<PAGE>

                          SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, D.C.  20549

                                      FORM 10-Q

                             ---------------------------


                 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                        OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended September 30, 1997

                [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                        OF THE SECURITIES EXCHANGE ACT OF 1934

                          Commission file number  0-19891  

                                 SCHULER HOMES, INC.
                (Exact name of registrant as specified in its charter)

           Delaware                                            99-0293125
 (State or jurisdiction of                                 (I.R.S. employer
incorporation or organization)                            identification no.)

                           828 Fort Street Mall, Suite 400
                             Honolulu, Hawaii  96813-4321
                 (Address of principal executive offices) (Zip code)

                                    (808) 521-5661
                 (Registrant's telephone number, including area code)

                                    Not Applicable
                 (Former name, former address and former fiscal year,
                            if changed since last report)

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

    YES   X                                                 NO     
        -----                                                  ----

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
                                                            Outstanding at
        Class of Common Stock                               October 31, 1997
        ---------------------                               ---------------
          $.01 par value                                       20,100,177


<PAGE>

                                 SCHULER HOMES, INC.
                                           
                                        INDEX


PART I.  FINANCIAL INFORMATION

Item 1.       Financial Statements

              Independent Accountants' Review Report...............   3

              Consolidated Balance Sheets - September 30, 1997 and
                December 31, 1996..................................   4

              Consolidated Statements of Income - Three and nine
                months ended September 30, 1997 and 1996...........   5

              Consolidated Statements of Cash Flows - Nine
                months ended September 30, 1997 and 1996...........   6

              Notes to Consolidated Financial Statements...........   7

Item 2.       Management's Discussion and Analysis of
                Financial Condition and Results of Operations......  11

PART II.      OTHER INFORMATION....................................  19

SIGNATURES.......................................................... 20


                                     2

<PAGE>


                        INDEPENDENT ACCOUNTANTS' REVIEW REPORT


The Board of Directors and Stockholders
Schuler Homes, Inc.

We have reviewed the accompanying interim consolidated balance sheet of 
Schuler Homes, Inc. as of September 30, 1997, and the related consolidated 
statements of income for the three-month and nine-month periods ended 
September 30, 1997 and 1996, and the consolidated statements of cash flows 
for the nine-month periods ended September 30, 1997 and 1996.  These 
financial statements are the responsibility of the Company's management. 

We conducted our reviews in accordance with standards established by the 
American Institute of Certified Public Accountants.  A review of interim 
financial information consists principally of applying analytical procedures 
to financial data, and making inquiries of persons responsible for financial 
and accounting matters.  It is substantially less in scope than an audit 
conducted in accordance with generally accepted auditing standards, which 
will be performed for the full year with the objective of expressing an 
opinion regarding the financial statements taken as a whole.  Accordingly, we 
do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that 
should be made to the accompanying interim consolidated financial statements 
referred to above for them to be in conformity with generally accepted 
accounting principles.  See Note 1.

We have previously audited, in accordance with generally accepted auditing 
standards, the consolidated balance sheet of Schuler Homes, Inc. as of 
December 31, 1996, and the related consolidated statements of income, 
stockholders' equity, and cash flows for the year then ended (not presented 
herein) and in our report dated March 7, 1997, we expressed an unqualified 
opinion on those consolidated financial statements.  In our opinion, the 
information set forth in the accompanying consolidated balance sheet as of 
December 31, 1996, is fairly stated, in all material respects, in relation to 
the consolidated balance sheet from which it has been derived.


                                       ERNST & YOUNG LLP


Honolulu, Hawaii
November 12, 1997

                                     3

<PAGE>


                                 SCHULER HOMES, INC.
                             CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                            SEPTEMBER 30, 1997  DECEMBER 31, 1996
                                                            ------------------  -----------------
                                                               (UNAUDITED)
<S>                                                            <C>                <C>
ASSETS

Cash and cash equivalents (Note 2) . . . . . . . . . . . .     $    546,000       $  1,619,000
Receivables  . . . . . . . . . . . . . . . . . . . . . . .          899,000            425,000
Prepaid income taxes . . . . . . . . . . . . . . . . . . .        2,805,000          2,604,000
Amount due from affiliate (Note 5) . . . . . . . . . . . .           23,000             26,000
Real estate inventories (Note 3) . . . . . . . . . . . . .      294,512,000        236,569,000
Investments in unconsolidated joint ventures (Note 1). . .       14,891,000         11,611,000
Deposits . . . . . . . . . . . . . . . . . . . . . . . . .          200,000            483,000
Deferred offering costs. . . . . . . . . . . . . . . . . .        1,228,000          1,399,000
Notes receivable (Note 2). . . . . . . . . . . . . . . . .        2,228,000          3,944,000
Deferred income taxes  . . . . . . . . . . . . . . . . . .        4,402,000          7,356,000
Intangibles (Note 7) . . . . . . . . . . . . . . . . . . .       13,922,000                 --
Other assets . . . . . . . . . . . . . . . . . . . . . . .        4,329,000          1,122,000
                                                               ------------       ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . .     $339,985,000       $267,158,000
                                                               ------------       ------------
                                                               ------------       ------------

LIABILITIES AND STOCKHOLDER'S EQUITY

Accounts payable . . . . . . . . . . . . . . . . . . . . .     $  9,747,000       $    593,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . .        8,096,000          6,910,000
Notes payable to banks (Note 4). . . . . . . . . . . . . .      101,770,000         44,690,000
Note payable to others (Note3) . . . . . . . . . . . . . .        1,713,000                ---
6-1/2% convertible subordinated debentures due 2003. . . .       57,500,000         57,500,000
                                                               ------------       ------------
Total liabilities. . . . . . . . . . . . . . . . . . . . .      178,826,000        109,693,000

Commitments and contingencies (Notes 4 and 9)

Stockholders' equity (Note 10):
  Common stock, $.01 par value; 30,000,000 shares authorized;                                 
    20,874,177 shares issued at September 30, 1997 and                                        
    December 31, 1996. . . . . . . . . . . . . . . . . . .          209,000            209,000
  Additional  paid-in capital. . . . . . . . . . . . . . .       93,096,000         93,096,000
  Retained earnings. . . . . . . . . . . . . . . . . . . .       72,854,000         69,160,000
  Treasury stock, at cost; 774,000 shares at September 30,
    1997 and December 31, 1996 . . . . . . . . . . . . . .       (5,000,000)        (5,000,000)
                                                               ------------       ------------
Total stockholders' equity . . . . . . . . . . . . . . . .      161,159,000        157,465,000
                                                               ------------       ------------
Total liabilities and stockholders' equity . . . . . . . .     $339,985,000       $267,158,000
                                                               ------------       ------------
                                                               ------------       ------------

</TABLE>


                            See accompanying notes.

