UNITED STATES
                SECURITIES AND EXCHANGE COMMISSION
                      Washington, D.C. 20549
                            FORM 10-KSB

                            (Mark One)

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

           For the fiscal year ended September 30, 1998

   [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE
                   ACT OF 1934 [NO FEE REQUIRED]

                 Commission File Number:  0-27552

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

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

   1650 University Boulevard, N.E., Suite 5-100, Albuquerque, New
                           Mexico, 87102
   ------------------------------------------------------------
  (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)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 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____.

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year: $36,395,184

State the  aggregate  market  value of the voting  stock held by  non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked  prices of such stock,  as of a specified  date within the past 60
days: On January 12, 1999, based on the price quoted by NASDAQ, the market value
was $3,420,625.

The number of shares  outstanding of each of the Registrant's  classes of voting
stock, as of December 23, 1998 , was:

     No Par Value Common:           2,767,000 shares.
     Series A Preferred:               82,569
     Series B Preferred:              212,859
     Series D Preferred:               23,919

PART I

ITEM 1:  DESCRIPTION OF BUSINESS

General

The  Registrant'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.

REALCO,  INC.,  a  New  Mexico  corporation  ("Realco",   hereinafter  with  its
subsidiaries  referred to  collectively as the  "Registrant"),  was organized in
1983 as a private  company and its  business was that of an  investment  company
providing  funds to  others  in the form of loans or  equity  interests  through
September 30, 1994.  Through its wholly owned subsidiary,  Great American Equity
Corporation  and  referred  to  hereafter  as  ("GAEC"),  it was  engaged in the
business of arranging and participating in secured loans involving various forms
of real  estate  acquisitions  and  ventures.  Beginning  October 1,  1994,  the
Registrant  changed  its  business  strategy  and  developed  a plan to create a
financial group of interrelated companies to provide a full range of real estate
services.

This Form 10-KSB,  including "Management's  Discussion and Analysis of Financial
Condition and Results of Operations" contains forward-looking  statements within
the  meaning of Section  27A of the  Securities  Act of 1933,  as  amended,  and
Section 21 E of the  Securities  Exchange Act of 1934, as amended,  that are not
historical  facts.  Such  forward-looking   information  may  include,   without
limitation,   statements  that  the  Company  does  not  expect  that  lawsuits,
environmental costs, commitments,  contingent liabilities, labor negotiations or
other matters will have material  adverse effect on its  consolidated  financial
condition,  results of operations  or liquidity  and other  similar  expressions
concerning  financial results.  Such statements are subject to certain risks and
uncertainties  which could cause actual results to differ  materially from those
anticipated  in the  forward-looking  statements.  Important  factors that could
cause such differences include but are not limited to contractual relationships,
industry competition,  regulatory  developments,  natural events such as weather
conditions,  changes in the real estate markets and interest rates,  fuel prices
and ultimate  outcome of environmental  investigations  or proceedings and other
types of claims and litigation.

On  March  14,  1995,  the  Registrant  entered  into an  agreement  and plan of
Reorganization  with a New Mexico corporate  holding company and certain of that
company's  shareholders,  which  resulted  in the  Registrant's  acquisition  of
several  wholly-owned  subsidiaries  including  Charter Building and Development
Corp.  (Charter),  a residential  home  building  contractor  and  Hooten-Stahl,
Inc.(dba,  Prudential  Preferred  Properties) a real estate brokerage  business.
Pursuant  to  the   Reorganization   certain  of  the  acquired   corporations's
shareholders exchanged all of their Common Stock, representing approximately 98%
of the outstanding  stock, for an aggregate of 82,569 shares of the Registrant's
Series A  Preferred  Stock  and  228,859  shares  of the  Registrant's  Series B
Preferred Stock.

Following  the  acquisition  of Charter and  Hooten/Stahl,  the  Registrant,  on
February 2, 1996,  successfully  concluded a public  offering of its securities,
consisting of common stock and subordinated debt.

The  Registrant  through its GAEC  subsidiary,  is active in lending  activities
which include residential construction lending, land acquisition and residential
homesite subdivision  development lending and limited computer leasing programs.
GAEC has entered into residential construction participation agreements with two
Albuquerque,  New  Mexico  banks.  The  agreements  between  the  banks  and the
Registrant  includes  among other terms,  that the  Registrant is to provide the
first 25% of all funding  commitments and the banks to provide the remaining 75%
of the  loan  commitment.  GAEC has  also  entered  into  land  acquisition  and
residential  subdivision loan participation  agreements with banks in New Mexico
and Arizona.  Generally,  the Registrant provides from 25% to 40% of the funding
commitments for this activity. The Registrant's portion of this lending activity
is often further leveraged by high net worth private participants. This specific
lending  activity has to date proved to be among the most profitable  activities
of the Registrant.  Agreements  between the Registrant and its bank participants
generally  include  terms which provide that both parties share all revenues and
profits as their interest appear.  In the event of default by the Borrower,  the
participation   agreements  require  that  the  funding   participation  by  the
Registrant  be  fully  subordinate  to  the  outstanding  balance  of  any  bank
participation  included in the joint  lending  program.  The  outstanding  money
balances of the  Registrant  associated  with these lending  activities may vary
from  time to time.  Such  variances  may be caused  by  cyclical  swings in the
market,  loan demand by its customers or cash  availability of the Registrant to
support these activities.  As of September 30, 1998, the Registrant and its bank
partners had  approximately  $3,7000,000  in  outstanding  loans and/or  funding
commitments,   of  which  approximately  $997,000  is  the  Registrant's  direct
participation.  The Registrant  anticipates  limited  funding of its residential
construction  lending capacity during the ensuing fiscal year. This kind of loan
generally  matures  within six months and the Registrant  anticipates  that upon
repayment  of  outstanding  loans  limited  funds  will  be  reinvested  in  the
continuation of this lending activity.

The Registrant  operates PHS, Inc., a joint venture with CTX Mortgage Company, a
full service residential mortgage provider.  The joint venture has operations at
three New Mexico and two Arizona residential brokerage branch locations operated
by the Registrant.  Arizona operations began in August of 1998, and consequently
did not materially  contribute to the September 30, 1998 operating results. PHS,
Inc. recorded approximately $317,000 as its share of earnings for the year ended
September 30, 1998.

Amity, Inc., the Registrant's New Mexico based general  contractor  specializing
in  commercial  construction,   including  commercial  tenant  improvements  and
residential  remodeling was acquired in July, 1996. The Registrant had exchanged
24,297  shares of its Series D  Convertible  Preferred  Stock,  $10.00 per share
liquidation  value,  bearing 3% cumulative  dividend,  for all of the issued and
outstanding Amity shares.

On  February  1,  1998 the  Registrant's  Arizona  Mull  Realty  Company,  Inc.,
subsidiary,  acquired for cash and future contingent payments,  Cliff Winn, Inc.
Realtors,  a  residential  and  commercial  brokerage  company  which  primarily
conducts its business in  Scottsdale,  Mesa and to a lesser  extent,  in central
Phoenix,  Arizona.  The  company  operates  under the trade  name of  Prudential
Preferred  Properties  as does Mull  Realty  Company,  Inc.  The  Registrant  is
currently seeking additional acquisition opportunities in Arizona.

Since the May 1, 1997  acquisition  of First  Commercial  Real Estate  Services,
Inc., a New Mexico based  commercial  brokerage  company,  First  Commercial has
introduced  several  construction  and financing  opportunities  to other of the
Registrants subsidiaries and affiliates.

On  October  7, 1998,  the  Registrant  participated  in the  purchase  of 6,156
additional  outstanding common stock of MI Acquisition  Corporation (MI), parent
company of Miller & Schroeder,  Inc., a financial  sevices firm.  Including this
acquisition  subsequent to fiscal year end, the Registrant through a combination
of Company cash and borrowings owns  approximately 12% of MI and the Registrants
President  has been  appointed to its Board of Directors  and is a member of its
Audit Committee. The Registrant and Miller & Schroeder Financial have engaged in
limited cross market activities of some of its services and products.

Operating Strategy

The Registrant's  business  activities are located in the  metropolitan  area of
Albuquerque,  New Mexico  and  Phoenix,  Arizona.  Since the  completion  of its
Initial  Public  Offering of February  1996,  the  Registrant  has  expanded its
financial,  construction  and brokerage  activities to its core of business in a
continuing  effort  to  become a one  stop  source  for  small  to  medium  size
independent  home  builders and  developers  who may need to acquire  financing,
marketing and sales support.

The  Registrant  believes that it can  capitalize  on its operating  methods and
strategies,  which it is formulating in its existing  markets,  for expansion to
other geographical areas. For example, the Registrant 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  entire  array  of  business  activities  of the
Registrant.

On  a  continuing  basis,  the  Registrant  has  been  exploring  a  variety  of
acquisition  opportunities,  consisting  of service,  product  and  distribution
businesses.  The  Registrant's  acquisition  strategy  complements  the  plan of
internal growth charted for its existing activities.

Inventory Acquisition and Development

During the fiscal year ended September 30, 1998 the Registrant acquired a parcel
of  undeveloped  land for  development of 96 affordable  residential  home sites
located in Las Lunas, New Mexico.  The land purchase and development  costs were
financed by a combination  of the  Registrant's  working  capital funds and bank
financing.

