SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

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

                                    FORM 10-K

(MARK ONE)

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

For the fiscal year ended   December 31, 1997

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transaction period from __________ to __________

                         Commission file number 33-58934

                        LUNDGREN BROS. CONSTRUCTION, INC.
             (Exact name of registrant as specified in its charter)

            MINNESOTA                                       41-0970679
  (State or other jurisdiction                           (I.R.S. employer
of incorporation or organization)                       identification no.)

935 EAST WAYZATA BLVD., WAYZATA, MINNESOTA                      55391
 (Address of principal executive offices)                    (Zip code)

Registrant's telephone number, including area code (612) 473-1231

Securities registered pursuant to Section 12(b) of the Act:   NONE

Securities registered pursuant to Section 12(g) of the Act:   NONE

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

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

         State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing.

         The voting stock is privately held. None of the voting stock is held by
non-affiliates of the registrant.

         Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the last practicable date.

         On March 27, 1998, there were 594 voting and 10,031 non-voting shares
of the registrant's no par value common stock outstanding.

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                                 FORM 10-K INDEX


PART I
        Item 1.   BUSINESS.....................................................1
        Item 2.   PROPERTIES..................................................16
        Item 3.   LEGAL PROCEEDINGS...........................................16
        Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS DURING FOURTH QUARTER OF FISCAL YEAR................16

PART II
        Item 5.   MARKET FOR REGISTRANT'S COMMON STOCK AND
                  RELATED STOCKHOLDER MATTERS.................................16
        Item 6.   SELECTED CONSOLIDATED FINANCIAL DATA........................16
        Item 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS..................................................18
        Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................24
        Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE.........................24

PART III
        Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF
                  THE REGISTRANT..............................................25
        Item 11.  EXECUTIVE COMPENSATION......................................28
        Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                  OWNERS AND MANAGEMENT.......................................29
        Item 13.  CERTAIN RELATIONSHIPS AND RELATED
                  TRANSACTIONS................................................31

PART IV
        Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES
                  AND REPORTS ON FORM 8-K.....................................33

SIGNATURES....................................................................40

EXHIBIT INDEX.................................................................42

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                                     PART I
ITEM 1.  BUSINESS

GENERAL

     Lundgren Bros. Construction, Inc. ("Lundgren" or the "Company") is engaged
in the interrelated activities of land development and the design, construction
and sale of detached single family homes in the Minneapolis and St. Paul,
Minnesota ("Twin Cities") metropolitan area. The Company maintains an inventory
of potential home lots by controlling undeveloped land through options,
contingent purchase agreements, joint ventures, partnerships and other contract
relationships with landowners (referred to herein collectively as "Land
Acquisition Agreements"). Upon obtaining the appropriate regulatory approvals
and zoning changes, and dependent on market conditions, the Company develops the
undeveloped land into finished lots for residential subdivisions, primarily for
its own use. The Company also periodically options or purchases finished lots
from other developers.

     Since its incorporation in 1970, the Company and its affiliates have
developed 2,717 lots. On December 31, 1997, the Company controlled 17 parcels of
land under Land Acquisition Agreements for future development of an estimated
1,392 lots. An important part of the Company's land development strategy is to
control prime property for residential development two to five years in advance
of actual development, using Land Acquisition Agreements structured to require
limited initial investment by the Company. Management believes that this
strategy minimizes the risk of the Company owning too much land at any one time
but allows the Company to control key sites for future development. See
"Business--Land Acquisition."

     The Company builds custom homes and homes from standard plans at prices
typically ranging from $130,000 to $800,000 for both the home and lot, with an
average selling price of approximately $321,000 in 1997. Lundgren's wholly-owned
subsidiary, Brush Masters, Inc. ("Brush Masters"), provides painting, staining
and drywall services to the Company, as well as to other residential building
contractors in the Twin Cities metropolitan area.

     Since inception, the Company has built and sold over 2,652 single family
homes. The Company sells its homes primarily through its own staff of sales
personnel, although it also utilizes local realtors. The Company closed the
sales of 204 homes in 1997, and as of December 31, 1997, had purchase agreements
for the sale of 70 homes, representing approximately $21.5 million in sales. In
1996, the Company closed the sales of 198 homes, and as of December 31, 1996,
had contracts for the sale of 41 homes, representing approximately $13.9 million
in sales. The Company markets its homes to middle and upper income professionals
and executives. The Company's marketing efforts emphasize the community
atmosphere of its residential subdivisions and those characteristics it believes
are distinctive to the Lundgren-built homes: desirable designs, quality
construction, competitive prices and customer service, before, during and after
the sale of a home.

