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

                                   -----------

                                    FORM 10-K
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001      Commission file number 0-28024

                            THE FORTRESS GROUP, INC.
             (Exact name of registrant as specified in its charter)

                                   -----------

                   Delaware                                  54-1774997
      (State or other jurisdiction of                   (I.R.S. Employer
       incorporation or organization)                   Identification No.)

1650 Tysons Boulevard, Suite 600, McLean, Virginia             22102
     (Address of principal executive offices)               (Zip Code)

       Registrant's telephone number, including area code: (703) 442-4545

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

                                      NONE

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

                          Common Stock, par value $.01

        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 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
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

        Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 26, 2002 was $8,706,305.

        As of March 26, 2002, 3,119,195 shares of the Registrant's Common Stock,
$.01 par value per share, were outstanding.



                                       1
<PAGE>


                       Documents Incorporated By Reference

            Certain information required by Items 10, 11, 12 and 13 of Form 10-K
is incorporated by reference into Part III hereof, from the registrant's proxy
statement, which will be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year covered by this Form 10-K,
and certain documents are incorporated by reference into Part IV hereof.


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<PAGE>


            PART I

ITEM 1.  BUSINESS

INTRODUCTION

The Fortress Group, Inc. (the "Company" or "Fortress") is a regional
homebuilding company engaged in designing, building and selling single family
homes in five regional housing markets. The Company offers high-quality,
innovative homes, targeting a diverse range of market segments including the
first-time and move-up buyers to semi-custom homebuyers. The Company markets
single family detached and attached homes ranging in size from 1,100 to 5,000
square feet at prices ranging generally from $110,000 to $600,000.

The Company was formed in June 1995 to create a national homebuilding company
through the simultaneous acquisition of four homebuilding companies and an
initial public offering of the Company's equity and debt securities. Subsequent
to the initial acquisitions the Company acquired nine additional homebuilding
companies from 1996 to 1998. In 1999, the Company sold the assets of one
subsidiary, consolidated the operations of two subsidiaries that were operating
in the same market areas, and closed down the operations of a third subsidiary.

During 2001, the Company began a phased restructuring program, which led to the
sale of eight additional subsidiaries. The Company's objective was to reduce
debt and other liabilities and at the same time increase consolidated tangible
net-worth and liquidity. The resulting smaller, more focused Company is
concentrated on enhancing operations in the Company's remaining markets. A
Planning Committee established by the Board of Directors (the "Planning
Committee") is continuing to evaluate various strategic alternatives and make
recommendations to the Board of the Directors which may result in, without
limitation, the sale of additional assets, one or both of the remaining
operating subsidiaries, the mortgage company, or of the Company. Until
such time as a disposition occurs, the Company will continue acquiring land
and building and selling single-family homes. (See Dispositions - page 7).

The Company elected to early adopt, effective January 1, 2001, Statement of
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144). Under SFAS No. 144, the Company has reported
the results of operations and cash flows of the operating subsidiaries sold in
2001 and the division classified as held for sale as discontinued operations for
all periods presented. The results of operations and related losses associated
with operating subsidiaries sold prior to the effective date of the Company's
adoption of SFAS No. 144 have not been reclassified to discontinued operations
in accordance with the Statement.

The Company conducts homebuilding operations in the following markets:

<TABLE>
<CAPTION>
STATES         MARKET AREAS                YEAR ENTERED          MARKETING NAME
------         ------------                ------------          --------------
<S>            <C>                         <C>                   <C>
Arizona        Tucson                          1996              The Genesee Company

Colorado       Denver, Fort Collins            1996              The Genesee Company

Texas          Austin and San Antonio          1996              Wilshire Homes
</TABLE>

In January 1997, Fortress formed Fortress Mortgage, Inc. ("Fortress Mortgage"),
a wholly-owned subsidiary, to provide mortgage financing to the Company's
customers. Fortress Mortgage is licensed as a mortgage banker in Arizona,
California, Colorado, Illinois, Missouri, New Jersey, Pennsylvania, Texas, and
Virginia.



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<PAGE>

MARKETS AND PRODUCTS

OVERVIEW

The Company's operations serve the metropolitan areas noted above. The Company
maintains the flexibility to tailor its product mix within a given market
depending upon market conditions including demographic trends, demand for a
particular type of product, margins, timing and the economic strength of the
market. Depending on the local market and our strategy to serve that market we
develop and build housing that addresses first-time homebuyers, first-time and
second-time move up homebuyers, retirees, empty nesters, and semi-custom buyers.

The table below details the product offerings of and the number of lots
controlled by the Company in each of its continuing operating subsidiaries at
December 31, 2001.

<TABLE>
<CAPTION>
OPERATING DIVISION        AVERAGE SELLING PRICE      PRODUCT RANGE (SQ. FT)     TOTAL LOTS UNDER CONTROL
------------------        ---------------------      ----------------------     ------------------------
<S>                       <C>                        <C>                        <C>
The Genesee Company             $262,400                  1,100-3,800                     2,848

Wilshire Homes                  $216,500                  1,200-5,000                     2,100
</TABLE>

LAND ACQUISITION AND DEVELOPMENT

The Company's policies and strategies regarding land acquisition and development
vary and are dictated by the specific market conditions where the Company
conducts its operations. Overall, the Company's land acquisition and development
practices include (i) acquiring and exercising options to purchase finished
lots; (ii) purchasing finished lots; (iii) controlling (by option or conditional
purchase contract) fully entitled land; (iv) securing options to purchase land,
which options are subject to the seller obtaining required entitlements; and (v)
in some instances, controlling or purchasing raw land and assuming the cost of
obtaining the necessary entitlements. Generally, the Company seeks to minimize
its overall land costs and the risks associated with owning unentitled land by,
whenever possible, using options and other purchase arrangements that allow the
Company to control land through the entitlement process but defer the
acquisition of such land until the entitlement process has been completed and
the Company is prepared to commence construction. The Company has also entered
into contracts where it acts as a general contractor providing construction and
marketing services but avoiding land development risk.

The Company selects land for development based upon a variety of factors,
including (i) internal and external demographic and marketing studies; (ii)
financial review as to the feasibility of the proposed project, including total
investment risk, projected profit margins and return on capital employed; (iii)
competition for the proposed project; (iv) the ability to secure governmental
approvals and entitlements; (v) results of environmental and legal due
diligence; (vi) proximity to concentrated job markets, quality school districts
and local traffic corridors; (vii) infrastructure requirements for grading,
drainage, utilities and streets; and (viii) management's judgment as to the real
estate market, economic trends and the Company's experience in a particular
market. The Company does not acquire land without the approval of its Project
and Feasibility Review Committee, a group composed of Senior Management and
members of the Company's Board of Directors.

The Company strives to develop a design and marketing concept for each of its
communities based on the specific geographic and target market, which includes
determination of size, style, price range of homes, layout of streets, size and
layout of individual lots and overall community design. The development and
construction of each project are managed by the Company's local operations.


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<PAGE>

At December 31, 2001, the Company's continuing operations had homes under
construction on 615 lots and owned 1,236 finished lots and 378 lots held for or
under development. As of December 31, 2001, the Company's continuing operations
also had under contract or option, subject to the satisfaction of the Company's
purchase contingencies, 2,719 finished, undeveloped or partially developed lots.

CONSTRUCTION

The Company's subsidiaries act as the general contractor for the construction of
its homes and development of finished lots. The Company's project development
operations are also controlled by its local operations, whose employees oversee
the construction of each community, including coordinating activities of
subcontractors and suppliers and insuring that all work is subject to quality
and cost controls and complies with zoning and building codes. Subcontractors
typically are retained on a subdivision-by-subdivision basis to complete
construction at a fixed price. Agreements with the Company's subcontractors and
materials suppliers are generally entered into after competitive bidding on an
individual basis.

Fortress management specifies that quality, durable materials be used in
constructing the Company's homes. The Company does not maintain a significant
inventory of construction materials. Each of the Company's local operations
maintains close contact with its respective subcontractors and suppliers, and
the Company believes that its relationship with its suppliers and subcontractors
is good. When possible, the Company negotiates price and volume discounts with
manufacturers and suppliers on behalf of subcontractors to take advantage of its
volume of production. Generally, access to the Company's principal
subcontracting trades, materials and supplies continues to be readily available
in each of its markets; however, prices for these goods and services may
fluctuate due to various factors, including supply and demand shortages which
may be beyond the control of the Company or its vendors.

The Company generally provides a one-year limited warranty of workmanship and
materials with each of its homes although warranty policies may differ within
each local operation and by community. The Company's subcontractors generally
provide the Company with an indemnity and a certificate of insurance prior to
receiving payments for their work; therefore, claims relating to workmanship and
materials are primarily the responsibility of the Company's subcontractors. In
many cases, the Company supplements its one-year limited warranty with a
ten-year limited warranty on structural items, through policies purchased from
third parties. Historically, the Company's divisions have not incurred material
costs relating to warranty claims or defects in construction.

SALES AND MARKETING

Each of the Company's subsidiaries is responsible for the sales and marketing
activities relating to its communities. The Company makes extensive use of
advertising and other promotional activities, including newspaper
advertisements, brochures, direct mail and signage in the immediate areas of its
developments. In addition the Company utilizes extensive market research
developed internally and provided by third parties. The Company believes that
each of its local operations has an established reputation for developing high
quality homes in the markets it serves, which generates additional interest in
the Company's new communities.

The effective use of model homes plays an integral part in demonstrating the
competitive advantages of our home designs and features to prospective
homebuyers. The Company generally builds between one and five model homes for
each active community, depending upon the number of homes to be built within
each community and the products to be offered. Each local operation is
responsible for creating an attractive model home presentation designed to
appeal to the preferences of potential homebuyers.

The Company's objective is to enter into sales contracts for its homes in
advance of construction, thereby reducing the risk of unsold inventory.
Depending on market conditions and the specific project, the


                                       5
<PAGE>

Company may also build speculative homes. Speculative homes are homes that are
under construction or completed but for which the Company does not yet have
sales contracts. These homes are often sold while under construction or soon
after completion. The Company reviews local market factors, such as new
employment opportunities, significant job relocations and growing housing
demand, in determining an appropriate level of speculative home inventory. The
construction of such homes is often necessary to supply homes to individuals who
are relocating and who have immediate housing needs. The Company's sales
contracts for its homes generally provide for mortgage approval within a
specified period. The Company attempts to minimize cancellations by requiring a
nonrefundable cash deposit of on average 5% to 10% of the purchase price for
buyers using conventional financing and by training its sales force to assess
the qualification of potential homebuyers.

BACKLOG

The Company's homes are generally offered for sale in advance of their
construction. The majority of the Company's homes sold in 2001 were sold
pursuant to standard sales contracts entered into prior to commencement of
construction. Such sales contracts are usually subject to certain contingencies
such as the buyer's ability to qualify for financing. Homes covered by such
sales contracts but not yet delivered are considered the Company's "backlog." As
of December 31, 2001, the Company's continuing operations had backlog of $116.8
million (403 homes). The Company does not recognize revenue on homes covered by
such contracts until the sales are closed and the risk of ownership has been
legally transferred to the buyer.

CUSTOMER FINANCING

In January 1997, the Company created Fortress Mortgage for the purpose of
providing mortgage origination and centralized underwriting to the buyers of
homes sold by the Company's subsidiaries. Fortress Mortgage is approved by the
Federal Housing Administration (FHA) and Veterans Administration (VA) as a
qualified mortgage lender and is licensed as a mortgage banker in Arizona,
California, Colorado, Illinois, Missouri, New Jersey, Pennsylvania, Texas, and
Virginia. The mortgage company facilitates the sale of the Company's homes
through the origination of first mortgage loans utilizing programs established
by FHA, VA, Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC).
As a mortgage banker, Fortress Mortgage completes the processing of loan
applications, performs credit checks, processes applications to underwrite loans
and originates and subsequently sells the mortgage loans.


CORPORATE OPERATIONS

The Company's corporate personnel oversee the Company's local operations. Senior
managers of the Company have extensive homebuilding experience. This senior
management group is primarily responsible for formulating and implementing the
Company's policies and procedures to promote the cohesiveness and direction of
its local operations. As a result of the planned restructuring activities
related to the asset sales (See Introduction above) the Company has implemented
a plan to reduce corporate staffing.

Specifically, the Company's senior management (i) reviews and approves
subsidiary capital requirements and requests, short and long range plans,
project acquisition activity, and monitors all operational and financial
performance as it relates to established objectives; (ii) evaluates and selects
geographic markets; (iii) maintains relationships with various institutional
lenders; (iv) develops operational improvement initiatives and oversees the
integration and sharing of "best practices" between homebuilding subsidiaries;


                                       6
<PAGE>

(v) provides accounting services, establishes financial policies and performs
financial analyses for the operations; (vi) provides for human resource
development; and (vii) secures and obtains capital resources.

The Company allocates the necessary capital resources for new communities
consistent with its overall strategy and utilizes anticipated return on capital
as the primary criterion for allocating capital. In addition to establishing
certain pre-determined targets, the Company establishes its capital allocation
policies based on the existing market, results of operations and other factors.
Capital commitments are determined by the Project and Feasibility Review
Committee of the Board of Directors.

Structurally, the Company operates through separate subsidiaries, which are
located within the areas in which they operate. Each subsidiary is managed by
executives with substantial experience in the subsidiary's markets. Although
formal approval of new communities is determined by a committee of the Board,
each subsidiary is fully equipped with the skills and resources to oversee all
local operations including land acquisition, land development, construction,
marketing, sales and product service.

CUSTOMER RELATIONS AND QUALITY CONTROL

Strong customer relations and an adherence to tough quality control standards
are fundamental to the Company's continued success. The Company believes that
its commitment to customer relations and quality control has significantly
contributed to its reputation as a quality builder in each of its local markets.
The Company contracts with a third party to perform standardized customer
satisfaction surveys. These surveys allow the Company to benchmark its
performance against its own subsidiaries and against national averages, and they
allow the Company to measure the effect of its initiatives on customer
satisfaction.

Generally, for each development, Company representatives oversee compliance with
the Company's quality control standards. These representatives allocate
responsibility for (i) overseeing the entire project from land development
through construction; (ii) overseeing performance by the Company's
subcontractors and suppliers; (iii) reviewing the progress of each home and
conducting formal inspections as specific stages of construction are completed;
and (iv) updating each buyer on the progress of its home.

DISPOSITIONS

During 1999 the Company discontinued or disposed of three operating divisions.
Effective March 31, 1999 the company (i) sold the assets of its Landmark Homes
division and exited the Wilmington, North Carolina and Myrtle Beach, South
Carolina markets, (ii) sold excess land inventory of its Buffington Homes
Division and combined the remaining operations of Buffington into its Wilshire
Homes subsidiary and (iii) began the phase out of its Westbrook Homes operation
and exited the Virginia market.

During 2001, the Company began a phased restructuring program, which led to the
sale of eight additional subsidiaries. The Company's objective was to reduce
debt and other liabilities and at the same time increase consolidated tangible
net worth and liquidity. The resulting smaller, more focused Company is
concentrated on improving operations in the Company's remaining markets.

In February 2001, the Company sold Brookstone Homes ("Brookstone") to a company
owned by the Company's former Chief Operating Officer. The sales price was
approximately $10.2 million, which included approximately $4.1 million in cash
before closing costs. An impairment charge of approximately $2.6 million was
recognized in the fourth quarter of 2000 in anticipation of the sale.
Brookstone's operating revenues for the years ended December 31, 2001 and 2000
were approximately $1.2 million and $28.1 million, respectively. Pretax
(loss)/income, excluding impairment charges for the same periods, were
approximately ($30,000) and $1.1 million, respectively. Brookstone operated in
the Milwaukee, Wisconsin area.



                                       7
<PAGE>

In May 2001, the Company sold the assets of its subsidiary Fortress-Florida,
Inc. to a company owned by D R Horton, Inc. The purchase price was approximately
$49.9 million, which included approximately $28.0 million in cash before closing
costs and the assumption of the existing debt. The Company recognized a pretax
gain on sale of approximately $1.8 million. Fortress Florida's operating
revenues for the years ended December 31, 2001 and 2000 were approximately $25.0
million and $104.6 million, respectively. Pretax income before the gain on sale
for the same periods, were approximately $1.2 million and $6.2 million,
respectively. Fortress Florida operated in the Jacksonville, Florida area.

In July 2001, the Company sold the assets of its subsidiary Whittaker Homes
("Whittaker") to Whittaker Builders, Inc., a company owned by one of the former
owners of Whittaker Homes and a former manager of Whittaker Homes after it
became a subsidiary of the Company. The purchase price was approximately $51.4
million, which included $11.8 million in cash before closing costs and the
assumption of the subsidiary's existing debt. The Company recognized a pretax
loss on sale of approximately $13.8 million. Whittaker's operating revenues for
the years ended December 31, 2001 and 2000 were approximately $28.9 million and
$82.6 million, respectively. Pretax (loss)/income excluding the loss on sale
for the same periods, were approximately ($0.9) million and $3.4 million,
respectively. Whittaker operated in the St. Louis, Missouri area.

In August 2001, the Company sold its subsidiary Christopher Homes
("Christopher"), to The JCS Family #1 Trust, a trust created by the former owner
of Christopher Homes and a former director of the Company. The sales price was
approximately $28.0 million, which consisted of the assumption of the existing
secured debt and other liabilities. The Company recognized a pretax loss of
approximately $11.1 million on the sale. Christopher's operating revenues for
the years ended December 31, 2001 and 2000 were approximately $29.7 million and
$66.0 million, respectively. Pretax (loss) excluding the loss on sale for the
same periods, were approximately ($1.1) million and ($3.6) million,
respectively. Christopher operated in the Las Vegas, Nevada area.

In October 2001, the Company sold its subsidiary Quail Construction, LLC and
associated entities ("Quail") to JLG Investments, LLC a company owned by one of
the former owners of Quail Construction and its manager after it became a
subsidiary of the Company. The sale price for the subsidiary was approximately
$1.8 million, in the form of the assumption of secured debt and other
liabilities. The Company recognized a pretax loss of approximately $2.1 million
on the sale. Quail's operating revenues for the years ended December 31, 2001
and 2000 were approximately $8.1 million and $15.6 million, respectively.
Pretax (loss) before the loss on sale for the same periods, were approximately
($0.6) million and ($2.3) million, respectively. Quail operated in the
Portland, Oregon area.

In December 2001, the Company sold its subsidiary Don Galloway Homes
("Galloway"), and substantially all of the assets of Sunstar Homes ("Sunstar")
to Lennar Corporation. The sales price was approximately $50.0 million, which
included approximately $20 million in cash before closing costs and the
assumption of existing debt and other liabilities. The Company recognized a
pretax loss of approximately $20.0 million on the sale. The combined operating
revenues of Galloway and Sunstar for the years ended December 31, 2001 and 2000
were approximately $103.5 million and $110.2 million, respectively. Combined
pretax income before the loss on sale for the same periods were approximately
$4.9 million and $5.9 million, respectively. Galloway operated in Charlotte,
North Carolina and Charleston, South Carolina and Sunstar operated in Raleigh,
North Carolina.

In the fourth quarter of 2001, the Company made a decision to sell the assets of
its subsidiary Iacobucci Homes ("Iacobucci"). The Company sold the assets to
The Baker Company on February 28, 2002. The purchase price was approximately
$27.0 million, which included approximately $11.6 million before closing costs
plus the assumption by the purchaser of substantially all


                                       8
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of the subsidiary's liabilities. An impairment charge of approximately $3.0
million was recognized in the fourth quarter of 2001 in anticipation of the
sale. Iacobucci's operating revenues for the years ended December 31, 2001 and
2000 were approximately $60.2 million and $42.3 million, respectively. Pretax
income before impairment charges for the same periods were approximately $1.7
million and $1.8 million, respectively. Iacobucci operated in the Philadelphia,
Pennsylvania and Atlantic City, New Jersey areas.

In each of the above transactions the Company has accrued appropriate reserves
to cover retained liabilities. However, these transactions include customary
representations, warranties and other covenants, which may or may not result in
financial exposure. These representations, warranties and covenants generally
expire throughout 2003. To date, no claims have been brought to the Company in
excess of the reserved amounts.

EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
              Name          Age                           Position
              ----          ---                           --------
<S>                         <C>
    George C. Yeonas        47            Chief Executive Officer and Director
    Jeffrey W. Shirley      43            Chief Financial Officer
    Edward Horne            48            President of the Texas Region
    Robert Short            56            President of the Western region
</TABLE>

George C. Yeonas joined the Company as Chief Operating Officer and Director in
August of 1997 and in March of 1999 was appointed Chief Executive Officer. He
has over 20 years of experience in the homebuilding industry. Prior to joining
Fortress, Mr. Yeonas served for seven years as Vice President and General
Manager of the Arvida Company's South Florida division. His responsibilities
there included the management of the city of Weston, Florida's number one
selling community. Prior to joining Arvida Mr. Yeonas served as Vice President
of Development for NVR in Washington, DC, and as a Divisional Partner for
Trammell Crow in Tampa, Florida.

Jeffrey W. Shirley joined the Company as Vice President of Finance in November
of 1996. He was named Chief Financial Officer in November of 1999. Mr. Shirley
has over 15 years of experience in the homebuilding industry. From 1984 to 1995,
Mr. Shirley was with Kenneth Leventhal & Company providing audit and consulting
expertise to both local and regional homebuilders, developers and syndicators of
real estate operating properties. Mr. Shirley was a leader in developing a
homebuilding practice for the Chicago office of Kenneth Leventhal & Company.
From June of 1995 to November of 1996, Mr. Shirley was a director of real estate
services for the Chicago office of Price Waterhouse LLP focusing on
transactional services for a variety of real estate clients.

Edward Horne served as Western Regional Vice President for Fortress from 1997 to
1999 following the acquisition of his company, Wilshire Homes. In 1999, he was
named Texas Region President of the combined operations of Wilshire and
Buffington Homes. Previously, Mr. Horne served as Chief Executive Officer of
Wilshire Homes, Inc., from its inception in 1991 until the Fortress Group
acquired it in April 1997. Mr. Horne previously served in several executive
positions for Nash-Copus, including four years in charge of apartment
development and five years overseeing the Houston single family division. In
addition, Mr. Horne was involved at the Trammel Crow Company in 1988 assisting
the Crow family in the restructuring of their real estate debt. From 1989 to
1991, Mr. Horne served as the trustee for 13 banks in the General Homes
restructure in Houston. He is a member of the Austin Homebuilders Association,
Austin Board of Realtors and the Texas Association of Realtors.