Financing of existing  residential  homesite  inventories  of the Registrant are
generally  first  position  secured loans which are generally  provided by local
banks  with  whom the  Registrant  has  credit  facilities,  on such  terms  and
conditions as are customary in the  geographical  market in which the Registrant
does business. Subordinate second position, secured loans are generally provided
by combination of Registrant  funds and outside third party  participants.  This
tier of subordinated debt is generally granted an "Equity Kicker" in the form of
additional  preferential  payments per  residential lot sold, in addition to the
return of principal and interest.  Interest,  terms and conditions are customary
in the market in which the Registrant  does  business.  The Registrant is almost
always  requested by the first position  lender,  (bank) to guarantee the entire
debt obligations.

The Registrant has from time to time acquired residential building home sites by
utilizing  its  available  cash,  consequently,  a  portion  of the  Registrants
residential homesite building inventory is unencumbered.

From time to time,  the  Registrant  enters  into joint  venture  agreements  to
acquire  undeveloped  parcels of land for development  into  homesites.  In such
instances,  the  Registrant may become a 50% joint venturer and may in addition,
provide  and/or  arrange  financing  to  the  joint  venture  through  its  GAEC
subsidiary.  At this time,  the Registrant is not involved in any existing joint
ventures.

As of  September  30,  1998,  the  Registrant  owned  or  controlled  through  a
combination of unencumbered  ownership,  debt financing and purchase agreements,
over 275  developed  or  currently  under  development,  home  sites  within the
Albuquerque, New Mexico metropolitan area. Inventory of home sites controlled by
the  Registrant,  are utilized by Charter and may also be available  for sale to
other home builders and individuals.

Prudential Preferred Properties of New Mexico represents a number of independent
custom home builders in an exclusive marketing  arrangement.  These builders are
part of a "Builders  Group" within the Prudential  Preferred  Properties  client
base  and may  number  from 15 to as many as 50 at any  given  time.  Any of the
builders  in the  "Builders  Group"  may  draw on the  available  building  site
inventory  controlled by the Registrant.  In addition,  any independent  builder
within the "Builders Group" may secure  residential  construction loans from the
Registrant's  GAEC  lending  subsidiary  subject to credit  approval  and budget
availability.

Competition and Market Factors

Each of the  Registrant's  subsidiaries  competes  principally  on the  basis of
reputation in the community in which it serves. However, the Registrant competes
in a  highly  competitive  environment  typical  of all  real  estate  dependent
companies. All of the Registrant's  subsidiaries compete with companies,  nearly
all of which have greater  financial  resources than the  Registrant.  It is for
that  reason  that the  Registrant  continues  to  undertake  to form  strategic
alliances with other companies with greater

financial resources and expertise.

The  Registrant  believes  that the host of  services it  currently  offers will
appeal to small and medium  size  builders  and  developers.  Since its  Initial
Public Offering, Prudential Preferred Properties of New Mexico has increased the
number of independent custom builders in its "Builder Group". The ability of the
Registrant  to expand its  business  has been due in part to the addition of new
capital from the public securities offering.  The Registrant anticipates that it
will require additional new capital at some future date in order to continue its
ability to expand the segments of its business in which it is currently engaged.

The real estate  industry,  and the  Registrant's  business,  is cyclical and is
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
property taxes,  changes in consumer  preferences and  demographic  trends.  The
Registrant  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.

Employees

As of September 30, 1998, the Registrant,  including its  subsidiaries,  had 127
full and part time salaried employees. They were employed as follows: corporate,
5  full-time:  residential  and  commercial  construction,  35  full-time  and 3
part-time;  and  real  estate  brokerage,  57  full-time  and 27  part-time.  In
addition,  real estate brokerage has  approximately 600 sales associates who are
independent  contractors.  The construction  segment of the Registrant  normally
hires  independent  subcontractors  to  provide  the  skilled  labor  needed  to
construct their projects.

ITEM 2: DESCRIPTION OF PROPERTIES

The Registrant  leases,  on a month to month basis,  approximately  6,600 square
feet of office  space at $4,100  per month for its  executive  and  construction
offices. Mr. James A. Arias, the Registrant's  President, is a part owner of the
building in which the  executive  offices are located.  The  Registrant's  lease
arrangement  is considered a below market lease as to terms and square foot cost
when compared to all other leases currently in effect within the building.

The Registrant leases space for its real estate brokerage  offices,  all located
within the  Albuquerque,  New Mexico and Phoenix,  Arizona  metropolitan  areas.
Leases  include  space  ranging  from 1,200  square feet to 6,000 square feet at
monthly  rental  costs  ranging  from $1,200 per month to $7,200 per month.  One
lease  is with  the  Registrant's  Executive  Vice  President  and  Chairman  of
Prudential Preferred Properties,  NM, Mr. Bill E. Hooten. Prior to entering into
the lease with Mr. Hooten, the Registrant acquired an independent  determination
of fairness and  reasonableness  of the lease and its annual rental of $103,200.
The lease with Mr. Hooten  expired on January 31, 1997,  and has continued to be
in effect month to month.  Lease terms and  conditions  have remained  unchanged
throughout the fiscal year and are expected to remain unchanged. During the past
fiscal  period,   Prudential  Preferred  Properties  of  Arizona,  has  occupied
replacement  office  space  for  each of its  brokerage  offices  as well as its
Arizona corporate office.  Management  believes that the new locations present a
more  favorable  business  image in  addition  to being  strategically  located.
Prudential  Preferred  Properties of New Mexico announced  earlier that it would
occupy on or about April 1, 1999, a new brokerage office location  consisting of
approximately  37,000  square feet.  The new location  will replace four offices
consisting of  approximately  22,500 combined square feet.  Management  believes
that the new location will yield additional operating  efficiencies and provides
space to increase  the  independent  real estate  brokerage  contractor  base in
Albuquerque,  New Mexico by  approximately  60 to 70  additional  agents.  ( See
"Management's   Discussion"   regarding   restructure  and  impairment   charges
associated with this transaction. )

ITEM 3: LEGAL PROCEEDINGS

The  Registrant  is  subject to certain  legal  claims  from time to time and is
involved in litigation  that has arisen in the ordinary  course of its business.
It is the  Registrant's  opinion that it either has adequate  legal  defenses to
such claims or that any liability that might be incurred due to such claims will
not, in the aggregate,  exceed the limits of the Registrant's insurance policies
or  otherwise  result  in  any  material  adverse  effect  on  the  Registrant's
operations or financial position.

On April 11, 1997, the City of Albuquerque instituted  condemnation  proceedings
related  to a parcel  of land  upon  which the  Registrant  has a joint  venture
financing  arrangement for  development.  This matter is more fully described in
the  Registrants  10-QSB  filing of June 30,  1997.  There  has been  continuing
correspondence,  verbally and written between the legal counsel for both parties
in an effort to settle the matter,  and on October 22, 1998,  the matter  became
the  subject  of a trial.  The Jury  found for the  joint  venture  and  awarded
approximately  $9,538,000 to the defendant,  (Registrant's joint venture), which
award would result in additional  payments to the joint venture of approximately
$1,633,000.  ( At the time of the taking by the City,  the City  posted with the
Court, and the joint venture received,  $7,905,000, the sum that the City deemed
fair  compensation.),  however,  the City of  Albuquerque  immediately  filed an
appeal of the jury verdict. On December 30, 1998, the Registrant entered into an
agreement with its joint venture  partner in which the Registrant  exchanged its
interest in the joint venture to its partner,  in exchange for five and one-half
residential  homesites valued at approximately  $550,000.  Management determined
that the exchange of its joint venture interest for readily saleable  homesites,
was in the best interest of the Registrant after considering,  risk, legal costs
of contesting an appeal and the present value of money.

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

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of the fiscal year ended September 30, 1998.

PART II

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

The Registrant's  common stock is traded in the  over-the-counter  market and is
quoted on the National  Association of Securities  Dealers  Automated  Quotation
System  ("NASDAQ") under the symbol "RLCO".  The following table sets forth from
October  1,1996  through  September 30, 1998, the range of the high and low last
reported  sale prices as  reported by NASDAQ.  The  quotations  shown  represent
inter-dealer  prices  without  adjustment  for  retail  markups,   markdowns  or
commissions, and may not reflect actual transactions.

Stock Quotations:

                    High       Low             High      Low

                     Fiscal 1998                Fiscal 1997
 
First Quarter      4            2.625           3 5/8      2
Second Quarter     3.25       2.25              3 1/8      2
Third Quarter      2.75       1.875             2 7/8      2 1/4
Fourth Quarter     2.75       1.375             4          2 1/4

On January 12, 1999,  the last sale price for the common  stock,  as reported by
NASDAQ,  was $1.625 per share. As of January 12, 1999, there were  approximately
680 beneficial holders of the common stock.

The transfer Agent for the Registrant's  Common Stock is American Stock Transfer
& Trust Registrant,  40 Wall Street,  New York City, New York 10005,  telephone:
(718) 921-8275.

The  Registrant 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 Registrant's  Board of Directors and will depend upon the earnings,  capital
requirements  and  operating and financial  condition of the  Registrant,  among
other factors.