<PAGE>


     The Company was incorporated as a Minnesota corporation on October 29,
1970. The Company's offices are located in Wayzata, Minnesota.

OPERATING STRATEGY

     The Company's operating strategy is to attempt to achieve the following
inter-related goals:

*    Land Acquisition - locate and control the best residential property in a
     specific geographic area in its price range of homes, with minimum up-front
     expenditure and financial exposure.

*    Land Development - enhance the existing features of the acquired land that
     make it unique, as well as develop subdivisions in a manner that creates a
     community feeling with superior attributes to those developed by
     competitors.

*    Home Building and Home Sales -

     (a)  Product Design - design and periodically update home plans in order to
          provide the best value in the Company's price range of homes.

     (b)  Customer Service - provide outstanding customer service.

     (c)  Quality and Customization - build homes of the highest possible
          quality in a particular price range and offer home buyers an
          opportunity to customize their homes to a degree superior to the
          competition's products.

     (d)  Cost Control - closely monitor the design of home plans and the
          construction process, from the bidding of the homes through
          construction in the field, to ensure that the Company is producing its
          homes in a manner that best balances cost-effectiveness and quality.

     (e)  Design Center - provide home buyers with ease and convenience in
          making selections to personalize their homes.

*    Inventory Management - monitor its finished lot inventory and the number of
     unsold homes in order to react to changing market conditions.

*    Painting, Staining and Drywall - provide cost-effective and superior
     painting, staining and drywall services.

LAND ACQUISITION

     The Company believes that its future success depends upon its continued
ability to acquire superior home sites at competitive prices. The Company has
developed procedures for, and employs management specialized in, site
acquisition and development. Before the Company enters

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into any acquisition arrangement, it generally employs an independent marketing
consultant to perform a market analysis of the geographic area to assess the
future desirability of that area for single family homes, the current and future
development competition, and the history of demand for housing in the area. The
Company's objective is to locate areas where there will be great demand for
homes in the future but with limited competition. The Company has concentrated
its efforts on the western and southwestern suburbs of Minneapolis, in the
communities of Eden Prairie, Chanhassen, Chaska, Minnetonka, Medina,
Minnetrista, Plymouth, Shorewood and Maple Grove, Eagan, Watertown and Elco. The
Company believes that these communities are and will be some of the most
desirable areas for housing in the Twin Cities metropolitan area.

     Generally, land acquired by the Company for development in the next one to
three years is located within the Minneapolis-St. Paul Municipal Urban Service
Area ("MUSA"). Land located within the MUSA is permitted to be serviced with
metropolitan sewer service and municipal water. A limited portion of the
Company's resources are used to control parcels of land outside the MUSA in
municipalities which the Company believes are willing to attempt to obtain
approval for the extension of the MUSA. Although the Company has been successful
in assisting municipalities in which it controls land to obtain extensions of
the MUSA, there can be no assurance that the Company will be able to
successfully assist municipalities to further extend the MUSA in the future.

     The Company attempts to control parcels of undeveloped land with minimum
capital expenditure. The Company acquires control of undeveloped land in several
ways. Generally, the Company has been able to obtain long-term options to
purchase land for future development. The Company uses the option period to
obtain necessary development approvals from government units and to evaluate the
feasibility of development, including whether the development costs are within
cost parameters per lot for a particular type of standard home plan. The Company
also purchases land through contingent purchase agreements. Under such
agreements, the Company agrees to purchase the land, contingent upon the
Company's obtaining necessary zoning and government approvals, on terms
satisfactory to the Company, within a predetermined period. These arrangements
allow the Company to reduce the risk of purchasing a site it will not be able to
develop profitably. Under these arrangements, the Company attempts to acquire
the land with minimum cash investment and maximum amount of seller financing.
The Company attempts to obtain such purchase money financing on a nonrecourse
basis, thereby limiting both its exposure to the amount invested in the property
and its predevelopment costs on such site. While this policy may somewhat raise
the cost of the land the Company acquires, it significantly reduces the
Company's financial exposure. As competition for land increases, the Company may
not be able to acquire land through such favorable arrangements in the future
and may be required to expend more cash and bear more risk in order to gain and
maintain control of undeveloped land. During the due diligence periods provided
for in the Company's Land Acquisition Agreements, the Company employs a detailed
checklist to assist in its investigation of factors affecting the feasibility of
the project, including: topography, geology, soils and grading, traffic,
transportation and access, environmental issues, archeological site status,
regulatory processing and approval schedule, financing alternatives, market
research, and economic feasibility.

