<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-K

[X]             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1998

                                       OR

[ ]            TRANSISTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                               For the transition
                            period from ___ to ___.

                          Commission File Number 1-9885

                             Legend Properties, Inc.
             (Exact name of Registrant as specified in its charter)

<TABLE>
<CAPTION>
<S>                                                                       <C>       
                        Delaware                                               36-3465359
(State or other jurisdiction of                                              (IRS Employer
incorporation or organization)                                            Identification No.)

13662 Office Place, Suite 201, Woodbridge, Virginia                              22192
 (Address of principal executive offices)                                      (Zip Code)

Registrant's telephone number, including area code                           (703) 680-2226

                                                                         Name of each exchange
Title of each Class                                                       on which registered
-------------------                                                       -------------------

Shares of Common Stock                                                            None
Securities registered pursuant to Section 12(g) of the Act:
</TABLE>

                                      None
                                (Title of Class)

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

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

Shares of common stock outstanding as of March 19, 1999: 6,290,874. The
Registrants shares are not listed on an exchange or included in the NASDAQ
quotation system. There is no established public trading market for the shares
and the volume of trades in the secondary market does not permit the
determination of the aggregate market value of the Registrants shares of common
stock held by non-affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE

                     See Exhibit index located on page 28

<PAGE>   2


                                TABLE OF CONTENTS



                                     PART 1

<TABLE>
<S>                                                                                   <C>
ITEM 1.    DESCRIPTION OF BUSINESS                                                         1
                                                                                            
ITEM 2.    PROPERTIES                                                                      6
                                                                                            
ITEM 3.    LEGAL PROCEEDINGS                                                               6
                                                                                            
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS                            7
                                                                                            
                                         PART II                                            
                                                                                            
ITEM 5.    MARKET FOR THE REGISTRANT'S SHARES AND RELATED                                   
           SHAREHOLDERS MATTERS                                                            8
                                                                                            
ITEM 6.    SELECTED FINANCIAL DATA                                                         9
                                                                                            
ITEM 7.    MANAGEMENT'S DICSUSSION AND ANALYSIS OF FINANCIAL                                
           CONDITION AND RESULTS OF OPERATIONS                                            10
                                                                                            
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                     21

ITEM 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                       21
                                                                                              
ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING                           
           AND FINANCIAL DISCLOSURE                                                       21

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                             22 
                                                                                             
ITEM 11.   EXECUTIVE COMPENSATION                                                         23 
                                                                                             
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND                               
           MANAGEMENT                                                                     25 
                                                                                             
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                 26 
                                                                                             
                                        PART IV                                              
                                                                                             
ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS                               
           ON FORM 8-K                                                                  II-1

                                   SIGNATURES
</TABLE>

<PAGE>   3




                                     PART I

ITEM 1.DESCRIPTION OF BUSINESS

BUSINESS OPERATIONS

The Registrant, Legend Properties, Inc., formerly known as Banyan Mortgage
Investment Fund (the Company or Legend), is the surviving corporation from the
December 31, 1996 merger (the Merger) of Banyan Mortgage Investment Fund
(Banyan) and RGI U.S. Holdings, Inc. (RGI/US). The Company is organized as a
corporation under the laws of the State of Delaware, pursuant to a Restated
Certificate of Incorporation filed December 31, 1996. As of December 31, 1998,
Holdings owns approximately 80% of the outstanding common shares of the Company.

The Company was originally established to invest primarily in (i) short-term
loans, junior mortgage loans, wraparound mortgage loans and first mortgage loans
on income-producing properties and (ii) construction loans, pre-development
loans and land loans. In response to defaults on loans made by the Company to
its borrowers, in February 1990, the Company suspended making new loans, except
for advances of additional funds under circumstances which it deemed necessary
to preserve the value of existing collateral, including instances where the
Company foreclosed upon or taken title, directly or indirectly to the
collateral. At the time of the Merger, the Company controlled the ownership of a
2,227-acre parcel located in Charles County, Maryland (Chapman's Landing), a
2,685-acre development located in Prince William County, Virginia (Southbridge)
and a 565-acre parcel located in Monterey County, California (Laguna Seca
Ranch). The Laguna Seca Ranch and Chapman's Landing projects were sold in
December 1997 and October 1998, respectively.

RGI/US was a Washington corporation and until the Merger, was a wholly-owned
subsidiary of RGI Holdings, Inc. (Holdings) which is an indirect majority-owned
subsidiary of Aker RGI ASA, a Norwegian investment company with interests in
cement and building materials, oil and gas technology, seafoods and other
industries. At the time of the Merger, RGI/US, through various subsidiaries,
owned, developed and operated the following real estate: (i) Grand Harbor, a
772-acre residential golf community located in Vero Beach, Florida; (ii) Oak
Harbor, a 116-acre retirement community also located in Vero Beach, Florida;
(iii) the Royal Palm Convalescent Center, a skilled nursing care facility
licensed for 72 beds located in Vero Beach, Florida and (iv) a 164,724 square
foot shopping center located in Lynnwood, Washington (the Lynnwood Center). The
Lynnwood Center was sold in November 1997.

The Company's strategy is to realize and enhance the market potential of its
remaining core assets. The Company currently controls approximately 2,800 acres
of land in a master planned community (Southbridge), a residential golf
community (Grand Harbor), a retirement community (Oak Harbor), and a commercial
business park (Ashburn).

Legend is a diversified real estate operating company engaged in three primary
business activities: real estate development and sales, club operations and
patient services. The Company operates other ancillary operations that provide
support services to its primary business activities but these ancillary
operations are not material enough to be considered a primary business activity.

            Real Estate Development and Sales

The Real Estate Development and Sales activity is responsible for land planning,
entitlements, land development, construction and the sale of land parcels and
finished homes.

Southbridge includes a mix of commercial and residential land uses including
single-family, townhouse and apartment/condominium units and office, retail and
industrial/flex space. The Company is attempting to enhance the value of this
project through land use, entitlement and zoning modifications and selective
development. Such activities take into account local zoning, political and
market conditions. The Company anticipates primarily developing commercial sites
and residential housing lots for sale to third parties but also pursues
opportunities to sell undeveloped parcels or enter into joint ventures, or whole
or partial bulk sales.

Grand Harbor and Oak Harbor include primarily finished lots upon which the
Company, through a general contractor, builds a variety of housing types and
styles including villas, cottages, duplex and condominiums for sale to third
parties. The Company also pursues outright lot sales.


                                       1
<PAGE>   4
During February 1998, the Company entered into an agreement to acquire Ashburn,
a 116 acre commercial tract in Loudoun County, Virginia. On March 6, 1998 the
first parcel of 88 acres was acquired. The tract is planned for office and
flex/tech development and contains substantial improvements including existing
sewer, water and roadways.

            Club Operations

The Club Operations activity is responsible for the management and operations of
the club facilities.

Grand Harbor operates the Grand Harbor Golf and Beach Club which includes a
clubhouse and two 18-hole golf courses, swimming and tennis facilities and an
ocean front beach club.

Oak Harbor operates the Oak Harbor Club which includes a clubhouse and a 9-hole
golf course.

            Patient Services

The Patient Services activity is responsible for the management and operations
of the assisted living and skilled care facilities.

Oak Harbor operates Somerset House (assisted living facility) and Royal Palm
Convalescent Center (skilled care facility).

Following is a narrative describing Legend's core assets. The project business
plans explained below are subject to numerous risks and uncertainties which are
more fully described in Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Factors Affecting Legend's
Business Plan." If the Company is unable to secure the necessary financing or
capital to meet its future needs, the project business plans will likely be
materially revised, which may have a material adverse effect on the Company's
financial condition and results of operations. (See Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.")

DESCRIPTION OF PROJECTS

Grand Harbor. Grand Harbor is a 772-acre gated residential golf community,
located along the Indian River in Vero Beach, Florida, with two 18-hole
championship golf courses and waterfront access with a marina containing 144
slips available for lease. The residences at Grand Harbor are clustered in
individual communities affording a view of the surrounding golf courses and
scenic waterways. Development of Grand Harbor began in 1987 and continued until
1990 when the Resolution Trust Corporation acquired the property and most
development and construction activities were terminated. In 1991, affiliates of
RGI/US acquired the project, completed the development of the marina and
constructed the clubhouse facilities and continued the residential development.
At December 31, 1998 the Company owned approximately 325 acres.

Grand Harbor offers two 18-hole championship golf courses: a Harbor Course
designed by Pete Dye and a River Course designed by Joe Lee. The 28,000 square
foot clubhouse, which serves both courses, also serves as a social center for
Grand Harbor residents. Grand Harbor maintains 24-hour access control, together
with a variety of amenities, including an on-site swimming facility and eight
clay tennis courts and an off-site oceanfront beach club. Grand Harbor and Oak
Harbor collectively received zoning entitlements for the development of a
maximum of 2,688 residential units. The Company's business plan, however,
contemplates the development of 990 residential units at Grand Harbor and 352
residential units at Oak Harbor (see below). The Company believes this plan best
maximizes the value of these parcels based on existing and anticipated market
conditions, even though these parcels are zoned for greater density. If market
conditions change, the Company can increase, to a certain extent, the proportion
of multi-family homes to be developed under existing zoning.

Grand Harbor currently offers single-family detached homes, duplexes and
low-rise condominiums with sales prices ranging from approximately $200,000 to
$1,100,000 with sizes ranging from 1,600 square feet in the condominiums to over
5,000 square feet in the single-family detached homes. In addition, there are
golf course and riverfront lots available at sales prices ranging from $165,000
to over $500,000. Through December 31, 1998, 686 residences had been sold and an
additional 39 contracted for sale for delivery in early or mid 1999. Based on
the current development plan, approximately 265 additional residences are
planned for Grand Harbor. Grand Harbor has 


                                       2
<PAGE>   5
received governmental approvals for approximately 725,000 square feet of
commercial space on 60 acres. In early 1998, a 20-acre parcel was sold for a
luxury apartment project.

Grand Harbor currently derives revenue from the construction and sale of
single-family detached homes, duplexes, condominiums and individual lots; rental
commissions from residential units and rental income from marina docks; and the
operation of harbor and club facilities. In conjunction with offering
residential units for sale, Grand Harbor offers four (4) types of equity
memberships in the Grand Harbor Golf and Beach Club: (i) full memberships for
$40,000; (ii) golf and tennis memberships for $20,000; (iii) tennis memberships
for $10,000; and (iv) social memberships for $7,500. Upon the completion of sale
of the equity memberships, Grand Harbor will turn over management and control of
the Grand Harbor Golf and Beach Club to its members.

There are several residential communities located within Vero Beach that compete
with Grand Harbor in terms of location, quality, and/or price, including but not
limited to Windsor, Orchid Island Golf & Beach Club, and Indian River Club.
While these communities offer many of the same amenities as Grand Harbor such as
an oceanfront beach club and a gated community, many do not offer boating
access, a completed golf clubhouse, or have a limited product choice.

Oak Harbor. Oak Harbor is a 116-acre luxury country club retirement community,
located along the Indian River in Vero Beach, Florida. On-site amenities include
the 36,000 square foot clubhouse, a 24,900 square foot assisted living facility
with 24 private suites and a nine-hole golf course designed by Joe Lee. The
clubhouse contains a community hall, arts and crafts room, hobby shop, game
room, library and fitness center. Oak Harbor provides the opportunity to own a
home within a community that offers on-site health care and a Club that offers a
wide range of daily services designed to make life easier for residents. Oak
Harbor Club members receive daily meals, transportation, housekeeping, social
activities and access to optional health care. A discussion of Oak Harbor's
zoning entitlements is included under "Grand Harbor". At December 31, 1998 the
Company owned approximately 110 acres.

Oak Harbor offers condominiums and single-family homes ranging in price from
$250,000 to $635,000 and ranging in size from 1,178 to 2,850 square feet. All
residences have emergency call systems and trained health professionals are
available 24 hours a day to handle emergencies. Three levels of health care,
including skilled, assisted living and home health care, are options available
to Oak Harbor residents at an additional cost above the monthly Club dues
described below.

-      Oak Harbor Club

            Membership in the Oak Harbor Club requires an initial $25,000 club
            deposit. Upon the re-sale of an Oak Harbor residence, the $25,000
            club deposit is refundable subject to the new owner becoming a Club
            member and paying the deposit. In addition, there is an initiation
            fee equal to ten percent (10%) of the purchase price of the
            residence. This fee may be deferred until the residence is resold,
            but will then equal 10% of the greater of the initial purchase price
            or the sale price of the residence. (Currently, this initiation fee
            is waived for the first 100 Club members.) The Oak Harbor Club is a
            non-equity club and Oak Harbor will not turn over management and
            control to its members. Monthly dues, ranging from $1,725 for a
            single person to $2,225 for a couple, include among other things,
            one meal per day, local transportation around Oak Harbor and Vero
            Beach, weekly housekeeping and linen service, Club activities, green
            fees on Oak Harbor's private nine-hole golf course, and 24-hour
            emergency response service.

-      Royal Palm Convalescent Center

            The off-site Royal Palm Convalescent Center is a skilled care
            nursing facility licensed for 72 beds, which is currently configured
            for 50 beds in private and semi-private rooms. Royal Palm is a
            private facility, which does not accept Medicaid or Medicare
            patients and has received a Superior Rating the past 15 consecutive
            years from the Florida Department of Health and Rehabilitative
            Services.

            Monthly rates range from approximately $4,080 for a semi-private 
            room to $6,300 for a private suite.  As of December 31, 1998, 41
            beds were occupied (82%).

-      Somerset House Assisted Living Facility



                                       3
<PAGE>   6
            The on-site Somerset House Assisted Living Facility is one of the
            finest of its kind in the United States. Initially constructed with
            24 private suites with patios situated in private courtyards, the
            facility is designed as a "mini-clubhouse" versus the institutional
            style facilities prevalent in many communities. The facility is
            designed to be expanded to up to 64 suites. The main building
            includes the common living, dining and kitchen facilities as well as
            the examination, consultation and Home Health Care offices. The 24
            private suites are located in a separate wing behind the main
            building. Each suite is 406 square feet and contains living, dining
            and kitchen facilities. A centrally located Nurse's Station is
            staffed 24 hours a day by nursing staff to provide assistance as
            needed.

            Monthly rates range from $2,400 for Oak Harbor Club members to
            $3,600 for non-members. As of December 31, 1998 there were 5
            suites occupied.

Oak Harbor's current development plan is for a total of 352 residences
consisting of villas, cottages and condominium units. As of December 31, 1998,
65 residences have been sold and an additional 14 residences were under contract
for sale for delivery in early or mid 1999. Residential sales are subject to a
non-refundable deposit of 20% of the sales price but are typically subject to
cancellation by the purchaser under specified circumstances, such as the
purchaser becoming incapable of independent living, or death. Although Oak
Harbor is a retirement community, all residents must be capable of independent
living at the time they join the Oak Harbor Club.

There are two competing lifecare communities located within a 35-mile radius of
Oak Harbor. Indian River Estates, located in Vero Beach, and Sandhill Cove,
located 32 miles south in Stuart, Florida. Both target a lower demographic
prospect than Oak Harbor, have smaller average units than those offered by Oak
Harbor, and do not offer home ownership to their residents.

Southbridge. Southbridge is a 2,685 acre mixed use master planned community
located along the Potomac River in Prince William County, Virginia,
approximately 24 miles south of Washington, D.C. Southbridge is located within
close proximity to the major employment centers of Washington, D.C. and is
comprehensively planned for approximately 5,000 single-family detached homes,
townhomes, garden apartments and condominiums as well as 4 million square feet
of commercial space including office, flex-tech and retail. The project is
anticipated to be built in phases over the next 15 - 20 years and will offer
residents an assortment of amenities including a public 18 hole championship
golf course, three clubhouse facilities with pools and tennis courts and a town
center overlooking the Potomac River. The mixture of commercial, recreational
and educational facilities will allow residents to work and educate their
children without leaving the community. At December 31, 1998 the Company owned
approximately 2,350 acres.

Southbridge is divided into seven phases; only the first of which has had sales
to date. Phase I is zoned for 2,376 residential units and 280,000 square feet of
commercial space. Although approved for 2,376 residential units, the Company's
current development plan anticipates development of 1,822 units, which the
Company believes maximizes the underlying value of the property based on
existing and anticipated market conditions. The Company can modify its
development plans within the limitations of the existing zoning in response to
changes in market conditions.

Southbridge offers builders different residential lot products as follows:

<TABLE>
<CAPTION>
  STYLE                                  LOT SIZE
  -----                                  --------
<S>                                 <C>
  Garden Apartments                           N/A
  Condominiums                                N/A
  Townhomes                                   N/A
  Cottage                                6,000 SF    (1)
  Village                                8,000 SF    (1)
  Country                               10,000 SF    (1)
  Estate                                20,000 SF
</TABLE>

(1) currently all available developed lots are under contract to builders

As of December 31, 1998, 657 residential lots have been sold to third-party
homebuilders that have in turn constructed and sold 169 single-family homes and
487 townhomes. In addition, the Company has under contract 142 single-family
lots developed and ready for delivery to builders. In total, the Company has
contracts with 4 builders for over 300 lots with a total contract value of
approximately $13,500,000. Anticipated quarterly deliveries 


                                       4
<PAGE>   7
range from 22 to 30 lots. The Company continues to negotiate with other builders
for additional residential lots sales contracts. Future engineering and
development of residential lots will be timed to satisfy contractual
requirements and anticipated market demands.

In November 1998, the Company formed Potomac Heritage Homes to construct and
sell single family homes at various price points within Southbridge. Potomac
Heritage's function is to compliment residential lot sale efforts. Potomac
Heritage is currently in the initial stages of operations, and has recently
begun sales and construction activities.

The housing industry in the Greater Washington D.C. region is highly
competitive. In the Company's local Washington D.C. market, there are numerous
land developers, homebuilders and private interests with which the company
competes to attract homebuilders and qualified buyers. The Company competes
primarily on the basis of price, location, product and the level of amenities
provided within the community.

Ashburn Corporate Center. Ashburn is a 116-acre commercial business park
development project located in Loudoun County, Virginia planned for office and
flex/tech uses. The project is improved with sewer, water and roadways in place.
On March 6, 1998 the Company closed on the initial acquisition of 88 acres.
Acquisition of the remaining 28 acres has not yet occurred. Subsequent to the
second quarter of 1998, the Company began marketing its interest in the project.
In Management's view, strong development and leasing activity in Northern
Virginia has created an opportunity to achieve an acceptable return from the
outright sale of the project rather than proceeding with development as
originally planned.

OPERATING SEGMENTS

See the Notes to Consolidated Financial Statements.

OTHER INFORMATION

Development and construction activities performed in the State of Florida are
not seasonal, however development and construction activities performed in the
State of Virginia is affected by inclement weather, with the majority of the
development and construction work occurring between the months of March and
November. As it relates to sales activities, the majority of revenues recorded
related to sales in the State of Florida occur between the months of October and
May, while revenues related to sales occurring in the State of Virginia are
recorded more evenly throughout the year.

As of December 31, 1998, the Company had 417 employees including 3 executive
officers.

The Company reviews and monitors compliance with federal, state and local
provisions which have been enacted or adopted regulating the discharge of
material into the environment, or otherwise relating to the protection of the
environment. For the year ended December 31, 1998, the Company did not incur a
material amount for capital expenditures for environmental matters nor does it
anticipate making any material expenditures for environmental matters for the
year ending December 31, 1999.