ITEM 6: MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

Operation by Segment

Revenues of the Company are  generated  through  the  following  segments:  real
estate brokerage both residential and commercial,  construction both residential
and commercial and financing  activities which include residential  construction
lending  through  participation  agreements  with banks,  land  acquisition  and
development  loans  for  single  family  residential   subdivisions,   and  from
recognition  of earnings  generated by other  entities in which the Company owns
equity  interests  ,  whose  businesses  currently  consist  of  commercial  and
residential  mortgage  lending,  and to a minor  extent,  property  and casualty
insurance.  The Company may participate from time to time as a 50% joint venture
partner while  affiliated  companies my act as a financier,  mortgage  banker or
insurance agent to the joint venture. The Company recognizes its share of income
from affiliate investee's profits and losses on the equity method of accounting.

The Company currently  operates its business within the Albuquerque,  New Mexico
and Phoenix, Arizona metropolitan areas. Since inception, management has planned
expanding the Company's  businesses and business concepts to other  geographical
areas, preferably within the southwest, that have similar demographics.  Because
of the various  businesses  in which the Company is engaged,  it has defined the
following  business  segments for purposes of accounting for revenue,  costs and
expenses:  Real Estate  Brokerage  Segment,  Construction  and Land  Development
Segment and Financial  Services Segment.  These areas of the Company's  business
are more fully discussed below.

Real Estate Brokerage Segment:

The real  estate  brokerage  segment  consists  of  Hooten/Stahl,  Realtors,dba,
Prudential Preferred Properties,  New Mexico,  (acquired in 1995), a residential
new and resale Realtor located in Albuquerque,  New Mexico; Mull Realty Company,
Inc.,  (acquired  January 1, 1997),  dba,  Prudential  Preferred  Properties  of
Arizona,  Cliff Winn, Inc. Realtors,  ( acquired February 1, 1998 by Mull Realty
Company,  Inc.),  a residential  Realtor  located in  Scottsdale,  Arizona which
currently operates as part of Prudential  Preferrred  Properties of Arizona, and
First Commercial Real Estate Services,  Inc. a commercial real estate broker and
property manager located in Albuquerque, New Mexico ( acquired May 1, 1997). The
Company  transferred  ownership  of  the  preceding  companies  to  an  inactive
subsidiary whose name was changed to Real Estate Brokerage Services, Inc. (REBS)
during 1997. This transfer did not affect  operations of this segment;  however,
operations  for 1998 are not  comparable  to 1997  because 1998  includes  eight
months of Cliff Winn, Inc. Realtors operations.

Registrant's   total   revenues  from  brokerage   commissions   and  fees  from
unaffiliated  customers increased $7,496,399 to $21,983,344 in 1998, an increase
of 52% over 1997.

The Arizona  companies  realized an overall  increase in commissions and fees to
unaffiliated  customers of $7,292,000 to $12,409,000 an increase of 143%, (Cliff
Winn,  Inc.  provided  commissions  and  fees of  $4,362,000  for  it's 8 months
operations in 1998). The Arizona  companies,  contributed  $486,000 in operating
profits  with  commissions  paid to  agents  and  operating  and  administrative
expenses  running  75%  and  19% of  commissions  revenue,  respectively.  Lower
operating  expenses in the Phoenix market where sales volumes continue to expand
and  competition  for  agents  (including  semi-retired  agents)  and demand for
expensive  operating services have not been as strong as in the Albuquerque area
have  contributed  to the  performance  variance  between the two  markets.  The
Arizona  company  anticipates  continued good earnings and is continuing to seek
opportunities to expand business operations in the Phoenix market.

The Albuquerque  brokerage companies realized an overall increase in commissions
and fees to unaffiliated customers of $205,000 to $9,575,000,  an increase of 2%
compared to 1997.  This  increase  slightly  trailed  the general  trend for the
Albuquerque market for the period. In addition,  the Albuquerque  companies paid
commissions  to  independent  contractor  agents,  and  incurred  operating  and
administrative  expenses  of  73%  and  41%  respectively  of the  1998  overall
commission  income;  with each being an increase over the comparable 71% and 34%
ratios for  Albuquerque  in 1997.  These  cost  increases  were  partly due to a
decrease of approximately  $502,000 of residential commission income as compared
to 1997, increased  competition for top agents and cost of services provided all
agents and  customers,  all in efforts to retain market share.  The  Albuquerque
companies  realized an operating  loss of  ($1,329,000)  for 1998 compared to an
operating loss of ($541,000 ) in 1998.

Market  conditions  in  residential  resale  activity  continues  to be brisk in
Phoenix,  and Albuquerque  residential  resale activity  continued to experience
modest  increases  during the year, a trend which is expected to continue during
the coming year.  Competition in  Albuquerque  continues  strong,  especially in
services  rendered  customers.  Continuing  mergers and  consolidation  of local
realtors  has  also  apparently  caused a drop in the  total  number  of  agents
remaining active in the local area, causing  troublesome  recruiting  pressures.
Albuquerque  management  has attempted to implement  changes to increase  market
share, lower agent commission  splits,  while reducing the percentage and amount
of operating  costs.  Such efforts  have to date been  unsuccessful.  Management
recently  announced plans to close four residential  branch offices and relocate
them by  March 1,  1999,  into a  single,  newly  constructed,  state of the art
facility,  in an effort to entice new recruits and to make available  additional
space to  enable  the  Albuquerque  residential  sales  brokerage  operation  to
increase  its sales force by  approximately  60  additional  agents.  Management
anticipates  that such changes,  if successful  could  significantly  reduce the
operating loss from the  Albuquerque  residential  brokerage  activities for the
year ending in 1999 by increasing market share, increasing commission income and
reducing the percentage of cost of operations and customer services. As a result
of the facilities  relocation,  the Albuquerque  residential brokerage operation
has  incurred a  restructure  charge for the year ending  September  30, 1998 of
$273,000.  This  charge is  associated  with  lease  abandonment  liability  and
expenses,  which are based upon the discounted future  obligations which are not
expected to be recovered through sublease revenues.

The  Albuquerque  commercial  brokerage  activity  realized an operating loss of
($55,000.  The  recruitment  of  additional  sales agents during the 1998 fiscal
period is expected to result in increased commission income for the coming year.
It was reported in Item 1 Description of Business that the  Registrant  expected
the  commercial  real estate  brokerage  activity to increase  construction  and
lending  activities of the Registrant by cross  marketing its customer base. The
Registrant's  commercial  construction  activity continues to benefit from cross
marketing.  Brokerage referrals have included, lease tenant improvements,  light
new construction and general infrastructure construction.

Assets  dedicated to the real estate  brokerage  segment  increased  $484,000 to
$3,920,000 in 1998 over 1997,  primarily due to the February 1, 1998 acquisition
of an Arizona  residential real estate brokerage company.  Depreciation  expense
increased  from that addition and from capital  expenditures  in 1998 which were
almost exclusively at the Albuquerque residential real estate segment.

Construction and Land Development Segment:

The construction  and land  development  segment operates in the Albuquerque and
Rio Rancho,  New Mexico  metropolitan  area, and consists of Charter  Building &
Development  Corp.(Charter) a residential home builder, and Amity, Inc. (Amity),
a company active in commercial  construction  and remodeling of both  commercial
and residential  properties.  This segment also includes The Company's equity in
earnings of joint ventures where the Company or a wholly-owned  subsidiary own a
50%  non-management  interest in land  development  activities which involve the
acquisition of raw land for development  into  residential  home site lots which
may be sold to Charter or to other builders.  The other builders  generally have
their  homes  marketed  by  Prudential  Preferred  Properties  NM,  and may have
construction  financing  through programs offered by the Registrant's  financial
services group.

Combined operating revenues for this segment of the Registrant's  business were,
$13,120,000.  Operating costs were  $13,499,000  which includes a fourth quarter
cost basis impairment  reserve of $281,000.  This segment sustained a year ended
September 30, 1998, operating loss of ($379,000).

Revenues  from  residential  construction  by Charter  decreased  $1,167,000  to
$10,124,000 in 1998, a decrease of 10% over 1997.  Operating  profit for Charter
declined  $260,000 from a loss of ($98,000) in 1997 to a loss of ($358,000)  for
1998, a decline of 265% from 1997. Costs of construction  for Charter  decreased
$954,000  to  $9,643,000  in 1998,  and  operating  costs  increased  $48,000 to
$839,000 in 1998.  Costs of construction  and operating costs were 95% and 8% of
construction  revenues in 1998 compared to 94% and 7%  respectively  for 1997. A
decline in first and  second  quarter  in new home  sales for  Charter,  and the
addition of a fourth quarter  impairment  write off of $270,000,  contributed to
significant  drop  in  operating   profit  for  Charter.   Completed  model  and
speculative  (Spec)  homes  required  discount  prices to sell when  compared to
similar  sized  houses  offered by other  builders.  The costs to  maintain  and
advertise  these models and spec homes added to  operating  costs in relation to
revenues.  Charter follows the completed  contract  method for residential  home
building and sales, with inventories valued at cost, not to exceed market value.
A year end  analysis of Charter's  inventory of finished  homes and building lot
inventory,  suggested that the cost basis of some of its inventory was in excess
of estimated market value, and was therefore  subject to impairment  adjustments
as referred to above. Charter has developed a new line of value engineered homes
in various price  ranges,  which it is currently  marketing.  Analysis of recent
sales of this new product  line,  indicate  improved  market appeal and improved
margin of profit.

