<PAGE>

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

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                                 FORM 10-KSB

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

    For the fiscal year ended December 31, 1998

                                      OR

[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

    For the transition period from          to


                        Commission file number 0-21378

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

                            INCO HOMES CORPORATION
                (Name of small business issuer in its charter)

<TABLE>
       <S>                                                 <C>
                   Delaware                                    33-0534734
         (State or other jurisdiction                       (I.R.S. employer
       of incorporation or organization)                   identification no.)
</TABLE>

               1282 West Arrow Highway Upland, California 91786
              (Address of principal executive offices)(Zip code)

                                (909) 981-8989
                Issuer's telephone number, including area code

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

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

                                     None

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

                                 Common Stock
                               (Title of class)

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

   Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [_]

   Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [X]

   Revenues of the issuer for the year ended December 31, 1998 were
$29,241,000.

   The aggregate market value of the voting stock held by non-affiliates of
the issuer on June 30, 1999 was $1,756,000.

   The number of shares outstanding of each of the issuer's classes of common
stock on June 30, 1999 was as follows:

           Common Stock (par value $.01 per share) 2,210,073 shares

                      DOCUMENTS INCORPORATED BY REFERENCE

   Definitive Proxy Statement relating to the Company's 1999 Annual Meeting to
be filed hereafter (incorporated into Part III hereof).

   Transitional Small Business Disclosure Format: Yes [_] No [X]

===============================================================================
<PAGE>

 All information herein with respect to shares of Common Stock gives effect to
       the Company's one-for-six reverse stock split that was effective
                             on January 16, 1997.

                                    PART I
ITEM 1. BUSINESS.

     Except for historical information contained herein, the matters discussed
in this report contain forward-looking statements that involve risks and
uncertainties that could cause results to differ materially, including the land
valuation write-downs, changing market conditions, and other risks detailed in
this report and other documents filed by the Company with the Securities and
Exchange Commission from time to time.

General

     Inco Homes Corporation (the "Company") is a developer and builder of
affordably priced single-family detached homes.  Historically, its markets have
been in Southern California, primarily in San Bernardino and Riverside Counties,
and to a lesser extent, in Los Angeles County.  The Company's homes are
primarily targeted to the first time buyer and also to the first time move-up
buyer where the Company believes there is significant long-term demand.  The
Company strives to deliver superior value to its homebuyers by aggressively
pricing its homes while providing a high quality product.

     During 1998, prices for the Company's homes, including a project being
built for a fee, ranged from $75,990 to $221,990, with an average sales price of
$141,260.  The Company believes that its focus on affordable housing and history
of developing and delivering these types of homes since 1976 has helped it to
develop a positive reputation in this market with homebuyers.

     The Company's business strategy in evaluating new projects includes such
factors as (i) the strength of the demand for affordable housing, (ii) the
existence and type of competition, (iii) the availability of relatively low-cost
land, (iv) the availability of utilities and zoning and (v) the receptiveness of
local government and community to growth in the housing sector.  The Company
considers the demand for affordable housing by evaluating such statistical
information as (i) the projected growth of the population, (ii) the number of
new jobs created or projected to be created, (iii) the number of housing starts
in previous periods, (iv) housing inventory and (v) sales absorption rates.

     The Company places great emphasis on customer service and relations and
maintaining favorable visibility in the markets in which the Company builds
homes.  This emphasis on customer service and relations and the Company's value-
driven product have earned the Company substantial referrals and a favorable
reputation among homebuyers and local governments.  The Company believes that
customer service and relations is an integral part of its strategy.  See "--
Customer Service and Relations."

     The Company was incorporated in October 1992 to succeed to the homebuilding
business of its predecessors operating under the "Inco Homes" name through
several limited partnerships and various corporations under the control of Ira
C. Norris, the Company's founder.  At the time of the Company's initial public
offering in 1993, the Company issued its Common Stock to acquire the equity
interests of its predecessors and consolidated ownership of its core projects
and businesses into the Company.  The Company sold its Arizona and Nevada
operations in 1995 and now exclusively builds in Southern California.

The Homebuilding Industry

     The homebuilding industry is cyclical and is significantly affected by
changes in general and local economic conditions, such as employment levels,
availability of land, availability and cost of financing land acquisition,
development and construction, interest rates, consumer confidence and housing
demand, as well as changes in elected officials and changes in government
regulation.  A variety of other factors affect the housing industry and demand
for new homes, including changes in costs associated with home ownership such as
increases in property taxes and energy

                                       2
<PAGE>

costs, changes in consumer preferences, demographic trends and the availability
of and changes in mortgage financing programs. Homebuilders are subject to
various risks, including conditions of supply and demand in local markets,
availability and cost of land, building materials and labor, weather conditions,
delays in construction schedules, cost overruns, the entitlement process, the
effect of moratoriums and environmental controls, decreased availability of
homeowners insurance, and increases in real estate taxes and other local
government fees. The Company's business could be adversely affected in the event
the Company is not able to attract qualified subcontractors for its projects.
Certain of the Company's projects are long-term in nature and are particularly
susceptible to cyclical real estate conditions and the other risks outlined
above due to the significant up-front expenditures required and the length of
time required to achieve profits from these projects.

Southern California Housing Markets

     The Company currently conducts all of its business in the Southern
California Counties of San Bernardino, Riverside and Los Angeles. The Company
believes that the depressed economic and real estate conditions in Southern
California over the last several years had adversely affected its results of
operations, most particularly in the high desert region of San Bernardino
County.  The Company now believes that the economy in the inland empire has
improved significantly.  The Company has experienced improved sales in recent
months, sales prices have been increased and incentives offered to prospective
purchasers have decreased.  Management hopes that the improved conditions will
continue but there can be no assurance that they will.  See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

     The Company continues to conduct detailed reviews of its land holdings,
which include land costs, capitalized costs and related seller financing.  This
has resulted in various writedowns and allowances in current and prior years.
There can be no assurance that there will be no write-off of additional costs in
the future.

     The areas in which the Company operates in California are subject to
earthquakes and other natural disasters. Damage to the Company's projects or
highway access to such projects from such earthquakes or other natural
disasters, or the perception of potential homebuyers as to the possible damage
to a home in these areas, could have a material adverse effect on the Company's
business, financial condition and results of operations.  To the Company's
knowledge, the Company has never suffered any physical damage to its projects as
a result of an earthquake, including the Northridge earthquake in January 1994.


                 [Remainder of page intentionally left blank]

                                       3
<PAGE>

                        Summary of Residential Projects

     Table I presents information relating to the Company's projects completed
since 1987. All homes are single-family detached homes.

                    TABLE I - PROJECTS COMPLETED SINCE 1987

<TABLE>
<CAPTION>
                                                                                       Total
                                                                                       Number
                                                                             Year        of        Sales Price
Project                               City              County            Completed    Homes        Range (1)
-------                               ----              ------            ---------    -----        ---------
<S>                                   <C>               <C>               <C>          <C>        <C>
Liberty Village                       Victorville       San Bernardino       1987       784       $ 49,990-$85,990
Moreno Del Rey                        Moreno Valley     Riverside            1987       119         89,990-123,990
Atlantic Village                      Palmdale          Los Angeles          1988       127         92,990-105,990
Catalina Collection                   Moreno Valley     Riverside            1989       124         99,990-155,990
Southlake                             Moreno Valley     Riverside            1989       185        104,990-154,990
Pacific Village                       Palmdale          Los Angeles          1991       283        112,990-210,990
Liberty Village                       Victorville       San Bernardino       1991       446         80,990-108,990
Country Village                       Victorville       San Bernardino       1991       189         85,990-135,990
Mustang Series at Northfork           Murrieta          San Bernardino       1992       123        129,990-198,990
Hunter Classic at Northfork           Murrieta          San Bernardino       1992        77        194,990-255,990
Paloverde at Eagle Ranch              Victorville       San Bernardino       1992       116        112,990-147,990
American Traditions                   Palmdale          Los Angeles          1993        89         99,990-127,990
Estates of Chaparral at Eagle Ranch   Victorville       San Bernardino       1994        88        169,990-219,990
Summerplace                           Indio             Riverside            1994       156         84,990-108,990
Dakota at Eagle Ranch                 Victorville       San Bernardino       1995        79        102,990-133,490
Spirit at Eagle Ranch                 Victorville       San Bernardino       1995       104        119,990-153,990
Pride at Eagle Ranch                  Victorville       San Bernardino       1995        39         89,990-127,990
American Traditions                   Adelanto          San Bernardino       1995       401         79,990-100,990
Harmony                               Adelanto          San Bernardino       1995        25         97,990-130,990
Hometown                              Adelanto          San Bernardino       1995       526          72,990-85,990
Victory Lenwood                       Lenwood           San Bernardino       1995        24          53,990-63,990
Pride at Wildrose                     Corona            Riverside            1995       102        126,990-151,490
Spirit                                Murrieta          Riverside            1995       261        133,990-171,990
Pride at Tradition East               Chandler          Maricopa             1995        73 (2)     91,990-121,990
Reunion at Tradition East             Chandler          Maricopa             1995       103 (2)     85,990-110,990
Victory at Amberlea                   Phoenix           Maricopa             1995        55 (2)      66,990-91,990
Hometown                              Las Vegas         Clark                1995        63 (2)     84,990-105,990
Reunion                               Las Vegas         Clark                1995        58 (2)     99,990-122,990
Victory                               Las Vegas         Clark                1995        22 (2)      72,990-94,990
Ventana                               Victorville       San Bernardino       1996       196        136,990-169,990
Reunion                               Adelanto          San Bernardino       1997        72         91,990-118,990
Spirit                                Corona            Riverside            1997       102        170,000-219,000
Victory Lane                          Adelanto          San Bernardino       1998       331          59,990-82,990
Winners Circle                        Adelanto          San Bernardino       1998        12         89,990-119,990
Spirit                                Palmdale          Los Angeles          1998        81        139,000-166,000
Hometown (formerly Reunion)           Lake Elsinore     Riverside            1998        63         99,990-141,990
                                                                                       -----
     Total                                                                             5,698
</TABLE>

_________________
(1)  Sales price range reflects base price, excluding any lot premiums, buyer-
     selected options and incentives, which vary from project to project.
(2)  Reflects homes closed by the Company prior to the December 1995 sale of the
     Phoenix and Las Vegas divisions.

                                       4
<PAGE>

     Table II presents information as of December 31, 1998 relating to the
Company's projects in which construction is either in progress or is in the
planning process. All homes are single-family detached homes. In all cases the
Company either owns the land or has a contract or option to acquire the land,
and all such land is entitled.

<TABLE>
<CAPTION>
                                      TABLE II - CURRENT AND PLANNED PROJECTS
                                                                                            Anticipated
                                                   Estimated                  Home Sites    or Actual
                                                     Number         Homes     Remaining        Year
                                                  of Homes at     Closed as     as of       of Initial          Sales Price
          Project                Location (1)    Completion (2)  of 12/31/98   12/31/98    Closings3(3)8          Range(4)
          -------                ------------    --------------  -----------   --------    -------------          --------
<S>                              <C>             <C>             <C>           <C>         <C>               <C>
HIGH DESERT - San Bernardino and Los Angeles Counties
-----------

Freedom at Eagle Ranch (5)       Victorville              166         46          120            1997        $110,990 - 132,540
Triumph (6)                      Lancaster                 78         77            1            1996           75,990 - 92,990
Saratoga I & II                  Palmdale                  43          2           41            1998          94,990 - 116,990
Heritage Place                   Adelanto                 326          0          326            1999           64,990 - 89,990
Monarch Collection               Lancaster                 42          0           42            1999         110,490 - 125,490
Greenbrier (7)                   Palmdale                  79          0           79            1999         138,990 - 168,990
Saratoga III (8)                 Palmdale                 166          0          166             n/a                       n/a
Vista Verde (8)                  Victorville              756          0          756             n/a                       n/a
                                                         ------     ------       ------
       Total High Desert                                  1,656        125        1,531


INLAND - San Bernardino and Riverside Counties
------

Desert Pride (formerly Reunion)  La Quinta                  150         56           94          1995         127,490 - 155,490
Bella Vita                       Fontana                     42         41            1          1997         181,990 - 221,990
Wildwood                         Fontana                     62         19           43          1998         110,190 - 147,190
Falcon Pointe                    Fontana                     76          0           76          1998         164,990 - 193,990
Hidden Oaks (9)                  Moreno Valley              139         30          109          1998          92,490 - 122,490
Country Manors                   Riverside                  154          0          154          1999         259,990 - 292,990
Lexington (7)                    Rancho Cucamonga            29          0           29          1999         229,990 - 249,990
RC-56 (7)                        Rancho Cucamonga            56          0           56          2000         239,990 - 259,990

                                                         ------     ------       ------
       Total Inland                                         708        146          562

            TOTAL COMPANY                                 2,364        271        2,093
                                                         ======     ======       ======
</TABLE>

_________________________
(1)  Victorville, Adelanto, Fontana and Rancho Cucamonga are located in San
     Bernardino County. Palmdale and Lancaster are located in Los Angeles
     County. La Quinta, Riverside and Moreno Valley are located in Riverside
     County.
(2)  Estimated number of homes at completion is subject to change and there can
     be no assurance that the Company will build these homes.
(3)  Anticipated year of initial closing is based on the Company's current
     planning estimates and forecasts, new orders and the status of construction
     at these projects, and therefore is subject to change.
(4)  Sales price range reflects estimated base price, excluding any lot
     premiums, buyer-selected options and incentives, which vary from project to
     project.
(5)  The Company is the managing general partner of, and has a 50% interest in,
     Freedom-Eagle Ranch Housing Partners ("FERHP"), the limited partnership
     that owns this project.
(6)  The Company is the managing general partner of, and has a 50% interest in,
     Triumph-Lancaster Housing Partners ("Triumph"), the limited partnership
     that owns this project.
(7)  Subsequent to December 31, 1998, the Company entered into a Development and
     Marketing Agreement with a third party to develop, construct and market
     these lots owned by the third party. Under this agreement: i) all financing
     and bonding is the responsibility of the third party; ii) the Company is to
     receive compensation in the form of development fees and design center
     profits totaling approximately 4.0% of the gross sales price of the homes;
     and iii) all home warranty costs are to be borne by the third party.
(8)  Represents additional land owned by the Company, which may be used for
     future projects or may be sold in a bulk sale.
(9)  In October 1997, the Company entered into a Development and Marketing
     Agreement with a third party to develop, construct, and market these
     lots owned by the third party. Under this Agreement: i) all financing
     and

                                       5
<PAGE>

     bonding is the responsibility of the third party; ii) the Company will
     receive compensation in the form of overhead draws, development fees and
     sales and marketing fees totaling approximately 8.0% of the gross sales
     price of the homes; and iii) the Company will assume the home warranty
     costs for which it will be paid $750 per house.

Land Acquisition and Development

     The Company generally purchases land that has the necessary entitlements to
enable the Company to begin development or construction as market conditions
warrant.  In addition, as the Company becomes familiar with local entitlement
and zoning procedures, or when the location and/or price is attractive, the
Company may buy unentitled land upon completion of a feasibility analysis.  The
term "entitlements" refers to development agreements and/or tentative maps,
pursuant to which a developer has the right to obtain building permits upon
compliance with conditions which are usually within the developer's control.
Even if entitlements are obtained prior to the Company's purchase of the land,
however, the Company is still required to obtain a variety of governmental
approvals and permits during the development process.  The Company strives to
acquire land as economically as possible, and to negotiate land purchase
contracts which allow the Company to defer payment for parcels until it is ready
to begin construction.

     The Company selects its land for development based upon a variety of
additional factors, including: (i) internally and externally generated
demographic and marketing studies; (ii) soil and other physical conditions of
the site; (iii) financial and legal reviews as to the feasibility of the
proposed project, including projected profitability; (iv) the ability to secure
necessary financing and additional governmental approvals and entitlements; (v)
environmental due diligence; (vi) competition; (vii) proximity to local traffic
corridors and community facilities; (viii) infrastructure requirements for
grading, drainage, utilities and streets; and (ix) management's judgment as to
the real estate market, economic trends and the Company's experience in a
particular market.

     In some cases, the Company purchases finished lots which are ready for
construction.  In other instances, the Company purchases land or obtains an
option to purchase land that may require certain site improvements prior to
construction.  The Company then undertakes the development activities that
include site planning and engineering, as well as constructing roads, sewer,
water, utilities and drainage facilities and other amenities.  The activities
are carefully managed, with the phases geared to anticipated demand.

     The Company historically has conducted some residential development
activities through partnerships and limited liability companies in order to fund
a portion of the Company's land acquisition, model complex development costs and
initial marketing expenditures.  The Company expects to continue to utilize such
arrangements when management perceives a favorable opportunity.

     With respect to its landholdings, the Company maintains the flexibility to
sell parcels of land adjacent to existing phases of a project to other builders
in a single transaction or a series of transactions.  Sales of land and lots,
which are not the Company's principal business focus, are made to take advantage
of market opportunities that might exist from time to time or to generate needed
cash.  Accordingly, these sales vary from year to year depending on market
conditions.  Revenue from land sales totaled $2,342,000 in 1998 and $933,000 in
1997, respectively. Additionally, parcels of land owned by the Company and
adjacent to its residential projects may be zoned for commercial use. To date,
the Company has never built on commercial land, but may later sell, lease or
joint venture such land with commercial property developers.  See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Construction

     The Company strives to develop a design and marketing concept for each of
its housing subdivisions, which includes determination of size, style and price
range of the homes, layout of streets, layout of individual lots and overall
community design.  The product line offered in a particular subdivision depends
upon many factors, including the housing generally available in the area, the
needs of a particular market and the Company's cost of lots in the subdivision.

                                       6
<PAGE>

     The development, construction and closing of each project generally is
managed at the various stages by Company employees reporting to persons
responsible for the various disciplines.  Projects move through a series of
stages, departmentally organized, beginning with the entitlement process, if
applicable, and ending with the closing and post-closing stages.  The Company
believes this strategy, as opposed to assigning each project to a manager who is
responsible for all stages of development, is more efficient, providing for
standardized procedures, quality service and considerable cost savings.

     The Company utilizes what it considers to be a "manufacturer's approach" to
home construction, always seeking to increase production efficiency and position
itself to be among the lowest-cost producers in each of its markets. The Company
(i) generally adheres to strict construction schedules and standardized plans,
(ii) generally pre-sells a portion of its homes before commencing construction
of a phase of a project, and (iii) generally purchases land that has necessary
entitlements.  See "--Land Acquisition and Development."

     The Company acts as the general contractor for the construction of its
residential projects.  The Company's employees supervise the construction of
each project, coordinate the activities of subcontractors and suppliers, subject
subcontractors' work to quality and cost controls and assure compliance with
zoning and building codes, but do no actual construction.  The Company specifies
that high-quality, durable materials be used in the construction of its homes.
The Company's subcontractors follow design plans prepared by architects who are
retained by the Company and whose designs are geared to the local market.
Subcontractors typically are retained on a project-by-project basis to complete
construction at a fixed price.  Agreements with the Company's subcontractors are
generally entered into after competitive bidding.

     As a result of the limited amount of available working capital,
relationships with certain of its subcontractors have weakened due to the
Company's inability to pay all of its subcontractors and their suppliers on a
current basis.  Numerous subcontractors, suppliers and general creditors are
pursuing further legal action, including the initiation of lawsuits.  As of
December 31, 1998, nine of these claims, totaling approximately $565,000, have
been perfected as judgments against the Company.  The Company has or intends to
negotiate payment arrangements, as appropriate, in an effort to settle these
claims.  However, if the Company continues to have disputes with its
subcontractors and suppliers, in the future it may be difficult for the Company
to attract and retain qualified subcontractors and suppliers who are willing to
work with the Company and the Company's business could be adversely affected.

     Generally, the Company "pre-sells" (execution of a sales contract, receipt
of a deposit, and  generally an indication of the buyer's ability to qualify for
a mortgage) a portion of the homes to be built in a phase before construction in
that phase is commenced.  Construction lenders typically specify minimum pre-
sale requirements.  The Company attempts to minimize cancellations by requiring
a refundable cash deposit of approximately $500 to $2,500 and by training its
sales force to assess the qualification of potential homebuyers. See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

     The Company generally adheres to strict construction schedules and
standardized plans.  Construction time for the Company's homes depends on the
availability of labor, materials and supplies, product type and location, but
the Company historically has completed construction of a home within three to
six months from commencement.  Homes are designed to promote efficient use of
space and materials and to minimize construction costs and time.

     Materials used in the construction of the Company's homes are available
from a number of sources, but material prices may fluctuate due to various
factors, including demand or supply shortages.  Construction labor and materials
have generally been available to the Company.  Although there is presently an
adequate supply of labor and materials it is possible that future shortages of
skilled workers and/or materials may occur.  See "--The Homebuilding Industry."