Certain statements in this Annual Report that are not historical fact constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Discussions containing forward-looking statements
may be found in this section and in the sections headed "Legal Proceedings,"
"Market for the Registrant's Shares and Related Shareholder Matters" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Without limiting the foregoing, words such as "anticipates,"
"expects," "intends," "plans" and similar expressions are intended to identify
forward-looking statements. These statements are subject to a number of risks
and uncertainties (See Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors Affecting Legends Business Plan.")
Actual results could differ materially from those projected in the
forward-looking statements. The Company undertakes no obligation to update these
forward-looking statements to reflect future events or circumstances.



                                       5
<PAGE>   8



ITEM 2.  PROPERTIES

As of December 31, 1998, the Company owned interests in five properties. Below
is a brief description of property interests owned by the Company

<TABLE>
<CAPTION>
             Name, Location and              Approx.          Date
              Type of Property                Size          Acquired                      Description
-------------------------------------   --------------  ---------------------  ------------------------------------

<S>                                     <C>                 <C>                <C>
Grand Harbor                                325 acres        6/91(1)           a 100% interest in a corporation
Vero Beach, FL                                                                 which owns the subject property
Residential Development

Oak Harbor                                  106 acres        6/91(1)           a 100% interest in a corporation
Vero Beach, FL                                                                 which owns the subject property
Residential Development

Royal Palm                                   72-Bed          6/94(1)           a 100% interest in a corporation
Convalescent Center                                                            which owns the subject property
Vero Beach, FL
Skilled Nursing Care facility

Southbridge                                2,350 acres        5/91             a 100% interest in general partnerships
Prince William County, VA                                                      which own the subject property
Land Development

Ashburn Corporate Center                    88 acres          3/98             an 82% interest in a limited liability company that
Loudoun County, VA                                                             owns the property
Land Parcel
</TABLE>

(1) The acquisition date represents the date the property was acquired by RGI/US
or affiliates. RGI/US merged with and into the Company effective December 31,
1996.


ITEM 3.  LEGAL PROCEEDINGS

Ashburn Corporate Center

During August 1998, Legend filed a lawsuit and a memorandum of Lis Pendens in
the Circuit Court of Loudoun County against Atlantic Research Corporation (ARC)
which was subsequently amended during November 1998. On March 6, 1998 Legend was
assigned the rights under an existing contract to purchase approximately 28
acres located in Loudoun County Virginia (the second Ashburn parcel) which
included a $100,000 contract deposit. Although the contract contained a
projected closing date, there was no provision stating that time was of the
essence. Subsequent to the assignment of the contract, ARC attempted to insert
new terms and conditions into the contract including a provision that time is of
the essence and a demand for additional consideration. During November 1998,
Legend tendered performance under the contract by delivering all necessary
papers and approximately $3.6 million to an escrow agent. Under the amended
complaint, Legend is seeking specific performance under the real estate sales
contract and any other relief the court may offer.

ARC has answered that the original contract had a clear and unambiguous
settlement date of June 23, 1998, that Legend has breached the contract and ARC
has no obligation to sell Legend the property, and that ARC is entitled to the
$100,000 deposit as partial damages. ARC has also filed a counterclaim
contending that ARC has been damaged under the contract breached by Legend and
the memorandum of Lis Pendens. ARC claims that ARC has been forced to maintain a
valuable piece of property and forego opportunities to sell the property for a
greater sum. ARC has requested the Court to deny Legend's claim, declare that
Legend has no further rights to the property, order Legend to forfeit the
$100,000 deposit, and award ARC $800,000 plus interest and costs as damages.

Laguna Seca Ranch

On December 14, 1998, a Legend subsidiary, BMIF Monterey County Corp., filed a
complaint against New Cities Development Group, Bates Properties, Inc., New
Cities Development Company, Deregt Development, Inc., Rancho 


                                       6
<PAGE>   9
Monterey, L.L.C. (collectively New Cities), Old Republic Title Company and David
Bohen (collectively Old Republic) in the United States District Court, Northern
District of California, San Jose Division.

During 1997, Legend sold a property known as the Laguna Seca Ranch Development
(the property) to New Cities with Legend retaining a house with certain
surrounding property known as Lot 40 together with certain access easements to
the nearest public right-of-way. New Cities agreed, as part of the sale, to
establish a separate legal parcel for Lot 40 subsequent to the sale. As part of
the sale, Legend agreed to cooperate and share equally in certain costs with New
Cities in negotiating an agreement concerning water service to the property with
California-American Water Company (Cal-Am). Pursuant to this, Legend agreed to
post $200,000 in an interest bearing escrow held by Old Republic to pay any
necessary amounts due from Legend in consummating an agreement with Cal-Am. An
agreement was reached with Cal-Am on March 20, 1998 to provide the water needs,
and Legend agreed with New Cities to contribute $60,000 out of the escrow to
defray certain costs. On August 28, 1998 Cal-Am withdrew from its commitment.
Subsequently, Old Republic released the $200,000 escrow with interest to New
Cities.

Legend is claiming that New Cities breached certain implied covenants in
refusing to negotiate and consummate the agreement with Cal-Am, that New Cities
failed to establish Lot 40 as a separate parcel, and that Old Republic wrongly
released the funds in escrow to New Cities. Legend asked to recover $140,000
plus interest on the escrow, that New Cities convey Lot 40, that New Cities pay
approximately $75,000 of costs incurred by Legend for negotiating the agreement
with Cal-Am, and other damages. New Cities has not responded to the complaint,
whereas Old Republic has denied any wrong doing in releasing the escrow, and has
asserted other separate defenses.

The Company is not aware of any other material pending legal proceedings as of
March 19, 1999.



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

There were no matters submitted to a vote of stockholders during the fourth
quarter of the year ended December 31, 1998.



                                       7
<PAGE>   10


                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S SHARES AND RELATED SHAREHOLDER MATTERS

There is no established public trading market for the Company's shares of common
stock. The Company has not declared cash dividends on its common stock since the
year ended December 31, 1989, nor does the Company anticipate the declaration of
any such dividends in the near future. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for further details.

At March 19, 1999, there were 8,693 record holders of the Company's shares of
common stock. Holdings owns approximately 80% of the outstanding shares of the
Company.


                                       8
<PAGE>   11


ITEM 6.  SELECTED FINANCIAL DATA

For financial reporting purposes, the December 31, 1996 Merger of Banyan and
RGI/US was treated as a recapitalization of RGI/US, with RGI/US as the acquiror
of Banyan. Accordingly, the historical consolidated financial statements of
Legend and the selected financial data presented below for 1994 - 1996 are those
of RGI/US.

<TABLE>
<CAPTION>
                                                  For the Year Ended December 31
                           ------------------------------------------------------------------------------
                                    1998                        1997                      1996(1)
                           -----------------------     -----------------------      ---------------------
<S>                         <C>                         <C>                             <C>
Cash and Cash
Equivalents                       $  4,446,864                 $ 12,732,681                 $  1,529,898
                                  ============                 ============                 ============

Investment in Real
Estate (1)                        $ 82,873,914                 $103,857,159                 $128,834,222
                                  ============                 ============                 ============

Properties Owned at
December 31 (1)                              5                            5                            7
                                  ============                 ============                 ============

Total Assets                      $147,558,291                 $162,870,552                 $184,110,129
                                  ============                 ============                 ============

Notes Payable to
Banks and Others                  $ 40,722,737                 $ 60,411,332                 $ 86,700,617
                                  ============                 ============                 ============


Payables to Related
Parties                           $ 84,744,478                 $ 72,893,927                 $ 47,609,097
                                  ============                 ============                 ============

Total Revenues                    $ 75,733,456                 $ 55,627,898                 $ 36,623,291
                                  ============                 ============                 ============

Loss Before
Extraordinary Item                $(12,136,973)                $(14,505,906)                $ (2,153,583)
                                  ============                 ============                 ============

Net Income (Loss)                 $(12,136,973)                $(14,505,906)                $ (2,153,583)
                                  ============                 ============                 ============


Income (Loss) Per
Share of Common
Stock Before
Extraordinary Item-
basic and diluted (2)             $      (1.93)                $      (2.31)                $       (.49)
                                  ============                 ============                 ============

Net Income (Loss) Per
Share of Common
Stock -basic and
diluted (2)                       $      (1.93)                $      (2.31)                $       (.49)
                                  ============                 ============                 ============
</TABLE>

<TABLE>
<CAPTION>
                                           For the Year Ended December 31
                                 ------------------------------------------------
                                           1995                       1994
                                 ---------------------      ---------------------

<S>                                <C>                        <C>
Cash and Cash
Equivalents                        $          578,906         $          430,819
                                   ==================         ==================

Investment in Real
Estate (1)                         $       21,984,169         $       14,153,666
                                   ==================         ==================

Properties Owned at
December 31 (1)                                     4                          4
                                   ==================         ==================

Total Assets                       $       40,555,418         $       36,061,717
                                   ==================         ==================

Notes Payable to
Banks and Others                   $       23,288,065         $       21,435,774
                                   ==================         ==================


Payables to Related
Parties                            $       25,728,682         $       17,521,229
                                   ==================         ==================

Total Revenues                     $        2,088,247         $        2,410,407
                                   ==================         ==================

Loss Before
Extraordinary Item                 $      (4,069,032)         $      (1,504,261)
                                   ==================         ==================

Net Income (Loss)                  $      (4,069,032)         $          971,097
                                   ==================         ==================


Income (Loss) Per
Share of Common
Stock Before
Extraordinary Item-
basic and diluted (2)              $            (.93)         $            (.34)
                                   ==================         ==================

Net Income (Loss) Per
Share of Common
Stock -basic and
diluted (2)                        $            (.93)         $              .22
                                   ==================         ==================
</TABLE>

(1)         "Investments in Real Estate" and "Properties Owned at December 31"
            include investments in Grand Harbor and Oak Harbor through December
            31, 1995. Effective January 1, 1996, Grand Harbor Associates, Inc.(a
            wholly-owned subsidiary of Legend), a 45% owner of the Grand Harbor
            and Oak Harbor projects (The Projects), acquired an additional 45%
            interest in The Projects. Additionally, effective December 31, 1996,
            RGI/US merged with Banyan. Both of these business combinations were
            accounted for under the purchase method of accounting, wherein the
            purchase price was allocated to the assets acquired and liabilities
            assumed based upon their relative fair values. The accounts of these
            acquired companies have been included in the consolidated financial
            statements of Legend from the acquisition dates.

(2)         For the year ended December 31, 1998 there were 6,290,874 shares
            outstanding. For the years ended December 31, 1997 and 1996 the
            weighted average number of shares outstanding was 6,286,322 and
            4,392,163, respectively, due to the recapitalization of RGI/US on
            December 31, 1996 and the sale of 34,130 shares in 1996. At December
            31, 1995 and 1994 the weighted average number of shares outstanding
            was 4,386,983.


                                       9
<PAGE>   12


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

OVERVIEW

Legend Properties, Inc., formerly known as Banyan Mortgage Investment Fund (the
Company or Legend), is the surviving corporation from the December 31, 1996
merger (the Merger) of Banyan Mortgage Investment Fund (Banyan) with RGI U.S.
Holdings, Inc. (RGI/US). For financial reporting purposes, the Merger was
treated as a recapitalization of RGI/US, with RGI/US as the acquirer of Banyan.
As of December 31, 1996, the historical consolidated financial statements of
RGI/US became those of Legend Properties, Inc.

During 1997 and 1998, Legend focused its management efforts and financial
resources on its core assets on the East Coast. Non-core assets, including a
565-acre land parcel (Laguna Seca Ranch) located in California and a 164,724
square foot retail shopping center located in the state of Washington (Lynnwood
Center), were sold during 1997 for approximately $33 million. During October
1998, Legend sold the Chapman's Landing project to the State of Maryland and an
environmental group for a total sales price of $28.5 million. As several of the
Company's projects are in the initial stages of development, where major
investments in infrastructure improvements are required to realize the market
potential, significant financial resources were committed to infrastructure and
amenity improvements.

Legend is currently focused on continuing the development of infrastructure,
amenities and residential units at Grand Harbor and Oak Harbor consistent with
approved zoning and development plans. At Southbridge, Legend intends to develop
and sell land parcels. Legend is currently marketing its interest in Ashburn.
The Company's ability to fully implement its business plan is dependent on,
among other things, securing long-term and short-term financing related to the
developments on acceptable terms. There can be no assurances that the Company
will be able to obtain the necessary financing on acceptable terms, if at all.
See "Factors Affecting Legend's Business Plan" below.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company has utilized internally generated funds, third party
borrowing and loans from Holdings and affiliated entities to fund its
construction and development activities, and ongoing operating expenses.

During 1999, the Company contemplates continued expenditures for development and
construction activities at Grand Harbor, Oak Harbor and Southbridge. For Grand
Harbor and Oak Harbor, the Company anticipates utilizing existing construction
lines for the majority of the construction financing and securing additional
construction lines from existing external lenders for the remainder. At
Southbridge, the Company must arrange for development financing.

During 1998, the Company sold Chapman's Landing for $28.5 million and realized
net proceeds, after closing costs, of approximately $28.4 million. Net proceeds
were used for the repayment of existing external debt and to fund construction
and development activities. In addition, the Company borrowed $6,000,000 from
Holdings to fund construction and development activities.

As of December 31, 1998 the Company's debt obligation totaled $125,467,215 of
which $25,777,613 matures during 1999. Loans from Holdings totaling $84,744,478
make up a substantial portion of the debt.

As noted above, the Company has substantial debt repayments in 1999 and early
2000 under existing financings and requires additional financing to advance its
business plan. As of December 31, 1998 the Company had $4,446,864 of cash and
cash equivalents, which will not be sufficient to fund these obligations. The
Company anticipates meeting its existing debt obligations during 1999 from the
release of restricted cash pledged as collateral on certain debt, net proceeds
from the sale of Ashburn, the renewal and extension of existing construction
lines, and internally generated funds from real estate sales and operations. If
sufficient funds are not available from the above, the Company anticipates
refinancing certain land acquisition financing and delaying certain quarterly
interest payments as allowed under the debt agreements. The Company also has
available, if needed, a $5 million credit facility from Holdings.        

For future construction and development activities, the Company anticipates
utilizing existing or additional construction lines as noted above.


                                       10
<PAGE>   13
During 1998, approximately $16 million of the Chapman's Landing proceeds were
utilized for the repayment of existing external debt pursuant to a loan
restructuring with Holdings, and Holdings indirect parent, Aker RGI ASA (Aker).
The previous debt agreements had required Legend to pay Holdings 50% of the net
cash flow (as defined), upon the sale of Chapman's Landing. In exchange for
releasing Legend from this commitment, Legend agreed to utilize these proceeds
to retire certain external debt obligations that had been guaranteed by Aker.
The Aker debt guarantees that were retired totaled approximately $42.9 million.

This restructuring has also provided for an extension of the debt due to
Holdings to April 2003, and it adjusted interest rates to between LIBOR plus
2.5% to Prime plus 2%. Moreover, certain interest and principal repayment
provisions were modified, and selected loans were consolidated. Lastly, Holdings
has made available a line of credit of $5 million to fund development,
construction and operations.

There can be no assurance that the Company will be able to refinance the
existing debt obligations or obtain the necessary construction and development
financing to implement its plan or that, if available, the terms and conditions
will be acceptable to the Company. If the Company is unable to secure the
necessary additional financing or capital when needed, the plans for its
projects will likely be materially revised, which would have a material adverse
effect on the Company's financial condition and results of operations. See
"Factors Affecting Legend's Business Plan".

For each of Legend's projects, cash flow generated from operations can differ
substantially from earnings, depending on the status of the development cycle.
At Southbridge, which is in the initial stages of development, significant cash
outlays are required for, among other things, land acquisitions, processing
zoning and other regulatory approvals, construction of amenities, sales
facilities, major roads, utilities, general landscaping and debt service. Since
a major part of these initial expenditures are capitalized, income reported for
financial statement purposes during the initial years may significantly exceed
operating cash flow. At Grand Harbor and Oak Harbor, which have completed the
initial stages of development, operating cash flow can exceed earnings reported
for financial statement purposes, since expenses include charges for substantial
amounts previously capitalized.

1998 compared to 1997

Legend's cash and cash equivalents balance at December 31, 1998, and December
31, 1997, was $4,446,864 and $12,732,681, respectively. The decrease is
attributable to cash used in investing and financing activities of $4,578,762
and $13,998,293, respectively, which is partially offset by cash provided by
operating activities of $10,291,238.

Cash Flows from Operating Activities: For the year ended December 31, 1998,
operating activities provided cash of $10,291,238.

Cash provided by operations in 1998 was primarily due to the following:

-           A net $13,067,070 reduction in inventory and assets held for sale
            resulting from the sale of Chapman's Landing which was partially
            offset by the acquisition of Ashburn for approximately $7.9 million.
            Moreover, development at Southbridge continued, so that finished
            lots will be available to satisfy existing contracts during 1999 and
            beyond, which also worked to counterbalance the inventory decline
            related to the Chapman's Landing sale. Total land acquisition,
            development and construction activities were $36,561,117. This was
            offset by an aggregate inventory reduction of $49,628,187, due to
            the Chapman's Landing sale and unit or lot sales of 64, 22, and 63
            at Grand Harbor, Oak Harbor and Southbridge, respectively.

-           Related party interest expense of $5,853,716 that was accrued but
            not paid during 1998. This accrued interest was capitalized into the
            loan balance on December 31, 1998 in accordance with the terms of
            the related loan agreements.

-           Depreciation and amortization of $2,977,467 that resulted primarily
            from fixed asset depreciation for Grand Harbor and Oak Harbor and
            loan cost amortization.

-           An increase in accounts payable and other notes and liabilities of
            $4,662,756 offset by an increase in accounts and notes receivable
            and other assets of $4,132,798 during 1998. Fluctuations in these
            accounts are generally due to the timing of the payment of certain
            liabilities, including trade payables, advances from customers,
            prepaid expenses, and the collection of accounts and notes
            receivable. These fluctuations can vary 


                                       11
<PAGE>   14

            significantly from period to period depending on the timing of sale
            closing, and development and construction activities. Due to the
            nature of Legend's business, significant fluctuations in operating
            assets and liabilities are not considered unusual.

Partially offset by the following:

-           A net loss of $12,136,973 that was caused principally by
            substantial interest expense, corporate overhead and operating
            losses at Oak Harbor, Ashburn and Southbridge. These were partially
            counterbalanced by operating profits at Grand Harbor and the gain
            from the sale of Chapman's Landing. Sales at Oak Harbor were less
            than expected and lower than 1997. Ashburn incurred certain costs
            associated with holding and marketing the property during the period
            it has been held for sale without any compensating revenues.
            Southbridge experienced delays in developing lots due to an
            extremely wet winter and spring in the Washington, DC area, and
            closed fewer lots than expected. Grand Harbor's operating profits
            resulted primarily from the sale of a 20-acre parcel of raw land and
            better than expected residential unit sales.


Cash Flows from Investing Activities: Legend used $4,578,762 in investing
activities during 1998. The majority of this was the result of $3,787,322
increase in restricted cash and investments, that arose chiefly from the growth
of customer sales deposit cash at Grand Harbor as the backlog has expanded from
12 to 39 units between December 31, 1997 and 1998. The remainder of the increase
relates to $791,440 in purchases of property and equipment during 1998.

