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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                   FORM 10-KSB

|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
      EXCHANGE ACT OF 1934
      For the fiscal year ended December 31, 1997
      OR

| |   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
      For the transition period from _______ to _______

                         Commission file number 33-98178

                     MATZEL & MUMFORD MORTGAGE FUNDING, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

          New Jersey                                             22-3382016
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(State or other jurisdiction of                                (IRS Employer
 incorporation or organization)                              Identification No.)

 100 Village Court, Hazlet, New Jersey                                   07730
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(Address of principal executive offices)                              (Zip Code)

       Registrant's telephone number, including area code: (732) 888-1055

           Securities registered pursuant to Section 12(b) of the Act:
                         Intermediate Term Secured Notes

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

Check whether the issuer has filed all reports required to be filed by Section
13 or 15(d) of the Securities Act of 1934 during the preceding 12 months, and
has been subject to such filing requirements for at least the past 90 days.
Yes |X| No |_|

Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|

Issuer's revenues for its most recent fiscal year:  $641,132

No voting stock of the registrant is held by non-affiliates.

Shares outstanding as of March 21, 1998:  500

                       Exhibit index appears on page i
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                                      INDEX

Item
Number                                                                Page
------                                                                ----

PART I

Item 1.  Description of Business......................................   1

Item 2.  Properties...................................................  12

Item 3.  Legal Proceedings............................................  16

Item 4.  Submission of Matters to a Vote of Security Holders..........  16

PART II

Item 5.  Market Price of the Company's Common Stock and
         Related Stockholder Matters..................................  17

Item 6.  Management's Discussion & Analysis of Financial
         Condition and Plan of Operations.............................  25

Item 7.  Financial Statements and Supplementary Data..................  27

Item 8.  Changes in and Disagreements with Accountants
         on Accounting and Financial Disclosures......................  29

PART III

Item 9.  Director, Executive Officers and Control Persons,
         Compliance with Section 16(a) of the Exchange Act............  30

Item 10. Executive Compensation.......................................  31

Item 11. Security Ownership of Certain Beneficial Owners
         and Management...............................................  31

Item 12. Certain Relationships and Related Transactions...............  31

PART IV

Item 13. Exhibits and Reports on Form 8-K.............................  33

Signatures............................................................  34


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                               CERTAIN DEFINITIONS

     Certain defined terms, as well as certain phrases that are commonly used in
the homebuilding industry, appear frequently in this Report. For the reader's
convenience, several of these terms are explained below.

     FUNDING COMPANY - Matzel & Mumford Mortgage Funding, Inc., the issuer of
the Notes.

     MMO - The Matzel & Mumford Organization, Inc., a real estate development
and management company that is affiliated with the Funding Company.

     MATZEL & MUMFORD REAL ESTATE DEVELOPMENT COMPANY - an entity controlled by
the principals of MMO which is engaged in the business, either directly or
indirectly, of developing single family housing communities.

     M&M PROJECT ENTITY or PROJECT ENTITY - a Matzel & Mumford real estate
development company to which the Funding Company makes a Loan.

     PROJECT - a single-family housing community that an M&M Project Entity will
develop with the proceeds of a Loan from the Funding Company.

     LOAN - a loan that the Funding Company makes to an M&M Project Entity to
finance a Project or a particular phase of a Project.

     BUILDING LOT - the site on which an individual home will be constructed.

     INFRASTRUCTURE IMPROVEMENTS - improvements to land, such as roads, sewers
and utilities, but not the improvement of individual building lots by the
construction of homes or the addition of landscaping, driveways and the like.

     TRUSTEE - First Union National Bank, formerly First Fidelity Bank, N.A., as
trustee for the holders of the Notes.

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                                     PART I

ITEM 1(a) DESCRIPTION OF BUSINESS--THE FUNDING COMPANY

GENERAL

     Matzel & Mumford Mortgage Funding, Inc. (the "Funding Company") is a
finance company that was incorporated in New Jersey on July 11, 1995 for the
purpose of funding land acquisition, infrastructure improvements, and the
construction of homes in single-family residential housing communities by making
Loans.

     In 1996, the Funding Company made a public offering of up to $6,000,000.00
of its Intermediate Term Secured Notes (the "Notes"). On May 16, 1996, the
Funding Company issued and sold $3,750,000.00 principal amount of Notes.

     The Funding Company was formed to make secured Loans to M&M Project
Entities for the development of Projects. See "Properties--Projects." The
Funding Company was conceived by the principals of MMO to provide a reliable and
flexible source of financing for Matzel & Mumford real estate development
companies. Lenders such as banks generally do not make loans for land
acquisition, development or construction without requiring corresponding equity
contributions equal to at least 25% of development costs. Prior to the
establishment of the Funding Company and the offering of the Notes, the
limitations imposed by first mortgage lenders had required MMO's principals to
expend time and energy, which could have otherwise been devoted to development
activities, to attract and maintain equity investors or subordinated lenders.
Moreover, the effective cost of equity capital or subordinated debt generally is
more than the interest rate that the Funding Company pays on the Notes.

     As of February 28, 1998, the Funding Company has an aggregate of $3,729,069
of Loans outstanding. See "Properties--Projects." The Funding Company also had
$270,931 deposited in a cash collateral account with First Union National Bank,
as trustee for the holders of the Notes.

LENDING PRACTICES

     The Funding Company makes Loans for varying purposes, depending upon the
stage to which a financed Project has been developed. MMO views the development
and construction of a housing community as a three-phase process. First, MMO (or
a Matzel & Mumford real estate development company) identifies and negotiates
the acquisition of land, obtains construction approvals, and then acquires the
land. Second, MMO (or a Matzel & Mumford real estate development company) makes
infrastructure improvements, and commences sales and marketing efforts,
including the construction of one or more model homes. Third, MMO (or a Matzel &
Mumford real estate development company) allocates building lots to individual
homebuyers, collects downpayments, constructs homes to the buyers'
specifications, and improves the individual building lots with driveways,
landscaping and the like, and also may construct one or more "spec"


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houses, which are homes that are not yet subject to a purchase contract.
Depending on the size of a Project, the last two phases of work may overlap; an
M&M Project Entity is likely to be entering into contracts for particular
building lots while it is engaged in making infrastructure improvements. When
the Funding Company makes Loans for Projects in the stage of home construction
and related activities, these "later-stage" Loans generally are also used to
refinance any outstanding debt that is secured by the particular building lots
that are to be developed.

     An M&M Project Entity must satisfy several preconditions to obtain advances
on a Loan. The Funding Company does not finance land acquisition without a land
appraisal, nor does the Funding Company make a land acquisition Loan until the
M&M Project Entity has secured preliminary site plan and subdivision approval,
and management of the Funding Company believes that the M&M Project Entity can
secure final approvals at a reasonable cost and within a reasonable period of
time. In addition, the Funding Company does not finance a Project until it
receives a market and financial feasibility study (or an updated study in the
case of a later-stage Loan) that considers the competition, comparable sales
absorption in the market, cost to complete the Project, and potential
profitability of the development, and an environmental assessment (or an updated
assessment in the case of a later-stage Loan) prepared by an independent
consultant. The Funding Company believes that these requirements reduce the risk
that a given Project will not prove to be viable, although no assurance can be
given that each Project will be profitable or that all costs will be fully
recovered through the sale of houses.

SELECTION OF PROPERTIES

     The Funding Company evaluates many factors in determining whether to make a
Loan for a particular housing community. These factors can be summarized as
follows:

*    Location. The Funding Company favors projects in communities with good
     public school systems, accessible amenities, available infrastructure, and
     property taxes that are considered reasonable for MMO's target homebuyers.

*    Zoning of the subject parcel and the adjacent parcels. The Funding Company
     favors property that adjoins property that is zoned for residential use.

*    Market analysis. The Funding Company requires an M&M Project Entity to
     provide a detailed market survey that demonstrates the potential of a new
     community at projected home prices. In the case of a later stage Loan, the
     Funding Company accepts an update of a market survey previously prepared
     for the initial lender.

*    Cost of land. For a land acquisition Loan, the Funding Company considers
     whether the acquisition cost is reasonable in light of other development
     costs and projected selling prices for the homes to be developed.

*    Site development costs. The Funding Company considers estimates of the per
     lot cost of preparing for construction, including utilities, roads and
     drainage. The Funding Company


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     also considers the necessity and cost of off-site improvements, as well as
     related monetary contributions or fees, that a municipality may require to
     compensate for the impact of a new housing community. Required off-site
     improvements may include improvement or expansion of existing roads,
     intersections, or sewer and water systems, and the construction of parks
     and playgrounds.

*    Density, or the number of houses per acre. The Funding Company favors
     moderate density sites that support upscale houses without excessive lot
     improvement costs.

*    Total lot count. The Funding Company generally does not invest in projects
     that involve fewer than fifteen building lots because management believes
     that fixed costs (such as marketing and organizational expenses) make it
     difficult for communities of that size to be profitable. Conversely, for a
     larger community, the project may be divided into sections so that an M&M
     Project Entity can develop and sell the homes on one segment without the
     need to first make infrastructure improvements to the entire parcel.

*    Utilities. The Funding Company favors parcels with available public sewers
     and water.

*    Environmental issues. The Funding Company avoids financing properties
     contiguous to Superfund sites and sites that are adversely affected by
     electrical transmission lines, train routes or waste control facilities.

*    Proximity of other MMO managed projects. Management of the Funding Company
     believes that the presence of an affiliated community may enable an M&M
     Project Entity to reduce its expenses by sharing certain services, to enjoy
     the benefits of cross-selling, and to learn from an affiliate that has
     already gained experience in the relevant market.

SUMMARY OF LOAN AGREEMENT

     The Funding Company enters into a loan agreement (a "Loan Agreement") with
an M&M Project Entity once the Funding Company decides to make a Loan for a
proposed Project. The Funding Company does not commit to finance a Project
unless the M&M Project Entity has secured preliminary site plan and subdivision
approval, and management of the Funding Company believes that the M&M Project
Entity can secure final approvals at a reasonable cost and within a reasonable
period of time. Prior to making any advances on a Loan, the Funding Company
requires a land appraisal (in the case of a land acquisition Loan) and current
market and environmental data.

     Unless its obligations are otherwise limited in the documents that govern a
particular Loan, once the Funding Company enters into a Loan Agreement with an
M&M Project Entity, it is committed to make advances for land acquisition and
all covered expenses related to infrastructure improvements and home
construction as such expenses are incurred, so long as the M&M Project Entity
provides the requisite supporting documentation. As previously stated, land
acquisition costs must be supported by an appraisal, but appraisals are only
estimates of value and there is no assurance that an appraisal accurately
reflects realizable value. M&M Project Entities are not


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required to inject equity capital into their respective Projects. Instead, Loans
are available to finance all approved expenses arising in connection with
development of a Project.

     The Loans are subject to quarterly interest payments at a rate of at least
16% per annum of the outstanding principal. In addition, each M&M Project Entity
pays the Funding Company an annual administrative fee to cover ongoing expenses
and contingencies arising in connection with the Loans, such as auditing, legal
and trust services. Loans may be paid on a revolving basis as M&M Project
Entities sell individual homes, but the full amount of a Loan are not scheduled
to mature until the projected completion date for the applicable Project (i.e.,
the date that all of the homes will be delivered and closed). However, to reduce
the risk that Loans will not mature until after the Notes come due, the Funding
Company does not make Loans for land acquisition or initial infrastructure
improvements after the fifth anniversary of the date of issuance of the Notes.

     Each M&M Project Entity that acquires a Loan is required to execute a
mortgage in favor of the Funding Company which grants to the Funding Company a
lien on the property to be acquired or developed. If the Funding Company makes a
Loan for infrastructure improvements or home construction, but did not make the
initial land acquisition loan, the borrowing M&M Project Entity may be required
to use a portion of the proceeds of its Loan to pay off any prior lenders to
enable the Funding Company's mortgage to assume a first priority position.
Alternatively, the Funding Company may accept a second lien to secure the Loans
made with up to 25% of the proceeds of the offering of the Notes.

     When the Funding Company has a mortgage on land within a financed Project,
the applicable M&M Project Entity is required to approach the Funding Company
for an incremental release of its lien when that M&M Project Entity wishes to
sell a particular building lot within that mortgaged land to a homebuyer.
Prepayments in connection with the release of individual building lots are
ratable, subject to a 5% additional prepayment. To offer a simplified example,
if the Funding Company makes a $1,000,000 Loan for a Project involving 21
building lots, the M&M Project Entity would be required to prepay $50,000 in
principal ($1,000,000, divided by 21 building lots, plus a 5% additional
prepayment) to obtain the release of a single building lot from the Funding
Company's lien. Because the Funding Company has incorporated this additional
prepayment into its "release" price, the value of the Funding Company's
collateral relative to the outstanding amount of the applicable Loan should
increase as homes are sold. In the foregoing example, after 19 homes are sold,
the Funding Company will hold a mortgage on the two remaining building lots when
the outstanding amount of the Loan is just slightly more than the selling price
of one house. For purposes of comparison, a bank that makes land acquisition and
development loans may also permit its borrowers to obtain incremental releases
of individual building lots by making partial prepayments, but generally will
require a 10-20% additional prepayment.

     M&M Project Entities are subject to certain restrictions while their Loans
from the Funding Company are outstanding. For example, they may not pay
dividends or make other distributions to or for the benefit of their equity
investors unless they are current on all of their payment and other obligations
to the Funding Company in connection with Loans. They also may not make loans
to, or guarantee the obligations of, any other person or entity while indebted
to the Funding Company.