<PAGE>


     Occasionally, the Company acquires control of land through joint ventures
and other contractual relationships with third party landowners ("Joint
Ventures"). Under these Joint Ventures, the Company generally is employed as an
agent of the Joint Venture to zone and develop the property and build and sell
homes on it. The Company must meet certain criteria as to cost control and
absorption rates for the sale of the finished lots. The landowner subordinates
his or her interest in the land to a mortgage securing the development
financing. As lots are sold, the landowner shares in the profits on the finished
lots. This approach allows the landowner to maximize the profit to be made on
the sale of the land. It also enables the Company to control a site which it
might not have been able to purchase through an option or contingent purchase
agreement. The Joint Venture also enables the Company to participate in the lot
profit, while retaining the profit from the construction of the homes on the
site.

     Periodically, the Company acquires lots through optioning and/or purchasing
finished lots from unaffiliated developers. This approach allows the Company to
control a large number of finished lots, including an entire subdivision, while
also enabling the Company to market a new subdivision with minimal capital
expenditure and limited development risk. Generally, under these agreements, the
Company can continue to control these finished lots as long as the Company
purchases a specified number of such lots within a predetermined time period.
This arrangement, however, provides the Company less profit on the sale of the
lot.

     Occasionally, the Company may sell a site to another entity and have it
develop the site for the Company. The Company will enter into an option
agreement with this entity to purchase the developed lots back. This approach
allows the Company to limit the amount of debt associated with developing the
site but provides the Company with less profit on the sale of the lot.

     The Company continuously searches for new sites to control which meet its
development criteria. The Company also attempts, whenever possible, to upgrade
the property it controls. If a better site becomes available, the Company will
try to acquire control of the new site and to determine whether it should hold,
sell or terminate its agreement for the less desirable parcel. The Company will
also abandon attempts to zone and develop a parcel if significant development
problems arise. Accordingly, the land controlled by the Company for future lot
inventory is constantly changing. The Company has Land Acquisition Agreements
and finished lot inventory sufficient to satisfy its land requirements for the
next two to three years, and attempts to control land sufficient for its needs
approximately two to five years in advance.

LAND DEVELOPMENT

     The Company's operations differ from the majority of home builders in the
U.S. Census Bureau Twin Cities Metropolitan Statistical Area (The "Twin Cities
MSA"), which area includes 11 Minnesota counties and two counties in Wisconsin,
in that it is involved in both land development and home building. Land
development is historically the most profitable portion of the Company's
business and an essential element to the success of the Company's home building
business.

<PAGE>


     During 1997, 79.9% of the homes delivered by Lundgren were built on lots
developed by Lundgren, compared to 84.8% in 1996 and 77.2% in 1995. In the
future, the Company's goal is to maintain this percentage in the range of 50% to
70%. Since inception, the Company has developed 113 residential subdivisions,
ranging in size from 3 to 94 lots, in the Twin Cities MSA. In 1996, the Company
commenced the development of 11 new residential subdivisions and, in 1997,
commenced the development of five new subdivisions.

     Once the Company acquires control of undeveloped land, it commences the
process of obtaining zoning and other government approvals necessary for the
proposed development. This process is generally completed in one to three years.
The Company estimates the cost of development of the entire parcel to determine
whether finished lots can be brought to market at a competitive, yet profitable,
price. Periodically during the approval process, the Company normally updates
its market studies to determine both the level of competition by other land
developers and builders which are, or will be, developing subdivisions in the
area, and projected lot absorption rates for that area. If at any time during
the zoning and approval process it appears that the cost of the lots will be too
great for the market, or that the approval process is not progressing
satisfactorily, the Company will cease the zoning and approval process and sell
or abandon its interest in the land. Therefore, because the Company's land
acquisition strategy is to acquire control of the land through Land Acquisition
Agreements structured to require limited initial investment by the Company and
to obtain the necessary zoning and governmental approvals prior to purchasing
the land, the Company minimizes the risk of substantial capital expenditures on
land which it ultimately cannot successfully develop. However, the Company may
spend between approximately $50,000 to $300,000 during the approval process
prior to determining whether it can, or will, develop the land. Nonetheless, the
Company believes that the outlay and potential loss of these pre-development
costs substantially reduces the risks of greater costs and capital expenditures
associated with owning undevelopable land. The Company generally has been
successful in obtaining the necessary zoning and governmental approvals for the
development of its land.

     During the zoning and approval process, the Company determines the
availability of utilities, surveys and tests soil conditions on the site, and
performs the required environmental reviews. Upon receipt of final governmental
approvals, the Company will usually complete its purchase of the land and begin
site development.