     The Company generally provides a one-year limited warranty of workmanship
and materials with each of its homes.  In addition, California law provides a
ten-year period during which consumers can seek redress for structural defects
in new homes.  The Company reserves against the possibility of charges relating
to its one-year warranty.  In

                                       7
<PAGE>

1998, certain homeowners in three of the Company's Southern California projects,
which were completed from 1989 to 1995, filed complaints against the Company
alleging construction defects.  See "Item 3.  Legal Proceedings."

Marketing and Sales

     The Company seeks to develop marketing programs tailored to the specific
buyers and markets in which the Company operates.  The Company takes a consumer
product approach to marketing its homes, conducting product research and
developing buyer and visitor profiles on each project.  Techniques employed by
the Company include referral incentives, customer testimonials, direct mail, and
radio and print advertisements.

     The Company normally builds, decorates, furnishes and landscapes model
homes for each project and maintains on-site sales offices, which typically are
open seven days a week.  The Company believes that model homes and the selection
of interior designs play a particularly important role in the Company's
marketing efforts. Consequently, the Company expends a significant effort in
creating an attractive atmosphere at its model homes. Interior decorations vary
among the Company's models and are carefully selected based upon the lifestyles
of targeted buyers.

     The Company has renewed effort seeking to convince the homebuying shopper
that its product has superior features and livability.  The Company is now
offering new features such as dog care centers, bulk item storage rooms,
electrical outlets in the eaves for easy installation and operation of holiday
lighting, and a number of custom-added features in the master bathroom including
an undercounter refrigerator, coffee bar, thoughtfully designed make-up area and
a locked compartment in the medicine cabinet among a host of others.

     Structural changes in design from the Company's standard plans are not
generally permitted, but homebuyers may select various optional amenities.
Additionally, the Company has designed a number of homes offering an options
program that gives homebuyers numerous opportunities to customize the interior
design.  For example, these options may provide for the ability to tailor a room
according to a homebuyer's needs such as a third garage space, an extended
family room, or an additional den, bedroom or bonus room.

     The Company maintains a design center in Southern California to provide
homebuyers with a greater visual presentation of the available amenities and
options, primarily in the area of flooring and window treatments.  Most of the
Company's homebuyers that have upgraded their flooring and window treatments
have utilized the Company's design center.  The company intends to expand the
amenities offered by the design center to serve the growing number of consumers
who desire the ability to customize and upgrade their home.

     The Company sells its homes primarily through its internal sales force,
which typically work from the sales offices located at the model homes in each
of the Company's subdivisions.  The Company occasionally uses independent and
cooperative brokers.  Company personnel are available to assist prospective
buyers by providing them with floor plans, price information and tours of model
homes and by assisting them with the selection of options.  The Company's
selection of interior features is a principal component of its marketing and
sales efforts.  Sales personnel are trained by the Company and attend periodic
meetings to be updated on sales techniques, competitive products in the area,
the variety of financing programs available, construction schedules and
marketing and advertising plans, which management believes results in reduced
training costs and a more motivated sales force with extensive knowledge of the
Company's operating policies and housing products.

     Through a customer referral program, persons referring homebuyers to the
Company may receive $250 or more from the Company at the closing of a home sale.

     The Company has developed a savings program to assist homebuyers in saving
the money required to close the sale of their home.  Under the savings program,
the Company determines the monthly contribution required to be put into escrow
so that the homebuyer has sufficient money in escrow to close the purchase of
the home when it is completed.  The Company monitors the homebuyer's
contributions to escrow under the savings program.

                                       8
<PAGE>

Customer Financing

     The Company seeks to assist its homebuyers in obtaining financing by
arranging with independent mortgage lenders to offer qualified buyers a variety
of financing options and to process their loans.  When necessary, the Company
provides prospective homebuyers free credit counseling and pre-qualification to
determine the price of the home they are able to afford.

     Substantially all homebuyers utilize long-term mortgage financing to
purchase a home and lenders generally make loans only to borrowers who earn
three to four times the total amount of the mortgage payment plus insurance and
property taxes.  Therefore, adverse economic conditions such as increases in
unemployment and high mortgage interest rates can eliminate a substantial number
of potential homebuyers from the market.  When necessary, the Company will pay a
fee to subsidize interest rates to assist homebuyers with financing.  Under such
programs, lower interest rates on mortgages are provided to the Company's
homebuyers than would otherwise prevail under then-current market conditions.
However, because of improving economic conditions in the inland empire and
surrounding counties, the Company believes its potential home buyers may be less
in need of closing cost assistance and interest rate buydowns than they were in
the recent past. Although mortgage financing for qualified homebuyers was
readily available during 1998, there can be no assurance that mortgage financing
will remain readily available to the Company's customers as a result of changing
general economic conditions and any restrictions of the ability of mortgage
finance markets to provide financing for the purchase of homes by homebuyers.
The Company attempts to minimize its exposure to interest rate fluctuations by
purchasing mortgage financing commitments that lock in the availability of funds
and interest rates at specified levels for a certain period of time and by
entering into hedging contracts, as it deems necessary.  See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

     Most of the Company's current projects meet applicable Federal Housing
Administration ("FHA") or Veteran's Administration ("VA") requirements.  In 1998
and 1997, FHA or VA financing was provided to a substantial number of purchasers
of the Company's homes.  FHA and VA financing generally enables homebuyers to
purchase homes with lower down payments than the down payments required by
conventional mortgage lenders. The principal reason why certain of the Company's
projects may not meet applicable FHA or VA requirements is that the base price
of homes in those projects exceeds established FHA or VA maximum home prices.
The Company believes that the availability of FHA and VA financing broadens the
group of potential purchasers for the Company's homes. The VA financing limit is
$203,000.  The FHA financing limit is $179,050 in San Bernardino and Riverside
Counties, and $208,800 in Los Angeles County.  The FHA generally permits loans
for up to 97% of the value of the home.

     In general, housing demand is adversely affected by increases in interest
rates. If mortgage interest rates increase significantly, affecting prospective
buyers' ability to adequately finance home purchases, the Company's business,
financial condition and results of operations could be  materially effected.
The Company's homebuilding activities are dependent upon the availability and
cost of mortgage financing for (i) potential customers who purchase a home from
the Company, and (ii) buyers of homes owned by potential customers so they can
sell their existing homes and purchase new homes from the Company, to the extent
they are not first time buyers. In addition, the Company believes that the
availability of FHA or VA mortgage financing is an important factor in marketing
its homes. Any limitations or restrictions on the availability of such financing
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Customer Service and Relations

     The Company strongly believes that a high level of customer service is a
key component of its homebuilder strategy.  Salespeople are encouraged to
develop a personal relationship with the homebuyers and offer support and
guidance throughout the home buying process.  The Company periodically arranges
dinners for groups of homebuyers during which information is provided about the
home buying process.  Homebuyers are oriented to local shopping, hospitals,
industry, schools and recreation and are familiarized with the homebuyers
obligations in the loan and escrow procedures and the final home inspection
process.

                                       9
<PAGE>

     The Company provides each homebuyer with a Homebuyer's Information Booklet
describing area amenities and services, such as schools, health services and
emergency services.  The Booklet also contains voter registration cards, change
of address forms for the Department of Motor Vehicle and United States Postal
Service and a variety of other helpful moving tips.  A Warranty and Information
Guide identifies the subcontractors and vendors, appliances, fixtures and
heating/cooling and other systems installed in the house, and provides
information on warranties, maintenance and manufacturer information. The
Company's utilization of these sales and closing programs are designed to reduce
the prospective homebuyer's anxiety over relocating and to help the homebuyer
settle into the new neighborhood.

     Approximately sixty days after closing, every homebuyer is asked to
complete a questionnaire that evaluates all aspects of the buying experience,
including questions about the home itself, the salespeople, the escrow process,
mortgage financing assistance, the closing process and customer service.  The
Company uses the responses to identify any problem areas, as well as to evaluate
and improve the floor plans and amenities offered in the Company's projects.

     The Company believes that its commitment to customer service has earned the
Company substantial referrals and an excellent reputation among homebuyers.

Competition and Market Forces

     The development and sale of residential properties is highly competitive.
Homebuilders, such as the Company, compete for desirable properties, financing,
raw materials and skilled labor.  The Company competes for residential sales on
the basis of a number of interrelated factors, including location, reputation,
amenities, design, quality and price, with numerous large and small
homebuilders, including some homebuilders with nationwide operations and greater
financial resources than the Company.  The Company also competes for residential
sales with individual resales of existing homes and condominiums and with
available rental housing.  New entrants into the markets in which the Company
operates increases competition in those markets.

     The housing industry is cyclical and affected by consumer confidence levels
and prevailing economic conditions in general and by job availability and
interest rate levels in particular.  A variety of other factors affect the
housing 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.

Government Regulation and Environmental Matters

     The Company is subject to a variety of statutes and rules regulating
certain environmental  matters, as well as building design and site design.

     The Company generally purchases land with entitlements, giving it the right
to obtain building permits upon compliance with specified conditions which are
within the Company's control.  Upon compliance with such conditions, the Company
must seek building permits for each house.  In developing a project, the Company
must obtain the approval of numerous governmental authorities regulating such
matters as permitted land uses and levels of density and the installation of
utility services such as electricity, water and waste disposal.  The length of
time necessary to obtain permits and approvals increases the carrying costs of
unimproved property acquired for the purpose of development and construction.
Several governmental authorities in California have imposed fees as a means of
defraying the cost of providing certain governmental services to developing
areas.  To date, the governmental approval processes discussed above have not
had a material adverse effect on the Company's development activities.  In
addition, because the Company generally purchases land that has already been
zoned for residential development, restrictive zoning issues also have not had a
material adverse effect on the Company's development activities.  However, there
is no assurance that these and other restrictions will not adversely affect the
Company in the future.

                                       10
<PAGE>

     The Company may also be subject to additional costs or periodic delays or
may be precluded entirely from developing communities due to building
moratoriums or "slow-growth" or "no-growth" initiatives, building permit
allocation ordinances or similar governmental regulations that could be
implemented in the future in the areas in which it operates.  Because the
Company usually purchases land with entitlements, the moratoriums generally
would only adversely affect the Company if they arose from unforeseen health,
safety and welfare issues.  Local and state governments also have broad
discretion regarding the imposition of development fees for projects in their
jurisdiction.

     The Company is also subject to a variety of local, state and federal
statutes, ordinances, rules and regulations concerning protection of the
environment.  The particular environmental laws that apply to any given
community vary greatly according to the community site, the site's environmental
conditions and the present and former uses of the site. 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.  Homebuilding projects in California are especially susceptible to
restrictive government regulations and environmental laws. Environmental
regulations can also have an adverse impact on the availability and price of
certain raw materials such as lumber.

Bonds and Other Obligations

     The Company is frequently required, in connection with the development of
its projects, to post performance, maintenance and other bonds.  The amount of
these bonds outstanding at any time varies in accordance with the Company's
pending development activities.  In the event any such obligations are drawn
upon because of the Company's failure to build required infrastructure, the
Company would be obligated to reimburse the issuing surety company or bank.  The
Company has never defaulted on any such bond.  At December 31, 1998, there were
approximately $11,752,000 in outstanding bonds for such purposes.

Employees

     At December 31, 1998, the Company employed 57 persons. None of the
Company's employees are covered by collective bargaining agreements.  The
Company believes that its relations with its employees are good. Certain of the
subcontractors that the Company engages are represented by labor unions or are
subject to collective bargaining arrangements.

     The Company's success is highly dependent upon the performance of its
senior management and, in particular, Ira C. Norris, President of the Company.
The loss of key personnel or an inability to attract, retain and motivate key
personnel could have a material adverse effect on the Company's business.  Mr.
Norris intends to continue to devote his full time to the affairs of the
Company.

     At April 30, 1999, the Board of Directors and officers of our company
beneficially owned 29.8% of our outstanding common stock.  The ownership
positions of the members of management, together with the anti-takeover effect
of certain provisions contained in the Company's Restated Certificate of
Incorporation and Restated Bylaws, may have the effect of delaying, deferring or
preventing a change in control of the Company.  These factors could have an
adverse effect on the market price of the Company's Common Stock.

Recent Developments

     In April 1999, the company entered into an Agreement and Plan of Merger
("Merger Agreement') with American Communities, Inc., a Nevada corporation
("American"), a privately held Las Vegas builder of entry level and move up
single family homes.  Under the Merger Agreement, the two principals of American
were to receive shares of newly issued common stock of the Company in exchange
for all of the outstanding common stock of American.  In addition, the Merger
Agreement provided for representation on the Company's Board of Directors for
representatives of American and the provision of a line of credit or alternative
financing of at least $3 million by American which would be available to the
Company after the closing.  In June 1999, the Merger Agreement with American was
terminated prior to any of the proposed transactions being consummated.

                                       11
<PAGE>

ITEM 2. PROPERTIES.

     The Company occupies approximately 6,800 square feet of office space in
Upland, California, which it uses as its corporate headquarters.  This space is
leased at an annual rental of approximately $124,000 for a term expiring in
November 2002.  The Company is also renting, on a month-to-month basis,
approximately 1,400 square feet of office space in Southern California for its
design center operations.  The Company believes that in general its facilities
are sufficient to meet its needs for the next year.

ITEM 3. LEGAL PROCEEDINGS.

     Except as disclosed below, the Company is involved only in routine
litigation arising in the ordinary course of business.  Such matters, if decided
adversely to the Company, would not, in the opinion of management, have a
material adverse effect on the financial condition of the Company.  In addition,
from time to time, the Company could be involved in litigation in connection
with claims of development or construction defects, which matters, if decided
adversely to the Company, could have a material adverse effect on the financial
condition of the Company.

     In May 1994, the owners of 11 homes sold by the Company at its 200-home
Northfork project located in Murrieta, California filed a complaint against Inco
Development Corporation, a wholly-owned subsidiary of the Company ("Inco
Development"), in the Superior Court of California in Riverside County.  Through
October 1996, various owners of additional homes in this project filed separate
complaints.  All complaints were subsequently consolidated into one complaint
involving 40 homeowners.  The alleged damages related primarily to the
performance of the concrete slabs of the homes.  The matter was resolved in
mediation, which concluded on March 2, 1998, in the agreed upon amount of
$2,100,000.  Payments of the settlement amount will be shared by three of the
Company's primary insurance carriers, and by various subcontractors against whom
the Company had filed cross-complaints.  Settlement documents were signed in
April and May 1998, which included all necessary releases and dismissals of all
complaints.

     As a result of the limited amount of available working capital,
relationships with certain of its subcontractors have weakened due to the
Company's inability to pay all of its subcontractors and their suppliers on a
current basis. Numerous subcontractors and suppliers have filed liens, and some
are pursuing further legal action, including the initiation of lawsuits.  As of
December 31, 1998, nine of these claims, totaling approximately $565,000, have
been perfected as judgements against the Company.  The Company has negotiated
payment arrangements, as appropriate, in an effort to settle these claims and
release the liens.  However, if the Company continues to have disputes with its
subcontractors and suppliers, in the future it may be difficult for the Company
to attract and retain qualified subcontractors and suppliers who are willing to
work with the Company and the Company's business could be adversely affected.

Pending Litigation

     In September 1998, the owners of 30 homes sold by the Company at its 261-
home Spirit project located in Murrieta, California, which was completed in
1995, filed a complaint against Inco Homes Corporation in the Superior Court of
California in Riverside County.  In January 1999, the owners of 13 additional
homes filed a separate complaint.  These two complaints were consolidated into
one action.  The complaint alleges, among other things, defects in design and
material, negligence, strict liability and breach of implied warranty.  The
plaintiffs are seeking compensatory and special damages in an unspecified
amount, attorney fees and interest at the legal rate.

     In November 1998, the owners of 8 homes sold by the Company at its 200-home
Northfork project located in Murrieta, California, which was completed in 1992,
filed a complaint in the Superior Court of California in Riverside County.  The
complaint alleges, among other things, defective material and workmanship,
negligence, nuisance, strict liability, breach of express and implied warranty.
The plaintiffs are seeking general, special and punitive damages in an
unspecified amount, and attorney fees.

                                       12
<PAGE>

     In November 1998, the owners of 10 homes sold by the Company at its 185-
home Southlake at Sunnymead Ranch project located in Moreno Valley, California,
which was completed in 1989, filed a complaint against SMR Housing Development,
a wholly-owned subsidiary of the Company, in the Superior Court of California in
Riverside County.  The complaint alleges, among other things, construction
failures and deficiencies, negligence, strict liability and breach of express
and implied warranty.  The plaintiffs are seeking compensatory and special
damages in an unspecified amount, attorney fees and interest at the legal rate.

     In November 1998, the Company was notified of threatened litigation from
the owners of 3 homes sold by the Company at its 22-home Victory project located
in Las Vegas, Nevada, which was completed in 1995.  The correspondence alleges
construction failures and deficiencies and  requests compromise and settlement
discussions be initiated.

     The Company believes that the claims made against it are without merit and
has tendered all of these claims to its product liability insurers who have
accepted defense subject to reservation of rights..  The Company believes that
these claims will not have a material adverse effect on the Company's business.

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

     On November 10, 1998 a "Notice of Special Meeting of Stockholders To Be
Held on December 11, 1998" was sent to stockholders of record as of October 27,
1998.  At the special meeting, the following matters were voted upon:

(1)  A proposal to approve the issuance of a three-year warrant (the "Warrant")
to purchase up to an aggregate of 200,000 shares of Common Stock of the Company
to the Norris Living Trust (the "Norris Trust"), a principal stockholder of the
Company and a trust created by and for the benefit of the Company's Chairman of
the Board, President and Chief Executive officer and his family:

     Affirmative Votes:   1,221,565            Abstentions:      7,631
     Negative Votes:         11,938            Not Voted:      854,666


(2)  A proposal to approve the issuance of 32,970 shares of the Company's Common
Stock to certain of the Company's current and former directors as payment in
full for an aggregate of $90,000 in unpaid director fees owed by the Company to
such individuals:

     Affirmative Votes:   1,516,285            Abstentions:      7,730
     Negative Votes:         24,120            Not Voted:      547,665

(3)  A proposal to approve future issuances of shares of the Company's Common
Stock to the non-employee directors of the Company in lieu of paying each of
them $2,500 per quarter in director fees for the fourth quarter of 1998 and for
each of the fiscal quarters of 1999:

     Affirmative Votes:   1,516,553            Abstentions:      7,797
     Negative Votes:         23,785            Not Voted:      547,665

(4)  A proposal to approve an amendment to the Company's Certificate of
Incorporation reducing the total number of authorized shares of Common Stock
from 20,000,000 to 5,000,000:

     Affirmative Votes:   1,535,413            Abstentions:      6,284
     Negative Votes:          6,438            Not Voted:      547,665

                                       13
<PAGE>

                                    PART II

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

Price Range of Common Stock

     The Company's Common Stock was quoted on the Nasdaq SmallCap Market tier of
the Nasdaq Stock Market under the symbol INHM until April 21, 1999, at which
time the Company's Nasdaq trading symbol was changed to "INHME" to reflect the
Company's delinquency in filing this Form 10-KSB. Effective as of June 4, 1999,
the Company was delisted from its Small-Cap equity listing due to the delinquent
filing of this Form 10-KSB.  See "Pending Proceedings Regarding Nasdaq SmallCap
Listing."  The following table shows the high and low closing prices for the
Common Stock of the Company for the periods indicated, as reported by the Nasdaq
SmallCap Market.  These prices do not include retail markups, markdowns or
commissions.

<TABLE>
<CAPTION>
                                                       High        Low
                                                       ----        ---
<S>                                                   <C>        <C>
Quarter ended March 31, 1997.......................   $ 5.25     $  1.75
Quarter ended June 30, 1997........................    5.125       2.625
Quarter ended September 30, 1997...................     4.00        1.00
Quarter ended December 31, 1997....................     4.00        1.25
Quarter ended March 31, 1998.......................     3.25        2.00
Quarter ended June 30, 1998........................     5.50        2.75
Quarter ended September 30, 1998...................     4.50        2.00
Quarter ended December 31, 1998....................     3.00      2.0625
</TABLE>

     As of May 5, 1999, there were approximately 155 holders of record of the
Company's Common Stock, whose record ownership, management believes, was for
approximately 701 beneficial holders.

Pending Proceedings Regarding Nasdaq SmallCap Listing

     The Company's Common Stock has historically traded on the Nasdaq SmallCap
Market.  By letter dated April 20, 1999, the Company received notice from Nasdaq
stating Nasdaq's intention to delist the Company's Common Stock from the Nasdaq
SmallCap Market effective April 27, 1999 because of the Company's failure to
file this Form 10-KSB on a timely basis.  Effective as of April 21, 1999, the
Company's Nasdaq trading symbol was changed to "INHME" to reflect the Company's
delinquency in filing this form 10-KSB.  Before April 27, 1999, the Company
requested a hearing before a Nasdaq panel to demonstrate its ability to regain
compliance with the filing requirement, as well as its ability to sustain long
term compliance with all applicable maintenance criteria.  This hearing was held
on June 3, 1999 and the Company provided Nasdaq with a submission showing that
this Form 10-KSB would be filed shortly, as well as stating how the Company
intended to meet the Nasdaq standards for maintenance of the listing of the
Company's Common Stock on the Nasdaq SmallCap Market.  For continued listing on
the Nasdaq SmallCap Market, a company, among other criteria, must have at least
$2,000,000 of total net assets (or $35,000,000 of market capitalization or
$500,000 in net income in two of the last three years), 500,000 share in the
public float, a market value of its public float of $1,000,000 and a minimum bid
price of $1.00 per share.

