UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                          Washington, D.C. 20549

                                   FORM 10-K/A

(Mark One)

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

For the fiscal year ended September 30, 1999

                                       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: 0-27552

                                  REALCO, INC.
-----------------------------------------------------------------------------
         (Exact name of registrant as specified in its charter)

                 New Mexico                         85-0316176
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       State or other jurisdiction of            (I.R.S. Employer
    incorporation or other organization         Identification No.)

     1650 University Boulevard, NE, Suite 5-100
                Albuquerque, New Mexico                      87102
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       (Address of principal executive offices)            (Zip Code)


Registrant's telephone number, including area code: (505)242-4561

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

Securities registered pursuant to Section 12(g) of the Act:

                            No Par Value Common Stock
                          -------------------------
                                (Title of Class)

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 __.

<PAGE>

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

The number of shares of the Registrant's common stock outstanding as of December
22, 1999 was 2,887,338.  The aggregate market value of the  Registrant's  common
stock held by non-affiliates as of December 23, 1999 was $4,739,000.

                   DOCUMENTS INCORPORATED BY REFERENCE

Notice of 2000 Annual Meeting of Stockholders and Proxy Statement  (incorporated
into Part III).

<PAGE>

                                  PART I


ITEM 1:  BUSINESS.

Realco,  Inc.,  incorporated  in 1983 under the laws of the State of New Mexico,
and subsidiaries is hereinafter sometimes referred to as the "Registrant" or the
"Company".

General
-------

The Company is an integrated real estate services company, which provides a wide
range of real estate related products and services to customers primarily within
the  Albuquerque,  New Mexico  and  Phoenix,  Arizona  metropolitan  areas.  The
Company's  operations  are grouped into three  principal  segments - real estate
brokerage services, construction and land development and financial services.

The Company's  principal  executive offices are located at 1650 University Blvd.
NE, Suite 5-100, Albuquerque,  New Mexico 87102 and its telephone number at that
location is (505) 242-4561.

Real Estate Brokerage Services:

This segment's  operations  consists of residential  and commercial  real estate
brokerage services in the Albuquerque and Phoenix metropolitan areas.

Residential  brokerage operations are conducted under a franchise agreement with
Prudential  Real  Estate  Affiliates  (PREA) by two of the  Company's  principal
subsidiaries,   Hooten/Stahl   Realtors,   Inc.  (d.b.a.   Prudential  Preferred
Properties,  New  Mexico)  and Mull  Realty  Company,  Inc.  (d.b.a.  Prudential
Preferred Properties,  Arizona).  Such operations consist of providing marketing
services to buyers and sellers of residential real estate,  providing relocation
services, and to a lesser extent, providing residential property management. The
Company's current  franchise  agreement with PREA expires in June 2001. PREA has
provided  notification  to the  Company  that  they  would  like to  renew  this
agreement  and the Company  currently  anticipates  that  renewal  terms will be
reached.  Terms of such  renewal  are not  expected  to differ  materially  from
existing terms.

Commercial   brokerage  operations  consist  primarily  of  providing  marketing
services to buyers,  sellers,  lessors and lessees of  commercial  real  estate.
These  operations  also  include  commercial  property  management  and business
brokerage to a lesser extent. These services are collectively performed by First
Commercial Real Estate Services,  Inc., an Albuquerque based subsidiary and Mull
Realty Company, Inc., a Phoenix based subsidiary.


Construction and Land Development:

The Company's  construction and land development  activities include residential
and commercial operations.
<PAGE>

Residential  construction is performed by Charter Building & Development,  Corp.
("Charter"),  an  Albuquerque  based  subsidiary.  Charter's  operations  can be
described as that of a general contractor,  whereby the majority of construction
labor and materials needs  associated with any given home are  subcontracted  to
third-parties.   Residential   construction  is  performed  in  the  Albuquerque
metropolitan  area at this time, but the Company has identified an individual in
the Phoenix  market  which is  interested  in  constructing  homes under a joint
venture arrangement in fiscal 2000. The Company anticipates participating in the
construction  of three  homes with this  individual  in the first half of fiscal
2000.  At September 30, 1999,  Charter had a backlog of 49 homes under  contract
with an indicated  value of  $8,000,000,  as compared to 51 homes under contract
with an indicated value of $9,000,000 in 1998.

The  Company is also in the  business of  acquiring  raw land for the purpose of
subdividing  and developing  into  residential  homesites.  Such  activities are
performed by Realco Land Development Division, an unincorporated division of the
Company,  in the Albuquerque  metropolitan area. The homesites developed by this
division are used internally by Charter as well as sold to third-parties.

Amity, Inc. (d.b.a.  Realco  Construction),  is the Company's  Albuquerque based
general  contractor  specializing  in commercial  construction.  Such commercial
construction  consists  primarily of ground-up  construction of small commercial
buildings,  tenant improvements and commercial remodels. With the acquisition of
certain net assets and business  operations  of TI  Construction,  Inc.  (TI) in
August 1999,  the Company now possesses a multi-state  presence and expertise in
the construction of veterinary facilities. Prior to this acquisition, operations
were focused primarily in the Albuquerque  metropolitan area. It is management's
intent to use the multi-state  presence of TI to expand the Company's previously
existing  commercial  operations to other regions.  At September 30, 1999, Amity
had a backlog of commercial construction projects of $2,300,000,  as compared to
$1,500,000 in 1998.

Financial Services:

The Company provides  financial  services through its wholly-owned  subsidiaries
Great American Equity Corporation (GAEC) and PHS, Inc. (PHS), as well as through
its equity investment in MI Acquisition  Corporation (MI), the parent company of
Miller & Schroeder, Inc.

GAEC's lending activities include residential  construction lending and homesite
acquisition and  development  lending.  Construction  lending is performed under
participation  agreements  with two banks in  Albuquerque.  These  participation
agreements  generally  provide  for GAEC to provide the first 25% of all funding
commitments  and the banks to provide the remaining 75% of the loan  commitment,
as well  as  administrating  these  loans.  GAEC  has  also  entered  into  land
acquisition and residential subdivision loan participation agreements with banks
in New Mexico and Arizona.  Typically,  the Company  provides from 25% to 40% of
the funding  commitments  for this activity  through  further  participation  to
certain  high net worth  private  investors,  which is  subordinate  to the bank
position.  The Company is  generally  required to guarantee  the entire  balance
financed  by the  banks,  while  no  guarantees  are  provided  to  the  private
investors.  As  consideration  for the  additional  risk  assumed by the private
investors,  they typically receive profit participation  payments in addition to
return of principal and interest.

<PAGE>

The  operations  of PHS  include  a 50%  partnership  interest  in PHS  Mortgage
Company,  a full service  residential  mortgage  banker.  This  partnership  has
operations at all New Mexico and Arizona residential  brokerage offices operated
by the Company,  and typically  receives its business through referrals from the
brokerage sales associates.

The Company  owns an 11% equity  position in MI,  which is a financial  services
firm specializing in underwriting debt securities. James A. Arias, the Company's
President and Chief Executive Officer serves on the Board of Directors and Audit
Committee of MI and actively  participates in certain cross marketing activities
of services and products.

Operating Strategy
------------------

Since the completion of the Company's  Initial Public Offering in February 1996,
it has been the Company's intention to cross market services between the primary
business segments. The Company believes that it can capitalize on this operating
strategy and eventually use it for expansion to other  geographical  areas.  For
example, the Company believes that expansion to other markets may be achieved by
its acquisition of either real estate brokerage or building companies. Once such
a business is  acquired,  the  strategy  will be to export to its new market the
other services which the Company offers.

On a continuing  basis,  the Company has been exploring a variety of acquisition
opportunities,  consisting of service, product and distribution businesses.  The
Company's  acquisition  strategy complements the plan of internal growth charted
for its existing  activities.  The ability of the Company to expand its business
in recent years has been due in part to the addition of working capital from the
public  securities  offering.  The  Company  anticipates  that it  will  require
additional working capital at some future date to continue its ability to expand
current operations.


Financial Information
---------------------

Financial information about the Company's business segments can be found in Note
K to the consolidated financial statements presented in Item 8 of this Form 10-K
and is incorporated herein by reference.


Inventory Acquisition and Development
-------------------------------------

The construction and land development  segment are the Company's only operations
with  significant  inventory  needs.  Such inventory needs consist of homesites,
building materials and labor.

<PAGE>

Residential homesites are acquired either by the purchase of developed lots from
third  parties  or by the  purchase  of a parcel of  undeveloped  land which the
Company  develops.  The Company has also entered into joint  venture  agreements
with other  builders and developers to acquire  undeveloped  parcels of land for
development  into  homesites.  At  September  30,  1999,  the  Company  owned or
controlled through a combination of unencumbered  ownership,  debt financing and
purchase agreements,  over 390 homesites (as compared to 275 in 1998), which are
developed or are currently under development within the Albuquerque,  New Mexico
metropolitan  area.  Such  homesites  are  utilized  by  Charter's  homebuilding
operations and may also be sold to other homebuilders and individuals.

Acquisition of residential homesites is funded through the use of available cash
of the  Company  or  through  secured  loans  with  various  financing  sources.
Financing is typically provided by local branches of financial institutions,  on
such  terms and  conditions  which are  customary  in the  marketplace.  In some
instances,  the Company may also secure  subordinate  debt on land  inventory to
reduce the loan to value position assumed by the financial institutions, without
using internal working capital.  Such subordinate debt is typically  arranged by
the Company's financial services subsidiary,  GAEC, and participated out to high
net worth individuals.

As the Company uses  subcontractors  to provide  skilled labor and materials for
the  majority  of  its  operations,  construction  inventory  purchases  consist
primarily  of payments to such  subcontractors.  Such  inventory  purchases  are
funded  through  construction  draws from  financial  institutions  under credit
agreements or from progress  billings to property  owners.  The Company's credit
agreements typically provide  pre-established lending guidelines which determine
interest rates,  available balances and repayment terms. These credit agreements
are  provided by local  branches  of  financial  institutions  on such terms and
conditions which are customary in the marketplace.


Internet Developments
---------------------

As part of the Company's focus to maximize  opportunities  and growth potential,
the Company has identified and is pursuing certain internet related  activities.
Specifically,  the  Company's  construction  and land  development  segment  has
established a website which  provides  users with the Company's  background  and
credentials, the Company's most popular floorplans,  information on subdivisions
where the Company is currently building and contact  information.  The Company's
real estate  brokerage  services  segment has a website which  provides  Company
background  and  credentials,  information  on  the  local  market  and  contact
information.  The Company is currently in the developmental  stages of a website
which will provide  "Virtual  Tours" of certain  homes  currently  listed on the
market.  Management believes this significant marketing tool will be operational
by the Company's second quarter of fiscal 2000.

<PAGE>


Competition and Market Factors
------------------------------

The business in which the Company is engaged is highly competitive.  Many of the
Company's competitors have nationwide operations or are affiliated with national
franchising  organizations.  As such, a number of the Company's competitors have
greater financial resources. It is for that reason that the Company continues to
pursue strategic alliances with other companies.

The real estate  industry,  and  therefore,  the  Company's  operations,  can be
cyclical and are affected by consumer  confidence  levels,  prevailing  economic
conditions  and  interest  rates.   Other  factors  effecting  business  include
increases  in  construction  costs,  increases  in costs  associated  with  home
ownership  such as  interest  rates and  property  taxes,  changes  in  consumer
preferences and demographic  trends.  The Company  believes that its strategy of
vertical  integration  will eventually build a dominance in the markets in which
it does business,  however, there can be no assurance that this strategy will be
successful.


Work Force
----------

As of September 30, 1999,  the Company's  work force totaled  approximately  970
people, including 195 employees and 775 real estate sales associates. Management
of the Company  believes that its relations with its personnel are  satisfactory
and none of its employees are represented by a union.

All  of its  real  estate  sales  associates  are  independent  contractors.  As
independent contractors, such personnel are paid by commission only on the basis
of closed sales  transactions.  The Company's  construction  operations normally
hire  independent  subcontractors  to  provide  the  skilled  labor  needed  for
construction projects.


ITEM 2:  PROPERTIES.

The Company leases its executive  offices on a month to month basis, at $500 per
month.  Mr.  James A. Arias,  the  Company's  President,  is a part owner of the
building in which the executive  offices are located.  This lease arrangement is
considered a below  market lease as to terms and square foot cost when  compared
to other leases currently in effect within the building.

The Company  leases space for its fifteen real estate  brokerage  offices in the
Albuquerque,  New Mexico and Phoenix, Arizona metropolitan areas. Leases include
space  ranging  from 1,200 square feet to 37,000  square feet at monthly  rental
costs  ranging  from  $1,200 per month to $40,200 per month.  Additionally,  two
office  facilities  are  leased  for  residential  and  commercial  construction
operations in Albuquerque.  The construction facilities, which consist of office
space and a workshop  area,  are 10,000 square feet and 3,000 square and monthly
rental costs are $4,500 and $3,000 respectively.

Management  believes all facilities are in adequate condition for their intended
use and will not require substantial improvements through Fiscal 2000.
<PAGE>


ITEM 3:  LEGAL PROCEEDINGS.

The Company is engaged in various  legal  proceedings  incidental  to its normal
business activities. Management of the Company does not believe that the outcome
of each such  proceeding or all of them  combined  will have a material  adverse
effect on the Company's operations or financial position.

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

No matters were submitted during the fourth quarter of the 1999 fiscal year to a
vote of security holders, through the solicitation of proxies or otherwise.


                                     PART II

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

Market Information
------------------

The  Company's  common stock is traded on the NASDAQ  National  Market under the
symbol "RLCO".  The following  table sets forth for the periods  indicated,  the
high and low sales prices as reported.

                                        Fiscal 1999           Fiscal 1998
                                     ------------------    -----------------
                                       High      Low         High      Low
                                     --------  --------    --------  --------

First Quarter                           2.438     1.125       4.000     2.625
Second Quarter                          2.875     1.125       3.250     2.250
Third Quarter                           3.250     1.625       2.750     1.875
Fourth Quarter                          3.000     1.625       2.750     1.375


Approximate Number of Holders of Common Stock
---------------------------------------------

As of December 22, 1999, there were  approximately  700 holders of record of the
Company's common stock.

Company Dividend Policy Disclosure
----------------------------------

The Company  has not paid any  dividends  on its Common  Stock since its initial
public offering in February 1996 and expects that for the foreseeable  future it
will follow a policy of  retaining  earnings  in order to finance the  continued
development  of its business.  Payment of dividends is within the  discretion of
the Board of Directors and will depend upon the earnings,  capital  requirements
and operating and financial condition of the Company, among other factors.
<PAGE>

ITEM 6:  SELECTED FINANCIAL DATA.

