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

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

                                    FORM 10-K

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


[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934 [FEE REQUIRED]
      For the fiscal year ended December 31, 1996

                                       OR


[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
      For the transition period from____________ to _________


                         COMMISSION FILE NUMBER 0-21378

                             INCO HOMES CORPORATION
             (Exact name of registrant as specified in its charter)



                DELAWARE                                33-0534734
      (State or other jurisdiction                    (I.R.S. employer 
    of incorporation or organization)               identification no.)

                             1282 WEST ARROW HIGHWAY
                            UPLAND, CALIFORNIA 91786
               (Address of principal executive offices)(Zip code)

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

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                      None

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                                  COMMON STOCK
                                (Title of class)

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

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

         The aggregate market value of the voting stock held by non-affiliates
of the registrant on March 31, 1997 was $2,878,037.

         The number of shares outstanding of each of the registrant's classes of
common stock on March 31, 1997 was as follows:

            COMMON STOCK (PAR VALUE $.01 PER SHARE) 1,637,096 shares

                       DOCUMENTS INCORPORATED BY REFERENCE

         Definitive Proxy Statement relating to the Company's 1997 Annual
Meeting to be filed hereafter (incorporated into Part III hereof).


<PAGE>   2
                                     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.

GENERAL

         Inco Homes Corporation ("Inco Homes" or 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.

         In 1994, Inco Homes entered the Phoenix, Arizona and Las Vegas, Nevada
markets as part of a diversification and growth strategy. During the fourth
quarter of 1994, the Company consolidated its two Southern California
homebuilding divisions, the High Desert Division and the Inland Division, into
one Southern California operation due to the reduced sales activity in the high
desert market and to realize the benefit of certain cost savings. In December
1995 the Company sold its Phoenix and Las Vegas homebuilding divisions to an
unrelated third party in order to raise needed capital and refocus on its
historical core markets in Southern California.

         During 1996, prices for the Company's homes ranged from $59,990 to
$219,000, with an average sales price of $136,000. 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 (the "Predecessor Subsidiaries")
operating under the "Inco Homes" name through several limited partnerships and
various corporations under the control of Ira C. Norris, the Company's founder
(the "Reorganization"). Pursuant to an exchange offer made to the shareholders
and partners of the Predecessor Subsidiaries which was effected in April 1993 at
the time of the Company's initial public offering (the "Initial Public
Offering") of its Common Stock, the Company (i) acquired the outstanding capital
stock or partnership interests of the Predecessor Subsidiaries and (ii)
consolidated ownership of all of the Company's projects and businesses, except
those related to Inco Land Acquisition Company and Palmdale Vistas Housing
Developments, L.P. ("Palmdale Vistas"), into the Company. Under the terms of the
Reorganization, the consideration paid to acquire the outstanding capital stock
and partnership interests of the Predecessor Subsidiaries consisted of shares of
Common Stock. Inco Homes(R) and the Company's logo are registered trademarks of
the Company.


                                       2
<PAGE>   3
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 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. Although the Company generally believes its
relationships with its subcontractors have been good, recently relationships
with certain subcontractors have weakened due to its inability to pay all of its
subcontractors on a current basis. Numerous subcontractors and suppliers have
filed liens, and some are pursuing further legal action, including the filing of
complaints. The Company has negotiated payment arrangements, as appropriate, in
an effort to settle these claims and release the liens. 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.

         During 1996, the Company's financial results were particularly affected
by certain factors, including but not limited to the continued low sales
activity in Southern California, higher mortgage interest rates during a portion
of the year, and the 1995 sale of its Phoenix and Las Vegas divisions.

SOUTHERN CALIFORNIA HOUSING MARKETS

         As a result of the 1995 sale of the Company's Phoenix and Las Vegas
divisions, 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 California
over the last several years have adversely affected its results of operations,
most particularly in the high desert region of San Bernardino County. Due to the
large number of defense contractors and major corporations located in
California, the state's economy has been adversely affected by military spending
cutbacks. The prolonged economic downturn in California has had and could
continue to have a material adverse effect on the Company's business, 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.
Additionally, in both 1995 and 1994 the Company concluded that certain
seller-financed parcels were no longer economically viable based on current
financing terms. Accordingly, several measures were initiated, including
requests that certain sellers substantially restructure the terms of their debt,
including extending the maturity date, reducing or eliminating payment and
accrual of interest and deferring principal payments. The Company also
identified certain properties that should be deeded back to the sellers in full
satisfaction of the remaining debt outstanding. 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.



                                       3
<PAGE>   4
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
                                                                                    ======
     Total                                                                           5,037
                                                                                    ======
</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>   5
         Table II presents information as of December 31, 1996 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 II - CURRENT AND PLANNED PROJECTS

<TABLE>
<CAPTION>
                                                                                  ANTICIPATED
                                                               HOMES    HOME SITES  OR ACTUAL
                                           ESTIMATED NUMBER    CLOSED    REMAINING    YEAR        
                                              OF HOMES AT      AS OF       AS OF   OF INITIAL     SALES PRICE
     PROJECT                LOCATION (1)      COMPLETION(2)   12/31/96   12/31/96  CLOSINGS(3)      RANGE(4) 
     -------                ------------   ----------------   --------   --------  -----------    -----------
<S>                         <C>            <C>                <C>       <C>        <C>           <C>
  HIGH DESERT
  Eagle Ranch
     Freedom (5)            Victorville              166           0        166       1997       $106,990 - 128,540
     Additional Land (6)    Victorville              993           0        993       n/a                       n/a
                                                   -----         ---      -----                
         Total Eagle Ranch                         1,159           0      1,159                
                                                   -----         ---      -----                
  Adelanto                                                                                     
     Victory Lane           Adelanto                 331         311         20       1993          59,990 - 82,990
     Reunion                Adelanto                  72          70          2       1994         91,990 - 118,990
     Winners Circle (7)     Adelanto                 162           1        161       1996         91,990 - 114,990
     Land to be deeded                                                                         
     back(8)                Adelanto                 527           0        527       n/a                       n/a
                                                   -----         ---      -----                
                                                                                               
         Total Adelanto                            1,092         382        710                
                                                   -----         ---      -----                
  Other                                                                                        
     Spirit (9)             Palmdale                 261          51        210       1995        139,000 - 163,000
     Triumph (10)           Lancaster                 78           3         75       1996          72,990 - 90,990
     Vista Verde (6)        Victorville              756           0        756       n/a                       n/a
     Vista Verde-Land to be                                                                    
        deeded back (11)    Victorville               56                     56       n/a                       n/a
                                                   -----         ---      -----                
                                                                   0                           
         Total Other                               1,151          54      1,097                
                                                   -----         ---      -----                
         Total High Desert                         3,402         436      2,966                
                                                   -----         ---      -----                
  INLAND                                                                                       
  Bella Vita (12)           Fontana                   83           0         83       1997        179,990 - 219,990
  Hometown (formerly        Lake Elsinore             63          36         27       1995         99,990 - 141,990
  Reunion)                                                                                     
  Hometown-Land to be                                                                          
  deeded back (13)          Lake Elsinore            115           0        115       n/a                       n/a
                                                                                               
  Desert Pride (formerly    La Quinta                150          10        140       1995        119,990 - 146,990
  Reunion)                                                                                     
  Spirit (14)               Corona                   144          80         64       1995        170,000 - 219,000
                                                   -----         ---      -----                
                Total Inland                         555         126        429                
                                                   -----         ---      -----                
                                                                                               
           TOTAL COMPANY                           3,957         562      3,395                
                                                   =====         ===      =====
</TABLE>
-----------                                                            

(1)   Victorville, Adelanto and Fontana are located in San Bernardino County.
      Palmdale and Lancaster are located in Los Angeles County. Lake Elsinore,
      La Quinta and Corona 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. One of the owners of two entities that own
      approximately 12.2% of the Company's outstanding common stock and a
      warrant to acquire approximately an additional 10.9%, respectively, is a
      partner of FERHP. See "Item 5. Market for Registrant's Common Equity and
      Related Stockholder Matters" and "Item 8. Financial Statements and
      Supplementary data, Note 8" herein. See also "Certain Relationships and
      Related Transactions" in the Company's Proxy Statement for its 1997 Annual
      Meeting of Stockholders (the "1997 Proxy Statement"), which, when filed
      pursuant to Regulation 14A under the Securities Act of 1934, will be
      incorporated by reference in this Annual Report on Form 10-K. (6)
      Represents additional land owned by the Company which will be used for
      future projects.

(7)   45% of project net income from the sale of 151 of these homes will be paid
      by the Company to ALG 1996-1 ("ALG"), the holder of a Secured
      Participation Note. Thomas E. Gibbs, Jr., a member of the Company's Board
      of Directors, holds a 25% general partner's interest in ALG. See "Item 8.
      Financial Statements and Supplementary Data, Note 9" herein, and "Certain
      Relationships and Related Transactions" in the Company's 1997 Proxy
      Statement.


                                       5
<PAGE>   6

(8)   This land, which is subject to seller financing aggregating $1.0 million
      at December 31, 1996, is anticipated to be deeded back to the sellers in
      satisfaction of the related debt. See " -- Southern California Housing
      Markets."

(9)   The Company is the managing general partner of, and has a 51.295% interest
      in, Palmdale Vistas Housing Developments, Ltd. ("Palmdale Vistas"), the
      limited partnership that owns this project. Mr. Gibbs holds a 1.295%
      limited partner's interest in Palmdale Vistas, and also a 23% general
      partner's interest and a 1.376% limited partner's interest in Palmdale
      Vistas Housing Investments, a limited partnership which holds a 47.41%
      limited partner's interest in Palmdale Vistas. See "Item 8. Financial
      Statements and Supplementary Data, Note 9" herein, and "Certain
      Relationships and Related Transactions" in the Company's 1997 Proxy
      Statement.

(10)  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. The Gibbs Family Trust, of which Mr. Gibbs is a
      beneficiary and a trustee, holds a 50% limited partner's interest in
      Triumph. See "Item 8. Financial Statements and Supplementary Data, Note 9"
      herein, and "Certain Relationships and Related Transactions" in the
      Company's 1997 Proxy Statement.

(11)  This land, which is subject to seller financing aggregating $0.3 million
      at December 31, 1996, was deeded back to the sellers in January 1997 in
      satisfaction of the related debt. See " -- Southern California Housing
      Markets."

(12)  50% of project net income from the sale of these homes will be paid by the
      Company to Hunters Ridge Investment Partners ("HRIP"), the holder of a
      Secured Participation Note. Mr. Gibbs is the managing general partner of
      HRIP, with a 56.25% interest. See "Item 8. Financial Statements and
      Supplementary Data, Note 9" herein, and "Certain Relationships and Related
      Transactions" in the Company's 1997 Proxy Statement.

(13)  This land, which is subject to seller financing aggregating $0.4 million
      at December 31, 1996, is anticipated to be deeded back to the sellers in
      satisfaction of the related debt. See " -- Southern California Housing
      Markets."

(14)  The Company is the general partner of, and has a 50% interest in, Spirit
      Corona 77, L.P. ("Spirit 77"), the limited partnership that is developing
      77 of these home sites. The Company purchased 31 developed lots from this
      partnership in 1996, 10 additional lots in February 1997, and expects to
      purchase the remaining lots. However, the Company is in default on the
      Purchase Agreement since the Company has not purchased all of the required
      minimum number of lots from Spirit 77. The Company and Spirit 77 are
      currently negotiating a modification to the Purchase Agreement.
      Additionally, the Company is in default on two notes payable to Spirit 77
      related to the purchase of lots in 1996. The Company and Spirit 77 are
      currently negotiating extensions to the due dates of these notes.

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.


                                       6
<PAGE>   7


         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 in order to fund a portion of the Company's land
acquisition, model complex development costs and initial marketing expenditures.
The Company will continue to utilize such partnership arrangements when
management perceives a favorable opportunity. In 1996 the Company formed three
such limited partnerships, FERHP, Triumph and Spirit 77, for certain projects in
which the Company is the general partner and has a 50% interest. Additionally,
in 1996 the Company was the maker of Secured Participation Notes with ALG and
HRIP, providing the holders with 45% and 50%, respectively, of a certain
project's net income. Thomas E. Gibbs, Jr., a member of the Company's Board of
Directors, holds partnership interests in each of Triumph, ALG and HRIP. Also,
one of the owners of two entities which own approximately 12.2% of the Company's
outstanding common stock and a warrant to acquire approximately an additional
10.9%, respectively, is a partner of FERHP. See "Item 8. Financial Statements
and Supplementary Data, Notes 8 and 9" herein, and "Certain Relationships and
Related Transactions" in the Company's 1997 Proxy Statement.

         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.
Accordingly, these sales vary from year to year depending on market conditions.
Land sales were $373,000 in 1994. The Company had no land sales in 1996 or 1995.
In addition, 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, and does not intend to build on such land, but
may later sell, lease or joint venture such land with commercial property
developers. In December 1996, in consideration of a $50,000 payment, the Company
gave an exclusive option to a third party to purchase approximately 71 acres of
commercial property located in one of the Company's high desert projects. See
"Item 7. 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.

         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 majority 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."


                                       7
<PAGE>   8


         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.

         The Company generally believes its relationships with its
subcontractors has been good. However, as a result of the limited amount of
available working capital, relationships with certain 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 filing of
complaints. The Company has negotiated payment arrangements, as appropriate, in
an effort to settle these claims and release the liens. The Company does not
believe that any of these claims, in the aggregate, will have a material adverse
financial effect on the Company's business. 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 majority 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 7. 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 in 1994 there was a
strike by the employees of one of the Company's cabinet suppliers. While the
strike was eventually settled, it had the effect of delaying approximately 50
closings from the third quarter to the fourth quarter of 1994. 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 1994, certain homeowners in one of
the Company's Southern California projects filed a complaint against the Company
alleging construction defects. See "Item 3. Legal Proceedings."

MARKETING AND SALES

         The Company develops 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, television,
radio and print advertisements.



                                       8
<PAGE>   9

         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.

         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 without significant additional cost. 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.

         In June 1994, the Company opened 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 sells its homes primarily through its internal sales force,
who typically work from the sales offices located at the model homes used in
each subdivision. In January 1997, the Company contracted with an independent
sales and marketing company to manage its sales force. The Company also 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.

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 prequalification to
determine the price of the home they are able to afford. These services had been
provided through the Company's wholly-owned mortgage brokerage subsidiary,
Freedom Mortgage, Inc. ("Freedom"). In the third quarter of 1995, the Company
transferred the California and Las Vegas operations of Freedom to an unrelated
third party and in December 1995 transferred the Phoenix operations in
connection with the sale of its Phoenix division.

         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.
Although mortgage financing for qualified homebuyers was readily available
during 1996, there can 


                                       9
<PAGE>   10

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 7. 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 1996,
1995 and 1994, 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 $152,362 in San
Bernardino and Riverside Counties, and $160,950 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 also 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 believes that providing 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 encouragement and
guidance throughout the homebuying process. The Company has developed video
brochures for some of the Company's projects which provide information about the
homebuying process, emphasizing the advantages of home ownership, and
reinforcing why homebuyers should purchase one of the Company's homes. These
videos are designed to motivate potential homebuyers on an emotional level,
presenting an image of community and orienting potential homebuyers to local
shopping, hospitals, industry, schools and recreation. The videos also
familiarize homebuyers with the loan and escrow procedures, as well as the final
home inspection process.

         The Company provides each homebuyer with a Homebuyer's Information
Booklet describing area amenities and services, such as schools, health services
and emergency services. A Warranty and Information Guide identifies the
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 thirty 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.



                                       10
<PAGE>   11

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. Entrants into the markets in which the Company
operates increases competition in those markets. In response to declining
overall home sales, the Company has been required to provide homebuyers with
price discounts and other sales incentives in order to remain competitive. This
has resulted in reduced profitability or losses for the homes that the Company
has sold. In addition, sales of homes and land at deeply discounted prices by
competitors, lenders and similar institutions in the markets where the Company
operates could have a material adverse effect on the Company's business,
financial condition and results of operation. Competition for the acquisition of
desirable real estate on which to build homes is also intense.

         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 and developmental 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.

         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 which 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. 


                                       11
<PAGE>   12

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, 1996, there were
approximately $8.9 million in outstanding bonds for such purposes.

EMPLOYEES

         At December 31, 1996, the Company employed 63 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. During 1994, there was a strike
by the employees of one of the Company's cabinet suppliers. While the strike was
eventually settled, it had the effect of delaying approximately 50 closings from
the third quarter to the fourth quarter of 1994.