     Site development is the process whereby the undeveloped land is developed
into finished lots ready for home construction. During the initial development
stage, the land is graded and sanitary sewer, watermain, stormsewer, curbs,
gutters and streets are installed. Upon completion of the initial development
stage, the Company landscapes the subdivision and constructs various amenities.
The Company believes that to create a successful subdivision distinguishable
from that of its competitors, it is important to create a neighborhood and a
sense of community. A number of factors are involved in the creation of this
sense of community: a street and lot configuration that arrives at the best
balance of installation and construction costs and the esthetics of the
subdivision; the location, design, landscaping and creation of the entrance; and
the creation of common amenities in the subdivision, such as children's play
areas, tennis courts,

<PAGE>


swimming pools, basketball courts, gazebos and community open spaces with trails
for neighbors to enjoy the natural beauty of the land.

      Since inception, the Company has developed 2,717 lots, for which the sales
of 2,412, or 88.8%, had been closed as of December 31, 1997. The remaining lots
are subject to purchase agreements or are available for sale. The development of
all but approximately 154 lots is complete. The subdivisions in which such 154
lots are located require minor finishing work, such as laying the final coat of
blacktop on the subdivision streets.
The Company expects to complete such finishing work in 1998.

HOME BUILDING AND HOME SALES

      The Company closed on 204 home sales in 1997. The Company's homes are sold
primarily through its own sales staff. The Company also sells its homes through
local realtors. The Company recognizes a sale for accounting purposes on the
closing date of the sale.

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


                                  HOME CLOSINGS

      Below is a summary of the Company's closings for the past five years.


                                              YEARS ENDED DECEMBER 31,
                                   --------------------------------------------
                                   1993      1994      1995      1996      1997
                                   ----      ----      ----      ----      ----
                          (Dollars in thousands, except numbers of homes closed)

 Homes Closed                       216       247       202       198       204
 Average Selling Price          $   265   $   297   $   311   $   339   $   321
 of Homes(1)
 Total Volume of Closed Homes   $57,136   $73,471   $62,796   $67,079   $65,549

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

(1)   The average selling price per home is affected by the mix of the type of
      lots developed, the product line of homes sold and mortgage interest
      rates. The Company estimates that the average selling price for the types
      of homes that it will be selling in the year ended December 31, 1998, will
      be lower compared to 1997.

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

<PAGE>


      The Company markets its homes primarily to middle and upper income buyers
in the Twin Cities MSA. The Company's promotional efforts include advertisements
in newspapers and other printed media, internet, radio and television,
illustrated brochures, billboards, on-site displays, realtor programs and
furnished model homes. Based upon its experience in the home building business
and the comments it receives from its customers, the Company believes that, in
addition to the location and design of its subdivisions, it has the competitive
advantages in the areas of (a) product design; (b) customer service; (c) quality
and customization; (d) cost control; and (e) its design center.

(a)  PRODUCT DESIGN.

      The Company designs, and builds from, a variety of standard home plans
that can be customized to some extent by the customer. The Company also designs
and builds true custom homes. The Company employs its own in-house designers,
which it supplements from time to time with national and local architectural
firms. The Company reviews its home designs on a regular basis in order to
ensure that the homes incorporate marketable floor plans that are both desirable
and practical. The Company also monitors local competition to determine whether
its product lines and home designs continue to maintain a competitive design
advantage. Additionally, the Company gets input on new home designs it is
developing from focus groups, which consist of individuals who have purchased
homes in the last six months in approximately the same price range as that of
the Company's new home designs.

      In addition to implementing its current product lines and having its new
home designs reviewed, the Company utilizes a number of marketing consultants in
cities across the United States having similar climate and housing construction
techniques. During the year, the Company periodically consults with these
marketing consultants to determine what type of houses within the price and
square footage ranges of the product lines offered by the Company are selling
well in other markets. Usually two or three times a year, the Company sends a
team of its employees to study these homes for new ideas that the Company can
use. In recent years, Company employees have traveled to Seattle, Denver,
Chicago, St. Louis, Kansas City, Indianapolis and Washington, D.C. This housing
market review allows the Company's design team to keep the Company's designs
current and to incorporate innovations from around the country.

(b)  CUSTOMER SERVICE.

      Providing a high level of customer service has always been a priority for
the Company and a part of its competitive strategy. The Company attempts to
maintain personal contact with its customers from their first meeting with the
Company's sales representative through the construction process and after the
closing. This relationship begins with the Company's sales representatives when
the customer first visits one of the Company's model homes and selects a home
plan and lot. The Company emphasizes customer service by making it a topic at
every weekly sales meeting with the Vice President -- Sales and Marketing, as
well as by making it an important part of the annual sales training program that
all the sales representatives are required

<PAGE>


to take. The Company's sales representatives service the customers' needs until
the customers' final plans have been approved for construction. Once approval
for construction has been obtained, a construction coordinator is assigned to
the customers. The construction coordinators have offices at the Company's
headquarters and report directly to the Vice President -- Construction. The
construction coordinators handle any of the customers' concerns, changes,
service and warranty work and are available to talk with customers at any time
during the Company's normal business hours. Additionally, these construction
coordinators are specially trained to understand customers' needs and the
importance of solving their problems quickly and pleasantly.

