<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



                                    FORM 10-Q



(Mark One)
[ X ]  Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 29, 1996 

[   ]  Transition report pursuant to Section 13 or 15(d) of the Securities 
Exchange Act of 1934 for the transition period from              to 


Commission File Number 0-6087


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


                   Delaware                             91-0508250
       (State or other jurisdiction of               (I.R.S. Employer
       incorporation or organization)               Identification No.)


                4300 South 104th Place, Seattle, Washington 98178
                    (Address of principal executive offices)
                                   (Zip code)


                                 (206) 725-0900
              (Registrant's telephone number, including area code)



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 

Common stock outstanding at November 1, 1996: 4,081,830 shares at $.01 par
value.
<PAGE>   2
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES





                                      INDEX




<TABLE>
<CAPTION>
                                                                                  Page 
                                                                                 Number
                                                                                 ------
<S>                                                                              <C>
Part I.       Financial Information

   Item 1     Financial Statements
                 Consolidated Balance Sheets                                        4
                 Consolidated Statements of Earnings                                5
                 Consolidated Statements of Cash Flows                              6
                 Notes to Consolidated Financial Statements                         8

   Item 2     Management's Discussion and Analysis of Financial Condition and
                 Results of Operations                                             14


Part II.      Other Information

   Item 6(b)  Reports on Form 8-K                                                  17

   Signatures                                                                      18
</TABLE>


                                       2
<PAGE>   3
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES




                          PART I: FINANCIAL INFORMATION



ITEM 1 - FINANCIAL STATEMENTS


                                       3
<PAGE>   4
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

            September 29, 1996, December 31, 1995 and October 1, 1995

             (Dollar amounts in thousands, except per share amounts)


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                                               September 29,    December 31,    October 1,
                                                                                    1996            1995           1995
--------------------------------------------------------------------------------------------------------------------------
                                                                                (unaudited)                     (unaudited)
<S>                                                                            <C>              <C>             <C>  
Assets
Current assets:
     Cash and cash equivalents                                                    $    848           1,661           2,008
     Short-term investments                                                          3,758           1,714           2,101
     Receivables:                                                                                                 
        Trade                                                                        2,400           2,342           2,352
        Current installments of long-term notes receivable                             109             106             105
                                                                                  ----------------------------------------
                                                                                                                  
                                                                                     2,509           2,448           2,457
        Less allowance for doubtful receivables                                        347             204             232
                                                                                  ----------------------------------------
                                                                                                                  
                      Net receivables                                                2,162           2,244           2,225
     Inventories                                                                    10,729           8,526           9,113
     Prepaid expenses                                                                1,609           1,930           2,008
     Deferred income taxes                                                             193             157             118
                                                                                  ----------------------------------------
                                                                                                                  
                      Total current assets                                          19,299          16,232          17,573
                                                                                                                  
Long-term notes receivable, excluding current installments                             774             517             848
Investment in affiliate                                                                 54              45            --
Property, plant and equipment, at cost, less accumulated depreciation                                             
     and amortization                                                               10,675          10,500          10,219
Other assets, at cost, less accumulated amortization                                   579             698             659
                                                                                  ========================================
                                                                                                                  
                                                                                  $ 31,381          27,992          29,299
                                                                                  ========================================
                                                                                                                  
                  Liabilities and Stockholders' Equity                                                            
                                                                                                                  
Current liabilities:                                                                                              
     Current installments of long-term debt                                             51              48              47
     Accounts payable - trade                                                        2,352           1,492           2,139
     Accrued salaries and wages                                                        833             617             490
     Other accrued expenses                                                            921             682             653
     Income taxes payable                                                              245             188             454
     Customer deposits                                                               5,197           4,365           4,907
                                                                                  ----------------------------------------
                                                                                                                  
                      Total current liabilities                                      9,599           7,392           8,690
                                                                                                                  
Long-term debt, excluding current installments                                       1,177           1,216           1,228
Deferred income taxes                                                                  138             104              83
                                                                                                                  
