreements were determined by arm's length negotiations.

         During fiscal 1996 and on November 7, 1996, a  partnership  between DMB
and  AEW  ("DMB/AEW   Partnership")  acquired   approximately   $28,607,000  and
$25,519,000,  respectively,  of land at the Company's cost, which is believed to
approximate  the fair value of such land based upon  appraisals  obtained at the
Acquisition  Date.  The Company  continues  to market the land  purchased by the
DMB/AEW  Partnership in exchange for a $150,000  management fee and commissions.
To the extent the cash  proceeds  from the sale of the property to a third party
exceeds  certain  thresholds,  the Company will  participate in excess  profits.
Additionally, the Company will receive additional proceeds from a parcel of such
land if certain lot zoning changes can be obtained.

         At  September  30,  1996,  AEW  and  DMB  each  owned  $15,000,000  and
$5,000,000  principal  amount of the Series C and Series D  Subordinated  Notes,
respectively.  Interest expense of $4,628,000 on the Subordinated  Notes held by
AEW and DMB was recorded in fiscal 1996.  Subsequent to September 30, 1996,  DMB
acquired an  additional  $2,000,000  principal  amount of Series C  Subordinated
Notes.

         An affiliate of DMB and AEW owns 25% of Westbrook  Village  Venture one
of the Company's Arizona retirement operations.

         During  fiscal 1996,  the Company  made  payments of $142,000 to Robert
Charles Lesser & Co. for strategic planning and market analysis. Mr. Kaufmann, a
Director of the Company, is Managing Director of Robert Charles Lesser & Co.

         In 1983, the Company organized Mill & Ellis Office Limited Partnership,
an Arizona  limited  partnership  ("Mill & Ellis"),  and in 1987 organized ME II
Limited  Partnership,  an Arizona limited  partnership  ("ME II"), each of which
owns one of the  Company's  two  executive  office  buildings  and leases  these
buildings to the Company.  During fiscal 1996,  Mr.  Kraemer owned 24% of Mill &
Ellis and 15% of ME II, and UDC Advisory,  having purchased interests previously
owned by certain  former  employees of the Company,  owned 25% of ME II. On June
                                       37
<PAGE>
25,  1996,  Mr.  Kraemer  assigned his interest in Mill & Ellis and ME II to the
Company.  The total equity  contributions  to these  limited  partnerships  were
$261,667.  The  land  and  construction  costs  of  the  two  buildings  totaled
approximately $2.4 million. In 1993, the Company entered into a lease for one of
the buildings for  approximately  $235,700 per year for 14,518 square feet and a
lease initially for  approximately  $244,000 per year for 14,775 square feet for
the second building.  Each of these leases contained a five-year lease extension
terminating in June 1998.

         In November 1995, in consideration of certain financial  accommodations
afforded the Company by Bank of America Arizona ("B of A"), the Company and Mill
& Ellis  agreed  in favor of B of A that  during  the  term of the  lease,  rent
payments  are payable from the Company to Mill & Ellis in the amount of $241,308
per year (or $20,109 per month) plus all Direct  Expenses (as defined) in excess
of $58,072  per year (or $4,839 per  month).  Similarly,  the  Company and ME II
agreed in favor of B of A that during the term of the lease,  rent  payments are
payable from the Company to ME II in the amount of $304,268 per year (or $25,355
per month) plus all Direct Expenses in excess of $59,100 per year (or $4,925 per
month). In December 1996, Mill & Ellis and ME II (which the Company  controlled)
sold these buildings to a third party.  The Company will relocate its operations
from these buildings in January 1997.

         Mr.  Kraemer  is  an  officer,  director  and a  25%  stockholder  in a
corporation  which is a  commercial  designer  and  fabricator  for  trade  show
exhibits,  residential sales offices,  custom signage,  restaurant interiors and
other  commercial  displays.  This  company  has  provided  interior  design and
decorating services to the Company for its model homes, sales offices and master
planned  community  clubhouses.  This  company  charges a design  fee and adds a
normal and  customary  commercial  markup for  furnishings  and fixtures that it
orders for installation on behalf of its customers. The Company made payments to
this company of approximately $96,000 during the fiscal year ended September 30,
1996. The Company believes, based upon its review of alternative suppliers, that
these transactions were entered into on a competitive basis.

         Mr.  Kraemer  is  an  officer,  director  and a  33%  stockholder  in a
corporation which provides travel services to the Company  consisting  primarily
of the sale of airline tickets for corporate  business travel.  The Company made
payments to this company of  approximately  $29,000 during the fiscal year ended
September 30, 1996. The Company  believes,  based upon its review of alternative
suppliers, that these transactions were entered into on a competitive basis.