Cash Flows from Financing Activities: For the year ended December 31, 1998,
Legend utilized net cash in financing activities in the amount of $13,998,293
primarily for the repayment of $41,258,127 of external debt, partially offset by
proceeds from borrowings of $21,569,532 from external parties and $6,000,000
from related parties.

The Company borrowed $21,569,532 from external parties that was mainly used at
Grand Harbor ($11,698,130) and Oak Harbor ($3,931,402) to fund construction and
development costs. Additional funds were borrowed at Ashburn Corporate Center
($5,940,000) to finance the acquisition of the first parcel as was previously
described. Debt repayments to external parties totaled $41,258,127 (Corporate
$996,220, Grand Harbor $23,642,961 and Oak Harbor $16,618,946). These funds were
generated from the sale of Chapman's Landing (described earlier), sale of
residential units and club memberships, and existing cash sources. Moreover, the
Company borrowed $6,000,000 from Holdings, which was used to pay off existing
external debt and fund construction and development activities, and ongoing
operations.

1997 compared to 1996

Legend's cash and cash equivalents balance at December 31, 1997, and December
31, 1996, was $12,732,681 and $1,529,898, respectively. The increase in 1997 is
attributable to cash provided by investing activities of $20,777,889, which is
partially offset by cash utilized in operating and financing activities of
$3,937,187 and $5,637,919, respectively.

Cash Flows from Operating Activities: For the year ended December 31, 1997,
Legend utilized cash in operating activities of $3,937,187.

            -           Net losses of $14,505,906 due primarily to operating
                        losses at the Grand Harbor, Oak Harbor, Southbridge and
                        Chapman's Landing developments, as well as corporate
                        overhead expenses. These losses are partially offset by
                        an operating profit at the Lynnwood Center, gain on the
                        sale of the Lynnwood Center of $195,076 and a gross
                        margin on the sale of the Laguna Seca project of
                        $4,013,444. Sales at Grand Harbor and Oak Harbor were
                        less than anticipated, due primarily to a lower level of
                        demand for new homes at these and similar-type
                        developments in the Vero Beach area in 1997, when
                        compared to 1996. Due to delays caused during the Merger
                        proceedings and the related litigation, Legend was
                        unable to start developments activities at the
                        Southbridge and Chapman's Landing properties as early as
                        originally anticipated, resulting in the closing on only
                        12 residential and one commercial lot at the Southbridge
                        project during 1997. Corporate overhead expenses
                        included costs associated with the merger and related
                        lawsuit, as well as costs related to the formation of
                        and transition to corporate offices in Seattle and
                        suburban Washington D.C.


                                       12
<PAGE>   15
            -           An increase in accounts and notes receivable and other
                        assets of $541,903 and a decrease in accounts payable
                        and other liabilities of $5,504,042 during 1997.
                        Fluctuations in these accounts are generally due to the
                        timing of the payment of certain liabilities, including
                        trade payables, advances from customers, prepaid
                        expenses, and the collection of accounts and notes
                        receivable. These fluctuations can vary significantly
                        from period to period depending on the timing of sale
                        closing, and development and construction activities.
                        Due to the nature of Legend's business, significant
                        fluctuations in operating assets and liabilities are not
                        considered unusual.

Partially offset by the following:

            -           Sales of 44 and 30 units at Grand Harbor and Oak Harbor,
                        respectively, and 12 residential and one commercial lot
                        sale at Southbridge. These sales reduced inventory in
                        the amount of $22,575,105 in 1997, which was offset by
                        construction and development costs incurred at the
                        development properties of $21,668,428. At Grand Harbor
                        and Oak Harbor the construction of residential units
                        continued, including the completion of a 24-unit
                        condominium building and starting construction of a
                        second identical condominium building at Oak Harbor and
                        the introduction of several new product types at Grand
                        Harbor. Development activities continued at Southbridge
                        in order to develop finished lots for expected
                        deliveries in 1998 and beyond under existing contracts.

            -           The decrease in assets held for sale of $8,301,604
                        related to the Laguna Seca Ranch sale.

            -           Related party interest expense of $4,721,217 was not
                        paid during 1997 pursuant to the terms of the loan
                        agreements.

            -           Depreciation and amortization expense of $3,205,495
                        related primarily to fixed assets at Grand Harbor and
                        Oak Harbor and amortization of deferred loan costs. As
                        of June 31, 1996, management decided to dispose of the
                        Lynnwood Center and discontinued recording depreciation.

Cash Flows from Investing Activities: For the year ended December 31, 1997,
Legend generated cash flow from investing activities of $20,777,889 primarily
from sales proceeds of the Lynnwood Center of $19,436,029 (net of selling
expenses) and the release of $7,260,767 from restricted cash and investments.
These sources were partially offset by additions to property and equipment of
$6,297,341, primarily at Oak harbor for the construction of the Assisted Care
Facility (ACF) and the nine-hole golf course. At December 31, 1996, Legend had,
among other things, restricted cash deposited with a lender for the construction
of the ACF. As construction occurred on the AFC during 1997, the lender released
certain of these restricted amounts to Oak Harbor to fund the construction.
Also, customer deposits previously received for the rental and sale of real
estate were released to Grand Harbor and Oak Harbor. Additionally, Legend's
indirect majority shareholder agreed to guarantee the repayment of a loan to a
third party lender, which resulted in the release of restricted cash held by the
lender of approximately $4.3 million during the third quarter of 1997.

Cash Flows from Financing Activities: For the year ended December 31, 1997,
Legend utilized net cash in financing activities in the amount of $5,637,919
primarily for the repayment of $45,942,347 of indebtedness from external
parties, partially offset by proceeds from borrowings of $19,653,062 from
external parties and $20,702,720 from related parties. The $20,702,720 from
related parties was used to fund development, construction and operating costs
associated with the properties, as well as costs associated with the Merger,
relocation and litigation.

The Company borrowed an additional $19,653,062 from external parties, which was
used primarily to fund certain construction and development costs, and to
"refinance" existing construction and development revolving loans. Repayments on
external debt totaled $45,942,347. Funding for the repayment of the indebtedness
on the Lynnwood Center was made from the net sale proceeds of the Lynnwood
Center. The other repayments were made primarily from funds generated through
the preceding borrowings and through sales of residential units and club
memberships.


                                       13
<PAGE>   16



RESULTS OF OPERATIONS

Due to the accounting treatment utilized for the Merger and the Company's
purchase of additional ownership interests in certain properties the Company
does not believe that its consolidated statement of operations for the years
ended December 31, 1998 and 1997 are comparable to 1996. To allow for a
comparison of results, the Company has utilized unaudited proforma results for
1996 (Pro Forma 1996). The Pro Forma 1996 results have been prepared as if the
Merger had occurred on January 1, 1996.

<TABLE>
<CAPTION>
                                                                                              Years Ended December 31
                                                                                              -----------------------
                                                                                Actual              Actual           Pro Forma
                                                                                 1998                1997                1996
                                                                             ------------        ------------        ------------
      Revenues:
<S>                                                                          <C>                   <C>                 <C>       
            Real estate sales                                                $ 65,218,900          43,595,507          25,445,563
            Club operations                                                     5,953,105           5,344,575           4,256,917
            Patient service                                                     2,600,866           2,718,014           2,617,615
            Rent                                                                        -           2,186,157           2,713,740
            Other                                                               1,960,585           1,783,645           1,822,350
                                                                             ------------        ------------        ------------

                                    Total revenues                             75,733,456          55,627,898          36,856,185
                                                                             ------------        ------------        ------------

      Operating costs and expenses:
            Real estate sales                                                  49,628,187          31,343,932          18,172,004
            Club operations                                                     7,291,432           6,364,169           4,827,002
            Patient service direct costs                                        1,919,183           1,521,292           1,378,808
            Rental operations                                                           -             359,325             788,081
            Other                                                               1,417,681             612,207             594,413
            Provision for loss on assets held for sale                                  -                   -           1,000,000
            Selling, general and administrative                                15,414,245          18,265,252          13,412,275
            Depreciation and amortization                                       2,092,509           1,780,904           1,249,179
                                                                             ------------        ------------        ------------

                                    Total operating costs and expenses         77,763,237          60,247,081          41,421,762
                                                                             ------------        ------------        ------------

      Operating loss                                                           (2,029,781)         (4,619,183)         (4,565,577)
                                                                             ------------        ------------        ------------

      Other income (expense):
            Interest income                                                       944,800           1,386,920             756,782
            Interest income, related party                                              -              73,339             146,277
            Interest expense                                                   (5,596,055)         (7,503,319)         (8,293,772)
            Interest expense, related party                                    (5,853,716)         (4,823,954)         (2,906,595)
            Other, net                                                            397,779             727,575           1,175,696
                                                                             ------------        ------------        ------------

                        Net other expense                                     (10,107,192)        (10,139,439)         (9,121,612)
                                                                             ------------        ------------        ------------


      Loss before equity in income of investee and minority interest          (12,136,973)        (14,758,622)        (13,687,189)

      Equity in income of investee                                                      -                   -             947,419

      Minority interest in losses of consolidated subsidiaries                          -             252,716             257,572
                                                                             ------------        ------------        ------------

      Net loss                                                               $(12,136,973)        (14,505,906)        (12,482,198)
                                                                             ============        ============        ============
</TABLE>


1998 compared to 1997

Result of operations for the year ended December 31,1998 include the
consolidated revenues and expenses of Grand Harbor, Oak Harbor, Southbridge,
Ashburn and Chapman's Landing whereas 1997 results consist of the consolidated
revenues and expenses for Grand Harbor, Oak Harbor, Southbridge, Chapman's
Landing, Laguna Seca Ranch and the 


                                       14
<PAGE>   17
Lynnwood Center. The 1998 changes were the acquisition of Ashburn in March 1998
and the sale of Chapman's Landing in October 1998, while 1997 changes were the
sales of the Laguna Seca Ranch and the Lynnwood Center in November and December
1997, respectively. Accordingly, the 1998 and 1997 results of operations are not
comparable.

Total revenues rose $20,105,558 between 1997 and 1998. This is mainly because of
increases in real estate revenues, and to a lesser extent improvements in club
operating revenues. These are discussed in further detail below.

Real estate sales revenues grew $21,623,393 between 1997 and 1998 primarily as a
result of increases in revenues from the bulk sale of properties. During 1997,
Laguna Seca was sold for approximately $12.8 million whereas Chapman's Landing
was sold in 1998 for $28.5 million. Moreover, a 20-acre land parcel was sold
during 1998 at Grand Harbor for $1.9 million yielding a net increase of $17.6
million in bulk sales revenue. The remainder of the change relates to a net
increase in unit and lot sales at Grand Harbor ($5,609,412 increase), Oak Harbor
($3,081,529 decrease) and Southbridge ($1,380,989 increase).

Grand Harbor's real estate sales rose to 64 units in 1998 from 44 units in 1997
resulting from improved marketing strategies and the overall health of the US
economy. The average sales price was approximately $407,000 in 1997 compared
with nearly $365,000 for 1998. At Oak Harbor, 22 units were sold during 1998 as
opposed to 30 units during 1997 for an approximate average sales price of
$390,000 for both 1998 and 1997. Oak Harbor completed its first 24-unit
condominium during March 1997, and at that time had a majority of those units
under contract. These units closed soon thereafter, which substantially
increased sales for 1997 over 1998. Sales prices range from $165,000 to
$1,100,000 at Grand Harbor, and $250,000 to $635,000 at Oak Harbor. Accordingly
average unit sales prices may fluctuate dramatically from period to period
depending upon factors such as the unit type and location of the product sold.

At Southbridge, lot sales increased from 12 in 1997 to 63 in 1998. This occurred
despite poor weather (in particular excessive rain) in the Washington, DC area
during the winter and spring of 1998, which stalled lot development activity.
The rise from 1997 to 1998 occurred primarily because sales for 1997 were
restrained due to delays in development activity. This was caused by the
previously discussed Merger and attendant litigation. The average Southbridge
lot revenue for 1998 was $40,500, which is comparable to the 1997 average of
$42,500.

The Company's backlog at December 31, 1998 was as follows:

<TABLE>
<CAPTION>
                                                        CONTRACT
                                   UNITS                  VALUE
                                   -----                  -----
<S>                             <C>               <C>          
Grand Harbor                            39         $       19,088,936
Oak Harbor                              13                  5,577,100
Southbridge                            341                 14,589,500
                              ------------         ------------------
                                       393         $       39,255,536
                              ============         ==================
</TABLE>

Club memberships increased between 1997 and 1998 as a result of the continued
progress in the sales and development activities at both Grand Harbor and Oak
Harbor, and was the chief component in the rise in club operations revenue. The
rental revenue for 1997 relates to the Lynnwood Center, which was sold during
1997. Accordingly, there is no such comparable revenue item for 1998.

Total operating costs and expenses rose $17,516,156. This is mainly due to
increased real estate sales expenses and club operating costs, net of a decrease
in selling, general and administrative expenses.

A $15.0 million rise in the costs associated with the bulk sale of property
($23.8 million in 1998 for Chapman's Landing and the 20-acre Grand Harbor land
parcel versus $8.8 million during 1997 for Laguna Seca) was primarily
responsible for the $18,284,255 increase in real estate sales expenses between
1997 and 1998. The balance of the increase relates mainly to the growth in the
overall number of units sold and changes in unit type, which were described
previously. The gross margin as a percentage of real estate sales revenues was
24% for 1998 (26% excluding Chapman's Landing and the sale of a 20-acre land
parcel at Grand Harbor) as compared to 28% for 1997 (27% excluding Laguna Seca).
The gross margins excluding bulk land sales are comparable for 1998 and 1997.
Even so, gross margins realized on the sale of residential units at Grand Harbor
and Oak Harbor can fluctuate significantly from period to period depending upon
the type and location of the product sold.

Club operation expenses increased in 1998 over 1997 mainly in response to the
growth in club operation revenues. Selling, general and administrative costs for
1997 included expenses for relocating the corporate offices and certain


                                       15
<PAGE>   18
costs for litigation associated with the merger and expenses for settling
lawsuits raised in connection with the merger. Accordingly, the 1997 costs
include certain "onetime" costs that were not repeated in 1998. Moreover, these
costs fell between 1997 and 1998 as real estate taxes and homeowner association
subsidies declined with the general sales progress of the projects. This was
coupled with reductions in professional fees from better management of those
relationships and other similar factors. The total effect was a $2,851,007
reduction in selling, general and administrative costs between 1997 and 1998.

Net other expense decreased $32,247 between 1997 and 1998 primarily due to a
decline in interest expense, offset by a drop in interest income. The interest
expense decline resulted from a net reduction in external debt. Reductions in
cash and cash equivalents available for short-term investment account for most
of the decline in interest income between 1997 and 1998.

These changes yielded a decrease in the net loss of $2,368,933 (a net loss for
1998 of $12,136,973 or $1.93 per share, as compared to $14,505,906 or $2.31 per
share for 1997).

1997 compared to Proforma 1996

Results of operations for the year ended December 31,1997 include the
consolidated revenues and expenses of Grand Harbor, Oak Harbor, Southbridge,
Chapman's Landing, Laguna Seca Ranch and the Lynnwood Center whereas 1996
results consist of the consolidated revenues and expenses for Grand Harbor, Oak
Harbor and the Lynnwood Center. As a result, the Company believes that its
consolidated statement of operations for 1997 is not comparable to the
consolidated statement of operations for 1996. To allow for comparability of
period to period variances, the 1997 results are compared to unaudited Pro Forma
1996 results of operations for 1996.

Total revenues for the year ended December 31, 1997 and for Pro Forma 1996 were
$55,627,898 and $36,856,185, respectively. Real estate sales increased by
$18,149,944 between 1997 and Pro Forma 1996. In the year ended December 31,
1997, real estate sales at Grand Harbor, Oak Harbor, Southbridge and Laguna Seca
Ranch were $17,840,512, $11,810,224, $1,162,500 and $12,782,271, respectively,
compared to sales of $19,500,609 and $5,944,954 at Grand Harbor and Oak Harbor,
respectively, in the comparable period of Pro Forma 1996. A total of 44 Grand
Harbor residential units were sold during 1997 at an average sale price of
approximately $365,000 as compared to 55 units sold during the comparable period
of Pro Forma 1996 at an average sale price of approximately $315,000. A total of
30 Oak Harbor residential units were sold during 1997, at an average sale price
of approximately $392,000. The fourth quarter of 1996 was the first quarter of
sales of residential units at Oak Harbor, and as such only 13 units were sold,
at an average sale price of approximately $457,000. Since sales prices vary
substantially at Grand Harbor and Oak Harbor, the average sales price of
residential units may fluctuate significantly from period to period depending
upon the type of product sold.

Delays in finalizing the Merger and subsequent litigation, blocked the start of
development activities at Southbridge, and accordingly, only 12 residential lots
were sold at Southbridge during 1997, at an average sale price of approximately
$42,000. In addition, one commercial lot of approximately 1.5 acres was sold for
$652,500. No lots were sold during 1996 at Southbridge.

Real estate sales for 1997 included the sale of the entire Laguna Seca Ranch.
The sale closed in late December 1997 and generated net sales proceeds of
$12,782,271.

Furthermore, the Lynnwood Center was sold in mid November 1997 for net sales
proceeds, after selling expenses, of $19,436,029. The net gain of $195,076
generated from the sale is included in other revenues. Rent revenues decreased
$527,583 between 1996 and 1997 mainly because the Lynnwood Center was sold in
the middle of November 1997. Moreover, Pro Forma 1996 included the results of
the 120 S. Spalding property, which was sold in April 1996.

Contributing to the growth in total revenues was an increase in club operations
revenues generated by the Grand Harbor and Oak Harbor clubs. Grand Harbor club
operation revenues increased $557,006 with the growth in overall memberships.
The Oak Harbor Club did not commence operations until March 1, 1997, and
generated club operation revenues of $530,652 for 1997.

An increase in real estate sales, club operations, and selling, general and
administrative expenses spurred the growth in operating costs and expenses. The
rise in the net real estate sales revenues from unit and lot sales between Pro
Forma 1996 and 1997 also increased related costs. Moreover, the sale of Laguna
Seca Ranch increased real estate 


                                       16
<PAGE>   19
sales expenses in 1997. The growth in the Grand Harbor club operations revenue
and the opening of the Oak Harbor club also increased costs between Pro Forma
1996 and 1997. The growth in selling general, and administrative costs will be
examined in a discussion that follows later.

Gross margin as a percentage of real estate sales was 28% (27% excluding the
sale of the Laguna Seca Ranch project) for 1997, compared to 29% for the
comparable period in Pro Forma 1996. Gross margins realized on the sale of
residential units at Grand Harbor and Oak Harbor may fluctuate significantly
from period to period depending upon the type of product sold.

Selling, general and administrative expenses increased $4,852,977 to $18,265,252
in 1997, from $13,412,275 in Pro Forma 1996. This increase is primarily due to
increases in expenses at the corporate office and Oak Harbor, and to a lesser
extent increases at Grand Harbor and Southbridge resulting from growing sales
and development activity. The relocation of the corporate offices, legal costs
related to the litigation associated with the Merger and the subsequent
settlement costs all contributed to a rise in corporate office costs. Increases
at Oak Harbor reflected a full year of operations in 1997 versus a partial year
for Pro Forma 1996.