                                       9
<PAGE>

Robert Short has been director of the Fortress Group since 1996 and has been
president and Chief Executive Officer of The Genesee Company since 1980. In
1999, Mr. Short took on additional responsibility as Western Region President.
From 1974 to 1980, Mr. Short was the Director of Administration for the Genesee
Land Company, a real estate investment subsidiary of the Fidelity Mutual Life
Insurance Company. From 1971 to 1974, he served as a Vice President of the
Continental Alliance Corporation, a diversified holding company with interests
in real estate development. From 1969 to 1971, Mr. Short was a management
consultant for Touche Ross & Company. Mr. Short is a certified public accountant
and has served on the Residential Development Council of the Urban Land
Institute, the boards of the Homebuilders Association of Denver and the National
Association of Homebuilders.

EMPLOYEES AND SUBCONTRACTORS

The Company employs 322 persons, including corporate staff and other personnel
involved in sales, construction management and customer service. The Company's
employees, subcontractors and suppliers are not covered by collective bargaining
agreements or represented by labor unions. The Company believes that its
relations with its employees, subcontractors and suppliers are good.

RISK FACTORS

SUPPLEMENTAL WARRANTS; POTENTIAL CHANGE IN CONTROL; DILUTION. In connection with
the issuance of the Company's Class AAA preferred stock to Prometheus
Homebuilders LLC ("Prometheus"), the Company also issued to Prometheus
Supplemental Warrants to purchase common stock at an exercise price of $0.01 per
share. The Supplemental Warrants expire on March 31, 2004. By agreement dated
July 31, 2001, the Company and the holders of the Supplemental Warrants agreed
to amend the Supplemental Warrant Agreement to set the number of supplemental
warrants at 5,937,500 unless the price of the common stock by September 30, 2001
exceeded $8.00 per share in which case the number of Supplemental Warrants would
be determined in accordance with the terms as previously disclosed in the
Company's financial statements as reported on prior years Form 10-K. Further, it
was agreed that each Supplemental Warrant shall, at all times during which such
Supplemental Warrant shall be exercisable, be exercisable for the purchase of
one share of common stock. On September 30, 2001, the price of the common stock
did not exceed $8.00 per share. The Company and the holders of the Supplemental
Warrants also agreed to clarify the application of the Registration Rights
Agreement to recognize a recent transfer by Prometheus of a portion of the Class
AAA Preferred Stock and Supplemental Warrants.

The Supplemental Warrants were initially scheduled to become exercisable on
September 30, 2001. However, by a letter of agreement dated March 20, 2002
(which superseded and replaced previous letters of agreement), Prometheus and
the Company agreed to amend the Supplemental Warrants to limit the number of
Supplemental Warrants which may be exercised by Prometheus and its affiliates
prior to the "Extended Exercise Date" to a number equal to the number of shares
of common stock of the Company which would not cause the holder of the warrants
or any "group" of which such holder is a member to be deemed beneficially to own
50% or more of the aggregate voting power of the common equity of the Company.
The Extended Exercise Date is the first to occur of (a) January 1, 2003, (b) the
day preceding the day on which any "Event of Default" under the Indenture
governing the Company's outstanding Senior Notes occurs, (c) the day on which
such Indenture ceases to require the Company to make a "Change of Control Offer"
upon the occurrence of a "Change of Control", (d) the tenth day prior to the
record date for taking certain actions by stockholders of the Company, (e) the
tenth day prior to the announced expiration date of any tender offer for shares
of the Company's common stock, or (f) the date as of which a "change of control"
occurs by reason of any circumstance or event other than the taking by
Prometheus of any action which causes an increase in the number of shares of
common stock beneficially owned by Prometheus. Based upon the amendment to the
Supplemental Warrants, unless the obligation under the Senior Note Indenture to
make a "Change of Control Offer" following a change of control is removed
(whether by amendment, waiver, payment of the Senior Notes, or otherwise) or the
Supplemental


                                       10
<PAGE>

Warrants are further amended, a Change of Control would be deemed to occur by no
later than 60 days prior to January 1, 2003, and the Company would be required
to commence a "Change of Control Offer" no later than 30 days prior to January
1, 2003. See "Potential Obligation to Make Change of Control Offer."

Prometheus' exercise of the Supplemental Warrants could (depending on the number
of Supplemental Warrants exercised) result in its owning a majority of the
outstanding common stock and would enable Prometheus to control all matters
submitted to a vote of the Company's stockholders, including the election of
directors, the amendment of the Company's certificate of incorporation and the
approval of extraordinary transactions, including a merger or a sale of assets.
See "Prometheus Voting Rights." In addition, the exercise of the Supplemental
Warrants could (depending on the number of Supplemental Warrants exercised)
materially dilute the economic interest of the Company's existing stockholders.

PROMETHEUS VOTING RIGHTS. Pursuant to the terms of the Class AAA preferred
stock, Prometheus has the right to elect three Preferred Stock directors of the
current seven-member board of directors. A proportionate number of the Preferred
Stock directors also are entitled to serve on each committee of the Board of
Directors. Upon the occurrence of certain events under the Class AAA preferred
stock (which principally consists of non-payment of dividends or other
obligations), Prometheus is entitled to elect additional Preferred Stock
directors sufficient to constitute a majority of the board of directors and all
committees of the board of directors. Due to the certain restrictions in the
Senior Note Indenture that existed during the latter part of 2000 and through
the third quarter of 2001, dividends during that time period were not paid in a
timely manner. Dividends payable totaled approximately $1.3 million and are
included in accrued expenses at December 31, 2001 (See Note 8 - Notes and
Mortgages Payable in the Company's consolidated financial statements, included
in Item 8 of this report). These dividends were paid in full on January 15, 2002
(See Note 22 - Subsequent Events in the Company's consolidated financial
statements, included in Item 8 of this report). Prometheus has not exercised its
rights to elect a majority of the board of directors but has reserved its right
to make such an election. This right continues until the Company has paid
dividends currently for four consecutive quarters.

Prometheus, as the majority holder of Class AAA preferred stock, is entitled to
vote on all matters voted on by holders of common stock, voting together with
the common stock as a single class at all meetings of the stockholders. Each
share of Class AAA preferred stock entitles its holder to cast the number of
votes equal to the number of shares of common stock into which such share of
Class AAA preferred stock is convertible, based on the $24.00 per share
conversion price. Based upon its ownership of $25,000,000 initial liquidation
value (25,0000 shares, representing 87.7%) of Class AAA preferred stock and
224,711 shares of common stock, Prometheus currently holds approximately 30% of
the total voting power of the Company's stock. In addition, Prometheus is the
voting trustee of a voting trust with respect to the other 3,500 shares of
Class AAA Preferred Stock, representing approximately 3.4% of the outstanding
voting stock and 1.4% of the voting stock if all Supplemental Warrants are
exercised. As described above, upon the exercise of the Supplemental Warrants,
Prometheus could acquire up to 5,208,375 additional shares of common stock
which, together with the shares of AAA Preferred and of common stock it already
owns, would give Prometheus up to 65% of the total voting power of the
Company's stock

Prometheus, as the majority holder of the Class AAA preferred stock also has
certain consent rights, which require the approval of the holders of at least 66
2/3% of the Class AAA preferred stock to effect certain significant corporate
actions or transactions, including a merger or sale of substantial assets.
Further, under the Company's amended bylaws, and the amended bylaws of the
Company's subsidiaries, the Company may not, and may not permit any of its
subsidiaries to, engage in or agree to engage in a number of significant actions
or transactions, including adopting an annual operating budget, taking actions
materially inconsistent with the budget, incurring new debt and issuing
securities, without the affirmative vote of over 81% of the board of directors.
Therefore, the Company needs the approval of at least two of


                                       11
<PAGE>

the three Preferred Stock directors (together with four non-Preferred Stock
directors) to engage in significant actions or transactions.

As a result of the foregoing rights, Prometheus has substantial influence over,
and could under certain circumstances obtain control of, the direction and
management of the Company and the conduct of its business.

POTENTIAL OBLIGATION TO MAKE CHANGE OF CONTROL OFFER. Under the Senior Note
Indenture, the Company would be obligated to offer to redeem all of the Senior
Notes at 101% of their aggregate principal amount plus any accrued and unpaid
interest following a Change of Control of the Company, as defined in the
Indenture. This definition includes any transaction that results in any person
acquiring "beneficial ownership" (as defined in Securities Exchange Act Rule
13d-3) of 50% or more of the total voting power of the Company's common equity.
Consequently, a Change of Control will be deemed to take place at any time
(among others) that Prometheus has the right, within 60 days of such time, to
exercise such number of Supplemental Warrants that, following such exercise, by
reason of its ownership of the shares of common stock issuable upon such
exercise and all other shares of common stock beneficially owned by Prometheus
and any group of which it is a member, it would beneficially own 50% or more of
the total voting power of the Company's common equity. See "Supplemental
Warrants; Potential Change in Control" above. The Company currently does not
have the requisite liquidity from internal sources to fund a Change of Control
redemption of all of the Senior Notes. Any failure by the Company to make and
consummate a required change of control offer could result in an event of
default under the Indenture that would materially and adversely affect the
Company.

MATURITY OF SENIOR NOTES. As of March 8, 2002 the Company has $33.3 million
outstanding of its Senior Notes, which mature in May 2003. The Company
continues to explore alternatives for discharging this obligation, including
refinancing the remaining obligations, continued open market repurchases and/or
the sale of additional assets in order to repay the Senior Notes obligations on
or before their maturity date. No assurances can be given that the Company will
be able to refinance or repay the remaining Senior Notes.

ANTI-TAKEOVER EFFECTS. Prometheus's representation on the board of directors and
the executive committee, its voting rights, its consent rights and the
requirements of Supermajority Director Approval and Supermajority Executive
Committee Approval for certain significant actions and transactions could have
anti-takeover effects. Also, provisions of Delaware law and of the Company's
Amended and Restated Certificate of Incorporation could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of the Company. These provisions
could deter, delay or prevent tender offers or other takeover proposals or
attempts that might result in benefits to stockholders, including the payment to
stockholders of a premium over the market price of the common stock.

COMPETITION AND MARKET FACTORS. The development and sale of residential property
is highly competitive and fragmented. The Company competes for residential sales
with national, regional and local developers and homebuilders, resales of
existing homes and, to a lesser extent, condominiums and available rental
housing. The Company's competitors include a number of large national and
regional homebuilding companies and small local homebuilding companies, some of
which may have greater financial resources, easier access to capital markets
and/or lower costs than the Company. Competition among both small and large
residential homebuilders is based on a number of interrelated factors, including
location, reputation, amenities, design, quality and price.


                                       12
<PAGE>


The homebuilding industry is cyclical and affected by consumer confidence
levels, prevailing economic conditions in general and job availability and
interest rate levels in particular. A variety of other factors affects the
homebuilding industry and demand for new homes, including changes in costs
associated with home ownership such as increases in property taxes and energy
costs, changes in consumer preferences, demographic trends and the availability
of and changes in mortgage financing programs. In addition, homebuilders are
subject to various risks often outside of their control, including weather
conditions and natural disasters, construction delays, cost overruns, changes in
governmental regulations, counterparty non-performance risk associated with
performance bonds, availability and price fluctuations of land, labor and raw
materials, and availability and cost of working capital financing.

The homebuilding industry is also subject to the potential for significant
variability and fluctuations in real estate values. Although the Company
believes the real estate assets currently reflected on the Company balance sheet
are reasonable in amount given the size of the Company's business and are
reflected at or below their fair value, no assurances can be given that
write-downs to the fair market value of some or all of the Company's assets will
not occur if market conditions deteriorate, or that such write-downs, should
they occur, will not be material in amount.

Additionally, due to the downsizing of the Company it is subject to greater
market risk and commodity price variance because of a reduction in the overall
markets in which it operates. In particular, the Company's assets are heavily
weighted towards the Austin, Texas and Denver/Ft. Collins, Colorado markets.

GOVERNMENT REGULATIONS AND ENVIRONMENTAL CONTROLS. The Company is subject to a
variety of Federal, state and local statutes, ordinances, rules and regulations
concerning protection of health and the environment. These laws may result in
delays, cause the Company to incur substantial compliance costs and prohibit or
severely restrict development in certain environmentally sensitive regions or
areas. Prior to purchasing a parcel of land, the Company's local management
evaluates such land for the presence of hazardous or toxic materials, wastes or
substances. The Company frequently engages independent environmental engineers
to complete such an evaluation. The Company has not been materially adversely
affected to date by the presence or potential presence of such materials, but
there is a risk that the presence of such materials could have an adverse affect
in the future.

Whether Fortress controls entitled or unentitled land, certain building and
other permits, as well as approvals, are required to complete all residential
developments. The ability of the Company to obtain necessary approvals and
permits for its planned communities is often beyond the Company's control and
could restrict or prevent the development of otherwise desirable property. The
length of time necessary to obtain permits and approvals increases the carrying
costs of unimproved land acquired for the purpose of development and
construction. In addition, the continued effectiveness of permits already
granted is subject to factors such as changes in policies, rules and regulations
and their interpretation and application.

The Company's mortgage activities also need to comply with various federal and
state laws, consumer credit rules and regulations and other requirements unique
to mortgage activities. Additionally mortgage loans originated under various
national mortgage programs such as FHA, VA, or FNMA are subject to regulations
imposed by the respective agency.

INTEREST RATES; MORTGAGE FINANCING. Virtually all purchasers of the Company's
homes finance their acquisitions through third-party lenders providing mortgage
financing. In general, housing demand is adversely affected by increases in
interest rates, unavailability of mortgage financing, increasing housing costs
and unemployment levels. If mortgage interest rates increase and the ability of
prospective buyers to finance home purchases is adversely affected, the
Company's sales, gross margins and net income and the market price of the common
stock may be adversely impacted. The Company's homebuilding activities are also
dependent upon the availability and cost of mortgage financing for buyers of
homes owned by

                                       13
<PAGE>

potential customers so those customers ("move-up buyers") can sell their homes
and purchase a home from the Company. In addition, the Company believes that the
availability of FHA and VA mortgage financing is an important factor in
marketing a number of its homes. Any limitation or restriction on the
availability of such financing could adversely affect the Company's sales.
Furthermore, changes in Federal income tax laws pertaining to the deductibility
of mortgage interest could affect demand for new homes.

SHARES ELIGIBLE FOR FUTURE SALE. The Company has outstanding approximately
3,119,000 shares of common stock, of which approximately 2,039,000 shares are
freely tradable without restriction and approximately 680,000 shares are
saleable subject to certain volume and other restrictions of Rule 144 under the
Securities Act. In addition, at least 1,195,500 shares are issuable upon the
conversion of the Company's outstanding classes of preferred stock and 57,000
shares are issuable upon exercise of currently exercisable options. An
additional 5,937,500 shares would be issuable upon the exercise of the
Supplemental Warrants. Sale of substantial amounts of such shares in the public
market or the prospect of such sales could materially adversely affect the
market price of the common stock.

DEPENDENCE ON MANAGEMENT. The Company's operations are dependent on the
continued efforts of its executive officers and on senior management of the
Company. In addition, the operations of each subsidiary are dependent upon the
senior management of that subsidiary. If any of these people become unable to
continue in their present roles, or if the Company is unable to attract and
retain other skilled employees, the Company's business could be adversely
affected.


                                       14
<PAGE>

ITEM 2.  PROPERTIES

The Company's principal executive offices are located at 1650 Tysons Boulevard,
Suite 600, McLean, Virginia 22102. The Company occupies approximately 4,800
square feet of leased office space for its corporate office in Virginia and
leases an aggregate of approximately 49,000 square feet of office space in 9
locations for its homebuilding and mortgage subsidiaries.


ITEM 3.  LEGAL PROCEEDINGS

The Company is, from time to time, a party to litigation arising in the normal
course of its business. Management believes that none of the actions to which it
is a party will have a material adverse effect on the financial condition,
results of operations or cash flows of the Company.


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

No matters were submitted to the Company's stockholders for consideration during
the quarter ended December 31, 2001.




                                       15
<PAGE>



PART II

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

(a)      Price Range of Common Stock. The Company's common stock has traded on
         the Nasdaq National Market since May 16, 1996. On March 26, 2002, the
         closing price of the common stock was $3.57 per share. The following
         table sets forth the range of daily high and low sale prices for the
         common stock, as reported on the Nasdaq National Market, for the
         periods indicated, as adjusted for the one-for-four reverse stock split
         implemented July 10, 2000:

<TABLE>
<CAPTION>
                                        High          Low
<S>                                     <C>          <C>
 Fiscal year 2000
       First fiscal quarter             $6.38        $2.50
       Second fiscal quarter            $4.25        $2.00
       Third fiscal quarter             $4.13        $1.50
       Fourth fiscal quarter            $3.47        $1.38
 Fiscal year 2001
       First fiscal quarter             $3.38        $1.50
       Second fiscal quarter            $1.93        $1.00
       Third fiscal quarter             $2.45        $1.35
       Fourth fiscal quarter            $2.44        $1.28
</TABLE>

(b)      Approximate Number of Equity Security Holders. The number of record
         holders of the Company's common stock as of March 26, 2002 was 76,
         which does not include beneficial owners who hold the Company's stock
         in street name.

(c)      Dividends. No dividends were declared or paid on the Company's common
         stock during 2001 or 2000. Pursuant to the terms of the Class AAA
         preferred stock the Company may not pay dividends on its common stock
         so long as any dividends on the Class AAA preferred stock remain
         accrued and unpaid (see Prometheus Voting Rights - page 11).


ITEM 6.  SELECTED FINANCIAL DATA

The selected financial data provided should be read in conjunction with The
Fortress Group, Inc. Consolidated Financial Statements, the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

The Company elected to early adopt, effective January 1, 2001, Statement of
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144). Under SFAS No. 144, the Company has reported
the results of operations and cash flows of the operating subsidiaries sold in
2001 and the division classified as held for sale as discontinued operations for
all periods presented. The results of operations and related losses associated
with operating subsidiaries sold prior to the effective date of the Company's
adoption of SFAS No. 144 have not been reclassified to discontinued operations
in accordance with the Statement.


                                       16
<PAGE>
                            THE FORTRESS GROUP, INC.
       (dollars in thousands, except per share amounts and operating data)

<TABLE>
<CAPTION>
                                                                                              Year ended December 31,
                                                                                              -----------------------
                                                                          2001            2000            1999            1998
                                                                          ----            ----            ----            ----
<S>                                                                    <C>            <C>            <C>            <C>
Statement of Operations Data:
Revenues                                                               $   259,982    $   232,400    $   240,359    $   252,310
Gross Profit                                                                52,519         41,857         35,788         32,028
Income/(loss) from continuing operations and before income taxes and
extraordinary item                                                           9,533          3,510         (2,322)        (3,417)
Discontinued operations                                                    (30,776)        (1,296)        10,599         16,251
Extraordinary items                                                         12,598              0              0              0
                                                                       -----------    -----------    -----------    -----------
Net (loss)/income                                                      $    (8,645)   $     2,214    $     8,277    $    12,834
                                                                       ===========    ===========    ===========    ===========

Income/(loss) per share
Basic:
Continuing operations before extraordinary item (1)                    $      2.18    $      0.27    $     (1.80)   $     (3.66)
Discontinued operations                                                      (9.91)         (0.42)          3.50           5.50
Extraordinary items                                                           4.05           0.00           0.00           0.00
                                                                       -----------    -----------    -----------    -----------
Basic (loss)/income per share (1)                                      $     (3.68)   $     (0.15)   $      1.70    $      1.84
                                                                       ===========    ===========    ===========    ===========

Diluted:
Continuing operations before extraordinary item (1)                    $      0.75    $      0.14    $     (1.80)   $     (3.66)
Discontinued operations                                                      (3.40)         (0.21)          3.50           5.50
Extraordinary items                                                           1.39           0.00           0.00           0.00
                                                                       -----------    -----------    -----------    -----------
Diluted (loss)/income per share (1)                                    $     (1.26)   $     (0.07)   $      1.70    $      1.84
                                                                       ===========    ===========    ===========    ===========

Cash dividends per common share                                        $       .00    $       .00    $       .00    $      .001

Weighted average shares outstanding, basic (1)                           3,105,394      3,076,354      3,029,917      2,954,722
Weighted average shares outstanding, diluted (1)                         9,040,122      6,135,937      3,029,917      2,954,722

Balance Sheet Data: (as of December 31)
Cash                                                                   $    10,589    $     1,037    $     4,646    $     2,949
Inventory                                                                  144,977        107,246         93,098         94,297
Assets held for sale                                                        26,836        260,409        307,992        301,653
                                                                       -----------    -----------    -----------    -----------
Total assets                                                           $   227,451    $   409,915    $   431,323    $   434,793

13.75% Senior Notes due 2003                                           $    42,565    $   100,000    $   100,000    $   100,000
Notes and mortgages payable                                                 78,134         61,760         46,769         51,649
Liabilities related to assets held for sale                                 15,190        146,318        178,523        167,617
Stockholders equity                                                         64,892         77,346         79,673         91,193
                                                                       -----------    -----------    -----------    -----------
Total liabilities and stockholders equity                              $   227,451    $   409,915    $   431,323    $   434,793

Operating Data: (for the years ended December 31)
Units
  New contracts, net of cancellations                                          979          1,051          1,085          1,550
  Closings                                                                   1,059          1,012          1,176          1,446
  Backlog (2)                                                                  403            483            445            584
Aggregate sales value of backlog (in thousands)(2)                     $   116,839    $   136,899    $   106,854    $   114,920
Average sales price per home closed                                    $   244,500    $   225,800    $   192,400    $   170,100
</TABLE>

<TABLE>
<CAPTION>
                                                                   Year ended December 31,
                                                                   -----------------------
                                                                              1997
                                                                              ----
<S>                                                                    <C>
Statement of Operations Data:
Revenues                                                               $   229,628
Gross Profit                                                                29,122
Income/(loss) from continuing operations and before income taxes and
extraordinary item                                                          (1,805)
Discontinued operations                                                     10,265
Extraordinary items                                                              0
                                                                       -----------
Net (loss)/income                                                      $     8,460
                                                                       ===========

Income/(loss) per share
Basic:
Continuing operations before extraordinary item (1)                    $     (0.78)
Discontinued operations                                                       3.50
Extraordinary items                                                           0.00
                                                                       -----------
Basic (loss)/income per share (1)                                      $      2.72
                                                                       ===========

Diluted:
Continuing operations before extraordinary item (1)                    $     (0.78)
Discontinued operations                                                       3.49
Extraordinary items                                                           0.00
                                                                       -----------
Diluted (loss)/income per share (1)                                    $      2.72
                                                                       ===========

Cash dividends per common share                                        $      .003

Weighted average shares outstanding, basic (1)                           2,939,928
Weighted average shares outstanding, diluted (1)                         2,939,928

Balance Sheet Data: (as of December 31)
Cash                                                                   $     3,875
Inventory                                                                   87,128
Assets held for sale                                                       186,909
                                                                       -----------
Total assets                                                           $   321,014

13.75% Senior Notes due 2003                                           $   100,000
Notes and mortgages payable                                                 45,052
Liabilities related to assets held for sale                                 90,288
Stockholders equity                                                         62,897
                                                                       -----------
Total liabilities and stockholders equity                              $   321,014

Operating Data: (for the years ended December 31)
Units
  New contracts, net of cancellations                                        1,380
  Closings                                                                   1,361
  Backlog (2)                                                                  468
Aggregate sales value of backlog (in thousands)(2)                     $    94,735
Average sales price per home closed                                    $   165,100
</TABLE>


(1)      See calculation in Note 10- Earnings Per Share in the Company's
         consolidated financial statements included in Item 8 hereof, which has
         been restated to take into account the effects of the one-for-four
         reverse stock split implemented July 10, 2000 and the adoption of SFAS
         144.