                                       4
<PAGE>



                                 SCHULER HOMES, INC.
                          CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>

                                           THREE MONTHS ENDED SEPTEMBER 30,      NINE MONTHS ENDED SEPTEMBER 30,
                                          --------------------------------       ---------------------------------
                                              1997                1996               1997                1996
                                           ------------       ------------       -------------        ------------
                                                     (UNAUDITED)                            (UNAUDITED)

<S>                                        <C>                 <C>                <C>                 <C>
Residential real estate sales. . . . . . . $61,057,000         $21,953,000        $163,509,000        $ 71,738,000

Costs and expense
  Residential real estate sales. . . . . . .48,683,000          18,122,000         132,168,000          58,345,000
  Inventory impairment loss  . . . . . . . .        --                  --                 ---          23,910,000
  Selling and commissions. . . . . . . . . . 4,731,000           2,042,000          12,497,000           5,848,000
  General and administrative . . . . . . . . 3,898,000           1,061,000          10,197,000           3,088,000
                                           -----------         -----------        ------------         -----------
    Total costs and expenses . . . . . . . .57,312,000          21,225,000         154,862,000          91,191,000

Income from unconsolidated joint ventures 
 (Note 1). . . . . . . . . . . . . . . .       176,000              14,000             192,000             114,000
                                           -----------         -----------        ------------         -----------
  Operating income (loss)  . . . . . . . . . 3,921,000             742,000           8,839,000         (19,339,000)
Other income (expense) (Note 4). . . . . . .(1,088,000)             45,000         (2,885,000)             246,000
                                           -----------         -----------        ------------         -----------
  Income (loss) before provision for
   income taxes. . . . . . . . . . . . . . . 2,833,000             787,000           5,954,000         (19,093,000)
Provision (credit) for income taxes
 (Note 6). . . . . . . . . . . . . . . . .   1,075,000             302,000           2,260,000          (7,452,000)
                                           -----------         -----------        ------------         -----------
  Net income (loss). . . . . . . . . . . . .$1,758,000         $   485,000          $3,694,000        $(11,641,000)
                                           -----------         -----------        ------------         -----------
                                           -----------         -----------        ------------         -----------
Net income (loss) per share (Note 8):
  Primary. . . . . . . . . . . . . . . .    $     0.09         $      0.02       $        0.18        $      (0.56)
                                           -----------         -----------        ------------         -----------
                                           -----------         -----------        ------------         -----------
  Fully diluted . . . . . . . . . . . .     $     0.09         $      0.02       $        0.18        $      (0.56)
                                           -----------         -----------        ------------         -----------
                                           -----------         -----------        ------------         -----------
</TABLE>

                            See accompanying notes.


                                       5
<PAGE>

                                           
                                 SCHULER HOMES, INC.
                        CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                NINE MONTHS ENDED SEPTEMBER 30,
                                               ---------------------------------
                                                   1997                1996
                                                ------------      --------------
                                                         (UNAUDITED)

OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . .   $3,694,000       $(11,641,000)
Adjustments to reconcile net income to net
 cash provided by operating activities:
   Depreciation and amortization expense. . . .     896,000            142,000
   Income from unconsolidated joint ventures. .     (26,000)          (144,000)
   Sales financed by Company. . . . . . . . . .          --            (86,000)
   Principal payments of notes receivable . . .   1,591,000            130,000

Changes in assets and liabilities, net of
 effects from purchase of Melody Homes 
 and Mortgage:
    Decrease in receivables. . . . . . . . . .      635,000            182,000
    (Increase) in prepaid income taxes . . . .     (201,000)        (1,271,000)
    (Increase) decrease in real estate
      inventories. . . . . . . . . . . . . . .  (17,081,000)         1,465,000
    Decrease in deposits . . . . . . . . . . .      283,000            841,000
    (Increase) in other assets . . . . . . . .   (1,506,000)          (332,000)
    Increase (decrease) in accounts payable. .    4,380,000           (440,000)
    Increase (decrease) in accrued expenses. .    1,079,000         (1,375,000)
    Change in deferred income taxes. . . . . .    2,954,000         (6,477,000)
                                                 ----------       ------------
      Net cash provided by (used in)
       operating activities. . . . . . . . . .   (3,302,000)       (19,006,000)

INVESTING ACTIVITIES
Payment for purchase of Melody Homes and
 Mortgage, net of cash acquired. . . . . . . .  (29,508,000)                --
Investment in unconsolidated joint ventures . .  (3,172,000)                --
Advances to unconsolidated joint venture . . . .   (180,000)        (3,765,000)
Repayments of advances to unconsolidated
 joint venture . . . . . . . . . . . . . . . . .     98,000          3,882,000
Capital distributions from unconsolidated
 joint venture . . . . . . . . . . . . . . . . .         --            115,000
Purchase of furniture, fixtures, and
 equipment . . . . . . . . . . . . . . . . . . .   (597,000)           (39,000)
                                                 ----------       ------------
      Net cash provided by (used in)
       investing activities. . . . . . . . . .  (33,359,000)           193,000

FINANCING ACTIVITIES
Proceeds from bank borrowings. . . . . . . . .  159,481,000         97,158,000
Principal payments on bank borrowings. . . . . (124,068,000)       (79,174,000)
Advances to affiliate. . . . . . . . . . . . .      (73,000)           (89,000)
Repayment of advances to affiliate . . . . . .       77,000             87,000
Net decrease in deferred offering costs. . . .      171,000            172,000
Reacquisition of the Company's common stock. . .         --         (5,000,000)
                                                 ----------       ------------
      Net cash provided by (used in)
       financing activities. . . . . . . . . .   35,588,000         13,154,000
                                                 ----------       ------------

Increase (decrease) in cash. . . . . . . . . .   (1,073,000)        (5,659,000)
Cash and cash equivalents at beginning 
 of period . . . . . . . . . . . . . . . . . .    1,619,000          6,147,000
                                                 ----------       ------------
Cash and cash equivalents at end of
 period. . . . . . . . . . . . . . . . . . . .  $   546,000       $    488,000
                                                 ----------       ------------
                                                 ----------       ------------


                             See accompanying notes

                                       6
<PAGE>

                                 SCHULER HOMES, INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 


1.  General

    The accompanying unaudited consolidated financial statements have been
    prepared in accordance with generally accepted accounting principles for
    interim financial information and with the instructions to Form 10-Q and
    Article 10 of Regulation S-X.  Accordingly, they do not include all of the
    information and footnotes required by generally accepted accounting
    principles for complete financial statements.  In the opinion of
    management, all adjustments (consisting of normal recurring adjustments)
    considered necessary for a fair presentation have been included.

    These financial statements should be read in conjunction with the Notes to
    Consolidated Financial Statements for the year ended December 31, 1996
    contained in the Company's 1996 annual report on Form 10-K.
    