         The Company's success is highly dependent upon the performance of its
senior management and, in particular, Ira C. Norris, President of the Company,
who is well recognized in California's homebuilding industry. 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 March 31, 1997, Ira C. Norris and Ronald L. Neeley, directors of the
Company, own beneficially approximately 25% and 8% of the Company's outstanding
Common Stock, respectively. Due to this ownership position, Mr. Norris and Mr.
Neeley may be able to control the affairs and policies of the Company and may be
able to elect a sufficient number of directors to control the Company's Board of
Directors and to approve or disapprove any matter submitted to a vote of
stockholders. Furthermore, Mr. Norris and Mr. Neeley may have conflicts of
interest with other stockholders with respect to the affairs and policies of the
Company. The ownership positions of Mr. Norris and Mr. Neeley, 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.

EXECUTIVE OFFICERS OF THE REGISTRANT

         The following are the names and respective ages as of December 31, 1996
of the executive officers of the Company. The Company's executive offers are
elected by, and serve at, the discretion of the Board of Directors.

<TABLE>
<CAPTION>
NAME                                         AGE                  POSITION
----                                         ---                  --------
<S>                                          <C>      <C>
Ira C. Norris..........................      60       Chairman of the Board, President and Chief
                                                      Executive Officer

Robert H. Daskal.......................      55       Executive Vice President, Chief Financial
                                                      Officer and Director (1)

Norman B. Gold.........................      44       Vice President, Chief Financial Officer (1)


Lynn C. Parkes.........................      44       Controller
</TABLE>

         (1) Robert H. Daskal stepped down from his positions as Executive Vice
President and Chief Financial Officer on January 15, 1997 to pursue other
professional interests. He will remain a member of the Company's board of


                                       12
<PAGE>   13
directors and will be available to the Company on a consulting basis. Norman B.
Gold was elected by the Company's Board of Directors as Vice President and Chief
Financial Officer on January 15, 1997.

         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.

         Robert H. Daskal was Executive Vice President and Chief Financial
Officer from October 1994 until his resignation in January 1997. Prior to
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.

         Norman B. Gold has been affiliated with the Company since September
1994 in various capacities, most recently as Director of Finance and Accounting.
Prior to joining the Company, Mr. Gold was Financial Vice President of Barclay
Associates, Inc., a builder/developer in Newport Beach, California, from 1985 to
1994.

         Lynn C. Parkes has been the Controller since June 1992. She served as
the Director of Human Resources from early 1989 until she became Assistant
Controller in December 1989, and served in that position until she was promoted
to Controller. Ms. Parkes joined the Company in 1980, serving in various
capacities.

ITEM 2.  PROPERTIES.

         At December 31, 1996, the Company had leased 8,187 square feet of
office space in Southern California, for its corporate headquarters and design
center operations. These two leases expire in May 1997 and September 2000,
respectively. The Company believes that in general its facilities are sufficient
to meet its needs for the next year.

ITEM 3.  LEGAL PROCEEDINGS.

         The Company is involved 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 1994, a former employee initiated litigation against the Company for
wrongful termination and other employment related claims. The parties agreed to
a final settlement of cash, notes payable through April 1997, and restricted
stock and the litigation was dismissed. The full amount of the settlement was
accrued in 1994.

         In May 1994, the owners of 11 homes sold by the Company at its 201-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. In June
1994, the owners of six additional homes filed a separate complaint. These two
complaints were consolidated into one action. Subsequent to the consolidation,
one of the homeowners dismissed the lawsuit due to the Company's repair of the
alleged defects. In August 1994, one additional homeowner filed a complaint. In
October 1996, an additional eighteen homeowners filed a separate complaint. The
complaint was subsequently amended to include an additional four homeowners. The
Company is attempting to have this complaint consolidated with the previously
consolidated complaints. The complaints each allege, among other things,
negligence, nuisance, strict liability, breach of warranty, negligent infliction
of emotional distress and fraud based on alleged design and construction defects
and inadequate soils conditions. The plaintiffs are seeking general, special,
and punitive damages in an unspecified amount, and attorney fees. The causes of
action for fraud were dismissed by the court in 1994 with respect to the
complaints filed in 1994, and accordingly, there are no claims for punitive
damages. The Company believes that the claims made against it are without merit
and intends to continue to vigorously defend itself in this action. The Company
believes that this litigation will not have a material adverse effect on the
Company's business. Additionally, the Company believes it has adequate insurance
coverage to pay the majority of claims and the costs related to these
complaints, if any. However, as 



                                       13
<PAGE>   14

this litigation is still in process, it is not possible to predict with
certainty the ultimate outcome and the impact on the Company, and therefore no
assurances can be given with respect thereto.

         As a result of the limited amount of available working capital,
relationships with certain 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 filing of complaints. The Company
has negotiated payment arrangements, as appropriate, in an effort to settle
these claims and release the liens. The Company does not believe that any of
these claims, in the aggregate, will have a material adverse financial effect on
the Company's business. 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.

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

         On December 16, 1996, a "Notice of Special Meeting of Stockholders To
Be Held on January 15, 1997" was sent to stockholders of record as of December
11, 1996. At the special meeting, a majority of the stockholders approved an
amendment to the Company's Restated Certificate of Incorporation to effect a
reverse stock split of the Company's Common Stock such that every six (6) shares
of Common Stock outstanding would be converted into one (1) share of Common
Stock. The amendment became effective January 16, 1997.



                                       14
<PAGE>   15
                                     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 National Market
tier of the Nasdaq Stock Market under the symbol "INHM" from April 2, 1993 to
November 10, 1996. Effective November 11, 1996, the Common Stock became listed
on the Nasdaq SmallCap Market tier of the Nasdaq Stock Market under the same
symbol. Subsequent to the Company's reverse stock split, on January 16, 1997 the
Company's symbol was changed to "INHMD". The following table shows the high and
low closing sales prices for the Common Stock of the Company for the periods
indicated, as reported by the Nasdaq National Market through November 10, 1996
and reported by the Nasdaq SmallCap Market thereafter. These prices do not
include retail markups, markdowns or commissions.

<TABLE>
                                                                        HIGH              LOW
                                                                        ----              ---
<S>                                                                     <C>               <C>
Quarter ended March 31, 1995......................................       12.75            7.50
Quarter ended June 30, 1995.......................................       15.378           6.75
Quarter ended September 30, 1995..................................       11.25            6.00
Quarter ended December 31, 1995...................................        8.25            4.125
Quarter ended March 31, 1996......................................        8.25            5.25
Quarter ended June 30, 1996.......................................        6.375           3.00
Quarter ended September 30, 1996..................................        5.625           2.625
Quarter ended December 31, 1996...................................        4.095           1.125
Quarter ended March 31, 1997 .....................................        5.25            1.75
</TABLE>

         Prices listed above have been restated as if the reverse stock split on
January 16, 1997 was in effect for all periods presented. See "Item 4.
Submission of Matters to a Vote of Security-Holders".

         The closing sale price of the Company's Common Stock as reported on the
Nasdaq SmallCap Market on March 31, 1997 was $2.625 per share. As of March 31,
1997, there were approximately 154 holders of record of the Company's Common
Stock.

DIVIDENDS

         The Company has not declared or paid any cash dividends on its Common
Stock since the Initial Public Offering. The Company anticipates that all
earnings in the foreseeable future will be retained to finance the continuing
development of its 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 1996, the Company entered into a Common Stock Purchase
Agreement with a third party to sell 200,000 shares (restated for reverse stock
split) of the Company's common stock in a private transaction. The stock was
issued subsequent to year end for a total purchase price of $750,000. The
Company also granted the third party the right to require the Company to
register the stock for public sale with the Securities and Exchange Commission.
At that time, in consideration of a $50,000 payment, the third party was also
given an exclusive option to purchase approximately 71 acres of commercial
property located in one of the Company's high desert projects. Additionally, in
December 1996, the Company issued a warrant to purchase 200,000 shares (restated
for reverse stock split) of common stock in a private transaction to an entity
related to this third party. The warrant was 



                                       15
<PAGE>   16

issued as compensation for all services to be performed pursuant to a Consulting
Agreement entered into in December 1996. The Consulting Agreement is for a term
of two years during which the related entity, on a non-exclusive basis, shall
seek out, investigate and pursue residential development projects and present
them to the Company for its consideration and approval. The warrant may be
exercised within eighteen months of the date of the agreement at a price of
$5.25 per share (restated for reverse stock split). If at least half of the
warrant shares are not exercised during this period, then half of the warrant
shares will expire, with the balance exercisable over an additional eighteen
month period at $9.75 per share (restated for reverse stock split). The related
entity may also convert the warrant shares or any portion thereof into shares of
common stock using a formula based upon the fair market value of the Company's
common stock on the conversion date. These transactions were exempt pursuant to
Rule 505 under Regulation D. One of the owners of this third party and the
related entity is a partner in FERHP, one of the Company's consolidated
partnerships, and is a general partner of the owner of land in which the Company
has entered into a Development and Marketing Agreement. See "Item 8. Financial
Statements and Supplementary Data, Note 8."




                                       16
<PAGE>   17



ITEM 6.  SELECTED FINANCIAL DATA.

         The following selected financial data of the Company are qualified by
reference to and should be read in conjunction with the financial statements,
related notes thereto and other financial data included elsewhere herein. These
historical results are not necessarily indicative of the results to be expected
in the future. Common stock shares and per share data have been restated to give
effect to the Company's reverse stock split.
See "Item 4. Submission of Matters to a Vote of Security Holders."


<TABLE>
<CAPTION>
                                                           (in thousands, except per share amounts)

                                                               FOR THE YEARS ENDED DECEMBER 31,
                                                 --------------------------------------------------------
                                                                  CONSOLIDATED                   COMBINED
                                                 --------------------------------------------   ---------
                                                   1996        1995       1994         1993        1992
                                                 --------    --------    --------    --------    --------
<S>                                              <C>         <C>         <C>         <C>         <C>     
STATEMENT OF OPERATIONS DATA:
Revenue from home sales                          $ 19,591    $ 71,317    $ 71,168    $ 85,189    $ 69,483
Revenue from land and lot sales                      --          --           373        --          --
                                                 --------    --------    --------    --------    --------
    Total                                          19,591      71,317      71,541      85,189      69,483
                                                 --------    --------    --------    --------    --------

Cost of homes sold                                 18,260      61,836      63,388      67,381      53,987
Cost of land and lots sold                           --          --           205        --          --
                                                 --------    --------    --------    --------    --------
    Total                                          18,260      61,836      63,593      67,381      53,987


Gross profit                                        1,331       9,481       7,948      17,808      15,496

Selling and marketing expenses                      3,039       8,034      13,004       8,587       6,537
General and administrative expenses                 2,066       3,825       7,858       4,071       4,270
                                                 --------    --------    --------    --------    --------

    Operating income (loss)                        (3,774)     (2,378)    (12,914)      5,150       4,689

Other income                                           77         353         112         376         208
Sale of divisions - net                              --            31        --          --          --
Mortgage brokerage income (loss) -- net              --          (355)       (320)        436         157
Provision for write-down of real estate              (785)    (11,043)     (6,714)       --          --
Settlement of compensation for services
   and severance arrangements (1)                    --          --          --         1,043      (2,392)
                                                 --------    --------    --------    --------    --------

Income (loss) before minority partners'
   share and provision (benefit) for
   income taxes                                    (4,482)    (13,392)    (19,836)      7,005       2,662
Minority partners' share                             (214)       --           (28)        859       4,083
                                                 --------    --------    --------    --------    --------
    Income (loss) before provision
        (benefit) for income taxes                 (4,268)    (13,392)    (19,808)      6,146      (1,421)
Provision (benefit) for income taxes                 --         2,284      (7,718)      1,330         408
                                                 --------    --------    --------    --------    --------

    Net income (loss)                            $ (4,268)   $(15,676)   $(12,090)   $  4,816    $ (1,829)
                                                 ========    ========    ========    ========    ========

Net income (loss) per common share
(restated for reverse stock split)               $  (3.01)   $ (11.68)   $  (9.08)
                                                 ========    ========    ========


PRO FORMA STATEMENT OF OPERATIONS DATA
(UNAUDITED)(2):
Pro forma net income                                                                 $  4,303    $  3,045
                                                                                     ========    ========
Pro forma net income per common share
(restated for reverse stock split)                                                   $   3.45    $   3.05
                                                                                     ========    ========

Weighted average number of common
   shares outstanding (restated for
   reverse stock split)                             1,418       1,342       1,331       1,248         998
                                                 ========    ========    ========    ========    ========
</TABLE>



<TABLE>
<CAPTION>
                                                                  AS OF DECEMBER 31,
                                          ------------------------------------------------------------
                                                             CONSOLIDATED                     COMBINED
                                          ----------------------------------------------      --------
    BALANCE SHEET DATA:                     1996         1995         1994        1993           1992
                                          -------      -------      -------      -------      --------
<S>                                       <C>          <C>          <C>          <C>          <C>     
    Real estate inventories               $36,752      $40,535      $72,371      $69,199      $ 59,021
    Total assets                           40,632       45,774       81,771       79,325        63,227
    Notes payable secured by real estate   15,360       16,660       30,577       23,244        29,475
    Lines of credit                         4,303        4,840        5,000        2,750          --
    Notes to stockholder                      676         --           --           --           2,498
    Minority partners' investment in
       consolidated partnerships              876         --           --             29        23,483
    Stockholders' equity (deficit)         12,284       15,532       31,058       43,148        (1,950)
</TABLE>

----------

(1)      During the year ended December 31, 1992, settlement of compensation for
         services and severance arrangements reflects an estimated non-cash
         charge for the value of certain shares of Common Stock issued 


                                       17
<PAGE>   18
         in connection with the Reorganization. During the year ended December
         31, 1993, the Company recognized income in the amount of approximately
         $1,043,000 which was attributable to the adjusted final settlement of
         the estimated charge from the previous year.

(2)      The pro forma statement of operations data reflect the effects on the
         historical statements of operations data for the years ended December
         31, 1993 and 1992 as if (i) the Reorganization had taken place on
         January 1, 1992, (ii) settlement of compensation for services and
         severance arrangements was eliminated and (iii) the amount of
         compensation paid to Ira C. Norris was limited to the $750,000 maximum
         compensation arrangements effective during 1993 and 1994. The pro forma
         statement of operations data also reflects provisions for federal and
         state income taxes assuming a 40% effective tax rate.



                                       18
<PAGE>   19
ITEM 7.    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 most recent peak in the
industry cycle occurred in 1988 and 1989, which was followed by a downturn in
1990, coinciding with the general national recession and the depressed economic
and real estate conditions in Southern California. These conditions continued in
1996 and have had an adverse impact on the Company's results of operations.

         The Company's financial results have been adversely affected by the
continuing weakness in the Southern California new home market. In response to
declining overall home sales in this market, the Company has been required to
provide homebuyers with price discounts and other sales incentives in order to
remain competitive. This has resulted in reduced profitability or losses on the
homes that the Company has sold.

         In 1994 the Company entered the Phoenix and Las Vegas markets, and
expanded its operations in Riverside County of Southern California.
Additionally, in 1994 the Company implemented cost reduction measures including
(i) consolidation of its High Desert Division with its Inland Division and (ii)
closing or reducing the scope of several communities in the high desert region.
These cost reduction efforts continued in 1995 and 1996. In 1995, the Company
closed an additional underperforming project in the high desert region and
reduced the current scope of development of a project in Riverside County.

         During the third quarter of 1995, the Company further consolidated all
of its Southern California operations and personnel in one location, closing its
Inland Division operating office and relocating the division into office space
at the Company's headquarters in Upland. The Company also sold its insurance
services operations to an unrelated third party and transferred the California
and Las Vegas operations of its mortgage brokerage subsidiary to an unrelated
third party.

         In December 1995 the Company sold its Phoenix and Las Vegas operations,
including its Phoenix mortgage operations, to an unrelated third party. The
sales price was $14.5 million, of which the purchaser assumed $12.0 million of
bank indebtedness, and accounts payable and accrued liabilities. This sale was
consummated as a result of the Company's continuing efforts to raise needed
capital, and enabled the Company to focus its efforts and capital on its
historical core business in Southern California. However, the sale initially has
resulted in a reduced level of closings and revenues, and has had an adverse
effect on earnings.

         As a result of cost controls and the consolidation of offices, the
Company reduced its total personnel from 162 at December 31, 1994 to 63 at
December 31, 1996.

         As a result of the impact of the sale of the Phoenix and Las Vegas
operations on future earnings, the land deed backs and write-downs, and current
business operations, pursuant to Statement of Financial Accounting Standards No.
109 ("SFAS No. 109") "Accounting for Income Taxes", as of December 31, 1996 the
Company has recorded reductions of the deferred tax asset with a cumulative
valuation allowance of $11.7 million to reflect the uncertainties created
regarding the timing of the realization of the deferred tax asset. No assurances
can be given that the Company will not have to record a further valuation
allowance against future tax benefits.

         In 1994, the Company recorded charges of approximately $2.8 million
related to costs associated with a proposed debt offering, certain post-warranty
work at one of its projects and other litigation costs and the settlement of an
outstanding lumber purchase commitment. The Company had pursued a private debt
offering that was terminated 


                                       19
<PAGE>   20
due to unfavorable market conditions. The post-warranty work was performed in an
effort to mitigate construction defect claims by homeowners at the affected
project.