                                        Years ended September 30,
                            ------------------------------------------------
                              1999      1998      1997      1996      1995
                            --------  --------  --------  --------  --------
                                (In thousands, except per share amounts)

                                         (a)       (b)       (c)

Net sales                   $ 48,328  $ 35,104  $ 28,681  $ 23,298  $ 13,531

Income (loss) from
  continuing operations          276    (1,180)      330       132       (50)

Income (loss)from
  continuing operations
  per common share               .10      (.47)      .07       .01      (.06)

Total assets                  27,812    28,368    26,354    22,608    10,781

Long-term obligations          8,888    10,584    10,296     7,883     2,275

Cash dividends declared
  per common share                -         -         -         -         -

---------------
(a) The 1998  results  were  affected by the  acquisition  of Cliff  Winn,  Inc.
    Realtors on February 1, 1998.
(b) The 1997 results were affected by the  acquisition  of Mull Realty  Company,
    Inc. on January 1, 1997 and the acquisition of First  Commercial Real Estate
    Services, Inc. on May 1, 1997.
(c) The 1996 results were affected by the acquisition of Amity,  Inc. on July 1,
    1996 and the issuance of debt and equity  securities in connection  with the
    Company's initial public offering on February 7, 1996.

<PAGE>



ITEM 7:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.


Overview of Operations
----------------------

Net earnings  increased  $1,456,000  in 1999 to $276,000 from a 1998 net loss of
$1,180,000.  The increase in earnings is primarily  attributable to construction
and land  development  operations.  Specifically,  gross profit from residential
construction  sales  increased  $1,359,000  and the Company  received  developed
homesites  with a value of  $550,000  in  connection  with the  settlement  of a
lawsuit.  Such items are offset by a $669,000  increase  in  operating  expenses
associated  with such  operations.  These items as well as other items affecting
results of operations for all segments are discussed in more detail below.

Business Combinations
---------------------

The  Company's  growth  has  been  achieved   primarily  through   acquisitions,
subsequent to its public offering in 1996.  Following is a brief  description of
such acquisitions and terms.

In fiscal 1996, the Company  acquired the outstanding  stock of Amity,  Inc., an
Albuquerque based commercial construction contractor for 24,297 shares of Series
D Preferred  Stock of the  Company.  Additionally,  the  Company  acquired a 50%
partnership  interest for $63,000 in PHS Mortgage Company,  which originates and
sells  residential  mortgages in the Albuquerque  market.  The operations of PHS
were expanded to Phoenix during 1998.

In fiscal 1997, the Company acquired the outstanding common stock of Mull Realty
Company (a Phoenix  based  residential  and  commercial  real  estate  brokerage
company, d.b.a. Prudential Preferred Properties,  Arizona) for a cash payment of
$359,000, the issuance of a $800,000 note payable and future contingent payments
of up to  $1,175,000.  The Company also purchased the net assets and business of
First  Commercial Real Estate  Services,  Inc. (an Albuquerque  based commercial
real  estate  brokerage  company)  for a  cash  payment  of  $265,000  in  1997.
Additionally,  the Company  purchased an 11% equity  interest in MI  Acquisition
Corporation,  the parent company of Miller & Schroeder,  Inc. for $1,000,000. MI
is a financial  services firm located in Minneapolis  which  specializes in debt
securities.

In fiscal 1998, the Company acquired the outstanding common stock of Cliff Winn,
Inc. Realtors (a Phoenix based residential real estate brokerage  company) for a
cash payment of $426,000 and future contingent payments of up to $963,000.

In fiscal 1999, the Company  acquired  certain net assets and the business of TI
Construction,   Inc.  The  acquisition  of  this  commercial   contractor  which
specializes in veterinary clinics was made through the issuance of 67,000 shares
of Company common stock held in treasury.

<PAGE>


Results of Operations
---------------------

Based upon the various lines of business in which the Company is engaged, it has
defined thefollowing operating segments for purposes of financial accounting and
reporting:  Real Estate  Brokerage  Segment,  Construction  and Land Development
Segment, and Financial Services Segment.

The Company currently  operates within the Albuquerque,  New Mexico and Phoenix,
Arizona metropolitan areas. Since inception, management has planned on expanding
operations  and business  concepts to other  geographical  areas,  preferably to
areas within the southwest United States having similar demographics.

Real Estate Brokerage Segment:

The real estate brokerage segment consists of Prudential  Preferred  Properties,
New Mexico (PPP-NM),  Prudential  Preferred  Properties,  Arizona (PPP-AZ),  and
First Commercial Real Estate Services, Inc. (First Commercial).

Market  conditions  in  residential  resale  activity  continues  to be brisk in
Albuquerque and Phoenix. While the Phoenix market continues to experience strong
growth,  the  Albuquerque  market  stabilized in the current  year.  There are a
record number of homes listed in  Albuquerque,  however,  the average  number of
days a home  stays on the  market  has  increased.  Competition  in  Albuquerque
continues to be strong,  especially  in attracting  and retaining  quality sales
associates.  This  competition  has been  increased by past  consolidations  and
mergers and fewer new agents  entering the  workplace.  Such  conditions  in the
Albuquerque market have led to continued losses from such operations.

Management  continues to attempt to implement changes in the Albuquerque  market
to increase market share,  reduce agent  commission  splits and reduce operating
expenses.  In 1998,  management  committed to a plan to  consolidate  four sales
offices in the  Albuquerque  market  into a single,  newly  constructed,  modern
facility.  As a  result  of  this  plan,  a  restructuring  charge  of  $273,000
associated  with lease  abandonment  expenses was accrued in fiscal 1998. Of the
$273,000 initial restructuring charge,  $235,000 remains as an accrued liability
at September 30, 1999 for expected tenant improvements, vacancies and shortfalls
on sublease revenues on the abandoned properties.

The new facility was initially  expected to be available for relocation in March
1999. As a result of delays encountered in the construction process,  operations
were  not  relocated  until  August  1999.  While  the new  facility  has had an
immediate  impact on the  marketplace and recruiting  abilities,  the later than
expected  occupancy  date did not  permit  management  to carry  out many of its
recruiting  and  cost  control  initiatives  in  fiscal  1999.  Accordingly,  no
significant  improvement  in  operations  of this  segment  occurred  during the
current year.

<PAGE>

   Fiscal 1999 vs. 1998

     Total brokerage  commissions and fees for this segment increased $3,274,000
or 15%, to  $25,625,000  in 1999.  This  increase is primarily  attributable  to
additional revenues of $2,722,000  generated by PPP-AZ and $494,000 generated by
First Commercial. PPP-AZ generated these additional revenues through $820,000 of
internal growth and $1,902,000 as a result of Winn Realtors  contributing twelve
months of operations  in 1999,  as opposed to eight months in 1998;  while First
Commercial's increase was attributable entirely to internal growth. This segment
experienced  a pre-tax loss of $495,000 for 1999 as compared to a $530,000  loss
in 1998. The decrease in the loss is the result of several factors  discussed in
more detail below.

     PPP-NM  experienced  a pre-tax loss of $1,097,000 in 1999, as compared to a
$1,250,000 loss in 1998. This decrease of $153,000 is primarily  attributable to
$273,000 of lease  abandonment  costs  accrued in the prior  year,  as offset by
nominal  changes in recurring  operating  expenses and gross profit on brokerage
fees (typically  referred to as company dollar).  Management  remains optimistic
that the aforementioned  plans will improve the operations of this subsidiary in
fiscal 2000.

     While  PPP-AZ  did  increase  its  brokerage  revenues  by 22% in  1999  to
$15,131,000, and increase its company dollar to 27%, as compared to 25% in 1998,
operating  expenses  increased  $1,137,000,  or 48% to  $3,530,000 in 1999. As a
result,  of these  factors,  pre-tax  earnings only  increased 38% to $663,00 in
1999.  This increase in operating  expenses is  attributable to the higher sales
volume,  as well as higher  facility  costs  associated  with this  subsidiary's
expansion  throughout  the Phoenix  metropolitan  area. The increase in facility
costs currently being  experienced is expected to eventually result in growth in
revenues and profitability for these operations.

     First  Commercial  recognized  pre-tax  earnings  of  $11,000  for the 1999
period,  as compared to a pre-tax loss of $101,000 in 1998. This  improvement in
operations  is the result of an  increase  in company  dollar of $215,000 or 47%
over 1999, which is attributable to a 45% increase in revenues.  The increase in
company dollar was offset by a $103,000 or 19% increase in operating expenses.

   Fiscal 1998 vs. 1997

     Total revenues from brokerage  commissions and fees increased $7,496,000 to
$21,983,000  in 1998,  an increase of 52% over 1997.  Such  increase  was almost
entirely in the Phoenix marketplace where revenues increased  $7,292,000 or 143%
to $12,409,000 in 1998. The February 1998  acquisition of Scottsdale  based Winn
Realtors contributed $4,362,000 to this increase.

     PPP-NM  recognized a pre-tax loss of  $1,250,000  in 1998, as compared to a
pre-tax loss of $749,000 in 1997. The additional  loss  recognized is the result
of a  decrease  in  company  dollar  of  $303,000  or 11%  from  1997,  and  the
recognition of $273,000 of charges  associated with the  aforementioned  plan of
management to relocate sales offices into a new facility.

<PAGE>

     The Phoenix operations  contributed pre-tax earnings of $799,000 in 1998 as
compared  to  $478,000  in  1997.   This   increase  is   attributable   to  the
aforementioned  acquisition  of Winn  Realtors,  which  contributed  $301,000 in
pre-tax  earnings in 1998.  An increase in the average  splits paid to agents of
previously  existing  operations  from 69% to 75% in 1998  offset  the  expected
profitability from the aforementioned  increase in revenues.  Operating expenses
remained relatively constant as a percentage of total revenues for the period.

     The Albuquerque  commercial brokerage operations resulted in a pre-tax loss
of  $101,000  in 1998 as  compared  to a pre-tax  loss of $35,000 in 1997.  This
increase is primarily  attributable to an increase in operating  expenses.  This
increase was incurred in an effort to expand operations  through sales associate
recruitment  and  establishing  property  management   operations.   These  cost
increases   are  expected  to  result  in  growth  in  revenues  and   therefore
profitability in future periods.

Construction and Land Development Segment:

The construction and land development  segment operates in the Albuquerque,  Rio
Rancho and Los Lunas, New Mexico metropolitan  areas.  Construction is comprised
of the residential and commercial operations of Charter and Realco Construction,
respectively.  This segment also includes development  activities  consisting of
the acquisition of raw land for development  into residential  homesites,  which
are sold to Charter or to other  builders.  Such land  development  projects are
performed under joint venture  agreements  with other  developers or entirely by
the Company.

   Fiscal 1999 vs. 1998

     Revenues  for this  segment  increased  $9,583,000  or 73% over 1998.  This
increase in  revenues  contributed  to a  $2,049,000  or 330%  increase in gross
profit  over 1998.  As a result of this  increase  and other  income of $550,000
received  in a  lawsuit  settlement  relating  to the  operations  of  the  land
development  division,  this segment  recognized a pre-tax profit of $820,000 in
1999 compared to a pre-tax loss of $1,034,000 in 1998.

     Charter's  residential  construction  revenues  for  the  period  increased
$7,028,000  or  69%  over  1998.  As  previously  discussed,  this  increase  is
attributable to the line of value  engineered  houses being received well by the
marketplace  upon its  introduction  in the fourth quarter of 1998. This product
line also contributed an increase in gross profit margin from 5% to 10% in 1999.
The increases in sales volume and gross profit  contributed to a decrease in the
1998  period's  pre-tax  loss of  $1,293,000  resulting  in a pre- tax profit of
$77,000 for 1999.  While management is pleased with the improvement in operating
results of this subsidiary, there is still improvement which needs to be made in
reducing job costs and  operating  expenses and improving  marketing  efforts in
order to return this subsidiary to its previous levels of profitability.
<PAGE>


     Revenues  from Realco  Construction's  commercial  construction  operations
totaled  $3,188,000 in 1999, an increase of $1,464,000 or 85% over 1998. Despite
this increase in revenues,  a decrease in gross profit margins and a $197,000 or
75% increase in general and  administrative  expenses resulted in a pre-tax loss
of $103,000  for 1999,  as compared  to a pre-tax  loss of $66,000 in 1998.  The
increase in general and administrative expenses for the 1999 period was incurred
as a result of expanding operations. This increased level of operating costs are
expected to continue,  however  higher future  production is expected to sustain
such costs.

     As previously  mentioned,  effective  August 1, 1999, the Company  acquired
certain  net assets and the  business  operations  of TI, an  Albuquerque  based
commercial  contractor which specializes in veterinary clinics. This acquisition
is  expected  to  further  increase  the  revenue  base,  as well as result in a
reduction in combined  operating  expenses  through  economies of scale of these
entities in the future.

     The  Company's  land  development  activities  experienced  an  increase in
revenues and pre-tax  earnings of  $1,414,000  and $463,000,  respectively  over
1998. The increase in revenues  primarily consists of $983,000 of additional lot
sales to Charter and other builders,  and $550,000 received in connection with a
lawsuit.  Specifically,  an agreement  reached on December 30, 1998 provided for
the Company to receive certain  residential  homesites  valued at  approximately
$550,000  in  consideration  for its 50%  interest  in a  joint  venture,  which
received an award of  $1,633,000  in a lawsuit.  As this award is expected to go
through an extensive future appeal process,  management determined this exchange
was in the best interest of the Company after  considering risk and future legal
costs. The overall level of profitability of this division decreased as a result
of increased  carrying costs on lot inventory and a reduction in equity earnings
of  investees,   as  a  profitable  joint  venture   concluded  its  development
operations.

     In August 1999,  the Company  entered into an agreement  which provides for
the Company to purchase eight lots and have the option to purchase an additional
eighty-nine lots subject to certain takedown requirements.  Construction in this
desirably located  subdivision will be performed under a joint venture agreement
whereby Charter and another  Albuquerque  based builder will market its homes in
this  subdivision.  Charter  will  serve  as the  construction  manager  to each
builder's homes to be constructed in this subdivision.

   Fiscal 1998 vs. 1997

     Total revenues for this segment  decreased 8% to  $13,338,000,  while total
expenses  were  comparable  between the  periods.  These  factors  resulted in a
pre-tax loss of $1,034,000 in 1998 as compared to pre-tax earnings of $93,000 in
1997. Included in total expenses for 1998 is a $281,000 impairment recognized on
land and  construction  inventories  to reduce  these  assets to net  realizable
value.

<PAGE>


     Revenues from residential  construction by Charter decreased  $1,167,000 to
$10,124,000 in 1998, a decrease of 10% from 1997.  Costs of  construction  sales
and operating costs were 95% and 8% of construction revenues in 1998 compared to
94% and 7%  respectively  for 1997.  Included in these  amounts is an  inventory
impairment of $270,000. These factors collectively resulted in a pre-tax loss of
$1,216,000 in 1998 as compared to a pre-tax loss of $591,000 in 1997.

     Revenues from commercial  construction  decreased  $26,000 to $1,724,000 in
1998, a decrease of 1% from 1997. Despite the nominal decline in revenues, gross
profits from commercial  construction  decreased $165,000 or 44% from 1997. This
decrease  in gross  profit  and a $47,000  increase  in  operating  expenses  to
$285,000  resulted in a pre-tax loss of $66,000 compared to pre- tax earnings of
$142,000  in  1997.  The  expansion  of  Amity's  offices  and the  addition  of
personnel, have contributed to increased operating costs, as well increasing job
costs. It is expected,  management will ultimately manage this growth period and
return to profitability.