    The Company has experienced, and expects to continue to experience,
    significant variability in quarterly sales and net income.  The results of
    any interim period are not necessarily indicative of the results that can
    be expected for the entire year.

    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.

    The Company entered into an interest-rate swap agreement to modify the
    interest characteristics of its outstanding debt.  This agreement involves
    the exchange of amounts based on a fixed interest rate for amounts based on
    variable interest rates over the life of the agreement without an exchange
    of the notional amount upon which the payments are based.  The differential
    to be paid or received as interest rates change is accrued and recognized
    as an adjustment of interest incurred related to the debt (the accrual
    accounting method). The fair value of the swap agreement is not
    recognized in the financial statements. In the event of the termination of
    the interest-rate swap agreement, gains and losses would be deferred as an
    adjustment to the carrying amount of the outstanding debt and amortized as
    an adjustment to interest incurred related to the debt over the remaining
    term of the original contract life of the terminated swap agreement.  In
    the event of the early extinguishment of a designated debt obligation, any
    realized or unrealized gain or loss from the swap would be recognized in
    income coincident with the extinguishment.
    
    On July 31, 1997,  the Company (through a new wholly-owned subsidiary, SHLR
    of Washington, Inc., incorporated in the state of Washington) acquired a
    49% interest in a homebuilder in the state of Washington.  The Company has
    an option to purchase the remaining 51% interest, subject to certain
    contingencies.  In connection with this acquisition, the Company entered
    into an agreement to make revolving loans to the acquiree in an aggregate
    principal amount of up to $5,000,000.  The Company accounts for this
    investment as an unconsolidated joint venture under the equity method of
    accounting.
    

2.  Notes Receivable

    Notes receivable consist primarily of notes receivable on seller financed
    sales of residential units and residential lots. The notes provide for
    terms and conditions similar to those offered by financial institutions and
    are collateralized by the residential units and residential lots sold. 
    Certain of the notes are collateralized by second mortgages relating to
    home buyers who purchased homes as part of the Company's "zero-down" sales
    program.  Revenue and profit recognition on such transactions are deferred
    until the down payment requirement for revenue and profit recognition 


                                       7
<PAGE>

    is satisfied. Cumulative revenue and gross profit remaining deferred on 
    such transactions as of September 30, 1997 are $6,681,000 and $866,000, 
    respectively.  In March 1997, the Company sold second mortgage notes of 
    approximately $2,500,000, resulting in the recognition of sales and gross 
    profit of approximately $11,303,000 and $817,000 (net of discount and 
    collection reserve relating to sale), respectively (includes five sales 
    which closed during the first quarter of 1997).  The collection reserve 
    results in a restriction on the Company's cash in the amount of 
    approximately $506,000. 

3.  Real Estate Inventories

    Inventories which are substantially completed are carried at the lower of
    cost or fair value less cost to sell.  Fair value is determined by applying
    a risk adjusted discount rate to estimates of future cash flows.  In
    addition, land held for future development or inventories under current
    development are adjusted to fair value, only if an impairment to their
    value is indicated.
    
    The estimates of future cash flows require significant judgment relating to
    the level of sales prices, rate of new home sales, amount of marketing
    costs and price discounts needed in order to stimulate sales, rate of
    increase in the cost of building materials and labor, introduction of
    building code modifications, and level of consumer confidence, among other
    items.  Accordingly, there exists at any date, a reasonable possibility
    that changes in estimates will occur in subsequent periods.
    
    Real estate inventories at September 30, 1997 consist of the following:


         Unimproved land held for future development . . . . . .   $ 41,553,000
         Development projects in progress. . . . . . . . . . . .    203,907,000
         Completed inventory (including lots held for sale). . .     49,052,000
                                                                   ------------
                                                                   $294,512,000
                                                                   -------------
                                                                   -------------

    Completed inventory includes residential units which are substantially
    ready for occupancy.

    The Company has a note payable to a land seller with a principal balance of
    $1,713,000 at September 30, 1997, which relates to land purchased for
    future residential development.  The note is secured by a mortgage on the
    purchased land. 
                                           

4.  Notes Payable to Banks

    At September 30, 1997, $36,000,000 of the Company's line of credit is
    unused, of which $3,224,000 is restricted as to withdrawal for outstanding
    but unused letters of credit.  

    In March 1997, the Company amended its Credit Agreement, increasing the
    unsecured revolving line of credit facility from $110,000,000 to
    $137,600,000.  The facility expires on July 1, 1999 and includes an option
    for the lenders to extend the term for an additional year.  The Company can
    select an interest rate based on either LIBOR (1, 2, 3 or 6 month term) or
    prime for each borrowing.  Based on the Company's leverage ratio, as
    defined,  the interest rate may vary from LIBOR plus 1.5% to 2% or prime
    plus 0% to 0.25%.  At September 30, 1997, the Company's outstanding
    borrowings were at interest rates of LIBOR plus 1.75% (7.4% ) and prime
    plus 0% (8.5%).  The Company's ability to draw upon its line of credit is
    dependent upon meeting certain financial ratios and covenants.

    The Company paid interest (relating to notes payable to bank and the
    convertible subordinated debentures) of approximately $4,000,000 during the
    quarter ended September 30, 1997.  Interest incurred during the quarter
    ended September 30, 1997 totaled $3,063,000, of which approximately
    $2,208,000 was capitalized to real estate inventories and approximately
    $855,000 was expensed ($816,000 included in Other income (expense) and
    $39,000 included in Income from unconsolidated joint ventures) and not
    capitalized. The difference between the amount of interest paid 

                                       8
<PAGE>

    and the amount incurred is comprised of accrued interest payable. 
    Interest, previously capitalized to real estate inventories, expensed as 
    a component of cost of residential real estate sales during the quarter 
    ended September 30, 1997 totaled $1,558,000.

5.  Related Party Transactions

    The Company charged $23,000 for the quarter ended September 30, 1997 to
    James K. Schuler & Associates, Inc. (an affiliate) under the management
    agreement  entered into between the Company and James K. Schuler &
    Associates, Inc., pursuant to which certain management and administrative
    personnel of the Company will perform certain functions for James K.
    Schuler & Associates, Inc., to be reimbursed by James K. Schuler &
    Associates, Inc.  At September 30, 1997, the $23,000 was included in Amount
    Due from Affiliate.  Subsequent to September 30, 1997, the receivable was
    paid in full.

    From time to time, the Company engages the law firms in which directors of
    the Company are partners.  During the quarterly period ended September 30,
    1997, legal fees of approximately $3,000 to such firms were incurred by the
    Company.
    
6.  Income Taxes

    During the three months ended September 30, 1997, the Company paid income
    taxes of $220,000. 