Stockholders' equity:                                                                                             
     Common stock of $.01 par value. Authorized 10,000,000 shares; issued                                         
        and outstanding 4,073,982 shares at September 29, 1996, 4,060,139                                         
        shares at December 31, 1995 and 4,046,906 shares at October 1,                                            
        1995                                                                            41              41              40
     Additional paid-in capital                                                     15,888          15,856          15,811
     Cumulative translation adjustment                                                (714)           (644)           (623)
     Retained earnings                                                               5,252           4,027           4,070
                                                                                  ----------------------------------------
                                                                                                                  
                      Total stockholders' equity                                    20,467          19,280          19,298
--------------------------------------------------------------------------------------------------------------------------
                                                                                                                  
                                                                                  $ 31,381          27,992          29,299
==========================================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.

                                       4
<PAGE>   5
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF EARNINGS

          For the periods ended September 29, 1996 and October 1, 1995

             (Dollar amounts in thousands, except per share amounts)

                                   (unaudited)


<TABLE>
<CAPTION>
=======================================================================================================================
                                                                Nine Months Ended                 Quarters Ended
                                                           September 29,     October 1,     September 29,    October 1,
                                                                1996            1995            1996            1995
-----------------------------------------------------------------------------------------------------------------------
                                                          
<S>                                                          <C>               <C>             <C>             <C>    
Revenue                                                      $ 35,392          32,113          14,632          11,536 
Cost of goods sold                                             26,526          23,826          11,137           8,415
                                                             --------------------------------------------------------
                                                                                                            
           Gross profit                                         8,866           8,287           3,495           3,121
                                                                                                            
Operating expenses:                                                                                         
     Selling, general and administrative expenses               6,820           6,738           2,306           2,222
     Display court expenses                                       506             550             189             198
                                                             --------------------------------------------------------
                                                                                                            
           Total operating expenses                             7,326           7,288           2,495           2,420
                                                             --------------------------------------------------------
                                                                                                            
           Operating income                                     1,540             999           1,000             701
                                                                                                            
Other income (expense):                                                                                     
     Equity in earnings of affiliate                             --               891            --              --
     Rental income                                                266             233             109              88
     Interest income                                              205             285              73             173
     Interest expense                                             (98)           (168)            (31)            (72)
                                                             --------------------------------------------------------
                                                                                                            
           Other income, net                                      373           1,241             151             189
                                                             --------------------------------------------------------
                                                                                                            
           Earnings before income tax expense                   1,913           2,240           1,151             890
                                                                                                            
                                                                                                            
Income tax expense                                                688             860             418             289
                                                             --------------------------------------------------------
                                                                                                            
           Net earnings                                      $  1,225           1,380             733             601
                                                             ========================================================
                                                                                                        
                                                            
Net earnings per common share                                $    .30             .34             .18             .15
=====================================================================================================================
</TABLE>



See accompanying notes to consolidated financial statements.

                                       5
<PAGE>   6
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

        For the nine months ended September 29, 1996 and October 1, 1995

                                 (In thousands)

                                   (unaudited)


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
                                                                                  1996        1995
----------------------------------------------------------------------------------------------------

<S>                                                                             <C>           <C>   
Increase (Decrease) in Cash and Cash Equivalents

Cash flows from operating activities:
     Cash received from customers                                               $ 36,190      33,016
     Cash paid to suppliers and employees                                        (33,274)    (31,320)
     Interest received                                                               160         243
     Interest paid                                                                   (98)       (174)
     Income tax expense                                                             (639)       (378)
     Cash paid for litigation settlement, including associated legal fees           (121)       (126)
                                                                                --------------------

                      Net cash provided by operating activities                    2,218       1,261

Cash flows from investing activities:
     Cash received for repayment of notes (not related to the sale of homes)          41          11
     Additions to plant and equipment                                               (989)     (1,102)
     Purchase of short-term cash investments                                      (4,973)     (3,323)
     Liquidation of short-term cash investments                                    2,927       1,699
     Disbursements for loans (not related to the sale of homes)                     --          (243)
     Proceeds from sale of property and equipment                                     10           2
     Additions to other assets                                                        (7)       (169)
     Investment in affiliate                                                        --         1,245
                                                                                --------------------