The Oak Harbor Clubhouse was placed in service during 1997. Consequently,
depreciation and amortization expense increased from $1,249,179 in Pro Forma
1996 to $1,780,904 in 1997. Partially offsetting this was management's decision
as of June 30, 1996 to dispose of the Lynnwood Center and discontinued recording
depreciation on the related assets.

During 1997, the Company borrowed additional funds from related parties to
finance construction and development activities. The net effect was to increase
interest expense in 1997 over Pro Forma 1996. A portion of the external debt was
refinanced with related party debt, while repayments of external debt as a
result of the sale of units continued during 1997. These last two factors caused
a shift from external to related party interest expense between Pro Forma 1996
and 1997.

The combination of the above changes resulted in a net loss of $14,505,906
($2.31 per share) in 1997, as compared to a net loss of 12,482,198 ($2.85 per
share) in Pro Forma 1996.


YEAR 2000 UPDATE

The Company is proceeding with its program to address the issue of computer
programs and embedded computer chips that are unable to distinguish between the
year 1900 and 2000. The problems arise from computer software and hardware that
fails to distinguish dates in the "2000's" from dates in the "1900's", because
historically computers and software have used only two digits to identify the
year in a date. The Company has identified all of the assets that may be
affected by this problem, and has substantially completed the assessment of
these assets, which include computers and related software, building mechanical
systems, and certain equipment. Most of the major or significant computer
systems, mechanical systems, and equipment have been assessed through inquiries
with the related vendor or testing of the systems. The assessment of the
remaining major systems should be completed during the second quarter of 1999.
The majority of the systems which have been assessed have been found to be
compliant. The Company is currently working to replace the few non-compliant
systems found by its assessment, and is actively seeking quotes for purchasing
new systems or performing similar activities. The estimated cost of
modifications to become "Year 2000" compliant is not expected to exceed
$150,000, and should be completed during the third quarter of 1999.

The nature of the Company's business minimizes its exposure to the "Year 2000"
problem. Nevertheless, it is possible during the final assessment and the
implementation phase that other significant risks could be identified.
Contingency plans are beginning to be developed to address various possible
business interruptions, which include the failure of accounting and related
information systems including point of sales systems, building mechanical
systems, and equipment. To date, the Company has identified and is replacing all
systems that could present a material risk of not being "Year 2000" ready.
However, it is possible that unforeseen business interruptions could have a
material adverse effect on financial conditions and results of operations.
Moreover, if any third parties that provide important goods or services to the
Company fail to appropriately address their "Year 2000" issues, there could be a
material adverse effect on the Company's financial conditions and results of
operations.


                                       17
<PAGE>   20



FACTORS AFFECTING LEGEND'S BUSINESS PLAN

            In addition to the other information contained in this Annual
Report, the following factors should be considered carefully:

Interest Rates

            Legend's business and financial condition may be affected during
inflationary periods as a result of the higher costs and interest rates that
accompany these cycles. High inflation and interest rates push financing and
construction costs upward, which may adversely impact the Company's operations.
Moreover, housing demand typically declines during such periods because
financing is difficult, and at times impossible, for potential buyers to obtain
on acceptable terms, thereby depressing demand for the Company's products.

Substantial Debt Obligations

            As of December 31, 1998 Legend's outstanding notes payable to banks
and others aggregated $40,722,737, of which $25,777,613 matures in 1999,
$2,635,459 in 2000, $3,235,659 in 2001, $2,448,308 in 2002, $3,706,560 in 2003
and $2,919,138 thereafter. Additionally, as of December 31, 1998 payables to
related parties totaled $84,744,478, which matures in 2003. As of December 31,
1998 the Company had $4,446,864 of cash and cash equivalents, which will not be
sufficient to fund these obligations. There can be no assurance that the Company
will be able to refinance the existing indebtedness or obtain the necessary
construction and development financing to implement its business plan or that,
if available, the terms and conditions will be acceptable to the Company. If the
Company is unable to secure the necessary additional financing or capital when
needed, the business plans for its projects will probably require substantive
revision, which would have a material adverse effect on the Company's financial
condition and results of operations.

            Legend's ability to service its debts and other obligations when
they become due will also depend on various factors affecting its properties,
such as operating expenses and construction schedules, which, in turn, may be
adversely affected by general and local economic conditions. Certain
expenditures, such as loan payments and real estate taxes are typically fixed
obligations and are not necessarily decreased by adverse events affecting
revenues generated by the properties. Therefore, expenditures for developing
properties may exceed the income derived from the sale of lots or homes and
Legend would have to obtain funds from other sources to operate and maintain a
property in order to protect its investment.


Need for Additional Capital

            Funds from operations and proceeds from the sale of assets will not
be sufficient to allow Legend to complete its business plans for its remaining
properties. There can be no assurance that additional capital will be available
to Legend or that, if available, the terms and conditions will be acceptable to
Legend or will not be dilutive to Legend's stockholders. A failure to secure
additional capital when needed would have a material adverse effect on Legend's
results of operation and financial condition.

Real Estate Investment Risks

            Real property investments are subject to certain risks that are not
always susceptible to prediction or control. The cash flow generated by, and
capital appreciation realized from, real property investments may be adversely
affected by the national and regional economic climate (which, in turn, may be
adversely impacted by plant closings, industry slow downs, income tax rates,
interest rates, demographic changes and other factors), local real estate
conditions (such as oversupply of, or reduced demand for rental space or housing
in the area), the attractiveness of the properties, zoning and other regulatory
restrictions, competition from other land developers or developments, increased
operating costs (including maintenance costs, insurance premiums and real estate
taxes), perceptions by tenants or potential buyers of the safety, convenience
and attractiveness of the property and the willingness of the owner of the
property to provide capable management and adequate maintenance. In light of the
foregoing factors, there can be no assurance that Legend's properties will be
salable at a price or prices sufficient to recover costs.

            The cash flow generated by, or capital appreciation from, real
property investments may also be adversely impacted by changes in governmental
regulations, zoning or tax laws, potential environmental or other legal
liabilities and 


                                       18
<PAGE>   21
changes in interest rates. Real estate investments, particularly development
properties, are also relatively illiquid and, therefore, Legend's ability to
vary its portfolio promptly in response to changes in economic or other
conditions will in all likelihood be limited. In the event Legend is forced to
sell a property, Legend may sustain a loss due to the inherent lack of liquidity
in such an investment.

Development and Construction Activities

            Development and construction activities are subject to numerous
risks including delays in construction, certain of which (for example, acts of
God, labor strikes or shortages of supplies) may not be controllable, and
quality of construction, which depends upon a number of factors including the
professional capabilities of the contractor(s), site constraints, adherence to
plans and specifications, adequacy of supervision, and the financial ability of
the developer to bear any unanticipated additional costs of construction.
Similarly, development and construction activities generally require various
governmental and other approvals and permits, the issuance or granting of these
is not certain. There can be no assurance Legend will be able to secure all
entitlements and permits necessary to complete the development and construction
of each of its properties. Further, these activities require the expenditure of
funds on, and the devotion of management's time to, projects which may not be
completed or which, if completed, may not be completed on time or on budget.
Likewise, financing may not be available on favorable terms, if at all, for
development and construction projects and delays in completing development and
construction could result in increases in debt service costs.

            Legend currently provides, and will continue to provide, certain
warranties with respect to the quality of the construction of the homes built at
Grand Harbor and Oak Harbor. In addition, Florida law requires homebuilders to
provide for certain additional warranties that cannot be disclaimed, regardless
of whether there are actual deficiencies in the quality of materials used or the
construction of the homes built at Grand Harbor and Oak Harbor. The cost of
settling, or the failure to settle, any presently unasserted claims in the
future may have a material adverse effect on Legend's future results of
operations and financial condition.

Lack of Geographic Diversification

            The Southbridge and Ashburn Corporate Center properties are located
in close proximity to Washington, D.C. Similarly, Grand Harbor and Oak Harbor
are both located in close proximity to Vero Beach, Florida. Economic weakness or
recession in either of these two areas, or the occurrence of other adverse
circumstances could have a material adverse effect on Legend's results of
operation and financial condition.


Government Regulation

            Land Use and Zoning. Federal, state and local regulations may be
promulgated which restrict or curtail certain uses of land or existing
structures or require renovation or alteration of these structures. Any
restrictions on the anticipated development of the Company's properties could
affect the market for and price of the lots or homes and prevent or delay sales.
Furthermore, obtaining any additional permits or other consents of local
governments for development of properties may require public hearings and
meetings with public officials and community groups. There can be no assurance
that some or all of the entitlements relating to the Company's properties will
not be revoked or modified in the future. From time to time, governmental
entities have imposed limitations on the development of certain areas. In
addition, it may be difficult or impossible to modify existing zoning to respond
to changing market conditions in order to increase the realizable value of the
property. Any revocation or modification, or refusal to modify existing
entitlements, could have a material adverse effect on the Company's results of
operations and financial condition.

            Environmental Matters. Under various federal, state and local laws,
ordinances and regulations, an owner, operator, manager or developer of real
estate may be liable for the cost of removing or remediating certain hazardous
or toxic substances (including asbestos containing materials) on, under or in
real estate owned, operated, managed or developed. These enactments often impose
liability without regard to whether the owner, operator, manager or developer
knew of, or was responsible for, the presence of the hazardous or toxic
substances. The cost of any required remediation and the accompanying liability
is generally not limited under these enactments and could exceed the value of
the property or the aggregate assets of the owner, operator, manager or
developer. The presence of hazardous or toxic substances, or the failure to
properly remediate these substances, may adversely affect an owner's ability to
sell or rent the property, or to borrow money using the property as collateral.
In addition, liability may be imposed for releasing asbestos containing
materials into the air. In connection with owning and operating its 


                                       19
<PAGE>   22
properties, Legend may be potentially liable for these costs. Legend does not
maintain insurance for any of these potential environmental liabilities and does
not anticipate securing any such insurance in the foreseeable future.

            Americans With Disabilities Act. Under the Americans with
Disabilities Act of 1990 (the "ADA"), all public accommodations must comply with
certain federal requirements related to access and use by disabled persons.
These requirements became effective in 1992. The ADA has separate compliance
requirements for "public accommodations" and "commercial facilities" but
generally requires making buildings accessible to people with disabilities.
Noncompliance with these requirements could result in the imposition of fines by
the federal government or an award of damages to private litigants. Management
believes that Legend is substantially in compliance with federal requirements
related to access and use by disabled persons.

            Healthcare Regulations. Healthcare operations in the State of
Florida are subject to varying degrees of regulation and licensing by health or
social service agencies and other regulatory authorities. Changes in the laws or
new interpretations of existing laws can have a significant effect on methods
and costs of doing business. Currently, no federal rules explicitly define or
regulate assisted living. In addition, the Royal Palm Convalescent Center does
not accept Medicare or Medicaid reimbursement. However, federal, state or local
laws or regulatory procedures which might adversely affect assisted living
businesses could be expanded or imposed and changes to licensing and
certification standards could have a material adverse effect on Legend's results
of operations and financial condition.

Book Value Not Reflective of Current Realizable Value

            Legend currently evaluates the carrying value of its real property
and other assets on an ongoing basis relying on a number of factors, including
operating results, business plans, budgets and economic projections. In
addition, Legend considers non-financial data such as continuity of personnel,
changes in the operating environment, competitive information, market trends and
client and business relationships. The future value of these assets is subject
to numerous contingencies, including the completion of construction and
development. A change in any or all of these factors could result in an
impairment in value of Legend's assets and the realizable value could differ
significantly from the current carrying value of these assets.

Bankruptcy Risks

            If Legend defaulted on its indebtedness, it may be required to
restructure its financial affairs under the Federal Bankruptcy Code or seek some
other type of relief. A restructuring or other reorganization under the
Bankruptcy Code or otherwise may result in the Stockholders losing their entire
interest in the Company.

Issuance of Preferred Stock or Common Stock

            Legend's board of directors has the authority to issue preferred
stock in one or more series or classes with such designations, preferences and
rights and such qualifications, limitations or restrictions as determined by the
board. The issuance of preferred stock or common stock could have a dilutive or
other material adverse effect on the holders of Legend's shares of common stock.

Shares Available for Future Sale

            As of December 31, 1998, Holdings owns approximately 80% of Legend's
outstanding shares of common stock. These shares are subject to resale
restrictions but a portion may, in certain circumstances, be registered for
sale. Sales of a substantial number of these shares of common stock in the
public market or the perception that sales occur could adversely affect the
market price of the common stock and Legend's ability to raise capital in the
future.

Dividend Policy

            The Company has not paid cash dividends since the first quarter of
1990 and does not contemplate paying cash dividends until it generates
sustainable cash flow in excess of its capital needs. There can be no assurance
that Legend will ever generate sufficient cash flow to pay dividends to its
stockholders. Moreover, certain of Legend's loan agreements prohibit the payment
of dividends. If Legend issues preferred stock with a dividend, the
stockholders' right to receive dividends, if any, will be subordinated to that
of the holders of preferred stock.


                                       20
<PAGE>   23


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The Company is exposed to market risks associated with interest rate changes on
the debt used to fund its construction, development, and operating activities.
The Company's interest rate risk management objective is to limit the impact of
interest rate changes on earnings and cash flow and to lower overall borrowing
costs. The Company uses a mixture of fixed rate debt, interest rate swap
agreements, and offsetting financial instruments such as annuity contracts and
certificates of deposits to mitigate this risk. The Company does not enter into
other derivative financial instruments for speculative purposes.

The Company's interest rate risk is monitored by management. The table below
presents the principal amounts, weighted-average interest rates and fair values
required to evaluate the expected cash flows of the Company under debt and
related agreements and its sensitivity to interest rate changes at December 31,
1998.



<TABLE>
<CAPTION>
                                                                                         There-                       Fair
      (000,000 omitted)         1999        2000      2001       2002       2003         after         Total          Value
                                ----        ----      ----       ----       ----          -----        -----          -----

<S>                              <C>        <C>        <C>        <C>        <C>          <C>         <C>            <C>     
Fixed rate debt                    9.3        0.4        0.4        0.4        0.4          2.9         13,8           13.8   
Average interest rate            11.1%       6.3%       6.3%       6.3%       6.3%         6,3%         7.1%                  
                                                                                                                              
Variable rate LIBOR debt          15.0        0.1        0.1        0.0       67.9          0.0         83.1           83.1   
Average interest rate             9.5%       9.7%       9.7%       9.7%       9.7%         0.0%         9.7%                  
                                                                                                                              
Variable rate prime debt           0.1        0.1        0.2        0.2       20.1          0.0         20.7           20.7   
Average interest rate             8.7%       8.7%       8.7%       8.7%      8..7%         0.0%         8.7%                  
                                                                                                                              
Variable rate bank cost of                                                                                                    
funds debt                         1.3        2.0        2.6        1.9        0.0          0.0          7.8            7.8   
Average interest rate             7.6%       7.6%       7.6%       7.6%       0.0%         0.0%         7.6%             
</TABLE>


The table only incorporates those exposures that exist as of December 31, 1998,
and it does not consider those exposures or positions, which could arise after
that date. As a result, the Company's gain or loss with respect to interest rate
fluctuations will depend on the exposures that arise after December 31, 1998,
the Company's hedging strategy during that period and interest rates.

ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Index to Consolidated Financial Statements on Page F-1 of this Report for
financial statements and financial statement schedules, where applicable.

See Item 6, "Selected Financial Data," for the supplemental financial
information specified by Item 302 of Regulation S-K.


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

Not Applicable


                                       21
<PAGE>   24




                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

            The directors and the executive officers of the Company as of March
19, 1999 are:

<TABLE>
<S>         <C>                        <C>    
            Walter E. Auch, Sr.        Director
            Helge Lund                 Director
            Jan Petter Storetvedt      Director, Chairman of the Board
            Robert M. Ungerleider      Director
            Fred E. Welker, III        Director
            Peter J. Henn              President and Chief Executive Officer
            Robert B. Cavoto           Vice President, Chief Financial Officer and Assistant Secretary
</TABLE>


Walter E. Auch, Sr., age 77, was the Chairman and Chief Executive Officer of the
Chicago Board of Options Exchange from 1979 to 1986. Prior to that time, he was
Executive Vice President, Director and a member of the executive committee of
Paine Webber. Mr. Auch is a Director of Pimco L.P., Brinson Partners Funds,
Advisors Series Trust, Smith Barney Concert Series Funds, Smith Barney Trak
Fund, Nicholas Applegate Funds, Fort Dearborn Fund, Semele Group, Inc. and BSRT
Management Corp. and a Trustee of Banyan Strategic Realty Trust, Hillsdale
College and the Arizona Heart Institute. Mr. Auch has been a director of the
Company since 1988.

Helge Lund, age 36, is presently Executive Vice President of Aker RGI ASA,
responsible for Investments. He has been employed by Aker RGI ASA since January
1999. Mr. Lund is a graduate of the Norwegian School of Economics and Business
Administration and has an MBA from INSEAD in France. He serves as a director for
Constructor Dexion Group PLC, Atlas Stord AS and Polynor Partners AS. Mr. Lund
has been a director of the Company since March 1999.

Jan Petter Storetvedt, age 43, is presently Senior Vice President, Investments
Real Estate of Aker RGI ASA. Since March 1997, he has served as chairman of the
board of Avantor ASA. From December 1991 to March 1997, he served as President,
Chief Executive Officer and Director of Avantor ASA, a Norwegian publicly traded
real estate company. Mr. Storetvedt has been Chairman of the Board of the
Company since June 1997.

Robert M. Ungerleider, age 57, is presently the President of Pilot Books, a book
publisher located in Greenport, New York, and practices law with and is of
counsel to the firm of Felcher, Fox & Litner P.C., in New York, New York. He has
founded, developed and sold a number of start-up ventures including Verifone
Finance, an equipment leasing business, SmartPage, a paging service company and
Financial Risk Underwriting Agency, Inc., an insurance agency specializing in
financial guarantee transactions. Prior to these endeavors, Mr. Ungerleider
practiced real estate and corporate law for ten years. Mr. Ungerleider received
his B.A. Degree from Colgate University and his Law Degree from Columbia
University Law School. Mr. Ungerleider has been a director of the Company since
1988.

Fred E. Welker, III, age 51, has been the President of Realty Financial
Advisors, Inc., a real estate investment banking firm, since January 1993. From
1982 to 1992, Mr. Welker was the Executive Vice President for the Southeast
Regional Office of Sonnenblick-Goldman Company, a real estate investment banking
firm. From 1981 to 1982, Mr. Welker was Vice President-Joint Ventures for
American Savings & Loan Association, and from 1976 to 1981 he was a commercial
loan officer with First Federal of Broward (merged with Glendale Federal). Mr.
Welker has been a director of the Company since January 1997.

Peter J. Henn, age 38, has been President of the Company since March 1999. Prior
to his appointment, Mr. Henn was Vice President, General Counsel and Secretary
of the Company since November 1997. Since March 1994, Mr. Henn has represented
certain of the Company's Florida subsidiaries and provided real estate closing
and escrow services to the company as President of Harbor Title & Escrow
Company. Mr. Henn received his B.A. and M.A. in Economics from Florida Atlantic
University and his J.D. from the University of Miami School of Law.