RESULTS OF OPERATIONS

         The following discussion of results of operations and financial
condition should be read in conjunction with the Selected Financial and
Operating Data and the Financial Statements and Notes thereto.

         The following table sets forth, for the periods indicated, selected
information of the Company as of and for each of the three years ended December
31, 1996, 1995, and 1994:

<TABLE>
<CAPTION>
                                                   For Year Ended December 31,
                                         ---------------------------------------------
                                           1996             1995              1994
                                         -----------      -----------      -----------
             <S>                         <C>              <C>              <C>        
                  OPERATING DATA:

            Number of  Homes Closed              144              595              600
            Average Sales Price          $   136,000      $   119,900      $   118,600
            Revenue from Home Sales      $19,591,000      $71,317,000      $71,168,000
</TABLE>

         The following table sets forth, for the periods indicated, the
percentage of the Company's revenue represented by each line item:

<TABLE>
<CAPTION>
                                                      For Year Ended December 31,
                                                     -----------------------------
                                                      1996         1995       1994
                                                     -----        -----      -----
            <S>                                      <C>          <C>        <C>    
            Gross Margin from Homes Closed             6.8%       13.3%       10.9%
            Selling, Marketing and General and
                Administrative Expenses               26.1%       16.7%       29.2%
            Operating Loss                           (19.3)%      (3.3)%     (18.1)%
</TABLE>

Revenue from Home Sales

         Revenue from home sales in 1996 was $19.6 million, a decrease of $51.7
million from revenue of $71.3 million during 1995. The total number of homes
closed in 1996 was 144 at an average sales price of $136,000, compared to 595
homes closed at an average sales price of $119,900 in 1995, a decrease of 75.8%
in number of homes closed and a 13.4% increase in average sales prices.

         The following table sets forth, for the periods indicated, the number
of homes closed by the Company's three operating divisions:

<TABLE>
<CAPTION>
                                           For Year Ended December 31,
                                        ---------------------------------
                                        1996          1995           1994
                                        ----          ----           ----
      <S>                               <C>           <C>            <C>
      Southern California Division                               
          High Desert                    89            144            316
          Riverside County               55            124            237
       Phoenix Division (1)              --            184             47
       Las Vegas Division (1)            --            143             --
                                        ---            ---            ---
          Total:                        144            595            600
                                        ===            ===            ===
</TABLE>
                                                            
----------

(1)      In December 1995 the Company sold its Phoenix and Las Vegas home
         building divisions to an unrelated third party. See "Item 1. Business
         -- General."


                                       20
<PAGE>   21
         The decrease in revenue and number of homes closed during the year
ended December 31, 1996 is attributable to the close-out of two successful
subdivisions in Riverside County in 1995, the sale of the Phoenix and Las Vegas
divisions and a decrease in demand combined with declining inventory available
for sale in Southern California. The increased average sales price is
attributable to a change in the mix of homes offered for sale.

         Revenue from home sales in 1995 was $71.3 million, an increase of
$100,000 from revenue of $71.2 million during 1994. The total number of homes
closed in 1995 was 595 at an average sales price of $119,900, compared to 600
homes closed at an average sales price of $118,600 in 1994, a decrease of 0.8%
in number of homes closed and a 1.1% increase in average sales prices. The
Company estimates that the sale of its Phoenix and Las Vegas divisions
eliminated approximately 40 to 50 potential December 1995 new home closings in
these two markets.

Revenue From Land and Lot Sales

         Revenue from land and lot sales, which are not the Company's principal
business focus, is generated when such sales are made to take advantage of
market opportunities that might exist from time to time. Accordingly, these
sales vary from year to year. The $373,000 of land sales revenue in 1994
represents the sale of a 10 acre parcel in the Company's Eagle Ranch master
planned community in Southern California to a local school district and the sale
of a land contract in Las Vegas. The Company had no land sales in 1996 or 1995.

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, 1996 was $18.3
million, a decrease of $43.5 million, or 70.5%, from $61.8 million during the
year ended December 31, 1995. Cost of homes sold as a percentage of revenue
increased to 93.2% in the year ended December 31, 1996 from 86.7% in the same
period in 1995. The increase in cost of homes sold as a percentage of revenue
for the year ended December 31, 1996 is the result of a number of factors
including price discounts and other sales incentives due to continuing
competitive pressures, the close out of certain high desert communities and
certain fixed costs included in cost of homes sold.

         Cost of homes sold during the year ended December 31, 1995 was $61.8
million, a decrease of $1.6 million, or 2.5%, from $63.4 million during the year
ended December 31, 1994. Cost of homes sold as a percentage of revenue decreased
to 86.7% in the year ended December 31, 1995 from 89.1% in the same period in
1994. The primary reasons for the decrease in cost of homes sold as a percentage
of revenue were increased lumber costs in 1994, and a lower percentage of home
closings in the high desert market in 1995, partially offset by a write-off of
capitalized costs associated with the operation of the Company's Phoenix and Las
Vegas divisions.

         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. In
late 1992 and throughout 1993, the Company encountered a significant increase in
the price of lumber purchased for use in its homes. In response, the Company in
the fourth quarter of 1993 entered into a lumber purchase contract for 600 homes
in 1994 at specified pre-established prices. The Company purchased lumber for
approximately 100 homes under the contract. In February 1995, the Company
reached an agreement with the lumber company to settle its outstanding lumber
purchase commitment for $800,000, $645,000 of which was paid during 1995, with
the balance paid during 1996.

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



                                       21
<PAGE>   22
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 $1.5 million and $3.3 million for the years ended
December 31, 1996 and 1995, respectively, a decrease of $1.8 million or 56.3%.
Selling expenses as a percentage of revenue were 7.5% and 4.7% for the years
ended December 31, 1996 and 1995, respectively. The decrease in the dollar
amount of selling expenses was a result of the sale of the Phoenix and Las Vegas
divisions, a smaller number of active projects in Southern California and the
implementation of cost reduction measures to further reduce selling expenses.
The increase in selling expenses as a percentage of revenue is primarily due to
financing and sales incentives granted to homebuyers as a result of higher
interest rates and low sales activity, and the low level of closing revenues.

         Selling expenses were $3.3 million and $3.4 million for the years ended
December 31, 1995 and 1994, respectively, a decrease of $100,000, or 2.9%. The
decrease is directly related to the slight decrease in the number of homes
closed. Selling expenses as a percentage of revenue were 4.7% and 4.8% for the
years ended December 31, 1995 and 1994, 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 which 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 $1.6 million and $4.7 million for the years
ended December 31, 1996 and 1995, respectively, representing a 66.4% decrease.
As a percentage of revenue, marketing expenses were 8.0% and 6.6% for the years
ended December 31, 1996 and 1995, respectively. The decrease in the dollar
amount of marketing costs was a result of the sale of the Phoenix and Las Vegas
divisions, a smaller number of active projects in Southern California and the
continuation of cost reduction measures to further reduce marketing expenses.
The increase in marketing costs as a percentage of revenues is due to the low
level of closing revenues. During 1996, the Company had grand openings for three
new projects and was delivering homes from nine active projects compared with
four grand openings and fourteen active projects in 1995.

         Marketing expenses were $4.7 million and $9.6 million for the years
ended December 31, 1995 and 1994, respectively, representing a 51.0% decrease.
As a percentage of revenue, marketing expenses were 6.6% and 13.4% for the years
ended December 31, 1995 and 1994, respectively. The decrease in marketing costs
was a result of a number of factors. During 1995, the Company had grand openings
for four new projects and was delivering homes from fourteen active projects,
compared with nine grand openings and seventeen active projects in 1994.
Marketing expenses in 1994 included increased marketing programs and sales
incentives in the high desert and the accelerated write-off of previously
capitalized marketing costs of $2.2 million due to closing or reducing the scope
of seven projects in the high desert. In 1995 the Company accelerated the
write-off of $600,000 of previously capitalized marketing costs relating to one
project in the high desert and one project in Riverside County. Additionally, in
1995 the Company implemented cost reduction measures to further reduce its
marketing expenses.

General and Administrative Expenses

         General and administrative expenses include payroll and related
benefits, insurance, financial reporting, general office expense and other
corporate and division level expenses.

         General and administrative expenses were $2.1 million and $3.8 million
for the years ended December 31, 1996 and 1995, respectively, a decrease of $1.7
million or 46.0%. As a percentage of total revenue, general and administrative
expenses were 10.5% and 5.4% for the years ended December 31, 1996 and 1995,
respectively. The decrease in the dollar amount of general and administrative
expenses primarily reflects the sale of the Phoenix and Las 



                                       22
<PAGE>   23
Vegas divisions and the Company's continuing cost reduction measures. The
increase as a percentage of revenues is due to the low level of closing
revenues.

         General and administrative expenses were $3.8 million and $7.9 million
for the years ended December 31, 1995 and 1994, respectively, a decrease of $4.1
million or 51.9%. As a percentage of total revenue, general and administrative
expenses were 5.4% and 11.0% for the years ended December 31, 1995 and 1994,
respectively. General and administrative expenses for 1995 decreased as a result
of the consolidation of the Southern California operating divisions, the
subsequent relocation of this division into office space at the Company's
headquarters, the cessation of its insurance services operations and the results
of other cost reduction measures. The Company also recorded approximately $2.2
million of charges in 1994 including costs associated with a proposed debt
offering that was terminated due to unfavorable market conditions, charges
related to post warranty work at one of its projects performed to potentially
mitigate construction defect claims by homeowners and other litigation costs
(See "Item 3. Legal Proceedings."), and costs associated with closing the High
Desert Division in 1994.

Other Income

         Other income includes the interest earned on cash balances related to
certain projects, miscellaneous income and revenue from the Company's insurance
services operation. Other income was $77,000 and $353,000 for the years ended
December 31, 1996 and 1995, respectively a decrease of 78.2%. Other income was
$353,000 and $112,000 for the years ended December 31, 1995 and 1994,
respectively, an increase of 215.2%. Changes in other income from 1996 to 1995
and from 1995 to 1994 are primarily attributable to the sale of the Company's
insurance services operations in the third quarter of 1995 to an unrelated third
party.

Mortgage Brokerage Income (Loss) - Net

         Mortgage brokerage income (loss) - net of Freedom, the Company's prior
mortgage brokerage business, reflects revenue earned from loan origination,
discount and servicing release fees, net of costs.

         In the third quarter of 1995, the Company transferred the California
and Las Vegas operations of Freedom to an unrelated third party, and recorded a
write-off for unamortized start-up costs and the undepreciated portion of
certain fixed assets of Freedom in the amount of $100,000, and in December 1995
the Company transferred its Phoenix operations in conjunction with the sale of
its Phoenix division.

         Freedom realized a net loss of $355,000 and $320,000 for the years
ended December 31, 1995 and 1994, respectively. The net losses are primarily
attributable to Freedom's low capture rate and its high general and
administrative costs.

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 impairment losses to be recorded on long-lived assets being
developed, based on fair value, when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. Assets held for sale are to be carried at the
lower of cost or fair value less the costs to sell.

         Prior to 1996, real estate inventories are carried at the lower of
historical cost or estimated net realizable value. Net realizable value is the
price obtainable in the future for parcels as improved with a completed housing
unit, net of disposal and holding costs (including interest), without provision
for future profit and without discounting future cash receipts to present value.

         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 


                                       23
<PAGE>   24
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.

         In 1996, the Company determined that the undiscounted cash flows
estimated to be generated by various real estate holdings were less than the
assets' carrying amounts. An impairment allowance, which writes these assets
down to fair value was established at December 31, 1996 totaling $785,000, of
which $255,000 relates to properties in the high desert and $530,000 relates to
a property in Riverside County. Additionally, in both 1995 and 1994, the Company
determined that it was necessary to reflect a reduction in the estimated future
cost recovery of various real estate holdings and established an allowance for
net realizable value. Write-downs of real estate totaling $5.8 million were
recorded as of December 31, 1995, of which $4.4 million related to properties in
the high desert and $1.4 million related to properties in Riverside County.
Write-downs of real estate totaling $2.6 million were recorded as of December
31, 1994, all of which related to properties in the high desert.

         The Company also concluded in 1995 and 1994 that certain
seller-financed parcels were no longer economically viable based on current
financing terms. Accordingly, several measures were initiated, including
requests that certain sellers substantially restructure the terms of their debt
(including extending the maturity date, reducing or eliminating payment and
accrual of interest and deferring principal payments). The Company also
identified certain properties that should be deeded back to the sellers in full
satisfaction of the remaining debt outstanding. In 1995 the Company commenced
negotiations with six land sellers from whom the Company purchased land in the
high desert. The Company owned these properties subject to seller loans that had
current or approaching maturity dates. In this regard, the Company recorded a
charge to operations in 1995 of $5.3 million. The balance of the related real
estate inventories and indebtedness at December 31, 1995 was $3.1 million. In
1996, the Company deeded property with a book value of $2.1 million back to four
of these land sellers in satisfaction of $2.1 million in indebtedness.
Continuing negotiations may result either in extensions of maturity dates and/or
other adjustments to the seller notes, or deedbacks of the two remaining
properties with a book value of $1.0 million to the sellers in satisfaction of
$1.0 million in indebtedness outstanding at December 31, 1996.

         During 1995 the Company also reduced the scope of one community in
Riverside County which resulted in the write-off of approximately $300,000 of
previously capitalized costs associated with architectural development and
marketing activities. As of December 31, 1996, the Company was still in the
process of deeding back land to the seller from whom the Company purchased the
property that will result in a reduction of real estate inventories of $0.4
million in satisfaction of $0.4 million of indebtedness outstanding at December
31, 1996.

         In 1995, the Company established a reserve in the amount of $300,000 to
cover the write-off of previously capitalized costs associated with an under
performing subdivision in the high desert area. Also in 1995, the balance of the
land in this subdivision was returned to the original seller pursuant to the
terms of the purchase contract and the remaining debt of $240,000 was deemed
satisfied.

         In 1994, the Company commenced the process of deeding property back to
nine other land sellers from whom the Company purchased land in the high desert.
In this regard, the Company recorded a charge to operations in 1994 of $4.1
million. The balance of the related real estate inventories and indebtedness at
December 31, 1994 was $3.2 million. Deed backs of real estate with a book value
and related indebtedness of $1.4 million and $1.5 million occurred in 1995 and
1996, respectively. As of December 31, 1996, the Company was still in the
process of deeding back land to one of these land sellers that will result in a
reduction of real estate inventories of $0.3 million in satisfaction of $0.3
million of indebtedness outstanding at December 31, 1996. This land was deeded
back in January 1997. During 1994 the Company also closed four communities and
reduced the scope of three other communities in the high desert which resulted
in the acceleration of the write-off of previously capitalized costs associated
with its regional development and marketing activities of approximately $4.0
million.

         There can be no assurance that there will be no additional write-downs
of land inventory or write-offs of costs in the future.



                                       24
<PAGE>   25

Minority Partners' Share


         Minority partners' share represents the interest of affiliated limited
partners in partnerships consolidated in the Company's financial statements.
Pursuant to the Reorganization in April 1993, all interests of minority partners
were eliminated except for the interest of partners in Palmdale Vistas. In 1996,
the Company formed three new limited partnerships, FERHP, Triumph and Spirit 77.
FERHP and Triumph are consolidated in the Company's financial statements.

         The minority partners' share of losses was $214,000, $0, and $28,000
for the years ended December 31, 1996, 1995, and 1994, respectively.

Provision (Benefit) for Income Taxes

         Provision (benefit) for income taxes represents federal income taxes
based on net income (loss) computed at the effective federal tax rate plus state
income taxes computed at the effective tax rate, net of federal tax benefit, as
adjusted for regulations affecting net operating losses.

         In 1996, the Company recorded an income tax provision of $0 consisting
of a deferred tax benefit of $3.9 million and a valuation allowance of $3.9
million. In 1995, the Company recorded an income tax provision of $2.3 million
consisting of a deferred tax benefit of $5.5 million and a valuation allowance
of $7.8 million. In 1994, the Company recorded an income tax benefit of $7.7
million, consisting of income taxes receivable of $2.1 million due to the
carryback of the Company's net operating loss and a deferred tax benefit of $5.6
million. In order to fully realize the recorded net deferred tax asset of $13.9
million, the Company will need to generate future taxable income of
approximately $34.8 million. The deferred tax asset is based on current
applicable corporate income tax rates. Future changes in tax rates will be
reflected in the valuation of the deferred tax asset in the period of change.

         Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes" requires, among other things, the recognition of
deferred tax assets for the estimated future tax effects attributable to net
deductible temporary differences and net operating loss carryforwards. SFAS No.
109 further requires the reduction of deferred tax assets by a valuation
allowance if, based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
The future realization of the deferred tax asset must be evaluated along with
the accumulated differences caused by other tax and book basis differences.
Uncertainties exist due to the reduced level of closings, revenues and earnings
resulting from the sale of the Company's Phoenix and Las Vegas divisions, the
need to raise capital for new land acquisitions and current business operations.
Accordingly, the Company has provided a cumulative $11.7 million valuation
allowance at December 31, 1996 to reserve against the deferred tax asset as a
result of these uncertainties. At such time as it becomes more likely than not
that portions of the additional tax asset will be realized in the future, the
valuation allowance can be adjusted. The Company believes that during the time
period in which the deferred tax asset can be utilized it will generate
sufficient income to realize the net deferred tax asset. It is difficult to
assess the ultimate timing of the realization of the deferred tax asset. No
assurances can be given regarding the realization of the deferred tax asset or
that the Company will not have to record a further valuation allowance against
future tax benefits.

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
majority of the homes to be built in the phase of a project before construction
commences. Such sales contracts are usually subject to certain contingencies
such as the buyer's ability to qualify for financing and/or the sale of an
existing home. Homes covered by such sales contracts, as well as 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. The following table sets forth
the Company's backlog at the dates indicated:


                                       25
<PAGE>   26


<TABLE>
<CAPTION>
                                                           December 31,
                                          -------------------------------------------------
                                             1996               1995               1994
                                          -----------        -----------        -----------
<S>                                       <C>                <C>                <C>        
      Southern California Division
           High Desert                             52                 45                 69
           Riverside County                        30                 32                 83
      Phoenix Division (1)                       --                 --                   88
      Las Vegas Division (1)                     --                 --                   33
                                          -----------        -----------        -----------
      Number of Homes                              82                 77                273
                                          ===========        ===========        ===========

      Aggregate Sales Value               $10,316,000        $10,833,000        $34,072,000
                                          ===========        ===========        ===========

      Average Sales Price                 $   125,800        $   140,700        $   124,800
                                          ===========        ===========        ===========
</TABLE>

(1)      In December 1995 the Company sold its Phoenix and Las Vegas home
         building divisions to an unrelated third party. See "Item 1. Business
         -- General."

         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 has generally experienced a rapid increase in backlog during periods
in which it holds a grand opening for one of its projects. In 1996 the Company
had three grand openings compared to four grand openings in 1995. The Company's
backlog changed insignificantly in 1996 from 1995 due to a fewer number of grand
openings and active projects, and declining inventory available for sale. The
aggregate sales value of the units in backlog decreased by $0.5 million or 4.8%,
and the average sales price of homes in backlog decreased by $14,900 or 10.6%
due to a change in the mix of homes offered for sale.

         During the latter part of 1995, the Company opened no new projects,
compared with six in 1994. Also, the Company sold its Phoenix and Las Vegas
divisions in December 1995, which contributed 121 units to its backlog at
December 31, 1994. As a result, the Company's backlog decreased to 77 from 273
units at December 31, 1995 and 1994, respectively, a decrease of 196 units or
71.8%. The aggregate sales value of homes in backlog was $10.8 million and $34.1
million at December 31, 1995 and 1994, respectively, a decrease of $23.3 million
or 68.3%.

              No assurances can be given that homes in backlog will result in
actual closings because cancellations vary from period to period. The Company
believes that cancellations have been relatively high in recent periods,
reflecting the weak economic conditions that have existed in the Southern
California markets, increased competition, higher interest rates and the
inability of certain potential homebuyers to qualify for mortgage financing.

NET ORDERS

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

         The following table sets forth the Company's net orders by region for
the dates indicated:

<TABLE>
<CAPTION>
                                          For the Year Ended December 31,
                                         --------------------------------
                                         1996          1995          1994
                                         ----          ----          ----
      <S>                                <C>           <C>           <C>
      Southern California Division                             
          High Desert                      96           120           308
          Riverside County                 53            73           267
      Phoenix Division (1)                 --           176           135
      Las Vegas Division (1)               --           189            33
                                          ---           ---           ---
          Total                           149           558           743
                                          ===           ===           ===
</TABLE>

(1)      In December 1995 the Company sold its Phoenix and Las Vegas home
         building divisions to an unrelated third party. See "Item 1. Business
         -- General."


                                       26
<PAGE>   27
         Net new orders declined 73.3% to 149 homes from 558 homes for the years
ended December 31, 1996 and 1995, respectively. The decrease in Southern
California net orders was 44 homes or 22.8% in 1996. The decrease in Southern
California net orders is attributable to market weakness as well as fewer
subdivisions and declining inventory available for sale.

         Net new orders declined 24.9% to 558 homes from 743 homes for the years
ended December 31, 1995 and 1994, respectively. The Company experienced
substantial decreases in net orders in both its Southern California markets
partially offset by increases in net orders in Phoenix and Las Vegas during the
first eleven months of 1995. The decrease in Southern California net orders was
attributable to continued market weakness in the high desert region, as well as
fewer subdivisions and declining inventory available for sale in both the high
desert and Riverside County. The increase in Phoenix and Las Vegas was
attributable to having more homes available for sale during 1995.

VARIABILITY IN QUARTERLY RESULTS

         The Company has experienced, and expects to continue to experience,
significant variability in its operating results. See "Item 8. Financial
Statements and Supplementary Data, Note 13." 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 that 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 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. In addition, the 1995 sale of operations in Phoenix and
Las Vegas has resulted in a reduction in the level of closings and revenues, and
has had an adverse effect on earnings.

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 believes that higher mortgage interest rates during much of
1995 that increased again in the second quarter and the early part of the third
quarter of 1996, has had a negative impact on home sales, particularly on
entry-level buyers. 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

         There were no new accounting pronouncements that could have a
significant effect on the Company's financial statements for any period
presented.

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 financial statements set forth in "Item 8. Financial Statements and
Supplementary Data" have been prepared assuming the Company will continue as a
going concern. 


                                       27
<PAGE>   28
In addition, the Company's business plan calls for substantial future
expenditures relating to the acquisition and construction of new projects. No
assurances can be given that anticipated cash flows from operations and the
Company's ability to borrow from various lenders will be sufficient to fund most
of its planned expenditures. The Company currently is attempting to raise
additional needed capital for both ongoing working capital and the acquisition
of land for future projects in Southern California. The Company is in active
discussions with certain capital sources and is optimistic that it can
successfully complete a transaction in 1997. However, no agreements between the
Company and these potential capital sources have been signed, and no assurances
can be given whether or when the Company will enter into a definitive 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 in
1997 to fund its planned expenditures, some or all of its projects may be
significantly delayed or abandoned. Any such delay or abandonment could result
in cost increases and have a material adverse effect on the Company's business,
financial condition and results of operations. The Company is unable to predict
whether it will be successful in raising such capital, nor can any assurances be
given that, if successful, the capital will be raised on terms favorable to the
Company. Accordingly, absent raising capital, the Company's ability to continue
its current level of business operations and finance the acquisition of
additional land for the delivery of future homes will be greatly impaired.
Additionally, as a result of the limited amount of available working capital,
the Company has not paid all of its subcontractors and suppliers on a current
basis. Numerous subcontractors and suppliers have filed liens, and some are
pursuing further legal action, including the filing of complaints. The Company
has negotiated payment arrangements, as appropriate, in an effort to settle
these claims and release the liens.

         During 1996 the Company entered into common stock purchase agreements
for 90,878 shares (restated for reverse stock split) of common stock with
certain subcontractors, suppliers and other creditors, including a director and
former directors of the Company. These shares were issued in exchange for
relieving the Company of debt owed to the respective creditors in the aggregate
amount of $539,000. In March 1996, the Company filed a Registration Statement on
Form S-3 in accordance with the terms of the common stock purchase agreement
that granted registration rights to these stockholders. The Registration
Statement was declared effective by the Securities and Exchange Commission in
April 1996. None of the proceeds from the sale of the shares by the selling
stockholders under that Registration Statement will be received by the Company.
The Company agreed to bear all expenses (other than underwriting discounts and
commissions) in connection with the registration.

         In December 1996, the Company entered into a Common Stock Purchase
Agreement with a third party to sell 200,000 shares (restated for reverse stock
split) of the Company's common stock in a private transaction. The stock was
issued subsequent to year end for a total purchase price of $750,000. The
Company also granted the third party the right to require the Company to
register the stock for public sale with the Securities and Exchange Commission.
At that time, in consideration of a $50,000 payment, the third party was also
given an exclusive option to purchase approximately 71 acres of commercial
property located in one of the Company's high desert projects. Additionally, in
December 1996, the Company issued a warrant to purchase 200,000 shares (restated
for reverse stock split) of common stock in a private transaction to an entity
related to this third party. The warrant was issued as compensation for all
services to be performed pursuant to a Consulting Agreement entered into in
December 1996. The Consulting Agreement is for a term of two years during which
the related entity, on a non-exclusive basis, shall seek out, investigate and
pursue residential development projects and present them to the Company for its
consideration and approval. The warrant may be exercised within eighteen months
of the date of the agreement at a price of $5.25 per share (restated for reverse
stock split). If at least half of the warrant shares are 


                                       28
<PAGE>   29
not exercised during this period, then half of the warrant shares will expire,
with the balance exercisable over an additional eighteen month period at $9.75
per share (restated for reverse stock split). The related entity may also
convert the warrant or any portion thereof into shares of common stock using a
formula based upon the fair market value of the Company's common stock on the
conversion date. One of the owners of this third party and the related third
party is a partner in FERHP, one of the Company's consolidated partnerships and
is a general partner of the owner of land in which the Company has entered into
the Development and Marketing Agreement described below.

         In November 1996, the Company entered into a Development and Marketing
Agreement with a third party to develop, construct, and market 163 lots owned by
the third party in Victorville, California. All financing and bonding will be
the responsibility of the third party. 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. The Company
will assume the home warranty costs for which it will be paid $750 per house.

         In May 1996, the Company assigned its $293,000 receivable 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. Mr. Norris and his wife own
a 70% general partner's interest in G&N Investments, Ltd. See "Item 8. Financial
Statements and Supplementary Data, Note 9" herein, and "Certain Relationships
and Related Transactions" in the Company's 1997 Proxy Statement. Additionally,
during 1996 Mr. Norris provided the Company with various unsecured loans
totaling $755,000 for working capital purposes. $92,000 was paid back to Mr.
Norris in 1996. Subsequent to year end, the Company received an additional
$537,000 from Mr. Norris and paid back $220,000 to him. The Company has issued
several notes to Mr. Norris bearing interest at 10%, all of which mature June
30, 1997. All of these transactions were unanimously approved by the
disinterested members of the Company's board of directors.

         In April 1996, the Company entered into a letter of intent with an
unaffiliated privately held home builder primarily doing business in Southern
California relating to a potential combination of the Company and the home
builder and certain of the home builders' affiliates. After conducting due
diligence relating to the proposed combination, negotiations were mutually
terminated. Subsequently, at the request of the unaffiliated home builder,
informal discussions have resumed. No assurances can be given whether or when
the Company and the home builder may enter into a definitive agreement or, if
entered into, what the precise terms of the transactions will be and whether any
conditions to the consummation of such a transaction will be satisfied.

         The Company has historically financed its operations from a combination
of limited partner capital contributions, cash generated from operations, land
seller financing and borrowings from various banking institutions. In addition,
the Company completed its Initial Public Offering in April 1993, which resulted
in net proceeds to the Company of $17.1 million. The Company also received an
income tax refund of $2.2 million in the first quarter of 1995 from the
carryback of its 1994 net operating loss to prior years.

         In 1996, the Company formed FERHP, Triumph and Spirit 77 limited
partnerships and entered into participating note agreements with ALG and HRIP,
providing total capital of approximately $4.0 million. These partnerships and
participating note agreements typically fund a portion of the land acquisition,
model complex development costs and initial marketing expenditures of specific
projects. Thomas E. Gibbs, Jr., a member of the Company's Board of Directors,
holds partnership interests in each of Triumph, ALG and HRIP. Also, one of the
owners of two entities which own approximately 12.2% of the Company's
outstanding common stock and a warrant to acquire approximately an additional
10.9%, respectively, is a partner of FERHP. See "Item 8. Financial Statements
and Supplementary Data, Notes 8 and 9" herein, and "Certain Relationships and
Related Transactions" in the Company's 1997 Proxy Statement.

         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, that 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, 1996 and 1995, the Company had
outstanding land seller indebtedness of $1.8 million and $5.5 million,
respectively. See " -- Results of Operations -- Provision for Write-Down of Real
Estate Assets".



                                       29
<PAGE>   30
         The Company typically obtains its infrastructure, development and
construction funding from commercial banks and other financing sources. Lenders
generally provide interim construction loans for each phase of homes within a
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. Commercial banks provided most of the Company's project
financing for the years ended December 31, 1996, 1995, and 1994. Interest rates
on these loans ranged from the prime rate plus 1.0% to the prime rate plus 3.0%.
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, 1996, aggregate bank borrowings of
approximately $13.6 million were outstanding under these facilities and
approximately $8.7 million was available for further qualified project finance
borrowing. At December 31, 1996 some of these loans with a commercial bank were
in default (see below). The weighted average interest rate was approximately
10.13% during 1996 and approximately 9.82% as of December 31, 1996.

         The Company also has secured lines of credit with banks as follows: (i)
a $3.0 million line that bears annual interest at the prime rate plus 1% that
matures December 1999, and provides for quarterly principal payments of $500 for
each home closed, commencing with the fourth quarter of 1995 and scheduled
principal payments of $400,000, $500,000 and $600,000 in calendar years 1997,
1998 and 1999, respectively. In connection with the extension and modification
of this line of credit, the Company issued a warrant to the lender to purchase
41,667 shares (restated for reverse stock split) of the Company's common stock
at $6.00 per share (restated for reverse stock split) that expires June 30,
2000; and (ii) a $1.5 million line that bears interest at the prime rate plus
2.5% that matured March 1996, is now in default, and the Company is negotiating
the terms of an extension (see below). The net outstanding balance under these
lines of credit at December 31, 1996 was $4.3 million.

         At December 31, 1996, total indebtedness secured by real estate totaled
$19.7 million. Peak month-end borrowing during 1996 was $20.9 million.

         In December 1996, a commercial bank filed notices of default relating
to matured loans with principal balances totaling $2.8 million secured by one of
the Company's projects. In February 1997, the Company obtained new financing
that provided approximately $2.3 million to pay the loans in full pursuant to a
Discounted Loan Payoff Agreement. In January 1997, this same bank filed separate
notices of default relating to matured loans with principal balances totaling
$3.5 million secured by an estimated 1,140 lots and 71 commercially zoned acres
of the Company's Eagle Ranch project in the high desert. The law permits the
bank to proceed with a non-judicial sale of the property as of April 9, 1997, 90
days after the notices of default were filed. Although the Company is currently
in negotiations with the bank to amend the terms of the loans and remove the
notices of default, there can be no assurances that the Company will be
successful in its negotiations with the bank or that the bank will not commence
with a non-judicial sale of the property. The final settlement could result in
writedowns in 1997 in amounts ranging from minimal to approximately $6.0
million.

          At December 31, 1996, the Company did not satisfy a certain financial
covenant pursuant to a loan to Spirit 77 related to minimum net worth levels.
The Company has received a waiver from the lender. Based on the anticipated
results for 1997, the Company may be in violation of certain financial covenants
under this loan agreement for the quarter ending March 31, 1997 and subsequent
quarters. Although the Company believes these covenants could continue to be
modified or waived, it is not certain that such modifications or waivers will be
obtained.

         The Company is currently in default on the Purchase Agreement with
Spirit 77 since the Company has not purchased all of the required minimum number
of lots from Spirit 77. The Company and Spirit 77 are currently negotiating a
modification to the Purchase Agreement. The Company is also in default on two
notes payable to Spirit 77 related to the purchase of lots in 1996. The Company
and Spirit 77 are currently negotiating extensions of the due dates of these
notes.

         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



                                       30
<PAGE>   31
financings are generally available, but 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.

         During the year ended December 31, 1993, the Company entered into a
loan agreement with a principal investor in certain of the limited partnerships
discussed above who became a principal stockholder and director of the Company,
pursuant to which the Company borrowed $1,760,000. Ten percent of the rights and
obligations under this agreement were assigned by the investor to another
limited partner in certain of the limited partnerships who became a stockholder
of the Company. On April 2, 1993, the loan was paid in full. In connection with
this loan, the Company issued warrants to these stockholders, which expire on
April 12, 1998, to purchase up to 8,800 shares (restated for reverse stock
split) of the Company's Common Stock in the aggregate at an exercise price per
share of $60.00 (restated for reverse stock split).

         In late 1992 and throughout 1993, the Company encountered a significant
increase in the price of lumber purchased for use in its homes. In response, the
Company in the fourth quarter of 1993 entered into a lumber purchase contract
for 600 homes in 1994 at specified pre-established prices. The Company purchased
lumber for approximately 100 homes under the contract. In February 1995, the
Company reached an agreement with the lumber company to settle its outstanding
lumber purchase commitment for $800,000, $645,000 of which was paid during 1995,
with the balance paid in 1996.