                      Net cash used in investing activities                       (2,991)     (1,880)

Cash flows from financing activities:
     Proceeds from exercise of stock options                                          28          33
     Repayment of long-term debt                                                     (35)        (43)
     Retirement of long-term debt                                                   --          (604)
                                                                                --------------------

                      Net cash used in financing activities                           (7)       (614)

Effect of exchange rates on cash and cash equivalents                                (33)         22
                                                                                --------------------

                      Net decrease in cash and cash equivalents                     (813)     (1,211)

Cash and cash equivalents at beginning of period                                   1,661       3,219
----------------------------------------------------------------------------------------------------

Cash and cash equivalents at end of period                                      $    848       2,008
====================================================================================================
</TABLE>




See accompanying notes to consolidated financial statements.

                                       6
<PAGE>   7
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED



                                 (In thousands)

                                   (unaudited)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
                                                                                 1996       1995
--------------------------------------------------------------------------------------------------

<S>                                                                             <C>          <C>  
Reconciliation of net earnings to net cash provided by operating activities:
     Net earnings                                                               $ 1,225      1,380

     Adjustments to reconcile net earnings to net cash provided by operating
        activities:
           Depreciation and amortization of plant and equipment                     712        631
           Amortization of other assets                                             125        152
           Amortization of display homes                                            172        199
           Loss (gain) on disposal of property and equipment                          9         (1)
           Deferred income tax expense                                               (2)       (39)
           Compensation expense related to restricted stock                           4       --
           Equity in earnings of affiliate                                         --         (891)
           Changes in certain assets and liabilities:
               Decrease (increase) in net receivables                                74       (255)
               Increase in inventories exclusive of amortization of display
                  models                                                         (2,390)      (720)
               Decrease (increase) in prepaid expenses related to operating
                  activities                                                        322       (604)
               Increase in current liabilities other than current portion of
                  long-term debt                                                  2,202      1,485
               Increase in notes receivable related to operating activities        (235)       (76)
                                                                                ------------------

                      Total adjustments                                             993       (119)
--------------------------------------------------------------------------------------------------

                      Net cash provided by operating activities                 $ 2,218      1,261
==================================================================================================
</TABLE>



See accompanying notes to consolidated financial statements.

                                       7
<PAGE>   8
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            September 29, 1996, December 31, 1995 and October 1, 1995

             (Dollar amounts in thousands, except per share amounts)

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

(1)    BASIS OF PRESENTATION

       The accompanying unaudited consolidated financial statements have been
       prepared in accordance with generally accepted accounting principles,
       except as noted below, and include all recurring adjustments that are
       considered necessary by management to fairly state the results of the
       interim periods. 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,
       liabilities, revenues and expenses and certain disclosures. Actual
       results could differ from those estimates. These consolidated financial
       statements and related notes have been prepared pursuant to the rules and
       regulations of the Securities and Exchange Commission. Accordingly,
       certain information and footnote disclosures normally included in the
       consolidated financial statements prepared in accordance with generally
       accepted accounting principles have been omitted. Due to the seasonality
       of the Company's business, the accompanying consolidated financial
       statements may not necessarily be indicative of the results to be
       obtained for the full year. This report should be read in conjunction
       with the Company's Annual Report to the Securities and Exchange
       Commission on Form 10-K for the year ended December 31, 1995.

(2)    EARNINGS PER COMMON SHARE

       There was no difference between primary and fully diluted earnings per
       share for all periods presented. The number of shares used to compute
       primary and fully diluted earnings per share was 4,096,664 and 4,104,794
       for the third quarter of 1996, 4,084,872 and 4,101,544 for the third
       quarter of 1995, 4,096,180 and 4,106,489 for the first nine months of
       1996, and 4,077,475 and 4,087,577 for the first nine months of 1995.