7.  Acquisition of Melody Homes, Inc. and Melody Mortgage Company

    On January 8, 1997, the Company completed the acquisition of the common
    stock of Melody Homes, Inc., a Colorado homebuilder, and Melody Mortgage
    Company, a mortgage brokerage firm for Melody home buyers.  The
    consideration of approximately $24,100,000 (excludes $4,000,000 of the
    covenant-not-to-compete paid to certain former Melody shareholders and
    certain other acquisition related costs) consisted of cash, in addition to
    liabilities assumed of approximately $26,500,000.  The transaction has been
    accounted for under the purchase method of accounting, wherein goodwill and
    a covenant-not-to-compete in the combined amount of approximately
    $14,500,000 has been recognized by the Company after recording other
    purchase adjustments necessary to allocate the purchase price to the value
    of assets acquired and liabilities assumed.  Goodwill and the
    covenant-not-to-compete are being amortized over a 20-year period. 
    Accumulated amortization at September 30, 1997 is approximately $542,000. 

    In connection with his consultation services relating to the acquisition of
    Melody, the Company paid a fee of $90,000 to Mr. Martin T. Hart, a member
    of the Company's Board of Directors.  Combined revenue for Melody Homes,
    Inc. and Melody Mortgage Company was approximately $97,000,000 for the year
    ended June 30, 1996.

8.  Net Income (Loss) Per Share

    Primary earnings per share for the quarter and nine-month period ended
    September 30, 1997 were computed using the weighted average number of
    common shares outstanding during the periods of 20,100,177.  Primary
    earnings per share for the quarter and nine-month period ended September
    30, 1996 were computed using the weighted average number of common shares
    outstanding during the periods of 20,495,780 and 20,745,088, respectively. 

    The computation of fully diluted earnings per share for the quarters and
    nine-month periods ended September 30, 1997 and 1996 resulted in amounts
    greater than the primary earnings per share.  Accordingly, the primary
    earnings per share is also presented as the fully diluted earnings per
    share.

                                       9
<PAGE>

    In February 1997, the Financial Accounting Standards Board issued Statement
    No. 128, EARNINGS PER SHARE, which is required to be adopted on December
    31, 1997.  At that time, the Company will be required to change the method
    currently used to compute earnings per share and restate all prior periods. 
    Under the new requirements for calculating primary earnings per share, the
    dilutive effect of stock options will be excluded.  The impact of Statement
    No. 128 on the calculation of primary and fully diluted earnings per share
    for the quarters and nine-month periods ended September 30, 1997 and 1996
    is not material.

9.  Commitments and Contingencies

    At September 30, 1997, the Company had under contract to purchase for
    approximately $1,028,000, land for residential development.

    The Company is from time to time involved in routine litigation or
    threatened litigation arising in the ordinary course of its business.  Such
    matters, if decided adversely to the Company, would not, in the opinion of
    management, have a material adverse effect on the financial condition of
    the Company.

    In April 1996, the Company was served with a lawsuit by owners of units and
    the Association of Owners of Fairway Village at Waikele, who sought to have
    a class of all owners certified.  The complaint alleges material
    construction defects and deficiencies, misrepresentation regarding the cost
    of insurance, breach of covenant of good faith and fair dealing, among
    other allegations.  The complaint does not specify an amount of damages,
    but includes a claim for punitive damages, among other claims.  However,
    this litigation is at an early stage of discovery.   Based upon its current
    understanding of the lawsuit, the Company believes (at this early stage of
    litigation) the claims to be largely without merit, or that meritorious
    defenses, together with potential third party defendants and insurance
    coverage, exist to offset a material portion of the related claims.  The
    Court has denied the motion to certify the class, and the litigation
    continues to be vigorously defended.   However, if this lawsuit were
    decided adversely to the Company, it could have a material adverse effect
    on the Company's business, financial condition and operating results.


10. Stockholders' Equity

    During the first quarter of 1997, options to purchase approximately 222,500
    shares of common stock were approved to be granted.  In addition, a plan
    was approved to permit option holders to effectively reprice certain of
    their outstanding options (covering up to an aggregate of approximately
    271,000 shares of common stock).  This plan would allow option holders to
    receive new options for the same number of shares covered by their existing
    options at an exercise price equal to $5.625.  Any such new options would
    be subject to a new vesting schedule and the existing options would be
    canceled. 
    
    In July, 1997, non-statutory stock options to purchase 15,000 shares of
    common stock were approved to be granted. 


                                       10
<PAGE>

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


    Except for historical information contained herein, the matters discussed 
in this report contain forward-looking statements that involve risks and 
uncertainties.  The Company's actual results may differ materially from the 
results discussed in the forward-looking statements.  Factors that might 
cause such a difference include, but are not limited to, those risks 
discussed herein, and other risks detailed in the Company's Annual Report on 
Form 10-K and other documents filed by the Company with the Securities and 
Exchange Commission from time to time. 

OVERVIEW

    For the quarter ended September 30, 1997, sales of residential real 
estate (revenue) were $61.1 million  and operating income was $3.9 million, 
compared to revenues of $22.0 million and operating income of $742,000 during 
the third quarter last year.  Net income was $1.8 million ($0.09 per share) 
for the quarter ended September 30, 1997, as compared to net income of 
$485,000 ($0.02 per share) during the 1996 third quarter. 

    For the first nine months of 1997, the Company reported sales of 
residential real estate of  $163.5 million, compared to sales of $71.7 
million during the first nine months of 1996.  Net income was $3.7 million or 
$0.18 per share during the nine months ended September 30, 1997, as compared 
to net loss of $11.6 million or $0.56 per share during the same period in the 
prior year. During the 1996 second quarter, the Company posted a net loss of 
$13.1 million, which includes a non-cash after-tax charge of $14.6 million in 
conjunction with Financial Accounting Standards Board Statement No. 121, 
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets 
to be Disposed of". Excluding the impact of the inventory impairment loss in 
the second quarter of 1996, net income was $2.9 million or $0.14 per share 
during the first nine months of 1996.

    On January 8, 1997, the Company acquired Melody Homes, Inc., a leading 
homebuilder and 43-year old company in the Denver metropolitan area of 
Colorado, and Melody Mortgage Company, a mortgage brokerage firm for Melody 
home buyers. The Company's Colorado operations have positively impacted the 
Company's 1997 financial results with strong sales rates and margins, while 
the Company's Hawaii operations and financial results continue to reflect 
weaknesses in Hawaii's market and resulting declines in homes sales rates, 
prices and profit margins.  The  Company anticipates that the Hawaii 
division's financial results will continue to be adversely affected by fewer 
closings of home sales, lower revenues and reduced margins in 1997 as 
compared to 1996.

    On July 31, 1997, the Company acquired a 49% interest in Stafford Homes 
(Stafford), a homebuilder in the greater Seattle/Puget Sound area of 
Washington state.  The Company has an option to purchase the remaining 51% 
interest in Stafford, subject to certain contingencies.  The Stafford 
homebuilding companies, founded by Brien Stafford in 1967, focus primarily on 
the entry-level, and first and second move-up markets.  The Company's income 
from unconsolidated joint ventures was positively impacted by approximately 
$150,000, related to the Company's share of Stafford's 1997 third quarter 
earnings.