     Equity earnings from investees in land development joint ventures decreased
$295,000  to $163,000 in 1998,  a decrease  of 64% over 1997.  This  decrease is
primarily the result of the Company  acquiring  its  partner's  interests in two
joint ventures  which are now accounted for as  wholly-owned  subsidiaries.  The
Company is not currently a joint  venture  partner in any  development  projects
with  significant  inventory.  Most of the lot inventory  held by the Company is
wholly  owned,  therefore,  gains on sale of lots to Charter are not  recognized
until  sales are closed.  As the  backlog of homes are closed,  gains on sale of
Company owned lots are recognized.

     During 1998, the Company  acquired an undeveloped land parcel and completed
development  of 96 home  building  lots in Los Lunas,  New Mexico,  a community,
approximately 15 miles south of Albuquerque.  This development is not subject to
a joint venture  agreement,  and all building  lots are  currently  reserved for
Charter.  This  subdivision  is  targeted  for entry level  housing  with prices
ranging from $90,000 to $120,000.


Financial Services Segment:

The financial  services  segment  consists of operations of the parent  company,
Great American Equity Corporation (GAEC) and PHS, Inc.

In addition to financial services performed directly by the Company,  operations
also  include  the  Company's  share of  earnings  from  various  equity  method
investees who perform  financial  services.  Such investees include a 50% equity
interest  in PHS  Mortgage  Company  and an  approximately  11%  interest  in MI
Acquisition Corporation.

<PAGE>

   Fiscal 1999 vs. 1998

     The  financial  services  segment,   which  includes  certain   unallocated
operating expenses of the parent company,  realized a pre-tax profit of $111,000
in 1999 as compared to a pre-tax  profit of  $205,000 in 1998.  The  decrease is
primarily  attributable  to the $334,000  gain  recognized  on the sale of First
American  Title, an equity method  investee,  in the 1998 period for which there
was no  comparable  activity  in 1999,  as offset  by a  $198,000  reduction  in
operating expenses in 1999. Other significant items affecting  operating results
are as follows.

     Net equity  earnings  recognized  by PHS,  Inc.  from its  interest  in PHS
Mortgage Company totaled  $353,000 for the 1999 period,  as compared to $317,000
in 1998.  This increase is the result of continued  growth in the  operations of
this venture within the Albuquerque  market as well as its recent expansion into
the Phoenix market.

     The Company  recognized  equity earnings of $140,000 for the 1999 period as
compared to $13,000 in 1998 for its  investment in MI  Acquisition  Corporation.
This increase in earnings of $127,000 is primarily  attributable  to the closing
of more investment banking deals in 1999.

     Earnings from GAEC were comparable between the periods,  $34,000 in 1999 as
compared to $46,000 in 1998. While earnings were comparable,  revenues decreased
by $115,000 and expenses decreased $104,000. These decreases are the result of a
reduction in financing activities performed by this subsidiary as a result of an
increase in working  capital  being  utilized by the real estate  brokerage  and
construction operations. Management does not anticipate any significant increase
in the amount of financing  activities  performed by this subsidiary in the near
term.

   Fiscal 1998 vs. 1997

     This segment  generated pre-tax earnings of $205,000 in 1998 as compared to
$772,000 in 1997. This decrease in earnings is the result of a decrease in total
revenues  of  $225,000 to  $1,693,000  in 1998 and an  increase  in  unallocated
general and  administrative  expenses of  $299,000.  Depreciation  and  interest
expense incurred in this segment were comparable between the periods.

     Equity  earnings from  investees  consisted  primarily of $317,000 from PHS
Mortgage  Company,  as compared to $249,000 in 1997. This increase is the result
of expanding  operations to the Arizona market.  The Company's  investment in MI
provided $13,000 in equity earnings in 1998, as compared to $30,000 in 1997.

     This  segment  experienced  a gain of $334,000 in 1998 on the sale of First
American  Title  Company of New Mexico,  a publicly held  corporation  which the
Company sold its 20% equity interest for $500,000 in November 1997.

     Interest and loan fees generated by GAEC decreased  $357,000 to $172,000 in
1998.  Increased  capital  requirements  to support  the  Company's  residential
brokerage  and home  building  activities  restricted  the capital  availability
required to maintain the GAEC lending program,  therefore  revenue and operating
profits experienced a sharp decline.

<PAGE>


Liquidity and Capital Resources
-------------------------------

The Company's  liquidity consists primarily of cash, trade accounts  receivable,
inventories and construction advances  collateralized by inventory.  Future cash
needs will be financed primarily by cash flows from operations,  future advances
under construction loans and if needed, other financing arrangements,  which may
be available to the Company.  The Company does not have any material commitments
for capital expenditures for fiscal 2000.

The Company's current projection of future cash requirements, may be affected in
the future by numerous factors, including changes in customer receipts, consumer
industry  trends,  sales volume,  operating cost  fluctuations,  acquisitions of
existing  businesses and unplanned  capital spending.  Management  believes that
cash flow from  operations,  current  reserves of cash and cash  equivalents and
credit facilities in place will sustain the Company's operations and anticipated
growth for the ensuing twelve months.


Year 2000 Issues
----------------

The Company has been notified by its principal vendors of its operating computer
programs,  that they are deemed Year 2000  compliant.  The Company has completed
its  systematic  program of testing its computer  hardware and related  software
programs to detect and correct any Year 2000 deficiencies.

The Company's key business  relationships  include suppliers and  subcontractors
for building and land development,  realtor clearing associations, and financial
institutions  and mortgage  companies  which not only process the Company's cash
receipts and disbursements but also provide deposit and lending services for the
Company and its customers.  The Company has limited assurance from most of these
key parties that they are Year 2000 compliant.

While some of the Company's  business relations have provided assurance they are
addressing Year 2000 issues,  the Company cannot  guarantee such businesses will
address and resolve these issues in a timely manner.

The Company does not believe there will be any significant future costs incurred
with  respect to its own computer  software and hardware  since its vendors have
deemed  them Year 2000  compliant.  As a result of the Company  primarily  using
internal  information  technology personnel to carry out its Year 2000 readiness
plan,  total costs  incurred  to address  this issue,  including  personnel  and
equipment costs, were limited to less than $35,000.


Impact of Inflation
-------------------

The Company's business is significantly affected by general economic conditions,
particularly  by  inflation  and its  generally  associated  adverse  effect  on
interest rates. Although inflation rates have been low in recent years, any rise
in inflation  would likely affect the Company's  revenues and earnings  power by
reducing demand for new and resale homes as a result of  correspondingly  higher
interest rates.

<PAGE>


Forward Looking Statements
--------------------------

Investors are cautioned that certain  statements  contained in this document are
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform Act of 1995 (the "Act").  Statements  which are predictive in
nature,  which depend upon or refer to future  events or  conditions  constitute
forward-looking  statements.  In  addition,  any  statements  concerning  future
financial  performance,  ongoing business strategies or prospects,  and possible
future  Company   actions,   which  may  be  provided  by  management  are  also
forward-looking statements as defined by the Act. Forward-looking statements are
based on  current  expectations  and  projections  about  future  events and are
subject to risks, uncertainties, assumptions, and economic and market conditions
in the real estate industry, among other things.

Actual  events  and  results  may differ  materially  from  those  expressed  or
forecasted  in the  forward-looking  statements  made by the  Company or Company
management due to a number of factors.  Important  factors that could cause such
differences  include  but  are not  limited  to,  changes  in  general  economic
conditions  either nationally or in regions in where the Company operates or may
commence operations,  employment growth or unemployment rates,  availability and
costs  of  land  and  homebuilding  materials,   labor  costs,  interest  rates,
prevailing   rates  for  sales   associate   commission   structures,   industry
competition,  regulatory  developments,  and the  success of the Company and its
suppliers in identifying and addressing  operating systems and programs that are
not year 2000 ready.

ITEM 7A:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company has no material market risk associated with interest rates,  foreign
currency exchange rates or commodity prices.
<PAGE>



ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.










              Report of Independent Certified Public Accountants



Shareholders
Realco, Inc.

We have audited the accompanying consolidated balance sheets of Realco, Inc. and
Subsidiaries,  as of September 30, 1999 and 1998,  and the related  consolidated
statements of operations,  stockholders'  equity, and cash flows for each of the
three years in the period ended September 30, 1999. Our audits also included the
financial  statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated  financial position of Realco, Inc. and
Subsidiaries, as of September 30, 1999 and 1998, and the consolidated results of
their operations and their  consolidated  cash flows for each of the three years
in the period ended  September 30, 1999, in conformity  with generally  accepted
accounting  principles.  Also, in our opinion,  the related financial  statement
schedule,  when  considered in relation to the financial  statements  taken as a
whole,  presents  fairly in all  material  respects  the  information  set forth
therein.




GRANT THORNTON LLP

Oklahoma City, Oklahoma
November 12, 1999

<PAGE>

                          REALCO, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                  September 30,

                             (Dollars in thousands)
                                                        1999         1998
                                                      --------     --------
ASSETS
  Cash and cash equivalents                           $  3,688     $  3,788
  Restricted cash                                          367          170
  Accounts and notes receivable, net                     1,899        2,278
  Cost and estimated earnings in excess of
    billings on uncompleted contracts                      482           -
  Inventories                                           14,932       16,760
  Property and equipment, net                            1,935          928
  Investments - equity method                            1,744        1,807
  Deferred income taxes                                    117          301
  Costs in excess of net assets acquired, net            1,605        1,276
  Other assets                                           1,043        1,060
                                                      --------     --------
                                                      $ 27,812     $ 28,368
                                                      ========     ========
LIABILITIES
  Notes payable                                       $  5,214     $  6,472
  Lease obligations                                        743           77
  Construction advances and notes payable,
    collateralized by inventories                        6,797        9,094
  Accounts payable and accrued liabilities               4,293        2,584
  Escrow funds held for others                             367          170
                                                      --------     --------
      Total liabilities                                 17,414       18,397

STOCKHOLDERS' EQUITY
  Preferred  stock  -  authorized,   500,000   shares  Series  A  -  issued  and
    outstanding, 79,969
      and 82,569 shares in 1999 and 1998,
      respectively, stated at liquidation value            799          826
    Series B - issued and outstanding, 212,859
      shares, stated at liquidation value                2,129        2,129
    Series D - issued and outstanding, 23,919
      shares in 1998, stated at liquidation value           -           239
  Common stock - no par value; authorized,
    6,000,000 shares; issued, 2,894,038 and
    2,845,000 shares in 1999 and 1998, respectively      7,909        7,712
  Retained deficit                                        (408)        (684)
  Accumulated other comprehensive income                    -           (27)
                                                       -------      -------
                                                        10,429       10,195
    Less 11,000 and 78,000 shares common
      stock held in treasury in 1999 and
      1998, respectively - at cost                          31          224
                                                      --------     --------
                                                        10,398        9,971
                                                      --------     --------
                                                      $ 27,812     $ 28,368
                                                      ========     ========
                             See accompanying notes.
<PAGE>

                          REALCO, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                            Years ended September 30,

              (Dollars in thousands, except per share amounts)

                                                 1999       1998       1997
                                               --------   --------   --------
REVENUES
  Brokerage commissions and fees               $ 25,625   $ 21,984   $ 14,487
  Construction sales                             20,340     11,848     13,041
  Sales of developed lots                         2,363      1,272      1,154
  Equity in net earnings of investees               545        506        789
  Interest and other                                911        785      1,080
                                               --------   --------   --------
                                                 49,784     36,395     30,551
COSTS AND EXPENSES
  Cost of brokerage revenue                      18,615     16,254     10,275
  Cost of construction sales                     18,287     10,953     11,608
  Cost of developed lots sold                     1,746      1,345      1,073
  Selling, general, administrative,
    and other                                     9,101      8,126      5,880
  Depreciation and amortization                     601        522        502
  Interest                                          998        711        684
                                               --------   --------   --------
                                                 49,348     37,911     30,022
                                               --------   --------   --------

    Earnings (loss) before income taxes             436     (1,516)       529

INCOME TAX EXPENSE (BENEFIT)                        160       (336)       199
                                               --------   --------   --------
    NET EARNINGS (LOSS)                             276     (1,180)       330

PREFERRED STOCK DIVIDEND REQUIREMENT                (4)        120        121
                                               --------   --------   --------
    NET EARNINGS (LOSS) APPLICABLE
      TO COMMON SHARES                         $    280   $ (1,300)  $    209
                                               ========   ========   ========
BASIC AND DILUTED EARNINGS (LOSS)
  PER COMMON SHARE
    Net earnings (loss) per common
      share before preferred stock
      dividend requirement                     $    .10   $   (.42)  $    .12
                                               ========   ========   ========
    Net earnings (loss) per common
      share after preferred stock
      dividend requirement                     $    .10   $   (.47)  $    .07
                                               ========   ========   ========

WEIGHTED AVERAGE COMMON
   SHARES OUTSTANDING                         2,774,609  2,777,452  2,829,837
                                              =========  =========  =========

                             See accompanying notes.
<PAGE>

                          REALCO, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                  Years ended September 30, 1999, 1998 AND 1997

                             (Dollars in thousands)

                               Series A Series  B Series D  preferred  preferred
                               preferred stock 6 % stock 3% stock 3% Common
                              cumulative  cumulative  cumulative   stock
                              ----------  ----------  ----------  --------

Balance at October 1, 1996    $      826  $    2,179  $      243  $  7,712

Retirement of Series B
  preferred stock                     -          (50)         -         -
Retirement of Series D
  preferred stock                     -           -           (4)       -
Purchase of common stock
  for treasury                        -           -           -         -
Comprehensive income
  Net earnings                        -           -           -         -
  Other comprehensive
    income (loss)
    Unrealized gain (loss)
      on investments, net             -           -           -         -

Comprehensive income                  -           -           -         -
                              ----------  ----------  ----------  --------

Balance at September 30, 1997        826       2,129         239     7,712

Purchase of common stock
  for treasury                        -           -           -         -
Comprehensive loss
  Net loss                            -           -           -         -
  Other comprehensive
    income (loss)
    Unrealized gain (loss)
      on investments, net             -           -           -         -

Comprehensive income                  -           -           -         -
                              ----------  ----------  ----------  --------

Balance at September 30, 1998        826       2,129         239     7,712

Redemption of Series A
  preferred stock                    (27)         -           -         -
Conversion of Series D
  preferred stock                     -           -         (239)      239
Issuance of treasury stock
  in acquisition                      -           -           -        (42)
Comprehensive income
  Net earnings                        -           -           -         -
  Other comprehensive
    income (loss)
    Unrealized gain (loss)
      on investments, net             -           -           -         -

Comprehensive income                  -           -           -         -

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

Balance at September 30, 1999 $      799  $    2,129  $       -   $  7,909
                              ==========  ==========  ==========  ========
<PAGE>
                          REALCO, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
               Years ended September 30, 1999, 1998 AND 1997

                             (Dollars in thousands)


                                                      Accumulated
                               Retained                 Other
                               earnings    Treasury  Comprehensive
                               (deficit)    stock    Income (Loss)    Total
                              ----------  ---------  -------------  --------

Balance at October 1, 1996    $      166  $      -    $          7  $ 11,133

Retirement of Series B
  preferred stock                     -          -              -        (50)
Retirement of Series D
  preferred stock                     -          -              -         (4)
Purchase of common stock
  for treasury
Comprehensive income                  -          (93)           -        (93)
  Net earnings                       330          -             -        330
  Other comprehensive
    income (loss)
    Unrealized gain (loss)
      on investments, net             -          -              11        11
                                                                    --------
  Comprehensive income                                                   341
                                --------   --------   ------------- --------