(2)      At end of period and represents homes sold but not closed.



                                       17
<PAGE>


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

The Company elected to early adopt, effective January 1, 2001, Statement of
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144). Under SFAS No. 144, the Company has reported
the results of operations and cash flows of the operating subsidiaries sold in
2001 and the division classified as held for sale as discontinued operations for
all periods presented. The results of operations and related losses associated
with operating subsidiaries sold prior to the effective date of the Company's
adoption of SFAS No. 144 have not been reclassified to discontinued operations
in accordance with the Statement.
..
The following table sets forth for the periods indicated certain items of the
Company's consolidated results of operations:

(dollars expressed in millions)
<TABLE>
<CAPTION>
                                                            For the Year              For theYear               For theYear
                                                         Ended Dec. 31, 2001      Ended Dec. 31, 2000       Ended Dec. 31, 1999
                                                         -------------------      -------------------       -------------------
                                                                        % of                     % of                      % of
                                                                      Revenue                   Revenue                  Revenue
                                                                      -------                   -------                  -------
<S>                                                    <C>        <C>           <C>        <C>            <C>        <C>
Revenues                                               $ 260.0                   $232.4                    $240.4
Gross profit                                              52.5       20.2%         41.8       18.0%          35.8       14.9%
Selling, general and administrative expenses              38.5       14.8%         35.8       15.4%          35.3       14.7%
Income/(loss) from continuing operations and before
     extraordinary items                                   9.5        3.7%          3.5        1.5%          (2.3)       (0.1)%
Income from discontinued operations, net of taxes
     (before loss on disposal of assets)                   3.4                      7.0                      11.7
(Loss) from disposal of assets, net of taxes             (34.2)                    (8.3)                     (1.1)
Extraordinary items, net of taxes                         12.6                      0.0                       0.0
                                                       -------                   ------                    ------
Net (loss)/income                                      $  (8.6)                   $ 2.2                    $  8.3
                                                       =======                   ======                    ======
</TABLE>


DISPOSITIONS AND CLOSURES

The Company has not acquired any companies since 1998.

During 1999 the Company discontinued or disposed of three operating divisions.
The Company (i) sold the assets of its Landmark Homes division and exited the
Wilmington, North Carolina and Myrtle Beach, South Carolina markets, (ii) sold
excess land inventory of its Buffington Homes Division and combined the
remaining operations of Buffington into its Wilshire Homes subsidiary and (iii)
began the phase out of its Westbrook Homes operation and exited the Virginia
market.

During the fourth quarter of 2000, the Company established a committee to
explore methods to maximize value for its stockholders (see "Planning
Committee"). As a result of the Planning Committee's analysis and
recommendation, the Company sold eight operating subsidiaries through the first
quarter of 2002.

During the year 2001, the Company sold its interest in Christopher Homes, LLC,
Quail Construction, LLC and Galloway Enterprises, LLC as well as substantially
all of the assets of Brookstone Homes, Inc., Fortress-Florida, Inc., Whittaker
Homes, LLC and Landmark Homes, Inc. ("Sunstar"). The purchasers paid
approximately $191.3 million, which included $63.9 million in cash and the
assumption of the existing secured debt and other liabilities.

In the fourth quarter of 2001 the Company made a decision to sell Iacobucci
Homes ("Iacobucci"). The Company sold the subsidiary to a subsidiary of The
Baker Company on February 28, 2002. The purchase price was approximately $27.0
million, which included approximately


                                       18
<PAGE>

$11.6 million before closing costs plus the assumption by the purchaser of
substantially all of the subsidiary's liabilities. An impairment charge of
approximately $3.0 million was recognized in the fourth quarter of 2001 in
anticipation of the sale. Iacobucci's operating revenues for the years ended
December 31, 2001 and 2000 were approximately $60.2 million and $42.3 million,
respectively. Pretax income before impairment charges for the same periods was
approximately $1.7 million and $1.8 million, respectively. Iacobucci operated in
the Philadelphia, Pennsylvania and Atlantic City, New Jersey areas.

Operating revenues from discontinued operations for the years ended December 31,
2001 and 2000 were approximately $256.6 million and $449.4 million,
respectively. Pretax income before loss on sale and impairment charges for the
same periods was approximately $5.2 million and $12.5 million, respectively and
net (loss) from discontinued operations net of taxes was approximately ($30.8)
million and ($1.3) million, respectively. See "Acquisitions and Dispositions"
Item 1 of Part 1 hereof.

PLANNING COMMITTEE

In November 2000, the Board of Directors of the Company created a planning
committee (the "Planning Committee") for the purpose of maximizing the value and
future prospects of the Company. The members of the Planning Committee are Mr.
Andrew Zobler (Chairman), Mr. Robert Short, and Mr. George Yeonas. The Planning
Committee has been charged with identifying the core and non-core businesses and
divisions of the Company and its operating profile and performance targets and
is responsible for assessing and recommending to the Board of Directors any
changes to the Company's operations to best support the Company's core business
and to best implement its business plan. These may include setting forth an
action plan for (i) exiting underperforming, overleveraged, or mature businesses
and (ii) rationalizing or refinancing the Company's capital structure.

After it identified the Company's non-core divisions, the Planning Committee
drafted a plan to dispose of such non-core divisions. Completion of this initial
plan to dispose of the non-core divisions (consisting of Brookstone Homes, Inc.;
Fortress-Florida, Inc.; Whittaker Homes, LLC; Sunstar Homes, Inc.; Christopher
Homes, LLC; and Quail Construction, LLC) concluded with the closing of the sale
of Quail Construction, LLC in October 2001. Subsequent to the completion of this
initial plan, the Planning Committee recommended to the Board of Directors the
exploration of the sale of the Company's East Coast divisions. During the fourth
quarter of 2001 the Company sold Don Galloway Homes and Sunstar Homes. The
Company did not sell its third East Coast subsidiary, Iacobucci Homes, until
the first quarter of 2002. In addition, the Planning Committee reviewed and
made recommendations to the Board of Directors with respect to the repayment of
the Senior Notes.

The Planning Committee is currently reviewing the consolidation of the remaining
divisions of the Company and exploring opportunities to maximize value for the
Company's stakeholders. The Company expects that, in 2002, the Planning
Committee will continue to meet and to make recommendations to the Board of
Directors with respect to these and other issues. The work of the Planning
Committee may result in various actions to be implemented by the Company
including, without limitation, repurchase of additional Senior Notes, additional
asset sales, or other extraordinary transactions.


                                       19
<PAGE>


HOME SALES ACTIVITY

The following table sets forth information relating to new orders, home
closings, and sales backlog by region for the years ended or as of December 31,
2001, 2000, and 1999 (continuing operations only):

<TABLE>
<CAPTION>
                                NEW ORDERS (NET)                        BACKLOG UNITS                    BACKLOG $ (IN 000'S)
                                ----------------                        -------------                    --------------------
                              2001        2000        1999         2001        2000        1999           2001           2000
                              ----        ----        ----         ----        ----        ----           ----           ----
<S>                          <C>       <C>         <C>            <C>         <C>         <C>       <C>            <C>
Market:
Denver                         329         291         236          178         206         163       $ 60,636       $ 68,587
Fort Collins                   135         123         114           67          64          41         22,013         22,219
Tucson                         173         122          46           29          12           5          4,089          1,473
                               ---       -----       -----          ---         ---         ---       --------       --------
  Western Region (Genesee)     637         536         396          274         282         209         86,738         92,279
Austin                         201         403         467           80         192         200         19,500         42,514
San Antonio                    141         112         175           49           9          35         10,601          2,106
                               ---       -----       -----          ---         ---         ---       --------       --------
  Texas Region (Wilshire)      342         515         642          129         201         235         30,101         44,620
                               ---         ---         ---          ---         ---         ---         ------         ------
Subtotal                       979       1,051       1,038          403         483         444       $116,839       $136,899
Landmark/WestBrook               0           0          47            0           0           1              0              0
                               ---       -----       -----          ---         ---         ---       --------       --------
Total                          979       1,051       1,085          403         483         445       $116,839       $136,899
                               ===       =====       =====          ===         ===         ===       ========       ========
</TABLE>

<TABLE>
<CAPTION>
                            BACKLOG $ (IN 000'S)
                            --------------------
                                   1999
                                   ----
<S>                          <C>
Market:
Denver                         $ 52,801
Fort Collins                     11,897
Tucson                              661
                               --------
  Western Region (Genesee)       65,359
Austin                           34,448
San Antonio                       6,457
                               --------
  Texas Region (Wilshire)        40,905
                                 ------
Subtotal                       $106,264
Landmark/WestBrook                  590
                               --------
Total                          $106,854
                               ========
</TABLE>

<TABLE>
<CAPTION>
                                     CLOSING UNITS                      CLOSING $ (IN 000'S)
                                     -------------                      --------------------
                               2001        2000        1999           2001            2000          1999
                               ----        ----        ----           ----            ----          ----
<S>                           <C>         <C>         <C>         <C>             <C>           <C>
Denver                          357         248         187       $104,551        $ 84,911      $ 64,339
Fort Collins                    132         100         142         44,711          28,937        27,542
Tucson                          156         115          75         19,998          13,524         9,211
                              -----       -----       -----       --------        --------      --------
  Western Region (Genesee)      645         463         404        169,260         127,372       101,092
Austin                          313         411         486         68,386          74,729        74,795
San Antonio                     101         138         221         21,250          26,409        37,902
                              -----       -----       -----       --------        --------      --------
  Texas Region (Wilshire)       414         549         707         89,636         101,138       112,697
                              -----       -----       -----       --------        --------      --------
Subtotal                      1,059       1,012       1,111       $258,896        $228,510      $213,789
Landmark/WestBrook                0           0          65             0                0        14,802
                              -----       -----       -----       --------        --------      --------
Total                         1,059       1,012       1,176       $258,896        $228,510      $228,591
                              =====       =====       =====       ========        ========      ========
</TABLE>



                                       20
<PAGE>


CONSOLIDATED RESULTS OF OPERATIONS

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000

General

As indicated in the chart above, net new orders for the Company's continuing
operations totaled 979 homes for the year ended December 31, 2001, a 6.9%
decrease from the 1,051 homes sold during 2000. The Company experienced year
over year increases in all of its markets with the exception of Austin. These
increases were more than offset by the Austin market, which experienced a 50%
decline in new orders in 2001 as compared to 2000. The decline in Austin is due
primarily to a weakening technology sector, which is a significant business in
the Austin market.

At December 31, 2001, the Company had a combined backlog of 403 homes with a
value of $116.8 million as compared to 483 homes with a value of $136.9 million
as of December 31, 2000, representing a 16.6% decline in backlog homes and a
14.7% decline in backlog value. The decrease in Austin new orders throughout
2001 was the primary reason for the lower backlog at the end of 2001. The
average value of a home in backlog increased 2.3% from $283,400 to $289,900.

Revenue

The Company's continuing operations generated revenues of $260.0 million for the
year ended December 31, 2001 as compared to $232.4 million for the year ended
December 31, 2000, an increase of 11.9%. This growth in revenue is due to a year
over year increase of 4.6% in the number of homes closed (from 1,012 to 1,059),
as well as an increase in the average price of a home closed (from $225,800 to
$244,500). Markets in the Company's western region (Denver, Fort Collins and
Tucson) all experienced significant increases in the number of homes closed in
2001, which more than offset the decline in closings in the Texas markets
(Austin and San Antonio).

Gross Profit

Gross profit increased 25.5%, from $41.8 million in 2000 to $52.5 million in
2001. The Company realized a 220 basis point increase in gross profit margin
(from 18.0% to 20.2%), with four out of five markets showing year over year
margin improvement. This margin growth, coupled with the increase in revenue
discussed above, accounted for the increase in gross profit.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("S,G&A expenses") decreased as a
percentage of revenue, from 15.4% in 2000 to 14.8% in 2001. However, S,G&A
expenses increased 7.4%, from $35.8 million for the year ended December 31, 2000
to $38.5 million for the year ending December 31, 2001.

Selling expenses increased from $14.3 million (6.2% of revenue) in 2000 to $17.7
million (6.8% of revenue) in 2001. The softening of the Texas markets
necessitated increasing selling and marketing costs to maintain sales absorption
in a weakening market. Because revenue in this region had declined year over
year as a result of prior declines in new order activity, selling expenses as a
percentage of revenue were significantly increased in Texas.

General and administrative expenses ("G&A expenses) decreased from $21.5 million
in 2000 to $20.7 million in 2001. Coupled with the year over year revenue
increase, this reduction in absolute dollars of G&A expenses resulted in a
significant decrease in G&A expense as a percentage of revenue (9.2% down


                                       21
<PAGE>

to 8.0%). Reductions in corporate overhead as subsidiaries were sold during
2001, particularly in the area of information technology, contributed to this
decrease.

Restructuring Charges

Restructuring activities related to asset sales (See Note 12 - Restructuring in
the Company's consolidated financial statements included in Item 8 hereof, and
"Acquisitions, Dispositions, and Closures" above) necessitated a reduction in
corporate staffing. The Company accrued approximately $1.6 million in
restructuring charges as of December 31, 2001. The majority of these costs were
for employee severances, office lease termination and other company benefits,
which provided no future benefit under the Company's restructured operations.
The Company expects these payments to be made, and the ongoing operating
expense reductions to be realized beginning during the second and third
quarters of 2002. This charge has been included in continuing operations.

Other (Income)/Expense

The Company generated other income of ($2.5) million for the year ended December
31, 2001, as compared to other income of approximately ($0.2) million in 2000. A
significant factor in this increase is growth in pretax income from the
Company's mortgage subsidiary, from ($0.4) million in 2000 to ($1.3) million in
2001. Revenue and expenses of Fortress Mortgage are shown net on the other
(income)/expense line of the statement of operations. The mortgage company
reduced expenses as branches were closed during 2001, while generating increased
revenue from increased capture rates. (See Note 14 - Other Income & Expenses in
the Company's consolidated financial statements included in Item 8 hereof).

Also contributing to the year over year increase in net other income was the
Company's significantly reduced financing expenses during 2001, due to the
retirement of $57.4 million of its 13.75% Senior Notes throughout the year.
Additionally, rates fell throughout the year on its secured variable debt.

Income from Continuing Operations

Due to the previously described factors, income from continuing operations for
the year ended December 31, 2001 nearly tripled to $9.5 million, from the $3.5
million reported for 2000.

Income per share from continuing operations and before extraordinary items, on
a diluted basis, was $0.75 for 2001 compared with $0.14 for 2000, a 435.7%
increase. Diluted income from continuing operations and before extraordinary
items was affected to a larger extent in 2001 than 2000 by the inclusion of the
Supplemental Warrants in the calculation (see Note 9 - Shareholders' Equity in
the Company's consolidated financial statements included in Item 8 hereof). The
Supplemental Warrants vested during the third quarter of 2000, and are
therefore included in the calculation for only the second half of 2000, as
compared to the entire year 2001.

Income/(Loss) from Discontinued Operations

During the year ended December 31, 2001, discontinued operations generated
pretax income before loss on sale and impairment charges of $5.2 million, as
compared to income of $12.5 million in 2000. Year 2001 results included pretax
losses on sale and impairment charges of $52.0 million, compared to $14.8
million in pretax losses on sale and impairment charges in 2000. Included in
2000 was a full year of operating results for all discontinued subsidiaries sold
during 2001, while 2001 includes only results of operations for each subsidiary
from January 1, 2001 through its respective date of sale.


                                       22
<PAGE>


The combined net loss from operating results and sale of discontinued
operations, net of taxes, was ($30.8) million for 2001 and ($1.3) million for
2000. These losses resulted in incremental losses per share on a diluted basis
of ($3.40) for 2001 and ($0.21) for 2000.

Extraordinary Items

During 2001, the Company retired a total of approximately $57.4 million
principal amount of its Senior Notes for a cash price of $34.0 million plus
accrued interest. The gain resulting from the retirement, net of income taxes,
is approximately $12.6 million, which is reflected as an extraordinary item in
the consolidated statement of operations for 2001. (See Note 8 - Notes and
Mortgages Payable in the Company's consolidated financial statements included in
Item 8 hereof.) This extraordinary gain resulted in incremental earnings per
share on a diluted basis of $1.39 for the year ended December 31, 2001.

Net (Loss)/Income and Net (Loss)/Income per Share

Due to the previously discussed results of operations from continuing
operations, discontinued operations and extraordinary item, the Company recorded
a net loss of ($8.6) million and ($1.26) loss per share on a diluted basis, for
the year ended December 31, 2001, as compared to net income of $2.2 million and
net loss per share on a dilute basis of ($.07) for the year ended December 31,
2000.

Earnings Before Interest, Taxes, Depreciation and Amortization

Earnings before interest, taxes, depreciation and amortization (EBITDA) from
continuing operations increased 57% to $29.2 million in 2001, as compared to
$18.6 million in 2000. EBITDA as a percentage of gross revenues increased to
11.2% from 8.0% in 2000. EBITDA is provided as a supplemental measurement of the
Company's operating performance. EBITDA does not represent cash flows from
operations as defined by generally accepted accounting principles and should not
be considered an alternative to net income as an indicator of the Company's
operating performance or to cash flows as a measure of liquidity. In addition,
EBITDA measures presented by the Company may not be comparable to other
similarly titled measures of other companies.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999

The comparative results for 1999 only include the continuing operations as of
December 31, 2001. They exclude the activity for Landmark Homes and Westbrook
Homes, which were sold or liquidated in 1999.

General

As indicated in the chart above, net new orders for the Company's continuing
operations totaled 1,051 homes for the year ended December 31, 2000, up very
slightly from the 1,038 new orders achieved during 1999. The Denver and Tucson
markets showed particularly strong year over year increases. The Company's Texas
markets showed a year over year decline in new orders. This was partially due to
the fact that the Company made a conscious decision during 1999 to restructure
its Texas operations and concentrate on more profitable, but fewer communities.

At December 31, 2000, the Company had a combined backlog of 483 homes with a
value of $136.9 million as compared to 444 homes with a value of $106.3 million
as of December 31, 1999, representing an 8.8% increase in backlog homes and a
28.8% increase in backlog value. The average value of a home in backlog
increased from $239,300 to $283,400. The Texas markets contributed most notably
to this increase in average price, as that region's operations continued its
shift to higher-priced, more profitable homes.


                                       23
<PAGE>

Revenue

The Company's continuing operations generated revenues of $232.4 million for the
year ended December 31, 2000 as compared to $225.4 million for the year ended
December 31, 1999, an increase of 3.1%. While the number of homes closed
declined 8.9% (from 1,111 to 1,012), the average price of homes closed rose
17.2% from $192,600 to $225,800. Offsetting the overall increase in revenue from
home sales, the Company's Western region generated approximately $7.6 million
less in revenue from land sales in 2000 than in 1999.

Gross Profit

Gross profit increased 20.6%, from $34.7 million in 1999 to $41.8 million in
2000. The Company produced a 260 basis point increase in gross profit margin
(from 15.4% to 18.0%), with four out of five markets showing year over year
margin improvement, and the fifth maintaining the same margin from year to year.
This overall margin improvement, coupled with the increase in revenue discussed
above accounted for the increase in gross profit.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("S,G&A expenses") increased 7.4%,
from $33.3 million for the year ended December 31, 1999 to $35.8 million for the
years ending December 31, 2000. S,G&A expenses, as a percentage of revenue,
increased from 14.8% in 1999 to 15.4% in 2000.

Selling expenses increased slightly, from $14.1 million in 1999 to $14.3 million
in 2000, but remained constant at 6.2% of revenue for both years.

General and administrative expenses ("G&A expenses") increased from $19.3
million in 1999 (8.6% of revenue) to $21.5 million (9.2% of revenue) in 2000.
Higher levels of corporate overhead in 2000 as compared to 1999 could not be
absorbed by more modest revenue growth of the continuing operations of the
Company.

Restructuring Charges

In 1999, the Company's Texas operations recorded restructuring costs of
approximately $0.5 million in conjunction with a decision to exit certain
communities. These costs related to employee severance, carrying costs for model
homes, and the write off of other product-line related assets that were
determined to provide no future benefit under the restructured operation (see
Note 12 - Restructuring in the Company's consolidated financial statements
included in Item 8 hereof).