                                       11

<PAGE>


The following table sets forth, for the periods indicated, the percentage of 
the Company's sales represented by each income statement line item presented.

<TABLE>
<CAPTION>
                                                                               PERCENTAGE CHANGE IN
                                           THREE MONTHS ENDED SEPTEMBER 30,     DOLLAR AMOUNTS FROM
                                           --------------------------------    --------------------
                                                  1997           1996               1996 TO 1997
                                                 ------         ------              ------------
<S>                                              <C>            <C>                 <C> 
Residential real estate sales. . . . . . . .     100.0%         100.0%                  178.1%

Costs and expenses
  Residential real estate sales. . . . . . .      79.7           82.5                   168.6
  Selling and commissions. . . . . . . .           7.7            9.3                   131.7
  General and administrative . . . . . . . .       6.5            4.9                   267.4
                                                  ----           ----
      Total costs and expenses . . . . . . .      93.9           96.7                   170.0

Income from unconsolidated joint ventures. .       0.3            0.1                 1,157.1
                                                  ----           ----

  Operating income . . . . . . . . . . . . .       6.4            3.4                   428.4
Other income (expense) . . . . . . . . . . .      (1.8)           0.2                (2,517.8)
                                                  ----           ----
Income before provision for
  income taxes . . . . . . . . . . . . . . .       4.6            3.6                   260.0
Provision for income taxes . . . . . . . . .       1.7            1.4                   256.0
                                                  ----           ----
  Net income . . . . . . . . . . . . . . . .       2.9%           2.2%                  262.5%
                                                  ----           ----
                                                  ----           ----

<CAPTION>

                                                                               PERCENTAGE CHANGE IN
                                            NINE MONTHS ENDED SEPTEMBER 30,     DOLLAR AMOUNTS FROM
                                            -------------------------------    --------------------
                                                  1997           1996               1996 TO 1997
                                                 ------         ------              ------------

Residential real estate sales. . . . . . . .     100.0%         100.0%                  127.9%

Costs and expenses
    Residential real estate sales. . . . . .      80.8           81.3                   126.5
    Inventory impairment loss. . . . . . . .        --           33.3                  (100.0)
    Selling and commissions. . . . . . . . .       7.7            8.2                   113.7
    General and administrative . . . . . . .       6.2            4.3                   230.2
                                                  ----           ----
              Total costs and expenses . . .      94.7          127.1                    69.8

Income from unconsolidated joint ventures. .       0.1            0.2                    68.4
                                                  ----           ----
   Operating income (loss) . . . . . . . . .       5.4          (26.9)                  145.7
Other income (expense) . . . . . . . . . . .      (1.8)           0.3                (1,272.8)
                                                  ----           ----
Income (loss) before provision for
    income taxes . . . . . . . . . . . . . .       3.6          (26.6)                  131.2
Provision (credit) for income taxes. . . . .       1.4          (10.4)                  130.3
                                                  ----           ----
    Net income (loss). . . . . . . . . . . .       2.2%        ( 16.2)%                 131.7%
                                                  ----           ----
                                                  ----           ----
</TABLE>


                                       12
<PAGE>


RESULTS OF OPERATIONS

SALES OF RESIDENTIAL REAL ESTATE

    The Company's sales of residential real estate (revenues) increased 
during the quarter and nine months ended September 30, 1997 as compared to 
the same periods in 1996, primarily reflecting a larger number of sales 
closed in 1997 at lower average sales prices than in 1996.  The increased 
number of closings came primarily from the Colorado division (acquired in 
January of 1997), as the number of sales closed in the Hawaii division 
declined in 1997 as compared to 1996.  In addition, the Company's California 
division closed its first 3 home sales during the quarter ended September 30, 
1997.  The average revenue recognized per unit in 1997 is lower than in 1996 
primarily due to (1) the lower average sales prices of homes in Colorado as 
compared to homes in Hawaii, and (2) the increased level of price discounts 
and sales incentives offered to prospective home buyers in Hawaii.    

    The Company's sales of residential real estate (revenues) for the quarter 
ended September 30, 1997 were approximately $61.1 million as compared to 
approximately $22.0 million during the quarter ended September 30, 1996.  
This represents an increase of approximately $39.1 million or 178.1%.  For 
the third quarter of 1997, the revenues are related to 368 sales closed 
(excludes 52 sales closed by the Company's joint ventures and 3 sales closed 
under the Company's "zero-down" sales program) during the quarter.  The 
average revenue recognized was $166,000 per unit for the third quarter of 
1997 compared to the 1996 third quarter average of $236,000.  Revenue and 
profit recognition on "zero-down" sales are deferred until the down payment 
requirement for revenue and profit recognition is satisfied.

    The Company's sales of residential real estate (revenues) were $163.5 
million for the nine months ended September 30, 1997, compared to $71.7 
million during the same period in 1996, an increase of 127.9%.  For the nine 
months ended September 30, 1997,  the revenues are related to 919 sales 
closed (excludes 62 sales closed by the Company's joint ventures and 19 sales 
closed under the Company's "zero-down" sales program).  For the first nine 
months of 1997, approximately $10.1 million of total revenue is related to 53 
sales that closed in 1996 under the Company's "zero-down" sales program, for 
which the second mortgage notes were sold during the 1997 first quarter.  
Pre-tax profit of $762,000 was recognized in connection with the sale of the 
53 second mortgages.  Revenue and profit recognition on these "zero-down" 
sales was deferred in 1996 until the requirements for revenue and profit 
recognition were satisfied, which occurred during the first quarter of 1997.  
The average revenue recognized was $178,000 per unit for the first nine 
months of 1997, compared to the first nine months of 1996 average of $236,000.

    The following table sets forth the number of sales closed during the 
quarter and nine months ended September 30, 1997 and 1996, which includes 
closings of homes and lots sold pursuant to the Company's "zero-down" sales 
program and 100% of the sales closed at projects developed by the Company's 
joint ventures in Hawaii and Washington.

<TABLE>
<CAPTION>

                   THREE MONTHS ENDED SEPTEMBER 30,   NINE MONTHS ENDED SEPTEMBER 30,
                   --------------------------------   ------------------------------
                       1997               1996              1997           1996
                     --------           ---------        ----------      ---------
<S>                    <C>               <C>               <C>              <C>
California                 3                  --                 3             --
Colorado                 288                  --               703             --
Hawaii                    93(1)              129(3)            255(4)          381(5)
Pacific Northwest         39(2)               --                39(2)           --
                        ----               -----             -----            ----
Total                    423                 129             1,000             381
                        ----               -----             -----            ----
                        ----               -----             -----            ----
</TABLE>


(1) Includes 3 closings under the Company's "zero-down" sales program and 13
    closings by the Company's joint  ventures.
(2) Includes 39 closings by the Company's joint venture.
(3) Includes 25 closings under the Company's "zero-down" sales program and 11
    closings by the Company's joint ventures.