     The Nasdaq Listing Qualifications Panel (the "Panel") determined that the
Company had failed to provide a definitive plan which would enable it to
evidence compliance with all requirements for continued listing on the SmallCap
Market and that, since this Form 10-KSB and the Form 10-Q for the quarter ended
March 31, 1999 had not been filed, the Panel was unable to evaluate the true
extent of the Company's compliance with Nasdaq's continued listing standards
without accurate, complete and publicly filed audited financial statements.  As
a result, the Panel delisted the Company's securities from the Nasdaq SmallCap
Market effective on June 4, 1999.  The Company has requested an appeal of this
ruling.  However, no assurances can be given that the Company will be successful
in its

                                       14
<PAGE>

appeal of Nasdaq's determination of the Company's noncompliance with the
SmallCap Market listing requirements or that the Common Stock will be quoted on
the Nasdaq SmallCap Market in the near future, if ever.  At this time trading,
if any, in the Company's Common Stock is conducted only in the over-the-counter
market in the so-called "pink sheets" published by the National Qualification
Bureau, or the OTC Bulletin Board of the National Association of Securities
Dealers, Inc.  A consequence of the delisting by Nasdaq is that a stockholder is
likely to find it more difficult to sell, or to obtain quotations as to the
price of, the Company's Common Stock

Dividends

     The Company has not declared or paid any cash dividends on its Common Stock
since its initial public offering in 1993.  The Company anticipates that any
earnings in the foreseeable future will be retained to help finance the
Company's business and does not anticipate paying cash dividends on its Common
Stock in the foreseeable future. The payment of any future dividends will be at
the discretion of the Company's Board of Directors and will depend upon, among
other things, future earnings, the success of the Company's business activities,
capital requirements, the general financial condition of the Company and general
business conditions.

Recent Sales of Unregistered Securities

     In December 1998, the Company sold an aggregate of 8,252 shares of Company
Common Stock to one of its consultants in satisfaction of indebtedness to them
in the amount of $25,000.

     The above-described sale of securities was not effected through any broker-
dealer, and no underwriting discounts or commissions were paid in connection
with such sale. Exemption from registration requirements is claimed under the
Securities Act of 1933 (the "Securities Act") in reliance on Section 4(2) of the
Securities Act and Regulation D promulgated thereunder. No brokers' commissions
or fees were paid in connection with the foregoing transaction. The recipient of
securities in such transaction represented that the company was an accredited
investor under Regulation D of the Act and their intention to acquire the
securities for investment only and not with a view to, or for sale in connection
with, any distribution thereof and appropriate legends were affixed to the
certificates evidencing the securities in such transactions. The recipient had
adequate access to information about the Company. No consideration or other
remuneration was paid or given, and no solicitation was made, in connection with
the conversion of the indebtedness involved in the sale.



                  [Remainder of page intentionally left blank]

                                       15
<PAGE>

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

     Except for historical information contained herein, the matters discussed
in this report contain forward-looking statements that involve risks and
uncertainties that could cause results to differ materially, including the land
valuation write-downs, changing market conditions, and other risks detailed in
this report.

OVERVIEW

     The Company's results of operations for the periods presented reflect the
cyclical nature of the homebuilding industry and the Company's historical focus
on the Southern California housing market.  The Company believes that the
depressed economic and real estate conditions in Southern California over the
last several years had adversely affected its results of operations, most
particularly in the high desert region of San Bernardino County.  The Company
now believes that the economy in the inland empire has improved significantly.
The Company has experienced improved sales in recent months, sales prices have
been increased and incentives offered to prospective purchasers have decreased.
Management hopes that the improved conditions will continue but there can be no
assurance that they will.

Results of Operations - 1998 vs. 1997

     The following discussion of financial condition and results of operations
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto, appearing elsewhere in this report.  Information concerning the
operations of the project built for a fee are limited to unit closings,
revenues, average sales price, backlog and net sales orders.  Project costs and
profitability of the fee project are the sole responsibility of the non-
affiliated owner of the project and are not discussed further.

     The following table sets forth, for the periods indicated, selected
information regarding home sales made for the years ended December 31, 1998 and
1997:

<TABLE>
<CAPTION>
                                                                           For Year Ended December 31,
                                                                           ---------------------------
                                                                              1998              1997
                                                                              ----              ----
     <S>                                                                 <C>                <C>
     Number of  Home Sales Closed:
      High Desert of San Bernardino and Los Angeles Counties                       82                100
      Inland San Bernardino and Riverside Counties                                 98                 57
                                                                         ------------       ------------
                    Subtotal, Owned Projects                                      180                157


     Project Built for a Fee (See Liquidity and Capital Resources)                 30                 --
                                                                         ------------       ------------
                    Total Combined Closings                                       210                157
                                                                         ============       ============

     Revenue from Home Sales:
      Owned Projects                                                      $26,320,000        $20,788,000
      Fee Income from Home Sales                                              579,000                 --
                                                                         ------------       ------------
                    Total Combined Revenue                                $26,899,000        $20,788,000

     Average Sales Price  of Owned Projects:                              $   146,200        $   132,400

     Gross Sales Generated from Fee Projects                              $ 3,345,000                 --

     Average Sales Price of Fee Projects                                  $   111,500                 --
</TABLE>


                                       16
<PAGE>

       The following table sets forth, for the periods indicated, consolidated
statements of operations data of the Company as a percentage of revenue from
home sales of Company owned projects:

<TABLE>
<CAPTION>
                                                                                  For Year Ended December 31,
                                                                                  ---------------------------
                                                                                  1998                    1997
                                                                                  ----                    ----
       <S>                                                                  <C>                     <C>
       Revenues from home sales                                                  100.0%                  100.0%
       Cost of homes sold                                                        (97.0%)                 (95.5%)
       Income from fee projects                                                    2.2                      --
       Profit/(Loss) from sale of land and lots                                    2.3%                   (0.8%)
                                                                            ------------            ------------
       Gross profit                                                                7.5%                    3.7%

       Provision for write-down of real estate                                    (4.3%)                 (44.6%)
       Selling expenses                                                           (5.8%)                  (7.5%)
       Marketing expenses                                                         (6.6%)                  (8.9%)
       General and administrative expenses                                        (8.7%)                  (7.6%)
                                                                            ------------            ------------
       Operating loss                                                            (17.9%)                 (64.9%)
                                                                            ============            ============
</TABLE>

Revenue from Home Sales, including the Fee Project

     Revenue from home sales in 1998 was $26,320,000, an increase of $5,532,000
from $20,788,000 during 1997.  The total number of home sales closed in 1998 was
180 at an average sales price of $146,200, compared to 157 home sales closed at
an average sales price of $132,400 in 1997, an increase of 14.6% in number of
home sales closed and a 10.4% increase in average sales prices.  Management
attributes the increase in revenue during the year ended December 31, 1998 to
the increase in the number of home sales closed and attributes the increased
average sales price to a change in the mix of homes offered for sale and sold.
The home sales from fee project jobs during 1998 was $3,345,000.  The total
number of sales closed was 30 at an average sales price of $111,500.  The
Company earned $579,000 in fees from these projects.

Revenue from Land and Lot Sales

     The Company has expanded its focus on generating cash flow by selling land
as an ongoing and important part of its operations. Such sales are made to take
advantage of market opportunities that might exist from time to time or to
generate needed cash.  Accordingly, these sales vary from year to year.

     In November 1998, the Company sold approximately 21 acres of undeveloped
land it owned in Murrieta, California to an unrelated party for $2,342,000, of
which $2,042,000 was paid in cash with the balance of $300,000 withheld in an
interest bearing account for the benefit of the Company.  This sum will be
released to the Company on or before November 1999 after deduction for certain
remedial costs which are estimated to be immaterial.

     In April 1997, the Company sold approximately 22 acres of undeveloped land
it owned in its Eagle Ranch project in the high desert of San Bernardino County.
The buyer was a local school district, which paid cash of $490,000 for the land.

     In June 1997, the Company sold to Overland Opportunity Fund, LLC
("Overland") approximately 13 acres of undeveloped land in Murrieta, California
for a price of $110,000, which was paid in cash.  Overland owned approximately
10.6% of the Company's outstanding Common Stock at March 25, 1998.  This
transaction was a result of arms-length negotiations between the parties, and
the Company believes the sales price represented the fair market value of the
property.

                                       17
<PAGE>

     In July 1997 the Company sold to an unrelated party seven improved lots
within its Spirit Corona project in Riverside County for a price of $333,200,
which was paid in cash.  Also in July 1997, this same buyer purchased 35
improved lots located within the Company's Spirit Corona project owned by Spirit
77, a non-consolidated partnership, for a price of $1.67 million, which was paid
in cash.  The Company received approximately $200,000 from Spirit 77 as a result
of this sale and the subsequent dissolution of the partnership.  See "Liquidity
and Capital Resources."

Cost of Homes Sold

     Cost of homes sold includes land acquisition, development, construction,
direct and indirect costs, job-site supervision, customer service, warranty
costs, capitalized interest, property taxes and other capitalized indirect
costs.

     Cost of homes sold during the year ended December 31, 1998 was $25,526,000,
an increase of $5,674,000, or 28.6%, from $19,852,000 during the year ended
December 31, 1997.  Cost of homes sold as a percentage of revenue from home
sales increased to 97.0% in the year ended December 31, 1998 from 95.5% in the
same period in 1997.  The increase in cost of homes sold as a percentage of
revenue for the year ended December 31, 1998 is primarily the result of the
write-off of previously capitalized costs due to the Company's reduction of
scope of one community in the high desert of San Bernardino County and one
community in Riverside County.  This increase is partially offset by the large
amount of closings occurring in one of the Company's newer, lower cost
subdivisions as well as in an existing lower cost subdivision.

     The Company believes that, since the prices of lumber, other building
materials and related services are subject to fluctuation, its gross margins in
future periods may be significantly affected by changes in prevailing prices.

     For a description of certain risks associated with the homebuilding
industry, see "Item 1. Business--The Homebuilding Industry."

Provision for Write-Down of Real Estate Assets

     Effective January 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 121 ("SFAS No. 121") "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which requires that impairment losses be recorded on long-lived assets that are
being developed based on their fair value, when (i) indicators of impairment are
present and (ii) the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount.  Assets that are held for sale
are to be carried at the lower of cost or fair value, less the estimated selling
costs.

     The estimation process in determining the value of real estate inventories
is inherently uncertain and relies to a considerable extent on current and
future economic and market conditions, the availability of suitable financing to
fund holding, development and construction activities, and the repayment or
refinancing of existing indebtedness. Such economic and market conditions may
affect management's development and marketing plans.  Accordingly, the ultimate
realization of the Company's real estate inventories is dependent upon future
events and conditions that may cause realizations to differ from amounts
presently estimated.

     At December 31, 1998, in accordance with the provisions of SFAS No. 121 an
impairment allowance was established for two projects as follows:

<TABLE>
       <S>                                                                                      <C>
       Sale to a third party of the remaining finished lots of the Company's Desert Pride
       project in Riverside County (as described herein)                                            $  974,000

       Remaining lots of the Company's Wildwood project in San Bernardino County (as
       described herein)                                                                               169,000
                                                                                                ---------------
                                                                                                    $1,143,000
                                                                                                ---------------
</TABLE>

                                       18
<PAGE>

     During the year ended December 31, 1997, the Company reevaluated its plans
for holding and developing several of its properties.  As a result of this
reevaluation, the Company reduced the number of lots it planned to develop in
certain projects, and identified other properties it plans to sell in their
current stage of development or deed back to lenders in satisfaction of the
loans securing the properties.  Additionally, the Company determined the
undiscounted cash flows estimated to be generated by various real estate
holdings were less than the assets' carrying amounts.  In accordance with the
provisions of SFAS No. 121, an impairment allowance, which writes these assets
down to fair value, was established totaling $9,270,000, consisting of the
following:

<TABLE>
       <S>                                                                                      <C>
       Sale of the Company's Eagle Ranch project in the high desert of San
        Bernardino County and related repurchase option (as described herein)                       $5,925,000

       Listing for sale of land formerly held for future development at the
        Company's Vista Verde project in the high desert of San Bernardino
        County                                                                                       2,288,000

       Decision not to proceed with the Company's Winners Circle
        project in the high desert of San Bernardino County (as described herein)                      806,000

       Sale to a third party of the remaining finished lots of the
        Company's Spirit Corona project in Riverside County (as described herein)                      251,000
                                                                                                ---------------
                                                                                                    $9,270,000
                                                                                                ===============
</TABLE>

Selling and Marketing Expenses

     Selling expenses include loan discount points, internal and third party
sales commissions, escrow fees, title insurance fees and other closing costs.

     Selling expenses were $1,539,000 and $1,552,000 for the years ended
December 31, 1998 and 1997, respectively, representing a 0.8% decrease.  This
decrease resulted primarily from improved market conditions which allowed the
Company to reduce selling budgets.  Selling expenses as a percentage of revenue
from home sales were 5.8% and 7.5% for the years ended December 31, 1998 and
1997, respectively.

     Marketing expenses include advertising and promotion and costs associated
with maintaining model homes and sales offices.  Marketing expenses in any given
period may be significantly influenced by the number of grand openings and the
number of projects that are being actively marketed during the period.
Marketing costs associated with items such as establishing the sales offices and
upgrading standard homes to model homes are capitalized when incurred and are
expensed as revenue is earned, while other marketing costs are expensed as
incurred.

     Marketing expenses were $1,724,000 and $1,859,000 for the years ended
December 31, 1998 and 1997, respectively, representing a 7.3% decrease.  As a
percentage of revenue from home sales, marketing expenses were 6.6% and 8.9% for
the years ended December 31, 1998 and 1997, respectively.  The decrease in
marketing costs for the year ended December 31, 1998 is primarily the result of
improved market conditions which allowed the Company to reduce market budgets.

     During 1998, the Company had grand openings for two new projects and was
delivering homes from ten active projects compared with two grand openings and
eight active projects in 1997.

General and Administrative Expenses

     General and administrative expenses include payroll and related benefits,
insurance, financial reporting costs, and general office expense.

                                       19
<PAGE>

     General and administrative expenses were $2,273,000 and $1,578,000 for the
years ended December 31, 1998 and 1997, respectively, an increase of $695,000 or
44.0%.  As a percentage of revenue from home sales, general and administrative
expenses were 8.7% and 7.6% for the years ended December 31, 1998 and 1997,
respectively.  The increase in general and administrative expenses is primarily
the result of the significant increase in sales volume and project activity in
1998.

Minority Partners' Share

     Minority partners' share represents the interests of the limited partners
of FERHP and Triumph.  These partnerships are consolidated in the Company's
financial statements.  See "Item 1. Business--Table II - Current and Planned
Projects, Notes (5) and (7)."

     The minority partners' share of losses was $66,000 and $331,000 for the
years ended December 31, 1998, and 1997, respectively.

Provision for Income Taxes

     At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of $32,341,000 that are available to offset future
federal taxable income.  Generally accepted accounting principles require that a
deferred tax asset be recognized for net operating loss carryforwards and
deductible temporary differences, and for management to reduce the deferred tax
asset by a valuation allowance to the extent that management believes that it is
more likely than not that some portion or all of the deferred tax asset will not
be realized.  As of December 31, 1997, the Company had recorded a gross deferred
tax asset of $11,198,000 and a valuation allowance of $8,998,000.  Management
believed that future taxable income would be sufficient to realize the tax
benefit reflected by the net deferred tax asset of $2.2 million.  The Company
continued to incur operating losses in 1998 in spite of improving residential
real estate market conditions, leading management to conclude that it is more
likely than not that the net deferred tax asset of $2.2 million will not be
realized.  Accordingly, management increased the valuation allowance to reduce
the net deferred tax asset to zero and has reflected this increase in the
valuation allowance, totaling $2.2 million, as the provision for income taxes
for the year ended December 31, 1998.

Backlog

  The Company's homes are offered for sale in advance of their construction.
Historically, the Company has entered into standard sales contracts for a
portion of the homes to be built in the phase of a project before construction
commences.  Such sales contracts are usually subject to contingencies such as
the buyer's ability to qualify for financing and/or the sale of an existing home
and thus may not be completed.  Homes covered by such sales contracts are
considered by the Company as its backlog.  The Company does not recognize
revenue on homes covered by such contracts until the escrows are closed and
title is transferred to the buyer.  The following table sets forth the Company's
backlog at the dates indicated:



                  [Remainder of page intentionally left blank]

                                       20
<PAGE>

<TABLE>
<CAPTION>
                                                                  December 31,
                                        ----------------------------------------------------------------
                                                    Backlog                        Gross Revenue
                                        ------------------------------    ------------------------------
                                             1998             1997             1998             1997
                                        -------------    -------------    -------------    -------------
     <S>                                <C>              <C>              <C>              <C>
     High Desert of San Bernardino
     and Los Angeles Counties                     25               22      $ 2,947,000       $3,110,000

     Inland San Bernardino and
     Riverside Counties                           52               21        7,549,000        2,968,000

     Projects Built for a Fee (See
     Liquidity and Capital  Resources)            22               --        2,481,000               --
                                        -------------    -------------    -------------    -------------
         Total Number of Homes                    99               43
                                        =============    =============

     Aggregate Sales Value                                                 $12,977,000       $6,078,000
                                                                          =============    =============

     Average Sales Price                                                   $   131,000       $  141,300
                                                                          =============    =============
</TABLE>

     The Company's backlog at any particular date is subject to substantial
variation and is dependent upon several factors including the number of homes
then available for sale, prevailing market conditions and the length of time
necessary to complete the closing of home sales subject to pending contracts.
The Company's backlog increased 130%, to 99 homes at December 31, 1998 from 43
homes at December 31, 1997 and management believes this was due to  the
strengthening market for single family homes in Southern California's inland
regions and the growing number of new home communities from which the Company is
selling.  The aggregate sales value of the units in backlog increased by
$6,899,000 or 114%, primarily due to the increase in number of homes under sales
contracts.  The average sales price of homes in backlog decreased by $9,700 or
6.9% due to a change in the mix of homes offered for sale.  Included in the
"Aggregate Sales Value" of the backlog is the value of the homes which are being
built for a fee and only the fee will represent revenue that will eventually be
recognized in the Company operating statement.  No assurances can be given that
homes in backlog will result in actual closings because cancellations vary from
period to period.

Net Orders

     Net orders, including the fee projects, represents the number of homes for
which the Company has received signed sales contracts and purchase deposits
during the period, net of cancellations.

     During 1998, the Company had received 266 net orders, of which 85 were in
the high desert of San Bernardino and Los Angeles Counties and 181 were in
inland San Bernardino and Riverside Counties. This compares to 118 net orders in
1997, of which 70 were in the high desert of San Bernardino and Los Angeles
Counties and 48 were in inland San Bernardino and Riverside Counties, an overall
increase of 125%.

     The increase in net orders received for the year ended December 31, 1998 is
attributable to intensive new marketing programs, innovative product offered by
the company including Smart Architecture and Meter Miser features, our ability
to access $0 down financing for our customers and improved market conditions in
certain of the geographic areas of Southern California in which the Company
conducts operations.

Variability in Quarterly Results

     The Company has experienced, and expects to continue to experience,
significant variability in its operating results.  This variability may cause
the Company's overall results of operations to fluctuate significantly on a
period-to-period basis, and revenues anticipated to occur in a fiscal period may
not be earned until subsequent fiscal periods. Many factors contribute to this
variability, including: (i) the timing and mix of home deliveries; (ii) the
Company's ability to continue to acquire additional land on favorable terms for
future developments; (iii) the condition of the real estate markets and the
economy in general; (iv) the cyclical nature of the home building industry and
changes in

                                       21
<PAGE>

prevailing interest rates; (v) cost and availability of materials and labor; and
(vi) delays in construction schedules caused by timing of inspections and
approvals by regulatory agencies, strikes at subcontractors and adverse weather
conditions.  The Company's historical financial results are not necessarily a
meaningful indicator of future results and, in general, the Company expects its
financial results to vary from project to project. The Company's revenue and net
income may also vary substantially as a result of variations in the number of
projects at which the Company is closing the sale of homes at any one time.

Inflation

     The Company, as well as the homebuilding industry in general, may be
adversely affected during periods of high inflation, primarily because of higher
land acquisition, land development, construction and interest costs. In
addition, higher interest rates may significantly affect the affordability of
permanent mortgage financing to prospective purchasers and the cost of financing
the Company's land acquisition, development of real estate and construction of
homes. The Company attempts to pass any increases in its costs due to inflation
to its buyers through increased selling prices of its homes.  However, there is
no assurance that inflation will not have a material adverse impact on the
Company's future results of operations.