Other (Income)/Expense

The Company generated other income of ($0.2) million for the year ended December
31, 2000, as compared to other expense of approximately $0.5 million in 1999.
Contributing to the year over year increase in other income was growth in pretax
income from the Company's Fortress Mortgage subsidiary, from $4,000 in 1999 to
$440,000 in 2000. Increased competitive pressure and reduced revenues per loan
originated resulted in less revenue in 2000 than 1999 ($5.7 million vs. $6.2
million). However, a decrease in expenses more than offset the decline in
revenue to allow for the overall growth in pretax income. (See Note 13 - Other
Income & Expenses in the Company's consolidated financial statements included in
Item 8 hereof).


                                       24
<PAGE>


Income from Continuing Operations

Due to the previously described factors, income from continuing operations for
the year ended December 31, 2000 was $3.5 million, as compared to $240,000 in
1999.

Income per share from continuing operations, on a diluted basis, was $0.14 for
2000 compared with a loss per share of ($1.80) for 1999. Diluted income from
continuing operations was affected in 2000 by the inclusion of the Supplemental
Warrants in the calculation (see "Dilution of Earnings per Share" in Item 1
hereof and Note 9 - Shareholders' Equity in the Company's consolidated financial
statements included in Item 8 hereof). The Supplemental Warrants vested during
the third quarter of 2000, and are therefore included in the calculation for the
second half of 2000.

Income/(Loss) from Discontinued Operations

During the year ended December 31, 2000, discontinued operations generated
pretax income before loss on sale and impairment charges of $12.5 million, as
compared to income of $20.9 million in 1999. 2000 included loss on sale and
impairment charges of $14.8 million compared to $2.0 million in loss on sale and
impairment charges in 1999.

The combined net (loss)/income from operating results and sale of discontinued
operations was ($1.3) million for 2000 and $10.6 million for 1999. This resulted
in incremental (loss)/income per share on a diluted basis of ($0.21) and $3.50
for 2000 and 1999, respectively.

Net (Loss)/Income and Net (Loss)/Income per Share

Due to the previously discussed results from continuing and discontinued
operations, the Company recorded net income of $2.2 million and ($0.07) loss per
share on a diluted basis for the year ended December 31, 2000, as compared to
net income of $8.3 million and net income per share of $1.70 for the year ended
December 31, 1999.

Earnings Before Interest, Taxes, Depreciation and Amortization

Earnings before interest, taxes, depreciation and amortization (EBITDA) from
continuing operations increased 36.9% to $18.6 million in 2000, as compared to
$13.6 million in 1999. EBITDA as a percentage of gross revenues increased to
8.0% from 6.0% in 1999. EBITDA is provided as a supplemental measurement of the
Company's operating performance. EBITDA does not represent cash flows from
operations as defined by generally accepted accounting principles and should not
be considered as an alternative to net income as an indicator of the Company's
operating performance or to cash flows as a measure of liquidity. In addition,
EBITDA measures presented by the Company may not be comparable to other
similarly titled measures of other companies.

LIQUIDITY AND CAPITAL RESOURCES

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                                                            2001             2000              1999
                                                            ----             ----              ----
-------------------------------------------------------------------------------------------------------
<S>                                                      <C>               <C>               <C>
  Cash provided by/(used in) operating activities        $(20,994)         $(8,893)           $13,705
-------------------------------------------------------------------------------------------------------
  Cash (used in)/provided by investing activities         $ 56,843         $(5,486)           $7,709
-------------------------------------------------------------------------------------------------------
  Cash (used in)/provided by financing activities        $(26,297)          $10,770          $(19,717)
-------------------------------------------------------------------------------------------------------
</TABLE>


                                       25
<PAGE>


The Company's operating activities involve several components, principally home
construction, land development and mortgage loan origination for home
purchasers. During 2001, the Company's operating activities, taken in the
aggregate, used approximately $21.0 million of cash. This cash was utilized
primarily to expand the Company's continuing operations, as evidenced by a $37.4
million increase in inventory during 2001.

During 2001, the Company sold eight of its operating subsidiaries. These
divestitures provided approximately $59.5 million in cash after closing costs.
The Company also reduced its investment in land partnerships, which provided an
additional $1.4 million. Offsets to these investment inflows included purchases
of property and equipment totaling $3.7 million. In the aggregate, investment
activities of the Company provided $56.8 million in cash. This cash was used to
fund the overall growth of the Company's continuing operations (see preceding
paragraph), as well as to repurchase a portion of the Company's Senior Notes
(see subsequent paragraph).

During 2001, the Company used approximately $37.1 million of the cash provided
by investment activities (see preceding paragraph) to repurchase a portion of
the Company's Senior Notes. It also spent $2.9 million to pay preferred stock
dividends and $0.8 million to redeem preferred stock. Offsetting these financing
activities were net borrowings under notes and mortgages payable, which
generated approximately $14.4 million in cash during the year. In total,
financing activities of the Company used approximately $26.3 million in cash
during 2001.

The Company regularly amends or extends existing loan agreements, which mature
at various times during the year, and/or executes new loan agreements.
Approximately $215.7 million of secured financing commitments were in place at
the subsidiary level at year-end. Under these credit facilities, the Company
has borrowed $86.2 million at December 31, 2001. The total amount available
under these commitments varies based on individual loan covenants and inventory
levels.

As of December 31, 2001 the Company had cash and cash equivalents on hand of
$10.6 million. The Company believes that funds available through the existing
credit facilities coupled with the cash on hand and cash generated through
operations should be adequate for the anticipated cash needs for the foreseeable
future. However, there can be no assurances that any current working capital
lender will agree to renew or extend its existing facility or, if renewed, that
such renewal or extension would be on similar or more advantageous terms. No
assurances can be given that, in the event any current working capital lender
declines to renew its facility, the Company would be able to replace such
facility.

At December 31, 2001, the Company had 1,826 lots in inventory, in excess of
backlog, which represents a 22-month supply of land based on sales absorption
rates during 2001. It is one of the Company's operating strategies to own a
relatively low supply of finished lots and lots under development in order to
manage and minimize risk associated with land ownership. The Company utilizes
land options and investments in partnerships as methods of controlling and
subsequently acquiring land. The Company plans to continue these practices and
expects to exercise, subject to market conditions, substantially all of its
option contracts. At December 31, 2001, the Company had 2,719 lots under option
representing a 33-month supply of land based on the same absorption rates as
above.

It is possible that the Company may experience a change of control (as defined
in the Senior Note Indenture) in 2002 as a result of the Supplemental Warrants
becoming exercisable. See "Risk Factors - Potential Obligation to Make Change in
Control Offer." The Company's liquidity position could be materially and
adversely impacted if it becomes obligated to make a change in control offer to
redeem the Senior Notes. The Company's ability to satisfy its obligations in
such circumstances will depend upon its ability to raise capital or sell assets
in a timely and sufficient manner.



                                       26
<PAGE>

By letter dated February 12, 2001, Prometheus delivered a notice purporting to
confirm that it had elected to exercise its rights under section 2.6 of the
Restructuring Agreement. By letter dated February 15, 2001, the Company advised
Prometheus that it disagreed that a timely election had been made. Each party
has reserved its rights with respect to this matter. Depending on the outcome
of this dispute, the Company may be obligated to make the payments required
under section 2.6 of the Restructuring Agreement, which amount to approximately
$1.4 million, and which would be accounted for as an equity transaction. (See
Note 9 - Shareholders' Equity in the Company's consolidated financial
statements included in Item 8 hereof).

As of March 8, 2002 the Company has $33.3 million outstanding of its Senior
Notes, which mature in May 2003. The Company continues to explore alternatives
for discharging this obligation, including refinancing the remaining
obligations, continued open market repurchases and/or the sale of additional
assets in order to repay the Senior Notes obligations on or before its maturity
date. No assurances can be given that the Company will be able to refinance or
repay the remaining Senior Notes.

SEASONALITY AND VARIABILITY OF RESULTS

The Company, and the homebuilding industry in general, experience significant
seasonality and quarterly variability in homebuilding activity levels. The
annual operating cycle generally reflects greater new home orders in the spring
and autumn months and slower new orders in the winter and summer months.
Closings are slowest during the first quarter and increase throughout the
remainder of the year. The Company believes that this seasonality is a
reflection of the impact of winter weather on construction activity and the
preference of homebuyers to close on their new home either prior to the start of
a new school year in the fall or prior to the holiday season.

OUTLOOK

The Company experienced a 6.4% decline in new order activity in continuing
operations during 2001 compared to 2000. As noted above all of the markets,
except for Austin, have experienced year over year increases. The Company saw a
strong increase in new order activity in its Tucson and San Antonio markets.
The Austin market was significantly affected by the job layoffs in the high
tech industry. Overall the Company expects new orders in 2002 to remain
relatively consistent with 2001 levels.

The Company believes the successful implementation of its key strategies should
benefit future operating results in the long run. The Company has addressed and
continues to address key business strategies through (i) the continued focus of
operational and financial management groups on the Company-wide program to
reduce direct construction costs, identification and implementation of processes
to improve return on assets at the subsidiary level, the sharing of "best
practices" and the implementation of an integrated computer information system,
and (ii) ongoing evaluations of certain under-performing assets and alternative
strategies to improve performance or redeploy funds which might be recovered
from the sale of assets assets (see "Planning Committee").

Please refer to Business- Risk Factors and the Statement on Forward-Looking
Information.

INFLATION

The Company's business performance and the homebuilding industry in general can
be negatively affected by the impact of inflation and the adverse effect
inflation has on interest rates and the overall economic climate both nationally
and in the Company's markets.


                                       27
<PAGE>

Inflation affects the Company in a number of ways including increasing the
Company's cost of construction. Costs including land acquisition and
development, materials and subcontractor labor, overhead and interest rates on
floating rate credit facilities can all be adversely affected by inflation. In
addition, inflation may reduce consumers' ability to purchase a new home,
thereby adversely affecting the Company's new order flow. While inflation has
not been a significant factor in 2001 or 2000, rising inflation in the future
would likely have an adverse long-term impact on the Company's business
performance.

CRITICAL ACCOUNTING POLICIES

The accompanying consolidated financial statements were prepared in conformity
with accounting principles generally accepted in the United States. When more
than one accounting principle, or the method of its application, is generally
accepted, the Company selects the principle or method that is appropriate in the
Company's specific circumstance. Application of these accounting principles
requires the Company to make estimates about the future resolution of existing
uncertainties; as a result, actual results could differ from these estimates. In
preparing these financial statements, the Company has made its best estimate and
judgments of the amounts and disclosures included in the financial statements,
giving due regard to materiality.

INVENTORY VALUATION AND COST OF SALES:

The Company's inventories are stated at the lower of cost or market. Included in
inventory are all direct development costs, certain indirect costs and
capitalized interest. If actual market conditions are less favorable than those
projected by management, additional impairment charges may be required.

Sold units are expensed to cost of sales based actual construction costs
incurred plus an allocation of total estimated land and land development costs,
interest, real estate taxes and any other capitalizable costs based on the
relative sales value method of accounting. Under the relative sales value
method, costs are assigned based on the sales value of the unit sold in relation
to the total estimated sales value of the project. If actual market conditions
are less favorable than those projected by management, additional costs of sales
could be charged in the future.

ADOPTION OF NEW ACCOUNTING STANDARDS

In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, as amended by SFAS 138, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and hedging activities. The
Company adopted SFAS 133 in the first quarter of fiscal 2001. The adoption of
SFAS 133 did not have a material effect on the financial position or results of
operations of the Company. The Company's only derivative is in the form of
mandatory forward looking commitments on loan sales.

Recognition of gains and losses from the sale of mortgage loans is based on
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, which was effective for transfers and servicing
of financial assets and extinguishment of liabilities occurring after December
31, 1996. SFAS No. 140 is based upon consistent application of a financial
components approach that focuses on control. Under that approach, after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, reverses financial
assets when control has been surrendered, and reverses liabilities when
extinguished. The Company adopted SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities, in 2001, which
did not have a material effect on the financial position or results of
operations of the Company.



                                       28
<PAGE>

STATEMENT ON FORWARD-LOOKING INFORMATION

Certain information included in this report is "forward-looking" within the
meaning of the Private Securities Litigation Reform Act of 1995. You can
identify this information by use of words like "may," "will," "expect,"
"anticipate," "estimate," or "continue" or similar expressions. Such statements
represent the Company's judgment and involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ
materially from those expressed or implied in the forward-looking statements.
Such risks, uncertainties and other factors include, but are not limited to,
fluctuations in interest rates, availability of land, raw materials, and labor
costs, levels of competition, housing demand in our markets, the effect of
government regulation, the availability of working capital, the price of the
Company's common stock, weather conditions, changes in general economic
conditions and other factors which may adversely affect The Fortress Group's
operating results including net income and/or net income per share and other
matters addressed in Business- Risk Factors.



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

The Company is exposed to market risks related to fluctuations in interest rates
on its debt and on its mortgage loans held for sale. The Company utilizes
forward sale (best efforts and mandatory) commitments to mitigate the risk
associated with the mortgage loan portfolio. Other than the commitments noted
above, the Company does not utilize interest rate swaps, forward option
contracts on foreign currencies or commodities, or other types of derivative
financial instruments.

Fortress Mortgage provides mortgage loans, which are generally sold upon closing
and subsequently delivered to a third-party purchaser within approximately 30
days. Due to the frequency of these loan sales, the market risk associated with
these mortgage loans is minimal.

The Company utilizes both short-term and long-term debt in its financing
strategy. For fixed rate debt, changes in interest rates generally affect the
fair value of the debt instrument, but not the Company's earnings or cash flows.
Conversely, for variable rate debt, changes in interest rates generally do not
impact the fair value of the debt instrument, but may affect the Company's
future earnings and cash flows. The Company does not have an obligation to
prepay fixed rate debt prior to maturity and, as a result, interest rate risk
and changes in fair value should not have a significant impact on the fixed rate
debt until the Company would be required to refinance such debt.

As of December 31, 2001, short-term debt was $84.2 million, which consisted
primarily of loans secured by real estate inventories. Also included in that
amount is a mortgage warehouse line that is collateralized by residential
mortgage loans. The Company borrows on a short-term basis from banks under
committed lines of credit, which bear interest at the prevailing market rates.

Long-term debt obligations outstanding and their maturities at December 31, 2001
are as follows (in thousands). The estimated fair value at December 31, 2001 for
all debt indicated is the face value, except for the $42.6 million of Senior
Notes due in 2003, which, based on available market information, had an
estimated fair market value of $34.1 million at December 31, 2001. This
estimated fair market value is extremely difficult to determine based on the
thin market for Senior Notes.



                                       29
<PAGE>

<TABLE>
<CAPTION>

                                          Maturities through December 31, (Dollars in thousands)
                                        2002           2003           2004          2005        2006
                                        ----           ----           ----          ----        ----
<S>                                 <C>            <C>            <C>            <C>           <C>
Fixed Rate Debt...............       $  2,056       $ 43,040       $      0       $     0       $  0
      Average Interest Rate...           7.4%          13.6%            N/A           N/A        N/A
Variable Rate Debt............       $ 82,133       $  4,055       $      0       $     0       $  0
      Average Interest Rate...           4.6%           4.8%            N/A           N/A        N/A
</TABLE>

The Company believes that its overall balance sheet structure has repricing and
cash flow characteristics that mitigate the impact of interest rate movements.


The following table summarizes our other commercial commitments as of December
31, 2001:

<TABLE>
<CAPTION>
                                             Maturities through December 31, (Dollars in thousands)
                                      2002           2003            2004           2005       Thereafter
                                      ----           ----            ----           ----       ----------
<S>                               <C>             <C>             <C>            <C>               <C>
Revolving credit facilities       $ 82,133        $ 4,055            $  0           $  0             $  0
Standby letters of credit              624              0               0              0                0
Loan commitments                   210,535          5,200               0              0                0
Operating leases                     2,140          1,238             939            724            1,318
                                  --------        -------         -------        -------           ------
Total commercial commitments      $295,432        $10,493         $   939        $   724           $1,318
                                  ========        =======         =======        =======           ======
</TABLE>


As of December 31, 2001, the Company had approximately $13.4 million in deposits
outstanding to acquire land with an aggregate purchase price of approximately
$121.7 million. If the Company decides not to purchase the land it would
forfeit certain of these deposits.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements are listed under Item 14(a)(1) and filed as part of
this report on the pages indicated and are incorporated herein by reference.

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

         None.



                                       30
<PAGE>


PART III

            The information required by Part III is omitted from this Annual
Report on Form 10-K and is incorporated by reference from the definitive proxy
statement with respect to the 2002 Annual Meeting of Stockholders (the Proxy
Statement) which the Company will file with the Securities and Exchange
Commission (the Commission) not later than 120 days after the end of the fiscal
year covered by this Report.


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

    (a)      Identification of Directors. Information required by this Item
             will be set forth under the caption "Proposal 1, Election of
             Directors - Nominees for Election at this Annual Meeting" in
             the Proxy Statement, which information is incorporated herein
             by reference.

    (b)      Identification of Executive Officers. Information required by
             this Item is set forth under the caption "Executive Officers
             of the Company" under Part I, Item 1 of this Report, which
             information is incorporated herein by reference.


ITEM 11.  EXECUTIVE COMPENSATION.

            Information required by this Item will be set forth under the
captions "Executive Compensation" and "Proposal 1, Election of Directors -
Directors' Remuneration" in the Proxy Statement, which information is
incorporated herein by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

            Information required by this Item will be set forth under the
caption "Stock Ownership" in the Proxy Statement, which information is
incorporated herein by reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

            Information required by this Item will be set forth under the
caption "Certain Transactions" in the Proxy Statement, which information is
incorporated herein by reference.




                                       31
<PAGE>

PART IV


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


 (a)  Financial Statements, Schedules and Exhibits.

         1.       Financial Statements

THE FORTRESS GROUP, INC.

INDEX TO FINANCIAL STATEMENTS




<TABLE>
<CAPTION>
THE FORTRESS GROUP, INC.
<S>                                                                                                          <C>
     Report of Ernst & Young LLP, Independent Accountants                                                     F-1
     Report of PricewaterhouseCoopers LLP, Independent Accountants                                            F-2
     Consolidated Balance Sheets as of December 31, 2001 and 2000                                             F-3
     Consolidated Statement of Operations for the years ended December 31, 2001, 2000, and 1999               F-4
     Consolidated Statement of Shareholders' Equity for the years ended December 31, 2001,
     2000, and 1999                                                                                           F-5
     Consolidated Statement of Cash Flows for the years ended December 31, 2001, 2000, and 1999               F-6
     Notes to Consolidated Financial Statements                                                               F-7
</TABLE>



                                       32
<PAGE>

2.       Financial Statement Schedules
         None.

3.       Exhibits

Number    Description

2.1      Agreement and Plan of Reorganization dated as of March 11, 1996 by and
         among the Company, Buffington Acquisition, Inc., Buffington Holdings,
         Inc. and the Stockholders named therein ("Buffington Merger
         Agreement"). (Exhibit 2.1 of the Registration Statement on Form S-1
         (File No. 333-2332) effective May 16, 1996, is hereby incorporated by
         reference.)

2.1(a)   First Amended to Buffington Merger Agreement, dated May 15, 1996.
         (Exhibit 2.1(a) of the Registration Statement on Form S-1 (File No.
         333-2332) is hereby incorporated by reference.)

2.3      Amended and Restated Agreement and Plan of Reorganization dated as of
         March 11, 1996 by and among the Company, Genesee Acquisition, Inc., The
         Genesee Company, The Genesee Company/Castle Pines, Ltd., The Genesee
         Company of Michigan, Ltd., Genesee Development Company and the
         Stockholders named therein ("Genesee Merger Agreement"). (Exhibit 2.3
         of the Registration Statement on Form S-1 (File No. 333-2332) is hereby
         incorporated by reference.)

2.3(a)   First Amendment to Genesee Merger Agreement, dated May 15, 1996.
         (Exhibit 2.3(a) of the Registration Statement on Form S-1 (File No.
         333-2332) is hereby incorporated by reference.)

2.9      Asset Purchase Agreement, dated May 1, 2001, by and between D. R.
         Horton, Inc. and Registrant and person named therein (Exhibit 2.8 of
         the Current Report on Form 8-K dated May 15, 2001 is hereby
         incorporated by reference.)

2.10     Asset Purchase Agreement, dated June 6, 2001, by and between Whittaker
         Builders, Inc. and Registrant and person named therein (Exhibit 2.10 of
         the Current Report on Form 8-K dated July 13, 2001 is hereby
         incorporated by reference.)

2.11     Purchase Agreement, dated April 5, 2001, among J. Christopher Stuhmer,
         Christopher Homes, LLC, Fortress Holding - Virginia, Inc. and
         Registrant and person named therein (Exhibit 2.11 of the Current Report
         on Form 8-K dated September 11, 2001 is hereby incorporated by
         reference.)

2.12     Purchase Agreement, dated October 16, 2001, among JLG Investments, LLC,
         Quail Construction, LLC, Fortress Holding - Virginia, LLC and
         Registrant and person named therein (Exhibit 2.12 of the Current Report
         on Form 8-K dated January 7, 2002 is hereby incorporated by reference.)

2.13     Purchase Agreement, dated December 21, 2001, among NC Builders
         Acquisition Corp., Landmark Homes, Inc., Fortress Holding - Virginia,
         LLC and Registrant and person named therein (Exhibit 2.13 of the
         Current Report on Form 8-K dated January 7, 2002 is hereby incorporated
         by reference.)




                                       33
<PAGE>


2.14     Purchase Agreement, dated February 20, 2002, among Baker Residential of
         Pennsylvania, LLC, Fortress Pennsylvania, LLC, and Registrant and
         person named therein (Exhibit 2.14 of the Current Report on Form 8-K
         dated March 14, 2002 is hereby incorporated by reference.)


3.2      Certificate of Amendment of Certificate of Incorporation of the Company
         (Exhibit 3.1(a) of Amendment No. 3 to the Registration Statement on
         Form S-1 (File No. 333-2332) is hereby incorporated by reference.)

3.3      Certificate of Amendment of Certificate of Incorporation of the
         Company, effective March 6, 1998 (Exhibit 3.1 of the Form 8-K dated
         March 16, 1998 is hereby incorporated by reference.)