                                       13
<PAGE>

(4) Includes 19 closings under the Company's "zero-down" sales program and 23
    closings by the Company's joint ventures.
(5) Includes 42 closings under the Company's "zero-down" sales program and 35
    closings by the Company's joint ventures.

    The number of Hawaii home sales closed in the first nine months of 1997 
has declined as compared to the first nine months of 1996, primarily as a 
result of the reduction in home sales rates during the periods, which have 
been declining since 1994.  The Company believes the reduction in the rate of 
new home sales to be the result of the general uncertainty of prospective 
home buyers as to, and to their lack of confidence in, Hawaii's economy.  
Although the Company believes that the Hawaiian economy has shown signs of 
recovery, particularly in the tourism industry, the Company's rate of new 
home sales has not improved.  The Company anticipates that the Hawaii 
division's financial results will continue to be adversely affected by fewer 
closings of home sales, lower revenues and reduced margins in 1997 as 
compared to 1996.

    During 1995 and 1996, Hawaii's unemployment rate has been higher than the 
national average.  Jobs in Hawaii declined by approximately 0.5% to 2.0% per 
year from 1992 through 1996.  Any increases in Hawaii's unemployment rate or 
continued lack of job growth may further adversely affect future demand for 
new homes.  In addition, increases in mortgage rates impact the home buyer's 
ability to qualify for mortgage loans, which could adversely affect demand 
for new homes.  Increases in mortgage rates may also reduce the sales price 
ceilings established on homes which are subject to governmentally imposed 
affordable housing requirements in Hawaii.  The affordable prices are 
generally determined at a price at which a purchaser earning up to 140% of 
the local median income is able to satisfy specified mortgage criteria.

COSTS AND EXPENSES - RESIDENTIAL REAL ESTATE SALES

    Cost of residential real estate sales represents the acquisition and 
development costs for a particular phase of a project attributable to the 
homes sold in that phase.  Acquisition and development costs primarily 
include land acquisition costs, sitework and construction payments to 
contractors, engineering and architectural costs, loan fees, interest and 
other indirect costs attributable to development, such as project management 
activities, and miscellaneous construction costs.

    Cost of residential real estate sales increased to approximately $48.7 
million during the quarter ended September 30, 1997 from approximately $18.1 
million during the same period in 1996, representing an increase of 
approximately $30.6 million or 168.6%.   This increase in the third quarter 
of 1997 as compared to the third quarter of 1996 is primarily the result of 
the increased number of home sales closed in the third quarter of 1997 as 
compared to the third quarter of 1996.

    Cost of residential real estate sales as a percentage of sales of 79.7% 
in the third quarter of 1997 decreased from 82.5% in the third quarter of 
1996, and reflects higher profit margins realized in the Company's Colorado 
division offset by lower profit margins realized by Hawaii projects as a 
result of the higher level of price discounts and sales incentives offered to 
prospective home buyers in Hawaii. The Company anticipates that an increased 
level of price discounts and sales incentives offered by its Hawaii division 
will continue to affect its operating results in future periods and no 
assurances can be given that they will not increase to even greater levels 
than reached in the past.

    The cost of residential real estate sold increased from approximately 
$58.3 million during the nine months ended September 30, 1996 to 
approximately $132.2 million during the same period in 1997, representing an 
increase of approximately $73.9 million or 126.5%, primarily reflecting the 
larger volume of home sales closed in 1997 as compared to 1996.

    The cost of residential real estate sold as a percentage of sales 
decreased from 81.3% for the nine months ended September 30, 1996 to 80.8% 
for the nine months ended September 30, 1997.  The decrease in the cost of 
residential real estate sold as a percentage of sales reflects higher margins 
realized by the Colorado division offset by the lower margins realized by the 
Hawaii division including the impact of  the recognition of costs related to 
the 53 "zero-down" sales deferred in 1996 and recognized in the first quarter 
of 1997 as a result of the sale of the related second mortgages.


                                       14
<PAGE>

    Total interest incurred during each of the quarters ended September 30, 
1997 and 1996 was approximately $3.1 million and $2.0 million, respectively.  
All amounts incurred were, except for approximately $855,000 in the third 
quarter of 1997,  capitalized to development projects.  Interest capitalized 
to projects is expensed through cost of residential real estate sales as 
sales are closed and revenue is recognized in the particular project.  

    Average debt outstanding was approximately $167.5 million and $116.8 
million during the third quarters of 1997 and 1996, respectively.  The 
Company's average interest rate on its debt for the quarters ended September 
30, 1997 and 1996 was approximately 7.3% and 7.0%, respectively.  The 
Company's notes payable bear interest based on prime or LIBOR.  Changes in 
the prime or LIBOR rates will affect the amount of interest being capitalized 
to inventory and subsequently expensed through cost of residential real 
estate sales as sales are closed and revenue is recognized.

COSTS AND EXPENSES - SELLING AND COMMISSIONS

    Sales and marketing costs represented approximately 7.7% and 9.3% of 
sales of residential real estate during the quarters ended September 30, 1997 
and 1996, respectively.  Such costs represented approximately 7.7% and 8.2% 
of residential real estate sales during the nine months ended September 30, 
1997 and 1996, respectively. The decrease in the third quarter of 1997 and 
nine months then ended is primarily the result of the lower relative level of 
selling and commission costs incurred by the Company's Colorado division, as 
compared to the Hawaii division, offset in part by increases in the level of 
selling and commission costs in Hawaii.

COSTS AND EXPENSES - GENERAL AND ADMINISTRATIVE

    General and administrative expense includes salaries, office and other 
administrative costs.  Indirect costs attributable to specific projects are 
capitalized and deducted as part of cost of residential real estate sales.

    General and administrative expenses increased by $2.8 million or 267.4% 
during the third quarter of 1997 and by  $7.1 million or 230.2% during the 
first nine months of 1997 as compared to the same periods in 1996 primarily 
due to the addition of the Colorado division and the start-up of operations 
in Northern California and the Pacific Northwest.  As a percentage of sales, 
general and administrative expense increased from 4.9% during the quarter 
ended September 30, 1996 to 6.5% during the quarter ended September 30, 1997 
and from 4.3% during the first nine months of 1996 to 6.2% during the first 
nine months of 1997, which is a result of the same items mentioned in the 
preceding sentence.

INCOME FROM UNCONSOLIDATED JOINT VENTURES

    Income from unconsolidated joint ventures primarily represents the 
Company's 49% interest in the operations of  Stafford Homes. Also included is 
the Company's 50% interest in the operations of two joint ventures in Hawaii. 
The increase in this income from the first nine months of 1996 to the same 
period in 1997 is primarily the result of the acquisition of the 49% interest 
in Stafford Homes on July 31, 1997.