Adoption of Accounting Standards

     Management believes there are no new accounting pronouncements that could
have a significant effect on the Company's financial statements for any period
presented.

Year 2000 Issue

     The Year 2000 ("Y2K") issue is a general term used to describe the
complications that may arise from the use of existing computer hardware and
software designed by applicable manufacturers without consideration for the
upcoming change in the century.  If not corrected, software programs with this
embedded problem may cause computer systems to fail or to miscalculate data.

     With respect to the Y2K issue, the Company has undertaken a project to
replace and/or convert portions of its existing computer operating systems to
ensure they will function properly with respect to dates in the year 2000 and
thereafter.  The Company has also formed a Y2K project team to direct the
company-wide efforts to ensure Y2K compliance.  The Y2K project team is
responsible to assure proper planning, sufficient resources, contemporaneous
monitoring, proper certification and timely completion of the year 2000
projects.  The Company's Y2K project encompass its information technology
systems as well as its non-information technology systems, such as systems
embedded in its office equipment and facilities.

State of Y2K Readiness

     The scope of the Company's Y2K compliance effort has been defined to
include six distinct projects.  Two of the six projects address areas of
greatest business risk and require the greatest technical effort and, therefore,
have been given the highest priority.  These two high priority projects are the
conversion and upgrade of the Company's accounting information systems and the
upgrade of the Company's primary computer network and personal computers. Of
these two high priority projects, as of June 30, 1999, the accounting
information systems conversion has been implemented, the Company replaced all of
its older personal computers with current models and the upgrade of the
Company's primary computer network file server will be remediated by August 1,
1999.

     The remaining four projects that comprise the balance of the Company's Y2K
compliance effort present a lower business risk and require less technical
effort to complete.  These projects are identified as follows: upgrade of the
Company's telephone and voice mail systems; certification of Y2K readiness or
upgrade of the Company's fax machines, copiers, miscellaneous equipment and
office facilities; and verification that material third-party suppliers to the
Company are Y2K compliant.  These three projects are in various stages of
assessment and/or remediation. The

                                       22
<PAGE>

sixth project is comprised of the Company's contingency plan in the event
problems are encountered as the year 2000 begins. This project is in the
assessment stage and is expected to be completed by September 30, 1999.

     As noted, two of the six projects that comprise the Company's Y2K
compliance effort involve verification that the third parties with which the
Company has a material relationship are Y2K compliant.  The Company is currently
in various stages of assessment with respect to these third-party verification
projects.  As part of these projects, the Company's relationships with
suppliers, subcontractors, financial institutions and other third parties are
being examined to determine the status of their Y2K issue efforts as related to
the Company's operations.  As a general matter, the Company is vulnerable to its
suppliers' inability to remedy their own Y2K issues.  Furthermore, the Company
relies on financial institutions, government agencies (particularly for FHA/VA
financing, zoning, building permits and related matters), utility companies,
telecommunication service companies and other service providers outside of its
control. There is no assurance that such third parties will not suffer a Y2K
business disruption and it is conceivable that such failures could, in turn,
have a material adverse effect on the Company's liquidity, financial condition
or results of operations.

Costs of Addressing Y2K Issues

     The total cost of all of the Company's projects associated with its Y2K
plan is currently estimated to be approximately $50,000; however, some projects
mentioned above involve conversions and upgrades that were not solely
necessitated to meet Y2K concerns and would have been undertaken regardless of
Y2K exposure.  It is not possible to determine the portion of that amount which
is specifically attributable to Y2K compliance efforts.  The Company believes
that the total costs incurred to specifically address the Y2K issue will not
have a material impact on the Company's liquidity, financial condition or
results of operations, for any year in the reasonably foreseeable future. The
schedule for the successful completion of the Company's Y2K project and the
estimated costs are based upon certain assumptions by management regarding
future events, including the continued availability of qualified resources to
implement the project and the costs of such resources.

Risks Presented by Y2K Issues

     The Company's failure to resolve a material Y2K issue could result in the
interruption in, or failure of, certain normal business activities or
operations.  Such failures could materially and adversely affect the Company's
results of operations.  Although the Company considers its exposure to the Y2K
issue risks from third-party suppliers as generally low, due to the uncertainty
of the Y2K readiness of third party suppliers, the Company is unable to
determine at this time the consequences of a Y2K failure.  In addition, the
Company could be materially impacted by the widespread economic or financial
market disruption by Y2K computer system failures at government agencies on
which the Company is dependent for lending, zoning, building permits and related
matters.  Possible risks of Y2K failure could include, among other things,
delays or errors with respect to payments, third-party delivery of materials and
government approvals.  The Company's Y2K project is expected to significantly
reduce the Company's level of uncertainty and exposure to the Y2K issue and, in
particular, its vulnerability to the Y2K compliance of material third parties.
To date, the Company has not identified any operating systems, either of its own
or of a third-party supplier, that present a material risk of not being Y2K
ready or for which a suitable alternative cannot be implemented.

Contingency Plan

     The Company's Y2K project calls for a Y2K-specific contingency plan to be
developed.  This plan is in the assessment stage and is expected to be completed
by September 30, 1999.

     Management currently anticipates that its operating systems will be Y2K
compliant well before January 1, 2000, and that its third party verification and
overall contingency plans should enable it to mitigate third-party disruptions
to its business which are of short duration or geographically localized.  At the
present time, management believes that the Y2K issue will not have a material
adverse effect on the Company's liquidity, financial condition or results of
operations.

                                       23
<PAGE>

Liquidity and Capital Resources

     The homebuilding industry is capital intensive and often involves high
leverage and significant up-front expenditures to acquire land and begin
development. Accordingly, the Company incurs substantial indebtedness to finance
its homebuilding activities and its business and earnings are substantially
dependent on its ability to obtain bank or other debt financing on acceptable
terms The Company plans for substantial future expenditures relating to the
acquisition and construction of new projects, as well as the continued
construction of existing, ongoing projects.

     As a result of the limited amount of the Company's available working
capital, relationships with certain of its subcontractors have weakened due to
the Company's inability to pay all of its subcontractors and their suppliers on
a current basis. Numerous subcontractors, suppliers and general creditors are
pursuing further legal action, including the initiation of lawsuits. As of
December 31, 1998, nine of these claims, totaling approximately $565,000, have
been perfected as judgments against the Company. The Company has or intends to
negotiate payment arrangements, as appropriate, in an effort to settle these
claims. However, if the Company continues to have disputes with its
subcontractors and suppliers, in the future it may be difficult for the Company
to attract and retain qualified subcontractors and suppliers who are willing to
work with the Company and the Company's business could be adversely affected.

     In April 1999, the Company entered into the Merger Agreement with American.
From April through early June, the Company devoted significant time and
resources to this proposed transaction which, in addition to the merger with
American, included a requirement that American obtain a $3 million line of
credit or alternative financing which would be available to the Company after
the closing. The Company expected that this financing would be available to it
to address its short and long-term working capital needs. However, the proposed
transactions with American were terminated in June 1999 and the Company has been
forced to seek financing from alternative sources.

     The Company has incurred net operating losses which have significantly
impacted its working capital levels and its ability to pay its obligations.
Management's current business plan reflects that, in addition to future profits,
sales of real estate inventories provide cash flow to the Company to help meet
operating requirements. During 1999, the Company will also need to extend the
maturity dates of certain notes payable and to raise capital for acquisitions of
additional land for future projects and working capital needs. Management's
plans and anticipated results are dependent on future events and economic market
conditions which are inherently uncertain. No assurances can be given that
anticipated cash flows from operations and the Company's ability to borrow from
various sources will be sufficient to fund all of its planned expenditures. In
its efforts to seek funding for working capital shortfalls and to reduce old
payables, as well as to finance the acquisition of additional land for the
delivery of future homes, the Company is discussing with various sources of
capital their investing additional funds in the Company. No material agreements
between the Company and these potential sources of capital have been signed, and
no assurances can be given whether or when the Company may enter into an
agreement with any source or, if entered into, what the precise terms of the
agreement will be.

     If the Company is not successful in obtaining sufficient capital to fund
its planned expenditures, the Company's ability to continue its current level of
business operations will be impaired, and the Company will not be able to
conduct operations as presently anticipated.  This would ""have a material
adverse effect on the Company's business, financial condition and results of
operations.  Historically, the Company has financed its operations from a
combination of limited partner capital contributions, subordinated debt, cash
generated from operations, purchase money financing of land purchases,
borrowings from various banking institutions, borrowings from related parties,
deferring accounts payable and sales of its capital stock, as discussed in more
detail below.  The Company is currently also exploring alternative methods of
financing.  Management believes that existing cash and capital resources,
including cash flow from operations, will be insufficient to fund the Company's
cash requirements at the Company's presently anticipated level of operations
without additional funds from outside sources.  No assurances can be given that
any funds will be available from such financial sources, or that they will be
available on terms favorable to the Company.  If adequate funds are not
available from those other sources, there are substantial doubts about the
Company's ability to continue as a going concern and fund its ongoing
operations.

                                       24
<PAGE>

     In February 1999, the Company concluded a private offering (the "Offering")
of Subordinated Investment Notes ("Investment Notes') bearing interest at the
rate of 15% per annum. The Investment Notes have an 18 month maturity date and
no prepayment penalty. The face value of each Investment Note is $10,000. As of
December 31, 1998, total outstanding bond indebtedness related to this offering
was $290,000.

     The Investment Notes have not been, and will not be, registered under the
Securities Act of 1933 and may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements of
the Securities Act of 1933.

     Thomas A. Hantges, a director and stockholder of the Company, owns
approximately 67% of both USA Commercial Mortgage Company ("USA") and USA
Commercial Real Estate Group ("USA Real Estate").  USA has provided loans and
arranged for individual lenders to provide loans to the Company secured by
Company projects in cumulative amounts totaling $13,650,000 and $12,120,000 for
the years ended December 31, 1998 and 1997, respectively.  USA has earned
cumulative fees for these loans for the years ended December 31, 1998 and 1997
totaling $1,118,000 and $1,087,000, respectively, of which $909,000 and
$878,000, respectively, has been paid.  The balance is secured by notes and is
to be paid from proceeds from sales of completed homes in certain of the
Company's projects.  The interest rates on these loans range from 12.25% to
15.25%  in 1998 and from 12.25% to 20.25% in 1997.  The outstanding balance of
these loans at December 31, 1998 and 1997 was $5,397,700 and $6,922,000,
respectively.

     In June 1997, USA Real Estate arranged for an additional group of investors
to purchase the Company's Eagle Ranch project in the high desert for $2,400,000.
Funds from this sale helped the Company repay portions of matured loans secured
by this project with a commercial bank.  The investors granted the Company a
six-year option to periodically repurchase portions of the property, subject to
annual minimum repurchase thresholds, for the development of single-family
homes.  If the Company failed to repurchase the minimum number of lots in any
year, the option would terminate.   Because of an election by the Company not to
acquire any lots under this option agreement and the failure to pay the
prerequisite real estate taxes, the Company was notified that its rights to
acquire these lots had been terminated.

     From September 1996 through November 30, 1997, the Company received
advances of $2,747,000 from Ira C. Norris, of which the Company had repaid
$460,000.  The advances were unsecured, bore interest at 10% and were due on
March 31, 1998.  The balance of these advances at December 23, 1997 was
$2,462,000, which included accrued interest of $171,000.  On that date, Mr.
Norris agreed to convert $2,340,000 of this debt into 2,340 shares of Series A
Cumulative Preferred Stock of the Company.  The Company issued these shares on
December 30, 1997 to the Norris Living Trust, of which Mr. Norris is a
beneficiary and trustee.  The Series A Preferred Stock has a par value of $0.01,
has no voting rights, is non-participating, and has no conversion features. The
stock is redeemable at the option of the Company for cash at the redemption
price of $1,000 per share plus accumulated but unpaid dividends. The established
dividend rate on the Preferred Stock is $100 per share per annum payable
quarterly from available working capital.  An unsecured note to the Norris
Living Trust, bearing interest at 10%, evidences the balance of indebtedness not
converted in the amount of approximately $122,000.  The note was due in December
1998 and has been extended until December 23, 1999.  The balance owing under
this note at December 31, 1998 was $134,035, which includes accrued interest of
approximately $12,035.

     In addition to the loans described above, in June 1997, the Norris Living
Trust loaned the Company $500,000 secured by undeveloped land owned by the
Company in Victorville and Palmdale, California.  This note bears interest at
10%, was due in June 1998 and has been extended until June 1999.  The balance
owing under this note at December 31, 1998 was $575,815, which includes accrued
interest of approximately $75,815.

     On December 2, 1998, the Norris Living Trust advanced $40,000 to the
Company to be repaid within 12 months at an interest rate of 10.0% per annum.
In addition, on December 4, 1998, the Norris Living Trust advanced an additional
$285,000 at an interest rate of 10.0% per annum to the Company in connection
with the closing of a $16.5 million construction loan on the Company's
Mockingbird Canyon Estates project.  The note is for a 12-month

                                       25
<PAGE>

period, with an interest rate of 10.0% per annum, which will accrue and be due
along with the principal on December 2, 1999. Subsequent to December 31, 1998,
the Norris Living Trust advanced an additional $200,000 to the Company to be
repaid within 12 months at an interest rate of 10.0% per annum. The Company has
pledged a security interest in its Mockingbird Canyon Estates project to the
Norris Living Trust as security for the repayment of the notes.

     Additionally, on December 11, 1998, the stockholders of the Company
approved the issuance of a three year warrant to purchase 200,000 shares of
Common Stock, at the purchase price of $2.625 per share, to Ira C. Norris in
connection with the extension of a $1,000,000 non-revolving line of credit made
by Mr. Norris on July 15, 1998 through the living trust he created for the
benefit of himself and his family (the "Norris Living Trust") to the Company's
wholly owned subsidiary Huntington Homes LLC.  The $1,000,000 non-revolving line
of credit bears interest at a variable interest rate, of which the initial
interest rate was 10.0% per annum.  The note securing the line of credit is due
and payable in full by July 2, 1999.  At December 31, 1998, the accrued interest
under the note was $2,275.

     In June 1997, the Company signed a note and deed of trust in connection
with a loan of $500,000 from the Neeley Revocable Family Trust.  Ronald L.
Neeley, a director of the Company, is a beneficiary and trustee of this trust.
The note bears interest at 15%, was due in June 1998 and has been extended until
June 1999, and is secured by the same undeveloped land owned by the Company in
Victorville and Palmdale, California which secures the Norris Living Trust loan
of $500,000 mentioned above.  The balance owing under this note at December 31,
1998 was $614,000, which includes accrued interest of approximately $114,000.

     All of the above transactions with Mr. Norris and the Company's other
directors were unanimously approved by the disinterested members of the
Company's board of directors.

     In October 1997, the Company entered into a Development and Marketing
Agreement with a third party to develop, construct, and market 139 lots owned by
the third party in Moreno Valley, California.  Under this agreement, i) all
financing and bonding is the responsibility of the third party; ii) the Company
is to receive compensation in the form of development fees and design center
profits totaling approximately 8.0% of the gross sales price of the homes; and
iii) the Company is to assume the home warranty costs for which it will be paid
$750 per house.

     Subsequent to December 31, 1998, the Company entered into three Development
and Marketing Agreements with three entities affiliated with the Overland Group
and Mr. Fred Liao, to develop, construct, and market 79 lots owned by the one
entity in Palmdale, California and 56 and 29 lots owned by two other entities in
Rancho Cucamonga, California.  Under these agreements, i) all financing and
bonding is the responsibility of each entity; ii) the Company will receive
compensation in the form of development fees and sales commissions totaling
approximately 4.0% of the gross sales price of the homes; iii) the Company will
receive all profits generated from buyer upgrades via the design center and iv)
all home warranty costs are to be borne by each entity.  The Overland Group and
Mr. Liao are affiliates of Overland Opportunity Fund, LLC ("Overland"), which
owned 9.1% of the Company's outstanding Common Stock at April 30, 1999.  The
Company often acquires land with an initial down payment, with the balance
financed by seller non-recourse notes.  The notes typically include partial
reconveyance provisions, which allow the Company to obtain the necessary
development financing on a phased basis.  The Company also occasionally uses
options to acquire property. At December 31, 1998, the Company had land seller
indebtedness outstanding of $1,325,000.

     The Company typically obtains its infrastructure, development and
construction funding and various other land loans from commercial banks and
other financing sources.  Lenders generally provide interim construction loans
for each phase of homes within the project for a term of up to 12 months, with
extension provisions.  The development loans typically are repaid with proceeds
from these interim construction loans.  The loan agreements include customary
representations and covenants.  All outstanding indebtedness under these
facilities is secured by a lien on the project real property.  At December 31,
1998, aggregate borrowings of $40,653,000 were outstanding under these
facilities and $19,809,000 was available for further qualified project finance
borrowing.  Interest rates on these loans range from 7.65% to 15.25%, with the
weighted average being 11.53%.

                                       26
<PAGE>

     The Company has unsecured revolving lines of credit of $1,000,000 and
$250,000 with commercial banks that bear interest at the prime rate plus 1.0%
and prime rate plus 2.0%. The net outstanding balance under these lines of
credit at December 31, 1998 was $768,000. With regard to the $1,000,000 line of
credit, at the time a homebuyer enters into a sales contract with the Company,
meets certain loan pre-qualification requirements with a third party mortgage
lender, and opens an escrow, the bank advances funds to the Company under this
line at an amount equal to 70% of the net cash proceeds estimated by the Company
that it would receive at the close of the homebuyer's escrow. The Company repays
the lender weekly from net escrow closing proceeds. With regard to the $250,000
credit line, the Company submits a loan request for project costs incurred prior
to obtaining a construction loan. The line is repaid when the construction loan
records. The Company is reimbursed for the project costs previously paid.

     In December 1997, the Company restructured a secured line of credit with an
outstanding principal balance of $2,891,000 from a commercial bank, which had
become due. Pursuant to a series of agreements, the bank's note was purchased
for $1,750,000 by a group of lenders ("new lender") provided by USA. The bank
forgave accrued interest of $92,000 and canceled its rights under a warrant to
purchase 41,667 shares of the Company's Common Stock that was issued to the bank
pursuant to an agreement made in June 1996 extending and modifying the line of
credit. The resulting obligation of the Company to the new lender is $2,350,000,
which includes the $1,750,000 paid to the bank, fees earned by USA, an interest
reserve and a payoff made by the new lender to an unrelated commercial bank of
another loan to the Company. The loan is secured by undeveloped land owed by the
Company in Victorville and Palmdale, California and by an assignment of the
Company's rights under the Eagle Ranch repurchase option agreement previously
described. Since the land in Palmdale was owned by Palmdale Vistas Housing
Developments, Ltd. ("Palmdale Vistas"), in which the Company was the managing
general partner and had a 51.3% interest, the new lender required the
dissolution of Palmdale Vistas pursuant to an Agreement signed by the partners
of Palmdale Vistas. The limited partners of Palmdale Vistas, which include a
former director of the Company (see "Item 7. Financial Statements and
Supplementary Data, Note 6" herein), received title to a 17 acre undeveloped
commercial site owned by Palmdale Vistas. The Company, as general partner of
Palmdale Vistas, received title to the balance of the partnership assets
consisting of three completed model homes, 11 completed homes for sale, and
approximately 180 unimproved residential lots. Additionally, the Company has
agreed to repay the bank the $1,141,000 principal amount not paid by the new
lender when it purchased the bank's note. This payment is unsecured, non-
interest bearing and payable from 15% of profits earned annually by the Company
commencing with the fiscal year ending December 31, 1999. Certain non-
operational changes in the Company's net worth in excess of $3,500,000 and
certain changes in control of the Company will also require additional payments
to the bank.

     In February 1997, the Company obtained new financing from both USA and
another third party lender, providing a total of $2,336,000. Pursuant to an
Agreement with a commercial bank, this amount was accepted as payment in full on
matured loans with balances totaling $2,822,000, secured by one of the Company's
projects in Riverside County. Additionally, in June 1997, pursuant to a separate
Agreement with this same commercial bank, $2,647,000 was accepted as payment in
full on matured loans with balances totaling $3,494,000 secured by the Company's
Eagle Ranch project in the high desert of San Bernardino County. The Company
repaid the bank from the following sources: (i) the sale in June 1997,
previously described, of the majority of the Eagle Ranch project for $2,400,000
to a group of investors provided by USA Real Estate, (ii) a new loan from a
third party lender in the amount of $580,000 and (iii) other Company funds.

     The availability of borrowed funds for homebuilders, especially for land
acquisition and construction financing is variable, and at times has been
severely restricted and in some cases eliminated entirely. Currently such
financings are generally available, but some lenders have been requiring
borrowers to invest increased amounts of equity in a project in connection with
both new loans and the extension of existing loans.