Charter sold 52 new homes at an average  sales price of  approximately  $195,000
and had a backlog of 51 homes under  contract at  September  30,  1998,  with an
indicated revenue of approximately  $$9,000,000.  At September 30, 1998, Charter
had over 275 lots available for new home construction,  either owned directly by
Charter,  or by affiliated  land  development  operations or under  contract for
purchase.  The lots may be used by Charter or sold to other  builders  as market
conditions warrant.

Revenues  from  commercial  construction  and  remodeling  decreased  $26,000 to
$1,724,000 in 1998, a decrease of 1% from 1997. Operating profits decreased from
$165,000  in  1997  to an  operating  loss of  $49,000  in  1998  with a cost of
construction  being 88% and  operating  expenses 15% of  revenues.  As discussed
earlier,  the  Registrant's  commercial  real  estate  brokerage  company  gives
referrals to Amity for  commercial  construction  jobs. The expansion of Amity's
offices and the addition of personnel,  have contributed to increased  operating
costs,  however,  this is expected to increase Amity's revenue and profitability
in the coming year.  Amity has a backlog  under  contract at September  30, 1998
with estimated revenue of $1,500,000.

Earnings from equity 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 Registrant  acquiring its other  partner's  interests in two joint
ventures  which  are now  accounted  for as  wholly-owned  subsidiaries  and the
Registrant is not currently a joint venture partner in any  development  project
with  significant  inventory.  Most of the  building lot  inventory  held by the
Registrant  is  wholly  owned,  therefore,  gains  on sale of  building  lots to
affiliates  are not recognized  until sales are closed.  As the backlog of homes
are closed,  gains on sale of Registrant owned building lots will be recognized.
At September  30, 1998,  the deferred gain on  intercompany  sales was $102,000.
Earnings from equity in land flowed  primarily from the sale of the Registrant's
inventory.

During 1998,  the Registrant  acquired an undeveloped  land parcel and completed
development  of 96 home  building  lots in Las  Lunas,  New  Mexico,  a  bedroom
community,  approximately  15 miles from  Albuquerque.  This  development is not
subject  to a joint  venture  agreement,  and all  building  lots are  currently
reserved for Charter. Charter is offering a complete line of entry level housing
ranging in price from $89,900 to $117,900.  Management believes that the sale of
this housing  project  will be  substantially  completed by September  30, 2000.
Subdivision  costs  are  budgeted  at  approximately  $1,700,000  of  which  the
Registrant has arranged bank borrowing of approximately $1,150,000.

Assets identified in the residential  construction activity increased $2,836,000
to $17,693 in 1998,  an increase  of 19% over 1997.  The  primary  increase  was
approximately  $2,946,000 of land held by the land  development  division of the
Registrant  rather than being held by a joint venture with only the Registrant's
50% of net equity being on the balance sheet.

Financial Services Segment:

The financial  services  segment consists of the Registrant,  its  subsidiaries,
Great American Equity Corporation (GAEC) and PHS, lnc. Operations include equity
earnings of various finance entities.

Equity earnings from investees consisted  principally of (1) 50% interest in PHS
Mortgage  partnership,  which share was $317,000 in 1998 compared to $249,000 in
1997,  and (2) 12.0%  interest in MI  Acquisition  Corporation,  which share was
$13,000, in 1998 compared to $30,000 in 1997.

First American Title Company of New Mexico, a publicly held  corporation,  which
the  Registrant  previously  owned  20%  equity  was sold for  $500,000  cash in
November, 1997 resulting in a gain of $334,000.

PHS,  Inc.,  (PHS)  owns  a  49.99%  interest  in  PHS  Mortgage  Company,  (the
"Partnership") a New Mexico general  partnership  managed by general partner CTX
Mortgage Ventures  Corporation (CTX Ventures).  The Partnership was organized in
April, 1996, for the purpose of originating and selling mortgage loans and to be
involved in other  mortgage  banking  activities  related  thereto.  Partnership
revenues consist of servicing  rights sold,  origination and other fees, gain on
sale of mortgages and interest. Operations presently cover only the Albuquerque,
New  Mexico  and  greater  Phoenix,   Arizona  Prudential  Preferred  Properties
residential  brokerage offices,  with real estate agents therein providing leads
and/or referrals for Partnership services.  Management is continuing to initiate
practices to increase participation by the independent contractor agents in this
activity.

MI Acquisition  Corporation was organized to acquire all the outstanding  common
stock of Miller & Schroeder,  Inc. , a financial  services  firm which derives a
majority of its revenue from the underwriting, sale and trading of securities by
its  principal  operating  subsidiary,  Miller &  Schroeder  Financial,  Inc. At
September 30,1998,  the Registrant's  percentage  interest in shares outstanding
was 11%.

Great American Equity  Corporation (GAEC) provides financing for the acquisition
and development of residential home subdivision and interim  construction  loans
to  certain  clients  of  Prudential  Preferred  Properties  NM.  GAEC loan fees
decreased  $357,000  to  $172,000  in 1998,  a decrease of almost 67% over 1997.
Increased capital requirements to support the Registrant's residential brokerage
and home building activities,  restricted the capital  availability  required to
maintain  the GAEC  lending  program,  therefore  revenue and  operating  profit
experienced a sharp decline.

Interest earned through use of uncommitted  funds is reported  separately  along
with related interest expense  primarily on the $5,750,000 of 9.5%  subordinated
notes payable.  Such uncommitted funds may be used in participation  with banks,
individuals and other  financial  institutions in financing home builder interim
construction  loans and loan for the  acquisition and development of residential
subdivisions.  Interest and other income  decreased  $584,000 to  $1,176,000  in
1998, a decrease of 33% over 1997.

Realization of Deferred Tax Assets:

At September 30, 1998, the Registrant's net deferred tax assets totaled $301,000
and related  primarily to net operating loss  carryforwards.  Realization of net
operating  carryforwards  is dependent on generating  sufficient  future taxable
income. The Registrant  believes that its operating strategy to continue to make
acquisitions   of   related   businesses,   consolidate   and   streamline   the
administrative  functions  of  its  New  Mexico  residential  brokerage,   while
increasing its agent sales force will generate future taxable  income.  Although
realization of net deferred tax assets is not assured,  the Registrant  believes
these  actions  will  generate  sufficient  future  taxable  income  during  the
available  carryforward period, and believes it is more likely than not that the
recorded net deferred tax assets will be realized.

Year 2000 Issues:

The  Registrant  has been  notified by its  principal  vendors of its  operating
computer programs, that they are deemed year 2000 compliant.  The Registrant has
embarked on a systematic program of testing each of its PCs and related software
programs to detect any year 2000 defect.  The  examination is being conducted by
Registrant  personnel  and is  scheduled  to be  completed  by  June  1999.  The
Registrant'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 Registrant's cash
receipts and disbursements but also provide deposit and lending services for the
Registrant  and  its  customers.  The  Registrant  has  begun  to  review  these
third-party relationships to seek assurances from key parties that they are year
2000 compliant and believes that this evaluation will be completed by late 1999.
While some of the  Registrant's  business  relations have assured the Registrant
they are addressing the year 2000 issues,  the Registrant  cannot  guarantee its
key business relationships will resolve these issues in a timely manner.

The Registrant does not believe there will be any significant  costs incurred in
regards to its own computer  software and hardware since its vendors have deemed
them year 2000 compliant. Testing of the subsystems and contacting third parties
will be done by the  Registrant's  existing  personnel  with  less  than  $5,000
additional costs due to overtime,  postage, mailing costs, and various supplies.
The Registrant does not yet have a comprehensive contingency plan but intends to
establish such a plan as part of its year 2000 assessment during 1999.

ITEM 7:  FINANCIAL STATEMENTS

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, 1998 and 1997,  and the related  consolidated
statements of  operations,  stockholders'  equity,  and cash flows for the years
then ended.  These financial  statements are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated  financial position of Realco, Inc. and
Subsidiaries, as of September 30, 1998 and 1997, and the consolidated results of
their operations and their  consolidated  cash flows for the years then ended in
conformity with generally accepted accounting principles.