3.4      Notice of Election to Terminate Charter Provisions (Exhibit 3.3(a) of
         the Company's 1998 Annual Report on Form 10-K dated March 30, 1999 is
         hereby incorporated by reference)

3.5      Certificate of Amendment of the Certificate of Incorporation of the
         Company, effective July 10, 2000 (Exhibit 3.5 of the Form 10-Q dated
         August 14, 2000 is hereby incorporated by reference.)

3.6      Amended and Restated Bylaws of the Registrant. (Exhibit 3.2 of the
         Registration Statement on Form S-1 (File No. 333-2332) effective May
         16, 1996, is hereby incorporated by reference.)

3.7      Amendments to the Company's By-laws, effective March 6, 1998 (Exhibit
         3.2 of the Form 8-K dated March 16, 1998 is hereby incorporated by
         reference.)

3.8      Amendment to the Company's By-laws adopted February 4, 1999 (Exhibit 2
         of the Form 8-K dated March 5, 1999 is hereby incorporated by
         reference.)

4.2      Form of Indenture for Senior Notes. (Exhibit 4.2 of the Registration
         Statement on Form S-1 (File No. 333-2332) is hereby incorporated by
         reference.)

4.3      Form of Certificate for Senior Notes. (Exhibit 4.3 of the Registration
         Statement on Form S-1 (File No. 333-2332) is hereby incorporated by
         reference.)

4.3(a)   Second Supplemental Indenture dated May 27, 1997 (Exhibit 4 of the
         Company's Quarterly Report on Form 10Q/A Amendment No. 1 for the
         quarter ended June 30, 1997 is hereby incorporated by reference.)

4.4      Loan Agreement dated November 10, 2000 and amended September 27, 2001
         between Key Bank National Association and The Genesee Company
         (included herein.)

         The Company is a party to a number of other instruments defining the
         rights of holders of long-term debt. No such instrument authorizes an
         amount of securities in excess of 10% of the total assets of the
         Company and its subsidiaries on a consolidated basis. On request, the
         Company agrees to furnish a copy of each such instrument to the
         Commission.

4.5      Amended and Restated Warrant Agreement dated as of March 6, 1998 by and
         between the Company and Prometheus Homebuilders LLC (Exhibit 4.6 of the
         Company's Current Report on Form 8-K dated March 16, 1998 is hereby
         incorporated by reference.)

4.5(a)   Supplemental Warrant Agreement dated as of February 4, 1999 by and
         between the Company and Prometheus Homebuilders LLC (Exhibit D of
         Exhibit 1 of the Schedule 13D,


                                       34
<PAGE>

         Amendment No. 4 filed by Prometheus Homebuilders LLC on January 12,
         1999 is hereby incorporated by reference.)

4.6      Amended and Restated Stockholders Agreement, dated as of March 6, 1998,
         by and among the Company and the Stockholders named therein (Exhibit
         4.7 of the Current Report on Form 8-K dated March 16, 1998 is hereby
         incorporated by reference.)

4.6(a)   Second Amended and Restated Stockholders Agreement dated as of February
         4, 1999 by and between the Company and Prometheus Homebuilders LLC
         (Exhibit C of Exhibit 1 of the Schedule 13D, Amendment No. 4 filed by
         Prometheus Homebuilders LLC on January 12, 1999 is hereby incorporated
         by reference.)

4.7      Amended and Restated Registration Rights Agreement dated as of March 6,
         1998 by and between the Company and Prometheus Homebuilders LLC
         (Exhibit 4.8 of the Current Report on Form 8-K dated March 16, 1998 is
         hereby incorporated by reference.)

4.7(a)   Second Amended and Restated Registration Rights Agreement dated as of
         February 4, 1999 by and between the Company and Prometheus Homebuilders
         LLC (Exhibit B of Exhibit 1 of the Schedule 13D, Amendment No. 4 filed
         by Prometheus Homebuilders LLC on January 12, 1999 is hereby
         incorporated by reference.)

4.8(a)   Amended Certificate of Designations, Preferences and Rights of Series C
         Convertible Preferred Stock of The Fortress Group Inc. (Exhibit 4.8(a)
         of the Company's 1998 Annual Report on Form 10-K dated March 30, 1999
         is hereby incorporated by reference)

4.8(b)   Certificate of Designations, Preferences and Rights of Series D
         Convertible Preferred Stock of The Fortress Group Inc. (Exhibit 2 of
         the Current Report on Form 8-K dated August 27, 1997 is hereby
         incorporated by reference.)

4.8(c)   Amended Certificate of Designations, Preferences and Rights of Series E
         6% Convertible Preferred Stock of The Fortress Group, Inc. (Exhibit 4.1
         of the Quarterly Report on Form 10-Q for the Quarter ended March 31,
         1997 is hereby incorporated by reference.)

4.8(e)   Certificate of Designations, Preferences and Relative, Participating,
         Optional and Other Special Rights of Preferred Stock and
         Qualifications, Limitations and Restrictions thereof of Class AAA
         Convertible Redeemable Preferred Stock (Exhibit A of Exhibit 1 of the
         Schedule 13D, Amendment No. 4 filed by Prometheus Homebuilders LLC on
         January 12, 1999 is hereby incorporated by reference.)

4.9      Letter of Agreement dated March 29, 2001 between Prometheus and the
         Company (Exhibit 1 to Amendment No. 8 to Schedule 13D filed by
         Prometheus Homebuilders LLC on April 25, 2001 is hereby incorporated
         by reference.)

10.1     Stock Incentive Plan. (Exhibit 10.1 of the Registration Statement on
         Form S-1 (File No. 333-2332) is hereby incorporated by reference.)

10.2     Stock Purchase Agreement dated as of August 14, 1997 by and between the
         Company and Prometheus Homebuilders LLC (Exhibit 1 of the Schedule 13D
         filed by Prometheus Homebuilders LLC on August 25, 1997 is hereby
         incorporated by reference.)

10.2(a)  Amended and Restated Stock Purchase Agreement dated as of September 30,
         1997 by and between the Company and Prometheus Homebuilders LLC
         (Exhibit 1 of the Schedule 13D,

                                       35
<PAGE>


         Amendment No. 1 filed by Prometheus Homebuilders LLC on October 15,
         1997 is hereby incorporated by reference.)

10.2(b)  Second Amended and Restated Stock Purchase Agreement dated as of
         February 19, 1998 by and between the Company and Prometheus
         Homebuilders LLC (Exhibit 10 of the Current Report on Form 8-K dated
         March 16, 1998 is hereby incorporated by reference.)

10.2(c)  Restructuring Agreement by and among The Fortress Group, Inc.,
         Prometheus Homebuilders LLC and the Homebuilder Stockholders listed
         therein dated as of December 31, 1998 (Exhibit 1 of the Schedule 13D,
         Amendment No. 4 filed by Prometheus Homebuilders LLC on January 12,
         1999 is hereby incorporated by reference.)

10.3     Incentive Compensation Plan. (Exhibit 10.3 of the Registration
         Statement on Form S-1 (File No. 333-2332) is hereby incorporated by
         reference.)

10.4(k)  Employment agreement between The Fortress Group, Inc. and George C.
         Yeonas (Exhibit 10.14 of the Company's 1997 Annual Report on Form 10K
         is hereby incorporated by reference.)

10.5     Directors Indemnification Agreement between The Fortress Group, Inc.
         and Thomas B. Buffington, J. Marshall Coleman, Charles F. Smith, Mark
         L. Fine, Steve D. Rivers, James F. McEneaney, James J. Martell, Jr., J.
         Christopher Stuhmer, Lawrence J. Witek and Robert Short. (Exhibit 10.5
         of the Registration Statement on Form S-1 (File No. 333-2332) is hereby
         incorporated by reference.)

10.10    Lease Agreement between Christopher Homes Custom Home Division, Inc.,
         and Towne Center Limited Partnership (Exhibit 10.10 of the Company's
         1996 Annual Report on Form 10-K dated March 31, 1997 is hereby
         incorporated by reference.)

10.11    Lease Agreement between The Genesee Company and Genesee Holdings
         Corporation (Exhibit 10.11 of the Company's 1996 Annual Report on Form
         10-K dated March 31, 1997 is hereby incorporated by reference.)


10.13    Purchase and Sale Agreement between The Genesee Company and RS
         Investments/Stonebridge LLC, dated December 1, 1999 (Exhibit 10.13 of
         the Company's 1999 Annual Report on Form 10-K dated March 24, 2000 is
         hereby incorporated by reference).

10.14    Amendment to Purchase and Sale Agreement between The Genesee Company
         and RS Investments/Stonebridge LLC, dated December 1, 1999 (Exhibit
         10.14 of the Company's 1999 Annual Report on Form 10-K dated March 24,
         2000 is hereby incorporated by reference).

10.15    Option Agreement between RS Investments/Stonebridge, LLC, and The
         Genesee Company, dated December 1, 1999 (Exhibit 10.15 of the Company's
         1999 Annual Report on Form 10-K dated March 24, 2000 is hereby
         incorporated by reference).

10.16    Amendment to Option Agreement between RS Investments/Stonebridge, LLC,
         and The Genesee Company, dated December 1, 1999 (Exhibit 10.16 of the
         Company's 1999 Annual Report on Form 10-K dated March 24, 2000 is
         hereby incorporated by reference).


                                       36
<PAGE>


10.17    Amendment to Option Agreement between RS Investments/Stonebridge, LLC,
         and The Genesee Company, dated December 10, 1999 (Exhibit 10.17 of the
         Company's 1999 Annual Report on Form 10-K dated March 24, 2000 is
         hereby incorporated by reference).

21.1.    List of Subsidiaries (included herein.)

23.1     Consent of Accountants (included herein.)

23.2     Consent of Accountants (included herein.)



                                       37
<PAGE>

(b)      Reports on Form 8-K.

                        None


                                       38
<PAGE>


                                   SIGNATURES

   Pursuant to the requirements 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 March 29, 2002.

                      THE FORTRESS GROUP, INC.

                                  By:         /s/ George C. Yeonas
                                        -----------------------------
                                  Name:  George C. Yeonas
                                  Title:   Chief Executive Officer and Director

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

<TABLE>
<CAPTION>
     Signature                                          Capacity In Which Signed                    Date
<S>                                             <C>                                         <C>
/s/ George C. Yeonas                            Chief Executive Officer and Director                  3/29/02
------------------------------------                                                        ------------------
George C. Yeonas

/s/ Jeffrey W. Shirley                          Chief Financial Officer,                              3/29/02
------------------------------------            and Principal Accounting Officer             -----------------
Jeffrey W. Shirley

/s/ Richard Balzano                             Director                                              3/28/02
------------------------------------                                                        ------------------
Richard Balzano


                                                Director
------------------------------------                                                        ------------------
Richard I. Gilchrist


                                                Director
------------------------------------                                                        ------------------
Thomas R. Kowalski


/s/ Sandra A. Lamb                              Director                                              3/26/02
------------------------------------                                                        ------------------
Sandra A. Lamb


                                                Director
------------------------------------                                                        ------------------
Robert Short


/s/ Andrew E. Zobler                            Director                                              3/26/02
------------------------------------                                                        ------------------
Andrew E. Zobler
</TABLE>



                                       39
<PAGE>


                         Report of Independent Auditors

Board of Directors
The Fortress Group, Inc.

We have audited the accompanying consolidated balance sheet of The Fortress
Group, Inc. as of December 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the management of
The Fortress Group, Inc. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Fortress
Group, Inc. as of December 31, 2001 and 2000, and the consolidated results of
its operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States.

As disclosed in Note 2 of the Notes to the Consolidated Financial Statements, in
2001 the Company adopted Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets".

                                                           /s/ ERNST & YOUNG LLP


February 22, 2002, except for the second, third and
            fourth paragraphs of Note 22, as to which
            the date is March 20, 2002



                                     F - 1
<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and
Shareholders of The Fortress Group, Inc.:

In our opinion, the accompanying consolidated statements of operations, of
shareholders' equity and of cash flows present fairly, in all material respects,
the results of operations and cash flows of The Fortress Group, Inc. and its
subsidiaries (the "Company") for the year ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.



PricewaterhouseCoopers LLP


Washington, D.C.

February 21, 2000, except for the fourth paragraph of Note 2, as to which the
date is July 10, 2000 and the third paragraph of Note 2, as to which the date is
October 4, 2001


                                     F - 2
<PAGE>


                            THE FORTRESS GROUP, INC.
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 2001 and 2000
                (Dollars in thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                             2001                 2000
                                                                          ---------            ---------
                                     ASSETS
<S>                                                                       <C>                  <C>
Cash and cash equivalents                                                 $  10,589            $   1,037
Accounts and notes receivable                                                13,250                4,367
Real estate inventories                                                     144,977              107,246
Assets held for sale                                                         26,836              260,409
Net assets of mortgage company                                                3,360                2,118
Property and equipment, net                                                   4,741                4,470
Prepaid expenses and other assets                                            23,698               30,268
                                                                          ---------            ---------
         Total assets                                                     $ 227,451            $ 409,915
                                                                          =========            =========


                      LIABILITIES AND SHAREHOLDERS' EQUITY

Accounts payable and accrued construction liabilities                     $   6,909            $  11,373
Liabilities related to assets held for sale                                  15,190              146,318
Notes and mortgages payable                                                 120,699              161,760
Accrued expenses                                                             16,286                9,323
Customer deposits                                                             3,475                3,795
                                                                          ---------            ---------
         Total liabilities                                                  162,559              332,569
                                                                          ---------            ---------

Commitments and Contingencies (see Note 21)

Shareholders' equity
  Preferred stock, all classes and series, $.01 par value, 1 million
    authorized (see Note 9)                                                       1                    1
  Common stock, $.01 par value, 99 million authorized,
    3,116,635 and 3,094,754 issued, respectively                                 31                   31
  Additional paid-in capital                                                 51,520               52,559
  Retained earnings                                                          14,590               26,005
  Treasury stock, at cost, 30,000 preferred shares                           (1,250)              (1,250)
                                                                          ---------            ---------

         Total shareholders' equity                                          64,892               77,346
                                                                          ---------            ---------

         Total liabilities and shareholders' equity                       $ 227,451            $ 409,915
                                                                          =========            =========
</TABLE>


   The accompanying notes are an integral part of these financial statements.



                                     F - 3
<PAGE>


                            THE FORTRESS GROUP, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (Dollars in thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                         For the Year            For the Year         For the Year
                                                                             Ended                  Ended                Ended
                                                                        December 31, 2001    December 31, 2000    December 31, 1999
                                                                        -----------------    -----------------    -----------------
<S>                                                                       <C>                 <C>                 <C>
Residential sales                                                           $   258,896         $   228,510         $   228,591
Lot sales and other                                                               1,086               3,890              11,768
                                                                            -----------         -----------         -----------
  Homebuilding revenues                                                         259,982             232,400             240,359
Cost of sales                                                                   207,463             190,553             204,571
                                                                            -----------         -----------         -----------
  Gross profit                                                                   52,519              41,847              35,788
Selling                                                                          17,746              14,326              15,128
General and administrative                                                       20,712              21,488              20,141
Restructuring and impairment charges                                              2,092                   0               1,270
Other (income)/expense                                                           (2,530)               (213)                486
                                                                            -----------         -----------         -----------
                                                                                 14,499               6,246              (1,237)
Loss on sale of Landmark Homes                                                        0                   0               2,900
                                                                            -----------         -----------         -----------

Income/(loss) from continuing operations before taxes and extraordinary
  items                                                                          14,499               6,246              (4,137)
Provision for income taxes                                                        4,966               2,736              (1,815)
                                                                            -----------         -----------         -----------
Income/(loss) from continuing operations before extraordinary items               9,533               3,510              (2,322)

Income from discontinued operations, net of applicable tax
  (benefit)/provision of $1,782, $5,495 and $9,157, respectively                  3,421               7,048              11,716
(Loss) from sale of discontinued operations, net of applicable tax
  (benefit) of ($17,816), ($6,505) and ($873), respectively                     (34,197)             (8,344)             (1,117)
                                                                            -----------         -----------         -----------
(Loss)/income from discontinued operations                                      (30,776)             (1,296)             10,599

(Loss)/income before extraordinary item                                         (21,243)              2,214               8,277
Extraordinary gains on early extinguishments of debts, net of
  applicable tax provision of $6,564, $0 and $0, respectively                    12,598                   0                   0
                                                                            -----------         -----------         -----------

Net (loss)/income                                                           $    (8,645)        $     2,214         $     8,277
                                                                            ===========         ===========         ===========

Income/(loss) from continuing operations before extraordinary
  items applicable to common shareholders, basic                            $     6,763         $       841         $    (5,450)
(Loss)/income applicable to common shareholders, basic                      $   (11,415)        $      (455)        $     5,149

Income/(loss) before extraordinary items applicable to common
  shareholders, diluted                                                     $     6,768         $       841         $    (5,450)
(Loss)/income applicable to common shareholders, diluted                    $   (11,410)        $      (455)        $     5,149

INCOME/(LOSS) PER SHARE DATA (See Note 10):
   Basic:
   Continuing operations before extraordinary items                         $      2.18         $      0.27         $     (1.80)
   Discontinued operations                                                        (9.91)              (0.42)               3.50
   Extraordinary gains on early extinguishments of debts                           4.05                0.00                0.00
                                                                            -----------         -----------         -----------
   (Loss)/income per share                                                  $     (3.68)        $     (0.15)        $      1.70
                                                                            ===========         ===========         ===========

   Diluted:
   Continuing operations before extraordinary items                         $      0.75         $      0.14         $     (1.80)
   Discontinued operations                                                        (3.40)              (0.21)               3.50
   Extraordinary gains on early extinguishments of debts                           1.39                0.00                0.00
                                                                            -----------         -----------         -----------
   (Loss)/income per share                                                  $     (1.26)        $     (0.07)        $      1.70
                                                                            ===========         ===========         ===========

Basic weighted average shares outstanding                                     3,105,394           3,076,354           3,029,917
                                                                            ===========         ===========         ===========
Diluted weighted average shares outstanding                                   9,040,122           6,135,937           3,029,917
                                                                            ===========         ===========         ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.



                                     F - 4
<PAGE>


                            THE FORTRESS GROUP, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (In thousands)


<TABLE>
<CAPTION>
                                                    --------SHARES--------             --------------AMOUNT-----------------------
                                                                                                                      Additional
                                                                                                                       Paid-In
                                                  Preferred         Common          Preferred         Common           Capital
                                                  ---------         ------          ---------         ------           -------
<S>                                              <C>           <C>               <C>            <C>              <C>
Balance at December 31, 1998                          149           11,908            $    1         $   122          $   71,313
                                                      ===           ======            ======         =======          ==========

Issuance of preferred stock                                                                                                 (342)
Redemption of preferred stock                         (33)                                                               (13,693)
Conversion of preferred stock                         (21)             212                                 2              (1,695)
Preferred stock dividend
Issuance of common stock                                               111                                 1                 146
Preferred Stock Redemption Obligation                                                                                     (1,421)
Net income
                                                      ---           ------            ------         -------          ----------

Balance at December 31, 1999                           95           12,231                 1             125              54,308
                                                      ===           ======            ======         =======          ==========

       Redemption of preferred stock                  (22)                                                                (2,127)
       Preferred stock dividends
       Issuance of common stock                                         94                                 1                  83
       Retirement of treasury stock                                                                       (3)             (1,218)
       Reverse stock split                                          (9,230)                              (92)                 92
       Preferred Stock Redemption Obligation                                                                               1,421
       Purchase of treasury stock                     (30)
       Net income
                                                      ---           ------            ------         -------          ----------

Balance at December 31, 2000                           43            3,095                 1              31              52,559
                                                      ===           ======            ======         =======          ==========

Redemption of preferred stock                         (14)                                                                (1,074)
Preferred stock dividends
Issuance of common stock                                                22                                                    35
Net loss
                                                      ---           ------            ------         -------          ----------

Balance at December 31, 2001                           29            3,117            $    1         $    31            $ 51,520
                                                      ===           ======            ======         =======          ==========
</TABLE>

<TABLE>
<CAPTION>
                                                    --------------------------------AMOUNT------------------------------
                                                                                                                Total
                                                         Subscription       Retained         Treasury       Shareholders'
                                                         Receivables        Earnings           Stock           Equity
                                                         -----------        --------           -----           ------
<S>                                                 <C>              <C>             <C>               <C>
Balance at December 31, 1998                              $   (333)        $  21,311       $  (1,221)        $  91,193
                                                          ========         =========       =========         =========

Issuance of preferred stock                                                                                       (342)
Redemption of preferred stock                                  333                                             (13,360)
Conversion of preferred stock                                                                                   (1,693)
Preferred stock dividend                                                      (3,128)                           (3,128)
Issuance of common stock                                                                                           147
Preferred Stock Redemption Obligation                                                                           (1,421)
Net income                                                                     8,277                             8,277
                                                          --------         ---------       ---------         ---------

Balance at December 31, 1999                                     0            26,460          (1,221)           79,673
                                                          ========         =========       =========         =========

       Redemption of preferred stock                                                                            (2,127)
       Preferred stock dividends                                              (2,669)                           (2,669)
       Issuance of common stock                                                                                     84
       Retirement of treasury stock                                                            1,221
       Reverse stock split
       Preferred Stock Redemption Obligation                                                                     1,421
       Purchase of treasury stock                                                             (1,250)           (1,250)
       Net income                                                              2,214                             2,214
                                                          --------         ---------       ---------         ---------

Balance at December 31, 2000                                     0            26,005          (1,250)           77,346
                                                          ========         =========       =========         =========

Redemption of preferred stock                                                                                   (1,074)
Preferred stock dividends                                                     (2,770)                           (2,770)
Issuance of common stock                                                                                            35
Net loss
                                                          --------         ---------       ---------         ---------

Balance at December 31, 2001                              $      -         $  14,590       $  (1,250)        $  64,892
                                                          ========         =========       =========         =========
</TABLE>

   The accompanying notes are an integral part of these financial statements.