Robert B. Cavoto, age 38, has been Vice President, Chief Financial Officer and
Assistant Secretary of the Company since November 1997. During 1997, prior to
this appointment, Mr. Cavoto was a financial consultant to LPI Development,
Inc., a subsidiary of the Company. From 1991 to 1997, he was an Asset Manager
with Banyan Management Corp., and was responsible for entitlement, development,
financing and disposition activities for a portfolio of mixed-use and
residential land developments. From 1988 to 1991, Mr. Cavoto was Vice President
of 


                                       22
<PAGE>   25
finance for a real estate company. Prior to that he was a manager in KPMG
LLP's real estate practice. Mr. Cavoto received his B.S in accounting from
Northern Illinois University and is a Certified Public Accountant.

Edward F. Podboy resigned as President of the Company in March 1999. Mr. Jon
Alvar Oyasaeter resigned as a Director of the Company in March 1999.

ITEM 11. EXECUTIVE COMPENSATION

A. DIRECTOR COMPENSATION

The Directors are paid an annual fee of $15,000, payable quarterly, plus $875
for each board or audit committee meeting attended in person and $250 an hour
for any of these meetings attended via telephonic conference call. In addition,
each Director is reimbursed for out-of-pocket expenses incurred in attending
meetings of the Board.

B. EXECUTIVE COMPENSATION

Salary Compensation Table. The following information is furnished with respect
to current and former Executive Officers whose compensation for the year ended
December 31, 1998 exceeded $100,000:


<TABLE>
<CAPTION>

                                                                                             Annual Compensation
                                                                      ---------------------------------------------------------

                                                                                                                   All Other
                 Name and Principal Position             Year             Salary              Bonus              Compensation
---------------------------------------------------    -----------    ---------------    ----------------     -----------------


<S>                                                      <C>             <C>                <C>                     <C>
Peter J. Henn                                            1998              n/a                 n/a                    n/a
Chief Executive Officer (1)                              1997              n/a                 n/a                    n/a
                                                         1996              n/a                 n/a                    n/a


Edward F. Podboy, Jr.                                    1998            $245,000           $390,932                     n/a
Former Chief Executive Officer (2)                       1997            $133,802            $44,985                 $31,000
                                                         1996                 n/a                n/a                     n/a

Robert B. Cavoto,                                        1998            $105,000            $30,000                 $11,078
Vice President, Chief Financial Officer and              1997                 n/a                n/a                     n/a
Assistant Secretary                                      1996                 n/a                n/a                     n/a
</TABLE>


(1)   Mr. Henn has served as President and Chief Executive Officer of the
      Company since March 1999. During 1998 and 1997, Mr. Henn was compensated
      under a Legal Services Agreement.

(2)   Mr. Podboy served as President and Chief Executive Officer of the Company
      from August 1997 to March 1999. From April to August 1997, Mr. Podboy
      served as President of LPI Development, Inc. a subsidiary of the Company.
      All Other Compensation for 1997 is a reimbursement for relocation
      expenses. Pursuant to his Employment Agreement, the Company remains
      obligated to pay Mr. Podboy his base salary, as defined in the employment
      agreement, through its expiration date of July 31, 2001 and to be
      determined additional incentive compensation.

The Company has entered into a Legal Service Agreement with the law firm of
Peter J. Henn, P.A. which provides, among other things, that the Company will
pay $210,000 for legal services provided to the Company for the fiscal year
ending December 31, 1999 and that Harbor Title & Escrow will continue to provide
title insurance, as required, at the minimum title insurance rates allowed under
Florida law.


C. EXECUTIVE AND DIRECTORS' STOCK OPTION PLAN

On June 25, 1993, the Company's stockholders approved and adopted the 1993
Executive and Directors' Stock Option Plan (the "Plan"). The Plan grants the
Board of Directors the authority to issue up to 40,000 shares (adjusted for the
stock split) of the Company's common stock for stock option awards. The Plan
consists of an Executive Option Grant Program and a Director Option Grant
Program. Under the Director Option Grant Program, each 

                                       23
<PAGE>   26
Director holding office on the tenth business day after adjournment of the
annual meeting automatically receives an option to acquire 1,000 shares. Options
granted vest 50% upon the first anniversary of the date of the grant and 50%
upon the second anniversary of the date of the grant and expire ten years from
the date of the grant. The exercise price for the options granted in July 1997,
January 1997 (1996 Annual Meeting), 1995, 1994 and 1993 is $4.50, $7.75, $15.64,
$17.19 and $15.64 per share, respectively.

The Board administers the Executive Option Grant Program and has the authority
to determine, among other things, the individuals to be granted executive
options, the exercise price at which shares may be acquired, the number of
shares subject to each option and the exercise period of each option. The Board
is also authorized to construe and interpret the Executive Option Grant Program
and to prescribe additional terms and conditions of exercise in option
agreements and provide the form of option agreement to be utilized with the
Executive Option Grant Program. No Director is eligible to receive options under
the Executive Option Grant Program.

Options granted under the Plan are not transferable except by will or by the
laws of descent and distribution, and are exercisable during an optionee's
lifetime only by the optionee or the appointed guardian or legal representative
of the optionee. Upon the: (a) death or permanent and total disability of an
optionee; or (b) retirement in accord with the Company's retirement practices,
then any unexercised options to acquire shares will be exercisable at any time
within one year in the case of (a) and ninety days in the case of (b) (but in no
case beyond the expiration date specified in the Option Agreement). If, while
unexercised options remain outstanding under the Plan, the Company ceases to be
a publicly traded company, or if the Company merges with another entity or a
similar event occurs, all options outstanding under the Plan shall immediately
become exercisable at that time.

The Plan requires the optionee to pay, at the time of exercise, for all shares
acquired on exercise in cash, shares or, in the case of the Executive Option
Grant Program, other forms of consideration acceptable to the Board.

If the Company declares a stock dividend, splits its stock, combines or
exchanges its shares, or engages in any other transactions which results in a
change in capital structure such as a merger, consolidation, dissolution,
liquidation or similar transaction, the Board may adjust or substitute, as the
case may be, the number of shares available for options under the Plan, the
number of shares covered by outstanding options, the exercise price per share of
outstanding options, any target price levels for vesting of the options and any
other characteristics of the options as the Board deems necessary to equitably
reflect the effects of those changes on the option holders.

Pursuant to the Plan, the Board granted an aggregate 14,440 options thru
December 31, 1996. Pursuant to the Company's Merger on December 31, 1996 which
resulted in a change in control (as defined in the Merger agreement),
substantially all stock options issued to the executive officers and various
employees of Banyan Management Corp. under the Executive Option Grant Program
became fully vested and exercisable until December 31, 1997. None of these
options were exercised and have been cancelled.

The exercise prices as well as the number of shares issuable on any options
granted prior to the Merger have been adjusted to give effect to the Company's
25 to 1 reverse stock-split as approved by its stockholders.

Options granted after December 31, 1996 (other than which have been described
above) under the Executive Option Grant Program will be exercisable and vested
in installments as follows: (1) 33.3% of the number of shares commencing on the
first anniversary of the date of grant; (ii) an additional 33.3% of the shares
commencing on the second anniversary of the date of the grant; and (iii) an
additional 33.4% of shares commencing on the third anniversary of the date of
grant. Options for all shares as granted under the Director Option Grant Program
will be exercisable and vest as follows: (i) 50.0% of the number of shares
commencing on the first anniversary of the date of grant; and (ii) an additional
50.0% of the number of shares commencing on the second anniversary of the date
of grant. The Board is granted discretion to determine the term of each Option
granted under the Executive Option Grant Program, but in no event will the term
exceed ten years and one day from the date of grant.

There were no stock options granted to or exercised by any present or former
executive officer during the year ended December 31, 1998.



                                       24
<PAGE>   27


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following entity is known by the Company (based on filings on Schedule 13d)
to be the beneficial owner of more than five percent (5%) of the outstanding
shares of common stock of the Company as of March 31, 1999.

<TABLE>
<CAPTION>
                                          Name and Address of                        Amount of                Percent
         Title of Class                    Beneficial Owner                    Beneficial Ownership         of Interest
------------------------------    --------------------------------------     -------------------------    ---------------

<S>                                 <C>                                               <C>                        <C>
Shares of Common                    RGI Holdings, Inc. and affiliates                 5,057,646                  80%
Stock, $0.01 par value               2025 First Avenue, Suite 830
                                       Seattle, Washington 98121                     
</TABLE>

The following table sets forth the ownership interest and shares owned directly
or indirectly by the directors and principal officers of the Company as of March
31, 1998:

<TABLE>
<CAPTION>
                                       Name and Address of                        Amount of                     Percent
          Title of Class                Beneficial Owner                  Beneficial Ownership (1)            of Interest
-----------------------------   -----------------------------------       -------------------------     ------------------------

<S>                               <C>                                           <C>                        <C>
Shares of Common                      Robert M. Ungerleider                     1,560 Shares                 Less than 1%
Stock, $0.01 par value                
                                   
Shares of Common                   All Directors and Officers                   1,560 Shares                 Less than 1% 
Stock, $0.01 par value                   of the Company,                                                                  
                                     as a group (7 persons)                                                               
                                                                                                                          
</TABLE>

(1) excludes 8,340 options granted to acquire shares at prices ranging from
$7.74 to $28.125 per share which have vested.


                                       25
<PAGE>   28


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The following is a summary of certain relationships and other significant
transactions with related parties during 1998 and outstanding intercompany
balances as of December 31, 1998 and 1997:

Consulting and Other Fees

The Company paid the law firm of Peter J. Henn, P.A. $232,022 during the fiscal
year ending December 31, 1998 for legal services provided to the Company by
Peter J. Henn, the Company's President and Chief Executive Officer. Mr. Henn
received no other compensation from the Company for serving as an officer of the
Company. Harbor Title & Escrow Company provides all title insurance that the
Company is obligated to deliver to purchasers of homes at its Florida
properties. Mr. Henn is the sole owner and President of Harbor Title & Escrow
Company and received $109,428 in title insurance premiums from the Company
during the fiscal year ending December 31, 1998. Harbor Title & Escrow Company
charges the Company the minimum title insurance rates allowed under Florida law
as determined by the Florida Department of Insurance.

The Company has entered into a Legal Service Agreement with the law firm of
Peter J. Henn, P.A. which provides, among other things, that the Company will
pay $210,000 for legal services provided to the Company for the fiscal year
ending December 31, 1999 and that Harbor Title & Escrow will continue to provide
title insurance, as required, at the minimum title insurance rates allowed under
Florida law.

Payables

<TABLE>
<CAPTION>
Payables to related parties consist of the following at December 31:                          1998                   1997
                                                                                              ----                   ----

<S>                                                                                     <C>                     <C>
              Mortgage note payable to Holdings with interest payable quarterly
              at LIBOR plus 2.5%. Principal payments equal to 20% of Southbridge
              and 50% of other collateral sales revenues is payable quarterly
              with the balance due April 1, 2003. The debt is secured by certain
              real estate inventory and property.                                          $30,649,872                30,649,872


              Mortgage note payable to Holdings with interest at Prime plus 2%
              and partially secured by certain real estate inventory. Interest
              and principal are payable quarterly after certain other debt
              payments provided that a $4.5 million cash reserve remains.
              Quarterly principal payments are equal to 80% of the defined net
              cash flow for Southbridge, Grand Harbor, and Oak Harbor with the
              balance due April 1, 2003. Unpaid interest will be capitalized
              into the principal balance annually.                                          35,024,632                20,960,448

              Unsecured note payable to RGI, Inc. with interest at Prime plus 2%
              Principal and interest is payable on the same terms, but after
              payments on the Mortgage note payable discussed immediately above
              with the remainder due April 1, 2003. Unpaid interest will be
              capitalized into the principal balance annually.                              16,821,696                14,412,667

              Unsecured note payable to Holdings, interest at Prime plus 2%.
              Principal and interest due June 1, 1999.                                       2,248,278                     -

              Accrued interest                                                                  -                      6,868,311

              Other                                                                             -                          2,629
                                                                                           -----------                ----------

                                                                                           $84,744,478                72,893,927
                                                                                           ===========                ==========
</TABLE>


                                       26
<PAGE>   29


Holdings has provided to the Company a $5 million credit facility to provide
sufficient working capital to fund ongoing development, construction and
operating activities. The credit facility provides for interest at Prime plus
2%, matures on April 1, 2003 and is secured by certain real estate inventory and
property.

Indemnity

Aker RGI ASA, the indirect parent of Holdings, has provided an indemnity, to a
maximum of $15,000,000, to the bonding company for development bonds at
Southbridge, of which an aggregate total of approximately $9.8 and $5.6 million
were outstanding at December 31, 1998 and March 19, 1999, respectively.


                                       27
<PAGE>   30


                                     PART IV

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

            (a)         Exhibits:

Exhibit No.

<TABLE>
<CAPTION>

<S>                  <C>
3.1                  --   Amended and Restated Certificate of Incorporation of Registrant.(1)

3.2                  --   Bylaws of Registrant, as amended and restated as of July 1, 1996.(2)

10.1                 --   Edward F. Podboy's Employment Contract dated _______, 1998 (3)

10.2                 --   Credit Agreements, Notes and Warrants between Registrant and Morgens Waterfall, Vintiadis & Co. Inc.(4)

10.3                 --   Loan Modification Agreement, dated as of May 20, 1996, by and between Registrant and RGI Holdings, Inc. 
                          (SoGen Loan)(5)

10.4                 --   Loan Modification Agreement, dated as of May 21, 1996, by and between Registrant and RGI Holdings, Inc.
                          (Morgens Loan)(5)

10.5                 --   Registration Rights Agreement, dated as of May 21, 1996, by and between Registrant and RGI Holdings,
                          Inc.(5)

10.6                 --   Second Stipulation and Agreement of Settlement, signed September 17, 1997, In Re: Banyan Mortgage
                          Investment Fund Shareholders Litigation. (6)

21.1                 --   Subsidiaries of the Registrant

27.1                 --   Financial Data Schedule

99.1                 --   Form of Director Stock Option Agreements dated July 1, 1993, July 24, 1994 and July 7, 1995.(7)

99.2                 --   Form of Executive Stock Option Agreements dated July 1, 1993, January 12, 1994 and February 8, 1995.(7)
</TABLE>

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


(1)       Incorporated by reference to the Registrant's Report on Form 10-K for
          the year ended December 31, 1996.

(2)       Incorporated by reference to the Registrant's Report on Form 10-Q for
          the quarter ended June 30, 1996.

(3)       Incorporated by reference to the Registrant's Report on Form 10-K for
          the year ended December 31, 1997.

(4)       Incorporated by reference to Exhibits 10(a) through 10(n) to the
          Registrant's Report on Form 10-K for the year ended December 31, 1994.

(5)       Incorporated by reference to the Registrant's Report on Form 8-K dated
          May 20, 1996.

(6)       Incorporated by reference to the Registrant's Report on Form 10-Q for
          the quarter ended September 30, 1997.

(7)       Incorporated by reference to the Registrant's Report on Form 10-K for
          the year ended December 31, 1995.

          (b)       Reports on Form 8-K:


          No reports were filed on Form 8-K during the quarter ended December
31, 1998.





                                       28
<PAGE>   31






                                   SIGNATURES

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

                                     LEGEND PROPERTIES, INC.



                                     By:      /s/ Peter J. Henn
                                              -------------------------------
                                                Peter J. Henn, President,
            April 15, 1999                       Chief Executive Officer

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

<TABLE>
<S>                                                                  <C> 
By:/s/ Peter J. Henn                                                 Date:       April 15, 1999
       -------------
            Peter J. Henn, President,
            Chief Executive Officer

By:/s/Robert B. Cavoto                                               Date:       April 15, 1999
       ---------------
            Robert B. Cavoto,
            Chief Financial Officer, Vice President
            and Assistant Secretary

By:/s/Walter E. Auch, Sr.                                            Date:       April 15, 1999
      -------------------
            Walter E. Auch, Sr., Director

By:/s/Helge Lund                                                     Date:       April 15, 1999
      ----------
            Helge Lund, Director

By:/s/Jan Petter Storetvedt                                          Date:       April 15, 1999
      ---------------------
            Jan Petter Storetvedt, Director

By:/s/Robert M. Ungerleider                                          Date:       April 15, 1999
      ---------------------
            Robert M. Ungerleider, Director

By:/s/Fred E. Welker, III                                            Date:       April 15, 1999
      -------------------
            Fred E. Welker, III, Director
</TABLE>


                                       29


<PAGE>   32
                   LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                     (A SUBSIDIARY OF RGI HOLDINGS, INC.)

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                           PAGES
                                                                                           -----
<S>                                                                                        <C>
Report of Independent Auditor .....................................................        F-2

Consolidated Balance Sheets at December 31, 1998 and 1997.........................         F-3

Consolidated Statements of Operations For the Years Ended December 31, 1998,
   1997, and 1996.................................................................         F-4

Consolidated Statements of Stockholders' Equity (Deficit) For the Years Ended
   December 31, 1998, 1997 and 1996...............................................         F-5

Consolidated Statements of Cash Flows For the Years Ended December 31, 1998,
   1997, and 1996.................................................................   F-6 - F-7

Notes to Consolidated Financial Statements........................................  F-8 - F-23
</TABLE>

   All schedules are omitted since the required information is not present or is
not present in amounts sufficient to required submission of the schedule or
because the information required is included in the consolidated financial
statements and notes thereto.

                                      F-1
<PAGE>   33




                         INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Legend Properties, Inc.:

We have audited the accompanying consolidated balance sheets of Legend
Properties, Inc. (a subsidiary of RGI Holdings, Inc.) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the years
in the three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the management of Legend Properties, Inc.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Legend Properties,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.