(3)    INVENTORIES

       A summary of inventories follows (in thousands):

<TABLE>
<CAPTION>
                                      September 29,   December 31,   October 1, 
                                          1996           1995           1995
         ---------------------------------------------------------------------

<S>                                   <C>              <C>           <C>  
             Raw materials               $ 3,832          2,838          2,674
             Work-in-process               2,324          1,581          1,996
             Finished goods                3,589          2,938          2,968
             Display homes                   984          1,169          1,475
         ---------------------------------------------------------------------
                                         $10,729          8,526          9,113
         =====================================================================
</TABLE>
                                                                   (Continued)


                                       8
<PAGE>   9
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



             (Dollar amounts in thousands, except per share amounts)

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

(4)    INVESTMENT IN AFFILIATE

       In 1994, the Company acquired a 50% interest in a corporate joint venture
       (JV) which is accounted for in accordance with the equity method. The
       remaining 50% interest is held by an unaffiliated company. Any
       contributions to the JV, which were made for working capital
       requirements, and asset or equity distributions from the JV are made in
       accordance with the respective ownership interests. The JV was formed to
       harvest timber in British Columbia, Canada. The harvesting of the timber
       began in the fourth quarter of 1994. The sale of the harvested logs was
       essentially completed in the second quarter of 1995.

(5)    PROPERTY, PLANT AND EQUIPMENT

       Property, plant and equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                        September 29,    December 31,   October 1,
                                                            1996            1995           1995
                                                          ---------------------------------------

<S>                                                     <C>              <C>            <C>  
       Building and leasehold improvements                $ 8,101           7,634           7,594
       Equipment                                            4,818           4,618           4,642
       Furniture and fixtures                               3,250           3,079           2,922
                                                          ---------------------------------------
                                                           16,169          15,331          15,158
       Less accumulated depreciation and                                                 
          amortization                                      9,449           8,856           8,841
                                                          ---------------------------------------
                                                            6,720           6,475           6,317
       Land                                                 3,955           4,025           3,902
                                                          ---------------------------------------
                  Net property, plant and equipment       $10,675          10,500          10,219
                                                          =======================================
</TABLE>
                                                                     (Continued)


                                       9
<PAGE>   10
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



             (Dollar amounts in thousands, except per share amounts)

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


(6)    LONG-TERM DEBT

       Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                          September 29,   December 31,   October 1,
                                                              1996           1995           1995
                                                             ------------------------------------
<S>                                                       <C>             <C>            <C>  
       First mortgage note payable, due in monthly                                         
            installments of $13, including interest at                                     
            9.5%; final payment due 2009                     $1,195          1,230          1,240
       Other                                                     33             34             35
                                                             ------------------------------------
                  Total long-term debt                        1,228          1,264          1,275
       Less current installments                                 51             48             47
                                                             ------------------------------------
                  Long-term debt, excluding current                                        
                       installments                          $1,177          1,216          1,228
                                                             ====================================
</TABLE>

       Certain properties, having an aggregate net book value of approximately
       $3,500, were pledged as collateral on the above long-term debt.

       At September 29, 1996, the Company had $2,866 of unsecured lines of
       credit with banks to be drawn upon as needed, with interest at 1/2% above
       the prime rate.

(7)    OUTSTANDING STOCK OPTIONS

       (A)  EMPLOYEE STOCK OPTION PLANS

            The Company has provided for the granting of stock options to key
            employees under two plans: the 1984 Incentive Stock Option Plan (the
            1984 Plan) and the 1988 Combined Incentive Stock Option and
            Nonqualified Stock Option Plan (the 1988 Plan). Both plans are
            administered by the Compensation Committee of the Board of Directors
            (Committee).

            Under the terms of the 1984 Plan, incentive options to purchase
            shares of the Company's common stock were granted at a price equal
            to the market price of the stock at the date of grant. The 1984 Plan
            expired on December 21, 1994 and no future options will be granted
            under this plan.