OTHER INCOME (EXPENSE)

    Other income (expense) is primarily composed of interest income of 
$50,000 and $45,000 earned on cash balances and notes receivable during the 
quarters ended September 30, 1997 and 1996, respectively, offset in the 1997 
third quarter by a) approximately $910,000 of financing costs (primarily 
including interest of $855,000) expensed and not capitalized resulting from 
reduced construction activity in Hawaii and the acquisition of Melody Homes
and Mortgage, and b) amortization of goodwill and the covenant-not-to-compete 
of $181,000 also associated with the acquisition of Melody Homes 


                                       15
<PAGE>

and Mortgage.

    Other income (expense) is primarily composed of interest income earned on 
cash balances and notes receivable during the nine months ended September 30, 
1997 and 1996, respectively, offset in the first nine months of 1997 by the 
same items mentioned in the preceding paragraph.

PROVISION (CREDIT) FOR INCOME TAXES

    The Company's effective income tax rate for the third quarters of 1997 
and 1996 was approximately 37.9% and 38.4%, respectively. The lower effective 
tax rate in the third quarter of 1997 primarily reflects the lower Colorado 
state income tax rate as compared to Hawaii's state income tax rate.
    
VARIABILITY OF RESULTS

    The Company has experienced, and expects to continue to experience, 
significant variability in sales and net income.  For example, the Company's 
sales of residential real estate for each of the four quarters ended December 
31, 1995, ranged from approximately $26.8 million to $39.5 million and for 
each of the four quarters ended December 31, 1996, ranged from approximately 
$20.0 million to $29.8 million.  The Company's net income (loss) for each of 
the four quarters ended December 31, 1995, ranged from a net loss of 
approximately  $3.1 million (after giving effect to the $5.7 million 
after-tax charge relating to FASB 121) to net income of $4.7 million and for 
each of the four quarters ended December 31, 1996, ranged from a net loss of 
approximately $13.1 million (after giving effect to the $14.6 million 
after-tax charge relating to FASB 121) to net income of $948,000.  Factors 
that contribute to variability of the Company's results include:  the timing 
of home closings, a substantial portion of which historically have occurred 
in the last month of each quarter; the Company's ability to continue to 
acquire additional land on favorable terms for future developments;  the 
condition of the real estate markets and economies in states in which the 
Company operates;  the cyclical nature of the homebuilding industry and 
changes in prevailing interest rates;  costs of material and labor; and  
delays in construction schedules caused by timing of inspections and approval 
by regulatory agencies, including zoning approvals and receipt of 
entitlements, the timing of completion of necessary public infrastructure, 
the timing of utility hookups and adverse weather conditions.  The Company's 
historical financial performance is not necessarily a meaningful indicator of 
future results and, in general, the Company's financial results will vary 
from development to development.

    The Company's recent expansion to markets in the mainland United States 
further exposes the Company to risks inherent in those markets.  For example, 
as a result of the Company's acquisition of Melody, it will encounter 
construction issues and risks such as expansive soils and extreme seasonal 
weather conditions (dissimilar to those encountered in Hawaii).

    The Company will continue to consider its expansion into additional 
selected residential housing markets in the United States mainland and into 
certain foreign countries and into other related industries.  The Company has 
and would consider the acquisition of or joint venture with an existing 
company, as well as its own acquisition and development of homebuilding 
projects in certain areas, in order to facilitate its expansion.  No 
assurances can be given that the Company will be able to successfully 
establish operations outside of its existing Hawaiian markets or that such 
expansion will not adversely affect its results of operations.

                                       16
<PAGE>

BACKLOG

    The Company's homes are generally offered for sale in advance of their 
construction upon applicable regulatory approval and sold pursuant to 
standard sales contracts.  The Company's standard sales contract may be 
canceled by the buyer at any time prior to closing.  The Company does not 
recognize revenues on homes covered by such contracts until the sales are 
closed.  Homes covered by such sales contracts are considered by the Company 
as its backlog.

    The following table sets forth the Company's backlog (for both homes and 
residential lots) at September 30, 1997 and 1996, which includes homes and 
lots sold pursuant to the Company's "zero-down" sales program and 100% of the 
backlog related to projects developed by the Company's joint ventures in 
Hawaii and Washington.

<TABLE>
<CAPTION>

                             SEPTEMBER 30, 1997              SEPTEMBER 30, 1996
                         ---------------------------      -------------------------
                                         AGGREGATE                       AGGREGATE
                           NUMBER       SALES VALUE       NUMBER        SALES VALUE
                          -------      -------------      ------       ------------
<S>                         <C>        <C>                 <C>          <C>
California                   16        $ 2,180,000            -         $         -
Colorado                    344         51,225,000            -                   -
Hawaii (1)                   96         26,321,000          121          27,629,000
Pacific Northwest (2)        61         12,991,000            -                   -
                           ------      -----------         ------       -----------
Total                       517        $92,717,000          121         $27,629,000
                           ------      -----------         ------       -----------
                           ------      -----------         ------       -----------
</TABLE>

(1) Includes 6 units and 14 units in backlog at the Company's joint venture
    projects in Hawaii at September 30, 1997 and September 30, 1996,
    respectively.
(2) Includes 47 units in backlog at the Company's joint venture projects in
    Washington at September 30, 1997.

    The Company has observed an increase in its historical cancellation rates 
in Hawaii, which the Company believes to be attributable to uncertainty of 
prospective home buyers as to, and to their general lack of confidence in, 
the Hawaiian economy.  The Company's historical cancellation experience 
(which prior to 1995 had been nominal) may not be indicative of cancellations 
in future periods.
    
    The average sales prices of the homes and lots comprising backlog at 
September 30, 1997 and 1996 were $179,000 and $228,000, respectively.   The 
decrease in average sales prices primarily reflects the lower average sales 
prices in Colorado, as compared to Hawaii and the increased level of sales 
price discounts and sales incentives offered in Hawaii.  Due to the ability 
of buyers to cancel their sales contracts, no assurances can be given that 
homes or residential lots in backlog will result in actual closings.  Backlog 
data includes 100% of the backlog of the Company's  joint ventures in Hawaii 
and Washington.

LIQUIDITY AND CAPITAL RESOURCES

    In March 1997, the Company amended its Credit Agreement, increasing the 
unsecured revolving line of credit facility from $110 million to $137.6 
million, and adding Bank One, Arizona, N.A. to the lending group.  The 
facility expires on July 1, 1999 and includes an option for the lenders to 
extend the term for an additional year.  The Company can select an interest 
rate based on either LIBOR (1, 2, 3 or 6 month term) or prime for each 
borrowing.  Based on the Company's leverage ratio, as defined, the interest 
rate may vary from LIBOR plus 1.5% to 2% or prime  plus 0% to 0.25%.  The 
Company's current rate is LIBOR plus 1.75% or prime plus 0%. The Company's 
ability to draw upon its line of credit is dependent upon meeting certain 
financial ratios and covenants.   At October 31, 1997, the Company had bank 
notes payable of approximately $102.4 


                                       17
<PAGE>

million.