Balance at September 30, 1997        496        (93)            18    11,327

Purchase of common stock
  for treasury                        -        (131)            -       (131)
Comprehensive loss
  Net loss                       (1,180)         -              -     (1,180)
  Other comprehensive
    income (loss)
    Unrealized gain (loss)
      on investments, net             -          -           (45)        (45)
                                                                    --------
  Comprehensive loss                                                  (1,225)
                                --------   ---------  ------------- --------

Balance at September 30, 1998       (684)      (224)           (27)    9,971

Redemption of Series A
  preferred stock                     -          -              -        (27)
Conversion of Series D
  preferred stock                     -          -              -         -
Issuance of treasury stock
  in acquisition                      -         193             -        151
Comprehensive income
  Net earnings                       276         -              -        276
  Other comprehensive
    income (loss)
    Unrealized gain (loss)
      on investments, net             -          -              27        27
                                                                    --------
Comprehensive Income                  -          -              -        303
                              ----------  ---------  -------------  --------

Balance at September 30, 1999 $     (408) $     (31) $          -   $ 10,398
                              ==========  =========  =============  ========
                             See accompanying notes.
<PAGE>

                          REALCO, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            Years ended September 30,

                             (Dollars in thousands)

                                                 1999       1998       1997
                                              --------   --------   --------
Cash flows from operating activities

Net earnings (loss)                           $    276   $ (1,180) $     330

Adjustments to reconcile net earnings
  (loss) to net cash provided by
  (used in) operating activities
    Depreciation and amortization                  601        522        502
    Accretion of discount on notes
      payable                                       49         55         55
    Net distributions in excess of
      earnings (earnings in excess of
      distributions) from investees                126         (7)      (658)
    Gain on sale of equity method investment        -        (334)        -
    Gain on sale of available for sale
      securities                                   (50)       (57)       (47)
    Loss on sale of property and equipment          10         41         -
    Provision for deferred income taxes            167       (328)       167
    Changes in operating assets and
      liabilities (net of businesses
      acquired)
        (Increase) decrease in restricted
          cash                                    (197)       233         86
        Decrease (increase) in accounts
          receivable                               137        242       (384)
        Decrease (increase) in inventories       1,828     (3,181)       323
        (Increase) decrease in net billings
          related to costs and estimated
          earnings on uncompleted contracts       (406)       128        180
        (Increase) decrease in other assets       (192)       240       (274)
        Increase in accounts payable and
          accrued liabilities                    1,107        292        340
        Increase (decrease) in escrow funds
          held for others                          197       (233)       (86)
                                              --------   --------   --------
          Net cash provided by (used in)
            operating activities                 3,653     (3,567)       534

<PAGE>

Cash flows from investing activities
  Purchases of property and equipment             (634)      (317)      (284)
  Proceeds from sale of property and
    equipment                                        5          2         -
  Payments for businesses acquired                (455)      (426)    (1,424)
  Advances on notes receivable                    (578)      (773)      (719)
  Receipts on notes receivable                   1,449        656      1,465
  Proceeds from securities available for sale      906        467        195
  Purchase of securities available for sale       (688)      (504)       (90)
  Purchase of equity method investments            (63)        -      (1,046)
  Proceeds from sale of equity method
    investment                                      -         500         -
  Cash acquired in business acquisitions            -         292        252
                                              --------   --------   --------
          Net cash used in investing
            activities                             (58)      (103)    (1,651)

Cash flows from financing activities
  Construction advances and notes, net          (2,297)     3,955        587
  Proceeds from borrowing under revolving
    and long-term debt                              20         -         500
  Payments on revolving, capital lease, and
    long-term debt                              (1,391)      (608)      (116)
  Purchase of treasury stock                        -        (131)       (93)
  Redemption of preferred stock                    (27)        -          -
                                              --------   --------   --------
          Net cash provided by (used in)
            financing activities                (3,695)     3,216        878
                                              --------   --------   --------

NET DECREASE IN CASH AND CASH EQUIVALENTS         (100)      (454)      (239)

Cash and cash equivalents at beginning
  of year                                        3,788      4,242      4,481
                                              --------   --------   --------
Cash and cash equivalents at end of year         3,688   $  3,788      4,242
                                              ========   ========   ========

Cash paid (received) during the year for:
-----------------------------------------

    Income taxes                              $     -    $   (184)  $     88
    Interest                                     1,002        711        684

<PAGE>

Noncash financing and investing activities:
-------------------------------------------

In 1999, the Company  purchased the net assets and business of TI  Construction,
Inc.  through the  issuance  of 67,000  shares of Company  common  stock held in
treasury.  In  connection  with the  acquisition,  liabilities  were  assumed as
follows:

    Fair value of assets acquired                        $    753
    Stock issued                                             (151)
                                                         --------
    Liabilities assumed                                       602
                                                         ========

In 1999 and 1998, capital lease obligations of $731 and $47, respectively,  were
incurred  when  the  Company  entered  into  leases  for  office  furniture  and
equipment.

In 1998, the Company acquired all the common stock of Cliff Winn, Inc.  Realtors
for $426.  In  conjunction  with the  acquisition,  liabilities  were assumed as
follows:

    Fair value of assets acquired,
      including cash of $292                             $    457
    Cash paid                                                (426)
                                                         --------
    Liabilities assumed                                  $     31
                                                         ========
<PAGE>

In 1997,  the Company  acquired all the common stock of Mull Realty  Company for
$1,159. In connection with the acquisition, liabilities were assumed as follows:

    Fair value of assets acquired,
      including cash of $206                             $  1,282
    Cash paid                                                (359)
    Issuance of note payable                                 (800)
                                                         --------
    Liabilities assumed                                  $    123
                                                         ========

In 1997, the Company  purchased the net assets and business of First  Commercial
Real Estate  Services,  Inc.  for $265.  In  conjunction  with the  acquisition,
liabilities were assumed as follows:

    Fair value of assets acquired                        $    269
    Cash paid                                                (265)
                                                         --------
    Liabilities assumed                                  $      4
                                                         ========

In 1997, the Company purchased the remaining 50% partnership interest in Village
Joint  Venture  and  Stonehenge  at High  Resort  Joint  Venture  for  $800.  In
conjunction with the acquisition, liabilities were assumed as follows:

    Fair value of assets acquired,
      including cash of $46                              $  3,697
    Cash paid                                                (800)
    Previous equity basis investment                         (619)
                                                         --------
    Liabilities assumed                                  $  2,278
                                                         ========

In 1997, the Company  exchanged a $50 note receivable for 5,000 shares of Series
B preferred  stock and $4 of  furniture  and fixtures for 378 shares of Series D
preferred stock.



                             See accompanying notes.
<PAGE>

                          REALCO, INC. AND SIBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      September 30, 1999, 1998 and 1997

              (Dollars in thousands, except per share amounts)


NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES

Realco,  Inc., a New Mexico  corporation,  and Subsidiaries  (the "Company") has
operations  which include real estate  brokerage  sales through a franchise from
Prudential Real Estate Affiliates,  Inc.; single-family home construction;  land
development;  and, to a lesser  extent,  commercial  construction  and financial
services.  Its  operations  and  customers  are  primarily  in the  vicinity  of
Albuquerque,  New Mexico except for certain real estate  brokerage and financial
services operations and customers in Phoenix, Arizona.

The Company's  accounting  policies  reflect  industry  practices and conform to
generally  accepted  accounting  principles.  The more significant  policies are
briefly discussed below.

1.  Principles of Consolidation

The consolidated  financial  statements include the accounts of Realco, Inc. and
its  wholly  owned  subsidiaries.   All  material   intercompany   accounts  and
transactions have been eliminated in consolidation.

2.  Revenue Recognition and Provision for Warranty Claims

The Company constructs  single-family homes of short building duration for which
minimal  deposits are generally  required from the buyer.  Revenue is recognized
upon closing. Estimated warranty costs are provided at the time of sale.

Revenues from significant  commercial  construction  contracts are recognized on
the  percentage-of-completion  method; accordingly,  income is recognized in the
ratio that costs incurred bear to estimated total costs.  The aggregate of costs
incurred and income  recognized  on  uncompleted  contracts in excess of related
billings  is  shown as an  asset,  and the  aggregate  billings  on  uncompleted
contracts in excess of related costs incurred and income  recognized is shown as
a liability.  Certain short-term smaller commercial  construction  contracts are
accounted   for  on  the   completed-contract   method,   which  does  not  vary
significantly from the  percentage-of-completion  basis of accounting.  Contract
costs include all direct material, subcontractor,  supplies, and labor costs and
those indirect costs relating to contract performance.  Provisions for estimated
losses on uncompleted  contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability,
and final  contract  settlements  may result in revisions to cost and income and
are recognized in the period in which the revisions are determined.

Brokerage  commissions and fees earned from real estate  brokerage  services are
recognized at the time of closing on the underlying real estate sales contracts.
<PAGE>


3.  Cash, Cash Equivalents, and Restricted Cash

The  Company  considers  money  market  accounts  and  all  highly  liquid  debt
instruments  purchased  with a  maturity  of  three  months  or  less to be cash
equivalents.  The Company  maintains its cash and cash  equivalents  in accounts
which may not be federally  insured.  The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit risk.

In the ordinary course of operations,  the Company  collects and holds in escrow
funds associated with real estate contract deposits, construction sales contract
deposits,  and other escrowed funds.  These balances are reflected as restricted
cash with a corresponding liability.

4.  Accounts and Notes Receivable

The  Company  reviews  accounts  and notes  receivable  for  collectibility  and
provides  reserves on specific  accounts based upon whether the Company believes
that the collection of a specific account is questionable.

The  Company  provides  credit to its  customers  under  ordinary  trade  terms.
Receivables for real estate contracts are generally  collateralized  by the real
estate.

5.  Inventories

Inventories  are carried at the lower of cost or estimated net realizable  value
and include all acquisition costs, direct labor and benefits,  project interest,
materials  unique to or  installed  in the project,  subcontractor  cost,  and a
proportional overhead allocation charge.

6.  Property and Equipment

Depreciation is provided in amounts sufficient to relate the cost of depreciable
assets to operations  over their  estimated  service lives of three to ten years
using straight-line and accelerated methods.

Impairment  losses are recorded on  long-lived  assets used in  operations  when
indicators of impairment are present and the  undiscounted  cash flows estimated
to be generated by these assets are less than the assets' carrying amount.

Assets  acquired  under capital  leases are recorded at the lower of fair market
value or the present value of future  minimum lease  payments.  These leases are
amortized  on the  straight-line  method  over the  primary  lease  term or over
estimated  economic  lives  in the  event  ownership  of the  underlying  assets
transfers at the end of the lease term.

<PAGE>

7.  Income Taxes

Deferred  income  taxes are provided on  temporary  differences  between the tax
basis of an asset or  liability  and its  reported  amount  in the  consolidated
financial statements that will result in taxable or deductible amounts in future
years.  Deferred income tax assets or liabilities are determined by applying the
presently enacted tax rates and laws.

The Company and its subsidiaries file consolidated income tax returns.

8.  Earnings (Loss) Per Common Share

Earnings  (loss) per common share is  calculated  based on the weighted  average
number of shares  outstanding during the year pursuant to Statement of Financial
Accounting  Standards  ("SFAS") No. 128,  Earnings per Share,  which was adopted
during the year ended  September  30, 1998.  Because the  conversion  prices for
convertible  debentures,  warrants,  and options  are  greater  than the average
market  price  for  the  periods  presented,  the  assumed  conversion  of  such
securities  are  antidilutive.  The  adoption of this  standard  did not require
restatement of 1997 net earnings per common share.

9.  Investments

Investments in affiliated companies and joint ventures owned 20% to 50% or which
the  Company is able to  exercise  significant  influence  over  operations  are
accounted for on the equity method. Accordingly,  the consolidated statements of
operations include the Company's share of the affiliated entities' net earnings.

10.  Intangible Assets

Costs in excess of net assets of businesses  acquired are being  amortized using
the straight-line method over fifteen or twenty years.  Accumulated amortization
of costs in excess of net  assets of  businesses  acquired  was $299 and $177 at
September 30, 1999 and 1998, respectively.

The  Company  assesses  the  recoverability  of costs in excess of net assets of
businesses acquired by determining whether the amortization of the asset balance
over its  remaining  life  can be  recovered  through  the  undiscounted  future
operating cash flows of the acquired operation. The amount of the impairment, if
any, is measured based on projected discounted future operating cash flows.

11.  Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect certain  reported amounts and  disclosures;  accordingly,  actual results
could differ from those estimates.

12.  Stock Options

The Company applies APB Opinion 25 and related interpretations in accounting for
its stock  options.  Accordingly,  compensation  expense is only  recognized for
grants of options which include an exercise  price less than the market price of
the stock at the date of the grant.

<PAGE>

13.  Advertising Costs

The Company  expenses the cost of advertising the first time  advertising  takes
place.  Advertising  expense for the fiscal years ended September 30, 1999, 1998
and 1997 was approximately $1,037, $990 and $893, respectively.

14.  Other Comprehensive Income

Accumulated  other  comprehensive  income  consists  solely  of  net  unrealized
investment gains (losses).

Unrealized gain (loss) on investments consists of the following:

                                            1999        1998       1997
                                           --------   --------   --------
  Unrealized gain (loss) on investments
    arising during the period              $     -    $    (27)  $     18
  Less reclassification adjustment for
    gains (losses) included in net
    earnings (loss)                             (27)        18          7
                                           --------   --------   --------

  Unrealized gain (loss) on investments,
    net                                    $     27   $    (45)  $     11
                                           ========   ========   ========

15.  Reclassifications

Certain  reclassifications  have  been  made to the 1998  and 1997  consolidated
financial statements to conform to the 1999 presentation.

NOTE B - INVENTORIES

During the years ended September 30, 1999,  1998 and 1997, the Company  incurred
and  capitalized  approximately  $363, $285 and $303  respectively,  of interest
costs.  Capitalized  interest costs charged to cost of  construction  sales were
approximately  $332,  $333 and $343 for the years ended September 30, 1999, 1998
and 1997, respectively.

Inventories consist of the following as of September 30:

                                                        1999       1998
                                                      --------   --------
    Land and improvements under development           $  8,755   $ 10,885
    Construction in progress                             5,206      4,878
    Model homes                                            971        997
                                                      --------   --------

                                                      $ 14,932   $ 16,760
                                                      ========   ========

Construction in progress  includes homes under contract of approximately  $3,971
and $3,056 at September 30, 1999 and 1998, respectively.
<PAGE>

NOTE C - COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS

The  following is a summary of  significant  commercial  construction  contracts
accounted for on the  percentage-of-completion  method as of September 30, 1999.
There were no contracts accounted for on the percentage-of-completion  method as
of September 30, 1998.