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Finally, they may not assume any other first mortgage debt while a first
mortgage Loan from the Funding Company is outstanding. The Funding Company does
not restrict the ability of the M&M Project Entities to acquire equity financing
and secured debt that is lower in priority than the Funding Company's liens.

COVERED EXPENSES

     The Loans are available to satisfy all expenses relating to the development
of a Project. These expenses may include:

     Land acquisition, such as (i) purchase price, (ii) costs of closing title,
(iii) subdivision approval expenses, including professional engineering, legal
and market analysis services, (iv) commissions, and (v) rollback taxes.

     Site development, such as (i) earthwork, (ii) utilities, (iii) curbs and
sidewalks, (iv) paving, (v) landscaping, (vi) engineering, (vii) off-site
contributions or impact fees, and (viii) inspections, fees and permits.

     Hard costs, such as subcontracted materials and services.

     Options, such as subcontracted materials and services for upgrades to sold
homes.

     Soft costs, such as (i) insurance, (ii) legal fees, (iii) realty transfer
fees, (iv) architectural services, (v) homeowners warranty policy, and (vi)
other warranty expenses.

     Construction overhead, such as (i) field supervision and labor, and (ii)
construction office and indirect expense.

     Selling and marketing overhead, such as (i) in-house sales office
personnel, (ii) outside commissions, (iii) sales office and indirect expenses,
(iv) furnishing, decoration and maintenance of model homes, and (v) advertising.

     Financing, such as (i) interest expense (including interest on the Loans),
and (ii) appraisal costs.

     General and administrative fees for general office management and overhead.

SERVICING

     The Funding Company has entered into a Loan Servicing Agreement with MMO
pursuant to which MMO services all of the Loans. Under the Loan Servicing
Agreement, MMO receives a fee equal to one-half of one percent (0.5%) per annum
of the outstanding principal amount of the serviced Loans, payable at the end of
each quarter. In exchange for the servicing fee, MMO collects payments in
respect of the Loans, transfers collected funds to the Funding Company or to the
Trustee, as appropriate, and institutes foreclosure proceedings following the
occurrence of


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certain defaults under a Loan Agreement. MMO is not entitled to collect the
servicing fee attributable to any Loan that is in default and subject to
foreclosure unless and until such default is cured or the principal amount of
the Loan is repaid in full, together with all accrued interest.

     In its capacity as servicer of the Loans, MMO must undertake commercially
reasonable efforts to collect all payments owed to the Funding Company in
respect of outstanding Loans and to enforce compliance with all obligations of
the M&M Project Entities under their respective Loan Agreements and Mortgages.
MMO will foreclose upon property securing a Loan that is in default only when,
in MMO's business judgment, no satisfactory arrangements can be made that will
enable the defaulting M&M Project Entity to cure its outstanding defaults while
protecting the Funding Company's rights and interests. MMO has the authority to
terminate foreclosure proceedings if all outstanding defaults have been cured.
The Funding Company must reimburse MMO for its out-of-pocket costs incurred in
connection with the collection of Loans after default only if and to the extent
that the Funding Company collects an amount in excess of the principal of and
accrued interest on a Loan.

MARKET FACTORS

     The Funding Company is a dedicated finance company that serves only its
affiliates. Accordingly, the Funding Company's success is tied to the success of
Matzel & Mumford real estate development companies. Because of the affiliation
between the Funding Company and its borrowers, the Funding Company effectively
has no competition in its market niche.

REGULATION

     The Funding Company's lending activities are not subject to significant
government regulation. However, the activities of the M&M Project Entities are
extensively governed by land use and other government laws and regulations.
Similarly, the Funding Company's activities do not directly implicate any
environmental laws, but the activities of the M&M Project Entities are subject
to many statutes, ordinances, rules and regulations concerning the protection of
health, safety and the public environment.

EMPLOYEES

     The Funding Company has no employees but instead relies on the services of
management and staff employed by MMO. MMO is the employer of record and assumes
all payroll obligations, payroll taxes and employee benefits administration for
such personnel. The Funding Company pays a fee to MMO for its loan
administration services.

     MMO had 95 employees as of February 28, 1998, six of which provide services
to the Funding Company. The Funding Company's officers, three of whom also are
officers of MMO and other related entities, devotes varying amounts of their
business time and energy specifically to the Funding Company. Bruce Matzel and
Roger Mumford each devote approximately 5% of their time to the affairs of the
Funding Company. Michael Skea devotes approximately 10% of his time to the
affairs of the Funding Company.


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<PAGE>

ITEM 1(b) DESCRIPTION OF BUSINESS--MATZEL & MUMFORD REAL ESTATE DEVELOPMENT
          COMPANIES

GENERAL

     After it identifies a Project, MMO assists with the formation of a new
Matzel & Mumford real estate development company to develop that Project. These
new entities constitute the M&M Project Entities to which the Funding Company
makes Loans.

     The M&M Project Entities designs, builds and markets single-family detached
housing in middle and high income residential communities. For the foreseeable
future, the Funding Company expects that the M&M Project Entities will restrict
their activities to the New Jersey market. The New Jersey market is
characterized by a wide diversity of housing choices and moderate population and
job growth, and is home to many large corporations, such as AT&T, Merck
Pharmaceutical, Allied Signal and Johnson & Johnson. The State of New Jersey
ranks in the upper quartile in total household income in the nation, creating
opportunities for the sale of larger, up-scale new homes which Matzel & Mumford
real estate development companies produce.

     MMO currently manages the development of 9 active single-family housing
communities in New Jersey. These projects include approximately 219 homes which
have been delivered and closed, approximately 159 homes which are under binding
contracts of sale, and approximately 309 building lots that are still available.
The outstanding purchase contracts are valued at an aggregate of approximately
$63,600,000. MMO manages all of the Projects that the M&M Project Entities
develop in exchange for management fees and other payments.

     MMO has purchase options for parcels of real estate that MMO expects can be
used for future development. Based on subdivision plans that have not yet been
approved, these parcels comprise approximately 1,226 building lots as of
December 31, 1997. Under current market conditions, MMO anticipates that those
1,226 lots, together with the approximately 309 available lots described above,
will provide approximately four years worth of development work. MMO may assign
to M&M Project Entities its rights under option contracts for particular parcels
for the development of new Projects.


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<PAGE>

COMMUNITIES

     MMO emphasizes careful land planning to help obtain the optimal siting of
each individual house in its communities. It seeks to provide an attractive
neighborhood appearance through the use of winding streets, cul-de-sacs,
underground utilities and, whenever possible, the preservation of existing
mature trees. MMO strives to mix a variety of home models with differing front
elevations to increase the visual interest in its communities. Varying
architectural styles are selected for each community to create a compatible,
pleasing streetscape, and communities have attractive entrances with distinctive
signage and landscaping. The Funding Company believes that the combination of
these design factors enhances long-term values for homebuyers.

HOUSES

     MMO continuously monitors and changes its house designs in keeping with
customer tastes and preferences. MMO has developed a reputation in the
marketplace for innovative floorplans and distinctive architectural
appointments, and strives to distinguish itself through its dedication to
customer satisfaction and quality construction. MMO attracts the upscale
homebuyer with its custom Design Center, where the homebuyer can choose from a
wide array of upgrades and options, including floorcoverings, kitchen and
bathroom fixtures and similar products. In addition, MMO can modify its house
designs by, for example, adding rooms and finishing basements.

     MMO offers an aggregate of over 40 different house designs in its
communities. It selects five or six models for each new development, and can
vary each model with different roof treatments and exterior finishes. Most
models have open floorplans where lines of sight run through several rooms.
Models frequently feature nine-foot ceilings on the first floor, and palladian
windows and volume ceilings on the upper floor to create a dramatic sense of
openness, size and depth. Models typically are deeper from the front to the back
of the house than most competing houses in the market, providing opportunities
for hallways and other transition areas between rooms.

     Depending on the location and model offered, houses in communities
developed by Matzel & Mumford real estate development companies have base
selling prices that range from the $200,000s to the $500,000s. Custom options
and upgrades can typically add 10% or more to the base selling price of a given
model. The prices at which homes are offered in particular communities have
generally increased from time to time as the number of available building lots
decreases, but there can be no assurance that sales prices will increase in the
future.

PROJECT OPERATIONS

     Matzel & Mumford real estate development companies rely on the services of
MMO's on-site sales associates and construction personnel. MMO charges the
Matzel & Mumford real estate development companies directly for the salary,
commission and benefit costs incurred in connection with such personnel.
Marketing, construction and administrative oversight are performed by other
employees of MMO in MMO's corporate offices in exchange for management fees.


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     Subcontractors (which typically are not affiliated with MMO) perform all
land development and house construction work in connection with Projects,
generally under fixed-price contracts. MMO or its designated affiliate acts as a
general contractor and purchasing agent. MMO's on-site construction supervisors
coordinate subcontractors' activities and supervise all aspects of construction
work and quality control. MMO generally seeks to motivate construction
supervisors by providing them with incentive compensation arrangements.

     MMO maintains insurance covering each Matzel & Mumford real estate
development company to protect against certain risks associated with their
activities. These insurance coverages include, among other things, general
liability, builder's risk, "all-risk" property, workers' compensation and
automobile. Matzel & Mumford real estate development companies repay MMO for
this insurance in part through a direct reimbursement and in part through MMO's
management fees. The Funding Company believes the amounts and extent of MMO's
insurance coverages are adequate.

     MMO generally receives the following four types of fees and other payments
from Matzel & Mumford real estate development companies in connection with the
development of housing communities:

     (1) Management Fee. This fee covers administrative management services
(other than warranty service) performed and third party expenses incurred on
behalf of a Matzel & Mumford real estate development company. The fee generally
ranges from 3% to 5% of revenues from the closing of homes to third party
buyers. MMO estimates the management fee at the commencement of development
activities and it is generally paid in equal monthly amounts over the projected
home selling period for a community.

     (2) Legal Fee. This fee covers legal services performed on behalf of a
Matzel & Mumford real estate development company, such as closing title to
purchased property, negotiating and closing financing, and closing sales of
homes to third party buyers. The fee generally is based on the fair value of
services performed by MMO's legal staff, with a fixed fee (currently,
approximately $1,000) assessed for each third party sale.

     (3) Warranty Fee. This fee covers the warranty service administrative
management functions described under "-- Customer Service, Warranties and
Quality Control." The amount of the fee varies from community to community, and
averaged approximately $700 per home in 1997.

     (4) Construction Cost Reimbursement. This payment is direct (dollar for
dollar) compensation for construction and sales expenses (including salaries,
commissions, bonuses and payroll taxes) incurred by MMO, as well as other
out-of-pocket expenses incurred by MMO and properly allocable to particular
Matzel & Mumford real estate development companies. The amount of this payment
varies from community to community.


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<PAGE>

ENVIRONMENTAL ISSUES

     Matzel & Mumford real estate development companies are subject to, and must
plan for compliance with, a number of environmental regulatory programs in
connection with the acquisition of property and the development of communities.

     Prior to acquiring any particular property, Matzel & Mumford real estate
development companies require a due diligence period of sufficient length to
permit a thorough investigation of environmental conditions affecting that
property. This investigation includes both an environmental site assessment to
determine whether there are potential environmental liabilities attached to the
acquisition of the property, and an analysis of the environmental issues
involved in developing the property. This latter analysis includes consideration
of the availability and cost of utility service, such as water and sewer, and an
investigation of the physical characteristics of the property, such as wetlands,
steep slopes, flood plains and the like, to determine whether the property can
be developed in accordance with applicable environmental regulations in a manner
consistent with the project's cost guidelines.

     In performing an environmental site assessment, Matzel & Mumford real
estate development companies retain qualified professional environmental
consultants to reduce the risk that the condition of the subject property will
expose them to liability under regulatory programs. To date, Matzel & Mumford
real estate development companies have been successful in avoiding the
acquisition of properties which carry such potential liabilities. In one
instance, involving a purchase of property in South River, New Jersey, the
environmental site assessment disclosed the need for a modest amount of
environmental remediation, estimated to cost $15,000. After the closing of the
acquisition, the environmental remediation was completed at a cost of $50,000.

     In evaluating the potential acquisition of particular parcels, Matzel &
Mumford real estate development companies consider the application of a number
of environmental statutes which could impose requirements for development
permits. In New Jersey, these statutes include the Freshwater Wetlands
Protection Act, the Flood Hazard Area Control Act, the Water Pollution Control
Act, the Water Quality Management Planning Act, the Coastal Area Facility Review
Act, the Waterfront Development Law and the Wetlands Act of 1970.

     During the contractual due diligence period before an acquisition, Matzel &
Mumford real estate development companies evaluate the applicability of
environmental regulatory programs and the estimated cost of related compliance.
For example, a wetlands analysis is undertaken to determine the nature and
extent of the wetlands on the property, including the applicable transition area
requirements. As another example, compliance with New Jersey's Flood Hazard Area
Control Act requires Matzel & Mumford real estate development companies to
retain qualified engineering consultants to delineate flood hazard areas
affecting proposed development plans and obtain stream encroachment permits
where structures or fill are required to encroach within these flood hazard
areas (for example, the installation of storm water outfalls adjacent to
streams). Obtaining the necessary stream encroachment permits requires that both
engineering and environmental quality standards are satisfied in the design of a
housing development.