                                       27
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                  Page
                                                                                                  ----
<S>                                                                                               <C>
Report of Independent Accountants...............................................................   F-2

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

Consolidated Statements of Operations for the years ended December 31, 1998 and 1997............   F-4

Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998 and 1997..   F-5

Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997............   F-6

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

                                      F-1
<PAGE>

                       Report of Independent Accountants


To the Board of Directors and Shareholders of
Inco Homes Corporation

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Inco Homes
Corporation at December 31, 1998 and 1997 and the results of their operations
and their cash flows for the years ended in conformity with generally accepted
accounting principles.  These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits.  We conducted our audits of these
statements in accordance with generally accepted auditing standards 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 audits provide a
reasonable basis for the opinion expressed above.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
which have negatively impacted cash flow and its abilities to pay its
obligations that raise substantial doubt about its ability to continue as a
going concern.  Management's plans in regard to these matters are also described
in Note 2.  The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.



PRICEWATERHOUSECOOPERS LLP

Newport Beach, California
June 8, 1999

                                      F-2
<PAGE>
INCO HOMES CORPORATION
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

(Dollars in thousands, except share data)                                                 December 31,            December 31,
                                                                                  ------------------------------------------------
                                                                                             1998                    1997
                                                                                             ----                    ----
<S>                                                                               <C>                         <C>
ASSETS

Cash                                                                              $                712        $               736
Real estate inventories                                                                         30,238                     27,329
Deferred tax asset                                                                                                          2,200
Other assets                                                                                     1,056                        669
                                                                                  ---------------------       --------------------

        Total assets                                                              $             32,006        $            30,934
                                                                                  =====================       ====================

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable and accrued liabilities                                          $              7,500        $             5,580
Notes payable                                                                                   23,044                     19,202
Line of credit                                                                                     768                        330
Notes to stockholders                                                                            2,649                      1,187
                                                                                  ---------------------       --------------------

        Total liabilities                                                         $             33,961        $            26,299
                                                                                  =====================       ====================


Minority partners' investment in consolidated partnerships                                         254                        545

Stockholders' Equity
     Preferred stock - $.01 par value; 1,000,000 shares authorized; 2,340 shares
         issued and outstanding
         for 1998 and 1997                                                                       2,340                      2,340
     Common stock - $.01 par value; 20,000,000 shares
         authorized;  2,104,052 and 1,637,096 shares issued
         and outstanding for 1998 and 1997                                                          21                         16
     Additional paid in capital                                                                 43,301                     42,876
     Deficit                                                                                   (47,871)                   (41,142)
                                                                                  ---------------------       --------------------

        Total stockholders' equity                                                              (2,209)                     4,090
                                                                                  ---------------------       --------------------

        Total liabilities and stockholders' equity                                $             32,006        $            30,934
                                                                                  =====================       ====================
</TABLE>

See accompanying notes to financial statements

                                      F-3

<PAGE>

INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

<TABLE>
<CAPTION>
                                                                      For the Twelve Months Ended
(Dollars in thousands, except per share data)                                  December 31,
                                                                    --------------------------------
                                                                       1998                 1997
                                                                       ----                 ----
<S>                                                                 <C>                  <C>
Revenue from home sales                                             $   26,320           $   20,788
Revenue from fee projects                                           $      579
Revenue from land and lot sales                                          2,342                  933
                                                                    ----------           ----------
                                                                        29,241               21,721
                                                                    ----------           ----------

Cost of homes sold                                                      25,526               19,852
Cost of land and lots                                                    1,736                1,094
                                                                    ----------           ----------
                                                                        27,262               20,946
                                                                    ----------           ----------

       Gross profit                                                      1,979                  775
                                                                    ----------           ----------


Provision for write-down of real estate                                  1,143                9,270
Selling and marketing expenses                                           3,263                3,411
General and administrative expenses                                      2,273                1,578
                                                                    ----------           ----------

                                                                         6,679               14,259
                                                                    ----------           ----------

       Operating loss                                                   (4,700)             (13,484)

Other income                                                               173                   79
                                                                    ----------           ----------

       Loss before minority partners' share
           and provision for income taxes                               (4,527)             (13,405)
                                                                             -                    -
Minority partners' share                                                   (66)                (331)
                                                                    ----------           ----------

Loss before provision for income tax                                    (4,461)             (13,074)

Provision for income tax                                                (2,200)                   -
                                                                    ----------           ----------

      Loss before extraordinary item                                    (6,661)             (13,074)

Extraordinary item                                                         (68)               1,425
                                                                    ----------           ----------

      Net loss                                                      $  (6,729)           $ (11,649)
Cumulative preferred stock requirement                                    (234)                   -
                                                                    ----------           ----------

Net loss available to common stockholders                               (6,963)             (11,649)
                                                                    ==========           ==========

Basic and diluted net loss per common share
      Loss before extraordinary item                                   $(3.48)              $(8.03)
      Extraordinary items                                               (0.03)                0.88
                                                                    ----------           ----------
     Net loss per common share                                         $(3.51)              $(7.15)
                                                                    ==========           ==========

Weighted average number of common shares
       outstanding                                                   1,983,371            1,628,694
                                                                    ==========           ==========
</TABLE>

See accompanying notes to financial statements

                                      F-4
<PAGE>

INCO HOMES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
---------------------------------------------


<TABLE>
<CAPTION>
                                                                                              Additional
(Dollars in Thousands)                               Preferred Stock        Common Stock       Paid -in
                                                   Shares       Amount    Shares    Amount     Capital       Deficit       Total
                                                   --------------------------------------------------------------------------------
<S>                                                <C>          <C>     <C>         <C>       <C>            <C>          <C>
Balance-December 31, 1996                                       $       1,437,096   $   14    $   41,763     (29,493)     $ 12,284

 Preferred stock issued                             2,340        2,340                                                       2,340

 Common stock issued                                                      200,000        2           463                       465


 Common stock subscriptions                                                                          300                       300

 Cash received pursuant to pending exercise of
 warrants                                                                                            350                       350

 Net loss - 1997                                                                                             (11,649)      (11,649)
                                                   --------------------------------------------------------------------------------

Balance-December 31, 1997                           2,340       $2,340  1,637,096   $   16    $   42,876    $(41,142)     $  4,090

Common Stock Issued                                   --           --     463,956        5           425                       430

Net Loss                                              --           --         --       --                     (6,729)       (6,729)
                                                   --------------------------------------------------------------------------------

Balance-December 31, 1998                           2,340       $2,340  2,101,052   $   21    $   43,301    $(47,871)     $ (2,209)
                                                   ================================================================================
</TABLE>

                                      F-5
<PAGE>
INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                         For the Years Ended December 31,
                                                                                      ------------------------------------
(Dollars in thousands)                                                                       1998                1997
                                                                                             ----                ----

<S>                                                                                   <C>                     <C>
Cash flows from operating activities:
        Net loss                                                                         $   (6,729)         $  (11,649)
        Adjustment to reconcile net loss to net cash provided by
            (used in) operating activities:
            Extraordinary item                                                                   68              (1,425)
            Provision for write-down of real estate                                           1,143               9,270
            Minority partners' share                                                            (66)               (331)
            Increase in real estate inventories                                              (6,832)              1,196
            Decrease in deferred income tax asset                                             2,200                   -
            Increase in other assets                                                           (218)                (68)
            Increase (decrease) in accounts payable and accrued liabilities                   2,473                (657)
                                                                                         ----------          ----------

                   Net cash used in operating activities                                     (7,961)             (3,664)
                                                                                         ----------          ----------

Cash flow from financing activities:

        Proceeds from notes payable secured by real estate                                   34,696              28,278
        Repayments on notes payable secured by real estate                                  (28,347)            (25,431)
        Proceeds from line of credit                                                            908               1,481
        Repayments on line of credit                                                           (470)             (4,313)
        Proceeds from notes to stockholder                                                    1,325               2,992
        Repayments on notes to stockholder                                                                         (368)
        Distribution from non-consolidated partnership                                                              260
        Repayments to minority partners                                                        (225)                  -
        Proceeds from sale of common stock                                                                          500
        Costs of stock issuance and reverse stock split                                                             (35)
        Proceeds from common stock subscriptions                                                 50                 450
                                                                                         ----------          ----------

                   Net cash provided by financing activities                                  7,937               3,814
                                                                                         ----------          ----------

Net increase in cash and cash equivalents                                                       (24)                150

Cash and cash equivalents at beginning of year                                                  736                 586
                                                                                         ----------          ----------

Cash and cash equivalents at end of period                                               $      712          $      736
                                                                                         ==========          ==========
</TABLE>

                                      F-6

<PAGE>

INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

Supplemental schedule of non-cash activities

[1]  During 1998 the Company converted $290,000 of accounts payable to $290,000
     worth of Subordinated Investment Notes - See Note 4.

[2]  During 1998 the Company issued 62,798 shares of Common Stock to creditors
     in exchange for relieving the Company of $125,531 of accounts payable - See
     Note 12.

[3]  During 1998 the Company deeded back properties with a book cost of $396,000
     to land sellers in satisfaction of indebtedness in that amount - See Note
     3.

[4]  During 1998 the Company chose to not exercise an option on land previously
     sold to a related party and was relieved of indebtedness of $2,400,000 -See
     Note 10.

[5]  During 1997, the Company was relieved of debt in the amount of $1,425,000
     pursuant to various agreements - See Note 8.

[6]  During 1997, the Company deeded back properties with a book cost basis of
     $1,000,000 to land sellers in satisfaction of indebtedness in that amount -
     See Note 3.

[7]  During 1997, the Company was relieved of debt in the amount of $680,000 as
     a result of a non-judicial foreclosure - see Note 10.

[8]  During 1997, the Company sold 204,122 shares of Common Stock in which a
     portion of the consideration consisted of a $200,000 reduction of a note
     payable - see Note 12.

[9]  During 1997, the Company converted $2,340,000 of debt to 2,340 shares of
     Series A Cumulative Preferred Stock - see Note 6.


See accompanying notes to financial statements.

                                      F-7
<PAGE>

INCO HOMES CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997


NOTE 1.   BACKGROUND AND ORGANIZATION

     Inco Homes Corporation, a Delaware corporation, ("Inco" or the "Company")
is a developer and builder of affordably priced single-family detached homes.
The Company's sole market is in Southern California and it is substantially
dependent on local economic factors.

     On January 16, 1997, a stockholder approved amendment to the Company's
Restated Certificate of Incorporation effecting a one-for-six reverse stock
split ("the reverse stock split") became effective. All share information
presented below is restated to reflect this reverse stock split.

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of the Company, all wholly-owned subsidiaries,
and the Company's general partnership interests in Palmdale Vistas Housing
Developments, Ltd. ("Palmdale Vistas"), Freedom-Eagle Ranch Housing Partners
("FERHP") and Triumph-Lancaster Housing Partners ("Triumph"). All significant
intercompany transactions have been eliminated. Palmdale Vistas was dissolved in
December 1997.

     The minority partners' investment in consolidated partnerships represents
the limited partners' net equity in the real estate projects. Pursuant to the
terms of the partnership agreements, losses are generally allocated 99% to the
limited partners, and their net equity will be repaid to the extent the
partnerships generate sufficient funds.

     Use of Estimates. The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the financial statement dates and the reported amounts of revenues and
expenses during the reporting periods. Due to uncertainties inherent in the
estimation process, it is reasonably possible that actual results could differ
from the estimates.

     Basis of Presentation. The Company has incurred net operating losses which
have significantly impacted its working capital levels and its ability to pay
its obligations. Management's current business plan reflects that, in addition
to future profits, sales of real estate inventories provide cash flow to the
Company to help meet operating requirements. During 1999, the Company will also
need to extend the maturity dates of certain notes payable and to raise capital
for acquisitions of additional land for future projects and working capital
needs. Management's plans and anticipated results are dependent on future events
and economic market conditions which are inherently uncertain. No assurances can
be given that anticipated cash flows from operations and the Company's ability
to borrow from various sources will be sufficient to fund all of its planned
expenditures. In its efforts to seek funding for working capital shortfalls and
to reduce old payables, as well as to finance the acquisition of additional land
for the delivery of future homes, the Company is discussing with various sources
of capital their investing additional funds in the Company. No material
agreements between the Company and these potential sources of capital have been
signed, and no assurances can be given whether or when the Company may enter
into an agreement with any source or, if entered into, what the precise terms of
the agreement will be.

     If the Company is not successful in obtaining sufficient capital to fund
its planned expenditures, the Company's ability to continue its current level of
business operations could be impaired, and the Company may not be able to
conduct operations as presently anticipated. This could have a material adverse
effect on the Company's business, financial condition and results of operations.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.

                                      F-8
<PAGE>

     Cash and Cash Equivalents. Cash equivalents represent short-term, highly
liquid investments with a maturity of three months or less when acquired. The
Company maintains some of its cash in bank deposit accounts which, at times, may
exceed the federally insured limits. Based on the quality of the financial
institutions, the Company does not believe it is exposed to any significant
concentrations of credit risk on cash and cash equivalents.

     Real Estate Inventories. Costs incurred which are included in inventory
consist of land, land development costs, direct and indirect costs of
construction, other overhead costs, interest and property taxes. Interest and
property taxes are capitalized to real estate inventories when development
activities begin, and capitalization ends when the qualifying assets are ready
for their intended use.

     Properties Under Construction and Land Held for Development. Properties
under construction and land held for development are stated at cost, unless it
is determined to be impaired, in which case the carrying value is reduced to
fair value. Costs include land acquisition and related costs, direct and
indirect construction costs, and indirect construction-related overhead costs.
Interest and property taxes are capitalized when development activities begin,
and capitalization ends when the property is available for sale.

     The Company review real estate inventories whenever events or changes in
circumstances indicate the cost basis of such assets may not be recoverable. If
the cost basis of the real estate is greater than the projected future
undiscounted net cash flows from the real estate, exclusive of interest, the
property is considered impaired. The estimation process in determining the value
of land held for development is inherently uncertain and relies to a
considerable extent on current and future economic and market conditions. Such
economic and market conditions may affect management's development and marketing
plans. Accordingly, the ultimate realization of the Company's real estate
inventories is dependent upon future events and conditions that may cause
realization to differ from amounts previously estimated.

     Sales and Profit Recognition. Revenue from the sale of homes, land and lots
is recognized when closings have occurred and a buyer has met down payment
requirements. At the time of revenue recognition, cost of sales is charged with
direct costs of construction, and an allocation of a project's total estimated
costs of land, land development, indirect construction, other overhead costs,
interest and property taxes.

     Earnings Per Share. In the fourth quarter of 1997, the Company was required
to adopt the provisions of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128). SFAS No. 128 replaces the previous
presentation of earnings per share on the Consolidated Statements of Operations
with dual presentation of Basic Earnings per Share and Diluted Earnings per
Share. Basic Earnings per Share are computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted Earnings per Share reflects the potential dilution
that could occur if stock options and other contracts to issue Common Stock were
exercised or converted into Common Stock or resulted in the issuance of Common
Stock that shared in the earnings of the Company. SFAS No. 128 requires
restatement of all prior-period earnings per share presented. Since losses have
occurred in all periods presented, the inclusion of potential shares would be
anti-dilutive. As a result, Basic and Diluted Earnings per Share do not differ
from earnings per share as previously and currently reported. At December 31,
1998, options to purchase 138,133 shares of Common Stock between $2.00 and $6.75
per share and warrants to purchase 200,000 shares of Common Stock at $2.625 per
share were outstanding during the year which were not included in the
computation of Diluted Earnings per Share because they are antidilutive, or
would have been excluded because the option's exercise price was greater than
the average market price or market value of the Common Shares.

     As of December 31, 1997, 41,023 options were outstanding at prices ranging
from $1.563 to $56.25 per share, none of which had been exercised.

     Fair Value of Financial Instruments. The carrying amounts reported on the
balance sheet for the Company's cash equivalents and accounts payable and
accrued liabilities approximate fair value due to the short-term nature of these
items. The carrying amounts of the Company's notes payable secured by real
estate, lines of

                                      F-9
<PAGE>

credit, and notes to stockholder approximate fair value based on a comparison
with current market rates for loans of similar risks and maturities.

NOTE 3.   REAL ESTATE INVENTORIES

     Real estate inventories consist of the following:

<TABLE>
<CAPTION>
                                                                       December 31,
                                                             ---------------------------------
                                                                 1998                 1997
                                                             ------------         ------------
     <S>                                                     <C>                  <C>
     Land                                                    $ 17,168,000         $ 16,929,000
     Land development and construction in progress             20,087,000           18,366,000
     Completed inventory not subject to pending sales
         contracts (unsold)                                     3,410,000            2,552,000
     Allowances for write-down of real estate                 (10,427,000)         (10,518,000)
                                                             ------------         ------------
     Total                                                   $ 30,238,000         $ 27,329,000
                                                             ============         ============
</TABLE>

     As of December 31, 1998 and 1997, the Company owned title to and held
options to acquire approximately 2,093 and 1,600 lots, respectively.
Approximately 200 lots were in the process of being deeded back to land sellers
as of both December 31, 1998 and 1997 (see below).

     During the year ended December 31, 1997, the Company reevaluated its plans
for holding and developing several of its properties. As a result of this
reevaluation, the Company reduced the number of lots it planned to develop in
certain projects, and identified other properties it plans to sell in their
current stage of development or deed back to lenders in satisfaction of the
loans securing the properties. Additionally, the Company determined the
undiscounted cash flows estimated to be generated by various real estate
holdings were less than the assets' carrying amounts. In accordance with the
provisions of SFAS No. 121, an impairment allowance, which writes these assets
down to fair value, was established totaling $9,270,000, of which $9,019,000
relates to properties in the high desert of San Bernardino County and $251,000
relates to a property in Riverside County.

     The Company incurred interest that was capitalized. The following table
shows the components of interest:

<TABLE>
<CAPTION>
                                                                             For the Years Ended
                                                                                  December 31,
                                                                         -----------------------------
                                                                             1998            1997
                                                                         ------------     ------------
<S>                                                                      <C>              <C>
Interest incurred and capitalized                                        $  5,204,000     $  3,686,000
                                                                         ============     ============

Amortization of capitalized interest included in
     cost of homes sold, cost of land and lots sold, and  provision
      for write-down of real estate                                      $  3,547,000     $  2,827,000
                                                                         ============     ============

Unamortized capitalized interest included in
     real estate inventories at year end                                 $  5,229,000     $  3,572,000
                                                                         ============     ============
</TABLE>

                                      F-10
<PAGE>

NOTE 4.   NOTES PAYABLE

     Notes payable consist of the following:

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                               ---------------------------
                                                                                   1998            1997
                                                                               -----------     -----------
<S>                                                                            <C>             <C>
Various land acquisition loans secured by real estate bearing interest
 at fixed rates ranging from 7.0% to 10.0% per annum.  Principal
 payments are required on fixed schedules or as land is taken down.
 The loan balance at December 31, 1998 can be reduced to zero as
 properties are deeded back to land sellers (see Note 3).                      $ 1,325,000     $   716,000

Various infrastructure, development, construction and other land loans
 secured by real estate with an aggregate maximum amount of
 $39,804,000 of which $19,516,000 was available as of December 31,
 1998 to finance construction.  Interest rates on these loans range
 from 7.625% to 20.25% and are due primarily in 1998 and 1999.
 Principal payments on construction loans are generally required as
 homes are closed.  The prime rate as of December 31, 1998 and 1997
 was 7.75% and 8.50%, respectively.                                             20,288,000      14,945,000
                                                                               -----------     -----------

Total notes payable secured by real estate                                      21,613,000      15,661,000
Subordinated Investment Notes                                                      290,000              --
Repurchase option for property sold in June 1997 (see Note 10)                          --       2,400,000
Unsecured loan payable to commercial bank                                        1,141,000       1,141,000
                                                                               -----------     -----------

                                                                               $23,044,000     $19,202,000
                                                                               ===========     ===========
</TABLE>

     Included in infrastructure, development, construction and other land loans
at December 31, 1998 and 1997, respectively, is a secured note payable to
Hunters Ridge Investment Partners ("HRIP") with a balance of $529,000 and
$474,000, respectively and $5,398,000 and $6,922,000, respectively, of secured
notes payable provided by USA Commercial Mortgage Company, Inc. ("USA") (see
Note 10).

     The weighted average short term borrowing rate for infrastructure,
development, construction and other land loans was 11.53% and 12.29% for the
years ended December 31, 1998 and 1997, respectively.