    Costs incurred on uncompleted contracts               $    893
    Estimated earnings                                         162
                                                          --------
                                                                           1,055
      Less billings to date                                    573
                                                          --------
    Costs and estimated earnings in excess of
       billings on uncompleted contracts                  $    482
                                                          ========



NOTE D - INVESTMENTS

The  following is a summary of  investments  carried on the equity  method as of
September 30:

                                                        1999       1998
                                                      --------   --------

    MI Acquisition Corporation, 11%
      stockholder interest                            $  1,245   $  1,043
    PHS Mortgage, 50% stockholder interest                 279        219
    Success Venture                                        105        392
    Other                                                  115        153
                                                      --------   --------
                                                      $  1,744   $  1,807
                                                      ========   ========

In  November  1997,  the  Company  sold its 20%  stockholder  interest  in First
American Title Company of New Mexico for $500 resulting in a gain of $334.

The Company has participated in certain land development projects under separate
joint venture agreements.  The Company's liability is joint and several for such
joint  ventures  and its 50% share in the  operations  is reported on the equity
method in the accompanying consolidated financial statements.  Effective July 1,
1997, the Company  purchased the other 50% interest in Village Joint Venture and
Stonehenge at High Resort Joint Venture for a cash payment of $800.  This action
terminated  the joint  ventures,  and the assets,  liabilities,  and  subsequent
results of operations are included in the  accompanying  consolidated  financial
statements.

<PAGE>
Summarized  financial  information of certain  investments carried on the equity
method is as follows:

               As of and for the year ended September 30, 1999
               -----------------------------------------------

                                          MI
                                      Acquisition      PHS        Joint
                                      Corporation    Mortgage    Ventures
                                      -----------  -----------  -----------

    Cash                              $     6,954  $        78  $        39
    Other assets                           62,503          504          171
                                      -----------  -----------  -----------
                                      $    69,457  $       582  $       210
                                      ===========  ===========  ===========

    Liabilities                       $    58,552  $        24   $        -
    Equity                                 10,905          558          210
                                      -----------  -----------  -----------
                                      $    69,457  $       582  $       210
                                      ===========  ===========  ===========

    Revenue earned                    $    34,501  $     1,599  $       110
                                      ===========  ===========  ===========

    Net earnings                      $     1,223   $      767   $       43
                                      ===========  ===========  ===========

               As of and for the year ended September 30, 1998
               -----------------------------------------------

                                          MI
                                      Acquisition      PHS        Joint
                                      Corporation    Mortgage    Ventures
                                      -----------  -----------  -----------

    Cash                              $     1,734  $       359  $       309
    Other assets                           34,385          543          716
                                      -----------  -----------  -----------
                                      $    36,119  $       902  $     1,025
                                      ===========  ===========  ===========

    Liabilities                       $    26,844  $       503  $       229
    Equity                                  9,275          399          796
                                      -----------  -----------  -----------
                                      $    36,119  $       902  $     1,025
                                      ===========  ===========  ===========

    Revenue earned                    $    31,779  $     1,214  $       893
                                      ===========  ===========  ===========

    Net earnings                      $       908  $       635  $       290
                                      ===========  ===========  ===========


<PAGE>


                      For the year ended September 30, 1997
                      -------------------------------------

                      First American      MI
                      Title Company   Acquisition      PHS        Joint
                      of New Mexico   Corporation    Mortgage    Ventures
                      --------------  -----------  -----------  -----------


    Revenue earned    $        3,921  $     5,178  $       919  $    12,434
                      ==============  ===========  ===========  ===========

    Net earnings      $          235  $       236  $       498  $       866
                      ==============  ===========  ===========  ===========
<PAGE>

NOTE E - ACCOUNTS AND NOTES RECEIVABLE

Accounts and notes receivable include the following at September 30:

                                                        1999       1998
                                                      --------   --------

    Residential  construction  advances to various  builders  subordinate to the
    interest of banks under participation agreements;  collateralized by certain
    real estate and homes under construction, interest due monthly at the banks'
    prime rate plus 1%, principal due as homes are sold, up to a nine-month term
    with three-
    month renewals considered                         $    150   $    936

    Notes receivable from various real estate agents; collateralized by computer
    equipment,  payable in monthly installments  including interest at 10%, with
    maturity
    dates through November 2000                             -          26

    Note receivable;  collateralized by real estate, interest due monthly at 9%,
    principal payable as lots are sold or upon
    demand                                                  -         118

    Brokerage commissions and fees receivable              530        715

    Construction sales receivable                          909        152

    Other advances and receivables                         335        356
                                                      --------   --------
                                                         1,924      2,303
      Less allowance for doubtful accounts                  25         25
                                                      --------   --------
                                                      $  1,899   $  2,278
                                                      ========   ========

NOTE F - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at September 30:

                                                        1999       1998
                                                      --------   --------

    Office equipment, furniture, and fixtures         $  2,564   $  1,719
    Leasehold improvements                                 577        150
    Automobiles and equipment                              182        123
                                                      --------   --------
                                                         3,323      1,992
      Less accumulated depreciation and
        amortization                                     1,388      1,064
                                                      --------   --------
                                                      $  1,935   $    928
                                                      ========   ========
<PAGE>


NOTE G - DEBT

Debt consisted of the following at September 30:

                                                        1999       1998
                                                      --------   --------

    Subordinated  sinking fund notes,  $5,750 face amount, 9.5% interest payable
    annually,  principal  payable at various dates  through  December 2003 (less
    $121  and  $170  unamortized  discount  at  September  30,  1999  and  1998,
    respectively,
    based on imputed interest rate of 10.5%) (A)      $  4,829   $  5,580

    Construction and development advances;
    collateralized by inventories (A)(B)                 3,866      4,939

    Notes payable; collateralized by
    inventories (A)(C)                                   2,931      4,155

    Note payable to Norwest Bank; collateralized by equity investee common stock
    owned by the  Company,  due in  semi-annual  installments  of  $35,700  plus
    interest at 1% over the bank's prime rate,
    through July 2004 (A)                                  357        429

    Noninterest-bearing  note  payable to  selling  shareholder  of Mull  Realty
    Company,  Inc.,  collateralized by the common stock of a Company subsidiary,
    due in  annual  installments  based  upon a  factor  of  earnings  with  all
    outstanding principal due
    in April 2001                                           -         362

    Revolving line of credit with Norwest Bank,
    interest payable monthly at 1.5% over the
    bank's prime rate, matured June 1999                    -         100

    Other notes payable                                     28          1
                                                      --------   --------
                                                      $ 12,011   $ 15,566
                                                      ========   ========

(A)  Subordinated  sinking fund notes and certain  construction  and development
advances and notes  payable  collateralized  by inventory are subject to various
covenants, the most restrictive of which include minimum net worth requirements,
cash flow coverage  requirements,  limitations on dividends,  and limitations on
debt.
<PAGE>

(B) Construction and development advances  collateralized by inventories include
amounts  advanced  under various  interim  construction  lines of credit,  other
lending  arrangements  and buyer  financed loans which are payable upon closing.
Each project under lines of credit requires a separate construction loan bearing
interest at the bank's prime rate plus 1% (9.25% and 9.5% at September  30, 1999
and 1998,  respectively).  Each home to be built under other lending  guidelines
requires a separate  construction loan at the bank's prime rate plus .5% to 1.5%
(prime rate was 8.25% and 8.5% at September 30, 1999 and 1998, respectively).

(C) Notes payable  collateralized by inventories  include amounts outstanding on
loan  agreements  expiring at various dates  through  April 2000,  with variable
interest  rates at the banks' prime rates plus .5% to 1.5% (prime rate was 8.25%
and 8.5% at September 30, 1999 and 1998,  respectively) and fixed interest rates
of 9% or 10%, with principal payments due as properties are sold.

Aggregate future maturities of debt are as follows at September 30, 1999:

    Year ending September 30
           2000                                       $  7,677
           2001                                            878
           2002                                            875
           2003                                            880
           2004                                          1,822
                                                      --------
                                                        12,132
    Less amount representing discount on debt              121
                                                      --------
                                                      $ 12,011
                                                      ========

NOTE H - INCOME TAXES

The  provision  for income taxes  consists of the  following for the years ended
September 30:
                                             1999       1998       1997
                                           --------   --------   --------
    Current                                $     (7)  $     (8)  $     32
    Deferred                                    167       (328)       167
                                           --------   --------   --------
                                           $    160   $   (336)  $    199
                                           ========   ========   ========

<PAGE>

The Company's  effective income tax rate on continuing  operations differed from
the federal statutory rate of 34% as follows:
                                             1999       1998       1997
                                           --------   --------   --------

    Income taxes at federal statutory
      rate                                 $    148   $   (515)  $    180
    Increase (decrease) in valuation
      allowance                                (187)       271        (16)
    Nondeductible expenses                       41         38         31
    State income taxes at statutory rate         26        (91)        -
    Adjustment of estimated income tax
      liability of prior year                   127        (49)        -
    Other                                         5         10          4
                                           --------   --------   --------
    Total tax expense                      $    160   $   (336)  $    199
                                           ========   ========   ========

Components of deferred taxes are as follows at September 30:

                                                   1999       1998
                                                 --------   --------

    Assets
      Inventories                                $     72   $    128
      Accrued liabilities                             177        147
      Property and equipment                           -          59
      Investments                                     105        123
      Tax loss carryforward                            32        249
      Valuation allowance                            (108)      (295)
                                                 --------   --------
                                                 $    278   $    411
                                                 ========   ========

    Liabilities
      Investments                                $    134   $    110
      Property and equipment                           27         -
                                                 --------   --------
                                                 $    161   $    110
                                                 ========   ========

The valuation allowance decreased $187 for the year ended September 30, 1999 and
increased $271 for the year ended September 30, 1998.

A valuation allowance for deferred tax assets is required when it is more likely
than not  that  some  portion  or all of the  deferred  tax  assets  will not be
realized.  The ultimate  realization  of this  deferred tax asset depends on the
Company's  ability  to  generate   sufficient  taxable  income  in  the  future.
Management  believes it is more  likely than not that a portion of the  deferred
tax asset will be realized by future operating results. If the Company is unable
to generate sufficient taxable income in the future through operating results or
tax-planning  opportunities,  an additional valuation allowance will be required
through a charge to expense.

<PAGE>

At September 30, 1999, the Company has net operating loss  carryforwards for tax
purposes of approximately $80 which will expire in 2013.

NOTE I - LEASES

The Company leases furniture and equipment under long-term leases with ownership
of the furniture and equipment  transferred to the Company at the termination of
the leases. Property and equipment include leased furniture and equipment with a
cost of $778 and $360 and accumulated  depreciation of $21 and $237 at September
30, 1999 and 1998, respectively.

Capital  lease terms range from three to five years and provide for  payments as
follows:

    Year ending September 30
           2000                                       $    291
           2001                                            291
           2002                                            267
           2003                                              6
                                                      --------
    Total minimum lease payments                           855
    Amount representing interest                           112
                                                      --------
    Present value of net minimum lease payments       $    743
                                                      ========

The  Company  leases  certain  office  facilities  and  equipment  used  in  its
operations  under  operating  leases  expiring at various dates through 2009 and
provide for payments as follows:

    Year ending September 30
           2000                                       $  1,746
           2001                                          1,546
           2002                                          1,491
           2003                                          1,257
           2004                                            924
           Thereafter                                    3,072
                                                      --------
                                                      $ 10,036
                                                      ========

Certain facilities are subleased under leases which expire in 2004. Total future
minimum sublease rentals amount to $280 at September 30, 1999.

Rental expense for all operating  leases for the years ended  September 30 is as
follows:

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

     Minimum rentals                       $  1,200   $    989   $    601
     Sublease rentals                           (67)       (61)        -
                                           --------   --------   --------
                                           $  1,133   $    928   $    601
                                           ========   ========   ========
<PAGE>

Certain of these leases relating to rental expense of  approximately  $137, $117
and $127 for the years ended  September 30, 1999,  1998 and 1997,  respectively,
are with related parties.

NOTE J - BUSINESS COMBINATIONS

The Company  acquired TI Construction,  Inc.  ("TI"), a commercial  construction
contractor  which  specializes in  constructing  veterinary  clinics,  effective
August 1, 1999. This  acquisition was made through the issuance of 67,000 shares
of Company common stock held in treasury.

The Company acquired Cliff Winn, Inc. Realtors ("Winn Realtors"),  a real estate
broker,  effective February 1, 1998. The acquisition  included a cash payment of
approximately $426 and future contingent payments of up to $963. As of September
30,  1999,  contingent  payments of $193 have been made,  thereby  reducing  the
future contingent payments to $770. Future contingent payments made, if any, are
based on future earnings levels and will result in additional costs in excess of
net assets acquired to be amortized over the remaining life of the asset.

The Company acquired Mull Realty Company,  Inc. ("Mull  Realty"),  a real estate
broker,  effective  January 1, 1997. The acquisition  included a cash payment of
approximately $359, the issuance of a noninterest-bearing note payable for $800,
and future  contingent  payments  of up to $1,175.  As of  September  30,  1999,
payments of $800 on the note payable have been made and  contingent  payments of
$56 have been made,  thereby reducing the future contingent  payments to $1,119.
The contingent  payments made, if any, are based on future  earnings  levels and
will  result in  additional  costs in excess of the net  assets  acquired  to be
amortized over the remaining life of the asset.

Additionally,  the Company acquired First Commercial Real Estate Services,  Inc.
("First  Commercial"),  a commercial real estate broker,  effective May 1, 1997,
for a cash payment of $265.

These business combinations have been accounted for using the purchase method of
accounting and the accompanying  consolidated  financial  statements include the
operations  of these  entities  subsequent to the date of  acquisition.  Initial
costs in excess of the net assets acquired were approximately $1,092.

The following summarized pro forma unaudited information assumes the acquisition
of TI occurred on October 1, 1997 and the  acquistions  of Winn  Realtors,  Mull
Realty, and First Commercial had occurred on October 1, 1996:

                                                 Years ended September 30,
                                                 -------------------------
                                              1999         1998         1997
                                           ----------   ----------   ----------

    Revenues                               $   54,408   $   42,578   $   37,232
                                           ==========   ==========   ==========
    Net earnings (loss)                    $      291   $   (1,078)  $       (3)
                                           ==========   ==========   ==========
    Earnings (loss) per common share       $      .10   $     (.42)  $     (.04)
                                           ==========   ==========   ==========

<PAGE>

NOTE K - SEGMENT INFORMATION

The Company operates in the following segments:  residential construction,  real
estate broker,  commercial  construction,  and financial  services.  Information
concerning  the  Company's  business  segments  as of and  for the  years  ended
September 30 is as follows:

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

    Revenues
      Residential construction and
        and Land Development                $19,515   $ 11,396   $ 12,445
      Real estate broker
        Sales to unaffiliated customers      25,625     21,983     14,487
        Intersegment sales                       -         368        405
      Financial services                        677        838        877
      Commercial construction                 3,188      1,724      1,750
      Interest and other
        Sales to unaffiliated customers         779        453        992
        Intersegment sales                      646        723        767
         Eliminations                          (646)    (1,090)    (1,172)
                                           --------   --------   --------

            Total                          $ 49,784   $ 36,395   $ 30,551
                                           ========   ========   ========

    Operating profit (loss)
      Residential construction and
        Land Development                   $  1,237   $   (348)  $     22
      Real estate broker                        (56)      (329)       (61)
      Financial services                        147        325        843
      Commercial construction                   (91)       (49)       165
                                           --------   --------   --------

            Total                          $  1,237   $   (401)  $    969
                                           ========   ========   ========

    Assets
      Residential construction
        and land development               $ 16,286   $ 17,693   $ 14,857
      Real estate broker                      4,796      3,920      3,436
      Financial services                      2,139      3,073      3,166
      Commercial construction                 1,913        575        767
                                           --------   --------   --------

        Identifiable assets                  25,134     25,261     22,226

      Equity investments                        220        544        566
      Corporate assets                          853        828        969
      Other assets                            1,605      1,735      2,593
                                           --------   --------   --------

             Total                         $ 27,812   $ 28,368   $ 26,354
                                           ========   ========   ========

<PAGE>

    Depreciation and amortization
      Residential construction and
       Land Development                    $    127   $    123   $    104
      Real estate broker                        339        256        249
      Commercial construction                    22         18         23
      Other                                     113        125        126
                                           --------   --------   --------

             Total                         $    601   $    522   $    502
                                           ========   ========   ========

    Capital expenditures
      Residential construction and
       Land Development                    $     90   $    147   $    188
      Real estate broker                        485        147         80
      Commercial construction                    17         17          9
      Other                                      42          6          7
                                           --------   --------   --------

             Total                         $    634   $    317   $    284
                                           ========   ========   ========

Operating profit consists of total revenues,  less costs and expenses  including
interest  expense  allocated to the  financial  services  segment,  but does not
include  unallocated  interest expense,  other income, net equity in earnings of
investees,  loss on sale of equipment, or income taxes.  Identifiable assets are
those assets used in the Company's operations in each area. Other assets include
cash and cash  equivalents,  investments  accounted for under the equity method,
and capitalized debt issuance costs.