                                                              GRANT THORNTON LLP

Oklahoma City, Oklahoma
December 18, 1998


                         Realco, Inc. and Subsidiaries

                          CONSOLIDATED BALANCE SHEETS

                                 September 30,


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

ASSETS
  Cash and cash equivalents .....................   $  3,788,086    $  4,242,305
  Restricted cash ...............................        170,240         402,979
  Securities available for sale .................        217,968         199,291
  Accounts and notes receivable, net (note E) ...      2,277,771       2,353,852
  Inventories (note B) ..........................     16,760,111      13,578,721
  Costs and estimated earnings in excess of
    billings on uncompleted contracts (note C) ..           --           228,272
  Property and equipment, net (note F) ..........        928,226         928,416
  Investments - equity method (note D) ..........      1,806,502       1,980,163
  Deferred income taxes (note H) ................        301,376            --
  Other assets ..................................      2,117,770       2,440,306
                                                    ------------    ------------

                                                    $ 28,368,050    $ 26,354,305
                                                    ============    ============

LIABILITIES
  Notes payable (note G) ........................   $  6,532,598    $  6,949,493
  Lease obligations (note I) ....................         77,422         104,800
  Construction advances and notes payable,
    collateralized by inventories (note G) ......      9,032,641       5,139,284
  Billings in excess of costs and estimated
    earnings on uncompleted contracts (note C) ..           --           100,638
  Accounts payable and accrued liabilities ......      2,583,933       2,260,896
  Deferred income taxes (note H) ................           --            69,339
  Escrow funds held for others ..................        170,240         402,979
                                                    ------------    ------------

       Total liabilities ........................     18,396,834      15,027,429

STOCKHOLDERS' EQUITY (notes M and N)
  Preferred stock - authorized, 500,000 shares
    Series A - issued  and  outstanding,
      82,569    shares in 1998 and 1997,
      stated at  liquidation  value .............        825,690         825,690
    Series B - issued and  outstanding,
      212,859 shares,  stated at liquidation
      value .....................................      2,128,590       2,128,590
    Series D - issued and  outstanding,
      23,919 shares, stated at liquidation
      value .....................................        239,190         239,190
  Common stock - no par value; authorized,
    6,000,000 shares; issued, 2,845,000 shares ..      7,712,461       7,712,461
  Retained earnings (deficit) ...................       (683,930)        495,585
  Unrealized gains (losses) on
    available-for-sale securities, net of taxes .        (26,809)         18,749
                                                    ------------    ------------
                                                      10,195,192      11,420,265
    Less 78,000 and 32,000 shares common stock
      held in treasury in 1998 and 1997,
      respectively - at cost ....................        223,976          93,389
                                                    ------------    ------------
                                                       9,971,216      11,326,876
                                                    ------------    ------------

                                                    $ 28,368,050    $ 26,354,305
                                                    ============    ============

        The accompanying notes are an integral part of these statements.


                         Realco, Inc. and Subsidaries

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                            Year ended September 30,


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

REVENUES
  Brokerage commissions and fees ..............    $ 21,983,344     $ 14,486,945
  Construction sales ..........................      11,848,352       13,041,022
  Sales of developed lots .....................       1,271,973        1,153,500
  Equity in net earnings of
    investees (note D) ........................         506,370          789,313
  Interest and other, net .....................         785,145        1,080,008
                                                   ------------     ------------
                                                     36,395,184       30,550,788

COSTS AND EXPENSES
  Cost of brokerage revenue ...................      16,254,116       10,275,373
  Cost of construction sales ..................      10,953,182       11,607,850
  Cost of developed lots sold .................       1,344,661        1,073,467
  Selling, general, administrative,
    and other .................................       8,125,902        5,879,596
  Depreciation and amortization ...............         521,909          501,752
  Interest ....................................         711,286          683,753
                                                   ------------     ------------
                                                     37,911,056       30,021,791
                                                   ------------     ------------

             Earnings (loss) before
                income taxes ..................      (1,515,872)         528,997

INCOME TAX EXPENSE (BENEFIT) (note H) .........        (336,357)         199,000
                                                   ------------     ------------

             NET EARNINGS (LOSS) ..............      (1,179,515)         329,997

PREFERRED STOCK DIVIDEND REQUIREMENT ..........         120,575          120,575
                                                   ------------     ------------

             NET EARNINGS (LOSS)
               APPLICABLE TO COMMON SHARES ....    $ (1,300,090)    $    209,422
                                                   ============     ============
BASIC AND DILUTED EARNINGS (LOSS)
  PER COMMON SHARE
    Net earnings (loss) per common
      share before preferred stock
      dividend requirement ....................    $       (.42)    $        .12
                                                   ============     ============
    Net earnings (loss) per common
      share after preferred stock
      dividend requirement ....................    $       (.47)    $        .07
                                                   ============     ============

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

        The accompanying notes are an integral part of these statements.


                         Realco, Inc. and Subsidaries

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                    Years ended September 30, 1998 and 1997

<TABLE>
<CAPTION>
                                                                                         Unrealized
                                                                                        gains (losses)
                         Series A    Series B     Series D                               on available              
                         preferred   preferred    preferred                 Retained     -for-sale                   Total
                         stock 6%    stock 3%     stock 3%      Common      earnings     securities   Treasury    stockholders'
                        cumulative  cumulative   cumulative     stock       (deficit)    net of tax     stock        equity       
                         --------   ----------    --------    ----------   -----------    --------    ---------    -----------
<S>                      <C>        <C>           <C>         <C>          <C>            <C>         <C>          <C>      
Balance at October 1,
  1996                   $825,690   $2,178,590    $242,970    $7,712,461   $   165,588    $  7,358    $    --      $11,132,657

Retirement of Series B
  preferred stock ....       --        (50,000)       --            --            --          --           --          (50,000)

Retirement of Series D
  preferred stock ....       --           --        (3,780)         --            --          --           --           (3,780)

Change in unrealized
  gains (losses) on
  available-for-sale
  securities, net of
  taxes of $7,757 ....       --           --          --            --            --        11,391         --           11,391

Purchase of common
  stock for treasury .       --           --          --            --            --          --        (93,389)       (93,389)

Net earnings .........       --           --          --            --         329,997        --           --          329,997
                         --------   ----------    --------    ----------   -----------    --------    ---------    -----------
Balance at September
  30, 1997 ...........    825,690    2,128,590     239,190     7,712,461       495,585      18,749      (93,389)    11,326,876

Change in unrealized
  gains (losses) on
  available-for-sale
  securities, net of
  tax benefit of
  $30,370                    --           --          --            --            --       (45,558)        --          (45,558)

Purchase of common
  stock for treasury .       --           --          --            --            --          --       (130,587)      (130,587)

Net loss .............       --           --          --            --      (1,179,515)       --           --       (1,179,515)
                         --------   ----------    --------    ----------   -----------    --------    ---------    -----------
Balance at September
  30, 1998 ...........   $825,690   $2,128,590    $239,190    $7,712,461   $   (683,930)  $(26,809)   $(223,976)   $ 9,971,216
                         ========   ==========    ========    ==========   ===========    ========    =========    ===========
</TABLE>
        The accompanying notes are an integral part of these statements.


                         Realco, Inc. and Subsidaries

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                            Year ended September 30,

<TABLE>
<CAPTION>
                                                                     1998           1997              
                                                                  -----------    -----------
<S>                                                               <C>            <C>    
Cash flows from operating activities
  Net earnings (loss) .........................................   $(1,179,515)   $   329,997
    Adjustments to reconcile net earnings (loss) to net cash
      provided by (used in) operating activities
        Depreciation and amortization .........................       521,909        501,752
        Accretion of discount on notes payable ................        55,235         55,235
        Net earnings in excess of distributions from investees         (7,246)      (657,505)
        Gain on sale of equity method investment ..............      (333,585)          --   
        Gain on sale of securities available for sale .........       (57,367)       (47,094)
        Loss on sale of property and equipment ................        40,714           --   
        Provision for deferred income taxes ...................      (328,068)       167,000
        Changes in operating assets and liabilities
          (net of businesses acquired)
          Decrease in restricted cash .........................       232,739         85,590
          Decrease (increase) in accounts receivable ..........       241,570       (384,293)
          Decrease (increase) in inventories ..................    (3,181,390)       322,705
          Decrease in net billings related to costs and
            estimated earnings on uncompleted contracts .......       127,634        179,799
          (Increase) decrease in other assets .................       239,746       (273,632)
          Increase in accounts payable and accrued liabilities        292,132        339,556
          Decrease in escrow funds held for others ............      (232,739)       (85,590)
                                                                  -----------    -----------

            Net cash provided by (used in) operating activities    (3,568,231)       533,520

Cash flows from investing activities
  Purchases of property and equipment .........................      (316,613)      (283,542)
  Proceeds from sale of property and equipment ................         1,905           --   
  Payments for businesses acquired ............................      (426,250)    (1,424,144)
  Advances on notes receivable ................................      (772,836)      (718,906)
  Receipts on notes receivable ................................       655,786      1,465,089
  Proceeds from sale of securities available for sale .........       466,864        195,490
  Purchase of securities available for sale ...................      (503,561)       (90,413)
  Purchase of equity method investments .......................          --       (1,045,900)
  Proceeds from sale of equity method investment ..............       500,000           --   
  Cash acquired in business acquisitions ......................       292,453        251,913
                                                                  -----------    -----------

            Net cash used in investing activities .............      (102,252)    (1,650,413)

Cash flows from financing activities
  Construction advances and notes payable, net ................     3,954,357        587,424
  Proceeds from borrowings under revolving and long-term debt .          --          500,000
  Payments on revolving, capital lease, and long-term debt ....      (607,506)      (115,717)
  Purchase of treasury stock ..................................      (130,587)       (93,389)
                                                                  -----------    -----------

            Net cash provided by financing activities .........     3,216,264        878,318
                                                                  -----------    -----------

            NET DECREASE IN CASH AND CASH EQUIVALENTS .........      (454,219)      (238,575)

Cash and cash equivalents at beginning of year ................     4,242,305      4,480,880
                                                                  -----------    -----------

Cash and cash equivalents at end of year ......................   $ 3,788,086    $ 4,242,305
                                                                  ===========    ===========

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

        Income taxes                                              $  (184,000)   $    88,000
        Interest                                                      711,000        684,000

Noncash financing and investing activities:
-------------------------------------------
In 1998, the Company acquired all the common stock of 
Cliff Winn, Inc. Realtors for $426,250.  In conjunction
with the acquisition, liabilities were assumed as follows:

  Fair value of assets acquired, including cash of $292,453                      $   457,155
  Cash paid                                                                         (426,250)
                                                                                 -----------

                   Liabilities assumed                                           $    30,905
                                                                                 ===========

In 1998, a capital  lease  obligation  of $46,998 was
incurred  when the Company entered into a lease for
office equipment.