     MMO has refined and improved the evaluation and investigation procedure
described above over the years in an effort to minimize the risk that a Matzel &
Mumford real estate development


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company will incur unexpected environmental compliance or mitigation costs. MMO
discovered approximately five years ago that its due diligence procedures then
in effect were not sufficiently thorough when a Matzel & Mumford real estate
development company acquired property unaware that it contained wetlands. The
seller of that property had misrepresented the character of the property and had
cleared vegetation in order to conceal the existence of wetlands, and even the
most exhaustive of investigative techniques may have failed to uncover those
wetlands. Nevertheless, MMO responded to that experience by enhancing its
environmental due diligence.

     The costs typically encountered in designing development plans to comply
with environmental regulations and obtaining the necessary permits range from
$1,000 to $4,000 per approved building lot.

MARKETING AND SALES

     MMO conducts a multi-faceted program to market and sell houses. Each
community that MMO manages has an on-site sales office and one to three models
that demonstrate the floorplans and many features of MMO's products. New
customers are attracted to Matzel & Mumford communities through various media,
including print advertising, direct mail, off-site signage, and local
publications targeted to potential homebuyers. A portion of sales, particularly
in the upper selling price ranges, are also derived from the introduction of
customers to Matzel & Mumford communities by local cooperating realtors.

     MMO's sales force, which services all Matzel & Mumford real estate
development companies, consists of licensed real estate salespersons or brokers,
many of whom have been associated with MMO for several years. Sales personnel
maintain considerable knowledge about MMO, its operations and its housing
products, and attend periodic refresher courses in the areas of mortgage
financing, construction techniques and scheduling, marketing, and advertising to
increase their effectiveness. These individuals are compensated with a
combination of salary and commission to optimize stability and motivation.

     Model homes in Matzel & Mumford communities are usually fully furnished and
decorated to accentuate the design and size of the home. Model home features are
selected by evaluating the demographics and lifestyle of the target buyer. Many
of the available options and upgrades are installed in model homes to further
enhance the presentation and increase the sales of such items. A fully furnished
and decorated model may contain, for example, a ceramic tile foyer, chair rails
and crown moldings, built-in cabinetry, home electronics for music and security,
recessed lighting, decorative wall and window treatments, and premium
appliances.

     MMO's Design Center in Hazlet, New Jersey promotes the sale of options and
upgrades that homebuyers may observe in the model homes. Design Center
consultants are trained to demonstrate all of the available premium items and to
strengthen the personal relationship that Matzel & Mumford real estate
development companies endeavor to create with each homebuyer. The Funding
Company expects that the Design Center will give the M&M Project Entities an
important competitive advantage in serving homebuyers, particularly in upscale
communities where customers can spend discretionary income on amenities.


                                       11

<PAGE>

     The pace at which Matzel & Mumford communities contract for the sale of
homes varies depending on several factors. Sales volume is generally highest
when the communities are first opened (due primarily to the wide choice of
available lots), and then sales activity generally decreases as projects mature.
In addition, the ability to sell houses is dependent, in large part, on the
ability of buyers to obtain mortgage financing. Matzel & Mumford real estate
development companies generally do not finance the purchase of houses in their
communities, but refer customers to sources of mortgage financing or rely on the
customers to access financing individually.

CUSTOMER SERVICE, WARRANTIES AND QUALITY CONTROL

     MMO has developed detailed quality and design standards for each home model
that provide strict construction guidelines for on-site staff and
subcontractors. Standards extend to the type and quality of every material used
in the construction process. These standards include detailed measurements,
diagrams and other graphical references.

     After a house is constructed, and as part of its ongoing management
responsibilities, MMO has on-site personnel to maintain quality control, conduct
house inspections, and provide post-closing warranty service. The proactive and
continuing participation by MMO personnel reduces post-closing repair costs,
fosters MMO's reputation for quality and service, and leads to repeat and
referral business.

     Through its warranty department that serves all communities developed by
Matzel & Mumford real estate development companies, MMO provides homebuyers with
a one-year limited warranty as to workmanship, and helps owners secure the
benefits of product warranties for materials used in the construction process
and equipment installed in its houses. In accordance with New Jersey consumer
protection laws, MMO also has a private warranty insurance policy that extends a
limited warranty to New Jersey homebuyers for the first ten years of home
ownership for major structural defects and provides limited assurance in the
event that MMO is unable to perform specified warrantable repairs. Finally, the
subcontractors who perform most of the actual construction in communities
developed by Matzel & Mumford real estate development companies provide
warranties of workmanship to MMO, the benefits of which are passed along to
homebuyers.

ITEM 2 PROPERTIES

GENERAL

     The Funding Company does not presently own, and does not intend in the
future to acquire, any property. Rather, the Funding Company makes Loans secured
by mortgages on property owned or to be acquired by Matzel & Mumford real estate
development companies.


                                       12

<PAGE>

     The Funding Company maintains its principal business office at 100 Village
Court, Hazlet, New Jersey, 07730, occupying space leased by MMO. The Funding
Company pays no rent for the use of MMO's headquarters.

PROJECTS

     Set forth below is a description of the Matzel & Mumford real estate
development companies to which, and communities for which, the Funding Company
has made Loans since its inception.

Staats Farm

     On May 17, 1996, the Funding Company made a first mortgage loan in the
amount of $2,000,000 to Matzel & Mumford at Staats Farm, L.L.C. ("Staats Farm
LLC"), the entity organized to develop, market and build a 51-lot subdivision
known as Staats Farm in Branchburg Township, Somerset County, New Jersey. The
Funding Company made additional Loans to Staats Farm LLC during 1996, all of
which were fully repaid in 1996.

     The subdivision was completed in 1997. The Funding Company does not
contemplate making additional Loans to this Project Entity.

Beacon Manor

     On May 17, 1996, the Funding Company made a first mortgage loan in the
amount of $1,610,000 and a second mortgage loan in the amount of $384,000 to
Beacon Manor Associates, a partnership organized to develop, market and build a
29-lot subdivision known as Beacon Manor in Basking Ridge, Somerset County, New
Jersey.

     The Funding Company was fully repaid by Beacon Manor Associates in 1996.
The Funding Company does not contemplate making additional Loans to this Project
Entity.

Maplehurst Farm

     On June 4, 1996, the Funding Company made a first mortgage loan in the
amount of $2,000,000 to Matzel & Mumford at Piscataway, L.L.C. ("Piscataway
LLC"), the entity organized to develop, market and build a 126-lot subdivision
known as Maplehurst Farm located in Piscataway, Middlesex County, New Jersey.
The Funding Company was fully repaid by Piscataway LLC on the Loan in 1996.

     On March 19, 1997, the Funding Company made a first mortgage loan in the
amount of $600,000 to Piscataway LLC. The Loan was secured by a first mortgage
on three building lots for construction of spec homes. Part of the Loan proceeds
was used to repay a loan made by Amboy National Bank ("Amboy") to finance the
acquisition and improvement of those three building lots. The Funding Company
was fully repaid by Piscataway LLC on the Loan in 1997.


                                       13

<PAGE>

     As of February 28, 1998, the Funding Company does not contemplate making
additional Loans to this Project Entity.

Heather Knolls-East & West

     On July 30, 1996, the Funding Company made a first mortgage loan in the
amount of $3,500,000 to Matzel & Mumford at South Brunswick, L.L.C., ("South
Brunswick LLC"), an entity organized to develop, market and build a 40-lot
subdivision known as Heather Knolls East (the "East subdivision"). In 1997, the
Funding Company was fully repaid by South Brunswick LLC on the Loan, and the
Funding Company does not contemplate making additional Loans to this Project
Entity in connection with the East subdivision.

     Further, on November 1, 1996, the Funding Company made a first mortgage
loan in the amount of $1,100,000 to South Brunswick to develop, market and build
a contiguous 51-lot subdivision known as Heather Knolls West (the "West
subdivision"). On November 13, 1997, the Loan was refinanced, pursuant to which
the Funding Company made a new first mortgage Loan to South Brunswick LLC in the
amount of $3,400,000 for land and improvements. As of December 31, 1997, South
Brunswick LLC owed the Funding Company $3,129,069 on the West subdivision Loan.

     As of February 28, 1998, South Brunswick LLC owed the Funding Company
$3,129,609 on the West subdivision Loan. South Brunswick LLC intends to seek
further site advances under the Loan in the approximate amount of $270,391 for
the West subdivision. Although no assurances can be given, South Brunswick LLC
expects to obtain bank financing during the third quarter of 1998 to pay off the
Loan to the Funding Company.

Seven Oaks

     On November 19, 1996, the Funding Company made a second mortgage loan in
the amount of $1,000,000 to Matzel & Mumford at Freehold, LLC ("Freehold LLC"),
the entity organized to develop, market and build a 126-lot subdivision known as
Seven Oaks located in Freehold Township, Monmouth County, New Jersey. In January
1997, the Funding Company was fully repaid by Freehold LLC on the Loan.

     On November 15, 1997, the Funding Company made a new second mortgage Loan
to Freehold LLC in the amount of $600,000. As of February 28, 1998, the full
amount of the Loan was outstanding.

West Windsor

     On February 4, 1997, the Funding Company made a first mortgage loan in the
amount of $850,000 to Matzel & Mumford at West Windsor, L.L.C. ("West Windsor
LLC"), the entity organized to develop, market and build a 38-lot subdivision
known as Windsor Crossing located in West Windsor, Mercer County, New Jersey.


                                       14

<PAGE>

     The Loan to West Windsor LLC was secured by a first mortgage on two
building lots for construction of spec homes. Part of the Loan proceeds was used
to repay loans made by First Savings Bank ("FSB") and Apple Chase Investors,
L.L.C. ("Apple Chase") to West Windsor LLC to finance the acquisition and
improvement of those two building lots.

     In 1997, the Funding Company was fully repaid by West Windsor LLC on the
Loan. The Funding Company does not contemplate making additional Loans to this
Project Entity.

Section 13

     On February 7, 1997, the Funding Company made a first mortgage loan in the
amount of $2,100,000 to Section 13 of the Hills, L.L.C. ("Section 13 LLC"), the
entity organized to develop, market and build a 60-lot subdivision known as
Beacon Crest located in a planned unit development known as "The Hills" in
Basking Ridge, Somerset County, New Jersey.

     The Loan to Section 13 LLC was secured by a first mortgage on five building
lots for construction of spec homes. Part of the Loan proceeds was used to repay
a loan made by Amboy to Section 13 LLC to finance the acquisition and
improvement of those five building lots.

     In 1997, the Funding Company was fully repaid by Section 13 LLC on the
Loan. The Funding Company does not contemplate making additional Loans to this
Project Entity.

White Oak Estates

     On February 27, 1997, the Funding Company made a first mortgage Loan in the
amount of $100,000 to Matzel & Mumford at White Oak Estates, LLC ("White Oak
LLC"), the entity organized to develop, market and build a 58-lot subdivision
known as White Oak Estates in Branchburg, Somerset County, New Jersey.

     The Loan to White Oak LLC was secured by a first mortgage on two building
lots for construction of spec homes. Part of the Loan proceeds was used to repay
loans made by FSB and Apple Chase to White Oak LLC to finance the acquisition
and improvement of those two building lots. In 1997, the Funding Company was
fully repaid by White Oak LLC on the Loan, and the Funding Company does not
contemplate making additional Loans to this Project Entity.

Apple Ridge II

     On July 15, 1997, the Funding Company made a first mortgage Loan in the
amount of $1,000,000 to Matzel & Mumford at Apple Ridge II, L.L.C. ("Apple Ridge
LLC"), the entity organized to develop, market and build a 17-lot subdivision
known as Apple Ridge II located on Church Road in Wall, Monmouth County, New
Jersey. The Loan to Apple Ridge LLC was for acquisition of the property and
project overhead.


                                       15

<PAGE>

     In 1997, the Funding Company was fully repaid by Apple Ridge LLC on the
Loan. As of February 28, 1998, the Funding Company does not contemplate making
additional Loans to this Project Entity.

Summary of MMO Projects

     The following table summarizes (as of February 28, 1998) the single-family
housing communities that Matzel & Mumford real estate development companies have
commenced. The entities developing some of these communities may receive Loans
for post-acquisition development activities.

<TABLE>
<CAPTION>

                                                                                                         Base
                                                         Number                 Homes                  Selling
                                                           of       Homes       Under       Lots        Prices
    Name                            Location             Homes    Delivered   Contract   Available      (000s)
    ----                            --------             -----    ---------   --------   ---------      ------

<S>                              <C>                      <C>        <C>         <C>        <C>       <C>
Beacon Manor                     Basking Ridge NJ          29         23          6          0        $689-949
Bedford Chase                    Tewksbury NJ              43         28          9          6        $390-450
Kings Crossing                   Montgomery NJ            118         29         12         77        $330-385
Seven Oaks                       Freehold NJ              126         21         35         70        $315-430
White Oak Estates                Branchburg, NJ            58         36         20          2        $295-355
Windsor Crossing                 West Windsor NJ           38         15         15          8        $385-480
Heather Knolls                   S. Brunswick NJ           91          0         30         61        $285-330
Maplehurst Farm                  Piscataway NJ            126         67         32         27        $255-308
Cranbury Knoll                   East Brunswick NJ         58          0          0         58        $299-369
                                                          ---        ---        ---        ---
                                                          687        219        159        309
                                                          ===        ===        ===        ===
</TABLE>


ITEM 3 LEGAL PROCEEDINGS

     The Funding Company has no pending legal matters, but it may be involved
from time to time in litigation arising in the ordinary course of business.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No meetings were held during the year ended December 31, 1997, and there
were no matters which developed that required a vote of security holders.