NOTE L - COMMITMENTS AND CONTINGENCIES

The Company is engaged in various  legal  proceedings  incidental  to its normal
business activities. Management of the Company does not believe that the outcome
of each such  proceeding or all of them  combined  will have a material  adverse
effect on the Company or its consolidated financial position or operations.

NOTE M - PREFERRED STOCK AND WARRANTS

Series A voting  preferred stock is entitled to dividends when declared and paid
at a 6% cumulative rate payable  annually  starting January 31, 1996 and payable
each  January 31  thereafter.  Series B voting  preferred  stock is  entitled to
dividends  when  declared  and paid at a 3%  cumulative  rate  payable  annually
starting  January 31, 1996 and payable each January 31 thereafter.  At September
30, 1999,  preferred  stock dividends in arrears for Series A were $173 or $2.17
per share ($127 or $1.54 per share for 1998) and Series B were $292 or $1.37 per
share ($228 or $1.07 per share for 1998).  Each series of preferred stock have a
liquidation  preference  of $10 per  share,  plus  all  accumulated  but  unpaid
dividends. Each Series A preferred share is convertible into common shares at $7
per common share on the basis of $10 per preferred share. The Series B preferred
stock is convertible under the same terms; however, the preferred stock value is
$11.11 per share.

<PAGE>

In 1999,  2,600 shares of the  outstanding  shares of Series A voting  preferred
stock were redeemed  based upon the $10 per share  liquidation  value and 23,919
shares of Series D voting  preferred  stock were converted into 47,838 shares of
common stock. To induce  conversion,  the Series D preferred stock was converted
at a rate of $5 per common share  instead of $7 per common share in the original
conversion terms. The excess carrying value of the Series D preferred stock over
the fair  value of the common  stock  given and the value of  additional  common
stock issued to induce conversion was approximately $116 which is reflected as a
negative return in the Preferred Stock Dividend  Requirement in the Consolidated
Statements of Operations.

During 1997, the Company  amended its articles of  incorporation  to convert the
previously  authorized  80,000 shares of Series C preferred stock to a series of
preferred   shares  which  are   unclassified   as  to  rights  or  preferences.
Additionally,  this amendment provides for all shares of Series A, Series B, and
Series D preferred shares which are reacquired by the Company to be converted to
a series of preferred  stock which is  unclassified as to rights or preferences.
As a result of these  amendments,  the  Company  has  207,172  preferred  shares
authorized which are unclassified as to rights and preferences. Such shares will
be fixed with respect to rights and preferences by the Board of the Company upon
issuance.


As a result of its past public  offering of certain debt and equity  securities,
690,000  warrants  to  purchase  Company  common  stock at $8.40 per share  were
issued.  These  warrants  became  immediately  exercisable  upon  closing of the
offering  and expire  February  1, 2001.  All  warrants  remain  outstanding  at
September 30, 1999.


NOTE N - STOCK OPTIONS

The Company  adopted an employee  incentive stock plan for certain key employees
during the year ended September 30, 1997.  Options  currently  outstanding under
the plan become  exercisable one year from the date of the grant and expire five
years after the date of the grant.  These  options are  exercisable  at not less
than  the  market  value  of the  Company's  stock  on the  date  of the  grant.
Accordingly,  no compensation  cost has been  recognized for these options.  Had
compensation  cost for these options been determined  based on the fair value of
the  options at the grant  dates  consistent  with the  method of SFAS No.  123,
Accounting for Stock-Based  Compensation,  the Company's net earnings (loss) and
earnings (loss) per common share would have been the pro forma amounts indicated
below for the years ended September 30:

                                             1999       1998       1997
                                           --------   --------   --------
     Net earnings (loss) applicable
       to common shares
         As reported                       $    280   $ (1,300)  $    209
         Pro forma                              202     (1,386)       193

     Earnings (loss) per share
       As reported                         $    .10   $   (.47)  $    .07
       Pro forma                                .07       (.50)       .07

The fair value of each option  grant is estimated on the date of the grant using
the  Black-Scholes  options-pricing  model with the following  weighted- average
assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yield
was  estimated to remain at zero for all years;  expected  volatility of 58% for
1999 and 54% for 1998 and 1997;  risk-free  interest rates of 5.5%, 6% and 5.9%,
respectively; and an expected life of one year for all years.
<PAGE>


The  Black-Scholes  options  valuation model was developed for use in estimating
the fair value of traded  options  which have no  vesting  restrictions  and are
fully  transferable.  In addition,  option valuation models require the input of
highly  subjective  assumptions  including the expected stock price  volatility.
Because the Company's employee stock options have characteristics  significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options.

A summary of the status of the Company's  fixed stock options as of September 30
and changes during the years then ended is presented below:


                              1999              1998              1997
                      -----------------   ----------------   ----------------
                              Weighted            Weighted           Weighted
                      Number   average    Number   average   Number   average
                        of    exercise      of    exercise     of    exercise
                      shares    price     shares    price    shares    price
                      ------- ---------   ------- --------   ------- --------

Outstanding at
  beginning of year   100,000  $   3.38    35,000  $   3.30       -  $     -
Granted               105,000      3.06    90,000      3.42   35,000     3.30
Forfeited             (10,000)     3.38   (25,000)     3.42       -        -
                      -------            --------            -------
Outstanding at
  end of year         195,000  $   3.21   100,000  $   3.38   35,000  $  3.30
                      =======            ========            =======

Options exercisable
  at year end         120,000  $   3.27

Weighted-average fair
  value of options
  granted during the
  year                         $   1.18            $   1.09           $   .46

The following information applies to options outstanding at September 30, 1999:

Number outstanding                                195,000
Range of exercise prices                          $2.85 to $3.45
Weighted average exercise price                   $3.21
Weighted average remaining contractual life       4 years

The Company records  proceeds from the exercise of stock options,  net of income
tax effects, if any, as additions to common stock.
<PAGE>


NOTE O - FINANCIAL INSTRUMENTS

The  following  table  includes  various  estimated  fair value  information  as
required by SFAS No. 107, Disclosures About Fair Value of Financial Instruments.
Such  information,  which pertains to the Company's  financial  instruments,  is
based on the  requirements  set forth in SFAS No.  107 and does not  purport  to
represent the aggregate net fair value of the Company.  The carrying  amounts in
the table below are the amounts at which the financial  instruments are reported
in the consolidated financial statements.

All of the  Company's  financial  instruments  are held for purposes  other than
trading.

The following  methods and  assumptions  were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:

1.  Cash,  Cash   Equivalents,   and  Restricted  Cash  -  The  carrying  amount
approximates  fair value because of the short  maturity and highly liquid nature
of those instruments.

2. Fixed Rate Notes  Receivable  - The  discounted  amount of future  cash flows
using the current  rates at which  similar  loans would be made to  borrowers is
used to estimate fair value.

3. Floating Rate Notes Receivable - The carrying amount  approximates fair value
because interest rates adjust to market rates.

4.  Fixed  Rate Debt - The  discounted  amount of future  cash  flows  using the
Company's current  incremental rate of borrowing for similar liabilities is used
to estimate fair value.

5.  Floating  Rate Debt - The carrying  amount  approximates  fair value because
interest rates adjust to market rates.

The  carrying  amounts  and  estimated  fair values of the  Company's  financial
instruments are as follows:

                                        1999                   1998
                                   --------------------  --------------------
                                    Carrying  Estimated   Carrying  Estimated
                                    amount   fair value   amount   fair value
                                   --------  ----------  --------  ----------
  Financial assets
    Cash, cash equivalents, and
      restricted cash              $  4,055  $    4,055  $  3,958  $   3,958
    Fixed rate notes receivable          -           -        144        144
    Floating rate notes receivable      144         144       936        936
  Financial liabilities
    Fixed rate debt                  (5,605)     (5,602)   (6,776)    (6,727)
    Floating rate debt               (6,407)     (6,407)   (8,428)    (8,428)
  Financial liabilities for which
    it is not practicable to estimate
    fair value
      Notes payable                       -           -      (362)        -

<PAGE>

It was not practicable to estimate the fair value of a noninterest-bearing  note
payable which does not have fixed repayment terms.

NOTE P - NON-RECURRING ITEMS

During the fourth  quarter of fiscal 1998,  the Company  committed to close four
real estate brokerage branch offices and re-establish those offices in a single,
strategically  located  facility.  As a result of this  commitment,  the Company
incurred  charges of $273 related to lease  abandonments.  Additionally,  during
this quarter,  the Company determined valuation allowances of $505 were required
on certain inventories,  receivables,  and other assets. The aggregate effect of
these  items was to increase  the loss for the fourth  quarter of fiscal 1998 by
$606 or $.22 per share.

During 1999,  the Company's  relocation to the new facility was delayed.  Of the
$273 initial charge relating to lease  abandonments,  $235 remains as an accrued
liability at September 30, 1999 which  represents the anticipated  present value
of future obligations for abandoned facilities.

<PAGE>



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

None

                                    PART III

ITEMS 10, 11, 12 and 13:

Information  required by Part III (Items 10, 11, 12 and 13) of this Form 10-K is
incorporated by reference from the  Registrant's  definitive Proxy Statement for
its 2000 Annual Meeting of Stockholders, which will be filed with the Securities
and Exchange  Commission,  pursuant to  Regulation  14A, not later than 120 days
after  the  end  of  the  fiscal  year,  all  of  which  information  is  hereby
incorporated by reference in, and made part of, this Form 10-K.



                                     PART IV

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

(a)  Documents filed as part of this report:

     (1) The financial  statements  filed as part of this report are included in
         Item 8.

     (2) The financial  statement  schedule required to be filed as part of this
         report  consists of  Schedule  II  Valuation  and  Qualifying  Accounts
         appearing at the end of this Item.

     (3) The following exhibits are filed as part of this report:

EXHIBIT
NUMBER   DESCRIPTION OF EXHIBIT
-------  ----------------------

 3.1 * Articles of Incorporation dated April 8, 1983.

 3.2     * Articles of  Amendment to Articles of  Incorporation  dated March 20,
         1995.

 3.3 * Articles of Amendment to Articles of Incorporation dated July 28, 1995.

 3.4 *   Bylaws as amended.

10.1 *   The Prudential  Real Estate Affiliates,  Inc. Franchise  Agreement with
         the Registrant, as amended.

10.2     1997  Employee  Incentive  Stock  Option Plan,  incorporated  herein by
         reference to the Registrant's Form 10-QSB filed on May 15, 1997.

21       Subsidiares of the Registrant,  incorporated herein by reference to the
         Registrant's Form 10-KSB filed on January 14, 1999.

27       Financial Data Schedule (filed herewith).


* Filed as an  exhibit  to the  Registrant's  Registration  Statement  under the
Securities Act of 1933, as amended on Form SB-2 (Registration Statement No.
33-98740-D), and incorporated herein by reference.



(b) Reports on Form 8-K:

     The Registrant  filed reports on Form 8-K and Form 8-K/A,  dated August 15,
     1999 during the quarter ended  September 30, 1999  reporting  matters under
     Item 5, Other Events.

(c)  The exhibits  listed under Item 14(a)(3) are filed herewith or incorporated
     by reference.

(d) Financial statement schedules:

     (1)  The  financial  statements  of  MI  Acquisition  Corporation  and  PHS
          Mortgage  Company,  which are  subsidiaries not consolidated and fifty
          percent or less owned, are being filed by amendment within ninety days
          after the end of such subsidiaries fiscal year end.

     (2)  The financial  statement  schedule listed under Item 14(a)(3) is filed
          herewith.


Schedule II - Valuation and Qualifying Accounts:

                                         (Dollars in thousands)

                            Balance at
                            beginning   Charged to                Balance at
                             of year      expense    Deductions   end of year
                           -----------  -----------  -----------  -----------

Year ended September 30,1999

Allowance for doubtful
  accounts                    $     25     $     54     $     54     $     25
Home construction
  warranty reserve                 132          166           90          208
Home construction
  inventory impairment             270           -            90          180
Reserve for abandonment
  of leaseholds                    273           -            38          235


Year ended September 30,1998

Allowance for doubtful
  accounts                    $     76     $      9     $     60     $     25
Home construction
  warranty reserve                 123          108           99          132
Home construction
  inventory impairment               -          270            -          270
Reserve for abandonment
  of leaseholds                      -          273            -          273


Year ended September 30,1997

Allowance for doubtful
  accounts                    $      -     $     76     $      -     $     76
Home construction
  warranty reserve                 133          129          139          123





<PAGE>


SIGNATURES

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

                                  REALCO, INC.

Date: December 27, 1999           By: /s/ JAMES A. ARIAS
                                     ----------------------------------
                                     James A. Arias, President,
                                       Chief Executive Officer, and
                                       Chairman of the Board of Directors


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

      Signature                       Title                    Date
------------------------   ----------------------------  -----------------

/s/ JAMES A. ARIAS         President, Chief Executive    December 27, 1999
-----------------------      Officer and Chairman
    James A. Arias         (Principal Executive Officer)


/s/ CHRIS A. BRUEHL        Senior Vice President and     December 27, 1999
-----------------------      Chief Financial Officer
    Chris A. Bruehl        (Principal Financial and
                               Accounting Officer)


/s/ BILL E. HOOTEN         Executive Vice President      December 27, 1999
-----------------------      and Director
    Bill E. Hooten


/s/ ARTHUR A. SCHWARTZ     Director                      December 27, 1999
-----------------------
    Arthur A. Schwartz


/s/ MARSHALL BLUMENFELD    Director                      December 27, 1999
-----------------------
    Marshall Blumenfeld


/s/ NOEL ZELLER            Director                      December 27, 1999
-----------------------
    Noel Zeller


/s/ MARTIN S. ORLAND       Director                      December 27, 1999
-----------------------
    Martin S. Orland

<PAGE>

Exhibit 21.1


                           MI ACQUISITION CORPORATION
                                AND SUBSIDIARIES

                        Consolidated Financial Statements

                            October 31, 1999 and 1998






                 MI ACQUISITION CORPORATION AND SUBSIDIARIES


                                Table of Contents


                                                                            Page

Independent Auditors' Report                                            1

Consolidated Balance Sheets                                             2

Consolidated Statements of Income                                       4

Consolidated Statements of Shareholders' Equity                         5

Consolidated Statements of Cash Flows                                   6

Notes to Consolidated Financial Statements                              7





<PAGE>



                          Independent Auditors' Report




The Board of Directors
MI Acquisition Corporation:

We have audited the accompanying  consolidated  balance sheets of MI Acquisition
Corporation  and  subsidiaries  as of October 31, 1999 and 1998, and the related
consolidated  statements of income,  shareholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the  financial  position of MI  Acquisition
Corporation and subsidiaries as of October 31, 1999 and 1998, and the results of
their  operations  and their cash flows for the years then ended,  in conformity
with generally accepted accounting principles.