    On January 8, 1997, the Company completed the acquisition of Melody 
Homes, Inc. ("Melody"), a homebuilder in the Denver metropolitan area of 
Colorado, and Melody Mortgage Company, a mortgage brokerage firm for Melody 
home buyers.  The Company funded the purchase and refinanced a portion of 
Melody's loans using its unsecured revolving line of credit facility.  Upon 
the finalization of the increase in the Company's unsecured revolving line of 
credit, all of Melody's loans were refinanced by the Company's line of credit.

    The Company has a note payable to a land seller with a principal balance 
of approximately $1.7 million at September 30, 1997, which relates to land 
purchased for future residential development.  The note is secured by a 
mortgage on the purchased land. 

    Companies in the homebuilding industry are generally highly leveraged and 
require significant up-front expenditures.  Accordingly, the Company incurs 
substantial indebtedness to finance its homebuilding and development 
activities. At September 30, 1997, the Company had bank notes payable of 
approximately $101.8 million.  Peak outstanding debt, including bank 
borrowings and the Convertible Subordinated Debentures, during the quarter 
ended September 30, 1997 was $172.8 million. In order to service these 
obligations and fund its ongoing operations, the Company has used proceeds 
from its initial public offering, the offering of convertible subordinated 
debentures, secondary offering of common stock, cash flow from operations, 
its available bank credit facilities and financing by sellers of land 
purchased.  The Company's business and earnings are substantially dependent 
on its ability to obtain debt financing on acceptable terms.  Although the 
Company has in the past been able to obtain credit facilities on acceptable 
terms and believes virtually all of its currently planned construction 
projects will be funded by a combination of cash flow from operations and 
bank or other financing, no assurance can be given that it will be able to 
obtain such bank or other debt financing or that any such financing will be 
on terms acceptable to the Company.  Further, the availability of borrowed 
funds to homebuilders, especially for land acquisition and construction 
financing, has been severely restricted and in some cases eliminated 
entirely. In compliance with federal guidelines, certain lenders are now 
requiring increased equity commitments by borrowers in connection with both 
new loans and the extension of existing loans.

    The Company believes that cash flow from operations, and borrowings under 
its credit facilities will provide adequate cash to fund the Company's 
operations at least through 1998.

    At October 31, 1997, the Company has a commitment to purchase a parcel of 
land for approximately $1 million, including land to be acquired for 
development by the Company.  The Company expects to utilize a combination of 
cash flow from operations and bank financing to purchase the land parcel.  
The Company intends to consummate the purchase of the land parcel in 1997.  
However, no assurances can be given that the purchase will be completed or 
that the land under purchase option will be acquired.

    On July 31, 1997 the Company (through a new wholly-owned subsidiary, SHLR 
of Washington, Inc., incorporated in the state of Washington) acquired a 49% 
interest in a homebuilder in the state of Washington.  The Company has an 
option to purchase the remaining 51% interest, subject to certain 
contingencies.  In connection with this acquisition, the Company entered into 
an agreement to make revolving loans to the acquiree in an aggregate 
principal amount of up to $5 million. 

    Certain of the Company's currently planned projects, as well as future 
projects, are anticipated to be longer term in nature than those developed in 
the past by the Company.  The increased length of such projects further 
exposes the Company to the risks inherent in the homebuilding industry, 
including reductions in the value of land inventory.  


                                       18
<PAGE>

                                 SCHULER HOMES, INC.

                             PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

         The Company is from time to time involved in routine litigation or
         threatened litigation arising in the ordinary course of its business. 
         Such matters, if decided adversely to the Company, would not, in the
         opinion of management, have a material adverse effect on the financial
         condition of the Company.

         In April 1996, the Company was served with a lawsuit by owners of
         units and the Association of Owners of Fairway Village at Waikele, who
         sought to have a class of all owners certified.  The complaint alleges
         material construction defects and deficiencies, misrepresentation
         regarding the cost of insurance, breach of covenant of good faith and
         fair dealing, among other allegations.  The complaint does not specify
         an amount of damages, but includes a claim for punitive damages, among
         other claims.  However, this litigation is at an early stage of
         discovery.   Based upon its current understanding of the lawsuit, the
         Company believes (at this early stage of litigation) the claims to be
         largely without merit, or that meritorious defenses, together with
         potential third party defendants and insurance coverage, exist to
         offset a material portion of the related claims.  The Court has denied
         the motion to certify the class, and the litigation continues to be
         vigorously defended.   However, if this lawsuit were decided adversely
         to the Company, it could have a material adverse effect on the
         Company's business, financial condition and operating results.

Item 2.  Changes in Securities

         A non-statutory stock option for 15,000 shares of Common Stock was
         approved to be granted to Mr. Brien Stafford, president of Stafford
         Homes, at an exercise price of $5.875 per share.  Each option will
         become exercisable for 25% of the option shares after 12 months of
         continued service from the date of grant.  The balance of the option
         shares will become exercisable in a series of 36 successive equal
         monthly installments upon the optionee's completion of each additional
         month of service measured from the first anniversary of the date of
         grant.  The options have a 10-year life and expire on July 30, 2007. 
         Exemption from the requirement to file a registration statement is
         claimed under Section 4(2) of the Securities Act of 1933.

Items 3 through 5.  Not applicable.

Item 6.  Exhibits and Reports on Form 8-K.

         (a)  Exhibits.

              Exhibit Number            Document Description
              --------------            ---------------------
                 27.1                   Financial Data Schedule.

         (b)  Reports on Form 8-K.  There were no reports on Form 8-K for the
         quarter ended September 30, 1997.

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<PAGE>


                                 SCHULER HOMES, INC.

                                      SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.



                                       SCHULER HOMES, INC.


Date: November 12, 1997                By:  /s/ James K. Schuler
                                          -----------------------------
                                          James K. Schuler
                                          Chairman of the Board, 
                                          President and Chief Executive Officer
                                          (principal executive officer)



Date: November 12, 1997                By:  /s/ Pamela S. Jones
                                          -----------------------------
                                          Pamela S. Jones
                                          Senior Vice President of Finance,
                                          Chief Financial Officer and
                                          Director (principal financial officer)



Date: November 12, 1997                By:  /s/ Douglas M. Tonokawa
                                           -----------------------------
                                           Douglas M. Tonokawa
                                           Vice President of Finance,
                                           Chief Accounting Officer
                                           (principal accounting officer)


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