                                        KPMG LLP

Washington, D.C.
February 5, 1999


                                      F-2
<PAGE>   34


                   LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                     (A SUBSIDIARY OF RGI HOLDINGS, INC.)
                         CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                                           December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 1998                      1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>                        <C>
                                     Assets
                                     ------

Real estate inventory                                                                      $  82,873,914                103,857,159
Assets held for sale                                                                           7,916,175                          -
Cash and cash equivalents                                                                      4,446,864                 12,732,681
Restricted cash and investments                                                               19,017,860                 15,230,538
Accounts and notes receivable                                                                  1,491,267                  1,012,877
Property and equipment, net                                                                   24,645,281                 25,759,305
Intangibles, net of accumulated amortization of
   $1,052,895 in 1998 and $1,137,935 in 1997                                                   1,646,542                  1,828,470
Other assets, net of accumulated amortization of
   $3,646,481 in 1998 and $2,291,080 in 1997                                                   5,520,388                  2,449,522
                                                                                           -------------              -------------
                                                                                           $ 147,558,291                162,870,552
                                                                                           -------------              -------------

                      Liabilities and Stockholders' Equity
                      ------------------------------------


Notes payable to banks and others                                                          $  40,722,737                 60,411,332
Payables to related parties                                                                   84,744,478                 72,893,927
Accounts payable                                                                               3,033,693                  3,406,650
Other notes and liabilities                                                                   14,443,250                  9,407,537
                                                                                           -------------              -------------
                                                                                             142,944,158                146,119,446
                                                                                           -------------              -------------
Stockholders' equity :
   Common stock, $.01 par value.  Authorized
      10,000,000 shares; 6,311,678 shares issued and
      6,290,874 shares outstanding at
      December 31, 1998 and 1997                                                                  63,117                     63,117
   Additional paid-in capital                                                                 44,171,103                 44,171,103
   Accumulated deficit                                                                       (39,498,771)               (27,361,798)
   Treasury stock, 20,804 shares at December 31, 1998 and 1997                                  (121,316)                  (121,316)
                                                                                           -------------              -------------
Total stockholders' equity                                                                     4,614,133                 16,751,106
Commitments and contingencies
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                           $ 147,558,291                162,870,552
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to the Consolidated Financial Statements

                                      F-3
<PAGE>   35


                   LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                     (A SUBSIDIARY OF RGI HOLDINGS, INC.)
                    CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------------------------
                                                                            1998                     1997                   1996
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                      <C>                     <C>
Revenues:
   Real estate sales                                                   $ 65,218,900              43,595,507              25,445,563
   Club operations                                                        5,953,105               5,344,575               4,256,917
   Patient service                                                        2,600,866               2,718,014               2,617,615
   Rent                                                                           -               2,186,157               2,480,846
   Other                                                                  1,960,585               1,783,645               1,822,350
                                                                       ------------------------------------------------------------
                     Total revenues                                      75,733,456              55,627,898              36,623,291
                                                                       ------------------------------------------------------------

Operating costs and expenses:
   Real estate sales                                                     49,628,187              31,343,932              18,172,004
   Club operations                                                        7,291,432               6,364,169               4,827,002
   Patient service direct costs                                           1,919,183               1,521,292               1,378,808
   Rental operations                                                              -                 359,325                 396,696
   Other                                                                  1,417,681                 612,207                 594,413
   Provision for loss on assets held for sale                                     -                       -               1,000,000
   Selling, general and administrative                                   15,414,245              18,265,252               7,073,640
   Depreciation and amortization                                          2,092,509               1,780,904               1,227,565
                                                                       ------------------------------------------------------------
    Total operating costs and expenses                                   77,763,237              60,247,081              34,670,128
                                                                       ------------------------------------------------------------
Operating income (loss)                                                  (2,029,781)             (4,619,183)              1,953,163
                                                                       ------------------------------------------------------------

Other income (expenses):
   Interest income                                                          944,800               1,386,920                 599,758
   Interest income, related party                                                 -                  73,339                 146,277
   Interest expense, including loan cost
      amortization                                                       (5,596,055)             (7,503,319)             (4,791,157)
   Interest expense, related party                                       (5,853,716)             (4,823,954)               (810,230)
   Other, net                                                               397,779                 727,575                 491,034
                                                                       ------------------------------------------------------------
                 Net other expense                                      (10,107,192)            (10,139,439)             (4,364,318)
                                                                       ------------------------------------------------------------
Loss before minority interests                                          (12,136,973)            (14,758,622)             (2,411,155)
                                                                       ------------------------------------------------------------
Minority interests in loss of
   consolidated subsidiaries                                                      -                 252,716                 257,572
                                                                       ------------------------------------------------------------


Net loss                                                               $(12,136,973)            (14,505,906)             (2,153,583)
                                                                       ------------------------------------------------------------
Net loss per share - basic and diluted                                 $      (1.93)                  (2.31)                  (0.49)
                                                                       ------------------------------------------------------------
Weighted average number of common shares outstanding                      6,290,874               6,286,322               4,392,163
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes to the Consolidated Financial Statements

                                      F-4
<PAGE>   36
                    LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                      (A SUBSIDIARY OF RGI HOLDINGS, INC.)
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                           COMMON STOCK
                                                           ------------                ADDITIONAL
                                                    SHARES             PAR VALUE        PAID-IN
                                                    ------             ---------        CAPITAL
                                                                                        -------
<S>                                               <C>                  <C>           <C>
Balances at December 31, 1995                     4,386,986            $ 43,870      $    (36,120)

    Merger of Grand Harbor Corporation
       and Grand Harbor Associates, Inc.            -                   -                  (1,000)
    Stockholder contribution                        -                   -              21,663,015
    Business combination with Banyan
       Mortgage Investment Fund                   1,890,562              18,906        22,167,813
    Net loss                                        -                   -                 -

                                                  ---------            --------      -------------
Balances at December 31, 1996                     6,277,548              62,776        43,793,708

    Purchase of fractional shares                   -                  -                  (22,267)
    Repurchase of shares                            -                  -                  -
    Sale of stock                                    34,130                 341           399,662
    Net loss                                        -                  -                  -
                                                  ---------            --------      -------------
Balances at December 31, 1997                     6,311,678              63,117        44,171,103

    Net loss                                        -                  -                  -
                                                  ---------            --------      -------------
Balance at December 31, 1998                      6,311,678            $ 63,117      $ 44,171,103
                                                  =========            ========      =============
</TABLE>

<TABLE>
<CAPTION>

                                                                                               TOTAL
                                                    ACCUMULATED              TREASURY      STOCKHOLDERS'
                                                      DEFICIT                 STOCK       EQUITY (DEFICIT)
                                                      -------                 -----       ----------------
<S>                                                 <C>                <C>               <C>
Balances at December 31, 1995                       $(10,703,309)       $      -           $ (10,695,559)

    Merger of Grand Harbor Corporation
       and Grand Harbor Associates, Inc.                   1,000               -                   -
    Stockholder contribution                              -                    -              21,663,015
    Business combination with Banyan
       Mortgage Investment Fund                           -                  (11,316)         22,175,403
    Net loss                                          (2,153,583)              -              (2,153,583)

                                                    -------------       -------------       -------------
Balances at December 31, 1996                        (12,855,892)            (11,316)         30,989,276

    Purchase of fractional shares                         -                    -                 (22,267)
    Repurchase of shares                                  -                 (110,000)           (110,000)
    Sale of stock                                         -                    -                 400,003
    Net loss                                         (14,505,906)              -             (14,505,906)
                                                    -------------       -------------       -------------
Balances at December 31, 1997                        (27,361,798)           (121,316)         16,751,106

    Net loss                                         (12,136,973)              -             (12,136,973)
                                                    -------------       -------------       -------------
Balance at December 31, 1998                        $(39,498,771)       $   (121,316)       $  4,614,133
                                                    =============       =============       =============
</TABLE>
See accompanying notes to Consolidated Financial Statements.


                                      F-5
<PAGE>   37


                    LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                       (A SUBSIDIARY OF RGI HOLDINGS, INC.)
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                      Years Ended December 31,
---------------------------------------------------------------------------------------------------------------------------------
                                                                                                       1998               1997
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                               <C>               <C>
Cash flows from operating activities:
    Net loss                                                                                      $(12,136,973)      (14,505,906)
    Adjustments to reconcile net loss to net cash provided by (used in)
       operating activities:
                         Depreciation and amortization                                               2,977,467         3,205,495
                         Gain on sale of assets held for sale                                               -           (195,076)
                         Related party interest expense not paid                                     5,853,716         4,721,217
                         Related party interest income not collected                                        -            (72,537)
                         Provisions for loss on assets held for sale                                        -                -
                         Minority interests in loss                                                         -           (252,716)
                         Change in certain assets and liabilities, net of
                            effect of acquisitions:
                                         Decrease (increase) in real estate inventory               20,983,245           906,677
                                         Decrease (increase) in assets held for sale                (7,916,175)        8,301,604
                                         (Increase) in accounts and notes receivable and other
                                          assets                                                    (4,132,798)         (541,903)
                                         Increase (decrease) in accounts payable and other notes
                                          and liabilities                                            4,662,756        (5,504,042)
                                                                                                  ------------      ------------

                                Net cash provided by (used in) operating activities                 10,291,238        (3,937,187)
                                                                                                  ------------      ------------

Cash flows from investing activities:
         Decrease (increase) in restricted cash and investments                                     (3,787,322)        7,260,767
         Purchase of property and equipment                                                           (791,440)       (6,297,341)
         Loans to related parties                                                                          -             (20,000)
         Collection of loans to related parties                                                            -             398,434
         Investments and acquisitions, net of cash acquired                                                -               -
         Proceeds from assets held for sale                                                                -          19,436,029
                                                                                                  ------------      ------------

                                Net cash provided by (used in) investing activities                 (4,578,762)       20,777,889

Cash flows from financing activities:
         Proceeds from notes payable to bank and others                                             21,569,532        19,653,062
         Repayment of notes payable to bank and others                                             (41,258,127)      (45,942,347)
         Proceeds from loans from related parties                                                    6,000,000        20,702,720
         Repayment of loans from related parties                                                        (3,165)         (139,107)
         Payment of loan fees                                                                         (306,533)         (179,983)
         Repurchase of common and fractional shares                                                         -           (132,267)
         Sale of common shares                                                                              -            400,003
                                                                                                  ------------      ------------

                                Net cash provided by (used in) financing activities                (13,998,293)       (5,637,919)
                                                                                                  ------------      ------------

Net increase (decrease) in cash and cash equivalents                                                (8,285,817)       11,202,783

Cash and cash equivalents at beginning of year                                                      12,732,681         1,529,898
                                                                                                  ------------      ------------
Cash and cash equivalents at end of year                                                          $  4,446,864        12,732,681
                                                                                                  ============      ============

                                                                                                                  (Continued)
</TABLE>

<TABLE>
<CAPTION>
                                                                                                     Years Ended December 31,
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                               1996
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                       <C>
Cash flows from operating activities:
    Net loss                                                                                               (2,153,583)
    Adjustments to reconcile net loss to net cash provided by (used in)
       operating activities:
                         Depreciation and amortization                                                      1,968,984
                         Gain on sale of assets held for sale                                                      -
                         Related party interest expense not paid                                              469,377
                         Related party interest income not collected                                         (146,277)
                         Provisions for loss on assets held for sale                                        1,000,000
                         Minority interests in loss                                                          (257,572)
                         Change in certain assets and liabilities, net of
                            effect of acquisitions:
                                         Decrease (increase) in real estate inventory                      (4,925,186)
                                         Decrease (increase) in assets held for sale                              -
                                         (Increase) in accounts and notes receivable and other
                                          assets                                                             (821,210)
                                         Increase (decrease) in accounts payable and other notes
                                          and liabilities                                                   2,499,825
                                                                                                         ------------

                                Net cash provided by (used in) operating activities                        (2,365,642)
                                                                                                         ------------

Cash flows from investing activities:
         Decrease (increase) in restricted cash and investments                                            (8,746,205)
         Purchase of property and equipment                                                               (15,219,862)
         Loans to related parties                                                                          (2,120,100)
         Collection of loans to related parties                                                             1,288,265
         Investments and acquisitions, net of cash acquired                                                  (609,984)
         Proceeds from assets held for sale                                                                       -
                                                                                                         ------------

                                Net cash provided by (used in) investing activities                       (25,407,886)

Cash flows from financing activities:
         Proceeds from notes payable to bank and others                                                    50,493,708
         Repayment of notes payable to bank and others                                                    (32,310,431)
         Proceeds from loans from related parties                                                          11,887,333
         Repayment of loans from related parties                                                                   -
         Payment of loan fees                                                                              (1,346,090)
         Repurchase of common and fractional shares                                                                -
         Sale of common shares                                                                                     -
                                                                                                         ------------

                                Net cash provided by (used in) financing activities                        28,724,520
                                                                                                         ------------

Net increase (decrease) in cash and cash equivalents                                                          950,992

Cash and cash equivalents at beginning of year                                                                578,906
                                                                                                         ------------
Cash and cash equivalents at end of year                                                                    1,529,898
                                                                                                         ============

                                                                                                         (Continued)
</TABLE>
See accompanying notes to the Consolidated Financial Statements

                                      F-6
<PAGE>   38


                    LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                      (A SUBSIDIARY OF RGI HOLDINGS, INC.)
              CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)


<TABLE>
<CAPTION>
                                                                                                YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------------------
                                                                                       1998              1997            1996
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                <C>             <C>
Supplement Disclosure of Cash Flow Information -
    Cash paid during the year for interest, net of amount capitalized of
       $1,137,447 in 1998, $903,978 in 1997, and $1,964,000 in 1996                 $4,699,226        5,811,516        3,506,755
                                                                                    ==========        =========       ==========
Supplemental Schedule of Noncash Investing and Financing Transactions:
    Contribution to equity of notes and interest payable from stockholder,
       net of receivable                                                            $    -              -             21,663,015
    Increase in restricted cash and investments and decrease in receivables
       from related parties                                                              -              -              4,012,667
    Decrease in receivables from related parties and payables to related
       parties                                                                           -              -              1,100,000
    Purchase of minority interest in exchange for cancellation of a note
       receivable and accrued interest                                                   -            1,681,584               --
    Net assets of Banyan Mortgage Investment Fund, net of cash acquired
       through the issuance of common stock                                         $    -              -             21,698,244
                                                                                    ==========        =========       ==========
</TABLE>

See accompanying notes to Consolidated Financial Statements.


                                      F-7

<PAGE>   39
                    LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                      (A SUBSIDIARY OF RGI HOLDINGS, INC.)

                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       DESCRIPTION OF BUSINESS

       Legend Properties, Inc. (Legend) formerly known as Banyan Mortgage
       Investment Fund (Banyan), is the surviving corporation from the December
       31, 1996 merger (the Merger) with RGI U.S. Holdings, Inc. (RGI/US) (see
       Note 2). Prior to the Merger, RGI/US was a wholly-owned subsidiary of RGI
       Holdings, Inc. (Holdings). As of December 31, 1998, Holdings owns
       approximately 80 percent of the outstanding common shares of Legend.

       For financial reporting purposes, the Merger was treated as a
       recapitalization of RGI/US, with RGI/US as the acquirer of Banyan. As of
       December 31, 1996, the historical consolidated financial statements of
       Legend are those of RGI/US.

       As of December 31, 1998, Legend owns, operates and develops real estate
       through its wholly owned subsidiaries as follows:

              -      Grand Harbor Associates, Inc. (GHA) was formed as a holding
                     company in 1991 and owns a 100 percent interest in Grand
                     Harbor Property Holdings, Inc. (GHPH) and a 100 percent
                     interest in Oak Harbor Property Holdings, Inc., Quality
                     Life Services, Inc. and Quality Life Services, Ltd.
                     (collectively, OHPH). GHA's original 45 percent interest
                     was increased by acquiring an additional 45 percent on
                     January 2, 1996 and the remaining 10 percent interest on
                     July 2, 1997.

                     GHPH includes nine corporations and seven limited
                     partnerships and was formed in 1991 to acquire and develop
                     772 acres of real estate in Indian River County, Florida.
                     Grand Harbor (the development) is planned for approximately
                     1,000 mid to high-end residential products. The development
                     has numerous amenities and facilities, including golf and
                     beach clubs, two 18-hole championship golf courses, tennis
                     courts and a marina.

                     OHPH includes eight corporations and a limited partnership
                     and was formed in 1993 to develop a senior citizen country
                     club community with an on-site assisted living center and
                     health clinic. In 1994, an off-site skilled nursing
                     facility was acquired.

              -      VMIF/Anden Southbridge Venture and VMIF/Anden Wayside
                     Venture (for financial reporting purposes, acquired on
                     December 31, 1996 as part of the merger with Banyan (see
                     note 2)) were formed in 1991 to hold and develop
                     Southbridge, a 2,685 acre master planned community in
                     Prince William County, Virginia planned for approximately
                     5,000 residential units, 4.2 million square feet of
                     non-residential uses (including office, R&D, commercial,
                     industrial, and other similar uses) and an 18 hole golf
                     course.

              -      Ashburn Corporate Center, LC (ACCLC) was formed in March
                     1998 to hold and develop the Ashburn Corporate Center, a
                     116-acre commercial business park development project in
                     Loudoun County, Virginia planned for office and flex/tech
                     uses. ACCLC is owned 82% by the Company, which serves as
                     the Manager of the LLC.

       During 1998 and 1997, Legend disposed of the following operating and
       development properties:

              -      VMIF Charles County Venture (for financial reporting
                     purposes, acquired on December 31, 1996 as part of the
                     merger with Banyan (see note 2)) was formed in 1991 to hold
                     and develop Chapman's Landing, a 2,227 acre master planned
                     community in Charles County, Maryland. Chapman's Landing
                     was sold during October 1998 for $28.5 million.



                                      F-8
<PAGE>   40
                   LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                     (A SUBSIDIARY OF RGI HOLDING, INC.)

                  Notes to Consolidated Financial Statements
(1) CONTINUED

              -      BMIF Monterey County Corp., a wholly owned subsidiary of
                     Legend Properties, Inc., (for financial reporting purposes,
                     acquired on December 31, 1996 as part of the merger with
                     Banyan (see note 2)) was formed to hold and develop a
                     565-acre land parcel in Monterey County, California known
                     as the Laguna Seca Ranch (Laguna). During 1997, the Company
                     sold Laguna for $12.8 million.

              -      American Property Investments, Inc. (API) was formed for
                     the purpose of acquiring, renovating and operating the
                     Lynnwood Shopping Center in Lynnwood, Washington (acquired
                     in November 1987). In November 1997, API sold Lynnwood
                     Center for $20.1 million.

       BASIS OF PRESENTATION

       The consolidated financial statements include the accounts of Legend,
       certain of its wholly and majority owned subsidiaries as of the
       acquisition dates noted above. The accounts of Resource Group, Inc. and
       K.W. Properties, Inc., both wholly-owned subsidiaries of RGI/US prior to
       April 1996, have been excluded from these consolidated financial
       statements because these independent entities were not part of the merger
       with Banyan. These two subsidiaries were spun-off by means of a dividend
       to Holdings from Legend in April 1996. All significant intercompany
       accounts and transactions have been eliminated in consolidation.

       USE OF ESTIMATES

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

       The Company computes cost of sales and relieves property under
       development (a component of real estate inventory) based on the ratio of
       current year and estimated future costs to current year and estimated
       future sales. Actual results could differ from these estimates.

       REAL ESTATE INVENTORY

       Real estate inventory is recorded at the lower of cost or fair value less
       cost to sell. Inventoried costs consist of land (including any related
       legal, engineering and other acquisition costs) common improvements,
       amenities, construction in progress and completed residential units.
       Interest, real estate taxes and other carrying costs are capitalized only
       for discrete parcels or units undergoing active development. The costs of
       common improvements are allocated to discrete parcels or units based on
       relative sales values or specific identification.

       The Company reviews its real estate inventory for impairment where events
       or changes in circumstances indicate that the carrying amount of the
       assets may not be recoverable. Recoverability of assets to be held and
       used is measured by comparing the carrying amount of an asset to future
       or anticipated net cash flows generated by the asset. If such assets are
       deemed to be impaired, the impairment is recognized by measuring the
       difference between the carrying amount of the assets and its fair value.

       ASSETS HELD FOR SALE

       Assets held for sale are reported at the lower of the carrying amount or
       fair value less costs to sell.



                                      F-9
<PAGE>   41

                    LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                      (A SUBSIDIARY OF RGI HOLDINGS, INC.)

                   Notes to Consolidated Financial Statements


       CASH AND CASH EQUIVALENTS

       Cash and cash equivalents consist of cash, demand deposits with banks and
       highly liquid investments with maturity dates of three months or less at
       the date of acquisition.

       RESTRICTED CASH AND INVESTMENTS

       Restricted cash includes customer deposits and various escrow accounts
       with local governments and others related to the completion of certain
       development of $7,007,417 and $4,224,312, and cash held in bank as loan
       collateral of $7,341,731 and $6,059,984 at December 31, 1998 and 1997,
       respectively.