KPMG LLP


Minneapolis, Minnesota
December 17, 1999

<PAGE>

                  MI ACQUISITION CORPORATION AND SUBSIDIARIES
                           Consolidated Balance Sheets
                            October 31, 1999 and 1998



                      Assets                            1999         1998
                                                     ----------   ----------

Cash and cash equivalents                          $  1,439,205    2,016,691
Receivables:
  Customers                                           1,390,753    1,114,183
  Brokers, dealers and clearing organizations            27,660       68,617
  Officers' and employees' notes and advances           130,696      128,944
  Notes receivable                                    1,363,139    1,906,634
  Other receivables                                   1,516,116    2,278,984
                                                     ----------   ----------
    Total receivables                                 4,428,364    5,497,362

Securities inventory                                 26,382,956   17,712,874
Loan participation notes held for sale               12,131,039    4,948,907
Office equipment and leasehold improvements,
  at cost, less accumulated depreciation and
  amortization of $5,140,291 in 1999 and
  $4,681,390 in 1998                                  1,512,254    1,291,618
Deferred taxes                                          500,000      548,230
Goodwill, net of amortization                         4,070,289    4,323,473
Other                                                   862,408    1,061,855
                                                     ----------   ----------

    Total assets                                   $ 51,326,515   37,401,010
                                                     ==========   ==========

See accompanying notes to consolidated financial statements.

                                      2
<PAGE>

                  MI ACQUISITION CORPORATION AND SUBSIDIARIES
                           Consolidated Balance Sheets
                            October 31, 1999 and 1998



        Liabilities and Shareholders' Equity            1999         1998
                                                     ----------   ----------

Demand notes payable                               $ 20,347,870   10,463,755
Accounts payable:
  Customers                                             374,262    1,134,376
  Brokers, dealers and clearing organizations           161,130      883,543
  Operating                                           1,035,395    1,217,506
  Payable to borrowers or participants                6,227,950    1,416,586
                                                     ----------   ----------
    Total accounts payable                            7,798,737    4,652,011

Accrued liabilities                                   4,640,583    4,739,865
Income taxes                                            285,578      140,548
Securities sold, not yet purchased                      302,992       11,501
Term debt                                             6,916,665    8,006,229
                                                     ----------   ----------
    Total liabilities                                40,292,425   28,013,909
                                                     ----------   ----------

Commitments and contingencies (note 8)

Shareholders' equity:
  Common stock, $.01 par value, 90,000,000
    shares authorized; 938,950 issued and
    outstanding in 1999 and 1998, respectively;           9,390        9,390
    preferred stock, $.01 par
    value, 10,000,000 shares authorized; none
    issued and outstanding
  Additional paid-in capital                          8,537,053    8,537,053
  Retained earnings                                   2,487,647    1,340,658
    Less:  Note receivable from
             shareholder (note 10)                           -      (500,000)
                                                     ----------   ----------
    Total shareholders' equity                       11,034,090    9,387,101
                                                     ----------   ----------
    Total liabilities and shareholders' equity     $ 51,326,515   37,401,010
                                                     ==========   ==========
<PAGE>


                  MI ACQUISITION CORPORATION AND SUBSIDIARIES
                        Consolidated Statements of Income
                      Years ended October 31, 1999 and 1998

                                                        1999         1998
                                                     ----------   ----------

Revenues:
  Securities underwriting and sales                $ 16,617,171   23,821,848
  Loan origination fees                              13,277,792    7,585,732
  Interest income                                     2,774,697    1,957,519
  Other income                                        3,576,086    2,050,089
                                                     ----------   ----------
    Total revenues                                   36,245,746   35,415,188

Expenses:
  Employee compensation:
    Management and underwriting salaries              6,741,204    6,582,929
    Sales commissions                                 5,733,152    5,959,824
    Bonuses and incentive compensation                3,178,843    4,003,277
    Office, clerical and support salaries             2,381,233    2,307,778
    Benefits and other personnel costs                2,515,568    2,129,441
                                                     ----------   ----------
    Total employee compensation                      20,550,000   20,983,249

General and administrative                           11,516,983   10,409,470
Interest expense                                      2,093,274    2,021,719
                                                     ----------   ----------
    Total expenses                                   34,160,257   33,414,438
                                                     ----------   ----------

    Income before income taxes                        2,085,489    2,000,750

Income tax expense                                      938,500      904,400
                                                     ----------   ----------
    Net income                                     $  1,146,989    1,096,350
                                                     ==========   ==========

See accompanying notes to consolidated financial statements.


                                      4
<PAGE>
                  MI ACQUISITION CORPORATION AND SUBSIDIARIES
                Consolidated Statements of Shareholders' Equity
                          Years ended October 31, 1999



                                                           Additional
                                                Common      paid-in
                                   Shares       stock       capital
                                 ----------   ----------   ----------

Balance, October 31, 1997           875,850  $     8,759    7,906,684

  Stock issued                       73,500          735      734,265
  Stock redeemed                    (10,400)        (104)    (103,896)
  Net income                             -            -            -
                                 ----------   ----------   ----------

Balances, October 31, 1998          938,950        9,390    8,537,053

  Note receivable collected              -            -            -
  Net income                             -            -            -
                                 ----------   ----------   ----------

Balances, October 31, 1999          938,950  $     9,390    8,537,053
                                 ==========   ==========   ==========


                                              Less: Note      Total
                                  Retained    receivable   shareholder's
                                  Earnings     (note 10)      equity
                                 ----------   ----------   -------------

Balance, October 31, 1997       $   244,308          -         8,159,751

  Stock issued                           -     (500,000)         235,000
  Stock redeemed                         -           -          (104,000)
  Net income                      1,096,350          -         1,096,350
                                 ----------   ----------   -------------

Balances, October 31, 1998        1,340,658    (500,000)       9,387,101

  Note receivable collected              -      500,000          500,000
  Net income                      1,146,989          -         1,146,989
                                 ----------   ----------   -------------

Balances, October 31, 1999      $ 2,487,647          -        11,034,090
                                 ==========   ==========   =============

See accompanying notes to consolidated financial statements.


                                      5
<PAGE>

                  MIACQUISITION   CORPORATION  AND   SUBSIDIARIES   Consolidated
                    Statements  of Cash Flows Years  ended  October 31, 1999 and
                    1998


                                                        1999         1998
                                                     ----------   ----------

Operating activities:
  Net income                                       $  1,146,989    1,096,350
  Adjustments to reconcile net income to net
    cash provided (used) for operating
    activities:
      Depreciation                                      613,872      404,742
      Amortization of goodwill                          253,184      248,151
      Receivables                                     1,068,998    4,483,748
      Securities inventory                           (8,670,082)  21,581,008
      Loan participation notes held for sale         (7,182,132)   3,968,234
      Deferred taxes                                     48,230      276,990
      Other assets                                      199,447       96,946
      Accounts payable                                3,146,726    1,743,063
      Accrued liabilities                               (99,282)     306,206
      Income taxes                                      145,030      140,548
      Securities sold, not yet purchased                291,491           -
                                                     ----------   ----------
        Net cash provided (used) for
          operating activities                       (9,037,529)  34,345,986

Investing activities:
  Goodwill adjustments (note 1)                              -       477,283
  Purchase of MSAM                                           -      (813,331)
  Payments for office equipment and leasehold
    improvements, net                                  (834,508)    (862,805)
                                                     ----------   ----------
        Net cash used for investing activities         (834,508)  (1,198,853)

Financing activities:
  Borrowings (repayments) under demand notes
    payable, net                                      9,884,115  (32,079,245)
  Net payments of term debt                          (1,089,564)  (1,713,376)
  Proceeds from note receivable to shareholder          500,000           -
  Stock issued in connection with purchase
    of MSAM                                                  -       235,000
  Payments for stock redeemed                                -      (104,000)
                                                     ----------   ----------
        Net cash provided (used) by
          financing activities                        9,294,551  (33,661,621)
                                                     ----------   ----------
        Net decrease in cash                           (577,486)    (514,488)


Cash and cash equivalents, beginning of year          2,016,691    2,531,179
                                                     ----------   ----------
Cash and cash equivalents, end of year             $  1,439,205    2,016,691
                                                     ==========   ==========

Supplemental  disclosures  of cash flow  information:  Cash paid during the year
  for:
    Interest                                       $  1,975,727    2,105,641
    Income taxes                                        745,239      702,887


See accompanying notes to consolidated financial statements.

                                      6
<PAGE>

                  MI ACQUISITION CORPORATION AND SUBSIDIARIES
                  Notes to Consolidated Financial Statements
                            October 31, 1999 and 1998


(1)  Summary of Significant Accounting Policies

MI  Acquisition  Corporation  (MIAC)  and  subsidiaries  (the  Company)  provide
investment  banking  and  advisory  services;  securities  sales,  trading,  and
underwriting  services;  and services pertaining to the origination,  financing,
and sales of loan participation  notes. MIAC is the parent company of Miller and
Schroeder, Inc. (MSI) which in turn is the parent company of: Miller & Schroeder
Financial, Inc. (MSF), Miller & Schroeder Investments Corporation (MSIC), Miller
& Schroeder Small Business  Capital  Corporation  (SBCC),  Pooled Loan Marketing
Corporation  (PLMC),  Miller & Schroeder Capital  Corporation  (MSCC),  Miller &
Schroeder Mortgage  Corporation (MSMC), and Miller & Schroeder Asset Management,
Inc. (MSAM).

MSF is a registered  broker-dealer in securities  under the Securities  Exchange
Act of 1934 and underwrites municipal and corporate securities. MSF also markets
and trades fixed income and equity securities. Effective November 8, 1999, MSF's
entire  account  base was  converted to a third party  clearing  firm on a fully
disclosed basis.

The primary  business of MSIC is the  origination,  financing,  and sale of loan
participation  notes and lease  transactions  which are  collateralized  by real
estate and/or equipment.  These transactions are sold through  arrangements made
by MSF in the form of nonrecourse loan participation notes. These sales are made
to unaffiliated  institutional  and other investors.  MSIC is also the servicing
agent for loan participation  notes of $889 and $639 million at October 31, 1999
and 1998, respectively.

All material  intercompany  balances and  transactions  have been  eliminated in
consolidation.

In 1997, MIAC was formed and acquired all of the issued and  outstanding  common
stock  of MSI for  $13,930,415.  The  transaction  has been  accounted  for as a
purchase.  The cash purchase of outstanding MSI stock was partially  financed by
$6,500,000  of term debt and the issuance of  $6,729,000 of common stock equity.
The excess of the purchase  price over the fair market value of  identified  net
assets  acquired of $4,289,192 was allocated to goodwill.  Goodwill is amortized
on a  straight-line  basis over a period of 20 years.  During  fiscal 1998,  the
Company made  purchase  accounting  adjustments  resulting in a net reduction to
goodwill of $477,283.

In February 1998, MIAC acquired all of the issued and  outstanding  common stock
of MSAM for $813,331  including the  assumption of net  liabilities of $542,864.
The purchase was partially financed by the issuance of $235,000 of common stock.
The excess of the purchase  price over the fair market value of  identified  net
assets acquired of $813,331 was allocated to goodwill.  Goodwill is amortized on
a straight-line basis over a period of 20 years.

The following is a summary of significant  accounting  policies  followed by the
Company:

     (a)  Cash and Cash Equivalents

     For financial  reporting  purposes,  the Company  considers all investments
     with original  maturities  of three months or less to be cash  equivalents.
     Included in cash at October 31, 1998 is $1,200,000  segregated in a special
     bank account for the  exclusive  benefit of customers  under Rule 15c3-3 of
     the Securities and Exchange Commission.  Amounts required to be segregated,
     however,  at October 31, 1998 was  $810,712  and no balance was required at
     October 31, 1999.
                                      7

<PAGE>

                  MI ACQUISITION CORPORATION AND SUBSIDIARIES
                  Notes to Consolidated Financial Statements
                            October 31, 1999 and 1998


     (b)  Repurchase and Resale Transactions

     Transactions  involving  purchases of securities under agreements to resell
     (reverse repurchase  agreements) or sales of securities under agreements to
     repurchase   (repurchase   agreements)   are  accounted  for  as  financing
     transactions  and are recorded at the contract amount plus accrued interest
     at which the securities will be subsequently resold or reacquired.

     (c)  Securities Transactions and Loan Participation Notes Held for Sale

     Securities  inventories are carried at estimated current market values. The
     difference  between  cost and market  value is included  in  revenues  from
     profits on securities trading.

     Loan  participation  notes  held  for  sale  are  carried  at the  lower of
     aggregate   cost  or  market  value.   Substantially   all  of  these  loan
     participation  notes were sold  subsequent  to October 31, 1999 and 1998 at
     prices that approximated their carrying values.

     Purchases and sales of securities  (including sales of loan participations)
     are recorded on a settlement date basis. The difference  between trade date
     basis and settlement  date basis  accounting did not have a material effect
     on the Company's financial position or results of operations.

     (d)  Office Equipment and Leasehold Improvements

     Office  equipment and leasehold  improvements are stated at net book value.
     Equipment is  depreciated  on a  straight-line  or  accelerated  basis over
     estimated useful lives of five to seven years.  Leasehold  improvements are
     amortized using the straight-line  method over the lesser of the respective
     lease term or estimated useful life of the improvements.

     (e)  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.

     (f)  Stock-based Compensation

     The Company  accounts for  stock  option grants using APB Opinion No. 25
     (APB No. 25) and,  accordingly,  does not recognize compensation expense
     related to option grants.  The Company, however,  applies the disclosure
     provisions of Statement of Financial Accounting Standards No. 123  (SFAS
     No. 123), Accounting for Stock-based Compensation.


                                      8
<PAGE>

                  MI ACQUISITION CORPORATION AND SUBSIDIARIES
                  Notes to Consolidated Financial Statements
                            October 31, 1999 and 1998


(2)  Securities Inventory and Loan Participation Notes Held for Sale

Securities positions,  net of securities sold, not yet purchased,  at October 31
are summarized as follows:
                                                        1999         1998
                                                     ----------   ----------

      Municipal securities                         $ 19,005,501   16,189,420
      U.S. Government and Government
        agency securities                               255,072        3,021
      Other                                           6,819,391    1,508,932
                                                     ----------   ----------

        Total                                      $ 26,079,964   17,701,373
                                                     ==========   ==========

Loan  participation  notes held for sale at October 31,  1999 and 1998  totaling
$12,131,039 and $4,948,907,  respectively, represent the unsold portions of real
estate  mortgage and equipment loan  financings with interest rates ranging from
7.25% to 10.00%.