     The minimum future principal payments due on the notes payable secured by
real estate at December 31, 1998 are as follows:

          1999                                                  $16,962,000
          2000                                                      390,000
          2001                                                    3,588,000
          2002                                                            0
          2003                                                            0
          Thereafter                                                673,000
                                                                -----------
                                                                $21,613,000
                                                                ===========

     In December 1997, the Company restructured a secured line of credit with an
outstanding principal balance of $2,891,000 from a commercial bank, which had
become due. Pursuant to a series of agreements, the bank's note was purchased
for $1,750,000 by a group of lenders ("new lender") provided by USA. The bank
forgave accrued interest of $92,000 and canceled its rights under a warrant to
purchase 41,667 shares of the Company's Common

                                      F-11
<PAGE>

Stock that was issued to the bank pursuant to an agreement made in June 1996
extending and modifying the line of credit. The resulting obligation of the
Company to the new lender is $2,350,000, which includes the $1,750,000 paid to
the bank, fees earned by USA, an interest reserve and a payoff made by the new
lender to an unrelated commercial bank of another loan to the Company. The loan
is secured by undeveloped land owed by the Company in Victorville and Palmdale,
California and by an assignment of the Company's rights under a repurchase
option agreement (see Note 10). Additionally, the Company has agreed to repay
the bank the $1,141,000 principal amount not paid by the new lender when it
purchased the bank's note. This payment is unsecured, non-interest bearing and
payable from 15% of profits earned annually by the Company commencing with the
fiscal year ending December 31, 1999. Certain non-operational changes in the
Company's net worth in excess of $3,500,000 and certain changes in control of
the Company will also require additional payments to the bank.

NOTE 5.   LINE OF CREDIT

     The Company has unsecured revolving lines of credit of $1,000,000 and
$250,000 with commercial banks that bear interest at the prime rate plus 1.0%.
The net outstanding balance under these lines of credit at December 31, 1998 and
1997 were $768,000 and $330,000, respectively. At the time a homebuyer enters
into a sales contract with the Company, meets certain loan prequalification
requirements with a third party mortgage lender, and opens an escrow, the bank
advances funds to the Company under this line at an amount equal to 70% of the
net cash proceeds estimated by the Company that it would receive at the close of
the homebuyer's escrow. The escrow company repays the lender directly from net
proceeds when the escrow closes. The $1,000,000 line of credit expired May 30,
1999. The Company is currently in negotiations with the bank for an additional
extension. With regard to the $250,000 credit line, the Company submits a loan
request for project costs incurred prior to obtaining a construction loan. The
line is repaid when the construction loan records and the Company is reimbursed
for the project costs previously paid.

NOTE 6.   NOTES TO STOCKHOLDERS

     On December 2, 1998, the Norris Living Trust advanced $40,000 to the
Company to be repaid within 12 months at an interest rate of 10.0% per annum. In
addition, on December 4, 1998, the Norris Living Trust advanced an additional
$285,000 at an interest rate of 10.0% per annum to the Company in connection
with the closing of a $16.5 million construction loan on the Company's
Mockingbird Canyon Estates project. The note is for a 12-month period, with an
interest rate of 10.0% per annum, which will accrue and be due along with the
principal on December 2, 1999. Subsequent to December 31, 1998, the Norris
Living Trust advanced an additional $200,000 to the Company to be repaid within
12 months at an interest rate of 10.0% per annum. The Company has pledged a
security interest in its Mockingbird Canyon Estates project to the Norris Living
Trust as security for the repayment of the notes.

     On December 11, 1998, the stockholders of the Company approved the issuance
of a warrant to purchase 200,000 shares of Common Stock to Ira C. Norris in
connection with the extension of a $1,000,000 non-revolving line of credit made
by Mr. Norris on July 15, 1998 through the living trust he created for the
benefit of himself and his family (the "Norris Living Trust") to the Company's
wholly owned subsidiary Huntington Homes LLC. The $1,000,000 non-revolving line
of credit bears interest at a variable interest rate, of which the initial
interest rate was 10.0% per annum. The note securing the line of credit is due
and payable in full by July 2, 1999. At December 31, 1998, the accrued interest
under the note was $2,275. In accordance with SFAS 123, the Company has recorded
the value of this warrant issued as issuance costs and will amortize the cost
over the extension period of the line.

     From September 1996 through November 30, 1997, the Company received
advances of $2,747,000 from Ira C. Norris, of which the Company had repaid
$460,000. The advances were unsecured, bore interest at 10% and were due on
March 31, 1998. The balance of these advances at December 23, 1997 was
$2,462,000, which included accrued interest of $171,000. On that date, Mr.
Norris agreed to convert $2,340,000 of this debt to 2,340 shares of Series A
Cumulative Preferred Stock of the Company. The Company issued these shares on
December 30, 1997 to the Norris Living Trust, of which Mr. Norris is a
beneficiary and trustee. The Series A Preferred Stock has a par value of $0.01,
has no voting rights, is non-participating, and has no conversion features. The
stock is

                                      F-12
<PAGE>

redeemable at the option of the Company for cash at the redemption price of
$1,000 per share plus accumulated but unpaid dividends. The established dividend
rate on the Preferred Stock of $100 per share per annum payable quarterly from
available working capital. An unsecured note to the Norris Living Trust, bearing
interest at 10%, evidences the balance of indebtedness not converted in the
amount of approximately $122,000. The note was due in December 1998 and has been
extended until December 23, 1999. The balance owing under this note at December
31, 1998 was $134,000, which includes accrued interest of approximately $12,000.

     In addition to the loans described above, in June 1997, the Norris Living
Trust loaned the Company $500,000 secured by undeveloped land owned by the
Company in Victorville and Palmdale, California. This note bears interest at
10%, was due in June 1998 and has been extended until June 1999. The balance
owing under this note at December 31, 1998 was $575,815, which includes accrued
interest of approximately $75,815.

     In June 1997, the Company signed a note and deed of trust in connection
with a loan of $500,000 from the Neeley Revocable Family Trust. Ronald L.
Neeley, a director of the Company, is a beneficiary and trustee of this trust.
The note bears interest at 15%, was due in June 1998 and has been extended until
June 1999, and is secured by the same undeveloped land owned by the Company in
Victorville and Palmdale, California which secures the Norris Living Trust loan
of $500,000 mentioned above. The balance owing under this note at December 31,
1998 was $614,000, which includes accrued interest of approximately $114,000.

NOTE 7.   INCOME TAXES

     The Company and its subsidiaries file a consolidated federal income tax
return and combined state income tax returns.

     Generally accepted accounting principles requires the recognition of
deferred tax assets for the estimated future tax effects attributable to net
deductible temporary differences and net operating loss carryforwards. To the
extent that management believes that it is more likely than not that some
portion or all of the deferred tax asset will not be realized, deferred taxes
are to be reduced by a valuation sufficient to reduce the deferred tax asset to
the amount that is more likely than not to be realized. The income tax provision
for the year ended December 31, 1998 represents an increase in the valuation
allowance necessary to reduce the deferred tax asset to zero as of December 31,
1998. Due to operating losses in 1998 and 1997, a provision for income taxes was
not otherwise required.

     The tax effects of temporary differences and net operating loss
carryforwards that give rise to the deferred tax asset and deferred tax
liability consist of the following at:

<TABLE>
<CAPTION>
                                                       December 31,
                                                   --------------------
                                                   1998            1997
                                                   ----            ----
<S>                                            <C>             <C>
Deferred tax asset:
  Net operating loss carryforwards             $ 11,966,000    $  8,327,000
  Write-downs of real estate                        817,000       1,747,000
  Accrued expenses                                   41,000         124,000
                                               ------------    ------------
  Total deferred tax asset                       12,824,000      11,198,000
Valuation allowance                             (12,824,000)     (8,998,000)
                                               ------------    ------------

Net deferred tax asset                         $          0    $  2,200,000
                                               ============    ============
</TABLE>

     At December 31, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of $32,341,000 that are available to offset future
federal taxable income. The federal net operating losses expire in the years
2009 through 2018.

     A reconciliation of the computed statutory income tax benefit at the
Federal statutory rate to the effective income tax benefit follows:

                                      F-13
<PAGE>

<TABLE>
<CAPTION>
                                                               For the Years Ended
                                                                    December 31,
                                                            ---------------------------
                                                                1998           1997
                                                            ------------   ------------
     <S>                                                    <C>            <C>
     Percent of pre-tax loss at current
          federal statutory income tax rate                    (34.0%)        (34.0%)
                                                            ------------   ------------
     State and local income taxes net of federal benefit        (4.7)          (4.7)
     Increase in valuation allowance                            38.7           38.7
     Net increase (reduction)                                   34.0           34.0
                                                            ------------   ------------

     Effective tax rate                                          0.0%           0.0%
                                                            ============   ============
</TABLE>

NOTE 8.   STOCK-BASED COMPENSATION PLANS

Stock Options

     In November 1992, the Board of Directors and stockholders of the Company
adopted the Company's initial Stock Option/Stock Issuance Plan (the "Initial
Plan"), which provides for the grant of options to purchase up to 100,000 shares
of Common Stock. In June 1998, the Board of Directors and stockholders of the
Company adopted the 1998 Incentive and Nonstatutory Stock Option Plan (the "1998
Plan") and reserved 200,000 shares of Common Stock to be optioned and sold under
the 1998 Plan. The discretionary option grant program provides for the grant of
options to purchase shares of the Company's Common Stock to key employees
(including officers and directors) and consultants of the Company. The options
issued to employees are subject to certain vesting requirements. The options
issued to directors may be exercised in full six months after the grant date.

     As of January 2, 1998, the Compensation Committee of the Board of Directors
offered all employees of the Company and one director who was a former employee
of the Company the right to exchange 32,269 outstanding options at prices
ranging from $3.75 to $6.75 per share with replacement options. The replacement
options were set at $2.00, the current fair market value at the time, and the
required holding period was reset. All employees and the director elected to
exchange their existing options for replacement options. Also on January 2,
1998, 41,058 new options were granted to employees at a price of $2.00 per
share.

     The Company has adopted Statement of Financial Accounting Standards No. 123
("SFAS No. 123") "Accounting for Stock-Based Compensation." In accordance with
the provisions of SFAS No. 123, the Company applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plan and does not recognize compensation expense for its
stock-based compensation plan. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for awards
given in 1998 and 1997 under this plan consistent with the methodology
prescribed by SFAS No. 123, the Company's net loss and loss per share would have
been reduced to the following pro forma amounts (in thousands, except per share
amounts):

                                                       1998        1997
                                                     --------    --------
     Basic and diluted net loss per share
       As reported                                    $3.51        $7.15
       Pro forma                                       3.55        $7.18

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

                                                       1998        1997
                                                     --------    --------
     Risk free interest rate                            5.56%       6.26%
     Dividend yield                                        0%          0%
     Expected volatility                               37.74%      40.68%
     Weighted average fair value                     $  1.20     $  0.93
     Expected option life (years)                         10          10

                                      F-14
<PAGE>

     The table below summarizes the transactions in the Company's stock option
plans (in thousands, except per share amounts):

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

        Options outstanding at beginning of year       41,023      45,741
        Granted                                       159,625       3,752
        Exercised                                           0           0
        Canceled                                      (62,535)     (8,470)
                                                     --------    --------

        Outstanding options at end of year            138,113      41,023

        Exercisable at end of year

        Exercise prices of outstanding options range from $1.563 to $6.75.


     The following table summarizes information about certain options in the
stock option plans outstanding as of December 31, 1998 in accordance with SFAS
123:

<TABLE>
<CAPTION>
                              Options Outstanding                                         Options Exercisable
--------------------------------------------------------------------------------  ----------------------------------------
                        Weighted Avg.
      Range of             Number            Remaining          Weighted Avg.           Number           Weighted Avg.
   Exercise Price       Outstanding       Contractual Life      Exercise Price        Exercisable        Exercise Price
-------------------  -----------------  -------------------   -----------------   -------------------  -------------------
<S>                  <C>                <C>                   <C>                 <C>                  <C>
Less than $2.50           67,133            1/1999-1/2008           1.99                 56,695                1.99
$2.51 to $5.00            73,775            1/1999-8/2008           3.30                  7,418                3.23
Greater than $5.00         2,255           1/1999-12/2005          12.53                  1,250                6.00
</TABLE>

NOTE 9.   EXTRAORDINARY ITEMS

     During 1998 the Company issued stock to relieve accounts payable which
resulted in a loss on the transaction.

     In December 1997, the Company restructured a line of credit with another
commercial bank. Pursuant to the Agreement with this bank, accrued and unpaid
interest was forgiven, resulting in an extraordinary gain of approximately
$92,000 (see Note 4).

     Additionally, in June 1997, pursuant to a separate Agreement with this same
commercial bank, $2,647,000 was accepted as payment in full on matured loans
with balances totaling $3,494,000 secured by the Company's Eagle Ranch project
in the high desert of San Bernardino County. The Company repaid the bank from
the following sources: (i) the sale in June 1997 of the majority of the Eagle
Ranch project for $2,400,000 to a group of investors provided by USA Real Estate
(see Note 10), (ii) a new loan from a third party lender in the amount of
$580,000 and (iii) other Company funds. This resulted in an extraordinary gain
of approximately $847,000.

     In February 1997, the Company obtained new financing from both USA and
another third party lender, providing a total of $2,336,000. Pursuant to an
Agreement with a commercial bank, this amount was accepted as payment in full on
matured loans with balances totaling $2,822,000, secured by one of the Company's
projects in Riverside County. This resulted in an extraordinary gain of
approximately $486,000.

NOTE 10.  COMMITMENTS AND CONTINGENCIES

     Except as disclosed below, the Company is involved only in routine
litigation arising in the ordinary course of business. Such matters, if decided
adversely to the Company, would not, in the opinion of management, have a

                                      F-15
<PAGE>

material adverse effect on the financial condition of the Company. In addition,
from time to time, the Company could be involved in litigation in connection
with claims of development or construction defects, which matters, if decided
adversely to the Company, could have a material adverse effect on the financial
condition of the Company.

     In May 1994, the owners of 11 homes sold by the Company at its 200-home
Northfork project located in Murrieta, California filed a complaint against Inco
Development Corporation, a wholly-owned subsidiary of the Company ("Inco
Development"), in the Superior Court of California in Riverside County. Through
October 1996, various owners of additional homes in this project filed separate
complaints. All complaints were subsequently consolidated into one complaint
involving 40 homeowners. The alleged damages related primarily to the
performance of the concrete slabs of the homes. The matter was resolved in
mediation, which concluded on March 2, 1998, in the agreed upon amount of
$2,100,000. Payments of the settlement amount will be shared by three of the
Company's primary insurance carriers, and by various subcontractors against whom
the Company had filed cross-complaints. Settlement documents were signed in
April and May 1998, which included all necessary releases and dismissals of all
complaints.

     As a result of the limited amount of available working capital,
relationships with certain of its subcontractors have weakened due to the
Company's inability to pay all of its subcontractors and their suppliers on a
current basis. Numerous subcontractors, suppliers and general creditors are
pursuing further legal action, including the initiation of lawsuits. As of
December 31, 1998, nine of these claims, totaling approximately $565,000, have
been perfected as judgments against the Company. The Company has or intends to
negotiate payment arrangements, as appropriate, in an effort to settle these
claims. However, if the Company continues to have disputes with its
subcontractors and suppliers, in the future it may be difficult for the Company
to attract and retain qualified subcontractors and suppliers who are willing to
work with the Company and the Company's business could be adversely affected.

     The Company believes that the claims made against it are without merit and
has tendered all of these claims to its product liability insurers who have
accepted defense subject to reservation of rights. The Company believes that
these claims will not have a material adverse effect on the Company's business.

     Commitments and contingencies also include the usual obligations incurred
by real estate developers in the ordinary course of business, including the
securing of financing, performance bonds, entitlement and water rights.
Outstanding performance bonds at December 31, 1998 and 1997 were $11,752,000 and
$11,230,000, respectively.

     The Company is responsible for a one-year warranty period upon the sale of
single-family homes. An estimated reserve for warranty costs is included in
accounts payable and accrued liabilities.

     The Company is committed under various operating leases for office space
and equipment. Rental expense relating to operating leases of $185,000 and
$148,000 for the years ended December 31, 1998 and 1997, respectively, is
included in general and administrative expenses. The minimum future payments due
on the lease contracts payable at December 31, 1999 are $198,000 for 1999,
$194,000 for 2000, $165,000 for 2001, $118,000 for 2002.

NOTE 11.  RELATED PARTY TRANSACTIONS

     For the years ended December 31, 1998 and 1997, the Company incurred
$25,500 and $45,000, respectively, in model home design fees and $152,431 and
$108,400, respectively, as reimbursement for the cost of the model home
furnishings to Nancy Orman Interiors. Nancy Orman Interiors is owned by Nancy
Norris, the wife of Ira C. Norris.

     In May 1996, the Company assigned an unsecured non-interest bearing
receivable in the amount of $293,000 from Victor Valley Commercial Properties to
Ira C. Norris in exchange for a cash payment of $293,000. Victor Valley
Commercial Properties is a limited partnership owned 50% by G&N Investments,
Ltd., its sole general partner.

                                      F-16
<PAGE>

     Thomas E. Gibbs, Jr., a former director of the Company, holds a 56.3%
general partner's interest in Hunter's Ridge Investment Partners ("HRIP").
Included in notes payable at December 31, 1998 is a loan with a balance of
$529,000 from HRIP, secured by one of the Company's projects in Fontana,
California. Additionally, the Gibbs Family Trust, of which Mr. Gibbs is a
beneficiary and trustee, is a 50% limited partner in Triumph.

     Thomas A. Hantges, a director and stockholder of the Company, owns
approximately 67% of both USA Commercial Mortgage Company ("USA") and USA
Commercial Real Estate Group ("USA Real Estate"). USA has provided loans and
arranged for individual lenders to provide loans to the Company secured by
Company projects in cumulative amounts totaling $13,650,000 and $12,120,000 for
the years ended December 31, 1998 and 1997, respectively. USA has earned
cumulative fees for these loans for the years ended December 31, 1998 and 1997
totaling $1,118,000 and $1,087,000, respectively, of which $909,000 and
$878,000, respectively, has been paid. The balance is secured by notes and is to
be paid from proceeds from sales of completed homes in certain of the Company's
projects. The interest rates on these loans ranged from 12.25% to 15.25% in 1998
and from 12.25% to 20.25% in 1997. The outstanding balance of these loans at
December 31, 1998 and 1997 was $5,397,700 and $6,922,000, respectively.

     In June 1997, USA Real Estate arranged for an additional group of investors
to purchase the Company's Eagle Ranch project in the high desert for $2,400,000.
Funds from this sale helped the Company repay portions of matured loans secured
by this project with a commercial bank. The investors granted the Company a six-
year option to periodically repurchase portions of the property, subject to
annual minimum repurchase thresholds, for the development of single-family
homes. If the Company failed to repurchase the minimum number of lots in any
year, the option would terminate. Because of an election by the Company not to
acquire any lots under this option agreement and the failure to pay the
prerequisite real estate taxes, the Company was notified that its rights to
acquire these lots had been terminated.

     In February 1999, the Company entered into an Agency Agreement with USA.
Pursuant to the Agency Agreement, upon completion of a proposed merger with
American Communities, Inc., USA was to receive a 10-year option to purchase
250,000 shares of Common Stock of the Company for $2.00 per share. In addition,
USA was to receive certain registration rights with respect to the optioned
shares. If the Company's stockholders did not approve the stock options and
registration rights, USA was to receive, upon completion of the American merger,
the sum of $600,000 payable $200,000 within two business days of approval of the
merger by the Company's stockholders, and $50,000 quarterly thereafter. The
proposed merger with American was terminated in June 1999.

     Subsequent to year end, the Company sold 53 finished lots and 4 completed
models to USA Investors II, LLC, whose manager is USA Commercial Mortgage. USA
Commercial Mortgage is controlled by Thomas Hantges, who is a member of the
Company's Board of Directors. The property was sold for cash consideration of
$50,000 and the assumption of approximately $1.7 million of debt and trade
accounts payable, including existing debt to USA Mortgage of approximately $1.1
million. The debt assumed is estimated based upon current outstanding
obligations minus proforma debt paydowns from the closing of 12 units under
construction. The Company is also entitled to additional consideration of
$100,000 payable from the profits upon the sale of these properties by USA
Investors II, LLC. As of December 31, 1998, the Company has chosen to write down
additional capitalized costs attributable to these lots. These costs would have
been charged to cost of sales in the normal course of business as each house was
sold had the lots been built out. The additional charge of $974,000 was expensed
to the provision for write down of real estate.

     One of the owners of Overland Opportunity Fund, LLC ("Overland"), which
owned 9.1% of the Company's outstanding Common Stock at April 30, 1999, is an
affiliate of three entities with which the Company has signed Development and
Marketing Agreements. See "Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."

                                      F-17
<PAGE>

NOTE 12.  EMPLOYEES' PROFIT SHARING PLAN

     The Company has an employee profit-sharing plan covering substantially all
employees. Contributions are made annually on a discretionary basis. No
contributions have been made for the years ended December 31, 1998 and 1997.