       Restricted investments include an irrevocable trust consisting of three
       annuities totaling $4,668,712 and $4,946,242 at December 31, 1998 and
       1997, respectively, which is solely to provide security for payment on a
       note payable. The annuity contracts will fully satisfy the note through
       annual principal and interest payments.


       PROPERTY AND EQUIPMENT

       Property and equipment are stated at cost. Significant additions and
       improvements are capitalized while repairs and maintenance are expensed
       as incurred. Interest charges related to assets developed or constructed
       for use in operations are capitalized during the construction period.
       Depreciation and amortization are provided using the straight-line method
       over the following estimated useful lives:

<TABLE>
<S>                                                              <C>
                 Buildings and improvements                      31 - 39 years
                 Furniture and fixtures                            3 - 7 years
                 Land Improvements                                    15 years
                 Marina                                               15 years
</TABLE>


       INTANGIBLES

       Intangibles include goodwill, a non-compete agreement and organization
       costs. Goodwill, which represents the excess of the purchase price over
       fair value of net assets acquired, is amortized using the straight-line
       method over fifteen years. The recoverability of goodwill is assessed by
       comparing estimated undiscounted future operating cash flows over the
       remaining amortization period to the current net asset balance.If
       impairment is idenfified, any loss is measured based on projected
       discounted future operating cash flows using a discount rate reflecting
       Legend's average cost of funds. The non-compete agreement is amortized
       using the straight-line method over a period of fifteen years, the term
       of the agreement.


       OTHER ASSETS

       Included among other assets are deferred loan costs that are amortized
       using the straight-line method over the term of the related debt.


       DEPOSITS

       Included in other liabilities are customer deposits on real estate sales,
       rental and club memberships of $7,765,583 and $4,304,494 at December 31,
       1998 and 1997, respectively. The real estate sales and rental deposits
       are held in restricted bank accounts, which were $5,470,785 and
       $2,463,885 at December 31, 1998 and 1997. Among these are certain
       associate member deposits that will be refunded at the end of the related
       term or upon cancellation by the member.

       REVENUE RECOGNITION



                                      F-10
<PAGE>   42

                    LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                      (A SUBSIDIARY OF RGI HOLDINGS, INC.)

                   Notes to Consolidated Financial Statements


       Revenues on retail sales of real estate are recorded upon the closing and
       transfer of title to the buyer, whereas rental revenue is recognized over
       the respective tenant lease terms (1 to 30 years) using the straight-line
       method. Sales of equity memberships in the Grand Harbor Golf and Beach
       Club (Club) are treated as real estate sales. Club assets at Grand Harbor
       are treated as an amenity and are charged to the cost of real estate
       sales as full equity memberships are sold. Membership dues for Grand
       Harbor are billed on an annual basis and recognized as revenue ratably
       over the year.


       INCOME TAXES

       The Company utilizes the asset and liability method of accounting for
       income taxes. Under the asset and liability method, deferred income taxes
       are recognized for the tax consequences of temporary differences by
       applying enacted statutory rates applicable to future years to
       differences between the financial statement carrying amounts and the tax
       basis of existing assets and liabilities. Changes in tax rates that
       effect deferred tax assets and liabilities are taken into income during
       the period that includes the enactment date. Deferred income tax assets
       are reduced by a valuation allowance when, in the opinion of management,
       it is likely that some portion or all of the deferred income tax assets
       will not be realized.

       ADVERTISING COSTS

       Costs of advertising, promotion and marketing are generally charged to
       operations as incurred. These expenses were $2,431,072 in 1998,
       $2,395,134 in 1997, and $900,753 in 1996.

       SEGMENT INFORMATION

       Effective December 31, 1998, the Company adopted SFAS No. 131,
       Disclosures About Segments of Enterprise and Related Information, which
       establishes standards for reporting information about operating segments
       and related disclosures about products and services. See note 14.

       RECLASSIFICATIONS

       Certain amounts in prior years consolidated financial statements have
       been reclassified to conform to the 1998 presentation.


(2)    ACQUISITIONS

       Certain business combinations consummated during 1997 and 1996 were
       accounted for under the purchase method of accounting, wherein the
       purchase price was allocated to the assets acquired and liabilities
       assumed based upon their relative fair values. Results of operations for
       these acquired companies have been included in the consolidated financial
       statements from the acquisition dates.

       BANYAN MORTGAGE INVESTMENT FUND

       On April 12, 1996, an Agreement and Plan of Merger was executed among
       RGI/US, Holdings and Banyan.

       Effective December 31, 1996, RGI/US was merged with and into Banyan.
       Banyan's certificate of incorporation was amended to convert each
       twenty-five shares of Banyan's issued and outstanding common stock into
       one issued and outstanding share (Reverse Split). Additionally, the name
       of Banyan was changed to Legend Properties, Inc. After giving effect to
       the Reserve Split, all outstanding shares of RGI/US were converted into
       4,386,986 shares of Banyan's common stock. For accounting purposes, the
       merger was treated as a recapitalization of RGI/US, with RGI/US as the
       acquirer of Banyan for $22,175,403.




                                      F-11
<PAGE>   43

                    LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                      (A SUBSIDIARY OF RGI HOLDINGS, INC.)

                   Notes to Consolidated Financial Statements


       GRAND HARBOR PROPERTY HOLDINGS, INC., AND OAK HARBOR PROPERTY HOLDINGS,
       INC.

       On January 2, 1996, GHA, a 45 percent general partner in GHPH and OHPH,
       purchased Southmortgage Finance Co., a holding company for certain bank
       debt (the proceeds of which were loaned to GHPH), and an additional 45
       percent interest in GHPH, OHPH and Harbor Title and Escrow Co. Ltd.
       (collectively, the Acquired Companies). Harbor Title and Escrow Co. Ltd.
       provides title and escrow service for GHPH and OHPH. The Acquired
       Companies were purchased from Andlinger Properties Capital L.P. for cash
       consideration of $52,237 and a promissory note of $996,220.

       In July 1997, GHA acquired the remaining 10 percent of the Acquired
       Companies. The Acquired Companies were purchased from Grand Harbor
       Development Company (GHDC), a corporation majority owned by Don Proctor,
       in exchange for the cancellation of a note receivable of $1,462,770 plus
       accrued interest of $218,814, payable to GHA from GHDC. Don Proctor is
       the majority shareholder of Proctor Construction Company, which has an
       exclusive contract to provide development and construction services at
       Grand Harbor and Oak Harbor. Mr. Proctor was an officer of GHPH, until
       his resignation in June 1997.

       The unaudited pro forma consolidated statements of operations that follow
       give effect to the transactions described above as if they had been
       consummated on January 1, 1997 or 1996. The unaudited pro forma
       consolidated statements of operations are presented for information
       purposes only and do not purport to represent what would have been
       Legend's actual results of operations for the years ended December 31,
       1997 and 1996 had the acquisitions, in fact, occurred on January 1, 1997
       or 1996, or Legend's results of operations for any future period.

<TABLE>
<CAPTION>
                          Year ended December 31, 1997
                     Assuming Acquisition on January 1, 1997
                                   (Unaudited)

<S>                                                 <C>               
        Total revenues                              $       55,627,898
        Total costs and expenses                            60,247,081
      --------------------------------------------------------------------

        Operating loss                                      (4,619,183)

        Net other expense                                  (10,139,439)
      --------------------------------------------------------------------

        Net loss                                    $      (14,758,622)
      ====================================================================

        Net loss per share                          $            (2.35)
      ====================================================================
</TABLE>

<TABLE>
<CAPTION>
                          Year ended December 31, 1996
                     Assuming Acquisition on January 1, 1996
                                   (Unaudited)

<S>                                                 <C>               
        Total revenues                              $       36,856,185
        Total costs and expenses                            41,421,762
      --------------------------------------------------------------------

        Operating loss                                      (4,565,577)

        Net other expense                                   (8,174,193)
      --------------------------------------------------------------------

        Net loss                                    $      (12,739,770)
      ====================================================================

        Net loss per share                          $            (2.03)
      ====================================================================
</TABLE>



                                      F-12
<PAGE>   44

                    LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                      (A SUBSIDIARY OF RGI HOLDINGS, INC.)

                   Notes to Consolidated Financial Statements


(3)    REAL ESTATE INVENTORY AND ASSET HELD FOR SALE

       Real estate inventory consisted of the following at December 31, 1998:

<TABLE>
<CAPTION>
                                                          Initial cost to Legend             Cost Adjustments
                                                          ----------------------             ----------------
        Name, approximate size            Encum-                     Building and                    Building and
           type and location              brances        Land        improvements         Land       improvements
           -----------------              -------        ----        ------------         ----       ------------

<S>                                      <C>          <C>              <C>               <C>         <C>
Grand Harbor, 325-acre residential       Note 5
development in Vero Beach, FL            (H-N)         $9,780,340        -                 -           19,368,981

Oak Harbor, 106-acre residential         Note 5
development in Vero Beach, FL            (C-G)          3,848,067        -                 -           13,554,582

Southbridge, 2,350-acre mixed use land   Note 5(A)
development in Prince William County,    Note 6
VA                                       (1&2)         20,785,086       7,146,670          -            8,509,388
                                                    --------------------------------------------------------------

                                                      $34,413,493       7,146,670           $0         41,432,951
                                                    ==============================================================
</TABLE>



<TABLE>
<CAPTION>
                                                                      Valuation
                                                                   adjustment and
                                                    Building         accumulated
                                                       and        depreciation and                    Date of        Date
          Description                  Land       improvements      amortization     Total (a)     Construction    Acquired
-----------------------------------------------------------------------------------------------------------------------------

<S>                                <C>              <C>               <C>            <C>               <C>          <C>
Grand Harbor, 325-acre
residential development in Vero
Beach, FL                           $9,780,340       19,368,981        (119,200)      29,030,121        (b)          03/91

Oak Harbor, 106-acre
residential development in Vero
Beach, FL                            3,848,067       13,554,582         -             17,402,649        (b)          05/91

Southbridge, 2350-acre mixed
uses land development in Prince
William County, VA                  20,785,086       15,656,058         -             36,441,144        (b)          12/96
                                 ----------------------------------------------------------------

                                   $34,413,493       48,579,621        (119,200)      82,873,914
                                 ================================================================
</TABLE>


                                      F-13
<PAGE>   45

                    LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                      (A SUBSIDIARY OF RGI HOLDINGS, INC.)

                   Notes to Consolidated Financial Statements


       a)     Reconciliation of real estate inventory for the years ended
              December 31:

<TABLE>
<CAPTION>
                                                                      1998              1997               1996
       -----------------------------------------------------------------------------------------------------------

<S>                                                     <C>                     <C>                <C>       
       Balance at beginning of year                      $     103,857,159       128,834,222        18,588,184
       -----------------------------------------------------------------------------------------------------------

       Reallocation of purchase price Banyan                        -                415,869             -
       Net dispositions through sale                           (47,425,324)      (47,784,281)      (16,680,199)
       Acquisitions                                                 -              1,260,019       106,480,671
       Net additions                                            26,442,079        21,250,530        22,005,547
       Depreciation                                                 -                 -               (195,030)
       Reclassification to property and equipment                   -                 -               (364,951)
       Valuation adjustment                                         -               (119,200)       (1,000,000)
       -----------------------------------------------------------------------------------------------------------

       Balance at end of year                            $      82,873,914       103,857,159       128,834,222
       ===========================================================================================================
</TABLE>

       b)     Properties are currently at various stages of development and
              entitlement. The build-out of the projects is expected to continue
              for periods ranging from 5-20 years under the current development
              plans.

       At December 31, 1998, Asset held for sale represents the carrying value
       of the Ashburn Corporate Center, which the Company expects to sell in
       1999. This property is encumbered by a Note payable to others--see Note 6
       (O).

(4)    PROPERTY AND EQUIPMENT

       Property and equipment are stated at cost and consist of the following at
       December 31:

<TABLE>
<CAPTION>
                                                                       1998               1997
       ---------------------------------------------------------------------------------------------

<S>                                                             <C>                      <C>      
       Marina                                                    $      2,683,471         2,683,471
       Buildings and improvements                                      14,602,202        14,633,725
       Furniture, fixtures and equipment                                7,225,351         6,589,497
       Depreciable land improvements                                    2,014,677         2,022,186
       ---------------------------------------------------------------------------------------------

                                                                       26,525,701        25,928,879

       Less accumulated depreciation and amortization                   6,623,845         4,912,995
       ---------------------------------------------------------------------------------------------

                                                                       19,901,856        21,015,884

       Land (including golf course land)                                4,743,425         4,743,421
       ---------------------------------------------------------------------------------------------

                                                                 $     24,645,281        25,759,305
       =============================================================================================
</TABLE>

(5)    NOTES PAYABLE TO BANKS AND OTHERS

       Notes payable to banks and others consists of the following at December
       31:

<TABLE>
<CAPTION>
       (Reference to note 3)                                                       1998            1997
       =====================================================================================================

      <S>                                                                       <C>              <C>
       (A)      Note payable to others, interest only payable monthly at
                        12 percent, principal due April 20, 1999, secured
                        by certain real estate inventory.                        $2,950,000       2,950,000

       (B)      Note payable to others, interest only payable monthly at
                        the prime rate plus .5 percent (8.25 percent at
                        December 31, 1998), principal repaid during July
                        1998.                                                     -                 996,220
</TABLE>


                                      F-14
<PAGE>   46

                    LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                      (A SUBSIDIARY OF RGI HOLDINGS, INC.)

                   Notes to Consolidated Financial Statements


<TABLE>
<CAPTION>
       (Reference to note 3)                                                       1998             1997
       =====================================================================================================
      <S>                                                                       <C>              <C>
       (C)      Note payable to others, interest at 6.34 percent, due
                        in annual installments of $600,000, including
                        interest through July 1, 2009. Secured by annuity
                        contracts.                                                4,650,912       4,937,852

       (D)      Notes payable to banks, interest payable monthly at the
                        banks' cost of funds rate (not to exceed the
                        LIBOR rate plus .50 percent) plus 2.25 percent
                        (7.60 percent at December 31, 1998); principal
                        payments of $504,794, $802,185, $997,841 and
                        $743,489 due in 1999, 2000, 2001 and 2002,
                        respectively. Secured by second mortgages on
                        certain real estate inventory and property.               3,048,309       7,474,410

       (E)      Note payable to bank, interest payable monthly at the
                        bank's cost of funds rate (note to exceed the
                        LIBOR rate plus 5 percent) plus 2.5 percent (7.85
                        percent at December 31, 1998); principal was repaid
                        during November 1998.                                        -            7,433,500

       (F)      Notes payable to banks, interest payable monthly at
                        LIBOR plus 2.0 percent and prime rate plus 1.0
                        percent (8.66 percent to 8.75 percent at December
                        31, 1998); principal payments of $7,632,421,
                        $147,361, $160,143, $177,519 and $3,316,371 due
                        in 1999, 2000, 2001, 2002 and 2003, respectively.
                        Secured by first mortgages on certain real estate
                        inventory, certain property and equipment and
                        certificates of deposit with balances totaling
                        $6.3 million at December 31,
                        1998.                                                    11,433,815      12,179,562

       (G)      Construction revolving line of credit, interest payable
                        monthly at the prime rate plus 1 percent (8.75
                        percent at December 31, 1998), due June 1999.
                        Secured by first mortgages on certain real estate
                        inventory, certain property and equipment, and a
                        certificate of deposit with a balance of $6.3
                        million at December 31, 1998.  Total advances are
                        not to exceed $16,000,000.                                1,287,663       1,073,852

       (H)      Notes payable to bank, interest payable monthly at the
                        bank's cost of funds rate (not to exceed the
                        LIBOR rate plus .50 percent) plus 2.25 percent
                        (7.60 percent at December 31, 1998); principal
                        payments of $785,216, $1,247,814, $1,552,159 and
                        $1,156,512 due in 1999, 2000, 2001 and 2002,
                        respectively. Secured by first and second mortgages
                        on certain real estate inventory.                         4,741,701      11,308,865

       (I)      Construction notes payable to bank, interest payable
                        monthly at the bank's cost of funds rate (not to
                        exceed the LIBOR rate plus .5 percent) plus 2.5
                        percent; principal repaid during November, 1998.             -            2,000,000

       (J)      Notes payable to bank, interest payable monthly at the
                        prime rate plus .5 percent (8.5 percent at December
                        31, 1998); principal repaid during 1998.                     -            2,121,650

       (K)      Notes payable to banks, interest payable monthly at the
                        prime rate (7.75 percent at December 31, 1998);
                        principal is due during 1999. Secured by a first
                        mortgage on certain real estate inventory.                1,732,588       3,982,736

       (L)      Construction revolving lines of credit payable to banks,
                        due on demand, but reviewed annually for renewal,
                        interest payable monthly at the prime rate (7.75
                        percent at December 31, 1998). Secured by a first
                        mortgage on certain property.  Total advances are
                        not to exceed $12,000,000.                                4,743,556       3,061,795
</TABLE>



                                      F-15
<PAGE>   47

                    LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                      (A SUBSIDIARY OF RGI HOLDINGS, INC.)

                   Notes to Consolidated Financial Statements


<TABLE>
      <S>                                                                       <C>              <C>
       (M)      Revolving line of credit payable to bank with interest
                        payable at the prime rate plus .75 percent,
                        principal repaid during 1998.                                -              171,901

       (N)      Notes payable to others, interest at 7.50 percent to 9.0
                        percent; principal and interest due during 1999.
                        secured by a first mortgage on certain real estate
                        inventory.                                                   91,000         490,200

       (O)      Note payable to others, interest due monthly at 18%,
                        principal due September 6, 1999. Secured by a first
                        mortgage on assets held for sale.                         5,940,000        -

       (P)      Other                                                               103,193         228,789
                                                                                -----------      ----------
                                                                                $40,722,737      60,411,332
                                                                                ===========      ==========
</TABLE>


       In conjunction with the acquisition of Royal Palm Convalescent Center by
       OHPH in June 1994, an irrevocable trust consisting of three annuities was
       established for the sole purpose of providing security for payments due
       on the note payable to Henry L. Block. The annuity contracts totaled
       $4,512,127 and $4,780,365 at December 31, 1998 and 1997, respectively,
       plus accrued interest receivable of $156,585 and $165,877, and will fully
       satisfy the note through annual principal and interest payments of
       $600,000 through July 1, 2009.

       Scheduled principal maturities of notes payable to banks and others at
       December 31, 1998 are as follows:

<TABLE>
       <S>                                         <C>         
       1999                                         $ 25,777,613
       2000                                            2,635,459
       2001                                            3,235,659
       2002                                            2,448,308
       2003                                            3,706,560
       Thereafter                                      2,919,138
       ----------------------------------------------------------

                                                    $ 40,722,737
       ==========================================================
</TABLE>


       As noted above, the Company has substantial debt repayments in 1999 and
       early 2000 under existing financings and requires additional financing to
       advance its business plan. As of December 31, 1998 the Company had
       $4,446,864 of cash and cash equivalents, which will not be sufficient to
       fund these obligations. The Company anticipates meeting its existing
       debt obligations during 1999 from the release of restricted cash pledged
       as collateral on certain debt, net proceeds from the sale of Ashburn,
       the renewal and extension of existing construction lines, and internally
       generated funds from real estate sales and operations. If sufficient
       funds are not available from the above, the Company anticipates
       refinancing certain land acquisition financing and delaying certain
       quarterly interest payments as allowed under the debt agreements. The
       Company also has available, if needed, a $5 million credit facility from
       Holdings.