            Under the terms of the 1988 Plan, both incentive and nonqualified
            options to purchase shares of the Company's common stock may be
            granted. Options granted under this plan may be designated as
            incentive or nonqualified at the discretion of the Committee. The
            exercise price of the options granted under this plan is set at the
            time of grant, but may not be less than the fair market value of the
            Company's stock at the date of grant.
                                                                    (Continued)

                                       10
<PAGE>   11
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



             (Dollar amounts in thousands, except per share amounts)

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

            At November 1, 1996, there were options outstanding under both plans
            to purchase 496,346 shares of common stock at per share prices
            ranging from $2.94 to $5.38. Of these 496,346 options, 351,891 were
            currently exercisable at an average exercise price of $4.10 per
            share. From January 1, 1996 to November 1, 1996, options to purchase
            218,400 shares of common stock were granted at per share prices
            ranging from $3.75 to $4.25. Options to purchase 100,000 shares were
            nonqualified. Options to purchase 118,400 shares were qualified.
            From January 1, 1996 to November 1, 1996, options to purchase 12,843
            shares were exercised at a per share price of $2.16 and options to
            purchase 32,279 shares were relinquished.

       (B)  DIRECTORS AND DISTRIBUTORS STOCK OPTION PLAN

            The Company has provided for the granting of stock options to
            nonemployee directors and distributors who serve on the Distributor
            Advisory Council (Council).

            Nonemployee directors are granted options to purchase 10,000 shares
            of common stock when first elected to the Board of Directors.
            Additionally, each nonemployee director in office each October 1 is
            granted options to purchase 5,000 shares of the Company's common
            stock. The exercise price of all options granted shall be the fair
            market value on the date of grant. On October 1, 1996, options to
            purchase 20,000 shares of common stock were granted at a per share
            price of $4.00.

            At November 1, 1996, there were options outstanding to nonemployee
            directors to purchase 102,209 shares of common stock at per share
            prices ranging from $3.75 to $6.36. Of these 102,209 options, 71,599
            were currently exercisable at per share prices ranging from $3.75 to
            $6.36. No options have been exercised from January 1, 1996 through
            November 1, 1996.

            All distributors who serve on the Council each February 1 are
            granted options to purchase 100 shares of common stock for each year
            of service on the Council. The exercise price of the options granted
            is the market price of the Company's stock on the first business day
            of October preceding the year in which the options are granted. At
            November 1, 1996, there were options outstanding to purchase 15,300
            shares of common stock at per share prices ranging from $3.50 to
            $6.36. Of these 15,300 options, 8,320 were currently exercisable at
            per share prices ranging from $3.50 to $6.36. From January 1, 1996
            to November 1, 1996, options to purchase 2,100 shares were granted
            at a per share price of $4.25 and options to purchase 710 shares
            were relinquished. No options have been exercised in 1996.
                                                                   (Continued)


                                       11
<PAGE>   12
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



             (Dollar amounts in thousands, except per share amounts)

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

       (C)  ISSUANCE OF RESTRICTED STOCK

            Pursuant to pre-employment negotiations, in January 1996, 1,000
            shares of common stock were granted, at the fair market value at the
            date of issuance, to the person who became the manager of the
            Company's sunroom division. As the stock issued has not been
            registered, the certificate bears the appropriate restrictive
            legend. A charge of $4 was recorded as compensation in 1996.

            Pursuant to a revised compensation program for nonemployee
            directors, 1,000 shares of the Company's common stock were granted
            to each of the four nonemployee directors, effective October 1,
            1996, at the fair market value on the date granted, $4.00. As the
            stock issued is not registered, all certificates bear the
            appropriate restrictive legend.