                                       31
<PAGE>   32
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.



                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                               Page
                                                                                                               ----
<S>                                                                                                            <C>
Report of Independent Accountants (Price Waterhouse LLP)........................................................F-2

Independent Auditors' Report (Ernst & Young LLP)................................................................F-3

Consolidated Balance Sheets as of December 31, 1996 and 1995....................................................F-4

Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994......................F-5

Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994............F-6

Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994......................F-7

Notes to Financial Statements...................................................................................F-9
</TABLE>

                                      F-1
<PAGE>   33
                        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, 1996 and the results of their operations
and their cash flows for the year 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 audit. We conducted our audit 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 audit provides a
reasonable basis for the opinion expressed above.

         As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for real estate inventories. Effective
January 1, 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of."






PRICE WATERHOUSE LLP

Costa Mesa, California
March 27, 1997



                                      F-2
<PAGE>   34
                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders of
Inco Homes Corporation


         We have audited the consolidated balance sheet of Inco Homes
Corporation as of December 31, 1995 and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years ended December
31, 1995 and 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.

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

         In our opinion, the financial statements referred to above present
fairly in all material respects, the consolidated financial position of Inco
Homes Corporation as of December 31, 1995 and the consolidated results of its
operations and its consolidated cash flows for the years ended December 31, 1995
and 1994 in conformity with generally accepted accounting principles.






                                              ERNST & YOUNG LLP

Los Angeles, California
March 19, 1996, except as to Note 12,
Second paragraph, which the date is
March 20, 1996


                                      F-3


<PAGE>   35

INCO HOMES CORPORATION
CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
(Dollars in thousands, except share data)                   December 31,
                                                          1996        1995
                                                        --------    --------
<S>                                                     <C>         <C>     
ASSETS

Cash                                                    $    586    $    420
Receivable from sale of divisions - Note 1                     9       1,722
Real estate inventories - Note 3                          36,752      40,535
Deferred tax asset - Note 7                                2,200       2,200
Investment in non-consolidated partnership - Note 2          428         -
Other assets - Note 9                                        657         897
                                                        --------    --------

        Total assets                                    $ 40,632    $ 45,774
                                                        ========    ========


LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable and accrued liabilities                $  7,133    $  8,742
Notes payable secured by real estate - Note 4             15,360      16,660
Lines of credit - Note 5                                   4,303       4,840
Notes to stockholder - Note 6                                676         -
                                                        --------    --------

        Total liabilities                                 27,472      30,242
                                                        --------    --------

Minority partners' investment in consolidated
  partnerships - Note 2                                      876         -

Commitments and contingencies - Note 8

Stockholders' Equity
     Common stock - $.01 par value; 20,000,000 shares
       authorized, 1,437,096 and 1,346,218 shares
       issued and outstanding for 1996 and 1995,
       respectively (restated for reverse stock 
       split) - Note 1                                        86          81
     Additional paid in capital                           41,691      40,676
     Deficit                                             (29,493)    (25,225)
                                                        --------    --------

        Total stockholders' equity                        12,284      15,532
                                                        --------    --------

        Total liabilities and stockholders' equity      $ 40,632    $ 45,774
                                                        ========    ========
</TABLE>


See accompanying notes to financial statements


                                      F-4

<PAGE>   36
INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)                For the Years Ended December 31,
                                                          -----------------------------------------
                                                              1996           1995          1994
                                                          -----------    -----------    -----------
<S>                                                       <C>            <C>            <C>        
Revenue from home sales                                   $    19,591    $    71,317    $    71,168
Revenue from land and lot sales                                   -              -              373
                                                          -----------    -----------    -----------

                                                               19,591         71,317         71,541
                                                          -----------    -----------    -----------
Cost of homes sold                                             18,260         61,836         63,388
Cost of land and lots sold                                        -              -              205
                                                          -----------    -----------    -----------
                                                               18,260         61,836         63,593
                                                          -----------    -----------    -----------

       Gross profit                                             1,331          9,481          7,948
                                                          -----------    -----------    -----------

Selling and marketing expenses                                  3,039          8,034         13,004
General and administrative expenses                             2,066          3,825          7,858
                                                          -----------    -----------    -----------
                                                                5,105         11,859         20,862
                                                          -----------    -----------    -----------

       Operating loss                                          (3,774)        (2,378)       (12,914)

Other income                                                       77            353            112
Sale of divisions - net - Note 1                                  -               31            -
Mortgage brokerage loss - net                                     -             (355)          (320)
Provision for write-down of real estate - Note 3                 (785)       (11,043)        (6,714)
                                                          -----------    -----------    -----------

       Loss before minority partners' share
          and provision (benefit) for income taxes             (4,482)       (13,392)       (19,836)

Minority partners' share                                         (214)           -              (28)
                                                          -----------    -----------    -----------

       Loss before provision (benefit) for income taxes        (4,268)       (13,392)       (19,808)

Provision (benefit) for income taxes - Note 7                     -            2,284         (7,718)
                                                          -----------    -----------    -----------

       Net loss                                           $    (4,268)   $   (15,676)   $   (12,090)
                                                          ===========    ===========    =========== 

Net loss per common share (restated for reverse stock
  split)- Note 1                                          $     (3.01)   $    (11.68)   $     (9.08)
                                                          ===========    ===========    =========== 


Weighted average number of common shares
  outstanding (restated for reverse stock
  split) - Note 1                                           1,417,794      1,341,582      1,330,833
                                                          ===========    ===========    =========== 
</TABLE>



See accompanying notes to financial statements


                                      F-5
<PAGE>   37
INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                            Common Stock
                                        --------------------
                                                Shares                   Additional            Retained
                                       (restated for reverse              Paid-in    Treasury  Earnings
(Dollars in thousands)                 stock split) - Note 1    Amount    Capital     Stock    (Deficit)       Total
                                       ---------------------    ------    -------     -----    ---------       -----
<S>                                           <C>                <C>      <C>        <C>      <C>            <C>     
Balance - December 31, 1993                   1,330,833          $80      $40,527      --     $  2,541       $ 43,148

                                                             
Net loss - 1994                                    --             --         --        --      (12,090)       (12,090)
                                              ---------          ---      -------    -----    --------       --------
                                                              
Balance - December 31, 1994                   1,330,833           80       40,527      --       (9,549)        31,058
                                                              
Common stock issued                              15,385            1          149      --         --              150
                                                              
Net loss - 1995                                    --             --         --        --      (15,676)       (15,676)
                                              ---------          ---      -------    -----    --------       --------
                                                              
Balance - December 31, 1995                   1,346,218           81       40,676      --      (25,225)        15,532
                                                              
Common stock issued - Note 8                     90,878            5          523      --         --              528
                                                              
Value of warrants issued to bank                              
pursuant to extension of line of                              
credit - Note 5                                    --             --          111      --         --              111
                                                              
Value of warrants issued pursuant to                          
consulting agreement - Note 8                      --             --          131      --         --                0
                                                              
Cash received from common stock                               
subscription - Note 8                              --             --          250      --         --              250
                                                              
Net loss - 1996                                    --             --         --        --       (4,268)        (4,268)
                                              ---------          ---      -------    -----    --------       --------
                                                              
Balance - December 31, 1996                   1,437,096          $86      $41,691      --     $(29,493)      $ 12,153
                                              =========          ===      =======    =====    ========       ========
</TABLE>
                                                              
                                                          
See accompanying notes to financial statements

                                      F-6


<PAGE>   38

INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                           For the Years Ended December 31,
                                                                        ------------------------------------
(Dollars in thousands)                                                     1996           1995         1994
                                                                        --------      --------      -------- 
<S>                                                                     <C>           <C>           <C>      
Cash flows from operating activities:
  Net loss                                                              $ (4,268)     $(15,676)     $(12,090)
  Adjustment to reconcile net loss to net cash provided by
    (used in) operating activities:
    Gain on sale of divisions                                               --             (31)         --
    Provision for write-down of real estate                                  785        11,043         6,714
    Minority partners' share                                                (214)         --             (28)
    Proceeds from sale of divisions                                        1,713           895          --
    (Increase) decrease in income taxes receivable                          --           2,230        (2,078)
    (Increase) decrease in deferred tax asset                               --           2,284        (4,484)
    (Increase) decrease in notes receivable secured by real estate          --            --             584
    (Increase) decrease in real estate inventories                          (711)        5,562        (9,886)
    (Increase) decrease in other assets                                      371           129          (171)
    Increase (decrease) in accounts payable and accrued liabilities       (1,019)       (1,715)        6,187
    Increase (decrease) in current income taxes payable                     --            --             (80)
    Increase (decrease) in deferred income taxes payable                    --            --          (1,127)
                                                                        --------      --------      -------- 

           Net cash provided by (used in) operating activities            (3,343)        4,721       (16,459)
                                                                        --------      --------      --------
Cash flow from financing activities:
    Proceeds from notes payable secured by real estate                    19,008        53,950        84,095
    Repayments on notes payable secured by real estate                   (16,716)      (58,838)      (76,761)
    Proceeds from lines of credit                                           --           6,000        11,777
    Repayments on lines of credit                                           (444)       (6,160)       (9,527)
    Proceeds from notes to stockholder                                       768          --            --
    Repayments on notes to stockholder                                       (92)         --            --
    Contribution to non-consolidated partnership                            (355)         --            --
    Contributions from minority partners                                   1,090          --            --
    Proceeds from common stock subscription                                  250          --            --
                                                                        --------      --------      -------- 

           Net cash provided by (used in) financing activities             3,509        (5,048)        9,584
                                                                        --------      --------      -------- 

Net increase (decrease) in cash and cash equivalents                         166          (327)       (6,875)

Cash and cash equivalents at beginning of year                               420           747         7,622
                                                                        --------      --------      -------- 

Cash and cash equivalents at end of year                                $    586      $    420      $    747
                                                                        ========      ========      ========
</TABLE>



See accompanying notes to financial statements




                                      F-7
<PAGE>   39
INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS


Supplemental schedule of non-cash activities


[1]     During 1996, the Company deeded back property with a book cost basis of
        $3.6 million to land sellers in satisfaction of $3.6 million in
        indebtedness - see Note 3.


[2]     During 1996, the Company issued 90,878 shares of common stock (restated
        for reverse stock split) to creditors in exchange for relieving the
        Company of $539,000 of accounts payable - see Note 8.


[3]     During 1996, the Company issued a warrant to purchase 41,667 shares of
        common stock (restated for reverse stock split) to a lender in
        connection with the extension of a line of credit - see Note 5. The
        value of this warrant was estimated at $111,000.


[4]     During 1996, the Company issued a warrant to purchase 200,000 shares of
        common stock (restated for reverse stock split) to a third party as
        compensation for all services to be performed pursuant to a consulting
        agreement - see Note 8. The value of this warrant was estimated at
        $131,000.


[5]     During 1995, the Company sold its Phoenix and Las Vegas divisions as
        follows -SEE NOTE 1:


<TABLE>
<CAPTION>
        <S>                                                  <C>
        Sales Price                                          $  14,545,000
        Assumptions of liabilities:
                 Accounts payable and accrued liabilities       (4,529,000)
                 Notes payable secured by real estate           (7,399,000)
        Receivable due from buyer                               (1,722,000)
                                                             --------------
        Cash received                                        $      895,000
                                                             ==============
</TABLE>


[6]     During 1995, the Company deeded back property with a book cost basis of
        $1.6 million to land sellers in satisfaction of $1.6 million in


See accompanying notes to financial statements


                                      F-8
<PAGE>   40
INCO HOMES CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994


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. In 1994, the Company expanded into Phoenix, Arizona and Las
Vegas, Nevada. In December 1995, the Company sold its Phoenix and Las Vegas
divisions, including its Phoenix mortgage operations, to an unrelated third
party. The sales price was $14.5 million, of which the purchaser assumed $12.0
million of bank indebtedness, and accounts payable and accrued liabilities. As a
result, the Company's sole market is in Southern California and it is
substantially dependent on local economic factors.

         The Company was incorporated in October 1992 to consolidate the
business conducted by various partnerships and corporations (the "Predecessor
Entities") under the control of Ira C. Norris ("Norris" or the "Stockholder").
In April 1993, the Company effected a reorganization (the "Reorganization") of
its operations, which involved an exchange offer (the "Exchange Offer") with the
shareholders and partners of the Predecessor Entities and an initial public
offering (the "IPO" or the "Initial Public Offering").

         Pursuant to the Exchange Offer made to the shareholders and partners of
the Predecessor Entities that was effected immediately prior to the consummation
of the IPO, the Company (i) acquired the outstanding capital stock of the
corporations under Inco Enterprises, and the outstanding partnership interests,
and (ii) consolidated ownership of all of the Company's projects and businesses,
except those related to Inco Land Acquisition Company which has been liquidated.
The partners in Palmdale Vistas Housing Developments Ltd. ("Palmdale Vistas"),
other than Norris, did not participate in the Exchange Offer and the Company
continues to maintain its investment in this partnership. Norris transferred his
12.5% interest in this partnership to the Company upon consummation of the
offering.

         Under the terms of the Reorganization, the consideration to acquire the
outstanding capital stock and partnership interests consisted of 5,850,139
shares of common stock of the Company. The total number of shares of common
stock issued in the Reorganization was determined by dividing the value (the
"Exchange Value") assigned to each of the corporations and partnerships by
$10.00. The Exchange Values for each corporation and partnership were determined
by the Company, based in part on independent appraisals, and were not the result
of arm's-length negotiations.

         On April 2, 1993, the Company sold 2,000,000 shares of common stock at
$10.00 per share through an Initial Public Offering, raising $20.0 million less
offering costs of approximately $2.9 million.

         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.

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,
Freedom-Eagle Ranch Housing Partners ("FERHP") and Triumph-Lancaster Housing
Partners ("Triumph"). All significant intercompany transactions have been
eliminated.

         The investment in non-consolidated partnership represents the Company's
investment in Spirit Corona 77, L.P. ("Spirit 77") and its share of profits and
losses allocated to the Company in accordance with the provisions of the
Partnership Agreement, based upon the equity method of accounting.



                                      F-9
<PAGE>   41
         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. Due to previous estimated
losses of Palmdale Vistas, future losses, if any, from operations will be
substantially borne by the Company.

         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. The accompanying financial statements have been prepared
assuming the Company will continue as a going concern. Management's current
business plan reflects that, in addition to future profits, sales of real estate
inventories provide a return of equity in the form of cash flow to the Company
to help meet operating requirements. During 1997, the Company will need to
extend the maturity dates of certain notes payable and to raise capital for
acquisitions of 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 lenders will be sufficient to fund most of its planned expenditures. The
Company currently is attempting to raise additional needed capital for both
ongoing working capital and the acquisition of land for future projects in
Southern California. The Company is in active discussions with certain capital
sources and is optimistic that it can successfully complete a transaction in
1997. However, no agreements between the Company and these potential capital
sources have been signed, and no assurances can be given whether or when the
Company will enter into a definitive 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 in
1997 to fund its planned expenditures, some or all of its projects may be
significantly delayed or abandoned. Any such delay or abandonment could result
in cost increases and have a material adverse effect on the Company's business,
financial condition and results of operations The Company is unable to predict
whether it will be successful in raising such capital, nor can any assurances be
given that, if successful, the capital will be raised on terms favorable to the
Company. Accordingly, absent raising capital, the Company's ability to continue
its current level of business operations and finance the acquisition of
additional land for the delivery of future homes will be greatly impaired.

         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 


                                      F-10
<PAGE>   42
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.

         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 impairment losses to be recorded on long-lived assets being
developed, based on fair value, when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. Assets held for sale are to be carried at the
lower of cost or fair value less the costs to sell.

         Prior to 1996, real estate inventories are carried at the lower of
historical cost or estimated net realizable value. Net realizable value is the
price obtainable in the future for parcels as improved with a completed housing
unit, net of disposal and holding costs (including interest), without provision
for future profit and without discounting future cash receipts to present value.

         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.

         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. Primary and fully diluted weighted average number
of common shares outstanding was 1,417,794, 1,341,582, and 1,330,833 for the
years ended December 31, 1996, 1995, and 1994, respectively. On January 16,
1997, a stockholder approved amendment to the Company's Restated Certificate of
Incorporation effecting a one-for-six reverse stock split became effective. The
amount of shares has been restated to give effect to the reverse stock split.
Common share equivalents include dilutive stock options and warrants using the
treasury stock method. There were no dilutive options or warrants for any of the
periods covered.