In 1997, the Company acquired all the common stock of
Mull Realty Company for $1,159,144.  In conjunction 
with the acquisition, liabilities were assumed as follows:

  Fair value of assets acquired, including cash of $205,912                      $ 1,282,077
  Cash paid                                                                         (359,144)
  Issuance of note payable                                                          (800,000)
                                                                                 -----------

                Liabilities assumed                                              $   122,933
                                                                                 ===========

In 1997, the Company purchased the net assets and business 
of First Commercial Real Estate Services, Inc. for $265,000.
In conjunction with the acquisition, liabilities 
were assumed as follows:

  Fair value of assets acquired                                                  $   268,500
  Cash paid                                                                         (265,000)
                                                                                 -----------
 
                Liabilities assumed                                              $     3,500
                                                                                 ===========

In 1997, the Company purchased the remaining 50% partnership
interest in Village Joint Venture and Stonehenge at High 
Resort Joint Venture for $800,000. In conjunction with the 
acquisition, liabilities were assumed as follows:

  Fair value of assets acquired, including cash of $46,002                       $ 3,697,038
  Cash paid                                                                         (800,000)
  Previous equity basis investment                                                  (618,938)
                                                                                 -----------
 
                Liabilities assumed                                              $ 2,278,100
                                                                                 ===========
</TABLE>
In 1997,  the Company  exchanged a $50,000 note  receivable  for 5,000 shares of
Series B preferred  stock and $3,780 of furniture and fixtures for 378 shares of
Series D preferred stock.

       The accompanying notes are an integral part of these statements.


                         Realco, Inc. and Subsidaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          September 30, 1998 and 1997


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 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.

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.
Included in cash and cash  equivalents  at September  30, 1998 is  approximately
$920,000 ($1,513,000 for 1997) in a single money market fund.

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 lesser of the primary lease term
or estimated economic lives.

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  (see Notes M and N). 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.

Available-for-sale  securities  are  carried at fair  value with the  unrealized
gains and losses excluded from earnings and reported in a separate  component of
stockholders' equity, net of tax effects.

10.     Intangible Assets

Cost in  excess  of net  assets  of  businesses  acquired  with a net  value  of
approximately  $1,276,000  and  $1,278,000  at  September  30,  1998  and  1997,
respectively,  is  included  in other  assets and is being  amortized  using the
straight-line method over fifteen or twenty years.

The  Company  assesses  the  recoverability  of cost 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. The
Company  believes that no  impairment  has occurred and that no reduction in the
estimated useful life is warranted.

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.

13.     Advertising Costs

The Company  expenses the cost of advertising the first time  advertising  takes
place.  Advertising  expense for 1998 and 1997 was  approximately  $990,000  and
$893,000, respectively.

14.     Recently Issued Accounting Pronouncement

In  1997,  the  Financial  Accounting  Standards  Board  issued  SFAS  No.  131,
Disclosure  About  Segments  of an  Enterprise  and Related  Information,  which
establishes  standards  for the way  that  public  business  enterprises  report
information about operating segments in annual financial statements and requires
that these enterprises  report selected  information about operating segments in
interim  financial  reports issued to shareholders.  The Company will adopt this
pronouncement in 1999; the effect of adoption is not expected to have a material
impact on the consolidated financial statements of the Company.

NOTE B - INVENTORIES

During the years ended  September  30, 1998 and 1997,  the Company  incurred and
capitalized  approximately  $285,000  and  $303,000,  respectively,  of interest
costs.  Capitalized  interest costs charged to cost of  construction  sales were
approximately  $333,000 and $343,000 for the years ended  September 30, 1998 and
1997, respectively.

Inventories consist of the following as of September 30:

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

Land and improvements under development ........     $10,884,705     $ 9,350,468
Houses in progress .............................       4,878,185       3,249,361
Model homes ....................................         997,221         978,892
                                                     -----------     -----------

                                                     $16,760,111     $13,578,721
                                                     ===========     ===========

Houses in progress include homes under contract of approximately  $3,056,000 and
$1,585,000 at September 30, 1998 and 1997, respectively.

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, 1997.
There were no contracts accounted for on the percentage-of-completion  method as
of September 30, 1998.

  Costs incurred on uncompleted contracts ....................          $384,736
  Estimated earnings .........................................            29,868
                                                                        --------
                                                                         414,604
    Less billings to date ....................................           286,970
                                                                        --------

                                                                        $127,634
                                                                        ========

  Included in the accompanying consolidated balance sheets under
    the following captions
      Costs and estimated earnings in excess of billings on
        uncompleted contracts ..................................      $ 228,272
      Billings in excess of costs and estimated earnings on
        uncompleted contracts ..................................       (100,638)
                                                                      ---------

                                                                      $ 127,634
                                                                      =========

NOTE D - INVESTMENTS

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

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

  First American Title Company of New Mexico,
    20% stockholder interest .....................     $     --       $  166,415
  MI Acquisition Corporation, 11% stockholder
    interest .....................................      1,043,454      1,030,370
  PHS Mortgage, 50% stockholder interest .........        218,518        261,915
  Success Venture ................................        391,794        420,627
  Vinyards Joint Venture .........................          6,290          4,952
  Other ..........................................        146,446         95,884
                                                       ----------     ----------

                                                       $1,806,502     $1,980,163
                                                       ==========     ==========

In  November  1997,  the  Company  sold its 20%  stockholder  interest  in First
American  Title  Company  of New  Mexico for  $500,000,  resulting  in a gain of
$333,585.

The Company  participates  in 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  $800,000.  This  action
terminated  the joint  ventures,  and the assets,  liabilities,  and  subsequent
results of operations are included in the  accompanying  consolidated  financial
statements.

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


                                 As of and for the year ended September 30, 1998
                                 -----------------------------------------------
                                      MI
                                 Acquisition           PHS              Joint
                                 Corporation         Mortgage          Ventures
                                 -----------       -----------       -----------

  Cash ...................       $ 1,733,533       $   359,061       $   308,658
  Other assets ...........        34,385,535           543,324           716,102
                                 -----------       -----------       -----------

                                 $36,119,068       $   902,385       $ 1,024,760
                                 ===========       ===========       ===========

  Liabilities ............       $26,843,919       $   503,113       $   228,593
  Equity .................         9,275,149           399,272           796,167
                                 -----------       -----------       -----------

                                 $36,119,068       $   902,385       $ 1,024,760
                                 ===========       ===========       ===========

  Revenue earned .........       $31,779,000       $ 1,214,015       $   892,731
                                 ===========       ===========       ===========

  Net earnings ...........       $   907,547       $   634,714       $   290,069
                                 ===========       ===========       ===========

                           As of and for the year ended September 30, 1997 
                           -----------------------------------------------
                  
                       First American      MI
                       Title Company   Acquisition        PHS          Joint
                       of New Mexico   Corporation      Mortgage      Ventures
                        -----------    -----------    -----------    -----------

  Cash .............    $   765,438    $ 2,145,578    $   588,166    $   218,319
  Other assets .....      9,294,676     30,991,355        629,000      1,549,920
                        -----------    -----------    -----------    -----------

                        $10,060,114    $33,136,933    $ 1,217,166    $ 1,768,239
                        ===========    ===========    ===========    ===========

  Liabilities ......    $ 9,228,041    $25,921,778    $   688,714    $   917,081
  Equity ...........        832,073      7,215,155        528,452        851,158
                        -----------    -----------    -----------    -----------

                        $10,060,114    $33,136,933    $ 1,217,166    $ 1,768,239
                        ===========    ===========    ===========    ===========

  Revenue earned ...    $ 3,920,670    $ 5,177,778    $   918,612    $12,433,511
                        ===========    ===========    ===========    ===========

  Net earnings .....    $   234,507    $   236,159    $   498,444    $   866,073
                        ===========    ===========    ===========    ===========

NOTE E - ACCOUNTS AND NOTES RECEIVABLE

  Accounts and notes receivable include the following at September 30:

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

    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 ..................   $  936,265   $  778,743

    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 ....................................       25,738      126,338

    Note receivable; collateralized by real
    estate, interest due monthly at 9%, principal
    payable as lots are sold or upon demand ..........      118,000      118,000

    Brokerage commissions and fees receivable ........      715,234      554,611

    Construction sales receivable ....................      151,585      416,872

    Other advances and receivables ...................      355,993      435,034
                                                         ----------   ----------
                                                          2,302,815    2,429,598
      Less allowance for doubtful accounts ...........       25,044       75,746
                                                         ----------   ----------