                                       16

<PAGE>

                                     PART II

ITEM 5(a) MARKET PRICE OF THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
          MATTERS

GENERAL

     The authorized capital stock of the Funding Company consists of 5,000
shares of common stock, no par value, 500 of which are outstanding. There is no
public market for the Funding Company's common stock. As of the date of this
Report, Bruce Matzel and Roger Mumford own all of the Funding Company's
outstanding common stock, and the Funding Company does not presently intend to
issue common stock to any third party. The Funding Company has never paid a
dividend in respect of its common stock, but is not prohibited from paying
dividends or making other distributions so long as it is current on its
obligations in respect of the Notes and any other obligations that it may have
under the Indenture described under the heading "Description of Notes and
Related Matters."

INDEMNIFICATION

     Directors and officers of the Funding Company are indemnified by the
Funding Company to the full extent permitted by the New Jersey Business
Corporation Act (the "NJBCA"), in particular Section 14A:3-5 of the NJBCA, the
material provisions of which may be summarized as follows:

     Legal Proceedings. Section 14A:3-5 of the NJBCA provides that in
nonderivative legal proceedings (proceedings other than those brought by or in
the right of the corporation), a corporation may indemnify "corporate agents"
(defined to include directors, officers, employees and persons serving in other
capacities at the corporation's request) against both "expenses" (defined as
reasonable costs, disbursements and counsel fees) and "liabilities" (defined to
include judgments, fines, settlements and penalties) if the corporate agent
acted in good faith and in a manner that such corporate agent reasonably
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal proceeding, such corporate agent had no reasonable
cause to believe the conduct was unlawful. The NJBCA also provides that in
derivative legal proceedings (proceedings brought by or in the right of the
corporation), a corporation may indemnify corporate agents against expenses if
the corporate agent acted in good faith and in a manner that such corporate
agent reasonably believed to be in or not opposed to the best interests of the
corporation.

     In all cases, the NJBCA requires a corporation to indemnify against
expenses, including counsel fees, to the extent that a corporate agent has been
successful in a derivative or nonderivative legal proceeding on the merits or
otherwise, or in defense of any claim, issue or matter therein, and permits a
corporation to advance expenses upon an undertaking for repayment if it shall
ultimately be determined that the corporate agent is not entitled to
indemnification. The


                                       17

<PAGE>

NJBCA states that the indemnification it provides "shall not exclude any other
rights, including the right to be indemnified against liabilities and expenses
incurred in proceedings by or in the right of the corporation," to which a
corporate agent may be entitled "under a certificate of incorporation, by-law,
agreement, vote of shareholders or otherwise," unless the agent has been
adjudged guilty of a breach of loyalty, a failure to act in good faith, a
knowing violation of law, or the receipt of an improper personal benefit.

     Determinations Regarding Indemnification. Indemnification of a party
(unless ordered by a court) is dependent upon a determination that such
indemnification is proper because the party has met the applicable standards set
forth above. Such a determination must be made (a) by the Board of Directors or
a committee thereof acting by a majority vote of a quorum consisting of
directors who were not parties to or otherwise involved in the proceedings, or
(b) under certain circumstances, by independent legal counsel in a written
opinion, or (c) by the shareholders.

     Other Material Provisions. The indemnification provided by statute is not
exclusive of other rights of indemnification, and inures to the benefit of an
officer's or director's legal representative, provided that a corporation may
not indemnify an officer or director who has been adjudged guilty of a breach of
loyalty, a failure to act in good faith, a knowing violation of law or the
receipt of any improper personal benefit. A corporation may purchase and
maintain insurance against expenses incurred by, and liabilities asserted
against, directors, officers, employees or agents, whether or not the
corporation would be empowered to provide such indemnity.

     The Funding Company's Certificate of Incorporation provides that directors
and officers shall not be personally liable to the Funding Company or its
shareholders for damages for breach of any duty except in the case of a breach
of the duty of loyalty to the Funding Company or its shareholders, an act or
omission that is not in good faith or that constitutes a knowing violation of
law, or an act or omission that results in the receipt by an officer or director
of an improper personal benefit.

     The Funding Company does not presently maintain indemnification insurance
for its officers and directors, but is in the process of applying for such
insurance. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Funding Company pursuant to the foregoing provisions,
or otherwise, the Funding Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.

ITEM 5(b) DESCRIPTION OF NOTES AND RELATED MATTERS

GENERAL

     In 1996, the Funding Company made a public offering of up to $6,000,000.00
of Notes. On May 16, 1996, the Funding Company issued and sold $3,750,000.00
principal amount of Notes. The Notes rank pari passu with all secured and
unsubordinated debt that the Funding Company


                                       18

<PAGE>

may incur in the future, including any other notes. The Notes bear interest at
the rate of 15% per annum, and will mature on April 1, 2002. Interest on the
Notes, calculated based on a 365-day year, is payable quarterly on March 31,
June 30, September 30 and December 31 of each year.

THE INDENTURE

     The Notes were issued under an Indenture (the "Indenture") between the
Funding Company and First Union National Bank as Trustee. The Indenture conforms
in many respects to the requirements of the Trust Indenture Act of 1939 (the
"TIA"). However, the TIA expressly exempts from its terms an offering of
securities issued pursuant to an indenture that is limited to $10,000,000
principal amount of debt. Because the Indenture contains such a limitation, the
Funding Company has elected, as permitted by the TIA, not to comply with certain
requirements of that statute.

     The Indenture gives the Funding Company the right, in its discretion, to
replace the Trustee with another qualified institution no more than once each
year so long as there is no outstanding Event of Default (as defined in the
Indenture) at the time of such action, and gives the Funding Company or the
Holders of a specified volume of Notes the right to replace the Trustee at any
time for certain defined reasons.

CONVERSION RIGHTS

     The Notes are not convertible into any other securities of the Funding
Company.

REDEMPTION AT THE OPTION OF THE FUNDING COMPANY

     The Funding Company has the right to redeem all or a portion of the Notes
at any time. In the event of a redemption of less than all of the Notes, the
Trustee will select the Notes to be redeemed by such method as the Trustee deems
fair and appropriate. The Funding Company will notify (or cause the Trustee to
notify) Holders of any redemption in writing at least 30 days in advance
thereof. In connection with any redemption, the Funding Company will pay all
accrued and unpaid interest on each redeemed Note to the date of redemption, and
an amount equal to (i) 103% of the face amount of each redeemed Note if the
redemption takes place prior to the first anniversary of the issuance thereof,
(ii) 102% of such face amount if the redemption takes place between the first
and second anniversary of the issuance thereof, (iii) 101% of such face amount
if the redemption takes place between the second and third anniversary of the
issuance thereof, and (iv) 100% of such face amount if the redemption takes
place after the third anniversary of the issuance thereof.

     The Funding Company intends, but is not obligated, to redeem the Notes,
either in whole or in part, during the sixth year after the issuance thereof.
The Funding Company is prohibited from initiating long-term Loans after the
fifth anniversary of the issuance of the Notes. Therefore, from time to time
management will consider whether it is in the Funding Company's best interest to
redeem Notes and relieve the Funding Company of the related interest payment
obligations.


                                       19

<PAGE>

SINKING FUND

     The Notes are not subject to any sinking fund.

RESTRICTIONS ON DIVIDENDS

     The Funding Company may pay dividends or make other distributions on its
equity securities so long as it is current on its obligations in respect of the
Notes and any other obligations that it may have under the Indenture.

RESTRICTIONS ON ADDITIONAL DEBT

     The Funding Company is prohibited from incurring any secured debt which is
senior to the Notes, but may have outstanding up to an aggregate $10,000,000
principal amount of notes or other evidences of indebtedness under the
Indenture. The Funding Company may fix the terms of any indebtedness that it
issues in the future ("Future Notes"), including: (i) the title; (ii) any limit
upon the aggregate principal amount; (iii) the date or dates on which the
principal is payable; (iv) the rate or rates at which the Future Notes will bear
interest, the date or dates from which such interest will accrue, the dates on
which such interest will be payable, and the record date for the interest
payable on any interest payment date; (v) the place or places where the
principal, premium, and interest, as applicable, will be payable; (vi) the
provisions for redemption, if any, and the redemption price and any remarketing
arrangements relating thereto; (vii) the sinking fund requirements, if any;
(viii) the period or periods within which, the price or prices at which, and the
terms and conditions upon which the Future Notes may be repaid, in whole or in
part, at the option of the holder thereof; (ix) the denominations in which the
Future Notes shall be issuable; and (x) any other terms. The purchasers of any
Future Notes will have an equal priority as creditors of the Funding Company
with the purchasers of the Notes offered hereby. Specifically, the holders of
Future Notes will share in the benefits of the mortgages and other collateral
that secure the Loans, including Loans that are outstanding prior to the
issuance of the Future Notes.

     The Funding Company is not restricted from acquiring additional equity
financing or incurring subordinated or unsecured debt from time to time. A
lender in a subordinated or unsecured position will be unable to recover against
any of the mortgages or other collateral securing the Notes unless all of the
Notes have been repaid or provided for in full.

COLLATERAL

     Each Loan is secured by a first or second mortgage on the financed work or
Project. In order to secure the Notes, the Funding Company assigns to the
Trustee, on behalf of the Holders, all of the Funding Company's rights and
interests under each Loan Agreement and each Mortgage that the Funding Company
enters into with an M&M Project Entity and under the Loan Servicing Agreement
with MMO. The collateral that the Trustee holds for the benefit of the Holders
includes (i) the Funding Company's security interests in and to the property
comprising the Projects, (ii) the Funding Company's right to all collections in
respect of the Loans, (iii) all right, title and interest in


                                       20

<PAGE>

and to any property acquired by means of foreclosure, and (iv) the Funding
Company's interest in all insurance policies maintained by M&M Project Entities
in connection with Projects.

     The Funding Company provides the Trustee with assignments in recordable
form for the mortgages that it takes on financed Projects. However, because of
the expense and administrative burden that would be involved in releasing the
Trustee's rights each time an M&M Project Entity sells a house, the assignments
are not recorded unless recording becomes necessary to enable the Trustee to
foreclose upon the related real estate. The failure to record an assignment of
mortgage to the Trustee may cause the assignment to be ineffective against
certain third parties. In particular, a bankruptcy trustee in a proceeding
respecting the Funding Company, a judgment creditor that records its judgment,
and a bona fide purchaser of any of the mortgaged property without notice of the
assignment would all have superior rights in relation to an unrecorded
assignment.

     To supplement the collateral described above, the Trustee maintains, for
the benefit of the Holders, a cash collateral account (the "Cash Collateral
Account") in the corporate trust department of the Trustee. All amounts that the
Funding Company (or that MMO, in its capacity as servicer of the Loans) receives
in connection with Loans that are not required within three business days for a
payment on any Notes or to fund another Loan, are promptly delivered to the
Trustee for deposit into the Cash Collateral Account. The Trustee advances funds
from the Cash Collateral Account as requested by the Funding Company to fund
Loans, and transfers funds from the Cash Collateral Account to a separate paying
account as required to service the interest payments on the Notes. Funds
remaining in the Cash Collateral Account are invested in U.S. government bonds,
certificates of deposit, or highly rated commercial paper and money market
funds, as further described in the Indenture.

     Each M&M Project Entity has the right, subject to certain prepayment
requirements, to obtain an incremental release of the Funding Company's lien in
respect of individual building lots within a Project so that such building lots
may be sold to homebuyers. All "release" payments from M&M Project Entities are
promptly delivered to the Trustee for deposit into the Cash Collateral Account
unless required within three business days for a payment on the Notes or to fund
another Loan. The Funding Company is required to deliver to the Trustee, at
least once every six months, a certificate attesting that all such releases of
property from the Funding Company's lien were in the ordinary course of the
Funding Company's business and did not impair the overall value of the
collateral for the Notes.

     The Funding Company may make Loans for several Projects or particular
phases of Projects at one time. The Funding Company does not designate its
mortgages on individual Projects as collateral for specific Notes. Instead, all
of the mortgages that the Funding Company holds to secure the Loans secure, as a
pool, all of the Notes. Similarly, all of the payments that the Funding Company
receives in connection with Loans constitute a pool of funds that the Funding
Company uses to make payments on all of the Notes.


                                       21

<PAGE>

PAYMENT AND PAYING AGENTS

     Payments on the Notes are generally be made at the office of the Trustee,
but the Funding Company may elect to pay interest (i) by check mailed to the
address of the Holder as such address shall appear in the security register for
the Notes, or (ii) by wire transfer to an account maintained by the Holder.

CERTAIN COVENANTS OF THE FUNDING COMPANY

     Limitations on Liens. So long as any Notes remain outstanding, the Funding
Company may not create, incur, assume or suffer to exist any lien of any kind
upon any of its property or assets except for (i) liens existing as of the date
of the Indenture, (ii) liens subordinated in all respects to the Notes, (iii)
liens securing the Notes and any Future Notes, and (iv) certain statutory,
judgment and other liens that are described in detail in the Indenture.

     Merger and Consolidation. So long as any Notes remain outstanding, the
Funding Company may not consolidate with, or merge into, or transfer or lease
all or substantially all of its properties and assets to, any person or entity
unless (i) the successor or purchasing person or entity is a domestic
corporation that expressly assumes all payment obligations on the Notes and the
performance of the Funding Company's obligations under the Indenture, (ii)
immediately after such transaction no Event of Default (as defined in the
Indenture), and no event which, after notice or lapse of time or both, would
become an Event of Default shall have happened and be continuing, and (iii) the
Funding Company has delivered to the Trustee an officer's certificate and an
opinion of counsel stating that such transaction complies with the Indenture.
The Funding Company does not expect that it will engage in any merger or
consolidation.