         Considering the  relationships  between the Company and its affiliates,
except as described in the first paragraph of this Item 13, negotiations between
and among such persons may be considered not to have been at arm's-length.
                                       38
<PAGE>
                                     PART IV

Item 14.  Exhibits. Financial Statement Schedules, and Reports on Form 8-K
--------  ----------------------------------------------------------------

(a)      The following documents are filed as part of this report:

         1.       Financial   Statements  (See  Index  to  Financial  Statements
                  located in Item 8 of this report);

         2.       Financial   Statement   Schedules   (See  Index  to  Financial
                  Statements located in Item 8 of this report); and

         3.       Exhibits  required  by  Securities  and  Exchange   Commission
                  Regulation S-K, Item 601 are listed below.

Exhibit
Number            Description of Document
------            -----------------------
   (3)
3.1               Restated Certificate of Incorporation
   (3)
3.2               Restated By-Laws
   (3)
4.1               Indenture  dated  as of  November  14,  1995  relating  to the
                  12-1/2% Series A Senior Notes due 2000
   (3)
4.2               Indenture  dated  as of  November  14,  1995  relating  to the
                  12-1/2% Series B Senior Notes due 2000
   (3)
4.3               Indenture  dated  as of  November  14,  1995  relating  to the
                  14-1/2% Series C Subordinated Notes due 2000
   (3)
4.4               Declaration  and  Agreement  of  Trust -- UDC  Homes  Series C
                  Subordinated Note Trust, dated as of November 14, 1995
   (5)
4.6               Form of 14-1/2% Series D Subordinated  Note due 2000 and dated
                  March 15, 1996 and addendum and  amendment  thereto dated July
                  24, 1996
       (3)
10.1(a)           UDC  Master  Revolving  Line of Credit  (Borrowing  Base) Loan
                  Agreement  dated  November 8, 1995 between Bank One,  Arizona,
                  NA, ("BOAZ") Bankers Trust Company  ("Bankers  Trust"),  First
                  Interstate Bank of California ("FICAL") and the Company
       (5)
10.1(b)           Second  Amendment to the UDC Master  Revolving  Line of Credit
                  (Borrowing  Base) Loan  Agreement  dated June 30, 1996 between
                  BOAZ, Bankers Trust,  
                                       39
<PAGE>
                  FICAL, The First National Bank of Boston ("BkB"),  Wells Fargo
                  Realty  Advisors   Funding,   Incorporated   ("Wells  Fargo"),
                  Guaranty  Federal Bank,  F.S.B.  ("Guaranty  Federal") and the
                  Company

10.1(c)           Third  Amendment  to the UDC Master  Revolving  Line of Credit
                  (Borrowing  Base)  Loan  Agreement  dated  December  23,  1996
                  between  BOAZ,  Bankers  Trust,  Wells  Fargo  Bank,  National
                  Association   ("WFB")  (formerly  FICAL),  BkB,  Wells  Fargo,
                  Guaranty Federal and the Company
       (3)
10.2(a)           Third  Restated  Revolving  Line of Credit  Construction  Loan
                  Agreement  dated  November  6, 1995  among  Westbrook  Village
                  Venture  ("WVV"),  the  Company  and Bank of  America  Arizona
                  ("BofA")
       (5)
10.2(b)           Letter  Agreement  dated  June 14,  1996  modifying  the Third
                  Restated  Revolving  Line of Credit  Agreement  among WVV, the
                  Company and BofA
       (3)
10.3(a)           Third  Restated  Acquisition  and  Development  Loan Agreement
                  dated November 6, 1995 among WVV, the Company and BofA
       (5)
10.3(b)           Letter  Agreement  dated  June 14,  1996  modifying  the Third
                  Restated Acquisition and Development Loan Agreement among WVV,
                  the Company and BofA
       (3)
10.4(a)           Master Term Loan Agreement  dated November 6, 1995 between the
                  Company, Bank of America Illinois and Bank of America National
                  Trust & Savings Association
       (5)
10.4(b)           Letter Agreement dated June 14, 1996 modifying the Master Term
                  Loan Agreement  between the Company,  Bank of America Illinois
                  and Bank of America National Trust & Savings Association
    (3)
10.5              Term Loan  Agreement  (Terra)  dated  November 6, 1995 between
                  Terra California Limited Partnership,  the Company and Bank of
                  America Illinois
    (4)
10.6              Stockholders  Agreement  dated May 6,  1996 by and among  DMB,
                  Eastrich No. 184, LLC and the Company
    (3)
10.7              Lease  Agreement  dated December 20, 1983 between Mill & Ellis
                  Office Limited Partnership and the Company, as amended
    (3)
10.8              Mill & Ellis Letter Agreement dated November 6, 1995
    (3)
10.9              Lease  Agreement  dated  August 21, 1987 between ME II Limited
                  Partnership and the Company, as amended
                                       40
<PAGE>
     (3)
10.10             ME II Letter Agreement dated November 6, 1995
     (2)
10.11             Loan  Origination and Lending Services  Agreement  between UDC
                  Mortgage Corporation and the Company
     (1)
10.12             Restatement UDC Savings and Investment Plan, as amended
     (1)
10.13             Employees' Profit Sharing Plan and Trust, as amended
  (6)
16                Arthur Andersen LLP letter dated September 11, 1996