                                     F - 5
<PAGE>


                            THE FORTRESS GROUP, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                       For the Year         For the Year     For the Year
                                                                           Ended                Ended           Ended
                                                                     December 31, 2001  December 31, 2000  December 31, 1999
                                                                     -----------------  -----------------  -----------------
<S>                                                                   <C>               <C>               <C>
Cash flows from operating activities
  Income/(loss) from continuing operations before
  extraordinary items                                                      $   9,533         $   3,510         $  (2,322)
  Adjustments to reconcile income/(loss) from continuing operations
  before extraordinary items to net cash (used in)/
  provided by operating activities:
   Depreciation and amortization                                               3,442             2,862             3,185
   Deferred tax provision                                                      5,714            (7,270)             (654)
   Restructuring charges                                                       1,629                 0             1,270
   Asset impairment charge                                                       463                 0                 0
   (Gain) on sale of investment in land partnerships                               0                 0              (291)
   (Gain)/loss on sale of property and equipment                                 (21)                7               113
   Loss on sale of subsidiary                                                      0                 0             2,900
   (Loss)/income from discontinued operations                                (30,776)           (1,296)           10,599
   Net loss from disposal of assets                                           34,197             8,344             1,117
   Net changes in assets and liabilities of discontinued operations           (5,146)              628             4,504
   Changes in operating assets and liabilities:
     Accounts receivable                                                       2,532              (551)            2,345
     Real estate inventories                                                 (37,416)          (13,029)           (6,629)
     Net assets of mortgage company                                           (1,242)              547              (436)
     Prepaid expenses and other assets                                        (1,275)           (9,248)           (4,315)
     Accounts payable and accrued construction liabilities                    (4,464)            6,182               931
     Accrued expenses                                                          2,156              (431)            1,347
     Customer deposits                                                          (320)              852                41
                                                                           ---------         ---------         ---------
Net cash (used in)/provided by operating activities                          (20,994)           (8,893)           13,705
                                                                           ---------         ---------         ---------

Cash flows from investing activities
   Proceeds from sale of subsidiaries                                         59,536                 0             3,078
   Proceeds from sale of land partnership interests                                0                 0             5,351
   Payment of contingent consideration                                          (478)           (3,504)           (2,372)
   Purchase of property and equipment                                         (3,701)           (1,992)           (1,916)
   Proceeds from sale of property and equipment                                   65                84               135
   Change in investment in limited partnerships                                1,421               (74)            3,433
                                                                           ---------         ---------         ---------
      Net cash provided by/ (used in) investing activities                    56,843            (5,486)            7,709
                                                                           ---------         ---------         ---------

Cash flows from financing activities
   Borrowings under notes and mortgages payable                              165,840           191,862           160,363
   Repayment of notes and mortgages payable                                 (151,444)         (177,990)         (160,972)
   Repurchase of Senior Notes                                                (37,073)                0                 0
   Related party borrowings                                                       17                 0                 8
   Repayment of related party borrowings                                           0               (38)             (145)
   Proceeds from issuance of common stock, net                                    35                84               148
   Proceeds from issuance of Class AA Preferred Stock, net                         0                 0              (342)
   Conversion of preferred stock                                                   0                 0            (1,693)
   Preferred stock redemption                                                   (786)             (521)          (13,360)
   Preferred dividends paid                                                   (2,886)           (1,377)           (3,724)
   Purchase of treasury stock (see Note 9)                                         0            (1,250)                0
                                                                           ---------         ---------         ---------
      Net cash (used in)/provided by financing activities                    (26,297)           10,770           (19,717)
                                                                           ---------         ---------         ---------

Net increase/(decrease) in cash and cash equivalents                           9,552            (3,609)            1,697
Cash and cash equivalents, beginning of period                                 1,037             4,646             2,949
                                                                           ---------         ---------         ---------
Cash and cash equivalents, end of period                                   $  10,589         $   1,037         $   4,646
                                                                           =========         =========         =========
</TABLE>


   The accompanying notes are an integral part of these financial statements.


                                     F - 6
<PAGE>


                            THE FORTRESS GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - BUSINESS AND ORGANIZATION

The Fortress Group, Inc. ("Fortress" or the "Company") was formed in June 1995
to create a national homebuilding company for the acquisition and development of
land or improved lots and the construction of residential for-sale housing.

Fortress began operations simultaneously with the closing of its initial public
offering on May 21, 1996 (the "Offering"), and the acquisition of four
homebuilding companies. As of December 31, 2001, the Company operated under the
following names in seven different markets:

<TABLE>
<CAPTION>
Homebuilder                           Market(s)
-----------                           ---------
<S>                                   <C>                                      <C>
Continuing Operations:
The Genesee Company                    Denver and Fort Collins, Colorado
("Genesee")                            and Tucson, Arizona
Wilshire Homes ("Wilshire")            Austin and San Antonio, Texas

Discontinued Operations:
Iacobucci Homes ("Iacobucci")          Philadelphia, Pennsylvania and          Sold February 2002. (See Note 22 -
                                       Atlantic City, New Jersey               Subsequent Events)
</TABLE>


During 1999 and 2001, the Company exited the following markets:

<TABLE>
<CAPTION>
Homebuilder                             Market(s)                                       Date Sold or Liquidated (See Note - 11
-----------                             ---------                                       --------------------------------------
                                                                                        Discontinued Operations)
                                                                                        ------------------------
<S>                                     <C>                                             <C>
Landmark Homes ("Landmark")             Wilmington North Carolina, Myrtle Beach,        March 1999 (sold)
                                        South Carolina
WestBrook Homes  ("WestBrook")          Loudoun County, Virginia                        During 1999 (liquidated)
Brookstone Homes ("Brookstone")         Janesville, Madison and Milwaukee, Wisconsin    February 2001 (sold)
Fortress Homes and Communities          Jacksonville, Florida                           May 2001 (sold)
   of Florida ("Fortress Florida")
Whittaker Homes ("Whittaker")           St. Louis, Missouri                             July 2001 (sold)
Christopher Homes ("Christopher")       Las Vegas, Nevada                               August 2001 (sold)
Quail Homes ("Quail")                   Portland, Oregon                                October 2001 (sold)
Don Galloway Homes ("Galloway")         Charlotte, North Carolina and Charleston,       December 2001 (sold)
                                        South Carolina
Sunstar Homes ("Sunstar")               Raleigh-Durham, North Carolina                  December 2001 (sold)
</TABLE>

In January 1997, Fortress formed Fortress Mortgage, Inc. ("Fortress Mortgage"),
a wholly-owned subsidiary. Its function is to originate mortgage loans primarily
to the buyers of homes constructed by the Company's builder subsidiaries.
Fortress Mortgage is licensed as a mortgage banker in Arizona, California,
Colorado, Illinois, Missouri, New Jersey, Pennsylvania, Texas and Virginia and
currently serves all of the Company's markets of it's continuing operations.



                                     F - 7
<PAGE>


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
Fortress, a Delaware corporation, and its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

Each acquisition subsequent to the Offering was accounted for under the purchase
method of accounting. The purchase price of each of the acquired companies was
allocated first to record the assets and liabilities acquired at estimated fair
value on the acquisition date with any remaining balances recorded as goodwill.

The Company elected to early adopt, effective January 1, 2001, Statement of
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144). Under SFAS No. 144, the Company has reported
the results of operations and cash flows of the operating subsidiaries sold in
2001 and the division classified as held for sale as discontinued operations for
all periods presented. The results of operations and related losses associated
with operating subsidiaries sold prior to the effective date of the Company's
adoption of SFAS No. 144 have not been reclassified to discontinued operations
in accordance with the Statement.

Certain prior period amounts have been reclassified to conform to the current
year presentation. All periods presented except for the consolidated statement
of shareholders' equity have been restated to take into account the effects of a
one-for-four reverse stock split implemented July 10, 2000.

GENERAL POLICIES

Cash and cash equivalents

For purposes of reporting cash flows, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.

Property and equipment

Property and equipment are carried at cost less accumulated depreciation and are
depreciated using the straight-line method over the estimated useful lives of
the assets, which range from two to ten years. Significant additions and
improvements are capitalized while expenditures for repairs and maintenance are
charged to operations as incurred. Costs incurred for common area model
improvements and certain furnishings are amortized on a per unit basis as home
sales in the related development are closed.

Deferred financing costs

Costs associated with the issuance of the 13.75% Senior Notes (See Note 8 -
Notes and Mortgages Payable) have been capitalized and are being amortized using
the straight-line method over the seven-year term of the related notes. As
Senior Notes were repurchased by the Company during 2001, a pro-rata share of
the issuance costs were written off against the extraordinary gains on the early
extinguishments of debts, (See Note 8 - Notes and Mortgages Payable).

Use of estimates

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



                                     F - 8
<PAGE>

HOMEBUILDING POLICIES

Revenue recognition

Residential homes and lot sales are recognized when all conditions precedent to
closing have been fulfilled and title has passed to the buyer. The Company's
homes are generally sold in advance of their construction. The Company's
standard sales contract generally requires the customer to make an earnest money
deposit, which is recognized as a liability until the unit closes.

Real estate inventories and cost of sales

Real estate inventories are carried at the lower of cost or fair market value as
measured in accordance with SFAS No. 144. Costs incurred which are included in
inventory consist of land, land development, direct and certain indirect
construction costs, capitalized interest during the period of development
through the completion of construction, real estate taxes, direct model
construction costs, and related improvements.

Assets held for sale are carried at the lower of book value or fair value less
costs to sell the assets. During the fourth quarter of 2001, the Company decided
to sell a subsidiary and as such, reclassified all of its assets to assets held
for sale. As a result, the Company evaluated its carrying value in these assets,
and recognized an asset impairment charge of approximately $3.0 million. These
charges have been included in discontinued operations.

At the time of revenue recognition, cost of sales is charged with the actual
construction costs incurred and an estimate of cost to complete, plus an
allocation of the total estimated cost of land and land development, interest,
real estate taxes and any other capitalizable common costs based on the relative
sales value method of accounting.

Certain components of cost of sales, particularly those pertaining to land
development, are based on management estimates of the total expected costs of an
ongoing project. These estimates are subject to change.

Warranty Costs

The Company generally provides a one to two-year limited warranty of workmanship
and materials with each of its homes. Accordingly, a warranty reserve, based on
the Company's historical experience, is provided as residential sales are
closed. Warranty reserves are included in "accrued expenses" and amounted to
approximately $2.8 million and $2.3 million as of December 31, 2001 and 2000,
respectively.

Option deposits

The Company enters into option agreements that allow the takedown of land under
the specified terms. When a deposit is required, the Company records the deposit
amount in "other assets." When the land is taken down, the deposit becomes part
of the cost basis of the land and is reclassified as land inventory. If the
decision is made not to exercise the option, the deposit is charged as an
expensed. Option deposits totaling approximately $13.4 million and $12.4 million
are included in "other assets" at December 31, 2001 and 2000, respectively.

Goodwill

Goodwill represented the excess of the purchase price over the fair value of
assets acquired and was amortized over periods ranging from five to twenty
years. As of December 31, 2001, all goodwill had been either amortized or
written off as unrecoverable, as subsidiaries were sold, or their respective
goodwill carrying amounts were deemed impaired. Goodwill at December 31, 2000
was $410,000 for and was only for Wilshire Homes. During 2001, 2000 and 1999 the
Company amortized $410,000, $328,000 and $432,000, respectively to continuing
operations.

FINANCIAL SERVICES POLICIES

Mortgage income

SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases, requires the
deferral of loan origination income and direct loan origination costs over the
estimated life of the loans. The Company defers the loan fees and costs and
recognizes them at the time of sale


                                     F - 9
<PAGE>


of the loans. A total of ($18,222) and $10,671 was recorded as part of the loans
held for sale balance for unamortized loan origination fees and costs recognized
under SFAS No.91 as of December 31, 2001 and 2000, respectively.

Gains and losses from sales of mortgage loans are recognized at the time of sale
and are determined by the difference between net sale proceeds and the carrying
value of the mortgage loans sold.

Recognition of gains and losses is based on SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,
which was effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996. SFAS No. 140 is
based upon consistent application of a financial components approach that
focuses on control. Under that approach, after a transfer of financial assets,
an entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, reverses financial assets when control has been
surrendered, and reverses liabilities when extinguished. The Company adopted
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, in 2001, which did not have a material effect on
the financial position or results of operations of the Company.

The Company does not retain servicing on loans sold.

Mortgage loans

Mortgage loans held for sale to nonaffiliated investors are recorded in the
aggregate at the lower of cost or market. Fair value is based upon contractually
established prices at which mortgage loans will be sold or, if loans are not
committed for sale, at current market prices. No valuation allowance was
required at December 31, 2001 or 2000.

New accounting pronouncements

In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, as amended by SFAS 138, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). These standards established
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and hedging activities. The
Company adopted SFAS 133 in the first quarter of fiscal 2001. The adoption of
SFAS 133 did not have a material effect on the financial position or results of
operations of the Company. The Company's only derivative is in the form of
mandatory forward looking commitments on loan sales.

NOTE 3 - ACQUISITIONS

The Company made no acquisitions during 2001, 2000 or 1999.

Several of the Company's acquisition agreements from prior to 1999 included
earnout provisions, by which the seller(s) may have received additional
consideration based upon the operational results of the purchased business.
These provisions generally extended two to four years past the purchase date and
were calculated as a set percentage of operational results in excess of
operational goal "hurdles." In each of the acquisitions that included earnout
provisions, the earnout consideration was accounted for as additional purchase
price and, accordingly, increased the goodwill related to the acquisitions and
was amortized over the corresponding remaining goodwill amortization periods.
Pursuant to these agreements, the Company recorded additional purchase price for
earnouts in the amount of approximately $0.6 million, $0.1 million and $2.0
million for the years ended December 31, 2001, 2000 and 1999, respectively. As
of January 1, 2002, the Company has no further earnout obligations.

NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental disclosures of cash flow information are as follows (in thousands):

<TABLE>
<CAPTION>
                                              For the Year
                                   2001            2000          1999
                                   ----            ----          ----
<S>                            <C>             <C>            <C>
Cash paid for the following:
  Interest                       $13,351         $13,524        $12,358
  Income taxes                    $2,358         $10,254         $6,065
</TABLE>



                                     F - 10
<PAGE>



Significant non-cash transactions

         In connection with acquisitions, the following contingent consideration
         amounts ("earnouts") were recorded as non-cash transactions.

<TABLE>
<CAPTION>
                                                       2001         2000         1999
                                                      -----        -----        ------

<S>                                                   <C>          <C>          <C>
Recorded as due to related parties at year end        $ 600        $  99        $1,927
</TABLE>


         In accordance with a Restructuring Agreement dated December 31, 1998
         between the Company and Prometheus Homebuilders LLC (Prometheus), the
         Company issued 40,000 shares of Class AAA Redeemable Convertible
         Preferred Stock in exchange for 40,000 shares of Class AA Convertible
         Preferred Stock, effective February 4, 1999 (See Note 9- Shareholders'
         Equity).

         As part of the Restructuring Agreement referenced above, and in
         conjunction with the partial redemption of the Company's Class AAA
         preferred stock, which occurred during 1999, the Company incurred a
         potential obligation to arrange for the sale of a portion of the Class
         AAA holder's common stock holdings and to guarantee the net proceeds
         received from that sale. The Company believes that this obligation has
         expired and, as such, in 2000 reclassified to shareholders' equity the
         amount reserved for this obligation. (See Note 9 - Shareholders' Equity
         and Note 21 - Commitments and Contingencies.)

         The Company is amortizing debt issuance costs associated with its
         13.75% Senior Notes over the remaining term of those notes. The Company
         amortized approximately $0.8 million, $1.1 million and $1.1 million in
         such fees in each of the years ended 2001, 2000 and 1999, respectively.
         The amortized financing costs were capitalized into inventory along
         with other interest and financing costs incurred in accordance with
         SFAS No. 34, Capitalization of Interest Cost. In addition,
         approximately $1.2 million in unamortized fees were written off against
         the extraordinary gain on early extinguishments of debt when the
         Company repurchased a portion of the Senior Notes during 2001 (See Note
         8 - Notes and Mortgages Payable)


NOTE 5 - REAL ESTATE INVENTORIES

Real estate inventories are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                       December 31,
                                                    2001            2000
                                                  --------        --------
<S>                                               <C>             <C>
Work-in-progress
  Sold homes                                      $ 44,074        $ 41,322
  Speculative                                       32,396          11,258
                                                  --------        --------
    Total work-in-progress                          76,470          52,581

Land
  Finished lots                                     58,231          39,996
  Land under development                                 0           8,889
  Unimproved land held for development               4,816           3,873
                                                  --------        --------
    Total land                                      63,047          52,758

Model homes                                          5,460           1,907
                                                  --------        --------
Total Inventory of Continued Operations           $144,977        $107,246
                                                  ========        ========

Total Inventory of Discontinued Operations
(included in "Assets held for sale")              $ 20,749        $200,941
                                                  ========        ========
</TABLE>

Model homes are constructed to assist in the marketing effort of a development.
Speculative homes, included above in work-in-progress, represent both completed
and under-construction, non-model homes, which are not subject to a sales
contract. Both work-in-progress and model homes include land, land development,
and other allocable costs.



                                     F - 11
<PAGE>


NOTE 6 - INTEREST

Information regarding interest is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                2001             2000             1999
                                                              --------         --------         --------
<S>                                                       <C>              <C>              <C>
Interest incurred                                             $ 12,282         $ 13,096         $ 12,188
Interest capitalized                                           (11,609)         (10,498)          (8,820)
Relief of previously capitalized interest                        9,198            7,952            8,010
                                                              --------         --------         --------
    Total interest expensed in statement of operations        $  9,871         $ 10,550         $ 11,378
                                                              ========         ========         ========

Capitalized interest in ending inventory                      $  8,995         $  6,584         $  4,038
                                                              ========         ========         ========


Interest incurred by discontinued operations                  $ 12,888         $ 23,795         $ 22,127
                                                              ========         ========         ========
</TABLE>


NOTE 7 - PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                 December 31,
                                                            2001             2000
                                                        --------         --------
<S>                                                     <C>              <C>
Model home upgrades and furnishings                     $  6,095         $  4,301
Equipment and furniture                                    5,370            5,647
Vehicles                                                     124              135
Plans                                                      3,642            2,235
Leasehold improvements                                       965              878
                                                        --------         --------
                                                          16,196           13,196
Less: Accumulated depreciation and amortization          (11,455)          (8,726)
                                                        --------         --------
                                                        $  4,741         $  4,470
                                                        ========         ========
</TABLE>


NOTE 8 - NOTES AND MORTGAGES PAYABLE

Notes and mortgages payable consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                            December 31,
                                                                        2001              2000
                                                                     ---------         ---------
<S>                                                               <C>               <C>
13.75% Senior Notes due 2003                                         $  42,565         $ 100,000
Project specific land, land development and
  construction loans                                                    77,214            62,245
Other loans                                                              1,555             2,128
                                                                     ---------         ---------
                                                                       121,334           164,373
Less: Unamortized debt issuance costs                                     (635)           (2,613)
                                                                     ---------         ---------
                                                                     $ 120,699         $ 161,760
                                                                     =========         =========
Notes and mortgages payable of discontinued operations
  (included in "Liabilities related to assets held for sale")        $  11,597         $ 112,459
                                                                     =========         =========
Mortgage warehouse lines of credit
(included in "Net assets of mortgage company")                       $   9,950         $  11,422
                                                                     =========         =========
</TABLE>


The Company pays interest on the Senior Notes in arrears on May 15 and November
15 of each year at the rate of 13.75% per annum. The Company is not entitled to
redeem the Senior Notes at any time prior to maturity. The Senior Notes are
unsecured and rank pari passu with, or senior in right of payment to, all other
existing and future

                                     F - 12
<PAGE>

unsecured indebtedness of the Company. The Senior Notes, however, are
effectively subordinated to secured debt of the Company to the extent of any
collateral, as well as to the Company's subsidiaries' indebtedness. The Company
is required to maintain a consolidated tangible net worth of at least $15.0
million and to comply with other financial covenants in the Senior Note
Indenture. The Company was in compliance with these financial covenants at
December 2001 and 2000.

In addition to financial covenants, the Senior Note Indenture imposes certain
operating restrictions on the Company, based on its performance. These
provisions place certain restrictions on the Company's ability to incur new debt
above levels previously outstanding if the Company's Consolidated Fixed Charge
Coverage Ratio (basically EBITDA to interest incurred for the Company and its
Restricted Subsidiaries) is below a ratio of two to one. The Senior Note
Indenture also restricts, and under certain conditions prevents, certain
payments including the payment of dividends and the repurchase or redemption of
the Company's stock. As of December 31, 2001 and 2000, the Company had in excess
of $13.8 million and $12.2 million, respectively, available for such payments,
subject to the potential limitations discussed in this paragraph. As of December
31, 2001, the Company's Consolidated Fixed Charge Coverage Ratio was above a
ratio of two-to-one thereby permitting the Company to make such restricted
payments up to that amount. (See Note 9 - Shareholders' Equity.)

During 2001, the Company repaid a total of approximately $57.4 million principal
amount of its Senior Notes for a cash price of $34.0 million plus accrued
interest. The gain resulting from the repayment, net of income taxes, is
approximately $12.6 million, which is reflected as an extraordinary gain on
early extinguishments of debt in the consolidated statement of operations.

Under the Senior Note Indenture, the Company would be obligated to offer to
redeem all of the Senior Notes at 101% of their aggregate principal amount plus
any accrued and unpaid interest following a "change of control" of the Company,
as defined in the Indenture. This definition includes any transaction that
results in any person acquiring "beneficial ownership" (as defined in Securities
Exchange Act Rule 13d-3) of 50% or more of the total voting power of the
Company's stock. Unless the obligation under the Senior Note Indenture to make a
change in control offer following a change in control is removed (whether by
amendment, waiver, payment of the Senior Notes or otherwise) or the Supplemental
Warrants are amended, the Company would be required to commence a "change in
control offer" by no later than 30 days prior to January 1, 2003 (See Note 22 -
Subsequent Events).

With cash on hand and net proceeds generated from the closings of Iacobucci, the
Company has repurchased in the open market $9.3 million of its 13.75%
non-callable Senior Notes since December 31, 2001. As of March 8, 2002 the
Company has $33.3 million outstanding of its Senior Notes, which mature in May
of 2003. The Company continues to explore alternatives which may include
refinancing the remaining obligations, continued open market repurchases and/or
the sale of additional assets in order to repay the Senior Notes obligations on
or before its maturity date. No assurances can be given that the Company will be
able to refinance or repay the remaining Senior Notes.