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




                                      F-11
<PAGE>   43
NOTE 3.  REAL ESTATE INVENTORIES

Real estate inventories consist of the following:

<TABLE>
<CAPTION>
                                                           December 31,
                                                   ----------------------------
                                                      1996             1995
                                                   ------------    ------------
<S>                                                <C>             <C>         
Land                                               $ 24,299,000    $ 30,379,000
Land development and construction in progress        25,520,000      28,497,000
Completed inventory not subject to pending sales
    contracts (unsold)                                2,030,000       1,084,000
Allowances for write-down of real estate            (15,097,000)    (19,425,000)
                                                   ------------     -----------

Total                                              $ 36,752,000    $ 40,535,000
                                                   ============    ============
</TABLE>

         As of December 31, 1996 and 1995, the Company owned title to
approximately 3,300 and 4,200 lots, respectively. As of December 31, 1996 and
1995, approximately 700 lots and 1,400 lots, respectively, were in the process
of being deeded back to land sellers (see below).

         In 1996, the Company determined that the undiscounted cash flows
estimated to be generated by various real estate holdings were less than the
assets' carrying amounts. An impairment allowance, which writes these assets
down to fair value was established at December 31, 1996 totaling $785,000, of
which $255,000 relates to properties in the high desert and $530,000 relates to
a property in Riverside County. Additionally, in both 1995 and 1994, the Company
determined that it was necessary to reflect a reduction in the estimated future
cost recovery of various real estate holdings and established an allowance for
net realizable value. Write-downs of real estate totaling $5.8 million were
recorded as of December 31, 1995, of which $4.4 million related to properties in
the high desert and $1.4 million related to properties in Riverside County.
Write-downs of real estate totaling $2.6 million were recorded as of December
31, 1994, all of which related to properties in the high desert.

         The Company also concluded in 1995 and 1994 that certain
seller-financed parcels were no longer economically viable based on current
financing terms. Accordingly, several measures were initiated, including
requests that certain sellers substantially restructure the terms of their debt
(including extending the maturity date, reducing or eliminating payment and
accrual of interest and deferring principal payments). The Company also
identified certain properties that should be deeded back to the sellers in full
satisfaction of the remaining debt outstanding. In 1995 the Company commenced
negotiations with six land sellers from whom the Company purchased land in the
high desert. The Company owned these properties subject to seller loans that had
current or approaching maturity dates. In this regard, the Company recorded a
charge to operations in 1995 of $5.3 million. The balance of the related real
estate inventories and indebtedness at December 31, 1995 was $3.1 million. In
1996, the Company deeded property with a book value of $2.1 million back to four
of these land sellers in satisfaction of $2.1 million in indebtedness.
Continuing negotiations may result either in extensions of maturity dates and/or
other adjustments to the seller notes, or deedbacks of the two remaining
properties with a book value of $1.0 million to the sellers in satisfaction of
$1.0 million in indebtedness outstanding at December 31, 1996.

         During 1995 the Company also reduced the scope of one community in
Riverside County which resulted in the write-off of approximately $300,000 of
previously capitalized costs associated with architectural development and
marketing activities. As of December 31, 1996, the Company was still in the
process of deeding back land to the seller from whom the Company purchased the
property that will result in a reduction of real estate inventories of $0.4
million in satisfaction of $0.4 million of indebtedness outstanding at December
31, 1996.

         In 1994, the Company commenced the process of deeding property back to
nine other land sellers from whom the Company purchased land in the high desert.
In this regard, the Company recorded a charge to operations in 1994 of $4.1
million. The balance of the related real estate inventories and indebtedness at
December 31, 1994 was $3.2 million. Deed backs of real estate with a book value
and related indebtedness of $1.4 million and $1.5 million occurred in 1995 and
1996, respectively. As of December 31, 1996, the Company was still in the
process of deeding back land 


                                      F-12
<PAGE>   44
to one of these land sellers that will result in a reduction of real estate
inventories of $0.3 million in satisfaction of $0.3 million of indebtedness
outstanding at December 31, 1996. This land was deeded back in January 1997.
During 1994 the Company also closed four communities and reduced the scope of
three other communities in the high desert which resulted in the acceleration of
the write-off of previously capitalized costs associated with its regional
development and marketing activities of approximately $4.0 million.

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

<TABLE>
<CAPTION>
                                                     For the Years Ended December 31,
                                                   -----------------------------------
                                                       1996        1995        1994
                                                   ----------   ----------   ---------
<S>                                                <C>          <C>          <C>       
Interest incurred and capitalized                  $1,635,000   $3,287,000   $3,607,000
                                                   ==========   ==========   ==========

Amortization of capitalized interest included in
     cost of homes, land and lots sold, and sale
     of divisions                                  $1,153,000   $6,621,000   $4,100,000
                                                   ==========   ==========   ==========

Unamortized capitalized interest included in
     real estate inventories at year end           $2,713,000   $2,231,000   $5,565,000
                                                   ==========   ==========   ==========
</TABLE>


NOTE 4.  NOTES PAYABLE SECURED BY REAL ESTATE

Notes payable secured by real estate consist of the following:

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                  -------------------------------
                                                                                    1996               1995
                                                                                  ----------        -------------
<S>                                                                               <C>               <C>
Various land acquisition loans bearing interest at fixed rates ranging from 7.0%
     to 11.0% per annum. Principal payments are required on fixed schedules or
     as land is taken down. The loan balance at December 31, 1996 can be reduced
     by approximately $1.7 million as
     properties are deeded back to land sellers (see Note 3).                     $1,796,000        $  5,498,000

Various construction loans with an aggregate maximum amount of $22.3 million of
     which $8.7 million is available as of December 31, 1996 to finance
     construction. The notes generally bear interest at variable rates based on
     the prime rate plus 1.0% to 3.0%, per annum and are due primarily in 1997.
     Principal payments are generally required as homes are closed. The prime
     rate as of December 31, 1996 was 8.25%. At December 31, 1996,
     some of these loans were in default (see Note 8).                            13,564,000          11,162,000
                                                                                 -----------        ------------
                                                                                 $15,360,000        $ 16,660,000
                                                                                 ===========        ============
</TABLE>

         Included in construction loans is a $600,000 secured participation note
payable to ALG 1996-1 ("ALG") and a $900,000 secured participation note payable
to Hunters Ridge Investment Partners ("HRIP") (see Note 9).

         The weighted average short term borrowing rate for construction loans
was 10.13% and 10.47% for the years ended December 31, 1996 and 1995,
respectively.


                                      F-13
<PAGE>   45


         The minimum future principal payments due on the notes payable secured
by real estate at December 31, 1996 are as follows:

<TABLE>
               <S>                <C>        
               1997               $13,161,000
               1998                 1,879,000
               1999                      --
               2000                      --
               2001                   320,000
                                  -----------
                                  $15,360,000
                                  ===========
</TABLE>

NOTE 5.  LINES OF CREDIT

         The Company has secured lines of credit with banks as follows: (i) a
$3.0 million line that bears annual interest at the prime rate plus 1% that
matures December 1999, and provides for quarterly principal payments of $500 for
each home closed, commencing with the fourth quarter of 1995 and scheduled
principal payments of $400,000, $500,000 and $600,000 in calendar years 1997,
1998 and 1999, respectively. In connection with the extension and modification
of this line of credit, the Company issued a warrant to the lender to purchase
41,667 shares (restated for reverse stock split) of the Company's common stock
at $6.00 per share (restated for reverse stock split) that expires June 30,
2000; and (ii) a $1.5 million line that bears interest at the prime rate plus
2.5% that matured March 1996, is now in default, and the Company is negotiating
the terms of an extension (see Note 8). The net outstanding balance under these
lines of credit at December 31, 1996 was $4.3 million.

NOTE 6.  NOTES TO STOCKHOLDER

         At December 31, 1996, the Company had received from Ira C. Norris
unsecured advances net of paybacks totaling $676,000 (which includes accrued
interest of $13,000). Subsequent to year end, the Company received an additional
$537,000 from Mr. Norris and paid back $220,000 to him. The Company has issued
several notes to Mr.
Norris, bearing interest at 10.0% , all of which mature June 30, 1997.

NOTE 7.   INCOME TAXES

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

         The accompanying financial statements reflect provision (benefit) for
federal and state income taxes as follows:

<TABLE>
<CAPTION>
                                                                 For the Years Ended December 31,
                                                  ------------------------------------------------
                                                      1996               1995              1994
                                                  -----------        -----------        -----------
               <S>                                <C>                <C>                <C>         
               Current provision (benefit)        $        --        $       --         $(2,107,000)
               Deferred provision (benefit)        (3,946,000)        (5,475,000)        (5,611,000)
               Valuation allowance                  3,946,000          7,759,000               --                    
                                                  -----------        -----------        -----------
                     Total                        $         0        $ 2,284,000        $(7,718,000)
                                                  ===========        ===========        ===========
</TABLE>

         Statement of Financial Accounting Standards No. 109 ("SFAS 109")
"Accounting for Income Taxes", requires, among other things, the recognition of
deferred tax assets for the estimated future tax effects attributable to net
deductible temporary differences and net operating loss carryforwards. SFAS No.
109 further requires the reduction of deferred tax assets by a valuation
allowance if, based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
The future realization of the deferred tax asset must be evaluated along with
the accumulated differences caused by other tax and book basis differences.
Uncertainties exist due to the reduced level of closings, revenues and earnings
resulting from the sale of 



                                      F-14
<PAGE>   46

the Company's Phoenix and Las Vegas divisions, the need to raise capital for new
land acquisitions and current business operations. Accordingly, the Company has
provided a cumulative $11.7 million valuation allowance at December 31, 1996 to
reserve against the deferred tax asset as a result of these uncertainties. At
such time as it becomes more likely than not that additional portions of the tax
asset will be realized in the future, the valuation allowance can be adjusted.
The Company believes that during the time period in which the deferred tax asset
can be utilized it will generate sufficient income to realize the net deferred
tax asset. It is difficult to assess the ultimate timing of the realization of
the deferred tax asset.

         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,
                                                    --------------------------------
                                                        1996                1995
                                                    ------------        ------------
<S>                                                 <C>                 <C>         
Deferred tax asset:
     Net operating loss carryforward                $  6,882,000        $  4,452,000
     Write-downs of real estate                        6,060,000           5,838,000
     Accrued expenses                                    963,000             453,000
                                                    ------------        ------------
     Total deferred tax asset                         13,905,000          10,743,000
Deferred tax liability
     Expensing of interest and property taxes               --              (784,000)
Valuation allowance                                  (11,705,000)         (7,759,000)
                                                    ------------        ------------

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

         At December 31, 1996, the Company has net operating loss carryforwards
for federal income tax purposes of $17.1 million that are available to offset
future federal taxable income. Of these federal net operating losses, $3.7
million, $5.0 million and $8.4 million expire in the years 2009, 2010 and 2011,
respectively.

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

<TABLE>
<CAPTION>
                                                 For the Years Ended December 31,
                                                ---------------------------------
                                                 1996         1995         1994
                                                -------     --------      -------
<S>                                              <C>          <C>          <C>    
Percent of pre-tax loss at current
     federal statutory income tax rate           (34.0%)      (34.0%)      (34.0%)
                                                 ------      -------      -------
State and local income taxes net of
     federal benefit                              (4.7)        (4.7)        (4.7)
Increase in valuation allowance to absorb
     benefit created                              38.7         --           --
Other                                             --           (2.0)        (0.2)
                                                 ------      -------      -------
Net increase (reduction)                          34.0         (6.7)        (4.9)
                                                 -----       ------       ------

Effective tax rate                                 0.0%       (40.7%)      (38.9%)
                                                 ======      =======      =======
</TABLE>

NOTE 8.  COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

         The Company is involved 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.



                                      F-15
<PAGE>   47
         The Company generally believes its relationships with its
subcontractors has been good. However, as a result of the limited amount of
available working capital, relationships with certain 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 filing of
complaints. The Company has negotiated payment arrangements, as appropriate, in
an effort to settle these claims and release the liens.

         In December 1996, a commercial bank filed notices of default relating
to matured loans with principal balances totaling $2.8 million secured by one of
the Company's projects. In February 1997, the Company obtained new financing
that provided approximately $2.3 million to pay the loans in full pursuant to a
Discounted Loan Payoff Agreement. In January 1997, this same bank filed separate
notices of default relating to matured loans with principal balance totaling
$3.5 million secured by an estimated 1,140 lots and 71 commercially zoned acres
of the Company's Eagle Ranch project located in the high desert. There is no
assurance that the Company will be successful in its negotiations with this
bank. The law permits the bank to proceed with a non-judicial sale of the
property as of April 9, 1997, 90 days after the notices of default were filed.
Although the Company is currently in negotiations with the bank to amend the
terms of the loans and remove the notices of default, there can be no assurances
that the Company will be successful in its negotiations with the bank or that
the bank will not commence with a non-judicial sale of the property. The final
settlement could result in writedowns in 1997 in amounts ranging from minimal to
approximately $6.0 million.

         During 1996 the Company entered into common stock purchase agreements
for 90,878 shares (restated for reverse stock split) of common stock with
certain subcontractors, suppliers and other creditors, including a director and
former directors of the Company. These shares were issued in exchange for
relieving the Company of debt owed to the respective creditors in the aggregate
amount of $539,000. In March 1996, the Company filed a Registration Statement on
Form S-3 in accordance with the terms of the common stock purchase agreement
that granted registration rights to these stockholders. The Registration
Statement was declared effective by the Securities and Exchange Commission in
April 1996. None of the proceeds from the sale of the shares by the selling
stockholders under that Registration Statement will be received by the Company.
The Company agreed to bear all expenses (other than underwriting discounts and
commissions) in connection with the registration.

         In December 1996, the Company entered into a Common Stock Purchase
Agreement with a third party to sell 200,000 shares (restated for reverse stock
split) of the Company's common stock in a private transaction. The stock was
issued subsequent to year end for a total purchase price of $750,000. The
Company also granted the third party the right to require the Company to
register the stock for public sale with the Securities and Exchange Commission.
At that time, in consideration of a $50,000 payment, the third party was also
given an exclusive option to purchase approximately 71 acres of commercial
property located in one of the Company's high desert projects. Additionally, in
December 1996, the Company issued a warrant to purchase 200,000 shares (restated
for reverse stock split) of common stock in a private transaction to an entity
related to this third party. The warrant was issued as compensation for all
services to be performed pursuant to a Consulting Agreement entered into in
December 1996. The Consulting Agreement is for a term of two years during which
the related entity, on a non-exclusive basis, shall seek out, investigate and
pursue residential development projects and present them to the Company for its
consideration and approval. The warrant may be exercised within eighteen months
of the date of the agreement at a price of $5.25 per share (restated for reverse
stock split). If at least half of the warrant shares are not exercised during
this period, then half of the warrant shares will expire, with the balance
exercisable over an additional eighteen month period at $9.75 per share
(restated for reverse stock split). The related entity may also convert the
warrant shares or any portion thereof into shares of common stock using a
formula based upon the fair market value of the Company's common stock on the
conversion date. One of the owners of this third party and the related entity is
a partner in FERHP, one of the Company's consolidated partnerships and is a
general partner of the owner of land in which the Company has entered into the
Development and Marketing Agreement described below.

         In November 1996, the Company entered into a Development and Marketing
Agreement with a third party to develop, construct, and market 163 lots owned by
the third party in Victorville, California. All financing and bonding will be
the responsibility of the third party. 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. The Company
will assume the home warranty costs for which it will be paid $750 per house.


                                      F-16
<PAGE>   48
         In April 1996, the Company entered into a letter of intent with an
unaffiliated privately held home builder primarily doing business in Southern
California relating to a potential combination of the Company and the home
builder and certain of the home builders' affiliates. After conducting due
diligence relating to the proposed combination, negotiations were mutually
terminated. Subsequently, at the request of the unaffiliated home builder,
informal discussions have resumed. No assurances can be given whether or when
the Company and the home builder may enter into a definitive agreement or, if
entered into, what the precise terms of the transactions will be and whether any
conditions to the consummation of such a transaction will be satisfied.

         In May 1994, the owners of 11 homes sold by the Company at its 201-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. In June
1994, the owners of six additional homes filed a separate complaint. These two
complaints were consolidated into one action. Subsequent to the consolidation,
one of the homeowners dismissed the lawsuit due to the Company's repair of the
alleged defects. In August 1994, one additional homeowner filed a complaint. In
October 1996, an additional eighteen homeowners filed a separate complaint. This
complaint was subsequently amended to include an additional four homeowners. The
Company is attempting to have this complaint consolidated with the previously
consolidated complaints. The complaints each allege, among other things,
negligence, nuisance, strict liability, breach of warranty, negligent infliction
of emotional distress and fraud based on alleged design and construction defects
and inadequate soils conditions. The plaintiffs are seeking general, special,
and punitive damages in an unspecified amount, and attorney fees. The causes of
action for fraud were dismissed by the court in 1994 with respect to the
complaints filed in 1994, and accordingly, there are no claims for punitive
damages. The Company intends to continue to vigorously defend itself in this
action. In 1994 the Company incurred as general and administrative expenses
approximately $850,000 of post-warranty costs to potentially mitigate these
items.

         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, 1996 and 1995 were $8.9 and $10.7
million, respectively.