(3)  Notes Receivable

Notes receivable at October 31, 1999 and 1998,  consist of $25,000 and $102,233,
respectively,  of short-term  notes and  $1,338,139  and $1,804,401 of long-term
notes, respectively. The long-term notes are collateralized by real estate, have
maturity  dates ranging from 2001 through 2005 and have  interest  rates ranging
from 9.41% to 12.43%.  The  short-term  notes  relate to  temporary  advances to
issuers.


(4)  Funds Held in Escrow

In  connection  with MSIC's  loan  servicing  activities,  funds for real estate
taxes,   insurance,   and  certain  reserve  accounts,   including  amounts  for
construction participations, are collected and held in escrow in accordance with
loan  documents.  Funds  held in escrow  as of  October  31,  1999 and 1998 were
$19,399,129 and $20,231,657,  respectively.  These funds are not included in the
Company's balance sheets.

(5)  Financing Arrangements

     (a)  Demand Notes Payable

     MSF has financing  arrangements with several financial institutions and may
     borrow up to an aggregate  of $51 million.  MSF's  trading  securities  and
     certain assets are pledged as collateral under these arrangements.  Amounts
     borrowed under these  arrangements  fluctuate  daily based on the timing of
     customer and broker-dealer trades and issues underwritten by MSF. The terms
     and expiration dates of these facilities are periodically renegotiated.  At
     October 31, 1999 and 1998,  $11,050,000 and $5,875,000 were outstanding and
     $39,950,000   and   $45,125,000   were   available  on  these   facilities,
     respectively. MSF is expected to maintain agreed-upon compensating balances
     with the financial  institutions.  MSF's interest rates on these borrowings
     fluctuate with the daily federal funds rate. The rates in effect at October
     31,  1999 and  1998,  ranged  from  6.55% to  6.875%  and  6.925%  to 7.0%,
     respectively.

                                      9
<PAGE>

                  MI ACQUISITION CORPORATION AND SUBSIDIARIES
                  Notes to Consolidated Financial Statements
                            October 31, 1999 and 1998


     MSIC has a $5 million credit facility with a financial institution, and may
     draw up to $10 million on MSF's  credit  facility.  At October 31, 1999 and
     1998,  MSIC had  $7,825,000  and  $4,500,000  outstanding  on these  credit
     facilities,  respectively.  MSIC may borrow funds under terms of the demand
     note to finance loan participation notes up to predefined amounts, with the
     underlying  notes pledged as collateral.  Interest accrues at the financial
     institution's  base rate plus 1% (9.25%  at  October  31,  1999 and 9.0% at
     October 31, 1998).

     SBCC has a $1 million credit facility with a financial institution which is
     secured by notes receivable,  and may draw up to $4 million on MSF's credit
     facility.  At October 31, 1999,  there was a balance on these facilities of
     $1,284,000 and at October 31, 1998, $0 was outstanding. Interest accrues at
     the financial institution's federal funds rate plus 1.5% (6.875% at October
     31, 1999).

     MSCC has a note payable to a limited partnership of $188,870 at October 31,
     1999 that is payable on demand. Interest accrues on this note at 7.25%.

     (b) Term Debt


     Term debt outstanding as of October 31 consisted of :

                                                        1999         1998
                                                     ----------   ----------

     Pollution Control  Financing  Certificates  collateralized by certain notes
       receivable guaranteed by the Small Business Administration:
         9%, due in annual installments through
           October 2001,                           $  1,095,000    1,575,000
         12.25%, due in March 2005.                     182,000      182,000

     Notes payable, 8.5%, due in monthly
       installments through February 2000,
       collateralized by equipment.                       3,855       14,789

     Notes  payable,  (8.45% to 9.20% and  10.375% at October 31, 1999 and 1998,
       respectively),   due  in   monthly   installments   through   June  2003,
       collateralized by certain furniture and
       office equipment.                                766,566    1,105,192

     Notes  payable,  prime rate plus 1% (9.25% and 9.0% at October 31, 1999 and
       1998,  respectively),  due in monthly  installments through October 2001,
       collateralized
       by note receivable.                              399,988      599,992

     Note payable to shareholder of the Company,
       6.5%, due in annual installments through
       January 2003.                                    289,256      289,256

                                      10
<PAGE>

                  MI ACQUISITION CORPORATION AND SUBSIDIARIES
                  Notes to Consolidated Financial Statements
                            October 31, 1999 and 1998


                                                        1999         1998
                                                     ----------   ----------

     Revolving line of credit, prime rate plus 1% (9.25% and 9.0% at October 31,
       1999 and 1998, respectively), due in quarterly
       installments through September 2002.           1,680,000    2,240,000

     Notes payable, federal funds rate plus 1.5% (6.875% and 7.0% at October 31,
      1999  and  1998,   respectively),   due  September   2002  or  on  demand,
      collateralized by marketable
      securities.                                     2,000,000    2,000,000

     Note payable to shareholder of the Company,
       7% due December 15, 1999.                        500,000           -
                                                     ----------   ----------

                                                   $  6,916,665    8,006,229
                                                     ==========   ==========


     The  revolving  line of  credit  is  collateralized  by all  assets  of the
     Company.  The  Company is  required  to meet  certain  operating,  capital,
     coverage, and debt related covenants under these agreements.


     Maturities of term debt outstanding at October 31, 1999 are as follows:

          2000                               $  2,170,108
          2001                                  1,512,906
          2002                                  2,660,904
          2003                                    390,747
          2004                                         -
          Thereafter                              182,000
                                               ----------
                                             $  6,916,665
                                               ==========

(6)  Income Taxes

The Company files  combined  state income tax returns,  except in certain states
where separate  returns are filed,  and files a consolidated  federal income tax
return.
                                      11
<PAGE>

                  MI ACQUISITION CORPORATION AND SUBSIDIARIES
                  Notes to Consolidated Financial Statements
                            October 31, 1999 and 1998


The income tax provision reflected in the accompanying  consolidated  statements
of income consists of:
                                                        1999         1998
                                                     ----------   ----------
     Current:
       Federal                                     $    685,000      897,000
       State                                            212,000       32,000
     Deferred                                            41,500      (24,600)
                                                     ----------   ----------

                                                   $    938,500      904,400
                                                    ===========   ==========

The Company had net  deferred tax assets of $500,000 and $548,230 at October 31,
1999 and  1998,  respectively.  The  temporary  differences  that give rise to a
significant  portion of the  deferred  tax asset  relate  primarily  to deferred
income and compensation related accruals.

In assessing  the  realizability  of deferred tax assets,  management  considers
whether it is more likely than not that some  portion or all of the deferred tax
assets will not be realized.  Management  considers  the  scheduled  reversal of
deferred tax  liabilities,  projected  future taxable  income,  and tax planning
strategies in making this assessment. In order to fully realize the deferred tax
asset, the Company will need to generate sufficient future taxable income. Based
upon the levels of historical  taxable  income,  projections  of future  taxable
income,  and the ability to carry  losses back,  management  believes it is more
likely than not that the Company  will  realize the benefits of the deferred tax
asset as of October 31, 1999 and 1998.


The effective tax rate is calculated  using the provision for income taxes.  The
difference between the U.S. Federal Statutory rate and the effective tax rate is
as follows:
                                                        1999         1998
                                                     ----------   ----------

     Statutory tax rate at October 31                    34.00%       34.00%

     Effect of items on tax rate and provision amounts:
         State taxes (net of federal benefit)             6.71%        7.72%
         Tax exempt income                               (8.40%)      (5.87%)
         Non deductible goodwill                          4.13%        4.22%
         Meals and Entertainment                          3.67%        0.00%
         Other                                            1.16%        5.13%
         Additional provision for income taxes            3.73%        0.00%
                                                     ----------   ----------
     Effective tax rate at October 31                    45.00%       45.20%
                                                     ==========   ==========

                                      12
<PAGE>

                  MI ACQUISITION CORPORATION AND SUBSIDIARIES
                  Notes to Consolidated Financial Statements
                            October 31, 1999 and 1998


(7)  Net Capital Requirements

As a  broker-dealer,  MSF is subject to the Securities  and Exchange  Commission
Uniform Net Capital  Rule (Rule  15c3-1),  which  requires  the  maintenance  of
minimum net capital. MSF has elected to use the alternative method, permitted by
the Rule,  which  requires  that MSF maintain  minimum net capital,  as defined,
equal to the greater of $250,000 or 2% of aggregate debit balances  arising from
customer  transactions,  as defined.  At October 31, 1999, MSF's net capital, as
defined,  of  $4,743,999  and  was  331% of  aggregate  debit  balances  and was
$4,493,999 in excess of the minimum net capital required.

(8)  Commitments and Contingencies

     (a)  Underwriting Commitments

     In  the  ordinary  course  of  business,   MSF  enters  into   underwriting
     commitments.  Transactions  relating to such underwriting  commitments that
     were open at October 31, 1999 have subsequently settled and had no material
     affect on the financial statements.


     (b)  Operating Leases

     The Company has operating lease  commitments  expiring at various dates for
     its offices and  certain  equipment.  Rental  expense  was  $1,326,800  and
     $1,292,821 for fiscal 1999 and 1998, respectively.  Future minimum payments
     under operating leases are as follows:


          Fiscal year:
            2000                                $  1,572,764
            2001                                   1,485,585
            2002                                   1,481,509
            2003                                   1,167,656
            2004                                   1,053,599
            Thereafter                             2,094,904


     (c)  Employee Benefit Plan

     The Company has a 401(k) plan that allows employees to contribute a portion
     of their  compensation.  The expense  related to this plan was $308,050 and
     $285,990 for the years ended October 31, 1999 and 1998, respectively.

     (d)  Contingencies

     In the normal course of business,  the Company,  from time to time, becomes
     involved in claims and litigation that may ultimately result in a liability
     to the  Company.  It is the opinion of  management  that facts known at the
     present  time do not  indicate  that the  ultimate  resolution  of any such
     claims  or  litigation  would  have a  material  effect  on  the  Company's
     operations or its financial position.

                                      13
<PAGE>

                  MI ACQUISITION CORPORATION AND SUBSIDIARIES
                  Notes to Consolidated Financial Statements
                            October 31, 1999 and 1998


     (e)  Other

     As of October 31, 1999 and 1998, MSIC had committed to advance $144,369,047
     and $47,440,244,  respectively, in construction loans. Concurrent with this
     commitment,  MSIC has entered into  commitments  to sell these loans in the
     form of nonrecourse loan participation notes.

(9)  Financial Instruments with Off-Balance-Sheet Risk

In the ordinary course of business,  the Company's securities activities involve
execution,  settlement,  and  financing of various  securities  transactions  as
principal  and agent.  These  activities  may  expose the  Company to credit and
market  risks  in  the  event  customers,  other  brokers  and  dealers,  banks,
depositories,  or  clearing  organizations  are  unable to  fulfill  contractual
obligations. Such risks may be increased by volatile trading markets.

The Company records customer securities transactions on a settlement date basis.
The Company is therefore exposed to off-balance-sheet  risk of loss on unsettled
transactions  in the event  customers  and other  counterparties  are  unable to
fulfill contractual obligations.

The Company also may assume short positions in its inventory. These transactions
result in off-balance-sheet  market risk as the Company's ultimate obligation to
satisfy the short sale may exceed the amount recognized in the balance sheets.

The Company also may lend money subject to reverse  repurchase  agreements.  All
positions are collateralized,  primarily with U.S. Government or U.S. Government
agency  securities.  The  Company's  policy is to take  physical  possession  of
securities  purchased under agreements to resell.  Such  transactions may expose
the Company to risk in the event such  borrowers  do not repay the loans and the
value of collateral held is less than that of the underlying  receivable.  These
agreements  provide the  Company  with the right to  maintain  the  relationship
between market value of the collateral and the receivable.


The  Company  does not believe  that it has any  significant  concentrations  of
credit risk.

(10)  Stock Option Plans

The Company  maintains two fixed stock  compensation  plans,  the MI Acquisition
Corporation Stock Option Plan and the Director Stock Option Plan, which are used
to provide  stock  incentives  to key  employees  and outside  directors  of the
Company.  Each Plan  authorizes  the  grant of  incentive  and/or  non-qualified
options with an exercise price equal to the fair value of the common stock as of
the grant date.  Vesting periods for the options range from  immediately to five
years and expire ten years from the date of grant. At October 31, 1999 and 1998,
136,287 and 158,912  shares of common stock,  respectively,  were  available for
grant under the Stock  Option Plan and 39,500 and 47,000  shares were  available
for grant under the Director Stock Option Plan.

The company  granted  50,000 options during the year ended October 31, 1997 to a
director of the company in connection  with the MSI  acquisition.  These options
were exercised effective August 1, 1998 and 50,000 shares were issued at a price
of $10  per  share.  The  Company  recorded  a loan  to the  director  for  this
subscription.  The  $500,000  outstanding  balance of this note  receivable  was
collected in full during fiscal 1999.
                                      14
<PAGE>

                  MI ACQUISITION CORPORATION AND SUBSIDIARIES
                  Notes to Consolidated Financial Statements
                            October 31, 1999 and 1998


The Company applies APB No. 25 and related Interpretations in accounting for its
stock option plan.  Accordingly,  no compensation expense has been recognized in
the consolidated  financial statements for stock option grants. Had compensation
expense  been  determined  based on the fair value of the  options at grant date
consistent  with  SFAS  No.  123,  the  Company's  consolidated  net  income  of
$1,146,989 and  $1,096,350 for the years ended October 31, 1999 and 1998,  would
have been $1,093,913 and $985,921, respectively.

The weighted average  per-share fair value of options granted during fiscal 1999
and 1998 was  $3.54  and  $1.87,  respectively.  The fair  value of each  option
granted is  estimated  on the date of grant using the Minimum  Value Method with
the following  weighted  average  assumptions  used for grants in 1999 and 1998;
dividend yields of 0%;  expected  volatility of 0%;  risk-free  interest rate of
5.97% in 1999 and  4.22% in  1998;  and  expected  life of 5 years in 1999 and 5
years in 1998. Pro forma amounts may not be indicative of future results.

The following  table  summarizes  the activity  related to the  Company's  stock
options for the year ended October 31, 1999 and 1998:

                                              1999              1998
                                       -----------------  -----------------
                                                Weighted           Weighted
                                                average            average
                                                exercise           exercise
                                       Shares   price     Shares   price
                                       -------  --------  -------  --------

    Options outstanding at
      beginning of year                144,088   $ 10.00   50,000   $ 10.00

      Granted                           34,000     13.72  144,088     10.00
      Exercised                             -         -   (50,000)    10.00
      Canceled, forfeited or expired    (3,875)    10.00       -         -
                                       -------  --------  -------  --------
    Options outstanding at
      end of year                      174,213   $ 10.73  144,088   $ 10.00
                                       =======  ========  =======  ========

The options  outstanding  at October  31, 1999 and 1998 have a weighted  average
remaining contractual life of nine and nine years, respectively.

                                       15

<PAGE>