       There can be no assurance that the Company will be able to refinance the
       existing debt obligations or obtain the necessary construction and
       development financing to implement its plan or that, if available, the
       terms and conditions will be acceptable to the Company. If the Company
       is unable to secure the necessary additional financing or capital when
       needed, the plans for its projects will likely be materially revised,
       which would have a material adverse effect on the Company's financial
       condition and results of operations.



(6)    RELATED PARTY TRANSACTIONS

       The following is a summary of other significant transactions and accounts
       with related parties during 1998, 1997 and 1996 and as of December 31,
       1998 and 1997:



                                      F-16
<PAGE>   48

                    LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                      (A SUBSIDIARY OF RGI HOLDINGS, INC.)

                   Notes to Consolidated Financial Statements


(6)    CONTINUED

       RECEIVABLES

       During 1996 and 1997, Legend held a note receivable that was due from a
       related party, which was cancelled in conjunction with the acquisition of
       the acquired companies that is discussed in a Note 2. Interest income
       from this note was $73,337 and $146,277 for 1997 and 1996, respectively.

       PAYABLES

       Payables to related parties consist of the following at December 31:

<TABLE>
<CAPTION>
                                                                                         1998              1997
                                                                                         ----              ----
<S>                                                                             <C>                     <C>       
       (Reference to note 3)
       (1)  Mortgage note payable to Holdings with interest payable
                    quarterly at LIBOR plus 2.5%. Principal payments
                    equal to 20% of Southbridge and 50% of other
                    collateral sales revenues is payable quarterly
                    with the balance due April 1, 2003. The debt is
                    secured by certain real estate
                    inventory and property.                                     $      30,649,872        30,649,872

       (2)  Mortgage note payable to Holdings with interest at Prime
                    plus 2% and secured by certain real estate
                    inventory. Interest and principal are payable
                    quarterly after certain other debt payments
                    provided that a $4.5 million cash reserve
                    remains. Quarterly principal payments are equal
                    to 80% of the defined net cash flow for
                    Southbridge, Grand Harbor, and Oak Harbor with
                    the balance due April 1, 2003. Unpaid interest
                    will be capitalized into the principal balance
                    annually.                                                          35,024,632        20,960,448

       (3)  Unsecured note payable to RGI, Inc. with interest at
                    Prime plus 2%. Principal and interest is payable
                    on the same terms, but after payments on the
                    Mortgage note payable discussed immediately above
                    with the remainder due April 1, 2003. Unpaid
                    interest will be capitalized into the principal
                    balance annually.                                                  16,821,696        14,412,667

       (4)  Unsecured note payable to Holdings, interest at Prime plus
                    2%.  Principal and interest due June 1, 1999.                       2,248,278            -

       (5)  Accrued interest                                                              -               6,868,311

       (6)  Other                                                                         -                   2,629
                                                                                 -----------------      ------------

                                                                                $      84,744,478        72,893,927
       =============================================================================================================
</TABLE>



                                      F-17
<PAGE>   49

                    LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                      (A SUBSIDIARY OF RGI HOLDINGS, INC.)

                   Notes to Consolidated Financial Statements


(6)    CONTINUED

       Holdings has provided to the Company a $5 million credit facility to
       provide sufficient working capital to fund ongoing development,
       construction and operating activities. The credit facility provides for
       interest at Prime plus 2%, matures on April 1, 2003 and is secured by
       certain real estate inventory and property.

       The entire $84,744,478 related party payable (principal and accrued
       interest) is due on April 1, 2003.

       During 1998, Legend sold Chapman's Landing for $28.5 million and realized
       net proceeds (after closing costs) of $28.4 million. Of these funds,
       approximately $16 million were applied towards paying off existing
       external debt pursuant to a loan restructuring with Holdings, and
       Holdings indirect parent, Aker RGI ASA (Aker). The previous debt
       agreements had required Legend to pay Holdings 50% of the net cash flow
       (as defined in the documents) upon the sale of Chapman's Landing. In
       exchange for releasing Legend from this commitment, Legend agreed to
       utilize these proceeds to retire certain external debt obligations that
       had been guaranteed by Aker. The Aker debt guarantees that were retired
       totaled approximately $42.9 million.

       This restructuring has also provided for an extension of the debt due to
       Holdings to April 2003, and it adjusted the interest rates to between
       LIBOR plus 2.5% to Prime plus 2%. Moreover, certain interest and
       principal repayment provisions were modified, and selected loans were
       consolidated. Lastly, Holdings made available the $5 million credit
       facility to fund development, construction and operations.


       INDEMNITY

       Aker RGI ASA, the indirect parent of Holdings, has provided an indemnity,
       to a maximum of $15,000,000, to the bonding company for development bonds
       at Southbridge, of which an aggregate total of approximately $9.8 and
       $5.6 million were outstanding at December 31, 1998 and March 19, 1999,
       respectively.


       CONSULTING AND OTHER FEES

       Proctor Construction Company (Proctor) has provided all development and
       construction services at Grand Harbor and Oak Harbor since Legend
       acquired the projects. Donald C. Proctor is the majority shareholder of
       Proctor, and an affiliate of Mr. Proctor owned 10 percent of GHPH and
       OHPH (the corporations that own Grand Harbor and Oak Harbor, see note 2).
       This exclusive contract is effective through December 31, 1999, with fees
       equal to the cost of the work, a 7 percent overhead charge and a 5
       percent profit fee, half of which is payable to GHPH and OHPH. There can
       be no assurance that Legend has purchased these services at prevailing
       market rates.

       Legend paid $100,000 in 1996 to K.L. Associates for consulting services.
       K.L. Associates is an entity owned by a former officer of Legend.

(7)    INCOME TAXES

       There was no current income tax benefit or expense in 1998, 1997 or 1996,
       and the deferred tax expense or benefit was offset by changes in the
       valuation allowance for deferred tax assets.



                                      F-18
<PAGE>   50

                    LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                      (A SUBSIDIARY OF RGI HOLDINGS, INC.)

                   Notes to Consolidated Financial Statements


(7)    CONTINUED

       The approximate tax effects of temporary differences and carryforwards
       that give rise to significant portions of deferred tax assets and
       liabilities as of December 31 are as follows:

<TABLE>
<CAPTION>
                                                                           1998               1997
       --------------------------------------------------------------------------------------------
<S>                                                              <C>                   <C>       
       Deferred tax assets:
          Real estate inventory and assets held for sale         $     20,488,000       26,975,000
          Deferred income                                                 270,000          424,000
          Net operating loss carryforwards                             20,324,000        9,185,000
          Organization and loan fees                                      849,000          896,000
          Other                                                           176,000          232,000

       --------------------------------------------------------------------------------------------
       Total gross deferred tax assets                                 42,107,000       37,712,000

       Less valuation allowance                                        40,950,000       37,239,000
       --------------------------------------------------------------------------------------------
       Net deferred tax assets                                          1,157,000          473,000
       --------------------------------------------------------------------------------------------
       Deferred tax liabilities:
          Property and equipment                                          516,000          376,000
          Other                                                           641,000           97,000
       ============================================================================================
       Total gross deferred tax liabilities                             1,157,000          473,000
       --------------------------------------------------------------------------------------------
       Net deferred tax liability                                $              -                -
       ============================================================================================
</TABLE>


       The valuation allowance increased by $3,711,000 and $7,907,000 in 1998
       and 1997, respectively. Management believes that it is more likely than
       not that the remaining deferred tax asset balance is not realizable based
       on estimates of future taxable income and after consideration of
       available tax planning strategies.

       As of December 31, 1998, Legend has net operating loss carryforwards of
       approximately $53,500,000 which substantially expire in 2011, 2012 and
       2018. This excludes net operating losses of Banyan which, because of
       certain tax regulations, are not realizable because of the change in
       ownership. Additionally, certain deductible temporary differences which
       existed at the time of the merger may be limited under current tax
       regulations should they be realized during the five years ended December
       31, 2001.


(8)    FAIR VALUE OF FINANCIAL INSTRUMENTS

       Legend's financial instruments include cash, restricted cash,
       receivables, accounts payable, and short-term and long-term borrowings.
       In general, Legend believes that the fair value of these financial
       instruments approximates their carrying amounts based upon their
       short-term nature or upon current market indicators, such as prevailing
       interest rates available to the Company for similar instruments.



                                      F-19
<PAGE>   51

                    LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                      (A SUBSIDIARY OF RGI HOLDINGS, INC.)

                   Notes to Consolidated Financial Statements


(8)    CONTINUED

       Legend's financial instruments also include restricted investments,
       consisting of an irrevocable trust fund containing three annuities,
       established to provide the annual payments required on the note payable
       to Henry L. Block (see Note 5(c)). The annual distributions from the
       annuities fully satisfy the interest and principal payments of the note
       payable. Moreover, these annuities cannot be surrendered and, therefore,
       have no cash value. Because the restricted investments and the note
       payable are inextricably linked, the fair value of each is considered to
       be the carrying amounts reported in the balance sheet.


(9)    CONCENTRATION OF ASSETS

       The majority of Legend's assets are real estate holdings which are
       subject to possible fluctuating economic conditions. Such fluctuations
       can have a significant impact on the market values, which in turn could
       limit the potential recovery of the properties' carrying values.


(10)   STOCKHOLDERS' EQUITY

       CHANGES IN AUTHORIZED SHARES

       In July of 1997, the Company amended Article Four of the Company's
       Amended and Restated Certificate of Incorporation to reduce the number of
       authorized shares of capital stock to 15,000,000 shares, of which
       5,000,000 shares shall be preferred stock, $0.01 par value, and
       10,000,000 shares shall be common stock, $0.01 par value.


(11)   STOCK OPTION PLAN

       The Company has granted stock options under the Executive and Directors'
       Stock Option Plan (the Plan) which was approved on June 25, 1993. The
       Plan grants the Board of Directors the authority to issue up to 40,000
       shares of the Company's common stock for stock option awards. The Plan
       consists of an Executive Option Grant Program and a Director Option Grant
       Program. Options issued under the Executive Option Grant Program vest
       over a three-year period. Options issued under the Director Option Grant
       Program vest over a two-year period. All options granted lapse ten years
       from the date of grant.

       The following is a summary of stock option activity:

<TABLE>
<CAPTION>
                                                              Option price           Number of shares
                ---------------------------------------------------------------------------------------
              <S>                                         <C>                            <C> 
                Balance at December 31, 1995                $15.64 to $28.13              20,440

                Granted                                          $11.69                    4,840
                ---------------------------------------------------------------------------------------

                Balance at December 31, 1996                $11.69 to $28.13              25,280

                Granted                                      $4.50 to $7.75                9,300

                Forfeited                                    $4.50 to $28.13             (20,500)
                ---------------------------------------------------------------------------------------

                Balance at December 31, 1997                 $4.50 to $17.19              14,080

                Granted                                             -                        -
                ---------------------------------------------------------------------------------------

                Balance at December 31, 1998                 $4.50 to $17.19              14,080
                =======================================================================================
</TABLE>


                                      F-20
<PAGE>   52

                    LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                      (A SUBSIDIARY OF RGI HOLDINGS, INC.)

                   Notes to Consolidated Financial Statements


(11)   CONTINUED

       At December 31, 1998, the number of options exercisable was 14,080. The
       Company has adopted the disclosure-only provisions of SFAS No. 123,
       Accounting for Stock-Based Compensation. Accordingly, the Company applies
       Accounting Principles Board Opinion No. 25 in accounting for the Plan and
       therefore no compensation cost has been recognized for the Plan.

       An insignificant amount of compensation cost would have been recorded had
       compensation cost for the Company's stock options been determined based
       upon the fair value at the grant date consistent with the methodology
       prescribed under SFAS No. 123.


(12)   EMPLOYEE BENEFIT PLAN

       The Company sponsors a defined contribution plan that provide employees
       of the Company an opportunity to accumulate funds for their retirement.
       Employees are eligible to join the plan if they are at least 21 years of
       age, have completed one year of service with the Company, and worked a
       minimum of 1,000 hours. The Company matches the contributions of
       participating employees on the basis of the percentages specified in the
       plan. Company matching contributions to the plan were approximately
       $47,000, $83,000 and $25,000 in 1998, 1997, and 1996, respectively.


(13)   CONTINGENCIES

       LEGAL PROCEEDINGS

       Ashburn Corporate Center

       During August 1998, Legend filed a lawsuit and a memorandum of Lis
       Pendens in the Circuit Court of Loudoun County against Atlantic Research
       Corporastion (ARC), which was subsequently amended during November 1998.
       On March 6, 1998 Legend was assigned the rights under an existing
       contract to purchase approximately 28 acres located in Loudoun County,
       Virginia (the second Ashburn parcel), which included a $100,000 contract
       deposit. Although the contract contained a projected closing date, there
       was no provision stating that time was of the essence. Both parties were
       sophisticated in real estate transactions and were represented by
       counsel. Subsequent to the assignment of the contract, ARC attempted to
       insert new terms and conditions into the contract, including a provision
       that time is of the essence and a demand for additional consideration.
       During November 1998, Legend tendered performance under the contract by
       delivering all necessary papers and approximately $3.6 million to an
       escrow agent. Under the amended complaint, Legend is seeking specific
       performance under the real estate sales contract and any other relief the
       court may offer.

       ARC has answered that the original contract has a clear and unambiguous
       settlement date of June 23, 1998, that Legend has breached the contract
       and ARC has no obligation to sell Legend the property, and that ARC is
       entitled to the $100,000 deposit as partial damages. ARC has also filed a
       counterclaim contending that ARC has been damaged under the contract
       breached by Legend and the memorandum of Lis Pendens. ARC claims that ARC
       has been forced to maintain a valuable piece of property and forego
       opportunities to sell the property for a greater sum. ARC has requested
       the Court to deny Legend's claim, declare that Legend has no further
       rights to the property, order Legend to forfeit the $100,000 deposit, and
       award ARC $800,000 plus interest and costs as damages.

       Laguna Seca Ranch

       On December 14, 1998, a Legend subsidiary, BMIF Monterey County Corp.,
       filed a complaint against New Cities Development Group, Bates Properties,
       Inc., New Cities Development Company, Deregt Development, Inc., Rancho
       Monterey, L.L.C. (collectively New Cities), Old Republic Title Company
       and 


                                      F-21
<PAGE>   53

                    LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                      (A SUBSIDIARY OF RGI HOLDINGS, INC.)

                   Notes to Consolidated Financial Statements


       David Bohen (collectively Old Republic) in the United States District
       Court, Northern District of California, San Jose Division.

       During 1997, Legend sold the Laguna Seca Ranch to New Cities with Legend
       retaining a house with certain surrounding property known as Lot 40
       together with certain access easements to the nearest public right of
       way. New Cities agreed, as part of the sale, to establish a separate
       legal parcel for Lot 40 subsequent to the sale. As part of the sale,
       Legend agreed to cooperate and share equally in certain costs with New
       Cities in negotiating an agreement concerning water service to the
       property with California-American Water Company (Cal-Am). Pursuant to
       this, Legend agreed to post $200,000 in an interest bearing escrow held
       by Old Republic to pay any necessary amounts due from Legend in
       consumating an agreement with Cal-Am. An agreement was reached with
       Cal-Am on March 20, 1998 to provide the water needs, and Legend agreed
       with New Cities to contribute $60,000 out of the escrow to defray certain
       costs. On August 28, 1998 Cal-Am withdrew from its commitment.
       Subsequently, Old Republic released the $200,000 escrow with interest to
       New Cities.

       Legend is claiming that New Cities breached certain implied covenants in
       refusing to negotiate and consummate the agreement with Cal-Am, that New
       Cities failed to establish Lot 40 as a separate parcel, and that Old
       Republic wrongly released the funds in escrow to New Cities. Legend asked
       to recover $140,000 plus interest on the escrow, that New Cities convey
       Lot 40, that New Cities pay approximately $75,000 of costs incurred by
       Legend for negotiating the agreement with Cal-Am, and other damages. New
       Cities has not responded to the complaint, whereas Old Republic has
       denied any wrong doing in releasing the escrow, and has asserted other
       separate defenses.

       General Legal Matters
       
       The Company is subject to various lawsuits arising in the ordinary course
       of business. The Company is of the opinion that the outcome of any such
       lawsuits will not have a material adverse effect on its operations.


       (14)   OPERATING SEGMENTS

       Legend's reportable operating segments are distinct operations that
       service differing markets. The real estate segment consists of the
       development, construction and sales activities for all of the Legend
       properties. The club operations consist of the clubhouse and related
       activities for Grand Harbor and Oak Harbor. Patient services includes the
       Royal Palm Convalescent Center which offers skilled nursing care, and the
       Somerset House Assisted Living Facility.

       The accounting policies for the reportable segments are the same as those
       described in Note 1. Internal interest is charged at rates similar to
       those charged on the payables to related parties. Summarized information
       concerning the reportable segments is presented in the following table.



                                      F-22
<PAGE>   54

                    LEGEND PROPERTIES, INC. AND SUBSIDIARIES
                      (A SUBSIDIARY OF RGI HOLDINGS, INC.)

                   Notes to Consolidated Financial Statements


<TABLE>
<CAPTION>
                                                                                       Other,
                                       Real            Club          Patient          Corporate
                                      Estate         Operations      Services    and Eliminations (1)    Total
                                      ------         ----------      --------    --------------------    -----
($000 omitted)

1998
<S>                              <C>                  <C>            <C>               <C>              <C>    
Revenues                          $     65,219          5,953          2,601           1,960            75,733 
Operating costs and expenses           (61,202)        (9,485)        (3,455)        ( 3,621)          (77,763)
Other income/expenses                   (8,790)        (1,151)          (301)            135           (10,107)
                                 -------------------------------------------------------------------------------
Net income (loss) before
    minority interest             $     (4,773)        (4,683)        (1,155)         (1,526)          (12,137)
                                 ===============================================================================

Total assets                           113,101         13,684         15,523           5,250           147,558
Capital expenditures              $        338            160           (135)            429               792
                                 ===============================================================================

1997
Revenues                          $     43,596          5,345          2,718           3,969            55,628
Operating costs and expenses           (44,916)        (8,499)        (2,736)         (4,096)          (60,247)
Other income / expenses                (10,452)          (711)          (127)          1,150           (10,140)
                                 -------------------------------------------------------------------------------
Net income (loss) before
   minority interest              $    (11,772)        (3,865)          (145)          1,023           (14,759)
                                 ===============================================================================

Total assets                           120,192         14,487         15,622          12,570           162,871
Capital expenditures              $      1,042            958          3,840             457             6,297
                                 ===============================================================================

1996
Revenues                          $     25,446          4,257          2,618           4,302            36,623
Operating costs and expenses           (25,900)        (6,035)        (2,491)           (244)          (34,670)
Other income / expenses                 (4,705)           (49)          (320)            710            (4,364)
                                 -------------------------------------------------------------------------------
Net income (loss) before
    minority interest             $     (5,159)        (1,827)          (193)          4,768            (2,411)
                                 ===============================================================================

Total assets                           153,026         13,671         14,366           3,047           184,110
Capital expenditures              $        988         13,013          1,219               -            15,220
                                 ===============================================================================
</TABLE>


       (1)    Other includes other segments which were not reportable in 1998.
              These other segments were not reported in earlier periods since 
              they were disposed of prior to 1998 and it was impractical to 
              report separately.


                                      F-23