         In 1993, the Company began to purchase lumber directly from suppliers
pursuant to forward purchase commitments. These commitments were initiated in an
effort to mitigate the continuing escalation in lumber pricing and ensure
supply. The agreement in place for 1994 obligated the Company to purchase lumber
to build at least 600 homes during 1994 at specified pre-established prices. The
Company purchased lumber for approximately 100 homes under the contract. In
February 1995 the Company reached an agreement with the lumber company to settle
its lumber purchase commitment for $800,000, $645,000 of which was paid during
1995, with the balance paid during 1996. The Company accrued the full settlement
as cost of homes sold in 1994.

         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 $274,000,
$520,000, and $440,000, for the years ended December 31, 1996, 1995, and 1994,
respectively, is included in general and administrative expenses. The minimum
future payments due on the lease contracts payable at December 31, 1996 are
$299,000 for 1997, $167,000 for 1998, $111,000 for 1999, $82,000 for 2000, and
$0 for 2001.

          At December 31, 1996, the Company did not satisfy a certain financial
covenant pursuant to a loan to Spirit 77 related to minimum net worth levels.
The Company has received a waiver from the lender. Based on the anticipated
results for 1997, the Company may be in violation of certain financial covenants
under this loan agreement for the quarter ending March 31, 1997 and subsequent
quarters. Although the Company believes these covenants could continue to be
modified or waived, it is not certain that such modifications or waivers will be
obtained.


                                      F-17
<PAGE>   49
         The Company is currently in default on the Purchase Agreement with
Spirit 77 since the Company has not purchased all of the required minimum number
of lots from Spirit 77. The Company and Spirit 77 are currently negotiating a
modification to the Purchase Agreement. The Company is also in default on two
notes payable to Spirit 77 related to the purchase of lots in 1996. The Company
and Spirit 77 are currently negotiating extensions to the due dates of these
notes.

NOTE 9. RELATED PARTY TRANSACTIONS

         For the years ended December 31, 1996, 1995, and 1994, the Company
incurred $47,000, $46,000, and $109,000, respectively, in model home design fees
and $153,000, $50,000, and $387,000, 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.

         For the years ended December 31, 1996, 1995, and 1994, the Company paid
$107,000, $147,000, and $154,000, respectively, for the use of office space, to
Inco Plaza, Ltd. Inco Plaza, Ltd. is a limited partnership owned 80% by G&N
Investments, Ltd., its sole general partner. G&N Investments, Ltd. is a limited
partnership owned 70% by Nancy and Ira C. Norris, its sole general partners.

         Included in other assets at December 31, 1995 is an unsecured
non-interest bearing advance in the amount of $293,000, from Victor Valley
Commercial Properties. Victor Valley Commercial Properties is a limited
partnership owned 50% by G&N Investments, Ltd., its sole general partner. During
1996 the Company assigned this advance to Ira C. Norris in exchange for a cash
payment of $293,000.

         Thomas E. Gibbs, Jr., a director of the Company, holds a 1.295% limited
partner's interest in Palmdale Vistas. Mr. Gibbs also holds a 23% general
partner's interest and a 1.376% limited partner's interest in Palmdale Vistas
Housing Investments, which holds a 47.41% limited partner's interest in Palmdale
Vistas. Mr. Gibbs also holds a 25% and 56.25% general partner's interest in ALG
and HRIP, respectively. Additionally, the Gibbs Family Trust, of which Mr. Gibbs
is a beneficiary and trustee, is a 50% limited partner in Triumph.

         One of the owners of two entities that own approximately 12.2% of the
Company's outstanding common stock and a warrant to acquire approximately an
additional 10.9%, respectively, holds a 5.55% limited partnership interest in
FERHP.

         In January 1993 the Company borrowed $1.8 million under a loan
agreement with one of its limited partners and a current stockholder and
director of the Company. Ten percent of the rights and obligations under this
agreement were assigned to another stockholder of the Company. The loan accrued
interest at an annual rate of 1.0% above the prime rate. The loan, plus
interest, was paid in full in April 1993, subsequent to the IPO. In connection
with this loan the Company issued to such stockholders warrants to purchase
7,920 shares (restated for reverse stock split) and 880 shares (restated for
reverse stock split), respectively, of the Company's common stock at an exercise
price of $60.00 per share (restated for reverse stock split). The warrants
expire in April 1998. As of December 31, 1996 none of the warrants had been
exercised.

NOTE 10. 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, 1996, 1995, and
1994.

NOTE 11.  STOCK OPTIONS/STOCK ISSUANCE PLAN

         In November 1992, the Company's Board of Directors adopted the Stock
Option/Stock Issuance Plan (the "Plan"). Under the plan, 100,000 shares
(restated for reverse stock split) of common stock were authorized for issuance.
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. 


                                      F-18
<PAGE>   50

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.

         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 1996 and 1995 under this plan consistent with the methodology
prescribed by SFAS No. 123, the Company's net loss and net loss per share for
the years ended December 31, 1996 and 1995 would not change materially from what
is presented.

         During 1996, 19,142 options (restated for reverse stock split) were
granted at prices ranging from $3.750 to $4.875 per share (restated for reverse
stock split). As of October 2, 1995 the Compensation Committee of the Board of
Directors offered all employees of the Company the right to exchange 26,167
existing options (restated for reverse stock split) at prices ranging from
$14.25 to $56.25 (restated for reverse stock split) with replacement options.
The replacement options were set at $6.75, the current fair market value at the
time (restated for reverse stock split), and reset the required holding period.
All employees elected to exchange their existing options for replacement
options. As of December 31, 1996, 45,741 options (restated for reverse stock
split) were outstanding at prices ranging from $3.75 to $56.25 per share
(restated for reverse stock split), none of which have been exercised.

NOTE 12.  SUBSEQUENT EVENTS

         On January 16, 1997, a stockholder approved amendment to the Company's
Restated Certificate of Incorporation effecting a one-for-six reverse stock
split became effective.

         In December 1996, a commercial bank filed notices of default relating
to matured loans with principal balances totaling $2.8 million secured by one of
the Company's projects. In February 1997, the Company obtained new financing
that provided approximately $2.3 million to pay the loans in full pursuant to a
Discounted Loan Payoff Agreement. In January 1997, this same bank filed separate
notices of default relating to matured loans with principal balance totaling
$3.5 million secured by an estimated 1,140 lots and 71 commercially zoned acres
of the Company's Eagle Ranch project located in the high desert. The law permits
the bank to proceed with a non-judicial sale of the property as of April 9,
1997, 90 days after the notices of default were filed. Although the Company is
currently in negotiations with the bank to amend the terms of the loans and
remove the notices of default, there can be no assurances that the Company will
be successful in its negotiations with the bank or that the bank will not
commence with a non-judicial sale of the property.

         In December 1996, the Company entered into a Common Stock Purchase
Agreement with a third party to sell 200,000 shares (restated for reverse stock
split) of the Company's common stock in a private transaction. The stock was
issued subsequent to year end for a total purchase price of $750,000.



                                      F-19
<PAGE>   51
NOTE 13.  QUARTERLY RESULTS (UNAUDITED)

              The Company has experienced, and expects to continue to
experience, significant variability in its operating results. The following
table reflects the quarterly operating results of the Company for 1996 and 1995
(in thousands, except for earnings per share, number of homes sales closed, and
average sales price).

<TABLE>
<CAPTION>
                                                                 For the Three Months Ended (unaudited)
                                                      ------------------------------------------------------------
                                                       Dec. 31,        Sept. 30,        June 30,         March 31,
                                                        1996              1996            1996             1996
                                                      ---------        ---------        ---------        ---------
<S>                                                   <C>              <C>              <C>              <C>      
Total revenue                                         $   7,269        $   5,704        $   2,972        $   3,646
Gross profit                                                268              615              145              303
Operating loss                                           (1,228)            (670)            (900)            (976)
Pretax loss                                              (1,798)            (667)            (859)            (946)
Net loss                                                 (1,798)            (667)            (857)            (946)
Net loss per common share (restated for reverse
  stock split)                                        $   (1.25)       $   (0.46)       $   (0.60)       $   (0.69)
Number of homes closed                                       53               41               22               28
Average sales price                                   $ 137,100        $ 139,100        $ 135,100        $ 130,200
</TABLE>


<TABLE>
<CAPTION>
                                                                 For the Three Months Ended (unaudited)
                                                       ---------------------------------------------------------
                                                        Dec. 31,        Sept. 30,        June 30,       March 31,
                                                         1995              1995            1995           1995
                                                       ---------        ---------        --------       --------
<S>                                                    <C>              <C>              <C>            <C>     
Total revenue                                          $  12,281        $  17,194        $ 21,209       $ 20,633
Gross profit                                                 434            2,346           3,325          3,376
Operating income (loss)                                   (2,094)            (402)             38             80
Pretax income (loss)                                     (12,989)            (466)             23             40
Net income (loss)                                        (15,435)            (279)             14             24
Net income (loss) per common share (restated for
  reverse stock split)                                 $  (11.47)       $   (0.21)       $   0.01       $   0.02
Number of homes closed                                       117              149             171            158
Average sales price                                    $ 105,000        $ 115,400        $124,000       $130,600
</TABLE>

         Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may not
agree with per share amounts for the year.


                                      F-20
<PAGE>   52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

                  None.


                                    PART III


         The Company's Proxy Statement for its 1997 Annual Meeting of
Stockholders, which, when filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, will be incorporated by reference in this Annual Report on
Form 10-K pursuant to General Instruction G(3) of Form 10-K and provides the
information required under Part III (Items 10, 11, 12 and 13), except for the
information with respect to the registrant's executive officers who are not
directors, which is included in "Item 1. Business -- Executive Officers of the
Registrant."



                                       32
<PAGE>   53

                                     PART IV

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


<TABLE>
<CAPTION>
(A)  FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.                              Page
                                                                                          ----
         <S>                                                                            <C>
         1.  The financial statements are included in Item 8.                           F1 - F20

</TABLE>
         2.  The following financial statement schedules are included in this 
Report:

                  None

Information required by other schedules has either been incorporated in the
financial statements and accompanying notes, or is not applicable to the
Company.

(B)  REPORTS ON FORM 8-K.

     The Company filed a current report on Form 8-K dated September 17, 1996
regarding a change of its independent accountant to Price Waterhouse LLP from
Ernst & Young LLP. The Company filed Amendments No. 1 and No. 2 to this Form 8-K
dated September 25, 1996 and October 1, 1996, respectively, to file the
requisite letters received from Ernst & Young LLP. No financial statements were
filed as part of these reports.

(C)  EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER               DOCUMENT DESCRIPTION
------               --------------------
<S>      <C>
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.)

*4.1     Specimen of Common Stock Certificate.

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.)
</TABLE>



                                       33
<PAGE>   54
<TABLE>
<CAPTION>
EXHIBIT
NUMBER               DOCUMENT DESCRIPTION
------               --------------------
<S>      <C>
+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     Building Loan Agreement between Mesa Verde Land Developments and Union
         Bank dated June 15, 1989. (Incorporated by reference to Exhibit 10.12
         of the Company's registration statement under the Securities Act on
         Form S-1, Registration Statement No. 33-58050.)

10.9     Amendment to Building Loan Agreement between Mesa Verde Land
         Developments and Union Bank dated January 10, 1990. (Incorporated by
         reference to Exhibit 10.13 of the Company's registration statement
         under the Securities Act on Form S-1, Registration Statement No.
         33-58050.)

10.10    Amendment to Building Loan Agreement between Mesa Verde Land
         Developments and Union Bank dated June 25, 1992. (Incorporated by
         reference to Exhibit 10.14 of the Company's registration statement
         under the Securities Act on Form S-1, Registration Statement No.
         33-58050.)

10.11    Amendment to Building Loan Agreement between Mesa Verde Land
         Developments and Union Bank dated August 14, 1992. (Incorporated by
         reference to Exhibit 10.15 of the Company's registration statement
         under the Securities Act on Form S-1, Registration Statement No.
         33-58050.)

10.12    Note between Mesa Verde Land Developments and Union Bank dated June 15,
         1989. (Incorporated by reference to Exhibit 10.16 of the Company's
         registration statement under the Securities Act on Form S-1,
         Registration Statement No. 33-58050.)

10.13    Construction Deed of Trust and Assignment of Rents between Mesa Verde
         Land Developments and Union Bank dated June 15, 1989. (Incorporated by
         reference to Exhibit 10.17 of the Company's registration statement
         under the Securities Act on Form S-1, Registration Statement No.
         33-58050.)

10.14    Guaranty between Ira C. Norris and Union Bank dated June 15, 1989.
         (Incorporated by reference to Exhibit 10.18 of the Company's
         registration statement under the Securities Act on Form S-1,
         Registration Statement No. 33-58050.)

10.15    Guaranty between Inco Holding and Union Bank dated June 15, 1989.
         (Incorporated by reference to Exhibit 10.19 of the Company's
         registration statement under the Securities Act on Form S-1,
         Registration Statement No. 33-58050.)

+10.16   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.)

10.17    Business Loan Agreement between Inco Homes Corporation and Riverside
         National Bank, dated October 12, 1993. (Incorporated by reference to
         Exhibit 10.76 of the Company's Annual Report on Form 10-K dated
         December 31, 1993.)
</TABLE>

                                       34
<PAGE>   55
<TABLE>
<CAPTION>
EXHIBIT
NUMBER               DOCUMENT DESCRIPTION
------               --------------------
<S>      <C>
10.18     Corporate Resolution to Borrow between Inco Homes Corporation and
          Riverside National Bank, dated October 12, 1993. (Incorporated by
          reference to Exhibit 10.77 of the Company's Annual Report on Form 10-K
          dated December 31, 1993.)

10.19     Disbursement Request and Authorization between Inco Homes Corporation
          and Riverside National Bank, dated October 12, 1993. (Incorporated by
          reference to Exhibit 10.78 of the Company's Annual Report on Form 10-K
          dated December 31, 1993.)

10.20     Promissory Note between Inco Homes Corporation and Riverside National
          Bank, dated October 12, 1993. (Incorporated by reference to Exhibit
          10.79 of the Company's Annual Report on Form 10-K dated December 31,
          1993.)

10.21     Note Secured by Deed of Trust between Inco Homes Corporation and Union
          Bank, dated August 30, 1993. (Incorporated by reference to Exhibit
          10.80 of the Company's Annual Report on Form 10-K dated December 31,
          1993.)

10.22     Revised Letter of Intent to Purchase Certain Unimproved Real Property
          Located in City of Corona, County of Riverside, State of California,
          dated December 2, 1993. (Incorporated by reference to Exhibit 10.95 of
          the Company's Annual Report on Form 10-K dated December 31, 1993.)

+10.23    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.)

10.24     Settlement Statement and Revised Letter of Intent to Purchase Certain
          Unimproved Real Property Located in the City of Corona, County of
          Riverside, State of California. (Incorporated by reference to Exhibit
          10.3 of the Company's Quarterly Report on Form 10-Q dated March 31,
          1994.)

10.25     Standard Office Lease - Gross between Princeland Development Company
          and Inco Homes Corporation, dated March 3, 1994. (Incorporated by
          reference to Exhibit 10.13 of the Company's Quarterly Report on Form
          10-Q dated June 30, 1994.)

10.26     Standard Form Shopping Center Lease between Commercial Center
          Management, Inc., Receiver for Ranch Center Limited and Inco Homes
          Corporation, dated June 30, 1994. (Incorporated by reference to
          Exhibit 10.16 of the Company's Quarterly Report on Form 10-Q dated
          June 30, 1994.)

10.27     Supplement to Deed of Trust between Union Bank and Inco Homes
          Corporation, dated October 7, 1994. (Incorporated by reference to
          Exhibit 10.11 of the Company's Quarterly Report on Form 10-Q dated
          September 30, 1994.)

10.28     Addendum to Deed of Trust, Assignment of Rents, Security Agreement and
          Fixture Filing between Union Bank and Inco Homes Corporation, dated
          August 23, 1994. (Incorporated by reference to Exhibit 10.12 of the
          Company's Quarterly Report on Form 10-Q dated September 30, 1994.)

10.29     Addendum to Commercial Promissory Note Secured by Deed of Trust
          between Union Bank and Inco Homes Corporation, dated August 23, 1994.
          (Incorporated by reference to Exhibit 10.13 of the Company's Quarterly
          Report on Form 10-Q dated September 30, 1994.)

10.30     Amendment Agreement Promissory Note and Deed of Trust between Union
          Bank and Inco Homes Corporation, dated October 7, 1994. (Incorporated
          by reference to Exhibit 10.14 of the Company's Quarterly Report on
          Form 10-Q dated September 30, 1994.)
</TABLE>



                                       35
<PAGE>   56
<TABLE>
<CAPTION>
EXHIBIT
NUMBER               DOCUMENT DESCRIPTION
------               --------------------
<S>      <C>
10.31    Amendment Agreement between Union Bank and Inco Homes Corporation,
         dated October 7, 1994; Loan No. 3779915092 0021-00-0-001. (Incorporated
         by reference to Exhibit 10.15 of the Company's Quarterly Report on Form
         10-Q dated September 30, 1994.)