(8)    INCOME TAXES

       Income tax expense (benefit) was allocated as follows (in thousands):

<TABLE>
<CAPTION>
                                             Nine Months Ended                Quarters Ended
                                       ----------------------------      ----------------------------
                                       September 29,     October 1,      September 29,     October 1,
                                           1996             1995             1996             1995
                                          --------------------------------------------------------
                                                                                           
<S>                                    <C>               <C>             <C>               <C>
            Current:                                                                       
                 U.S. Federal             $ 838              585              492              401
                 Canadian                  (167)             296              (38)            (102)
                 State                       20               17               10                7
                                          --------------------------------------------------------
                                                                                           
                                            691              898              464              306
                                                                                           
            Deferred:                                                                      
                 U.S. Federal               (33)             (36)             (64)             (20)
                 Canadian                    30               (2)              18                3
                                          --------------------------------------------------------
                                                                                           
                                             (3)             (38)             (46)             (17)
                                          --------------------------------------------------------
                                                                                           
                                          $ 688              860              418              289
                                          ========================================================
</TABLE>

       The Company's consolidated Canadian subsidiary had a pretax loss of
       approximately $381 in the first nine months of 1996 and $342, excluding
       the earnings of the affiliate, in the first nine months of 1995.
                                                                   (Continued)


                                       12
<PAGE>   13
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



             (Dollar amounts in thousands, except per share amounts)

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

       The tax effects of temporary differences that give rise to significant
       portions of the deferred tax assets and deferred tax liabilities were as
       follows (in thousands):

<TABLE>
<CAPTION>
                                                                              September 29,   December 31,      October 1,
                                                                                  1996            1995            1995
                                                                                  ------------------------------------
       Deferred tax assets:                                                                                      
<S>                                                                           <C>             <C>               <C>
            Receivables, due to the allowance for doubtful receivables            $111              64              80
            Uniform inventory capitalization for tax purposes                       19              20              15
            Accrued expenses, deductible in different years for tax                 63              73              23
            Foreign tax credit carryforward                                        --              --                6
                                                                                  ------------------------------------
                             Total gross deferred tax assets                       193             157             124
                                                                                                                 
            Less valuation allowance                                               --              --                6
                                                                                  ------------------------------------
                                                                                                                 
                             Net deferred tax assets                               193             157             118
                                                                                                                 
       Deferred tax liabilities - property, plant and equipment,                                                 
            principally due to differences in basis of assets and                                                
            depreciation                                                           138             104              83
                                                                                  ------------------------------------
                             Net deferred tax liabilities                         $ 55              53              35
                                                                                  ====================================
</TABLE>

(9)    OTHER FINANCIAL INFORMATION

       The Company's business is seasonal in that most deliveries have
       historically been made during the period from April to October. To
       illustrate this, revenue by quarter is presented below (in thousands of
       dollars):

<TABLE>
<CAPTION>
                                           1st Quarter        2nd Quarter       3rd Quarter     4th Quarter
                                           ------------------------------------------------------------------
<S>                                        <C>                <C>               <C>             <C>        
                      1996

              Revenue                      $   6,587             14,173           14,632

                      1995

              Revenue                          6,630             13,947           11,536           10,198

                      1994

              Revenue                          7,076             11,521           10,979            9,957

                      1993

              Revenue                          7,171             12,776           12,965            9,084

                      1992

              Revenue                          5,565             12,478           11,738            8,802
</TABLE>


                                       13
<PAGE>   14
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES

                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS

                                  THIRD QUARTER

RESULTS OF OPERATIONS

Revenue increased $3.1 million (27%) from the third quarter of 1995 to the third
quarter of 1996 due to home and sunroom sales.

Home and sunroom revenue increased $3.4 million (37%) from $9.2 million in the
third quarter of 1995 to $12.6 million in the third quarter of 1996. The number
of home units shipped increased 47% from 118 units in the third quarter of 1995
to 174 units in the third quarter of 1996. The average revenue per home unit
shipped decreased 3% from $70,200 in the third quarter of 1995 to $67,800 in the
third quarter of 1996 due primarily to the Access product. The Access product
sells for approximately 30% less than the traditional Cedar Frame home. The
Access product accounted for 32% of the home units shipped in the third quarter
of 1996 compared to 18% of the home units shipped in the third quarter of 1995.
It is believed that the Access product allows broader market appeal in the
custom home market.