21                Subsidiaries of the Company

27                Financial Data Schedule
    (3)
99.1              Second  Amended  Disclosure  Statement  with Respect to Second
                  Amended Reorganization Plan of UDC Homes, Inc. dated August 3,
                  1995 (including the following exhibits thereto: Second Amended
                  Reorganization  Plan, Stock Purchase Agreement,  and Amendment
                  to Stock Purchase Agreement)
    (3)
99.2              Addendum to Second Amended  Disclosure  Statement with Respect
                  to Second Amended Reorganization Plan of UDC Homes, Inc. dated
                  August 31, 1995  (including  the following  exhibits  thereto:
                  Addendum to Second Amended Plan of  Reorganization  and Second
                  Amendment to Stock Purchase Agreement)


(1)               Incorporated by reference from the Company's  Annual Report on
                  Form 10-K for the fiscal year ended September 30, 1994

(2)               Incorporated  by  reference  from the  Company's  Registration
                  Statement on Form S-14 (No. 2-98040) or amendments thereto

(3)               Incorporated by reference from the Company's  Annual Report on
                  Form 10-K for the fiscal year ended September 30, 1995

(4)               Incorporated by reference from the Company's  Quarterly Report
                  on Form 10-Q for the quarter ended March 31, 1996

(5)               Incorporated by reference from the Company's  Quarterly Report
                  on Form 10-Q for the quarter ended June 30, 1996

(6)               Incorporated  by reference  from the Company's  Report on Form
                  8-K dated September 3, 1996
                                       41
<PAGE>
All other exhibits are omitted as the information required is inapplicable.

(b)               The Company filed a report on Form 8-K dated September 3, 1996
                  regarding  the Company's  dismissal of its former  independent
                  accountants,  Arthur Andersen LLP and the engaging of Deloitte
                  & Touche LLP as independent accountants.
                                       42
<PAGE>
                                   SIGNATURES

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

Dated:  December 27, 1996           UDC HOMES, INC.
                                    By: /s/ Garth R. Wieger
                                      -------------------------------------
                                       Garth R. Wieger, Chief Executive Officer,
                                       President and Director

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature                                   Title                                       Date
---------                                   -----                                       ----
<S>                                         <C>                                 <C>
/s/ Garth R. Wieger                         President, Chief Executive          December 27, 1996
---------------------------                 Officer and Director         
Garth R. Wieger                             (Principal Executive Officer)
                                            

/s/ Kenda B. Gonzales                       Senior Executive Vice President     December 27, 1996
---------------------------                 and Chief Financial Officer                 
Kenda B. Gonzales                           (Principal Financial and 
                                            Accounting Officer)
                                            

/s/ Drew M. Brown                           Director, Chairman                  December 27, 1996
---------------------------
Drew M. Brown

/s/ Joseph F. Azrack                        Director                            December 27, 1996
---------------------------
Joseph F. Azrack

/s/ Bennett Dorrance                        Director                            December 27, 1996
---------------------------
Bennett Dorrance

/s/ Gadi Kaufmann                           Director                            December 27, 1996
---------------------------
Gadi Kaufmann

/s/ James L. McCabe                         Director                            December 27, 1996
---------------------------
James L McCabe

/s/ Thomas H. Nolan, Jr.                    Director                            December 27, 1996
---------------------------
Thomas H. Nolan, Jr.

/s/ Mark Sklar                              Director                            December 27, 1996
---------------------------
Mark Sklar
</TABLE>
                                       43