10.32    Office lease between Princeland Properties (International), Inc. and
         Inco Homes Corporation, dated October 5, 1994. (Incorporated by
         reference to Exhibit 10.106 of the Company's Annual Report on Form 10-K
         dated December 31, 1994.)

10.33    Promissory Note, Loan No. 01373927-70, dated October 24, 1994, between
         Riverside National Bank and Inco Homes Corporation. (Incorporated by
         reference to Exhibit 10.107 of the Company's Annual Report on Form 10-K
         dated December 31, 1994.)

10.34    Construction Deed of Trust, Assignment of Rents, Security Agreement
         and Fixture Filing, dated October 7, 1994, between Union Bank and Inco
         Homes Corporation. (Incorporated by reference to Exhibit 10.108 of the
         Company's Annual Report on Form 10-K dated December 31, 1994.)

10.35    Building Loan Agreement/Disbursement Schedule dated October 7, 1994,
         between Union Bank and Inco Homes Corporation. (Incorporated by
         reference to Exhibit 10.109 of the Company's Annual Report on Form
         10-K dated December 31, 1994.)

10.36    Commercial Promissory Note dated October 7, 1994, between Union Bank
         and Inco Homes Corporation. (Incorporated by reference to Exhibit
         10.110 of the Company's Annual Report on Form 10-K dated December 31,
         1994.)

10.37    Lease of premises located at 1282 West Arrow Highway, Upland,
         California, dated as of October 1, 1995, between Inco Homes
         Corporation and G & N Investments. (Incorporated by reference to
         Exhibit 10.70 of the Company's Annual Report on Form 10-K dated
         December 31, 1995.)

10.38    Construction Deed of Trust, Modification of Deed of Trust Agreement
         (two Agreements), Construction Loan Modification Agreement and Amended
         and Restated Promissory Note, dated October 1, 1995, between Inco
         Homes Corporation and Riverside National Bank. (Incorporated by
         reference to Exhibit 10.71 of the Company's Annual Report on Form 10-K
         dated December 31, 1995.)

10.39    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.)

10.40    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.)

10.41    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.)
</TABLE>


                                       36
<PAGE>   57
<TABLE>
<CAPTION>
EXHIBIT
NUMBER               DOCUMENT DESCRIPTION
------               --------------------
<S>      <C>
10.42     Secured Participation Note by and between ALG-1996-1, a California
          Limited Partnership and Inco Homes Corporation, a Delaware
          corporation, dated June 26, 1996. (Incorporated by reference to
          Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q dated June
          30, 1996.)

10.43     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.)

*10.44    Common Stock Purchase Agreement by and between Inco Homes Corporation,
          a Delaware corporation and Overland Opportunity Fund, LLC, a
          California limited liability company, dated December 23, 1996.

*10.45    Option Agreement by and between Inco Homes Corporation, a Delaware
          corporation and Overland Opportunity Fund, LLC, a California limited
          liability company, dated December 26, 1996.

*10.46    Consulting Agreement by and between Inco Homes Corporation, a Delaware
          corporation and Overland Opportunity Fund, LLC, a California limited
          liability company, dated December 26, 1996.

*10.47    Warrant to Purchase 1,200,000 Shares of Inco Homes Corporation Common
          Stock issued to Overland Company, Inc., dated December 26, 1996.

*10.48    Development and Marketing Agreement by and between Victorville 163
          Partners, L.P., a California limited partnership and Inco Homes
          Corporation, a Delaware corporation, dated November 15, 1996.

*10.49    Secured Participation Note by and between Hunter's Ridge Investment
          Partners, a California partnership and Inco Homes Corporation, a
          Delaware corporation, dated October 1996.

*10.50    Registration Rights Agreement by and between Inco Homes Corporation, a
          Delaware corporation and Overland Opportunity Fund, LLC, a California
          limited liability company, dated December 23, 1996.

*21.1     Subsidiaries of the Registrant.

*23.1     Consent of Independent Auditors (Ernst & Young LLP).

*23.2     Consent of Certified Public Accountants (Price Waterhouse LLP).

*27.1     Financial Data Schedule
</TABLE>


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



                                       37
<PAGE>   58
                                   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:  April 14, 1997

         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.

<TABLE>
<CAPTION>
           SIGNATURE                               TITLE                             DATE
           ---------                               -----                             ----
<S>                                 <C>                                            <C> 
     /s/ Ira C. Norris              Chairman of the Board, President and Chief     April 14, 1997
--------------------------------    Executive Officer (principal executive
       Ira C. Norris                officer)

    /s/ Norman B. Gold              Vice President and Chief Financial Officer     April 14, 1997
--------------------------------    (principal financial officer)
        Norman B. Gold                                           


   /s/ Robert H. Daskal                  Director                                  April 14, 1997
--------------------------------
       Robert H. Daskal


 /s/ Thomas E. Gibbs, Jr.                Director                                  April 14, 1997
--------------------------------
     Thomas E. Gibbs, Jr.


   /s/ Ronald L. Neeley                  Director                                  April 14, 1997
--------------------------------
       Ronald L. Neeley


     /s/ John Seymour                    Director                                  April 14, 1997
--------------------------------
         John F. Seymour, Jr.
</TABLE>






                                       38
<PAGE>   59
                             INCO HOMES CORPORATION

                FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1996

                                  EXHIBIT INDEX


<TABLE>
<CAPTION>
EXHIBIT                                                                             SEQUENTIALLY
NUMBER                        DOCUMENT DESCRIPTION                                  NUMBERED PAGE
------                        --------------------                                  -------------
<S>      <C>                                                                        <C>
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.)

*4.1     Specimen of Common Stock Certificate 

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     Building Loan Agreement between Mesa Verde Land Developments and Union
         Bank dated June 15, 1989. (Incorporated by reference to Exhibit 10.12
         of the Company's registration statement under the Securities Act on
         Form S-1, Registration Statement No. 33-58050.)
</TABLE>



                                       1
<PAGE>   60
<TABLE>
<CAPTION>
EXHIBIT                                                                             SEQUENTIALLY
NUMBER                        DOCUMENT DESCRIPTION                                  NUMBERED PAGE
------                        --------------------                                  -------------
<S>      <C>                                                                        <C>
10.9     Amendment to Building Loan Agreement between Mesa Verde Land
         Developments and Union Bank dated January 10, 1990. (Incorporated by
         reference to Exhibit 10.13 of the Company's registration statement
         under the Securities Act on Form S-1, Registration Statement No.
         33-58050.)

10.10    Amendment to Building Loan Agreement between Mesa Verde Land
         Developments and Union Bank dated June 25, 1992. (Incorporated by
         reference to Exhibit 10.14 of the Company's registration statement
         under the Securities Act on Form S-1, Registration Statement No.
         33-58050.)

10.11    Amendment to Building Loan Agreement between Mesa Verde Land
         Developments and Union Bank dated August 14, 1992. (Incorporated by
         reference to Exhibit 10.15 of the Company's registration statement
         under the Securities Act on Form S-1, Registration Statement No.
         33-58050.)

10.12    Note between Mesa Verde Land Developments and Union Bank dated June 15,
         1989. (Incorporated by reference to Exhibit 10.16 of the Company's
         registration statement under the Securities Act on Form S-1,
         Registration Statement No. 33-58050.)

10.13    Construction Deed of Trust and Assignment of Rents between Mesa Verde
         Land Developments and Union Bank dated June 15, 1989. (Incorporated by
         reference to Exhibit 10.17 of the Company's registration statement
         under the Securities Act on Form S-1, Registration Statement No.
         33-58050.)

10.14    Guaranty between Ira C. Norris and Union Bank dated June 15, 1989.
         (Incorporated by reference to Exhibit 10.18 of the Company's
         registration statement under the Securities Act on Form S-1,
         Registration Statement No. 33-58050.)

10.15    Guaranty between Inco Holding and Union Bank dated June 15, 1989.
         (Incorporated by reference to Exhibit 10.19 of the Company's
         registration statement under the Securities Act on Form S-1,
         Registration Statement No. 33-58050.)

+10.16   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.)

10.17    Business Loan Agreement between Inco Homes Corporation and Riverside
         National Bank, dated October 12, 1993. (Incorporated by reference to
         Exhibit 10.76 of the Company's Annual Report on Form 10-K dated
         December 31, 1993.)

10.18    Corporate Resolution to Borrow between Inco Homes Corporation and
         Riverside National Bank, dated October 12, 1993. (Incorporated by
         reference to Exhibit 10.77 of the Company's Annual Report on Form 10-K
         dated December 31, 1993.)

10.19    Disbursement Request and Authorization between Inco Homes Corporation
         and Riverside National Bank, dated October 12, 1993. (Incorporated by
         reference to Exhibit 10.78 of the Company's Annual Report on Form 10-K
         dated December 31, 1993.)
</TABLE>



                                       2
<PAGE>   61
<TABLE>
<CAPTION>
EXHIBIT                                                                             SEQUENTIALLY
NUMBER                        DOCUMENT DESCRIPTION                                  NUMBERED PAGE
------                        --------------------                                  -------------
<S>      <C>                                                                        <C>
10.20    Promissory Note between Inco Homes Corporation and Riverside National
         Bank, dated October 12, 1993. (Incorporated by reference to Exhibit
         10.79 of the Company's Annual Report on Form 10-K dated December 31,
         1993.)

10.21    Note Secured by Deed of Trust between Inco Homes Corporation and Union
         Bank, dated August 30, 1993. (Incorporated by reference to Exhibit
         10.80 of the Company's Annual Report on Form 10-K dated December 31,
         1993.)

10.22    Revised Letter of Intent to Purchase Certain Unimproved Real Property
         Located in City of Corona, County of Riverside, State of California,
         dated December 2, 1993. (Incorporated by reference to Exhibit 10.95 of
         the Company's Annual Report on Form 10-K dated December 31, 1993.)

+10.23   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.)

10.24    Settlement Statement and Revised Letter of Intent to Purchase Certain
         Unimproved Real Property Located in the City of Corona, County of
         Riverside, State of California. (Incorporated by reference to Exhibit
         10.3 of the Company's Quarterly Report on Form 10-Q dated March 31,
         1994.)

10.25    Standard Office Lease - Gross between Princeland Development Company
         and Inco Homes Corporation, dated March 3, 1994. (Incorporated by
         reference to Exhibit 10.13 of the Company's Quarterly Report on Form
         10-Q dated June 30, 1994.)

10.26    Standard Form Shopping Center Lease between Commercial Center
         Management, Inc., Receiver for Ranch Center Limited and Inco Homes
         Corporation, dated June 30, 1994. (Incorporated by reference to Exhibit
         10.16 of the Company's Quarterly Report on Form 10-Q dated June 30,
         1994.)

10.27    Supplement to Deed of Trust between Union Bank and Inco Homes
         Corporation, dated October 7, 1994. (Incorporated by reference to
         Exhibit 10.11 of the Company's Quarterly Report on Form 10-Q dated
         September 30, 1994.)

10.28    Addendum to Deed of Trust, Assignment of Rents, Security Agreement and
         Fixture Filing between Union Bank and Inco Homes Corporation, dated
         August 23, 1994. (Incorporated by reference to Exhibit 10.12 of the
         Company's Quarterly Report on Form 10-Q dated September 30, 1994.)

10.29    Addendum to Commercial Promissory Note Secured by Deed of Trust between
         Union Bank and Inco Homes Corporation, dated August 23, 1994.
         (Incorporated by reference to Exhibit 10.13 of the Company's Quarterly
         Report on Form 10-Q dated September 30, 1994.)

10.30    Amendment Agreement Promissory Note and Deed of Trust between Union
         Bank and Inco Homes Corporation, dated October 7, 1994. (Incorporated
         by reference to Exhibit 10.14 of the Company's Quarterly Report on Form
         10-Q dated September 30, 1994.)
</TABLE>



                                       3
<PAGE>   62
<TABLE>
<CAPTION>
EXHIBIT                                                                             SEQUENTIALLY
NUMBER                        DOCUMENT DESCRIPTION                                  NUMBERED PAGE
------                        --------------------                                  -------------
<S>      <C>                                                                        <C>
10.31    Amendment Agreement between Union Bank and Inco Homes Corporation,
         dated October 7, 1994; Loan No. 3779915092 0021-00-0-001. (Incorporated
         by reference to Exhibit 10.15 of the Company's Quarterly Report on Form
         10-Q dated September 30, 1994.)

10.32    Office lease between Princeland Properties (International), Inc. and
         Inco Homes Corporation, dated October 5, 1994. (Incorporated by
         reference to Exhibit 10.106 of the Company's Annual Report on Form 10-K
         dated December 31, 1994.)

10.33    Promissory Note, Loan No. 01373927-70, dated October 24, 1994, between
         Riverside National Bank and Inco Homes Corporation. (Incorporated by
         reference to Exhibit 10.107 of the Company's Annual Report on Form 10-K
         dated December 31, 1994.)

10.34    Construction Deed of Trust, Assignment of Rents, Security Agreement and
         Fixture Filing, dated October 7, 1994, between Union Bank and Inco
         Homes Corporation. (Incorporated by reference to Exhibit 10.108 of the
         Company's Annual Report on Form 10-K dated December 31, 1994.)

10.35    Building Loan Agreement/Disbursement Schedule dated October 7, 1994,
         between Union Bank and Inco Homes Corporation. (Incorporated by
         reference to Exhibit 10.109 of the Company's Annual Report on Form 10-K
         dated December 31, 1994.)

10.36    Commercial Promissory Note dated October 7, 1994, between Union Bank
         and Inco Homes Corporation. (Incorporated by reference to Exhibit
         10.110 of the Company's Annual Report on Form 10-K dated December 31,
         1994.)

10.37    Lease of premises located at 1282 West Arrow Highway, Upland,
         California, dated as of October 1, 1995, between Inco Homes Corporation
         and G & N Investments. (Incorporated by reference to Exhibit 10.70 of
         the Company's Annual Report on Form 10-K dated December 31, 1995.)

10.38    Construction Deed of Trust, Modification of Deed of Trust Agreement
         (two Agreements), Construction Loan Modification Agreement and Amended
         and Restated Promissory Note, dated October 1, 1995, between Inco Homes
         Corporation and Riverside National Bank. (Incorporated by reference to
         Exhibit 10.71 of the Company's Annual Report on Form 10-K dated
         December 31, 1995.)

10.39    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.)

10.40    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.)
</TABLE>



                                       4
<PAGE>   63
<TABLE>
<CAPTION>
EXHIBIT                                                                             SEQUENTIALLY
NUMBER                        DOCUMENT DESCRIPTION                                  NUMBERED PAGE
------                        --------------------                                  -------------
<S>      <C>                                                                        <C>
10.41    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.)

10.42    Secured Participation Note by and between ALG-1996-1, a California
         Limited Partnership and Inco Homes Corporation, a Delaware corporation,
         dated June 26, 1996. (Incorporated by reference to Exhibit 10.3 of the
         Company's Quarterly Report on Form 10-Q dated June 30, 1996.)

10.43    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.)

*10.44   Common Stock Purchase Agreement by and between Inco Homes Corporation,
         a Delaware corporation and Overland Opportunity Fund, LLC, a California
         limited liability company, dated December 23, 1996.

*10.45   Option Agreement by and between Inco Homes Corporation, a Delaware
         corporation and 58 Overland Opportunity Fund, LLC, a California limited
         liability company, dated December 26, 1996.

*10.46   Consulting Agreement by and between Inco Homes Corporation, a Delaware
         corporation and 61 Overland Opportunity Fund, LLC, a California limited
         liability company, dated December 26, 1996.

*10.47   Warrant to Purchase 1,200,000 Shares of Inco Homes Corporation Common
         Stock issued to Overland Company, Inc., dated December 26, 1996.

*10.48   Development and Marketing Agreement by and between Victorville 163
         Partners, L.P., a California limited partnership and Inco Homes
         Corporation, a Delaware corporation, dated November 15, 1996.

*10.49   Secured Participation Note by and between Hunter's Ridge Investment
         Partners, a California partnership and Inco Homes Corporation, a
         Delaware corporation, dated October 1996.

*10.50   Registration Rights Agreement by and between Inco Homes Corporation, a
         Delaware corporation and Overland Opportunity Fund, LLC, a California
         limited liability company, dated December 23, 1996.

*21.1    Subsidiaries of the Registrant.

*23.1    Consent of Independent Auditors (Ernst & Young LLP).

*23.2    Consent of Certified Public Accountants (Price Waterhouse LLP).
</TABLE>


                                       5
<PAGE>   64
<TABLE>
<CAPTION>
EXHIBIT                                                                             SEQUENTIALLY
NUMBER                        DOCUMENT DESCRIPTION                                  NUMBERED PAGE
------                        --------------------                                  -------------
<S>      <C>                                                                        <C>
*27.1    Financial Data Schedule.
</TABLE>

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




                                       6