The dollar value of new orders decreased 20% from the third quarter of 1995 to
the third quarter of 1996. The number of new orders decreased 18% from the third
quarter of 1995 to the third quarter of 1996. July and August were relatively
weaker than the comparable period of 1995 due to the timing of the seasonal peak
in new order activity. For September and October, the number of new orders were
approximately 15% ahead of the comparable periods of 1995. The Access product
represented 41% of the new orders in the third quarter of 1996 compared to 27%
of the new orders in the third quarter of 1995.

As stated in its December 31, 1995 Form 10-K, the Company has begun the process
of consolidating its manufacturing and distribution operations. In late February
1996, employees at the Kent, Washington facility were notified that home
shipment operations would be moved to Surrey, British Columbia. All home
shipments are currently planned to originate from the Surrey, British Columbia
facility not later than January 1, 1997. In August 1996, negotiations with the
union that represents the 12 union employees effected were completed. The
Company will pay approximately $150,000 in severance to these employees. In the
third quarter of 1996, a charge of $150,000 was included in the cost of goods
sold.

The gross profit percentage (gross profit/revenue) was 27.1% in the third
quarter of 1995 compared to 23.9% in the third quarter of 1996. In the third
quarter of 1995, the cost of goods sold was reduced by $189,000 for U.S.
government refunds of duty on Canadian lumber. With this credit removed from the
cost of goods sold, the gross profit percentage was 25.4% for the third quarter
of 1995. With the aforementioned $150,000 charge for the closing of the Kent,
Washington plant removed from the cost of goods sold, the gross profit
percentage was 24.9% for the third quarter of 1996. Increased forest and
building products costs, which more than offset savings in other areas, are
responsible for the decrease in the gross profit percentage, as adjusted, from
25.4% in the third quarter of 1995 to 24.9% in the third quarter of 1996.



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<PAGE>   15
                                  YEAR-TO-DATE


RESULTS OF OPERATIONS

Revenue increased $3.3 million (10%) from 1995 to 1996.

Home and sunroom revenue increased $3.9 million (15%) from $25.9 million in 1995
to $29.8 million in 1996. The number of home units shipped increased 20% from
336 in 1995 to 402 in 1996. The average revenue per home unit shipped decreased
3% from $71,400 in 1995 to $69,100 in 1996 due to the Access product. The Access
product accounted for 30% of the home units shipped in 1996 compared to 15% of
the home units shipped in 1995.

Material and chip sales revenue decreased $537,000 (16%) from 1995 to 1996.

The dollar value of new orders increased 8% from 1995 to 1996. The number of new
orders increased 6%. The Access product represented 32% of the new orders in
1996 compared to 17% of the new orders in 1995.

Entering the fourth quarter of 1996, the total backlog, stated in dollars, was
8% lower than it was entering the fourth quarter of 1995.

The gross profit percentage was 25.8% in 1995 compared to 25.1% in 1996. With
the $189,000 credit for duty refunds in 1995 and the $150,000 charge related to
the closure of the Kent, Washington plant in 1996 removed from the respective
costs of goods sold, the gross profit percentage was 25.2% in 1995 compared to
25.5% in 1996. The increased cost to produce plans offset cost savings in other
areas of the cost of goods sold.

In 1994, the Company obtained the rights to harvest approximately 50,000 cubic
meters of timber in the Province of British Columbia. The harvesting of the
timber began in the fourth quarter of 1994. In the second quarter of 1995, the
sale of the harvested timber was essentially complete. Equity in the earnings of
the affiliate were $891,000 in 1995. There were no such earnings in 1996.

Interest expense decreased $70,000 (42%) primarily due to the September 1995
pay-off of a mortgage that was due in 2010 with an interest rate of 11%. This
mortgage had a balance owing of approximately $600,000.

LIQUIDITY

The Company's policy is that all home and sunroom orders be accompanied by cash
deposit and that units be paid in full before shipment or be shipped on a C.O.D.
basis. The majority of home and sunroom sales are prepaid. Lumber sales are made
on terms common to the lumber industry.