      Building a home is a very complicated process and one in which customers
probably have limited or no experience. Accordingly, the Company has developed a
system to educate its customers as to the Company's procedures and schedule for
everything that will happen from the time a customer signs a purchase agreement
through the entire construction process and through any service and warranty
work. This system establishes, prior to a customer's signing a purchase
contract, the correct customer expectations and the sequences and timing of
events during the process of building and servicing their home. The system also
explains when customer input is required in order for construction to proceed as
scheduled. The system is summarized for the customer in a comprehensive book
entitled "Building a New Home with Lundgren Bros.," which is given to them after
they have executed a purchase agreement with the Company. Moreover, at strategic
points in the construction process, customers are automatically sent letters
informing them of the progress and indicating what is required of them in order
to keep on schedule.

      The Company also employs a system by which to evaluate the quality of its
service and the satisfaction level of its home buyers. The Company telephones
its home buyers at four different times during the term of its relationship with
the home buyers. These telephone calls are designed to get the home buyers'
feedback on how the Company is doing and how the Company is addressing their
problems, if any. The responses the Company receives from these telephone calls,
which are delivered weekly to the President of the Company and the Company's
department heads, are used to give management a qualitative measure as to how
the Company is doing at various critical points during the home building
process. In addition, the Company employs an outside firm to survey Company
customers who have recently closed on a home to determine both how such
customers feel about the treatment that they have received from the Company at
various stages during the home building process and whether they would recommend
the Company to another home buyer.

(c) QUALITY AND CUSTOMIZATION.

      Since its inception, the Company has designed and built both custom homes
and a number of standard plan homes that can be customized to a customer's
personal taste. Through a series of meetings with the Company's sales
consultants and, if necessary, its designer, a customer's home plans evolve to a
compromise that balances the customer's wish list and budget. The design process
ends in a detailed final plan review with the customer.

<PAGE>


      In order to provide home customers the price advantage of a standardized
product line while still providing them with flexibility to customize their home
before and after the final plan review, the Company has integrated its
construction process with a schedule for the customer's required
decision-making, contained in the book "Building a New Home with Lundgren Bros."
The book coordinates the customer's required input (final plan review, change
orders and selections) with the separate stages of construction. To ensure
proper communication between the customer and the field superintendent, as well
as to provide an inspection process to assure the customer that the construction
will meet the Company's performance standards, four orientation meetings are
scheduled for the customer before the closing: an on-site preconstruction
meeting; a pre-drywall orientation; a preclosing orientation; and a new home
orientation (walk-through). The book also alerts the customer to construction
deadlines for needed customer selections. Additionally, the Company's
construction coordinator helps the customer schedule and complete all the
necessary paperwork, meetings, change orders and selections. Because the Company
believes that its home buyers will increasingly demand more customizing
opportunities, it has positioned itself to take advantage of such a trend.

      The Company has four standard product lines of homes that it offers its
homebuyers, in addition to building totally customized homes. The standard
product lines are the Heritage Homes, the Heartland Homes, the Lifestyle Homes
and the Traditional Homes. The Heritage Homes range in size from approximately
1,350 to 2,400 square feet. These homes with the lot sell for approximately
$130,000 to $190,000. The Heartland Homes range from 1,800 to 3,000 square feet
and sell with the lot from approximately $220,000 to $300,000. The Lifestyle
Homes series is a maintenance free attached or detached home. It is built in a
community that has a homeowners association that controls the maintenance of the
exteriors of the buildings and the common land. The Lifestyle Homes range from
1,800 to 2,200 square feet and sell with the lot from approximately $230,000 to
$300,000. The Traditional Homes range in size from 1,800 to 4,000 square feet
and sell with the lot from approximately $250,000 to $550,000. The purchasers of
the Company's standard houses can select from various base floor plan and
elevation combinations, as well as customize their homes with a selection of
changes, features and upgrades. Some typical features of the Company's floor
plans, depending on the subdivision, are:

     *    vaulted or higher-than-average ceilings and large decorative windows
          to admit natural light

     *    two story entries which offer a sight line through the house

     *    incorporation of columns, arches, bridges, niches and wall cutouts,
          formal and informal stairways and other design features

     *    basements, most with windows or outside entries

     *    two and three car garages.