The loan agreements for project-specific land, land development and construction
loans are secured by a lien on the applicable residential development project or
a specific unit under construction. Repayment of the loans are generally due
upon sale of the collateral property. The loans bear interest at annual variable
rates ranging from prime to prime plus 1.5% and fixed rates ranging from 8.0% to
9.0%. Certain of the subsidiary credit facilities contain covenants that limit
the subsidiary's overall ratio of debt to tangible net worth, and other
covenants including minimum tangible net worth, current ratio and interest
coverage. In addition, a few of the credit facilities include similar covenants
at the Company level.

The remainder of other loans at December 31, 2001, consists primarily of debt
financed corporate insurance policies, which bear interest at varying rates
between 5.4% and 7.8%.

The Company's mortgage subsidiary has two lines of credit outstanding for the
purpose of originating loans. The lines of credit are secured by the mortgage
loans held for sale and are repaid upon sale of the mortgage loans. These lines
bear interest at variable rates ranging from 1.5% over the LIBOR rate to 1.5%
over the Fed Funds rate based on the type of loan and lending requirements. The
aggregate commitment available under these lines was $73.0 million and $40.0
million with $10.0 million and $11.4 million outstanding at December 31, 2001
and 2000, respectively.


                                     F - 13
<PAGE>

Principal maturities of the above indebtedness at December 31, 2001 are as
follows (in thousands):

<TABLE>
<CAPTION>
 Year Ending December 31,
 -----------------------
<S>                              <C>
          2002                     $  74,298
          2003                        47,036
                                   ---------
                                    $121,334
                                   =========
</TABLE>

These maturities exclude the mortgage company's loans of $9.9 million, which
mature during 2002.

NOTE 9 - SHAREHOLDERS' EQUITY

Preferred stock

The Company has authorized 1 million shares of $.01 par value preferred stock.
The following were the Company's classes and series of preferred stock, amounts
designated, and amounts outstanding at December 31, 2001 and December 31, 2000:

  Class AAA cumulative convertible (rate of 9% per annum), 40,000 designated,
           28,500 issued and outstanding ($28.5 million aggregate liquidation
           preference)

  Series C convertible, 70,000 designated, 0 and 2,433, respectively, issuable
           (See below)

  Series D convertible, 67,500 designated, 30,000 issued and 0 outstanding ($0
           aggregate liquidation preference)

  Series E convertible, 50,000 designated, 800 and 12,229, respectively, issued
           and outstanding ($80,000 aggregate liquidation preference)


Class AAA

Under a Restructuring Agreement dated December 31, 1998 between the Company and
Prometheus Homebuilders LLC (Prometheus), the Company agreed to issue to
Prometheus 40,000 shares of Class AAA Redeemable Convertible Preferred Stock
having an initial liquidation value of $40.0 million in exchange for the
outstanding 40,000 shares of Class AA Convertible Preferred Stock having a
liquidation value of $40.0 million held by Prometheus. This exchange was
effective February 4, 1999.

The Class AAA preferred stock ranks senior to the Company's common stock as to
the payment of dividends and distributions upon the dissolution, liquidation or
winding up of the Company. Dividends are payable in cash at the annual rate of
9% cumulative and compounded quarterly, on the liquidation value of $1,000 per
share. The Company is required to declare and pay such dividends to the extent
that funds are legally available for the payment of dividends. The Class AAA
preferred stock is convertible, in whole or in part, at the option of the
holder, into the Company's common stock, at any time after issuance, at an
initial conversion price of $24.00 per share, subject to certain customary
anti-dilution adjustments.

The Class AAA preferred stock includes provisions that would entitle Prometheus
to elect a majority of the Board following certain adverse events, including any
failure to pay the required dividends or the obligations in connection with its
redemption. Under the terms of the Class AAA Preferred Stock, the Company is
obligated to pay the 9% annual dividend on a quarterly basis. Due to the certain
restrictions in the Senior Note Indenture that existed during the latter part of
2000 and through the third quarter of 2001, dividends during that time period
were not paid in a timely manner. Dividends payable totaled approximately $1.3
million and are included in accrued expenses at December 31, 2001 (See Note 8 -
Notes and Mortgages Payable). These dividends were paid in full on January 15,
2002 (See Note 22 - Subsequent Events). Prometheus has not exercised its rights
to elect a majority of the board of directors but has reserved its right to make
such an election. This right continues until the Company has paid dividends
current for four consecutive quarters.

The Company had the right to redeem the Class AAA Preferred Stock at any time
until December 31, 2000 for its liquidation value plus dividends that, when
combined with dividends previously paid on the Class AA preferred stock and
subsequent dividend payments on the Class AAA Preferred Stock, would have
provided a 20% annual return from the inception of Prometheus' investment in the
Company. As of December 31, 2001, the Company has redeemed $11.5 million in
Class AAA Preferred Stock.


                                     F - 14
<PAGE>

In conjunction with the issuance of the Class AAA Preferred Stock, the Company
also issued Supplemental Warrants. By agreement dated July 31, 2001, the Company
and the holders of the Supplemental Warrants agreed to amend the Supplemental
Warrant Agreement to set the number of supplemental warrants at 5,937,500 unless
the price of the common stock by September 30, 2001 exceeded $8.00 per share in
which case the number of Supplemental Warrants would be determined in accordance
with the terms as previously disclosed in the Company's financial statements as
reported on prior years Form 10-K. Further, it was agreed that each Supplemental
Warrant shall, at all times during which such Supplemental Warrant shall be
exercisable, be exercisable for the purchase of one share of common stock. On
September 30, 2001, the price of the common stock did not exceed $8.00 per
share. The Company and the holders of the Supplemental Warrants also agreed to
clarify the application of the Registration Rights Agreement to recognize a
recent transfer by Prometheus of a portion of the Class AAA Preferred Stock and
Supplemental Warrants.

A letter of agreement dated March 20, 2002 (which superseded and replaced
previous letters of agreement), Prometheus and the Company agreed to amend the
Supplemental Warrants to limit the number of Supplemental Warrants which may be
exercised by Prometheus and its affiliates prior to the "Extended Exercise Date"
to a number equal to the number of shares of common stock of the Company which
would not cause the holder of the warrants or any "group" of which such holder
is a member to be deemed beneficially to own 50% or more of the aggregate voting
power of the common equity of the Company. The Extended Exercise Date is the
first to occur of (a) January 1, 2003, (b) the day preceding the day on which
any "Event of Default" under the Senior Note Indenture occurs, (c) the day on
which such Senior Note Indenture ceases to require the Company to make a "Change
of Control Offer" upon the occurrence of a "Change of Control", (d) the tenth
day prior to the record date for taking certain actions by stockholders of the
Company, (e) the tenth day prior to the announced expiration date of any tender
offer for shares of the Company's common stock, or (f) the date as of which a
"change of control" occurs by reason of any circumstance or event other than the
taking by Prometheus of any action which causes an increase in the number of
shares of common stock beneficially owned by Prometheus. Based upon the
amendment to the Supplemental Warrants, unless the obligation under the Senior
Note Indenture to make a "Change of Control Offer" following a change of control
is removed (whether by amendment, waiver, payment of the Senior Notes, or
otherwise) or the Supplemental Warrants are further amended, Change of Control
would be deemed to occur by no later than 60 days prior to January 1, 2003 and
the Company would be required to commence to make a "Change of Control Offer" by
no later than 30 days prior to January 1, 2003. (See Note 22 - Subsequent
Events)

Series C

In connection with the Hutson acquisition, Fortress agreed to issue 60,000
shares (70,000 authorized) of Series C convertible preferred stock on an annual
basis over a period not to exceed six years ($6 million liquidation preference).
The acquisition agreement (as amended) allowed the Company to pay the earnout in
cash or Series C preferred stock. The stock had been treated as outstanding for
the purpose of calculating earnings per share; however, it was not actually
outstanding. The Series C preferred stock was convertible into common stock
based on $100 liquidation value per Series C share, payable in common stock,
cash, or a combination of both, at the option of Fortress. The 1997 earnout was
paid in cash during 1998. The 1998 earnout was paid in 1999 by issuing 21,163
shares of Series C stock, which were immediately converted into 52,908 shares of
common stock. The 1999 and 2000 earnouts were paid in cash during 2000 and 2001,
respectively. At December 31, 2001, no Series C shares remain issuable.

Series D

In connection with the Galloway acquisition, Fortress issued 60,000 shares of
Series D convertible preferred stock with a liquidation value of $100 per share
($6 million aggregate liquidation preference). Each Series D share is
convertible into 2.5 shares of common stock. Series D shares are redeemable at
the option of the holder up to 25% each year, cumulative, over a four-year
period. The shares can be redeemed in cash, common stock or a combination of
both equal to the $100 per share liquidation value. The allocation between
common stock and cash is at the sole option of Fortress. During each of 1998 and
1999, 15,000 shares were redeemed resulting in 30,000 shares outstanding at
December 31, 1999. During the fourth quarter of 2000, Fortress Mortgage
purchased the remaining 30,000 shares for $1,250,000, which are reflected as
treasury shares. All claims held by, and obligations to the former holder of the
Series D shares have been released and waived as of December 31, 2000.


                                     F - 15
<PAGE>

Series E

The Company has designated 50,000 shares as Series E 6% convertible preferred
stock ("Series E"), with a liquidation value of $100 per share. In connection
with the WestBrook and Quail acquisitions, the Company issued 19,881 shares of
Series E. The purchase price was subsequently adjusted and 500 Series E shares
were returned to the Company. Each Series E share is convertible into 2.5 shares
of common stock at any time at the option of the holder. After the common stock
has traded for $40.00 per share or more for ten consecutive business days, the
Company may require the conversion of the Series E at the same 2.5-for-1
conversion rate. At the option of the holder, the Company may be required to
redeem up to 20% of the total number of shares initially issued each year
beginning with the first anniversary of the date of issuance in cash. The
holder's redemption right is cumulative. During 2000 and 2001, the Company
redeemed 5,214 and 11,429 shares, respectively, resulting in 800 shares
outstanding at December 31, 2001.



                                     F - 16
<PAGE>



NOTE 10 - EARNINGS PER SHARE

The following table reconciles the numerators (income) and the denominators
(shares) used to calculate the basic and diluted earnings per-share (in
thousands except number of shares and per share amounts):

<TABLE>
<CAPTION>
                                                                                          FOR THE YEAR ENDED DECEMBER 31,
                                                                                      2001           2000              1999
                                                                                   ----------    -----------       -----------
<S>                                                                              <C>           <C>               <C>
Income/(loss) from continuing operations before extraordinary items                $    9,533    $     3,510       $    (2,322)
(Loss)/income from discontinued operations, net of taxes                              (30,776)        (1,296)           10,599
                                                                                   ----------    -----------       -----------
(Loss)/income before extraordinary items                                              (21,243)         2,214             8,277
Extraordinary gain on early extinguishments of debt, net of income taxes               12,598              0                 0
                                                                                   ----------    -----------       -----------
Net (loss)/income                                                                      (8,645)         2,214             8,277
Less preferred stock dividends                                                         (2,770)        (2,669)           (3,128)
                                                                                   ----------    -----------       -----------

Income/(loss) from continuing operations before extraordinary items applicable to
common shareholders, basic                                                              6,763    $       841       $    (5,450)
                                                                                   ==========    ===========       ===========
Net (loss)/income applicable to common shareholders, basic                            (11,415)   $      (455)      $     5,149
                                                                                   ==========    ===========       ===========

BASIC EPS
Income/(loss) from continuing operations before extraordinary items applicable to
common shareholders                                                                     6,763    $       841       $    (5,450)
(Loss)/income from discontinued operations, net of taxes                              (30,776)        (1,296)           10,599
                                                                                   ----------    -----------       -----------
(Loss)/income applicable to common shareholders before extraordinary items            (24,013)          (455)            5,149
Extraordinary gain early extinguishments of debt, net of taxes                         12,598              0                 0
                                                                                   ----------    -----------       -----------
Net (loss)/income applicable to common shareholders                                   (11,415)          (455)            5,149
Weighted average number of common shares outstanding                                3,105,394      3,076,354         3,029,917

Income/(loss) per share from continuing operations before extraordinary items            2.18    $      0.27       $     (1.80)
(Loss)/income per share from discontinued operations                                    (9.91)         (0.42)             3.50
Extraordinary gain per share on debt extinguishments                                     4.05           0.00              0.00
                                                                                   ----------    -----------       -----------
Net (loss)/income per share                                                             (3.68)   $     (0.15)      $      1.70
                                                                                   ==========    ===========       ===========

DILUTED EPS
Income/(loss) from continuing operations before extraordinary items applicable to
common shareholders                                                                     6,763    $       841       $    (5,450)
Plus dilutive preferred stock dividends                                                     5              0                 0
                                                                                   ----------    -----------       -----------
Income/(loss) from continuing operations before extraordinary items applicable to
common shareholders                                                                     6,768            841            (5,450)
(Loss)/income from discontinued operations                                            (30,776)        (1,296)           10,599
                                                                                   ----------    -----------       -----------
(Loss)/income before extraordinary item                                               (24,008)          (455)            5,149
Extraordinary gain on early extinguishments of debt                                    12,598              0                 0
                                                                                   ----------    -----------       -----------
Net loss/(income) applicable to common shareholders                                   (11,410)   $      (455)      $     5,149

Weighted average number of common shares outstanding                                3,105,394      3,076,354         3,029,917
Effect of dilutive securities:
   Preferred stock                                                                     27,992         74,611                 0
   Common Stock Warrants                                                            5,906,736      2,984,973                 0
   Options                                                                                  0              0                 0
                                                                                   ----------    -----------       -----------
Weighted average number of common shares outstanding, diluted                       9,040,122      6,135,938         3,029,917
                                                                                   ==========    ===========       ===========

Income/(loss) per share from continuing operations before extraordinary items            0.75    $      0.14       $     (1.80)
(Loss)/income per share from discontinued operations                                    (3.40)         (0.21)             3.50
Extraordinary gain per share on debt extinguishments                                     1.39           0.00              0.00
                                                                                   ----------    -----------       -----------
Net (loss)/income per share                                                             (1.26)   $     (0.07)      $      1.70
                                                                                   ==========    ===========       -----------
</TABLE>




                                     F - 17
<PAGE>
The following common stock equivalents of the Company's various classes of
preferred stock were not included in the computation of diluted earnings per
share because of the effect of adding back the related dividends and weighted
average common shares would be antidilutive:

<TABLE>
<CAPTION>
                           Outstanding at December 31,                    Convertible into Common Shares as of
                                                                                      December 31,
                                   2001          2000            1999           2001           2000           1999
                                   ----          ----            ----           ----           ----           ----
Class/ Series
-------------
<S>                          <C>            <C>              <C>           <C>           <C>            <C>

Class AA                              0             0               0              0              0              0
Class AAA                        28,500        28,500          28,500      1,187,500      1,187,500      1,187,500
Series C                              0         2,433          18,493              0          6,083         46,233
Series D                              0             0          30,000              0              0         75,000
Series E                            800        12,229          17,443          2,000         30,573         43,608
Series F                              0             0               0              0              0              0
Common Stock Warrants         5,937,500     5,937,500             N/A      5,937,500      5,937,500            N/A
</TABLE>

<TABLE>
<CAPTION>
                                Potential Common Stock outstanding, year
                                        ended December 31,
                                     2001          2000           1999
                                     ----          ----           ----
Class/ Series
-------------
<S>                            <C>           <C>            <C>

Class AA                                0             0        465,750
Class AAA                       1,187,500     1,187,500      1,195,875
Series C                         Dilutive      Dilutive         56,815
Series D                                0      Dilutive         99,863
Series E                         Dilutive        35,808         45,703
Series F                                0             0          4,030
Common Stock Warrants            Dilutive      Dilutive            N/A
</TABLE>

SFAS No.128 requires that options are included in the earnings per share
calculation on a quarterly basis only when the average market price of the
common stock during that period exceeds the exercise price of the options. The
options included in the annual computation of earnings per share are based on
the average of the four quarters. No options are included in the calculation of
diluted earnings per share for 1999, 2000 and 2001 since the average market
price of the common stock in each quarter during those years did not exceed the
exercise price of the options. Note 17 - Employee Benefit and Incentive Plans
contains more detailed disclosure regarding the Company's outstanding options.

NOTE 11 - DISCONTINUED OPERATIONS

The net (loss)/income from discontinued operations includes the operating
results of the operating subsidiaries that were sold in 2001 as well as the gain
or loss on the sale of those operations. In accordance with FAS 144, these gains
and losses are shown net of income taxes. The subsidiaries included in
discontinued operations are Brookstone, Fortress Florida, Whittaker,
Christopher, Quail, Galloway, Sunstar and Iacobucci. All periods presented have
been restated. Operating subsidiaries sold prior to January 1, 2001 are included
in continuing operations. The discontinued operations disclosures are summarized
as follows (in millions):

<TABLE>
<CAPTION>

                                       Sales                                                   Pretax Income/(Loss)
                                       Price              Homebuilding Revenues                  from Operations
                                       -----              ---------------------                  ---------------

                                                       2001         2000          1999       2001      2000       1999
                                                       ----         ----          ----       ----      ----       ----
<S>                                    <C>           <C>          <C>           <C>        <C>      <C>        <C>
Brookstone (1)
 (sold February, 2001)                 $ 10.2         $ 1.2        $28.1         $31.8        $ 0    $  1.1     $  2.3
Fortress Florida
 (sold May 2001)                         49.9          25.0        104.6          96.4        1.2       6.2        5.3
Whittaker (2)
 (sold July 2001)                        51.4          28.9         82.6          99.9       (0.9)      3.4        6.7
Christopher (3)
  (sold August 2001)                     28.0          29.7         66.0          60.7       (1.1)     (3.6)      (3.8)
Quail (4)
(sold October 2001)                       1.8           8.1         15.6          21.4       (0.6)     (2.3)      (1.7)
Sunstar
(sold December 2001)                     36.9          41.4         34.0          48.9        2.6       1.8        2.8
Galloway
(sold December 2001)                     13.1          62.1         76.2         100.4        2.3       4.1        8.7
                                         ----          ----         ----         -----       ----      ----       ----
    Subtotal- 2001 dispositions         191.3         196.4        407.1         459.5        3.5      10.7       20.3
Iacobucci (5)
(sold February 2002)                     27.0          60.2         42.3          34.8        1.7       1.8        0.6
                                         ----          ----         ----         -----        ---       ---        ---
   Subtotal                            $218.3        $256.6       $449.4        $494.3        5.2      12.5       20.9
                                       ======        ======       ======        ======
Tax benefit                                                                                   1.8       5.5        9.2
                                                                                          -------    ------     ------
Net loss                                                                                  $   3.4    $  7.0     $ 11.7
                                                                                          =======    ======     ======
</TABLE>


                                     F - 18
<PAGE>

<TABLE>
<CAPTION>
                                     Gain/(Loss) on Sale/Impairment
                                                 Charges


                                         2001        2000       1999
                                         ----        ----       ----
<S>                                  <C>         <C>         <C>
Brookstone (1)
 (sold February, 2001)                    $ 0      $(2.6)        $ 0
Fortress Florida
 (sold May 2001)                          1.8           0          0
Whittaker (2)
 (sold July 2001)                      (13.8)           0          0
Christopher (3)
  (sold August 2001)                   (11.1)       (7.0)      (2.0)
Quail (4)
(sold October 2001)                     (2.1)       (5.2)          0
Sunstar
(sold December 2001)                    (5.2)           0          0
Galloway
(sold December 2001)                   (14.8)           0          0
                                      ------       ------     ------
    Subtotal- 2001 dispositions        (45.2)      (14.8)      (2.0)
Iacobucci (5)
(sold February 2002)                    (6.8)           0          0
                                       -----            -          -
   Subtotal                            (52.0)      (14.8)      (2.0)

Tax benefit                            (17.8)       (6.5)      (0.9)
                                       ------       -----      -----
Net loss                              $(34.2)      $(8.3)     $(1.1)
                                      =======      ======     ======
</TABLE>




1.       Sold to a company owned by the Company's former Chief Operating
         Officer.

2.       Sold to Whittaker Builders, Inc., a company owned by one of the former
         owners of Whittaker Homes and a former manager of Whittaker Homes after
         it became a subsidiary of the Company.

3.       Sold to an entity controlled by a former owner of Christopher Homes who
         was also a former director of Fortress.

4.       Sold to JLG Investments, LLC a company owned by one of the former
         owners of Quail Construction and its manager after it became a
         subsidiary of the Company.

5.       See Note 22 - Subsequent Events

The total cash proceeds (before closing costs) from the sale of the subsidiaries
listed above were approximately $75.5 million, of which $59.5 net of closing
costs was received in 2001. The total net (loss)/income from discontinued
operations for the years ended December 31, 2001, 2000 and 1999 was ($30.8)
million, ($1.3) million and $12.8 million, respectively.


NOTE 12 - RESTRUCTURING CHARGES

On March 31, 1999 the Company, as part of a restructuring of its Texas
operations, sold its interest in several land partnerships in its Austin and San
Antonio markets. The total proceeds to the Company from this sale were
approximately $5.4 million and were received in April 1999. The gain on the sale
of these partnership interests of approximately $291,000 is included in other
income in the accompanying Consolidated Statement of Operations.

Concurrent with the decision to sell its interest in several land partnerships
in Texas, the Company decided to exit certain communities. Restructuring costs
totaling $480,000 related to employee severance, carrying costs for model homes,
and the write off of other product-line related assets that were determined to
provide no future benefit under the restructured Wilshire operation. As of
December 31, 1999, substantially all of the estimated restructuring costs had
been paid and charged against the liability.

As a result of the planned restructuring activities related to the asset sales
(See Note 11 - Discontinued Operations) the Company has implemented a plan to
reduce corporate staffing and has accrued approximately $1.6 million in
restructuring charges as of December 31, 2001. The majority of these costs are
for employee severances and other company-wide benefit programs, which provide
no future benefit under the Company's restructured operations. The restructuring
charge is included in continuing operations.