                                                         $2,277,771   $2,353,852
                                                         ==========   ==========

NOTE F - PROPERTY AND EQUIPMENT

        Property and equipment consisted of the following at September 30:

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

  Office equipment, furniture, and fixtures ..........   $1,719,010   $1,423,922
  Leasehold improvements .............................      150,348      159,317
  Automobiles and equipment ..........................      123,025      113,208
                                                         ----------   ----------
                                                          1,992,383    1,696,447
    Less accumulated depreciation and amortization ...    1,064,157      768,031
                                                         ----------   ----------
                                                         $  928,226   $  928,416
                                                         ==========   ==========

NOTE G - DEBT

Debt consisted of the following at September 30:

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

   Subordinated  sinking fund notes, $5,750,000
   face amount, 9.5% interest payable annually,
   principal  payable  at  various  dates
   through December  2003 (less $170,107  and
   $225,342 unamortized  discount at  September
   30, 1998 and 1997, respectively,  based on
   imputed interest  rate of  10.5%) (A) ...........   $ 5,579,893   $ 5,524,658

   Construction and development advances;
   collateralized by inventories (B) ...............     4,938,718     1,798,584

   Notes payable; collateralized by inventories (C)      4,154,923     3,340,700

   Note payable to Norwest Bank; collateralized by
   equity investee common stock owned by the
   Company, due in semiannual installments of
   $35,700 plus interest at 1% over the bank's
   prime rate, through July 2004 ...................       428,600       500,000

   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 .....................       361,527       800,000

   Revolving line of credit with Norwest Bank,
   interest payable monthly at 1.5% over the bank's
   prime rate, principal payable June 1999 .........       100,000       100,000

   Other notes payable .............................         1,578        24,835
                                                       -----------   -----------

                                                       $15,565,239   $12,088,777
                                                       ===========   ===========

  (A)   Subordinated  sinking fund notes are subject to various  covenants,  the
        most  restrictive  of which  include  minimum  net  worth  requirements,
        limitations on dividends, and limitations on debt.

  (B)   Construction  and  development  advances  collateralized  by inventories
        include  $1,250,113  ($523,350 at September  30,  1997)  advanced  under
        various  interim  construction  lines of credit which total  $1,600,000.
        Each   project   under  these  lines  of  credit   requires  a  separate
        construction  loan  bearing  interest  at the bank's  prime rate plus 1%
        (9.5% at  September  30, 1998 and 1997).  Construction  and  development
        advances  also include  $3,327,033  ($1,158,424  at September  30, 1997)
        advanced  under other  lending  guidelines.  Each home to be built under
        these lending  guidelines  requires a separate  construction loan at the
        bank's prime rate plus .5% to 1.5% (prime rate was 8.5% at September 30,
        1998 and  1997).  Additional  construction  advances  collateralized  by
        inventories  of  $361,572  ($116,810  at  September  30,  1997)  consist
        primarily of  buyer-financed  construction  loans which are payable upon
        closing.

  (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 8.5% at September 30, 1998 and 1997) 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, 1998:

          Year ending September 30
            1999                                        $ 9,067,019
            2000                                          1,871,000
            2001                                          1,232,927
            2002                                            871,400
            2003                                            871,400
            Thereafter                                    1,821,600
                                                        -----------
                                                         15,735,346
          Less amount representing discount on debt         170,107
                                                        -----------

                                                        $15,565,239
                                                        ===========


NOTE H - INCOME TAXES

The  provision  for income taxes  consists of the  following for the years ended
September 30:

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

    Current .......................             $  (8,289)             $  32,000
    Deferred ......................              (328,068)               167,000
                                                ---------              ---------

                                                $(336,357)             $ 199,000
                                                =========              =========

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

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

    Income taxes at federal statutory rate .......     $(515,396)     $ 179,859
    Change in valuation allowance ................       270,859        (15,966)
    Nondeductible expenses .......................        37,628         30,884
    State income taxes at statutory rate .........       (90,952)          --   
    Dividend exclusion ...........................          --            1,665
    Adjustment of estimated income tax
      liability of prior year ....................       (48,831)          --   
    Other ........................................        10,335          2,558
                                                       ---------      ---------

                Total tax expense ................     $(336,357)     $ 199,000
                                                       =========      =========

  Components of deferred taxes are as follows
    at September 30:

    Assets
      Inventories ................................     $ 128,160      $    --   
      Accrued liabilities ........................       146,956         59,434
      Property and equipment .....................        59,446         49,943
      Investments ................................       123,410         89,892
      Tax loss carryforward ......................       248,720         13,888
      Valuation allowance ........................      (295,319)       (24,460)
                                                       ---------      ---------

                                                       $ 411,373      $ 188,697
                                                       =========      =========

    Liabilities
      Investments ................................     $ 109,997      $ 256,943
      Other ......................................          --            1,093
                                                       ---------      ---------

                                                       $ 109,997      $ 258,036
                                                       =========      =========

The valuation allowance increased $270,859 for the year ended September 30, 1998
and decreased $15,966 for the year ended September 30, 1997.

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.

At September 30, 1998, the Company has net operating loss  carryforwards for tax
purposes of approximately $610,000 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  approximately  $360,000 and $313,000 and  accumulated  depreciation  of
approximately   $237,000  and   $222,000  at   September   30,  1998  and  1997,
respectively.

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

        Year ending September 30
          1999                                         $  46,778
          2000                                            11,578
          2001                                            11,578
          2002                                            11,578
          2003                                             6,560
                                                       ---------

        Total minimum lease payments                      88,072
                                
        Amount representing interest                      10,650
                                                       ---------

        Present value of net minimum lease payments    $  77,422
                                                       =========

The  Company  leases  certain  office  facilities  and  equipment  used  in  its
operations  under  operating  leases  expiring at various dates through 2004 and
provide for payments as follows:

        Year ending September 30
          1999                                      $   899,000
          2000                                          855,000
          2001                                          687,000
          2002                                          644,000
          2003                                          437,000
          Thereafter                                    130,000
                                                     ----------

                                                     $3,652,000
                                                     ==========

Two  facilities  are subleased  under leases which expire in 2000.  Total future
minimum sublease rentals amount to $89,000 at September 30, 1998.

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

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

  Minimum rentals .....................           $ 989,000            $ 601,000
  Sublease rentals ....................             (61,000)                --
                                                  ---------            ---------

                                                  $ 928,000            $ 601,000
                                                  =========            =========

Certain of these leases relating to rental expense of approximately $117,000 and
$127,000 for the years ended September 30, 1998 and 1997, respectively, are with
related parties.

NOTE J - BUSINESS COMBINATIONS

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  $426,000 and future  contingent  payments of up to $962,500.  The
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  $359,000, the issuance of a noninterest-bearing  note payable for
$800,000, and future contingent payments of up to $1,175,000. As installments on
this  noninterest-bearing  note payable are based upon a factor of earnings, the
terms  are not  fixed  and no  discount  on debt is  readily  determinable.  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 $265,000.

These business combinations have been accounted for using the purchase method of
accounting and the accompanying  consolidated  financial  statements include the
operations of these real estate brokers  subsequent to the date of  acquisition.
Costs in excess of the net assets acquired were approximately $1,049,000.

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


                                            Year ended September 30 
                                            -----------------------     
                                             1998              1997    
                                         ------------       -----------

  Revenues                               $ 38,471,000       $37,232,000
                                         ============       ===========

  Net loss                               $ (1,104,000)      $    (2,505)
                                         ============       ===========

  Loss per common share                  $       (.44)      $      (.04)
                                         ============       ===========

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:

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

  Revenues
    Residential construction ...............     $ 10,124,161      $ 11,290,953
    Real estate broker
      Sales to unaffiliated customers ......       21,983,344        14,486,945
      Intersegment sales ...................          367,617           405,009
    Financial services .....................          838,229           876,743
    Commercial construction ................        1,724,191         1,750,069
    Other sales ............................        1,271,973         1,153,500
    Interest and other
      Sales to unaffiliated customers ......          453,286           992,578
      Intersegment sales ...................          722,604           766,980
    Eliminations ...........................       (1,090,221)       (1,171,989)
                                                 ------------      ------------

             Total .........................     $ 36,395,184      $ 30,550,788
                                                 ============      ============

    Operating profit (loss)
      Residential construction .............     $   (357,829)     $    (97,610)
      Real estate broker ...................         (329,289)          (61,058)
      Financial services ...................          325,183           843,042
      Commercial construction ..............          (49,405)          164,830
      Other sales ..........................           10,692           120,067
                                                 ------------      ------------

               Total .......................     $   (400,648)     $    969,271
                                                 ============      ============
    Assets
      Residential construction ............      $ 17,692,589      $ 14,856,678
      Real estate broker ..................         3,919,507         3,436,032
      Financial services ..................         1,811,497         1,707,052
      Commercial construction .............           575,380           767,169
                                                 ------------      ------------

               Identifiable assets ........        23,998,973        20,766,931

      Equity investments ..................         1,806,502         2,025,238
      Corporate assets ....................           827,748           969,319
      Other assets ........................         1,734,827         2,592,817
                                                 ------------      ------------

               Total ......................      $ 28,368,050      $ 26,354,305
                                                 ============      ============

    Depreciation and amortization
      Residential construction ............      $    123,258      $    103,612
      Real estate broker ..................           255,986           249,199
      Commercial construction .............            17,410            22,868
      Other ...............................           125,255           126,073
                                                 ------------      ------------

               Total ......................      $    521,909      $    501,752
                                                 ============      ============

    Capital expenditures
      Residential construction ............      $    146,570      $    188,331
      Real estate broker ..................           147,405            79,418
      Commercial construction .............            16,818             8,679
      Other ...............................             5,820             7,114
                                                 ------------      ------------

               Total ......................      $    316,613      $    283,542
                                                 ============      ============

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  contingently  liable on land  development  loans made by various
lending  institutions  to joint  ventures  to which the Company is a 50% general
partner.  The  Company was  contingently  liable for  approximately  $97,000 and
$917,000 at September 30, 1998 and 1997, respectively.