In addition, purchasers can choose, at additional cost, optional amenities such
as different front elevations for the house, bay windows, decks, cabinets,
upgraded carpets and floor coverings, fireplaces, lighting fixtures, appliances
and hardware.

<PAGE>


      Custom homes designed and built by the Company have ranged from
approximately $250,000 to $800,000 for house and lot, and have ranged from
approximately 2,500 to 5,000 square feet.

(d)  COST CONTROL.

      In order for the Company to control construction costs without sacrificing
quality, it must start with the efficient design of its homes. After completion
of the schematic plan of a home from the Company's standard product line, the
construction department, purchasing department and estimating department review
the plan to ensure the home is designed to minimize the costs of labor and
materials. The sales department also reviews the plan at the same time to ensure
that amenities designed into the home will create value for the home buyer. The
plan is then sent to an outside structural engineer who reviews the structural
integrity of the plan and makes recommendations where necessary. Additionally,
the plan is sent to a truss manufacturer, electrical consultant and a cabinet
maker for additional input and recommendations. The Company then reviews these
recommendations and, if appropriate, incorporates them into the final plans.
Along with the design department, the construction and purchasing departments
also review the final plan and officially approve it for use by the Company. The
purchasing and construction department may seek the advice of suppliers and
subcontractors with respect to better or more cost efficient ways to design and
build the home so as to create more value for the home buyer. Thereafter, the
plan is revised based on all of the above reviews and input into the Company's
Auto Cad (computerized architectural design programs) system. The Auto Cad
creates very detailed drawings of the home and allows the Company to make
changes to the plan rapidly. Once the plan is completed, the purchasing and
estimating departments seek to obtain competitive pricing from local
subcontractors and suppliers. The Company has negotiated contracts with various
vendors for set pricing on certain standard product line plans. The Company
believes it is generally able to negotiate satisfactory pricing due to both the
high volume of work it offers to its unaffiliated subcontractors and its ability
to pay its bills promptly. The Company has also arranged and is continually
attempting to establish direct purchase relationships with national vendors in
order to provide certain items at a lower price. The Company believes its design
center is appealing to these national vendors because it offers them a
professional place to show their products, while also giving the Company an
opportunity to negotiate special relationships with the national vendors.

      The Company utilizes its management information system to monitor all
subcontractor expenditures for each home it builds. Once the home plans are
completed, they are sent to the estimating department, which, using a
computerized estimating system, determines the exact quantities of materials
needed to build the home and the estimated cost associated with using such
materials. This estimated cost is then verified with individual cost quotes or
bids from each subcontractor or supplier. A detailed budget for the home is then
input into the computerized purchase order system which enables the Company to
monitor all of its costs and variances from the original budget for the home.
The Company has one person who is responsible for recording and inputting into
the system variances from the original budget for the home as they occur. This
allows the Company to view on a daily basis any variance on every home under

<PAGE>


construction. Management normally has weekly meetings to review all variances so
as to determine the cause and to establish procedures to eliminate such
variances in the future.

      The Company also uses its management information system to pay its
suppliers and subcontractors for their completed work on the home. Unless there
is an approved variance purchase order or an approved change order that has been
entered into the system, the only amount paid to the suppliers and
subcontractors is the amount which was originally budgeted on the system. With
this system, the Company knows at all times the current cost of each home. If
there is a variance from the original budget, the Company can study the variance
when it occurs to determine what went wrong and how to correct its plans and
procedures so the variance will not occur in the future. By using this system
over a period of time, the Company can determine the most cost efficient way to
produce its homes. The Company also monitors its gross margin on each home at
four different points in order to make certain how the actual margin compares to
the budgeted one: when the purchase agreement is signed by the Company, after
the budget is placed in the computerized purchase order system, when the home
closes and approximately 45 days after the home closes and all outstanding
invoices have been reviewed and entered into the purchase order system.

(e)  DESIGN CENTER.

      All of the Company's home buyers can choose from the Company's various
base floor plans and elevation combinations or design a custom plan for
themselves. Home buyers can further customize their home by making a number of
selections and upgrades from the Company's state-of-the-art Design Center. The
Design Center is located in a separate building and allows the buyers to view a
wide selection of items. The Design Center currently has seven complete
kitchens, six bathrooms and a media center on one level. The lower level of the
Design Center displays numerous items, including selections of roofing, siding,
plumbing fixtures, cabinets, interior and exterior doors, carpeting, floor
coverings, counter tops and window treatments. The Company's home buyers can
visit this center as many times as they like. The Company employs interior
decorators who work full time for the Company and staff the Design Center to
assist customers. In addition, the Company's interior design staff will meet
with home buyers on an appointment basis when it is convenient for the home
buyer to make selections, or home buyers can visit the design center, which is
open weekdays as well as during convenient evening and weekend hours. The
Company is not aware of any other housing company in the Twin Cities that has a
comparable facility. Normally, a home buyer purchasing a home from one of the
Company's competitors will be forced to travel to many different locations
scattered around the city to make their selections from different suppliers.
This is not only time-consuming, but there is no way of controlling the quality
of service the home buyer will receive at each of these different suppliers. The
Company's home buyers will be able to make the vast majority of all their
selections at the Company's Design Center where they will be assisted by the
Company's trained staff.