     Prompt and Continuous Use of Proceeds. In connection with the offering of
the Notes, the Funding Company agreed to convert at least 90% of the proceeds of
such offering into Loans within ten business days of the issuance of the Notes.
The Funding Company must keep an average of 90% of such funds (determined
quarterly based on average daily balances of the Loans) invested in Loans at all
times unless required within five business days to satisfy a payment obligation
under the Notes.

     Timing of Loans. The Indenture prohibits the Funding Company from making
long-term Loans (such as for land acquisition and early stage development
activities) after the fifth anniversary of the issuance of the Notes. The
Funding Company may make short-term Loans (with maturities of three months or
less), such as Loans for the construction of individual homes and final
infrastructure improvements, at any time.

     Modification of Lending Policies. So long as any Notes remain outstanding,
the Funding Company may not make a Loan (i) to a person or entity other than a
Matzel & Mumford real estate development company, or (ii) to finance any
activity other than the acquisition, development and construction of a
single-family residential community, or (iii) if more than 25% of the offering
proceeds would be invested in second mortgage loans, with the balance to be
invested in first


                                       22

<PAGE>

mortgage loans or deposited in the Cash Collateral Account, without the consent
of the Holders of at least 51% of the outstanding principal amount of the Notes.

MODIFICATION AND WAIVER

     Except as otherwise described in this section, the Funding Company and the
Trustee may modify and amend the Indenture by means of a supplemental indenture
with the consent of the Holders of not less than 66% in principal amount of the
Notes of each series affected thereby.

     The Funding Company may not modify and amend the Indenture without the
consent of the Holder of each Note affected thereby if such modification or
amendment would: (a) change the maturity of any installment of principal of, or
interest on, any Note or change the redemption price; (b) reduce the principal
amount of, or the rate of interest on, any Note; (c) change the currency of any
payment on any Note; (d) impair the right to institute suit for the enforcement
of any payment with respect to any Note; (e) reduce the percentage in principal
amount of the Notes of any series, the consent of whose Holders is required to
modify or amend the Indenture; or (f) modify the foregoing requirements or
reduce to less than a majority the percentage of Notes necessary to waive any
past default.

EVENTS OF DEFAULT; REMEDIES

     The following will be Events of Default under the Indenture with respect to
the Notes or any series of Future Notes: (a) default in the payment of any
interest upon any Note of that series when due, continued for 60 days; (b)
default in the payment of any principal or premium, if any, on any Note of that
series when due, continued for 30 days; (c) default in the deposit of a sinking
fund payment, if any, when due, in respect of any Note of that series, continued
for 30 days; (d) default in the performance, or breach, of any other covenant or
warranty of the Funding Company contained in the Indenture or in the Notes of
such series, continued for 90 days after written notice as provided in the
Indenture; (e) acceleration of any indebtedness (including any series of Future
Notes) for money borrowed in an aggregate principal amount exceeding $500,000
under the terms of the instrument under which such indebtedness is issued or
secured, if such acceleration is not annulled, or such indebtedness is not
discharged, within 30 days after the Funding Company receives written notice of
such acceleration; and (f) certain events in bankruptcy, insolvency or
reorganization.

     The Trustee or the Holders of 25% in principal amount of the outstanding
Notes may declare the principal amount of all outstanding Notes due and payable
immediately if any Event of Default with respect to the Notes of any series
occurs and is continuing at the time of declaration. At any time after a
declaration of acceleration has been made but before a judgment or decree for
payment of money due has been obtained by the Trustee, the Holders of a majority
in principal amount of the outstanding Notes may rescind such declaration of
acceleration and its consequences if all payments due (other than those due as a
result of acceleration) have been made and all Events of Default have been cured
or waived.


                                       23

<PAGE>

     Any Event of Default with respect to the Notes of any series may be waived
by the Holders of a majority in principal amount of all outstanding Notes of
that series, except a default (i) in any payment on any Note of that series, or
(ii) in respect of a covenant or provision which cannot be modified or amended
without the consent of the Holder of each outstanding Note of such series. The
Holders of at least 75% in principal amount of the Notes of any series may
consent to the postponement, for up to three years, of any interest payment due
in respect of the Notes of such series.

     The Trustee is generally required, within 90 days after becoming aware of
the occurrence of an Event of Default which is continuing, to give the Holders
of the Notes of the affected series notice of such default. However, except in
the case of a payment default, the Trustee may be entitled under the terms of
the Indenture to withhold or postpone the giving of such notice if the Trustee
determines in good faith that such action is in the interest of the Holders.

     The Holders of a majority in principal amount of the outstanding Notes of a
series may direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or exercising any trust or power conferred
on the Trustee with respect to the Notes of such series, so long as such
direction is not in conflict with any rule of law or the Indenture. Before
proceeding to exercise any right or power under the Indenture at the direction
of such Holders, the Trustee is entitled to receive from such Holders reasonable
indemnity against the costs, expenses and liabilities which the Trustee might
incur in complying with any such direction.

     The Indenture provides that no Holder may institute an action against the
Funding Company under the Indenture (except actions for payment of overdue
principal or interest) unless (i) the Holder previously has given to the Trustee
written notice of default and continuance thereof, (ii) the Holders of not less
than 25% in principal amount of the outstanding Notes of the affected series
have requested the Trustee to institute such action and have offered the Trustee
reasonable indemnity, and (iii) the Trustee has not instituted such action
within 60 days of such request, nor has the Trustee received directions
inconsistent with such written request from the Holders of a majority in
principal amount of the outstanding Notes of such series.

     The Funding Company is required to furnish to the Trustee annually a
statement as to the fulfillment by the Funding Company of all of its obligations
under the Indenture.

SATISFACTION AND DISCHARGE OF INDENTURE

     The Funding Company may terminate its obligations under the Indenture if
all of the Notes previously authenticated and delivered (other than lost,
destroyed or stolen Notes that have been replaced or paid) (i) have been
delivered to the Trustee for cancellation and the Funding Company has paid all
sums payable by it thereunder, or (ii) have matured or will mature within one
year, or are to be called for redemption within one year and the Funding Company
has irrevocably deposited with the Trustee money sufficient to pay all amounts
that are or will become due in respect of such Notes. If the Funding Company
makes such a deposit with the Trustee, Holders may look only to the deposited
money for payment.


                                       24

<PAGE>

ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN
       OF OPERATIONS

     The following discussion and analysis contains certain forward-looking
statements. Actual results could differ materially from those referred to in the
forward-looking statements due to a number of factors, including those set forth
herein. Additional detailed information concerning a number of factors that
could cause actual results to differ materially from the information contained
herein is readily available in the Funding Company's Prospectus dated February
8, 1996, as filed with the Securities and Exchange Commission, starting with the
section on RISK FACTORS.

OVERVIEW

     The Funding Company began operations on May 16, 1996. It was formed for the
purpose of funding land acquisition, infrastructure improvements, and the
construction of homes in single-family residential housing communities by making
secured Loans to M&M Project Entities for the development of Projects. See
"Properties--Projects."

LIQUIDITY AND CAPITAL RESOURCES

     The Company derives necessary cash flow from the collection of principal
and interest on Loans to Project Entities. The Company continually monitors the
timing of receipt of such funds to coincide with the quarterly payment of
interest to holders of its 15% Secured Notes, which represents the primary cash
expenditure by the Company.

     The Company does not expect to raise additional funds from external sources
in the foreseeable future and its shareholders are under no obligation to
contribute additional capital to the business.

     The Company is dependent on the collectibility of Loans to Project Entities
to meet its working capital needs. In the event that a Project Entity defaults
on a Loan, the Company would need to seek repayment of such Loan through
foreclosure on the collateral securing the Loan. The Company is unable to
predict the amount or timing of receipt of proceeds from a foreclosure action
and, accordingly, may be unable to meet the schedule of principal and interest
payments to holders of the 15% Secured Notes.

RESULTS OF OPERATIONS

     Revenues comprised of interest income were $641,132 during 1997. Revenues
were generated by the Company on Loans made to five Project Entities from during
1997. See Management's Discussion and Analysis of Financial Condition and
Results of Operations--Loans to Project Entities. At year end, the Company had
Loans outstanding to two Project Entities totaling $3,096,545. The Company makes
Loans bearing interest at 16% per annum and collects fees for administering each
Loan from the Project Entity.


                                       25

<PAGE>

     The Company's cost of revenues during 1997 was $651,727, consisting
primarily of interest expense on the 15% Secured Notes issued by the Company on
May 15, 1996. Costs also included $42,524 in amortization costs related to the
issuance of the 15% Secured Notes.

     The Company elected "S" corporation status for both federal and state
income tax purposes, therefore limiting the amount of income taxes incurred
through December 31, 1997.

     The Company recorded a net loss of $10,595 for the year ended December 31,
1997, although the net interest margin was a positive $60,689.

LOANS TO PROJECT ENTITIES

     During 1997, the Funding Company made the following Loans to seven Project
Entities:

                                       Loan      Initial Date of      Loan
   Project          Location        Commitment       Funding      Outstanding
   -------          --------        ----------       -------      -----------

Apple Ridge II     Wall             $1,000,000    July 15, 1997         --
Heather Knolls W.  So. Brunswick    $3,400,000    July 15, 1997   $2,496,545

Seven Oaks         Freehold         $  600,000    Nov. 15, 1997   $  600,000
Section 13         Basking Ridge    $2,100,000     Feb. 7, 1997          --
Windsor Crossing   West Windsor     $  850,000     Feb. 4, 1997          --
White Oak          Branchburg       $  600,000    Feb. 27, 1997          --
Maplehurst Farm    Piscataway       $  600,000    Mar. 19, 1997          --


EFFECT OF INFLATION

     The principal effect of inflation on the Company arises from the impact of
inflation on the underlying homebuilding operations of Project Entities that
have received Loans from the Company. Homebuilding may be adversely affected
during periods of high inflation, primarily because of higher land and
construction costs. Inflation also increases financing, labor and material
costs. In addition, higher mortgage interest rates significantly affect the
affordability of permanent mortgage financing to prospective homebuyers.
Homebuilding companies attempt to pass through to their customers any increases
in their costs through increased sales prices. Inflation has not had a material
adverse effect on the results of operations of the Project Entities; however,
there is no assurance that inflation will not have a material adverse impact on
such results or on the Company's future results of operations.

READINESS FOR YEAR 2000

     The Company has taken actions to understand the nature and extent of the
work required to make its systems and infrastructure Year 2000 compliant. The
Company has been


                                       26

<PAGE>

working to prepare its financial, information and other computer-based systems
for the Year 2000 and will replace or update existing systems as necessary. The
Company continues to evaluate the estimated costs associated with these efforts
based on actual experience. While these efforts will involve additional costs,
the Company believes, based on available information, that it will be able to
manage its total Year 2000 transition without any material adverse effect on its
business operations or financial prospects.

ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     See the Consolidated Financial Statements beginning on Page F-1.
                                                                 ---

                                       27

<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Certified Public Accountants

Consolidated Balance Sheet as of December 31, 1997

Consolidated Statement of Loss for the year ended December 31, 1997

Consolidated Statement of Stockholders' Equity for the year ended December
  31, 1997

Consolidated Statement of Cash Flows for the year ended December 31, 1997

Summary of Accounting Policies

Notes to Consolidated Financial Statements


                                       28

<PAGE>

ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
       FINANCIAL DISCLOSURES

     Nothing to report.


                                       29

<PAGE>

                                    PART III

ITEM 9 DIRECTOR, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
       WITH SECTION 16(a) OF THE EXCHANGE ACT

(a) DIRECTORS AND EXECUTIVE OFFICERS

     The Funding Company's officers are elected annually by the Board of
Directors and serve at the discretion of the Board. The directors and executive
officers of the Funding Company are as follows:

      Name                    Age               Position
      ----                    ---               --------

      Bruce Matzel            53                Chairman of the Board
      Roger Mumford           42                President, Director
      Michael S. Skea         41                Vice President, Secretary

     Bruce Matzel is Chairman of the Board of the Funding Company. Mr. Matzel
has served in the same capacity for MMO since its formation in 1986. Mr. Matzel
has over thirty years of experience in the real estate development business,
including the homebuilding business. Mr. Matzel has developed property in
various locations in New Jersey, New York, and Virginia.

     Roger Mumford is President of the Funding Company. Mr. Mumford has served
in a similar capacity for MMO since its formation in 1986. Mr. Mumford has been
actively engaged in the homebuilding business for over twenty years in various
locations in New Jersey and Virginia.

     Michael S. Skea is Vice President and Secretary of the Funding Company. Mr.
Skea has served as Corporate Counsel for MMO since May 1992. Before that, Mr.
Skea served in a similar capacity for Weiner Homes Corporation, a homebuilding
company located in Neptune, New Jersey, from 1986 to 1993. He has 11 years of
experience in the homebuilding industry, and is a member of the New Jersey Bar.

     The Funding Company's directors are elected annually by the shareholders.
Mr. Matzel and Mr. Mumford are presently the only directors of the Funding
Company. Because there are only two directors, it is possible that a
disagreement between Messrs. Matzel and Mumford could cause a stalemate in the
Funding Company's operations.

     There is no family relationship between or among any of the directors or
executive officers.

(b) COMPLIANCE WITH SECTION 16(a) OF EXCHANGE ACT

     No person has been required to file Forms 3, 4 or 5 during the last fiscal
year or prior years because no class of the registrant' securities is registered
under the Securities Exchange Act of 1934.