NOTE 13 - OTHER INCOME & EXPENSES

The following table summarizes the composition of "Other (income)/expenses" for
the years ended December 31, 2001, 2000 and 1999 (in millions):

<TABLE>
<CAPTION>
                                                                                   Year ended December 31,
                                                                                   -----------------------
                                                                           2001            2000            1999
                                                                        ---------       ---------       ---------
<S>                                                                     <C>             <C>             <C>
Pretax (income)/loss from financial services (see below)                $    (1.3)      $    (0.4)      $     0.0
Interest expense                                                             (0.1)            1.2             2.1
Interest income                                                              (0.3)           (0.2)           (0.1)
Sale of land partnership interests (see Note 12 - Restructuring)              0.0             0.0            (0.3)
Other, net                                                                   (0.8)           (0.8)           (1.2)
                                                                        ---------       ---------       ---------
Net other (income)/expense                                              $    (2.5)      $    (0.2)      $     0.5
                                                                        =========       =========       =========
</TABLE>

Financial services (income)/loss is generated by the Company's wholly-owned
subsidiary Fortress Mortgage. The following results of operations of Fortress
Mortgage for the year presented are reflected in "Other (income)/expense" (in
millions):

<TABLE>
<CAPTION>
                                                                             Year ended December 31,
                                                                            -----------------------
                                                                          2001           2000           1999
                                                                       ---------      ---------      ---------
<S>                                                                    <C>            <C>            <C>
Revenue                                                                $     5.8      $     5.7      $     6.2
Expenses                                                                     4.5            5.3            6.2
                                                                       ---------      ---------      ---------
Pretax income/(loss)                                                   $     1.3      $     0.4      $     0.0
                                                                       =========      =========      =========
</TABLE>


                                     F - 19
<PAGE>


NOTE 14 - NET ASSETS OF MORTGAGE COMPANY

The assets and liabilities of the mortgage company for the years ended December
31, 2001 and 2000 are summarized in the following table (in thousands):

<TABLE>
<CAPTION>
                                                         December 31, 2001               December 31, 2000
                                                         -----------------               -----------------
<S>                                                          <C>                               <C>
Cash and cash equivalents                                    $   938                           $   717
Accounts and notes receivable                                    278                               249
Mortgage loans                                                12,534                            12,153
Property and equipment, net                                      267                               501
Prepaid expenses and other assets                                102                               150
                                                             -------                           -------
  Total assets                                               $14,119                           $13,770
                                                             =======                           =======

Accounts payable and accrued construction liabilities        $   502                               181
Notes and mortgages payable                                    9,950                            11,422
Accrued expenses                                                 307                                49
                                                             -------                           -------
Total liabilities                                             10,759                            11,652
Total shareholders' equity                                     3,360                             2,118
                                                             -------                           -------
  Total liabilities and shareholders' equity                 $14,119                           $13,770
                                                             =======                           =======
</TABLE>


NOTE 15 - RELATED PARTY TRANSACTIONS

Due to related parties

Amounts due to related parties, which are included in accrued expenses at
December 31, 2001 and 2000, total $1.5 million and $1.7 million, respectively.
The December 31, 2001 balance is made up of approximately $0.2 million in
accrued but not paid earnouts due to the former owners of certain acquisitions
and $1.3 million in accrued dividends payable. The December 31, 2000 balance is
made up of approximately $0.1 million in accrued but not paid earnouts due to
the former owners of certain acquisitions, $1.4 million in accrued dividends
payable and the balance representing individually immaterial amounts due to
various related parties.

Other transactions (Continuing Operations)

A significant shareholder and director of the Company is a member of several
limited liability companies ("LLCs"), which are engaged in the acquisition and
development of finished lots in the Denver market. Genesee has placed deposits
of $1.6 million with these LLC's, in exchange for an option agreement to
purchase lots pursuant to take down terms on a non specific performance basis.
During the calendar years 2001 and 2000, the Company purchased 109 and 71 lots
totaling $5.4 million and $4.8 million, respectively. (See Note 21 - Commitments
and Contingencies.)

Pursuant to an agreement with two limited liability companies ("Ltd"), the
Company has an option to acquire land from a certain party related to Wilshire's
president. Wilshire has placed a deposit of $0.3 million with this Ltd, in
exchange for an option agreement to purchase lots pursuant to take down terms on
a non specific performance basis. During the calendar year 2001 the Company
purchased 40 lots totaling $1.8 million. (See Note 21 - Commitments and
Contingencies.)

In addition, several of the operating subsidiaries were sold to related parties.
(See Note 11 - Discontinued Operations.)

Other transactions (Discontinued Operations)

During 2001, 2000 and 1999, Fortress Florida purchased a majority of its
finished lots under written agreements with an entity whose principal was a
significant holder of the Company's Series B and C preferred stock. In 2001,
2000 and 1999, Fortress Florida purchased approximately $2.1 million, $13.9
million and $16.1 million, respectively, of such lots.



                                     F - 20
<PAGE>


Fortress Florida contracted cabinetry, interior finish services and other items
from an affiliated party amounting to approximately $1.8 million, $5.9 million
and $5.0 million for the years ended December 31, 2001, 2000 and 1999,
respectively.

Pursuant to an option agreement executed simultaneously with the acquisition of
Iacobucci, the Company had an option to acquire land from certain parties
related to Iacobucci's officers over a period of five years. In 2001, 2000, and
1999, the Company acquired 193, 88 and 117 of these lots, respectively, at a
total cost of approximately $2.0 million, $1.3 million and $2.0 million,
respectively.

Pursuant to an agreement executed simultaneously with the acquisition of
Brookstone, the Company purchased finished lots from an entity owned by a former
officer of the Company. During the years ended December 31, 2000 and 1999, the
Company purchased 15 and 39 lots for an aggregate purchase price of $0.5 million
and $1.1 million, respectively.

A significant shareholder and former director of the Company is a member of
certain LLC's established for the purpose of constructing and selling real
estate. Christopher had been engaged as the manager for the projects, offering
sales and marketing and construction expertise in exchange for fees amounting to
$2.1 million and $2.5 million in 2001 and 2000, respectively. In addition,
Christopher entered into an agreement with the shareholder and former director
requiring him to share the profits from three of these LLCs with the Company.


NOTE 16 - LEASES

The Company is obligated under various noncancelable operating leases for office
facilities, model homes and equipment expiring at various times through 2007.
Rental expense under these agreements amounted to approximately $2.4 million,
$2.0 million and $2.3 million for the years ended December 31, 2001, 2000 and
1999, respectively. Included in this amount is rent paid to affiliated
companies, under office, model home, and warehouse leases, totaling $0.2
million, $0.2 million and $0.4 million for the respective periods.

Future minimum lease payments under noncancelable operating lease agreements are
as follows (in thousands):

<TABLE>
<CAPTION>
Year Ended
December 31,
<S>                     <C>
      2002                 $2,140
      2003                  1,238
      2004                    939
      2005                    724
      2006                    732
Thereafter                    586
                           ------
                           $6,359
                           ======
</TABLE>

NOTE 17 - EMPLOYEE BENEFIT AND INCENTIVE PLANS

Bonus award plan

The Company has a bonus award plan under which directors, officers, employees
and key consultants of the Company may be awarded cash or common stock based
upon the satisfaction of specific performance criteria. The plan provides for
the grant of up to 143,750 shares of common stock. No awards have been made
under the plan as of December 31, 2001.

Profit sharing plan

The Company's profit sharing plan is a defined contribution plan qualified under
the Internal Revenue Code. All employees who have completed one-half year of
service with the Company may participate in the plan on the first day of the
month after becoming eligible. A participant's interest in Company contributions
are 100% vested after six years of credited service. Contributions to the plan
are entirely within the discretion of the Company's Board of


                                     F - 21
<PAGE>


Directors and are determined annually. Company contributions to the plan were
approximately $572,000, $629,000, and $518,000 for 2001, 2000 and 1999,
respectively.

Stock purchase plan

The Board of Directors of the Company has approved a stock purchase plan under
which 125,000 shares of the Company's common stock are reserved for issuance and
sale to substantially all of the employees of the Company at 85% of market price
of the stock on specified offering dates. The number of shares issued and the
average price per share under this plan during the years ended December 31,
2001, 2000, 1999, were 21,881 and $1.60, 36,935 and $2.28 and 27,856 and $5.32,
respectively. At December 31, 2001, a total of 31,665 shares were available for
issuance.

Stock incentive plan

The Company has a stock incentive plan under which non-employee directors,
officers, key employees and consultants of the Company may be granted options to
purchase up to 387,500 shares of the Company's common stock. The stock incentive
plan also allows for the award of stock appreciation rights, restricted stock
and deferred stock. As of December 31, 2001, no stock appreciation rights,
restricted stock or deferred stock had been granted under this plan.

The stock options granted may be either nonqualified or incentive stock options
although only employees of the Company may be granted incentive stock options.
The option price shall not be less than the fair market value of the common
stock on the date of grant; the option period shall not exceed ten years from
the grant date. Options granted as of December 31, 2001 vest over various
periods from immediately to over three years.

The Company accounts for its stock option plans under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, as
the option price equals the market price at the date of issuance, no
compensation expense is recognized for options issued to employees. The Company
provides disclosure in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation.

The fair value of each stock option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model, using the following weighted
average assumptions:

<TABLE>
<CAPTION>
                                                                                           Year Ended December 31,
                                                                                           -----------------------
                                                                                 2001              2000                1999
                                                                                 ----              ----                ----
<S>                                                                           <C>                <C>               <C>
Expected volatility                                                              100%               N/A                 60%
Risk-free interest rate                                                           5%                N/A                5.7%
Expected life                                                                  5 years              N/A             5.84 years

Number of stock options granted                                                315,000               0                45,250
Weighted-average fair value of options granted                                  $1.53               N/A                $3.86
Total value of stock options granted                                           $481,950             N/A              $175,000
</TABLE>

Had the Company determined the compensation cost of these options in accordance
with SFAS No. 123, the following unaudited proforma results would have been
reported:


<TABLE>
<S>                                                                           <C>                <C>               <C>
Net Income                                                                     $(8,873,000)          $2,061,000         $8,124,000
Earnings per share, basic                                                           $(3.75)             $(0.20)              $1.65
Earnings per share, diluted                                                         $(1.29)             $(0.10)              $1.65
</TABLE>


                                     F - 22
<PAGE>

Option activity is summarized as follows:

<TABLE>
<CAPTION>
                               Shares                            Weighted
                              available          Number           average
                             for options        of shares      option price
                             -----------        ---------      ------------
<S>                          <C>              <C>             <C>
As of December 31, 1998         264,100          123,400         $   23.08
     Grants                     (45,250)          45,250              6.35
     Cancellations               62,339          (62,339)            22.85
                               --------         --------         ---------
As of December 31, 1999         281,189          106,311         $   16.09
     Grants                           0                0
     Cancellations                5,771           (5,771)            22.98
                               --------         --------         ---------
As of December 31, 2000         286,960          100,540         $   15.69
     Grants                    (315,000)         315,000              2.00
     Cancellations              100,307         (100,307)             6.48
                               --------         --------         ---------
As of December 31, 2001          72,767          315,233         $    4.94
</TABLE>

The following table summarizes information about options outstanding at December
31, 2001:

<TABLE>
<CAPTION>
                                           Outstanding Options                            Exercisable Options
                                           -------------------                            -------------------
                              Number Outstanding at      Remaining Contractual                            Weighted Average
 Range of Exercise Prices       December 31, 2001           Life (in years)          Exercisable           Exercise Price
<S>                                       <C>                     <C>                     <C>                  <C>
           $2.00                          252,000                 4.6                          0               $ 0.00
           $6.38                           25,000                 7.6                     18,750               $ 6.38
      $20.00 - $25.00                      38,233                 4.1                     38,233               $23.40
                                          -------                 ---                     ------               ------
                                          315,233                 4.8                     56,983               $17.79
                                          =======                 ===                     ======               ======
</TABLE>



                                     F - 23
<PAGE>

NOTE 18 - INCOME TAXES

The (benefit) 1 provision for income taxes consists of the following (in
thousands):

<TABLE>
<CAPTION>
                                              Year ended
                                             December 31,
                                 2001             2000             1999
                               --------         --------         --------
<S>                            <C>              <C>              <C>
Current:
    Federal                    $ (8,846)        $  7,559         $  5,350
    State                        (1,372)           1,437            1,773

                                (10,218)           8,996            7,123
Deferred:
    Federal                       4,732           (5,996)            (579)
    State                           982           (1,274)             (75)
                                  5,714           (7,270)            (654)

Total                          $ (4,504)        $  1,726         $  6,469
                               ========         ========         ========

Continuing Operations             4,966         $  2,736         $ (1,815)
Discontinued Operations         (16,034)          (1,010)           8,284
Extraordinary Items               6,564                0                0
                               --------         --------         --------
Total                          $ (4,504)        $  1,726         $  6,469
                               ========         ========         ========
</TABLE>

The (benefit) 1 provision for income taxes differs from the amount computed by
applying the Federal income tax statutory rate of 35% for the years ended
December 31, 2001,2000 and 1999, respectively, as follows (in thousands):

<TABLE>
<CAPTION>
                                                   2001             2000            1999
                                                  -------          -------         -------
<S>                                               <C>              <C>             <C>
Income tax computed at statutory rate             $(4,602)         $ 1,379         $ 5,161
State income taxes, net of Federal benefit           (518)             225           1,097
Other, net                                            616              122             211

Total                                             $(4,504)         $ 1,726         $ 6,469
                                                  =======          =======         =======

Effective Rate                                       34.3%            43.8%           43.9%
                                                  =======          =======         =======
</TABLE>

Deferred tax assets (liabilities) arise due to the recognition of income and
expense items for tax purposes in periods which differ from those used for
financial statement purposes. At December 31, 2001 and 2000, the net deferred
tax asset was comprised of the following (in thousands):

<TABLE>
<CAPTION>
                                                           2001             2000
                                                         --------         --------
<S>                                                      <C>              <C>
Deferred Tax Assets:
Warranty and other reserves                              $  2,406         $  7,971
Depreciation                                                  351            1,276
Amortization                                                  126                0
Capitalized inventory                                         296              348
Payroll accruals                                               89              170
Workers compensation accruals                                  10              309
Deferred profit                                                43              388
Other                                                          56               29
                                                         --------         --------
             Total gross deferred tax assets                3,377           10,491

 Deferred Tax Liabilities:
 Prepaid expenses                                              (7)            (261)
 Amortization                                                   0             (471)
 Rebates                                                      (38)              (0)
                                                         --------         --------
             Total gross deferred tax liabilities             (45)            (732)

 Net deferred tax asset                                  $  3,332         $  9,759
                                                         ========         ========
</TABLE>




                                     F - 24
<PAGE>

Net deferred tax assets are included with prepaid expenses and other assets on
the balance sheet.

Fortress and its wholly owned subsidiaries file a consolidated federal income
tax return. The Internal Revenue Service selected for review the consolidated
tax return for the year ended December 31, 1999. The company does not expect any
adverse effects from this review.


NOTE 19 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Quarterly financial information for the years ended December 31, 2001 and 2000
is presented below. The sum of the individual quarterly data may not equal the
annual data due to rounding and fluctuations in weighted average shares
outstanding on a quarter-to-quarter basis.

<TABLE>
<CAPTION>
                                                                 In Thousands Except Per Share Data
                                                                         Three Months Ended

                                                   December 31,      September 30,        June 30,          March 31,
                                                   ------------      -------------        --------          ---------
                                                        2001             2001               2001              2001
                                                        ----             ----               ----              ----

<S>                                                <C>                <C>                <C>               <C>
Revenue                                            $   90,937         $   66,459         $   61,429        $   41,157
Income/(loss) from continuing operations
before extraordinary
items                                                   5,726              2,328              1,749              (270)
Per share, basic                                         1.58               0.54               0.36             (0.30)
Per share, diluted                                       0.54               0.18               0.12             (0.30)

Net income/(loss)                                      (7,400)            (4,583)             3,030               308
Per share, basic                                        (2.64)             (1.69)              0.77             (0.12)
Per share, diluted                                      (0.91)             (0.58)              0.26             (0.12)

                                                   December 31,      September 30,        June 30,          March 31,
                                                   ------------      -------------        --------          ---------
                                                        2000             2000               2000              2000
                                                        ----             ----               ----              ----

Revenue                                            $   71,289         $   59,366        $   53,494         $   48,251
Income/(loss) from continuing operations
before extraordinary
items                                                   2,316              1,218               301               (325)
Per share, basic                                         0.53               0.18             (0.12)             (0.32)
Per share, diluted                                       0.18               0.87             (0.12)             (0.32)

Net income/(loss)                                      (3,911)             3,346             2,146                633
Per share, basic                                        (1.48)              0.06              0.48              (0.01)
Per share, diluted                                      (0.51)              0.29              0.48              (0.01)
</TABLE>


NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The financial instruments of the Company consist of accounts receivable, loans
held for sale, due to and from related parties, accounts payable and
construction liabilities and notes and mortgages payable. Mortgage loans held
for sale to nonaffiliated investors of $12.4 million and $12.2 million at
December 31, 2001 and 2000, respectively, are recorded in the aggregate at the
lower of cost or market. The estimated fair value of $12.6 million and $12.3
million at December 31, 2001 and 2000, respectively, is based upon contractually
established prices at which mortgage loans will be sold or, if loans are not
committed for sale, at current market prices. The fair value of the Company's
Senior Notes at December 31, 2001 was recorded at their carrying value of $42.6
million. Based on the Company's repurchase of $11,650,000 of Senior Notes on
December 31, 2001 for $9,300,000, the Company estimates the value was
approximately $34.1 million as of December 31, 2001. The fair value of the
remainder of the financial instruments is equal to the recorded amounts due to
the short-term nature of the instruments.




                                     F - 25
<PAGE>





NOTE 21 - COMMITMENTS AND CONTINGENCIES

The Company believes that the homebuilding industry is subject to risks and
uncertainties including 1) cyclical markets sensitive to changes in general and
local economic conditions; 2) volatility of interest rates, which may affect
homebuilding demand and credit availability; 3) seasonal and weather-related
factors; 4) significant fluctuations on building material prices, finished lots
and subcontracted labor; 5) counterparty non-performance risk associated with
performance bonds; and 6) environmental regulations.

In the ordinary course of business, the Company enters into option agreements to
purchase land. As of December 31, 2001, the Company had approximately $13.4
million in deposits outstanding to acquire land with an aggregate purchase price
of approximately $121.7 million.

The Company is involved in various routine legal proceedings incidental to the
conduct of its normal business operations. The Company's management believes
that none of these legal proceedings will have a material adverse impact on the
financial condition or results of operations of the Company.

Loan Commitments

Commitments to originate loans have an off-balance sheet market risk to the
extent that the Company does not have matching commitments to sell loans
originated under such commitments. Commitments to sell loans have off-balance
sheet market risk to the extent the Company does not have the available loans to
fill those commitments, which would require the Company to purchase the loans in
the open market.

At December 31, 2001 and 2000, the Company had mandatory or best efforts
delivery commitments to cover all of the Company's loans held for sale. As of
December 31, 2001 and 2000, the Company had commitments to originate loans
(pipeline) in the amount of $68.0 million and $98.8 million, respectively. These
loans sell at the prevailing market rates at the time of closing.

Prometheus Make-Whole Election Notice

By letter dated February 12, 2001, Prometheus delivered to the Company a notice
of election under section 2.6 of the Restructuring Agreement purporting to
confirm that it had elected to exercise its rights under section 2.6 of the
Restructuring Agreement. By letter dated February 15, 2001, the Company advised
Prometheus that it disagreed that a timely election had been made. Each party
has reserved its rights with respect to this matter. Depending on the outcome of
this dispute, the Company may be obligated to make the payments required under
section 2.6 of the Restructuring Agreement, which amount to approximately $1.4
million, and which would be accounted for as an equity transaction.


NOTE 22 - SUBSEQUENT EVENTS

On January 15, 2002 the Company made a payment of approximately $1.3 million for
the Class AAA Preferred Stock dividends due as of December 31, 2001. There are
currently no unpaid dividends.

During the first quarter of 2002, the Company repurchased additional Senior
Notes in the open market with a principal amount of approximately $9.2 million
for a cash price of approximately $9.0 million plus accrued interest. The gain
resulting from the retirement, net of income taxes, will be reflected as an
extraordinary item in the consolidated statement of operations. As of March 8,
2002 the Company has $33.3 million outstanding of its Senior Notes.

On February 28, 2002 the Company sold Iacobucci Homes. The sale price was $27.0
million, which included $11.6 million in cash and the assumption by the
purchaser of substantially all of the subsidiary's secured debt and other
liabilities. The operating revenues and income before $6.8 of impairment charges
for Iacobucci Homes during the years ended December 31, 2001 and 2000 were $52.2
million and $1.7 million and $41.7 million and $1.8 million, respectively.

A letter of agreement dated March 20, 2002 (which superseded and replaced
previous letters of agreement), Prometheus and the Company agreed to amend the
Supplemental Warrants to limit the number of Supplemental


                                     F - 26
<PAGE>

Warrants which may be exercised by Prometheus and its affiliates prior to the
"Extended Exercise Date" to a number equal to the number of shares of common
stock of the Company which would not cause the holder of the warrants or any
"group" of which such holder is a member to be deemed beneficially to own 50% or
more of the aggregate voting power of the common equity of the Company. The
Extended Exercise Date is the first to occur of (a) January 1, 2003, (b) the day
preceding the day on which any "Event of Default" under the Senior Note
Indenture occurs, (c) the day on which such Senior Note Indenture ceases to
require the Company to make a "Change of Control Offer" upon the occurrence of a
"Change of Control", (d) the tenth day prior to the record date for taking
certain actions by stockholders of the Company, (e) the tenth day prior to the
announced expiration date of any tender offer for shares of the Company's common
stock, or (f) the date as of which a "change of control" occurs by reason of any
circumstance or event other than the taking by Prometheus of any action which
causes an increase in the number of shares of common stock beneficially owned by
Prometheus. Based upon the amendment to the Supplemental Warrants, unless the
obligation under the Senior Note Indenture to make a "Change of Control Offer"
following a change of control is removed (whether by amendment, waiver, payment
of the Senior Notes, or otherwise) or the Supplemental Warrants are further
amended, Change of Control would be deemed to occur by no later than 60 days
prior to January 1, 2003 and the Company would be required to commence to make a
"Change of Control Offer" by no later than 30 days prior to January 1, 2003.

                                     F - 27