<PAGE>


INVENTORY MANAGEMENT

      Much of the risk in the home building industry is related to excessive
inventory, including undeveloped land, finished lots and completed homes. The
Company attempts to reduce its exposure to excess capital committed to land by
continuously monitoring its undeveloped and finished lot inventory. The Company
tries to purchase land through options and non-recourse contingent purchase
agreements, which reduce the amount of committed capital and permit the Company
to terminate or postpone the ultimate purchase of land that it does not need.
The Company controls its finished lot inventory by developing finished lots in
increments of approximately 20 to 40 lots, which it believes can be sold and
closed in a normal market within one and one-half years from the completion of
lot development. The Company reviews its lot inventory on a weekly basis.

      The Company attempts to limit its exposure to an excess inventory of
completed houses by (a) generally not starting construction of a home until
execution of a purchase agreement, receipt of satisfactory earnest money,
receipt by the home buyer of a preliminary mortgage commitment and removal of
all contingencies, and (b) controlling the number of finished homes held in
inventory on a project-by-project basis and monitoring weekly the sales progress
of each subdivision.

      For sales and marketing purposes, the Company generally will build one to
three model homes in each of its subdivisions. These homes are completed,
including interior furnishings and decorations, in order to market a particular
home plan to potential home buyers. These model homes are not generally marketed
for sale for at least a year or, if earlier, until the subdivision in which they
are located is nearly sold out.

      As of December 31, 1997, the Company had 39 houses built or under
construction to be held as inventory which represents 35.7% of the Company's
total house inventory. Total house inventory also includes homes under purchase
agreements. A house is put in this category as soon as application is made for a
building permit. Therefore, these 39 houses could be at any stage in the
construction process. In the Company's experience, these houses often sell prior
to completion. The Company rarely holds many houses in inventory after
completion of construction.

      The 39 houses in inventory as of December 31, 1997, were located in 19
different subdivisions. Houses in inventory are generally marketed to transferee
home buyers. Transferee home buyers have traditionally represented a significant
portion of the Company's sales. A transferee home buyer typically is relocating
for employment, needs a new house within 30 to 60 days, and cannot buy a new
home which is not currently under construction because it would take too long to
complete. The Company has actively marketed to this type of buyer for most of
its history. The Company believes that these home buyers are primarily concerned
about the reputation of the builder, location and quality of the subdivision,
the competitive price of the home and the resale potential of the home. The
number of homes held in inventory will vary seasonally and with changes in the
local and national economy.

<PAGE>


PAINTING , STAINING  AND DRYWALL SERVICES

      Brush Masters provides painting, staining and drywall services to the
Company and to unaffiliated residential building contractors. Brush Masters
offers value added services to its contractors and their customers. Such
services include blueprint estimating, advising contractors on recent
innovations in paint and stain products and their application, daily visits from
a superintendent to construction sites, and providing professional stain and
paint color selection service.

      Brush Masters currently services approximately 34 residential building
contractors, including three of the largest builders in the Twin Cities MSA.
Brush Masters also provides all of the Company's painting and staining services.
The Company's transactions with Brush Masters are conducted on terms of price,
quality and service that are comparable to terms available in arm's length
transactions. The Company represented 35.8% of Brush Masters' sales in 1997.

      Brush Masters competes with numerous small painting, staining and drywall
contractors, generally on the basis of quality and service.