                                       30

<PAGE>

ITEM 10 EXECUTIVE COMPENSATION

     The Funding Company does not pay any compensation to its officers or
directors. The officers and all other staff members performing services for the
Funding Company are employees of MMO. The cost to the Funding Company of such
services is covered by a loan servicing fee that the Funding Company pays to
MMO. The Funding Company expects to maintain this arrangement for the
foreseeable future. MMO does not expect to derive any profit from the loan
servicing fee; MMO expects that the full amount of this fee will be directly
attributable to the costs of the services that MMO employees will perform for
the Funding Company.

ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information as of the date of this
Report with respect to the beneficial ownership of the Company's common stock by
all persons known by the Company to be the beneficial owners of more than 5% of
its outstanding shares, by directors who own common stock and by all officers
and directors as a group.

                                                   Amount and
                                                   Nature of
                       Name and Address of         Beneficial      Percent of
 Title of Class         Beneficial Owner           Ownership          Class
 --------------         ----------------           ---------          -----

Common Stock, no          Bruce Matzel             250 shares          50%
    par value           100 Village Court
                       Hazlet, New Jersey
                              07730

                          Roger Mumford            250 shares          50%
                        100 Village Court
                       Hazlet, New Jersey
                              07730

     The Company is not aware of any arrangements which may result in a change
of control of Matzel & Mumford Mortgage Funding, Inc.

ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Bruce Matzel and Roger Mumford are the promoters of the Funding Company,
which was incorporated in July, 1995.

     Messrs. Matzel and Mumford were obligated to and did contribute,
contemporaneously with or prior to the issuance and sale of the Notes, an
aggregate of $490,000 to the Funding Company to


                                       31

<PAGE>

provide for initial capitalization expenses and the expenses of the offering of
the Notes, and each of them renders services to the Funding Company as directors
and executive officers without separate compensation therefor. The Funding
Company may pay dividends or make other distributions to its shareholders if it
is current on all of its obligations under the Notes and the Indenture.

     Bruce Matzel and Roger Mumford own substantially all of the equity of MMO
and serve as MMO's principal executive officers. MMO services the Loans pursuant
to the terms of a Loan Servicing Agreement. MMO also provides management
services and design, warranty and other services to each of the M&M Project
Entities in exchange for management fees and other payments.

     Bruce Matzel and Roger Mumford, in the aggregate, own at least a
controlling percentage of the equity interests in, and serve as executive
officers of, each M&M Project Entity. M&M Project Entities may pay dividends or
make other distributions to their equity holders if they are current on their
payment and other obligations to the Funding Company. Several Matzel & Mumford
real estate development companies have financing in place that is personally
guaranteed by Messrs. Matzel and Mumford. It is possible that one or more Loans
from the Funding Company may be used to refinance some of that debt.


                                       32

<PAGE>

                                     PART IV

ITEM 13 EXHIBITS, SCHEDULES, AND REPORTS ON FORM 8-K

(a) Exhibits: None

(b) Reports on Form 8-K: Current Reports on Form 8-K were filed on January 15,
1997 and February 14, 1997, each concerning Loans from the Funding Company to
M&M Project Entities and one also concerning a change in accountants.


                                       33

<PAGE>

                                   SIGNATURES

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

                              MATZEL & MUMFORD MORTGAGE FUNDING, INC.

Date:  March 30, 1998         By: /s/ ROGER MUMFORD
                                  --------------------------------------------
                                  Roger Mumford, President
                                  (Principal Executive Officer)

                              By: /s/ JONATHAN FISHER
                                  --------------------------------------------
                                  Jonathan Fisher, Controller
                                  (Principal Accounting Officer)



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

Date: March 30, 1998          By: /s/ BRUCE MATZEL
                                  --------------------------------------------
                                  Bruce Matzel, Director

                              By: /s/ ROGER MUMFORD
                                  --------------------------------------------
                                  Roger Mumford, Director


                                       34

<PAGE>

                                MATZEL & MUMFORD
                             MORTGAGE FUNDING, INC.





================================================================================


                                                            FINANCIAL STATEMENTS
                                          YEARS ENDED DECEMBER 31, 1997 AND 1996







                                      F-1


<PAGE>



                                      MATZEL & MUMFORD MORTGAGE FUNDING, INC.

                                                                     CONTENTS

================================================================================

INDEPENDENT AUDITORS' REPORT                                           F-3

FINANCIAL STATEMENTS:
   Balance sheets                                                      F-4
   Statements of loss from operations                                  F-5
   Statements of cash flows                                            F-6
   Notes to financial statements                                     F-7-F-9


                                      F-2


<PAGE>



INDEPENDENT AUDITORS' REPORT


Matzel & Mumford Mortgage Funding, Inc.
Hazlet, New Jersey

We have audited the accompanying balance sheets of Matzel & Mumford Mortgage
Funding, Inc. as of December 31, 1997 and 1996, and the related statements of
operations and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Matzel & Mumford Mortgage
Funding, Inc. as of December 31, 1997 and 1996 and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.





February 20, 1998


                                      F-3


<PAGE>

<TABLE>
<CAPTION>


                                                MATZEL & MUMFORD MORTGAGE FUNDING, INC.

                                                                         BALANCE SHEETS

==================================================================================================

December 31,                                                          1997              1996
--------------------------------------------------------------------------------------------------
<S>                                                                <C>              <C>
ASSETS
  Cash                                                             $  945,616       $  210,207
--------------------------------------------------------------------------------------------------
              CURRENT ASSETS                                          945,616          210,207
--------------------------------------------------------------------------------------------------
MORTGAGE RECEIVABLE (NOTE 2)                                        3,096,545        3,800,000
DEFERRED FINANCING COSTS                                              186,049          228,573
--------------------------------------------------------------------------------------------------
              TOTAL ASSETS                                         $4,228,210       $4,238,780
==================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
   Accounts payable                                                $      125       $      100
--------------------------------------------------------------------------------------------------
              TOTAL CURRENT LIABILITIES                                   125              100
--------------------------------------------------------------------------------------------------
   Notes payable (Note 4)                                           3,750,000        3,750,000
--------------------------------------------------------------------------------------------------
              TOTAL LIABILITIES                                     3,750,125        3,750,100
--------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
   Common stock, no par value, 5,000 shares authorized; 500
      shares issued and outstanding                                    10,000           10,000
   Additional paid in capital                                         490,000          490,000
   Accumulated deficit                                                (21,915)         (11,320)
--------------------------------------------------------------------------------------------------
              TOTAL SHAREHOLDERS' EQUITY                              478,085          488,680
--------------------------------------------------------------------------------------------------
              TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY           $4,228,210       $4,238,780
==================================================================================================

</TABLE>

                                 See accompanying notes to financial statements.


                                      F-4


<PAGE>




                                         MATZEL & MUMFORD MORTGAGE FUNDING, INC.

                                              STATEMENTS OF LOSS FROM OPERATIONS

===============================================================================

December 31,                                         1997             1996
-------------------------------------------------------------------------------
REVENUE:
   Interest (Note 5)                               $606,715        $365,015
   Fees (Note 5)                                     34,417          24,769
-------------------------------------------------------------------------------
                                                    641,132         389,784
-------------------------------------------------------------------------------
EXPENSES:
   General and administrative                        46,703          18,533
   Amortization                                      42,524          26,578
   Interest                                         562,500         355,993
-------------------------------------------------------------------------------
                                                    651,727         401,104
-------------------------------------------------------------------------------
              LOSS FROM OPERATIONS                  (10,595)        (11,320)
ACCUMULATED DEFICIT, BEGINNING OF YEAR              (11,320)             --
-------------------------------------------------------------------------------
ACCUMULATED DEFICIT, END OF YEAR                   $(21,915)       $(11,320)
-------------------------------------------------------------------------------

                                 See accompanying notes to financial statements.


                                      F-5

<PAGE>

<TABLE>
<CAPTION>


                                                                          MATZEL & MUMFORD MORTGAGE FUNDING, INC.

                                                                                         STATEMENTS OF CASH FLOWS

===========================================================================================================================

December 31,                                                                            1997                       1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                     <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                                        $ (10,595)              $    (11,320)
   Adjustments to reconcile net loss to net cash used in operating
      activities:
        Amortization                                                                  42,524                     26,578
        Decrease in due from affiliates                                                   --                    184,000
        Increase (decrease) in accounts payable                                           25                   (119,511)
        Decrease (increase) in mortgage loans, net                                   703,455                 (3,800,000)
---------------------------------------------------------------------------------------------------------------------------
              NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                    735,409                 (3,720,253)
---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:

   Proceeds from debt offering                                                            --                  3,750,000
   Financing charges                                                                      --                    (70,144)
   Shareholder contributions                                                              --                    200,000
---------------------------------------------------------------------------------------------------------------------------
              NET CASH PROVIDED BY FINANCING ACTIVITIES                                   --                  3,879,856
---------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH                                                                     735,409                    159,603
CASH, BEGINNING OF PERIOD                                                            210,207                     50,604
---------------------------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD                                                                 $945,616               $    210,207
===========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the year for:
      Interest                                                                      $562,500               $    355,993
===========================================================================================================================
      Income taxes                                                                  $     200              $        250
===========================================================================================================================

                                                                            See accompanying notes to financial statements.
</TABLE>

                                       F-6


<PAGE>


                                         MATZEL & MUMFORD MORTGAGE FUNDING, INC.

                                                   NOTES TO FINANCIAL STATEMENTS

================================================================================

1. SUMMARY OF                 Nature of Business
   ACCOUNTING POLICIES
                              Matzel & Mumford Mortgage Funding, Inc. is a New
                              Jersey corporation formed for the purpose of
                              financing loans to real estate development
                              companies controlled by the principals of The
                              Matzel and Mumford Organization, Inc. ("MMO"),
                              which are engaged in the business of developing
                              single-family residential housing communities.

                              Debt Registration

                              The Company filed a registration statement with
                              respect to a debt offering of up to $6,000,000
                              under the Securities and Exchange Act of 1933, as
                              amended. The Company's registration statement was
                              declared effective by the Securities and Exchange
                              Commission on February 7, 1996. The Company raised
                              a total of $3,750,000 and the funding took place
                              on May 15, 1996. These funds have been used to
                              finance affiliated real estate projects in the
                              early stages of development in accordance with the
                              registration statement. The Company charges
                              interest on the loans at a rate of 16% or more and
                              assesses each borrower a quarterly administrative
                              fee based on the average outstanding loan balance.
                              Debt service payments on the loans, together with
                              the administrative fee, are intended to service
                              the 15% interest due on the investor notes and the
                              .5% loan servicing fee payable to MMO and other
                              expenses. The loans are collateralized by
                              first or second mortgages on the affiliates
                              property.

                              Deferred Costs

                              Deferred costs include legal, accounting and
                              filing fees incurred in connection with the
                              company's registration statement. These costs are
                              being amortized over 6 years.

                              Long-Lived Assets

                              Statement of Financial Accounting Standards No.
                              121 "Accounting for the Impairment of Long-Lived
                              Assets and for Long-Lived Assets to be Disposed
                              of," ("SFAS 121"), was adopted as of January 1,
                              1996. SFAS 121 standardized the accounting
                              practices for the recognition and measurement of
                              impairment losses on certain long-lived assets.
                              The adoption of SFAS 121 was not material to the
                              results of operations or financial position.


                                      F-7


<PAGE>

                                         MATZEL & MUMFORD MORTGAGE FUNDING, INC.

                                                  NOTES TO FINANCIAL STATEMENTS

================================================================================

                              Income Taxes

                              The stockholders of the Company have elected "S"
                              corporation status for federal and state income
                              tax purposes. Under those provisions, the
                              shareholders are liable for income taxes or their
                              respective share of the Company's net taxable
                              income or loss.

                              Use of Estimates

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

2. MORTGAGE RECEIVABLE        The Company has the following mortgages receivable
                              from its affiliates:



                         December 31, 1997                                 1997
                         -------------------------------------------------------
                         Matzel & Mumford at South Brunswick (a)      $2,496,545

                         Matzel & Mumford at Freehold (b)                600,000
                         -------------------------------------------------------
                                                                      $3,096,545
                         =======================================================

                              (a) The note is in the maximum amount of
                                  $3,400,000 and is to fund land
                                  acquisition and site improvements. The
                                  note is payable interest only at 16%.
                                  Interest payments are payable quarterly
                                  until November 1999, when the
                                  outstanding principal is due. The note
                                  is collateralized by a first mortgage on
                                  the property.

                              (b) A $600,000 note used to finance the
                                  construction of two model homes. The
                                  note has a term of 24 months and bears
                                  interest at 16%. Interest is payable
                                  quarterly and principal is due at
                                  maturity. The loan is collateralized by
                                  a second mortgage of phase three (31
                                  lots) of the project.


                                      F-8

<PAGE>



                                         MATZEL & MUMFORD MORTGAGE FUNDING, INC.

                                                   NOTES TO FINANCIAL STATEMENTS

================================================================================

                              The recorded value of these mortgages receivable
                              approximate fair value of instruments with similar
                              interest rates and maturities.

3. EQUITY                     Contemporaneously, with the issuance and sale of
                              notes offered by the Company as reflected in the
                              registration statement, the stockholders
                              contributed as capital an additional $200,000, as
                              required under the registration statement to meet
                              the $500,000 capital requirement.

4. NOTES PAYABLE              The Company raised $3,750,000 in connection with
                              its February 7, 1996 debt registration. The Notes
                              are payable interest only at 15%. Interest
                              payments are payable quarterly beginning June 30,
                              1996. The Note matures on May 14, 2002 and is
                              redeemable at the option of the Company subject to
                              certain conditions and a 1% to 3% prepayment
                              premium, if the Note is redeemed prior to the
                              third anniversary of the offering.

                              The recorded value of the notes payable
                              approximate fair value of instruments with similar
                              rates and maturities.