The Company pays its vendors within stated terms and takes advantage of
discounts for early payment. Operations and customer deposits for home and
sunroom orders are the Company's primary sources of cash. The Company does not
foresee the need to increase its lines of credit in 1996.

Cash and cash equivalents, at September 29, 1996, decreased $813,000 (49%) from
December 31, 1995 and decreased $1.2 million (58%) from October 1, 1995 due to
the corresponding increases in short-term investments. Short-term investments,
at September 29, 1996, increased $2.0 million (119%) from December 31, 1995 and
$1.7 million (79%) from October 1, 1995. At September 29, 1996, short-term
investments were primarily composed of bankers' acceptances, 



                                       15
<PAGE>   16
tax exempt bonds and commercial paper. Approximately 90% of the September 29,
1996 short-term investments mature at planned intervals before April 1, 1997.
Although no need to borrow for operating needs is foreseen, should a need arise,
the Company has available lines of credit totaling $2.9 million. The Company did
not use the available lines of credit, at any time, in 1996 or 1995.

On September 30, 1996, the Company announced that it had been awarded a timber
sale by the British Columbia government. The contract is for 372,000 cubic
meters of timber over a five-year period and is expected to allow the Company to
secure a cedar supply for more than five years.

As stated previously, the Company has begun the consolidation of its home
shipment operations in British Columbia. As a condition of the timber sale, the
Company is committed to complete the relocation of the home shipment operations
and move a considerable amount of its lumber manufacturing to British Columbia.
To accomplish this consolidation, it is expected to require an investment of
five to six million dollars in new plant and equipment. The Company has
evaluated the project in light of the required capital investment, operational
viability and other relevant factors. Management believes that the Canadian
consolidation is in the best interest of the Company and its shareholders.

Currently, the Company expects to partially finance the investment by selling
the Kent, Washington facility, undeveloped land located at Marysville,
Washington and possibly one other parcel of real estate. Additional sources of
financing are being investigated as the plans of the new facility are being
finalized. It is not expected that there will be significant cash requirements
for this project until the spring of 1997.

The Company has begun to consolidate its sunroom and window divisions into the
newly created Lindal Building Products Division. It is expected that this new
division will begin manufacturing the Company's sunroom in 1997. Sunrooms are
currently manufactured, on a contract basis, by a third party.

Additionally, the relocation of the Lindal Building Products Division to Skagit
County in Washington State is actively being pursued. An investment of two to
three million dollars is anticipated for plant and equipment. It is expected
that this relocation may happen as early as spring 1997. Various sources of
financing are being evaluated.

In order to finance both projects, the Company may invest a portion of its
current cash reserves.

Management believes that favorable financing for both projects will be obtained.


Inventories, accounts payable-trade and customer deposits increased $2.2 million
(26%), $860,000 (58%) and $832,000 (19%), respectively, from December 31, 1995
to September 29, 1996 due to seasonal factors. Inventories increased $1.6
million (18%) from October 1, 1995 to September 29, 1996 primarily due to
increased home sales and increased costs for forest and building products.

The Company continues to hedge a portion of its expected non-cedar lumber needs
for its home packages using options and future contracts. The program's
objective is to manage well defined commodity risks. These derivative financial
instruments are not being used for trading purposes.


                                       16
<PAGE>   17
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES




                           PART II: OTHER INFORMATION


ITEM 6(b) - REPORTS ON FORM 8-K

There were no reports on Form 8-K filed during the third quarter of 1996.




                                       17
<PAGE>   18
                            LINDAL CEDAR HOMES, INC.
                                AND SUBSIDIARIES



SIGNATURE:

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



                                             LINDAL CEDAR HOMES, INC.




                             By:               /S/ Robert W. Lindal
                                  ----------------------------------------------
                                                 Robert W. Lindal
                                       Chairman and Chief Executive Officer




                             By:                 /S/ John F. Dacy
                                  ----------------------------------------------
                                                   John F. Dacy
                                        Vice President Finance & Treasurer
                                            (Chief Accounting Officer)










DATE:

November 13, 1996



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