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.  Series D
voting  preferred  stock is entitled to dividends when declared and paid at a 3%
cumulative  rate  annually  starting  July  1,  1996  and  payable  each  July 1
thereafter.  At September  30, 1998,  preferred  stock  dividends in arrears for
Series A were $127,086 or $1.54 per share  ($77,545 or $.94 per share for 1997),
Series B were $227,670 or $1.07 per share ($163,812 or $.77 per share for 1997),
and  Series C were  $18,799  or $.79 per  share  ($11,623  or $.49 per share for
1997). All three series of preferred stock have a liquidation  preference of $10
per share, plus all accumulated but unpaid dividends. Each Series A and Series D
preferred  share is convertible  into common shares at $7.50 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.

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  180,923  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 all warrants remain outstanding at September 30, 1998.

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, 1998 and 1997:

                                                         1998           1997
                                                    -------------    -----------
  Net earnings (loss) applicable to common shares
    As reported .................................   $  (1,300,090)   $   209,422
    Pro forma ...................................   $  (1,386,036)   $   193,322

  Earnings (loss) per share
    As reported .................................   $        (.47)   $       .07
    Pro forma ...................................   $        (.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 1998 and 1997,  respectively:  dividend yield was
estimated to remain at zero for both years;  expected volatility of 54% for both
years; risk-free interest rates of 6% and 5.9%; and an expected life of one year
for both years.

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:

                                               1998               1997
                                        ------------------  -------------------
                                                  Weighted             Weighted
                                                   average              average
                                        Number     exercise   Number    exersize
                                       of shares    price    of shares   price
                                        -------    ------     ------     ------
                                          
  Outstanding at beginning of year ...   35,000    $ 3.30       --       $  --
  Granted ............................   90,000      3.42     35,000       3.30
  Forfeited ..........................  (25,000)     3.42       --          --
                                        -------    ------     ------     ------

  Outstanding at end of year .........  100,000    $ 3.38     35,000     $ 3.30
                                        =======    ======     ======     ======

  Options exercisable at year end ....   30,000    $ 3.30       

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

The following information applies to options outstanding at September 30, 1998:

              Number outstanding                               100,000
              Range of exercise prices                      $3.25 to $3.45
              Weighted average exercise price                   $3.38
              Weighted average remaining contractual life      4 years

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. Securities Available for Sale

The estimated fair values are based upon quoted market prices.

3. 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.

4. Floating Rate Notes Receivable

The carrying  amount  approximates  fair value because  interest rates adjust to
market rates.

5. 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.

6. 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:
<TABLE>
<CAPTION>
                                              1998                          1997      
                                   --------------------------    --------------------------                    
                                     Carrying      Estimated       Carrying      Estimated
                                      amount      fair value        amount      fair value    
                                   -----------    -----------    -----------    -----------
<S>                                <C>            <C>            <C>            <C>
Financial assets
  Cash, cash equivalents, and
    restricted cash ............   $ 3,958,326    $ 3,958,326    $ 4,645,284    $ 4,645,284
  Securities available for sale        217,968        217,968        199,291        199,291
  Fixed rate notes receivable ..       143,738        143,738        244,338        232,090
  Floating rate notes receivable       936,265        936,265        778,743        778,743

Financial liabilities
  Fixed rate debt ..............    (6,775,271)    (6,727,059)    (7,027,768)    (6,983,417)
  Floating rate debt ...........    (8,428,441)    (8,428,441)    (4,261,009)    (4,261,009)

Financial liabilities for which
  it is  not practicable to
  estimate fair value
    Notes payable ..............      (361,527)          --         (800,000)          --   
</TABLE>

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

NOTE P - ITEMS AFFECTING FOURTH QUARTER RESULTS OF OPERATIONS

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 $273,157 related to lease abandonments. Additionally, during
the fourth quarter, the Company determined valuation allowances of $505,436 were
required on certain  inventories,  receivables,  and other assets. The aggregate
effect  of these  items  was to  increase  the loss for the  fourth  quarter  by
$605,823 or $.22 per share.

ITEM  8:  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING
AND FINANCIAL DISCLOSURE

There have been no  changes in or  disagreements  with  Accountants  of the kind
described by Item 304 of Regulation S-B at any time during the  Registrant's two
(2) most recent fiscal years.

PART III

Pursuant to instruction  E(3) to From 10-KSB,  the information  required by Part
III  (Items  9,  10,  11 and 12) is  hereby  incorporated  by  reference  to the
materials  contained  in  "Election  of  Directors,"  "Executive  Compensation,"
"Certain  Transactions" and "Security Ownership of Certain Beneficial Owners and
Management,"  contained in the  Registrant's  definitive  proxy  materials to be
filed with the Commission within 120 days of September 30, 1998.

ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K

(a) Listing of Exhibits:

EXHIBIT
NUMBER                  DESCRIPTION

2.1*  Articles of Merger dated July 12, 1995

3.1* Articles of Incorporation dated August 8, 1983

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

3.3*  Articles of Amendment dated July 28, 1995

3.4*  Bylaw as amended

10.1* Agreement and Plan or Reorganization dated March 14, 1995

10.2* Employment  Agreement dated March 14, 1995, between the Registrant and Mr.
      Bill  E.  Hooten,  included  as  an  exhibit  to  Agreement  and  Plan  of
      Reorganization

10.3* Employment  Agreement dated March 14, 1995, between the Registrant and Mr.
      Melvin A.  Hardison,  included  as an  exhibit  to  Agreement  and Plan of
      Reorganization

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

10.5* First Security Bank line of construction  credit commitment dated December
2, 1994

10.6* Loan Agreement dated July 5, 1994, between Sunwest Bank of Albuquerque and
      Charter Building and Development Corp.

10.7* Real  Estate  lease  dated  January 1, 1994,  between  R.R.  Rutledge  and
      Hooten/Stahl, Inc.

10.8* Real  Estate  lease  dated  January 1, 1991,  between  Bill E.  Hooten and
      Hooten/Stahl, Inc.

10.9* Shopping Center Lease dated December 7, 1993,  between Rio Rancho Shopping
      Center and Hooten/Stahl, Inc.

10.10 1997  Employee  Incentive  Stock  Option  Plan,   incorporated  herein  by
      reference to the Registrant's Form 10-QSB filed on May 15, 1997.

21    Subsidiaries of the small business issuer

21.1  Real Estate Brokerage Services, Inc.

21.2  Charter Building and Development Corporation, Inc.

21.3 Great American Equity Corporation, Inc.

21.4 Amity, Inc.

21.5    PHS, Inc.

25.* Form T-1 Statement of Eligibility and  Qualification  under Trust Indenture
Act of 1939 of a Corporation  Designated to act as Trustee * Filed as an exhibit
to the Registrant's  Registration Statement under the Securities Act of 1933, as
amended, on Form S-B2 (Registration Statement No. 33-98740-D),  and incorporated
herein by reference.  All other exhibits  required by Item 601 of Regulation S-B
are inapplicable to this Registrant in this filing.

(b) Reports on Form 8-K:

No reports were filed on Form 8K during the quarter ended September 30, 1998.

SIGNATURES

In  accordance  with  Section 13 or 15(d) of the Exchange  Act,  the  Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Date: January 13, 1999                           REALCO, INC.

By: James A. Arias 
------------------------------------------
  James A. Arias, President, Chief
                                Executive Officer, Chairman of the Board of
                                Directors


In  accordance  with the Exchange  Act, 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                          Dated:


Melvin A. Hardison
------------------------
Melvin A. Hardison       Chief Financial                 January 13, 1999
                         Officer/Secretary/Treasurer


Bill E. Hooten
------------------------
Bill E. Hooten           Executive Vice President
                         and Director                    January 13, 1999


Arthur A. Schwartz
------------------------
Arthur A. Schwartz       Director                        January 13, 1999


Marshall Blumenfeld
------------------------
Marshall Blumenfeld      Director                        January 13, 1999


Jeffrey S. Silverman
------------------------
Jeffrey S. Silverman     Director                        January 13, 1999


Noel Zeller
------------------------
Noel Zeller                     Director                 January 13, 1999 


Martin S. Orland
------------------------
Martin S. Orland                Director                 January 13, 1999