5. RELATED PARTY              Revenues from related parties are as follows:
   TRANSACTIONS

                              December 31,           1997              1996
                              -------------------------------------------------
                              Interest            $606,826           $356,105

                              Service fees          34,417             24,769
                              -------------------------------------------------
                                                  $641,132           $380,874
                              =================================================


                                      F-9


<PAGE>

                               MATZEL & MUMFORD AT
                             SOUTH BRUNSWICK, L.L.C.










================================================================================

                                                            FINANCIAL STATEMENTS

                             YEAR ENDED DECEMBER 31, 1997 AND PERIOD MAY 1, 1996

                                        (DATE OF INCEPTION) TO DECEMBER 31, 1996



                                      F-10



<PAGE>



                                 MATZEL & MUMFORD AT SOUTH BRUNSWICK, L.L.C.

                                                                    CONTENTS

================================================================================

INDEPENDENT AUDITORS' REPORT                                           F-12

FINANCIAL STATEMENTS:
   Balance sheets                                                      F-13
   Statements of income from operations                                F-14
   Statements of cash flows                                            F-15
   Notes to financial statements                                    F-16-F-20


                                      F-11


<PAGE>



INDEPENDENT AUDITORS' REPORT

To the Members
Matzel & Mumford at South Brunswick, L.L.C.
Hazlet, New Jersey

We have audited the accompanying balance sheets of Matzel & Mumford at South
Brunswick, L.L.C. as of December 31, 1997 and 1996, and the related statements
of operations and cash flows for the year ended December 31, 1997 and the period
May 1, 1996 (date of inception) to December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Matzel & Mumford at South
Brunswick, L.L.C. as of December 31, 1997 and 1996 and the results of its
operations and its cash flows for the year ended December 31, 1997 and the
period May 1, 1996 (date of inception) through December 31, 1996 in conformity
with generally accepted accounting principles.



February 20, 1998


                                      F-12


<PAGE>

<TABLE>
<CAPTION>


                                               MATZEL & MUMFORD AT SOUTH BRUNSWICK, L.L.C.

                                                                            BALANCE SHEETS

==========================================================================================

December 31,                                                      1997                1996
------------------------------------------------------------------------------------------
<S>                                                        <C>                  <C>
ASSETS
   Cash                                                    $    53,028          $      457
   Cash - restricted (Note 1)                                  188,600                  --
   Inventory (Note 2)                                        8,776,775           4,404,951
------------------------------------------------------------------------------------------
              TOTAL ASSETS                                  $9,018,403          $4,405,408
==========================================================================================
LIABILITIES AND MEMBERS' EQUITY
   Accounts payable and accrued expense                    $   163,174              18,063
   Customer deposits                                           581,526                  --
   Due to affiliates (Note 5)                                  422,194             642,220
   Note payable (Note 3)                                       300,000                   -
   Mortgage payable - M&M Mortgage Funding (Note 4)          2,496,545           2,800,000
   Mortgage payable (Note 4)                                 5,046,744             945,125
------------------------------------------------------------------------------------------
              TOTAL LIABILITIES                              9,010,183           4,405,408
------------------------------------------------------------------------------------------
MEMBERS' EQUITY                                                  9,220               1,000
RECEIVABLE FROM MEMBERS                                         (1,000)             (1,000)
------------------------------------------------------------------------------------------
              TOTAL MEMBERS' EQUITY                              8,220                  --
------------------------------------------------------------------------------------------
              TOTAL LIABILITIES AND MEMBERS' EQUITY         $9,018,403          $4,405,408
==========================================================================================

                                           See accompanying notes to financial statements.

</TABLE>

                                      F-13


<PAGE>







                                     MATZEL & MUMFORD AT SOUTH BRUNSWICK, L.L.C.

                                            STATEMENTS OF INCOME FROM OPERATIONS

================================================================================
                                                                 For the period
                                                  FOR THE      May 1, 1996 (date
                                                YEAR ENDED      of inception to
                                               DECEMBER 31,       December 31,
                                                   1997               1996
-------------------------------------------------------------------------------
INTEREST INCOME                                  $1,620          $     --
OTHER INCOME                                      6,600                 -
-------------------------------------------------------------------------------
              NET INCOME                         $8,220          $     --
================================================================================

                                 See accompanying notes to financial statements.


                                      F-14


<PAGE>

<TABLE>
<CAPTION>


                                                                   MATZEL & MUMFORD AT SOUTH BRUNSWICK, L.L.C.

                                                                                      STATEMENTS OF CASH FLOWS

==============================================================================================================
                                                                                                For the period
                                                                                   FOR THE    May 1, 1996 (date
                                                                                 YEAR ENDED    of inception) to
                                                                                DECEMBER 31,     December 31,
                                                                                    1997             1996
---------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                                   $     8,220       $        --
   Adjustments to reconcile net loss to net cash used in operating
      activities:
        Increase in cash - restricted                                              (188,600)               --
        Increase in inventories                                                  (4,371,824)       (3,459,826)
        Increase in accounts payable and accrued expenses                           145,111            18,063
        Increase in customer deposits                                               581,526                --
-----------------------------------------------------------------------------------------------------------------
              NET CASH USED IN OPERATING ACTIVITIES                              (3,825,567)       (3,441,763)
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from note payable                                                       300,000                --
   Proceeds from mortgages payable                                                6,443,289         2,800,000
   Repayments on mortgages payable                                               (2,645,125)               --
   Repayments to/advances from affiliates                                          (220,026)          642,220
-----------------------------------------------------------------------------------------------------------------
              NET CASH PROVIDED BY FINANCING ACTIVITIES                           3,878,138         3,442,220
-----------------------------------------------------------------------------------------------------------------
INCREASE IN CASH                                                                     52,571               457
CASH, BEGINNING OF PERIOD                                                               457                --
-----------------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD                                                             $    53,028       $       457
=================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
   Cash paid for interest                                                       $   752,434       $   412,416
=================================================================================================================

                                                                  See accompanying notes to financial statements.

</TABLE>

                                      F-15


<PAGE>



                                     MATZEL & MUMFORD AT SOUTH BRUNSWICK, L.L.C.

                                                   NOTES TO FINANCIAL STATEMENTS

================================================================================

1. SUMMARY OF                 Nature of Business and Organization
   ACCOUNTING POLICIES
                              Matzel & Mumford at South Brunswick, L.L.C.("M&M
                              at South Brunswick") is a New Jersey limited
                              liability company formed on May 1, 1996 for the
                              purpose of purchasing land in South Brunswick, New
                              Jersey and developing and constructing 91
                              single-family homes on the land.

                              Revenue Recognition

                              Revenues arising from home sales will be
                              recognized under the accrual method. Under this
                              method, income will be recognized when all terms
                              relating to the sale of a unit are complete,
                              consideration is exchanged and title is conveyed
                              to the buyer.

                              Restricted Cash

                              Restricted cash represents amounts on deposit as
                              collateral for project improvements.

                              Inventories

                              Inventories are stated at the lower of cost or
                              estimated net realizable value, which is
                              determined by reducing the anticipated net sales
                              proceeds by the estimated costs necessary to
                              complete or improve the property to the condition
                              used in arriving at the anticipated selling price.

                              Inventory costs are comprised of land, direct
                              unit, financing costs, project overhead and
                              allocated costs. Development costs will be
                              capitalized until the property is complete and
                              title has been conveyed to the buyer. Development
                              costs generally include land and improvements,
                              house construction, project overhead, interest and
                              a portion of construction management fees.
                              Interest capitalized is based upon the interest
                              rate on specifically related debt. Management fees
                              to a related party are paid and capitalized by the
                              Company.

                              Members' Capital

                              The two managing members have pledged a total of
                              $1,000 in capital contributions.



                                      F-16


<PAGE>


                                     MATZEL & MUMFORD AT SOUTH BRUNSWICK, L.L.C.

                                                  NOTES TO FINANCIAL STATEMENTS

================================================================================

                              Income Taxes

                              The Company is organized and operates as a limited
                              liability corporation which is not subject to
                              Federal or state income taxes. Accordingly, no
                              provision for income taxes has been made. The
                              earnings or losses of the Company are included on
                              each member's tax return, according to the terms
                              of the operating agreement.

                              Use of Estimates

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

2. INVENTORIES                Inventories relating to the development of
                              single-family homes consist of the following:

                               December 31,               1997          1996
                               -----------------------------------------------
                               Land                 $3,580,091    $3,473,309

                               Direct construction   1,252,118            --

                               Project overhead      2,779,716       519,196

                               Financing             1,164,850       412,416
                               -----------------------------------------------
                                                    $8,776,775    $4,404,951
                               ===============================================

                              All expenses incurred for the development of the
                              project will be capitalized. Selling expenses
                              which do not benefit future periods, will be
                              treated as period costs and will be expensed as
                              incurred.


                                      F-17

<PAGE>




                                     MATZEL & MUMFORD AT SOUTH BRUNSWICK, L.L.C.

                                                  NOTES TO FINANCIAL STATEMENTS

================================================================================

3. NOTES PAYABLE              On June 16, 1997, the Company entered into a
                              financing arrangement with an individual in the
                              amount of $300,000 bearing interest at 15%.
                              Repayment of principal calls for $10,000 per
                              closing, for closings 11 through 40, but no later
                              than June 15, 1999. The first interest payment
                              commences six months from the date of the note and
                              then every three months thereafter. The note is
                              collateralized by a financial guarantee bond,
                              which is guaranteed by the managing member's of
                              the Company.

                              The fair value of the note payable approximates
                              fair value of instruments with similar terms and
                              average maturities.

 4. MORTGAGES PAYABLE         December 31, 1997
                           -----------------------------------------------------
                           Land and construction - related party (a)  $2,496,545

                           Land and construction (b)                   4,809,244

                           1st mortgage (c)                              237,500

                           -----------------------------------------------------
                                                                      $7,543,289
                           =====================================================

                              (a) The Company has a mortgage payable to
                                  Matzel & Mumford Mortgage Funding, Inc.,
                                  an entity controlled by the members of
                                  M&M at South Brunswick. The note is in
                                  the maximum amount of $3,400,000 and is
                                  to fund land acquisition and site
                                  improvements for phase two (51 lots) and
                                  is payable interest only at 16%.
                                  Interest payments are payable quarterly
                                  until November 1999, when the
                                  outstanding principal balance is due.
                                  The note is collateralized by a first
                                  mortgage on the property.



                                      F-18

<PAGE>



                                     MATZEL & MUMFORD AT SOUTH BRUNSWICK, L.L.C.

                                                   NOTES TO FINANCIAL STATEMENTS

================================================================================

                              (b) The Company has commitments from a bank
                                  for land acquisition and construction as
                                  follows:

                                  o  Note A, in the maximum amount of
                                     $4,000,000, is to fund land acquisition
                                     and improvements. The note bears
                                     interest at the prime rate, plus 1 1/2%,
                                     and matures in June 1998. Interest is
                                     payable monthly and principal is payable
                                     with each closing at the rate of 120% of
                                     the cost of the related land and site
                                     improvements or $120,000. The loan is
                                     collateralized by a first mortgage on
                                     the land and improvements of phase one
                                     (40 lots) of the project and is
                                     guaranteed by the managing member's of
                                     the Company. At December 31, 1997, the
                                     Note has a balance of $4,000,000.

                                  o  Note B, a revolver, in the maximum
                                     amount of $2,500,000, is to be used to
                                     fund construction projects. The note
                                     bears interest at the prime rate, plus
                                     1%, and matures in June 1998. Interest
                                     is payable monthly and principal is paid
                                     at par upon closing of a unit. The loan
                                     is collateralized by a first mortgage on
                                     the units being constructed. The note
                                     balance is $809,240 as of December 31,
                                     1997.

                              (c)    The Company has a mortgage payable in
                                     the maximum amount of $500,000, is to
                                     fund the construction of two model
                                     homes. The note has a term of 18 months
                                     expiring July 1998 and bears interest at
                                     the prime rate, plus 1 1/2%. Interest is
                                     payable monthly and principal is paid at
                                     par upon closing of the unit. The loan
                                     is collateralized by the model home
                                     being constructed. The note balance is
                                     $237,500 as of December 31, 1997.

                                     The fair value of the mortgages
                                     approximates fair value of instruments
                                     with similar terms and average
                                     maturities.


                                      F-19




<PAGE>



                                     MATZEL & MUMFORD AT SOUTH BRUNSWICK, L.L.C.

                                                  NOTES TO FINANCIAL STATEMENTS

================================================================================

5. RELATED PARTY
   TRANSACTIONS               The Company has an agreement with the Matzel &
                              Mumford Organization, Inc. ("MMO"), whereby MMO
                              provides construction management services at a fee
                              of 4% of the gross selling price of each house.
                              MMO is entitled to draws of $30,000 per month.
                              Through December 31, 1997, the Company advanced
                              MMO $530,000 of management fees.

                              Included in due to/from affiliates are transfers
                              of costs incurred by affiliated companies of the
                              managing member of the Company. The amounts are
                              short term in nature and bear no interest. The
                              amounts are to be repaid as cash flow allows.


                                      F-20


<PAGE>





                               MATZEL & MUMFORD AT
                                  FREEHOLD, L.L.C.






================================================================================

                                                            FINANCIAL STATEMENTS
                         YEAR ENDED DECEMBER 31, 1997 AND PERIOD OCTOBER 3, 1996
                                        (DATE OF INCEPTION) TO DECEMBER 31, 1996


                                      F-21

<PAGE>



                                         MATZEL & MUMFORD AT FREEHOLD, L.L.C.