NOTE 13.  STOCKHOLDERS' EQUITY

Common Stock Issued

     In December 1997, the Company sold 204,122 shares of Company Common Stock
in a private transaction to Institutional Equity Partners, LLC ("IEP"), an
entity owned 67% by Thomas A. Hantges. The total consideration was $306,183,
paid as follows: (i) payment to the Company of $100,000 in cash, (ii) reduction
by $200,000 of a $347,500 note payable to the principals of USA by the Company
for fees related to a loan arranged by USA with respect to one of the Company's
projects and (iii) $6,183 for consulting services provided by the principals of
USA for the Company. The shares were issued in January 1998.

     In December 1996, the Company issued a warrant to purchase 200,000 shares
of Common Stock in a private transaction to Overland Company, Inc. ("OCI"). OCI
is affiliated with Overland. The warrant was issued as compensation for services
to be performed pursuant to a consulting agreement entered into with OCI in
December 1996. The consulting agreement is for a term of two years during which
OCI, on a non-exclusive basis, is to seek out, investigate and pursue
residential development projects and present them to the Company for its
consideration and approval. The warrant was exercisable within eighteen months
of the date of the agreement at a price of $5.25 per share. Beginning in
November 1997, the Company offered OCI the opportunity to exercise the warrant
for an exercise price of $2.00 per share. From November 1997 through February
1998, OCI assigned portions of its total interest in the warrant to third
parties. The Company received $350,000 in 1997 and $50,000 in 1998 from these
third parties as deposits pursuant to the exercise of the warrants for all
200,000 shares. The stock certificates were issued in June 1998.

NOTE 14.  SUBSEQUENT EVENTS

     In April 1999, the Company entered into an Agreement and Plan of Merger
("Merger Agreement') with American Communities, Inc., a Nevada corporation
("American"), a privately held Las Vegas builder of entry level and move up
single family homes. Under the Merger Agreement, the two principals of American
were to receive shares of newly issued common stock of the Company in exchange
for all of the outstanding common stock of American. In addition, the Merger
Agreement provided for representation on the company's Board of Directors for
representatives of American and the provision of a line of credit or alternative
financing of at least $3 million by American which would be available to the
Company after the closing. In June 1999, the Merger Agreement with American was
terminated prior to any of the proposed transactions being consummated.

                                      F-18
<PAGE>

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

           None.


                                   PART III



ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Executive Officers of the Registrant

     The following are the names and respective ages as of December 31, 1998 of
the executive officers of the Company. The Company's executive officers are
elected by, and serve at, the discretion of the Board of Directors.

<TABLE>
<CAPTION>
     Name                                  Age                   Position
     ----                                  ---                   --------
     <S>                                   <C>    <C>

     Ira C. Norris.......................   62    Chairman of the Board, President and Chief
                                                  Executive Officer
     David A. Fogg.......................   48    Chief Financial Officer and Secretary
     Gary E. Sorley......................   44    Division Manager
     Sue Monaco..........................   37    Vice President of Sales and Marketing
</TABLE>

     Ira C. Norris founded the Company in 1976, and has served as the Chairman
of the Board, President and Chief Executive Officer since that time. From 1968
to 1976, Mr. Norris served as a Corporate Vice President and Division Operating
Manager of Kaufman and Broad, Inc., a company engaged in the real estate and
life insurance business. From 1960 to 1968, he was an independent
builder/developer in Los Angeles and the San Fernando Valley suburbs.

     David A. Fogg has served as a director and Chief Operating Officer of the
Company since April 1998, and has served as Chief Financial Officer of the
Company since November 1997. Prior to joining the Company, Mr. Fogg was Chief
Financial Officer of Century/Crowell Communities, a builder/developer in San
Bernardino, California from 1992 to 1997.

     Gary E. Sorley has served as the Company's Division Manager since August
1998. Prior to becoming Division Manager, Mr. Sorley served the Company as Vice
President of Operations and Forward Planning and Director of Purchasing. Prior
to joining the Company in 1994, Mr. Sorley worked for Brock Homes, a
builder/developer in Laguna Hills, California, from 1984 to 1994 and Shea Homes
from 1977 to 1984.

     Sue Monaco has served the Company since July 1997 in various capacities,
most recently as Vice President of Sales and Marketing. From 1994 to 1997, Ms.
Monaco was manager of Stuart Wright, a mortgage banking firm located in Las
Vegas, Nevada. Prior to 1994, she sold new homes for various builders in
Southern California. Ms. Monaco is licensed with the State of California,
Department of Real Estate.

                                       28
<PAGE>

Directors of the Company.

     The members of the Board of Directors of Inco Homes are classified into
three classes, one of which is elected at each Annual Meeting of Stockholders to
hold office for a three-year term and until successors of such class have been
elected and qualified.  The following are the names of the Board of Directors of
the Company as of April 30, 1999:

<TABLE>
<CAPTION>
                                                                                         Class and Year
                                                                           Director       In Which Term
          Name                            Principal Occupation              Since          Will Expire          Age
          ----                            --------------------             --------      --------------         ---
    <S>                          <C>                                       <C>           <C>                    <C>
    Ira C. Norris                Chairman of the Board, President and        1993            Class I             62
                                 Chief Executive Officer of Inco Homes                        1999
                                 Corporation


    David A. Fogg                Chief Operating Officer and Chief           1998            Class I             48
                                 Financial Officer of Inco Homes                              1999
                                 Corporation


    John F. Seymour, Jr.         Chief Executive Officer, Southern           1995            Class II            61
                                 California Housing Development                                2001
                                 Corporation


    Thomas A. Hantges            Founder and Chairman, USA Capital           1998            Class II            46
                                                                                               2001

    Robert H. Daskal             Senior Vice President and Chief             1995            Class III           57
                                 Financial Officer, Olympic Cascade                            2000
                                 Financial Corporation
</TABLE>

     For additional information regarding Mr. Norris and Mr. Fogg, see
"Executive officers of the Registrant."

     Thomas A. Hantges has served as a director of the Company since January
1998.  Mr. Hantges is the founder and Chairman of USA Capital, a Nevada-based
private lending corporation that specializes in originating, funding and
servicing short-term real estate loans to major builders and developers
throughout the United States.  Mr. Hantges has been involved in the investment
banking industry since 1980.

     John F. Seymour, Jr. has served as a director of the Company since December
1995.  Mr. Seymour has been the Chief Executive Officer of Southern California
Housing Development Corporation, a non-profit organization, since January 1995.
Prior to joining Southern California Housing Development Corporation, Mr.
Seymour served for two years as the Executive Director of the California Housing
Finance Agency which directs billions of dollars of capital vital to affordable
housing.  In January 1991, Mr. Seymour was appointed by Governor Pete Wilson to
be his successor in the United States Senate, where he served until January
1993.  From April 1982 to January 1991, Mr. Seymour served as a California State
Senator for the 35th Senate District.  Mr. Seymour is a director of Irvine
Apartment Communities, a Real Estate Investment Trust.

     Robert H. Daskal has served as a director of the Company since May 1995.
Mr. Daskal is Senior Vice President and Chief Financial Officer of Olympic
Cascade Financial Corporation, a financial services holding company.  Mr. Daskal
was the Executive Vice President and Chief Financial Officer of Inco Homes
Corporation from October 1994 to January 1997.  Before joining the Company, Mr.
Daskal was Executive Vice President-Finance and Chief Financial Officer of UDC
Homes, Inc., a homebuilder in Tempe, Arizona, from 1985 to 1994.  UDC Homes,
Inc. filed a petition for relief under Chapter 11 of the U.S. Bankruptcy code in
May 1995.

                                       29
<PAGE>

Compliance with Section 16(a) of the Securities Exchange Act of 1934

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than ten-percent stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) reports
they file.

     Based solely upon review of the copies of such reports furnished to the
Company and written representations that no other reports were required, the
Company believes that there was compliance for the fiscal year ended December
31, 1998 with all Section 16(a) filing requirements applicable to the Company's
officers, directors and greater than 10% beneficial owners.

ITEM 10.  EXECUTIVE COMPENSATION.

Summary of Cash and Certain Other Compensation

The following table sets forth the compensation paid by the Company for the
years ended December 31, 1998, 1997, and 1996 to the named Executive Officers.

<TABLE>
<CAPTION>
                                                Summary Compensation Table
                                                                                    Long Term
                                                                                  Compensation
                                                                                  ------------
                                                  Annual Compensation                Awards
                                                  -------------------                ------
                                                                                   Securities
      Name and Principal                                                           Underlying              All Other
          Position                 Year         Salary (1)           Bonus       Options/SARs (#)       Compensation (2)
          --------                 ----         ----------           -----       ----------------       ---------------
<S>                                <C>          <C>                  <C>         <C>                    <C>
Ira C. Norris                      1998         $  180,000           $   0            25,0000           $     6,196 (3)
  Chairman of the Board,           1997            240,000 (4)           0                  0                 5,580 (5)
  President and Chief              1996            360,000 (6)           0                  0                 7,856 (7)
Executive Officer

David A. Fogg                      1998         $  100,222           $   0             60,000           $    14,183 (8)
 Chief Operating Officer and       1997             12,500               0                  0                     0
 Chief Financial Officer           1996                  0               0                  0                     0

Gary E. Sorley                     1998         $  100,178           $   0             23,000 (9)                 0
  Division Manager                 1997             85,008               0                  0                     0
                                   1996             85,008              50              2,084                     0
</TABLE>

______________
(1) Salary includes employee contributions under the Company's 401(k) Plan.
(2) Excludes a nominal amount, not more than $500 per employee annually, for
    life insurance premiums.
(3) Represents medical expenses of $2,788, auto expenses of $2,920 paid by the
    Company, and $488 of the Company's contribution under the Company's 401(k)
    Plan..
(4) Includes $42,500 accrued in 1997, but not yet paid.
(5) Represents medical expenses of $2,477 and auto expenses of $2,303 paid by
    the Company, and $800 of the Company's contribution under the Company's
    401(k) plan.
(6) Includes $75,000 accrued in 1996, but not yet paid.
(7) Represents medical expenses of $4,849 and auto expenses of $2,072 paid by
    the Company, and $935 of the Company's contribution under the Company's
    401(k) Plan.
(8) Represents vacation pay of $1,923, auto expenses of $12,000 paid by the
    Company, and $260 of the Company's contribution under the Company's 401(k)
    Plan.
(9) Includes options to purchase 2,501 shares granted in exchange for the
    options originally granted in 1996 and 1995.

                                       30
<PAGE>

Stock Options

     The following table contains information concerning the grant of stock
options under the Company's 1992 Stock Option/Stock Issuance Plan and the
Company's 1998 Incentive and Nonstatutory Stock Option Plan for the 1998 fiscal
year to the named Executive Officers. The table also lists potential realizable
values of such options on the basis of assumed annual compounded stock
appreciation rates of 5% and 10% over the life of the options which are set at a
maximum of 10 years.

<TABLE>
<CAPTION>
                                                                                               Potential Realizable Value
                                                                                               at Assumed Annual Rates of
                                                                                                Stock Price Appreciation
                                    Individual Grants                                                for Option Term

-------------------------------------------------------------------------------------------------------------------------
                           Number of            % of Total
                           Securities          Options/SARs
                           Underlying           Granted to       Exercise or
                          Options/SARs         Employees in      Base Price    Expiration
    Name                  Granted (#)(1)        Fiscal Year       ($/Sh) (2)      Date            5% (3)         10% (3)
    ----                  -------------         -----------       ----------      ----            ------         -------
<S>                       <C>                  <C>                <C>          <C>               <C>             <C>
Ira C. Norris                25,000                 12.6%          $   3.25     08/02/08          51,098         129,492

David A. Fogg                60,000                 30.3%          $   3.25     08/02/08         122,634         310,780

Gary E. Sorley               13,000 (4)              6.6%          $   2.00     01/01/08          16,351          41,437
                             10,000                  5.0%              3.25     08/02/08          20,439          51,797
</TABLE>

________________
(1) Each listed option granted to a named executive officer becomes exercisable
    for 25% of the option shares after 12 months of continued service from the
    date of grant. The option will become exercisable for the balance of the
    shares in a series of 36 successive equal monthly installments upon the
    optionee's completion of each additional month of service measured from the
    first anniversary of the date of grant. Each option will become immediately
    exercisable for all of the option shares in the event the Company is
    acquired by merger or sale of substantially all of the Company's assets or
    outstanding Common Stock, unless the option is assumed or otherwise replaced
    by the acquiring entity. The Compensation Committee has authority to provide
    for the acceleration of each option in connection with certain hostile
    tender offers or proxy contests for Board membership. Each option includes a
    limited stock appreciation right pursuant to which the option, if in effect
    for at least six months, will automatically be cancelled upon the occurrence
    of certain hostile tender offers, in return for a cash distribution from the
    Company based on the tender offer price per share. Each option has a maximum
    term of 10 years, subject to earlier termination in the event of the
    optionee's cessation of service with the Company.
(2) The exercise price of each option may be paid in cash, in shares of Common
    Stock valued at fair market value on the exercise date or through a cashless
    exercise procedure involving a same-day sale of the purchased shares. The
    Company may also finance the option exercise by loaning the optionee
    sufficient funds to pay the exercise price for the purchased shares and the
    federal and state tax liability incurred in connection with such exercise.
    The Compensation Committee has the authority to reprice outstanding options
    through the cancellation of those options and the grant of replacement
    options with an exercise price equal to the lower fair market value of the
    option shares on the regrant date.
(3) The potential realizable value is reported net of the option price, but
    before income taxes associated with exercise. These amounts represent
    assumed annual compounded rates of appreciation at 5% and 10% only from the
    date of grant to the expiration date of the option. There is no assurance
    provided to any executive officer or any other holder of the Company's
    securities that the actual stock price appreciation over the 10-year option
    term will be at the assumed 5% and 10% levels or at any other defined level.
    Unless the market price of the Common Stock does in fact appreciate over the
    option term, no value will be realized from the option grants made to the
    executive officers.
(4) Includes options to purchase 2,501 shares granted in exchange for options
    originally granted in 1996 and 1995.

                                       31
<PAGE>

Option/SAR Exercises and Holdings

     The following table provides information with respect to the named
executive officers concerning the unexercised options held as of the end of the
last fiscal year. None of the named executive officers exercised options to
purchase the Company's Common Stock during the last fiscal year.

Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
           Name              Number of Securities Underlying Unexercised      Value of Unexercised in-the-Money
                                   Options/SARs at FY-End                  Options/SARs at FY-End (Market price of
                                                                               shares at FY-End ($2.1875) less
                                                                                     exercise price) (1)
                           ----------------------------------------------------------------------------------------
                                  Exercisable           Unexercisable          Exercisable         Unexercisable
-------------------------------------------------------------------------------------------------------------------
<S>                               <C>                   <C>                    <C>                 <C>
Ira C. Norris                          0                    25,000                  0                    0
David A. Fogg                          0                    60,000                  0                    0
Gary E. Sorley                         0                    23,000                  0                    0
===================================================================================================================
</TABLE>

Option/SAR Repricing

     As of January 2, 1998, the Compensation Committee of the Board of Directors
offered all employees of the Company and one director who was a former employee
of the Company the right to exchange 32,269 outstanding options at prices
ranging from $3.75 to $6.75 per share with replacement options. The replacement
options were set at $2.00, the current fair market value at the time, and the
required holding period was reset. All employees and the director elected to
exchange their existing options for replacement options. Also on January 2,
1998, 41,058 new options were granted to employees at a price of $2.00 per
share.

Compensation Committee Report on Option Exchange

     The Compensation Committee (the "Committee") of the Board of Directors is
responsible for administration of the Company's Stock Option Plan, including the
determination that the Plan continues to provide a continuing incentive to
employees to remain as employees of the Company. A report of the Committee at
the time of the exchange relating to repricing of the options is as follows: (i)
the fair market value of the Company's common stock ("Common Stock") on January
2, 1998 was $2.00 per share based on the closing selling price of the Common
Stock, as reported by Nasdaq; (ii) a number of employees of the Company held
outstanding options (the "Higher-Priced Options") granted under the Company's
1992 Stock Option/Stock Issuance Plan (the "Plan") to purchase shares of Common
Stock at an exercise price which is significantly in excess of the current fair
market value of the Common Stock; (iii) it is in the best interests of the
Company to provide its employees with a continuing opportunity to acquire shares
of the Common Stock at the current fair market value of such stock and provide
each individual with a significant incentive to operate the Company from the
perspective of an owner with an equity stake in the business; and (iv) the
Committee deems it advisable to implement a cancellation/re-grant program under
the Plan, pursuant to which there shall be granted, in cancellation of each
Higher-Priced Option, a new replacement option under the Plan to purchase shares
of Common Stock with an exercise price equal to the current fair market value of
such shares.

     Reports on Option Exchange submitted by the Compensation Committee of the
Company's Board of Directors:

                                 Ira C. Norris
                               Thomas A. Hantges
                             John F. Seymour, Jr.

                                       32
<PAGE>

Director Remuneration

     Each non-employee member of the Board is paid an annual retainer fee of
$10,000 and reimbursed for all out-of-pocket costs incurred in connection with
attendance at meetings of the Board of Directors of the Company. In January
1999, the Company issued an aggregate of 35,826 shares of Company Common Stock
to certain of the Company's current and former directors as payment in full of
an aggregate of $97,500 in unpaid director fees owed by the Company to such
individuals. Upon joining the Board, the Company granted to each non-employee
director options to purchase 1,250 shares of Common Stock pursuant to the
Company's automatic option grant program under the Company's 1992 Stock
Option/Stock Issuance Plan. The options have a maximum term of ten years from
the date of grant at exercise prices per share equal to the fair market value on
the date of grant as follows: John F. Seymour Jr. - $6.00; Robert H. Daskal -
$2.622; and Thomas A. Hantges - $2.00. The Company made and makes similar
automatic option grants to purchase 834 shares annually to each continuing non-
employee director on the date of each Annual Meeting of Stockholders, provided
that such individual has served on the Board for at least six months prior to
the date of the meeting. Accordingly, in June 1998, John F. Seymour, Jr. and
Robert H. Daskal each received a ten-year option to purchase 834 shares of
Common Stock at an exercise price of $3.625 per share. Options granted under the
automatic option program may be exercised in full six months after the grant
date, provided the eligible director remains a member of the board through that
date. Such automatic option grants cease for any non-employee director who has
been granted options to purchase a cumulative total of options of 5,417 shares
of Common Stock.



                 [Remainder of page intentionally left blank]

                                       33
<PAGE>

Item 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1999 by (i) each person
who is known to the Company to own beneficially more than 5% of the outstanding
shares of the Common Stock of the Company, (ii) each director and director
nominee, (iii) each officer listed in the Summary Compensation Table, and (iv)
all directors and executive officers as a group. All shares are subject to the
named person's sole voting and investment power except where otherwise
indicated.