                                                                     CONTENTS

================================================================================

INDEPENDENT AUDITORS' REPORT                                            F-23

FINANCIAL STATEMENTS:
   Balance sheets                                                       F-24
   Statements of loss from operations                                   F-25
   Statements of cash flows                                             F-26
   Notes to financial statements                                      F-27-F-31



                                      F-22


<PAGE>



INDEPENDENT AUDITORS' REPORT

To the Members
Matzel & Mumford at Freehold, L.L.C.
Hazlet, New Jersey

We have audited the accompanying balance sheets of Matzel & Mumford at Freehold,
L.L.C. as of December 31, 1997 and 1996, and the related statements of
operations and cash flows for the year ended December 31, 1997 and the period
October 3, 1996 (date of inception) to December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Matzel & Mumford at Freehold,
L.L.C. as of December 31, 1997 and 1996, and the results of its operations and
its cash flows for the year ended December 31, 1997 and the period October 3,
1996 (date of inception) through December 31, 1996 in conformity with generally
accepted accounting principles.



February 20, 1998




                                      F-23



<PAGE>

<TABLE>
<CAPTION>


                                                                  MATZEL & MUMFORD AT FREEHOLD, L.L.C.

                                                                                        BALANCE SHEETS

======================================================================================================

December 31,                                                           1997                       1996
------------------------------------------------------------------------------------------------------
<S>                                                             <C>                        <C>
ASSETS
   Cash                                                         $   361,379                 $   67,949
   Cash-restricted (Note 1)                                         229,020                    197,470
   Inventory (Notes 2 and 3)                                     11,756,553                  7,718,927
   Note receivable                                                   44,500                         --
   Due from affiliates (Note 4)                                     809,711                    126,322
   Fixed assets, net                                                  7,856                         --
   Utility deposits                                                  38,570                         --
------------------------------------------------------------------------------------------------------
              TOTAL ASSETS                                      $13,247,589                 $8,110,668
======================================================================================================
LIABILITIES AND MEMBERS' EQUITY
   Accounts payable and accrued expenses                        $   709,668                 $  134,426
   Mortgages payable (Note 3)                                    11,587,034                  7,976,242
   Customer deposits                                                891,680                         --
------------------------------------------------------------------------------------------------------
              TOTAL LIABILITIES                                  13,188,382                  8,110,668
------------------------------------------------------------------------------------------------------
MEMBERS' EQUITY                                                      60,207                      1,000
MEMBERS' EQUITY RECEIVABLE                                           (1,000)                    (1,000)
------------------------------------------------------------------------------------------------------
              TOTAL MEMBERS' EQUITY                                  59,207                         --
------------------------------------------------------------------------------------------------------
              TOTAL LIABILITIES AND MEMBERS' EQUITY             $13,247,589                 $8,110,668
======================================================================================================

                                                       See accompanying notes to financial statements.

</TABLE>

                                      F-24


<PAGE>


                                            MATZEL & MUMFORD AT FREEHOLD, L.L.C.

                                              STATEMENTS OF LOSS FROM OPERATIONS

================================================================================

December 31,                                            1997          1996
-------------------------------------------------------------------------------
NET SALES                                         $6,309,597       $    --
COST OF SALES                                      6,062,480            --
-------------------------------------------------------------------------------
              GROSS PROFIT                           247,117            --
GENERAL AND ADMINISTRATIVE EXPENSES                  194,409            --
-------------------------------------------------------------------------------
              INCOME FROM OPERATIONS                  52,708            --
OTHER INCOME                                           6,499            --
-------------------------------------------------------------------------------
              NET INCOME                          $   59,207       $    --
================================================================================

                                 See accompanying notes to financial statements.


                                      F-25


<PAGE>


<TABLE>
<CAPTION>

                                                                                    MATZEL & MUMFORD AT FREEHOLD, L.L.C.

                                                                                                STATEMENTS OF CASH FLOWS

========================================================================================================================
                                                                                                      For the period
                                                                                                      October 3, 1996
                                                                                 YEAR ENDED         (date of inception)
                                                                                DECEMBER 31,          to December 31,
                                                                                    1997                    1996
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                                  $     59,207            $        --
   Adjustments to reconcile net income to net cash used in operating
      activities:
        Depreciation                                                                  3,929                     --
        Increase in cash-restricted                                                 (31,550)              (197,470)
        Increase in inventories                                                  (4,037,626)            (6,019,659)
        Increase in accounts payable                                                575,242                134,426
        Increase in miscellaneous deposits                                          (38,570)                    --
        Increase in customer deposits                                               891,680                     --
-----------------------------------------------------------------------------------------------------------------------
              NET CASH USED IN OPERATING ACTIVITIES                              (2,577,688)            (6,082,703)
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Fixed asset acquisition                                                          (11,785)                    --
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Repayments of mortgages payable                                                 (850,000)                    --
   Proceeds from mortgages payable                                                4,460,792              6,276,974
   Increase in note receivable                                                      (44,500)                    --
   Increase in due from affiliates                                                 (683,389)              (126,322)
-----------------------------------------------------------------------------------------------------------------------
              NET CASH PROVIDED BY FINANCING ACTIVITIES                           2,882,903              6,150,652
-----------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH                                                                    293,430                 67,949
CASH, BEGINNING OF PERIOD                                                            67,949                     --
-----------------------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD                                                             $   361,379            $    67,949
=======================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
   Cash paid for interest                                                       $ 1,204,100            $   161,884
========================================================================================================================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
   The acquisition of the land was partially financed by the seller in the
   amount of $1,699,268 in 1996.
========================================================================================================================

                                                                         See accompanying notes to financial statements.
</TABLE>


                                      F-26



<PAGE>




                                            MATZEL & MUMFORD AT FREEHOLD, L.L.C.

                                                   NOTES TO FINANCIAL STATEMENTS

================================================================================

1. SUMMARY OF                 Nature of Business and Organization
   ACCOUNTING POLICIES
                              Matzel & Mumford at Freehold, L.L.C. ("M&M at
                              Freehold") is a New Jersey limited liability
                              company formed on October 3, 1996 for the purpose
                              of purchasing land in Freehold, New Jersey and
                              developing and constructing 126 single-family
                              homes on the land.

                              Revenue Recognition

                              Revenues arising from home sales will be
                              recognized under the accrual method. Under this
                              method, income will be recognized when all terms
                              relating to the sale of a unit are complete,
                              consideration is exchanged and title is conveyed
                              to the buyer.

                              Restricted Cash

                              Restricted cash represents amounts on deposit as
                              collateral for project improvements.

                              Inventories

                              Inventories are stated at the lower of cost or
                              estimated net realizable value, which is
                              determined by reducing the anticipated net sales
                              proceeds by the estimated costs necessary to
                              complete or improve the property to the condition
                              used in arriving at the anticipated selling price.

                              Inventory costs are currently comprised of land,
                              financing and project overhead. Inventory costs
                              will be comprised of direct unit and allocated
                              costs. Development costs will be capitalized until
                              the property is complete and title has been
                              conveyed to the buyer. Development costs generally
                              include land and improvements, house construction,
                              project overhead, interest and a portion of
                              construction management fees. Interest capitalized
                              is based upon the interest rate on specifically
                              related debt. A portion of the management fees to
                              a related party are paid and capitalized by the
                              Company.

                              Members' Capital

                              The two managing members have pledged a total of
                              $1,000 in capital contributions.



                                      F-27


<PAGE>


                                            MATZEL & MUMFORD AT FREEHOLD, L.L.C.

                                                   NOTES TO FINANCIAL STATEMENTS

================================================================================

                              Income Taxes

                              The Company is organized and operates as a limited
                              liability company which is not subject to Federal
                              or state income taxes. Accordingly, no provision
                              for income taxes has been made. The earnings or
                              losses of the Company are included on each
                              member's tax return, according to the terms of the
                              operating agreement.

                              Use of Estimates

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

2. INVENTORIES                Inventories relating to the development of
                              single-family homes consist of the following:


                              December 31,                1997            1996
                              -------------------------------------------------
                              Land                 $ 6,268,725      $7,060,556

                              Site improvements      2,724,508              --

                              Construction costs       664,462              --

                              Financing              1,227,091         234,147

                              Project overhead         871,767         424,224
                              -------------------------------------------------
                                                   $11,756,553      $7,718,927
                              ================================================

                              All expenses incurred for the development of the
                              project will be capitalized.


                                      F-28


<PAGE>


                                            MATZEL & MUMFORD AT FREEHOLD, L.L.C.

                                                   NOTES TO FINANCIAL STATEMENTS

================================================================================

3. LOANS AND               December 31, 1997
   MORTGAGES PAYABLE
                           ---------------------------------------------
                           Land and construction loan (a)  $  6,843,090
                           1st mortgage (b)                   1,099,268
                           2nd mortgage (c)                     600,000
                           2nd mortgage (d)                     979,676
                           3rd mortgage (e)                   1,000,000
                           4th mortgage (f)                   1,065,000
                           ---------------------------------------------
                                                           $11,587,034
                           =============================================


                           a) The Company has a commitment from a bank for
                              land acquisition and construction not to exceed
                              $10,330,000 as follows:

                              o    Note A in the maximum amount of $6,030,000 is
                                   to fund land acquisition and improvements.
                                   The note has a term of 18 months, is due in
                                   May 1998 and bears interest at the prime
                                   rate, plus 1.5%. Interest is payable monthly
                                   and principal is payable with each closing at
                                   the rate of 120% of the cost of the related
                                   land and site improvements or $110,210. The
                                   Note has a balance of $4,266,440 at December
                                   31, 1997.

                              o    Note B in the amount of $700,000 matures in
                                   May 1998 and bears interest at 18%. Interest
                                   is payable monthly and principal is due at
                                   maturity. At December 31, 1997, this Note had
                                   a balance of $325,000.

                              o    Note C, a revolver, in the maximum amount of
                                   $3,000,000, is to be used to fund
                                   construction projects. The note bears
                                   interest at the prime rate, plus 1%, and
                                   matures in May 1998. Interest is payable
                                   monthly and principal is paid at par upon
                                   closing of a unit. The Note balance is
                                   $2,251,650 as of December 31, 1997.

                              The loan is collateralized by a first mortgage on
                              the land and improvements of phases one and two
                              (95 lots) of the project and is guaranteed by the
                              managing members.


                                      F-29


<PAGE>


                                            MATZEL & MUMFORD AT FREEHOLD, L.L.C.

                                                   NOTES TO FINANCIAL STATEMENTS

================================================================================

                          (b) The Company has a first mortgage to the seller
                              in the original amount of $1,699,268, of which
                              $600,000 was payable on November 15, 1997 and
                              another $600,000 is payable on November 15, 1998
                              with the balance due on November 15, 1999. The
                              mortgage bears interest at 9.25%, which is payable
                              at the time of the related principal payment. The
                              note is collateralized by a first mortgage on
                              phase three (31 lots) of the project.

                          (c) The Company has a mortgage payable to Matzel &
                              Mumford Mortgage Funding, an entity controlled by
                              the members of M&M at Freehold, which is payable
                              interest only at 16%. Interest payments are
                              payable quarterly until October 15, 1999 when the
                              outstanding principal balance is due. The note is
                              collateralized by a second mortgage on the land
                              and improvements.

                          (d) The Company has a second mortgage from a bank
                              for site improvements on phase two (49 lots) not
                              to exceed $2,415,000. The note matures in May 1998
                              and bears interest at the prime rate, plus 1 1/2%.
                              Interest is payable monthly and principal is
                              payable with each closing at the rate of 120% of
                              the cost of the related site improvements or
                              $59,143 per lot.

                          (e) The Company has a third mortgage payable on
                              phases one and two to an investor group in the
                              amount of $1,000,000. The note bears interest at
                              the rate of 20%, of which 6% can be deferred until
                              the 21st closing when the deferred portion is
                              payable. Thereafter, interest is payable in full
                              quarterly. Principal is payable $20,000 per house
                              beginning with the 21st through 50th closing and
                              $40,000 for the 51st through 60th closing with the
                              balance, if any, due on January 31, 2000.


                                      F-30


<PAGE>



                                            MATZEL & MUMFORD AT FREEHOLD, L.L.C.

                                                   NOTES TO FINANCIAL STATEMENTS

================================================================================

                          (f) The Company has a mortgage payable to an
                              insurance company in the maximum amount of
                              $1,250,000 bearing interest at 20% on the first
                              $1,000,000 and 25% on the balance. The Company
                              made a principal repayment of $250,000 during the
                              year, which was at the interest rate of 25%. Fifty
                              percent of the interest is payable semi-annually
                              beginning one year from initial advance with the
                              balance deferred until the related principal
                              payments commence. Principal is payable $50,000
                              per house, plus the related portion of the
                              deferred interest, beginning with the 76th closing
                              through the 95th closing with the unpaid balance,
                              if any, due December 31, 2001. The note is
                              collateralized by a third mortgage on the land and
                              improvements of phases two and three and the
                              guarantee of the managing members.

4. RELATED PARTY
   TRANSACTIONS            The Company has an agreement with the Matzel &
                           Mumford Organization, Inc. ("MMO"), whereby MMO
                           provides construction management services at a fee of
                           4% of the gross selling price of each house. MMO is
                           entitled to draws of $30,000 per month. Through
                           December 31, 1997, $360,000 of management fees have
                           been paid.

                           Included in due to/from affiliates are advances to
                           and transfers of costs incurred by affiliated
                           companies of the managing member of the Company. The
                           amounts are short term in nature and bear no
                           interest. The amounts are to be repaid as cash flow
                           allows.


                                      F-31