<TABLE>
<CAPTION>
     Name and Address
     of Beneficial Owner                                                              Shares Beneficially Owned
     -------------------                                                              -------------------------
                                                                                     Number          Percentage(1)
                                                                                     ------          -------------
     <S>                                                                             <C>             <C>
     Ira C. Norris (2)....................................................           607,405             27.5%
      1282 West Arrow Highway
      Upland, CA  91786

     Robert C. and Cheryl C. Porter.......................................           229,122             10.4%
      3068 East Sunset Road, Suite 14
      Las Vegas, NV  89120

     Overland Opportunity Fund, LLC (3)...................................           200,000              9.0%
      147 East Olive Avenue
      Monrovia, CA 91016

     Ronald L. Neeley (4).................................................           153,213             6.93%
      P.O. Box 371347
      San Diego, CA  92137

     Wellington Management Company, LLP (5)...............................           128,016              5.8%
      75 State Street
      Boston, MA 02109

     First Financial Fund, Inc. (6).......................................           128,016              5.8%
      One Seaport Plaza - 25th Floor
      New York, NY 10292

     Robert H. Daskal (7).................................................            19,860                *
      1282 West Arrow Highway
      Upland, CA 91786

     John F. Seymour, Jr. (8).............................................            15,670                *
      1282 West Arrow Highway
      Upland, CA 91786

     Thomas A. Hantges (9)................................................             6,341                *
      3900 Paradise Road, Suite 253
         Las Vegas, NV  89109

     David A. Fogg........................................................                --               --
      1282 West Arrow Highway
      Upland, CA 91786

     All directors and executive officers as a group
     (7 persons)(2)(7)(8)(9)..............................................           657,900             29.8%
</TABLE>

_______________
*    Percentage of shares beneficially owned does not exceed 1% of the class so
owned.

                                       34
<PAGE>

(1)  The percentage of beneficial ownership is calculated using 2,210,073 shares
     of Common Stock which were outstanding on April 30, 1999. Beneficial
     ownership is determined in accordance with the rules of the Securities and
     Exchange Commission and generally includes voting or investment power with
     respect to the securities.
(2)  Includes warrants to purchase 200,000 shares of the Company's Common Stock,
     currently exercisable at $2.625 per share, which were granted to the Norris
     Living Trust in December 1998. All shares of Common Stock are owned by the
     Norris Living Trust Dated 2/17/89, a family trust of which Mr. Norris and
     his wife, Nancy D. Norris, serve as trustees.
(3)  According to a Schedule 13D filed by Overland Opportunity Fund, LLC with
     the Securities and Exchange Commission ("SEC"), which states that in its
     capacity as a real estate investment company, Overland Opportunity Fund,
     LLC may be deemed beneficial owner of the shares. The Schedule 13D
     indicates that Overland Opportunity Fund, LLC has sole voting power and
     sole dispositive power.
(4)  Includes 22,500 shares of Common Stock owned by Mr. Neeley and 130,713
     shares of Common Stock owned by Neeley Revocable Family Trust dated
     9/15/81, as amended, of which Mr. Neeley is a co-trustee with his wife.
(5)  According to a Schedule 13G filed by Wellington Management Company, LLP
     with the SEC, which states that in its capacity as investment advisor, it
     may be deemed beneficial owner of the shares owned by its investment-
     counseling clients. The Schedule 13G indicates that Wellington Management
     Company, LLP has no voting power and shared dispositive power with respect
     to the shares.
(6)  According to a Schedule 13G filed by First Financial Fund, Inc. with the
     SEC, which states that in its capacity as an investment company, it may be
     deemed beneficial owner of the shares. The Schedule 13G indicates that
     First Financial Fund, Inc. has sole voting power and shared dispositive
     power with respect to the shares.
(7)  Includes 9,193 shares of Common Stock owned by Mr. Daskal and his wife
     jointly, options held by Mr. Daskal to purchase 1,250 shares of Common
     Stock currently exercisable at a price of $2.622 per share, options to
     purchase 834 shares of Common Stock currently exercisable at a price of
     $1.563 per share, options to purchase 834 shares of Common Stock currently
     exercisable at a price of $3.625 per share, options to purchase 1,500
     shares of Common Stock currently exercisable at a price of $3.250 per
     share, options to purchase 5,555 shares of Common Stock currently
     exercisable at a price of $2.00 per share, options to purchase 347 shares
     of Common Stock exercisable in June 1999 at a per share price of $2.00 and
     options to purchase 347 shares of Common Stock exercisable in July 1999 at
     a per share price of $2.00.
(8)  Includes 11,252 shares of Common Stock owned by Mr. Seymour, options held
     by Mr. Seymour to purchase 1,250 shares of Common Stock currently
     exercisable at $6.00 per share, options to purchase 834 shares of Common
     Stock currently exercisable at a price of $1.563 per share, options to
     purchase 834 shares of Common Stock currently exercisable at a price of
     $3.625 per share and options to purchase 1,500 shares of Common Stock
     currently exercisable at a price of $3.250 per share.
(9)  Includes 3,591 shares of Common Stock owned directly by Mr. Hantges and
     options held by Mr. Hantges to purchase 1,250 shares of Common Stock
     currently exercisable at a price of $2.00 per share, and options to
     purchase 1,500 shares of Common Stock currently exercisable at a price of
     $3.25 per share.

                                       35
<PAGE>

Item 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Transactions with Ira C. Norris and Entities Controlled by Ira C. Norris

     For the years ended December 31, 1998 and 1997, the Company incurred
$25,500 and $45,000, respectively, in model home design fees and $152,431 and
$108,400, respectively, as reimbursement for the cost of the model home
furnishings to Nancy Orman Interiors. Nancy Norris, the wife of Ira C. Norris,
owns Nancy Orman Interiors.

     From September 1996 through November 30, 1997, the Company received
advances of $2,747,000 from Ira C. Norris, of which the Company had repaid
$460,000. The advances were unsecured, bore interest at 10% and were due on
March 31, 1998. The balance of these advances at December 23, 1997 was
$2,462,000, which included accrued interest of $171,000. On that date, Mr.
Norris agreed to convert $2,340,000 of this debt into 2,340 shares of Series A
Cumulative Preferred Stock of the Company. The Company issued these shares on
December 30, 1997 to the Norris Living Trust, of which Mr. Norris is a
beneficiary and trustee. The Series A Preferred Stock has a par value of $0.01,
has no voting rights, is non-participating, and has no conversion features. The
stock is redeemable at the option of the Company for cash at the redemption
price of $1,000 per share plus accumulated but unpaid dividends. The established
dividend rate on the Preferred Stock is $100 per share per annum payable
quarterly from available working capital. An unsecured note to the Norris Living
Trust, bearing interest at 10%, evidences the balance of indebtedness not
converted in the amount of approximately $122,000. The note was due in December
1998 and has been extended until December 23, 1999. The balance owing under this
note at December 31, 1998 was $134,035, which includes accrued interest of
approximately $12,035.

     In addition to the loans described above, in June 1997, the Norris Living
Trust loaned the Company $500,000 secured by undeveloped land owned by the
Company in Victorville and Palmdale, California. This note bears interest at
10%, was due in June 1998 and has been extended until June 1999. The balance
owing under this note at December 31, 1998 was $575,815, which includes accrued
interest of approximately $75,815.

     On December 2, 1998, the Norris Living Trust advanced $40,000 to the
Company to be repaid within 12 months at an interest rate of 10.0% per annum. In
addition, on December 4, 1998, the Norris Living Trust advanced an additional
$285,000 at an interest rate of 10.0% per annum to the Company in connection
with the closing of a $16.5 million construction loan on the Company's
Mockingbird Canyon Estates project. The note is for a 12-month period, with an
interest rate of 10.0% per annum, which will accrue and be due along with the
principal on December 2, 1999. Subsequent to December 31, 1998, the Norris
Living Trust advanced an additional $200,000 to the Company to be repaid within
12 months at an interest rate of 10.0% per annum. The Company has pledged a
security interest in its Mockingbird Canyon Estates project to the Norris Living
Trust as security for the repayment of the notes.

     Additionally, on December 11, 1998, the stockholders of the Company
approved the issuance of a warrant to purchase 200,000 shares of Common Stock to
Ira C. Norris in connection with the extension of a $1,000,000 non-revolving
line of credit made by Mr. Norris on July 15, 1998 through the living trust he
created for the benefit of himself and his family (the "Norris Living Trust") to
the Company's wholly owned subsidiary Huntington Homes LLC. The $1,000,000 non-
revolving line of credit bears interest at a variable interest rate, of which
the initial interest rate was 10.0% per annum. The note securing the line of
credit is due and payable in fully by July 2, 1999. At December 31, 1998, the
accrued interest under the note was $2,275.

Transactions with Thomas A. Hantges

     Thomas A. Hantges owns approximately 67% of both USA Commercial Mortgage
Company ("USA") and USA Commercial Real Estate Group ("USA Real Estate"). USA
has provided loans and arranged for individual lenders to provide loans to the
Company secured by Company projects in cumulative amounts totaling $13,650,000
and $12,120,000 for the years ended December 31, 1998 and 1997, respectively.
USA has earned cumulative fees for these loans for the years ended December 31,
1998 and 1997 totaling $1,118,000 and $1,087,000, respectively, of which
$909,000 and $878,000, respectively, has been paid. The balance is secured by
notes and is to be paid

                                       36
<PAGE>

from proceeds from sales of completed homes in certain of the Company's
projects. The interest rates on these loans ranged from 12.25% to 15.25% in 1998
and from 12.25% to 20.25% in 1997. The outstanding balance of these loans at
December 31, 1998 and 1997 was $5,397,700 and $6,922,000, respectively.

     In June 1997, USA Real Estate arranged for an additional group of investors
to purchase the Company's Eagle Ranch project in the high desert for $2,400,000.
Funds from this sale helped the Company repay portions of matured loans secured
by this project with a commercial bank. The investors granted the Company a six-
year option to periodically repurchase portions of the property, subject to
annual minimum repurchase thresholds, for the development of single-family
homes. If the Company failed to repurchase the minimum number of lots in any
year, the option would terminate. Because of an election by the Company not to
acquire any lots under this option agreement and the failure to pay the
prerequisite real estate taxes, the Company was notified that its rights to
acquire these lots had been terminated.

     In February 1999, the Company entered into an Agency Agreement with USA.
Pursuant to the Agency Agreement, upon completion of the proposed merger with
American Communities, Inc., USA shall receive a 10-year option to purchase
250,000 shares of Common Stock of the Company for $2.00 per share. In addition,
USA shall receive certain registration rights with respect to the optioned
shares. If the Company's stockholders do not approve the stock options and
registration rights, USA shall receive, upon completion of the American merger,
the sum of $600,000 payable $200,000 within two business days of approval of the
merger by the Company's stockholders, and $50,000 quarterly thereafter.

     Subsequent to year end, the Company sold 53 finished lots and 4 completed
models to USA Investors II, LLC, whose manager is USA Commercial Mortgage. The
property was sold for cash consideration of $50,000 and the assumption of
approximately $1.7 million of debt and trade accounts payable, including
existing debt to USA Mortgage of approximately $1.1 million. The debt assumed is
estimated based upon current outstanding obligations minus proforma debt
paydowns from the closing of 12 units under construction. The Company is also
entitled to additional consideration of $100,000 payable from the profits upon
the sale of these properties by USA Investors II, LLC. As of December 31, 1998,
the Company has chosen to write down additional capitalized costs attributable
to these lots. These costs would have been charged to cost of sales in the
normal course of business as each house was sold had the lots been built out.
The additional charge of $974,000 was expensed to the provision for write down
of real estate.

Transactions with Overland Opportunity Fund, LLC

     One of the owners of Overland Opportunity Fund, LLC ("Overland"), which
owned 9.1% of the Company's outstanding Common Stock at April 30, 1999, is an
affiliate of three entities with which the Company has signed Development and
Marketing Agreements. See "Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."

                                       37
<PAGE>

ITEM 13.  EXHIBITS LIST, AND REPORTS ON FORM 8-K.

(a)  Exhibits.

Exhibit
Number                        Document Description
------                        --------------------

3.1       Restated Certificate of Incorporation of the Registrant. (Incorporated
          by reference to the Company's Form 8-K dated January 15, 1997.)

3.2       Restated Bylaws of the Registrant. (Incorporated by reference to
          Exhibit 3.2 of the Company's Annual Report on Form 10-K dated December
          31, 1995.)

*3.3      Certificate of Amendment of the Restated Certificate of Incorporation
          of the Registrant, dated December 11, 1998.

4.1       Specimen of Common Stock Certificate. (Incorporated by reference to
          Exhibit 4.1 of the Company's Annual Report on Form 10-K dated December
          31, 1996.)

4.2       Preferred Stock Certificate issued to Norris Living Trust.
          (Incorporated by reference to Exhibit 4.2 of the Company's Annual
          Report on Form 10-KSB dated December 31, 1997.)

4.3       Certificate of Designations, Preferences and Rights of Series A
          Cumulative Preferred Stock of Inco Homes Corporation. (Incorporated by
          reference to Exhibit 4.3 of the Company's Annual Report on Form 10-KSB
          dated December 31, 1997.)

10.1      Form of Indemnification Agreement between the Registrant and its
          directors and certain officers. (Incorporated by reference to Exhibit
          10.1 of the Company's registration statement under the Securities Act
          on Form S-1, Registration Statement No. 33-58050.)

+10.2     Form Stock Option Agreement. (Incorporated by reference to Exhibit
          10.3 of the Company's registration statement under the Securities Act
          on Form S-1, Registration Statement No. 33-58050.)

+10.3     Form Stock Option Agreement (with Stock Appreciation Right.)
          (Incorporated by reference to Exhibit 10.4 of the Company's
          registration statement under the Securities Act on Form S-1,
          Registration Statement No. 33-58050.)

+10.4     Form of Non-employee Director Option Agreement. (Incorporated by
          reference to Exhibit 10.5 of the Company's registration statement
          under the Securities Act on Form S-1, Registration Statement No. 33-
          58050.)

+10.5     Form of Stock Issuance Agreement. (Incorporated by reference to
          Exhibit 10.6 of the Company's registration statement under the
          Securities Act on Form S-1, Registration Statement No. 33-58050.)

+10.6     Profit Sharing Plan. (Incorporated by reference to Exhibit 10.7 of the
          Company's registration statement under the Securities Act on Form S-1,
          Registration Statement No. 33-58050.)

+10.7     Cash or Deferred Profit Sharing Plan. (Incorporated by reference to
          Exhibit 10.8 of the Company's registration statement under the
          Securities Act on Form S-1, Registration Statement No. 33-58050.)

+10.8     Employees' Incentive Compensation Plan. (Incorporated by reference to
          Exhibit 10.49 of the Company's registration statement under the
          Securities Act on Form S-1, Registration Statement No. 33-58050.)

                                       38
<PAGE>

Exhibit
Number                        Document Description
------                        --------------------

+10.9     1992 Stock Option/Stock Issuance Plan. (Incorporated by reference to
          Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q dated
          March 31, 1994.)

10.10     Tax Indemnification Agreement between the Registrant and Ira C. Norris
          dated March 15, 1993. (Incorporated by reference to Exhibit 10.44 of
          the Company's registration statement under the Securities Act on Form
          S-1, Registration Statement No. 33-58050.)

10.11     Limited Partnership Agreement of Spirit Corona 77, L.P. by and between
          ORA A&D Associates, L.P., a California Limited Partnership and Inco
          Homes Corporation, a Delaware corporation, dated January 11, 1996.
          (Incorporated by reference to Exhibit 10.1 of the Company's Quarterly
          Report on Form 10-Q dated June 30, 1996.)

10.12     Limited Partnership Agreement of Freedom--Eagle Ranch Housing Partners
          by and between Julia Construction Inc., a California corporation, Fred
          E. Liao and Bob C. Chang, and Inco Homes Corporation, a Delaware
          corporation, dated May 1, 1996. (Incorporated by reference to Exhibit
          10.2 of the Company's Quarterly Report on Form 10-Q dated June 30,
          1996.)

10.13     Limited Partnership Agreement of Triumph--Lancaster Housing Partners
          by and between the Gibbs Family Trust and Inco Homes Corporation,
          dated August 5, 1996. (Incorporated by reference to Exhibit 10.1 of
          the Company's Quarterly Report on Form 10-Q dated September 30, 1996.)

10.14     Common Stock Purchase Agreement by and between Inco Homes Corporation
          and Overland Opportunity Fund, LLC, a California Limited Liability
          Company, dated December 23, 1996. (Incorporated by reference to
          Exhibit 10.44 of the Company's Annual Report on Form 10-K dated
          December 31, 1996.)

10.15     Option Agreement by and between Inco Homes Corporation and Overland
          Opportunity Fund, LLC, a California Limited Liability Company, dated
          December 26, 1996. (Incorporated by reference to Exhibit 10.45 of the
          Company's Annual Report on Form 10-K dated December 31, 1996.)

10.16     Consulting Agreement by and between Inco Homes Corporation and
          Overland Company, Inc., a California Corporation, dated December 26,
          1996. (Incorporated by reference to Exhibit 10.46 of the Company's
          Annual Report on Form 10-K dated December 31, 1996.)

10.17     Warrant to Purchase 1,200,000 Shares of Inco Homes Corporation Common
          Stock issued to Overland Company, Inc., dated December 26, 1996.
          (Incorporated by reference to Exhibit 10.47 of the Company's Annual
          Report on Form 10-K dated December 31, 1996.)

10.18     Secured Participation Note by and between Hunter's Ridge Investment
          Partners, a California Partnership and Inco Homes Corporation, dated
          October 1996. (Incorporated by reference to Exhibit 10.49 of the
          Company's Annual Report on Form 10-K dated December 31, 1996.)

10.19     Registration Rights Agreement by and between Inco Homes Corporation
          and Overland Opportunity Fund, LLC, a California Limited Liability
          Company, dated December 23, 1996. (Incorporated by reference to
          Exhibit 10.50 of the Company's Annual Report on Form 10-K dated
          December 31, 1996.)

10.20     Development and Marketing Agreement by and between Capital Mutual
          Moreno Valley, LLC., a California Limited Liability Company and Inco
          Homes Corporation, dated October 21, 1997. (Incorporated by reference
          to Exhibit 10.8 of the Company's Annual Report on Form 10-KSB dated
          December 31, 1998.)

                                       39
<PAGE>

Exhibit
Number                        Document Description
------                        --------------------

10.21     Letter Agreement by and between Overland Company, Inc. a California
          Corporation and Inco Homes Corporation, dated November 4, 1997.
          (Incorporated by reference to Exhibit 10.88 of the Company's Annual
          Report on Form 10-KSB dated December 31, 1998.)

10.22     Common Stock Purchase Agreement by and between Thomas Hantges and
          Joseph D. Milanowski and Inco Homes Corporation, dated November 14,
          1997. (Incorporated by reference to Exhibit 10.89 of the Company's
          Annual Report on Form 10-KSB dated December 31, 1998.)

10.23     Agreement by and between City National Bank and Inco Homes
          Corporation, dated December 1, 1997. (Incorporated by reference to
          Exhibit 10.99 of the Company's Annual Report on Form 10-KSB dated
          December 31, 1998.)

10.24     Restructuring Agreement by and between Sara Katz, et al., Palmdale
          Vistas Housing Developments, a California Limited Partnership, Inco
          Development Corporation, and Inco Homes Corporation, dated December 4,
          1997. (Incorporated by reference to Exhibit 10.103 of the Company's
          Annual Report on Form 10-KSB dated December 31, 1998.)

10.25     Agreement and Escrow Instructions by and between Palmdale Vistas
          Housing Investments, a California Limited Partnership, Palmdale Vistas
          Housing Developments, a California Limited Partnership, and Inco
          Development Corporation, dated December 19, 1997. (Incorporated by
          reference to Exhibit 10.104 of the Company's Annual Report on Form 10-
          KSB dated December 31, 1998.)

10.26     Promissory Note between the Norris Living Trust and Business Bank of
          California dated July 15, 1998. (Incorporated by reference to Exhibit
          10.1 of the Company's Quarterly Report on Form 10-QSB dated June 30,
          1998.)

10.27     Modification of Secured Promissory Note between Ira C. Norris,
          Trustee, Norris Living Trust ad Inco Homes Corporation, dated June 26,
          1998. (Incorporated by reference to Exhibit 10.2 of the Company's
          Quarterly Report on Form 10-QSB dated June 30, 1998.)

10.28     Modification of Secured Promissory Note between Ronald L. Neeley and
          Lucille A. Neeley, Co-Trustees under the Neeley Revocable Family Trust
          and Inco Homes Corporation, dated June 26, 1998. (Incorporated by
          reference to Exhibit 10.3 of the Company's Quarterly Report on Form
          10-QSB dated June 30, 1998.)

*+10.29   Inco Homes Corporation 1998 Incentive Stock Option Plan and
          Nonstatutory Stock Option Plan.

*10.30    Warrant to Purchase 200,000 Shares of Inco Homes Corporation Common
          Stock issued to Norris Living Trust, dated December 11, 1998.

*10.31    Development & Marketing Agreement by and between Harwood Palmdale
          Partners I, a Limited Partnership and Inco Homes Corporation.

*10.32    Development & Marketing Agreement by and between Overland Haven, LLC,
          a California Limited Liability Company and Inco Homes Corporation.

*10.33    Development & Marketing Agreement by and between Overland R.C. 29,
          LLC, a California Limited Liability Company and Inco Homes
          Corporation.

*10.34    Agency Agreement by and between USA Commercial Mortgage Company, a
          Nevada corporation, and Inco Homes Corporation, a Delaware Corporation
          dated February 26, 1999.

                                       40
<PAGE>

Exhibit
Number                        Document Description
------                        --------------------

*10.35    Purchase and Sale Agreement by and between USA Investors II, LLC, a
          Nevada limited liability company and Huntington Homes, LLC, a
          California limited liability company, dated June 23, 1999.

*21.1     Subsidiaries of the Registrant.

*23.1     Consent of Certified Public Accountants (PriceWaterhouseCoopers LLP).

*27.1     Financial Data Schedule

________________
* Filed herewith
+ Management contract, compensatory plan or arrangement

(b)  Reports on Form 8-K.

     None.

                                       41
<PAGE>

                                  SIGNATURES

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

                              INCO HOMES CORPORATION


                              By  /s/ Ira C. Norris
                                  -----------------------------------------
                                  Ira C. Norris
                                  Chairman of the Board, President and
                                  Chief Executive Officer
Dated: July 7, 1999

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

         Signature                          Title                     Date
         ---------                          -----                     ----
  /s/ Ira C. Norris           Chairman of the Board, President   July 7, 1999
---------------------------
      Ira C. Norris           and Chief Executive Officer
                              (principal executive officer)

  /s/ David A. Fogg           Chief Financial Officer            July 7, 1999
---------------------------
      David A. Fogg           (principal financial officer)

  /s/ Robert H. Daskal        Director                           July 7, 1999
---------------------------
      Robert H. Daskal

  /s/ Thomas A. Hantges       Director                           July 7, 1999
---------------------------
      Thomas A. Hantges

  /s/ John F. Seymour, Jr.    Director                           July 7, 1999
---------------------------
      John F. Seymour, Jr.

                                       42