COMPETITION

      The Company faces competition in its land acquisition, land development
and home building activities. While the Company's objective is to purchase and
develop land located in areas where there will be great demand for homes in the
future with limited competition, it, nonetheless, competes with many national
builders, including the Rottlund Companies, U.S. Homes (doing business as Orrin
Thompson Homes), Pulte Homes, Centex Homes, Ryland Homes, Town & Country and
D.R. Horton (doing business as Joe Miller Homes), as well as a number of large
local builders, who also seek to acquire land in the same types of areas. In
addition, the Company faces competition in its land development activities. The
competition principally consists of the larger home builders, mentioned above,
which develop land for their own account, as well as land developers who
specialize in developing for small builders. The Company's home building
activities are also subject to competition from national builders and large and
small local builders. The building and sale of residential properties is highly
competitive and fragmented, and it involves a number of interrelated factors,
including location, product design, perceived value, price and reputation in the
marketplace. With the entrance of the above-referenced national builders into
the Twin Cities market, the home building competition in the Twin Cities has
increased. Additionally, the Company competes with a large number of relatively
small local builders who generally purchase finished lots from unaffiliated
developers, build homes on these lots and then sell them to the public. These
small builders, however, are generally restricted to making a profit only on the
actual sale of the house, while the lot develper realizes the profit on the sale
of the lot. The Company also faces competition with respect to the sale of the
houses it builds with the resale of existing houses and rental homes.

<PAGE>


EMPLOYEES

      At December 31, 1997, the Company employed 205 full-time employees,
including executive and office personnel, construction superintendents, painters
and general laborers. The Company's employees are not covered by a collective
bargaining agreement and the Company believes its relations with its employees
are good.

GOVERNMENTAL REGULATION

      The Company's business is subject to regulation by a variety of state and
federal laws and regulations relating to, among other things, advertising,
collection of state sales and use taxes and product safety. The Company's
development activities are also affected by local zoning ordinances, building
codes and other municipal laws as well as federal, state and municipal
environmental and conservation laws, including, for example, a Minnesota law
regulating development of wetland areas. While the Company believes it is
presently in material compliance with such regulations, in the event that it
should be determined that the Company is not in compliance with all such laws
and regulations, the Company could become subject to cease and desist orders,
injunctive proceedings, civil fines and other penalties.

      The Company generally acquires undeveloped land located within the MUSA.
The location and size of the MUSA is regulated by the Metropolitan Council. The
MUSA is the area within the metropolitan area where public services, including
roads, water and sanitary service are permitted by the Metropolitan Council to
be made available. The Metropolitan Waste Control Commission, a regional agency,
regulates the extension of sewer services within the MUSA. Access to public
water and sanitary sewer is necessary to enable the Company, as well as other
developers, to develop undeveloped land economically. There is a limited amount
of land within the MUSA available for development. Accordingly, competition for
prime land within the MUSA will likely increase. The Company has attempted to
acquire what it believes are some of the best undeveloped parcels of land within
the MUSA in the western suburbs of the Twin Cities metropolitan area.
Occasionally, the Company has acquired land outside the MUSA and successfully
assisted the municipalities in which such land was located in obtaining
extension of the MUSA line to include such land. The process of seeking an
extension can be costly and time-consuming, thus adding to the cost of such
land, and there can be no assurance that the extensions sought will be granted.

<PAGE>


ENVIRONMENTAL AND LEGAL PROCEEDINGS

      The Company currently is not subject to any environmental litigation or
administrative proceedings. The Company is not currently involved in any legal
proceedings other than those arising in the ordinary course of business.

      The Company believes that its potential liability for environmental
concerns can arise in one of two contexts: (a) liability could arise with
respect to substances that are in, under or on land which the Company intends to
acquire; or (b) liability could arise in connection with how the Company intends
to develop the land. With respect to a substance in, under or on land for which
the Company could face environmental liability, the Company performs a Phase I
environmental audit prior to exercising an option. If the audit uncovers any
environmental hazards on the land, the Company would not exercise the option
unless the hazard could be corrected at a reasonable cost. With respect to
liabilities in connection with a planned development, the Company obtains the
federal and state permits necessary for building and development before it
exercises the options. If a planned development is not permissible under
environmental laws, the Company will not exercise the option. The Company's
operations are generally small enough (subdivisions typically are less than 100
acres in size) that no environmental impact statement is required prior to
development.

<PAGE>


ITEM 2. PROPERTIES

      The Company's corporate offices are located at 935 East Wayzata Boulevard,
Wayzata, Minnesota 55391 and consist of approximately 11,000 square feet. The
Company leases these offices from a related partnership. The lease expires March
31, 2009, and calls for monthly rental and tax escrow payments of approximately
$12,700, subject to annual adjustments. See "Certain Transactions." The Company
also owns property in Wayzata, Minnesota which it utilizes as its Design Center.
In addition, the Company leases the following properties in Minnesota:

                           SQUARE       LEASE         MONTHLY       EXPIRATION
          TYPE              FEET       LOCATION       PAYMENT         DATE
          ----              ----       --------       -------         ----
Warehouse                  1,120        Loretto       $  650         month to
                                                                       month

Office/Warehouse           8,450        Medina        $3,000(1)       4/30/98

--------------------
1) Does not include required additional payments for operating expenses.


ITEM 3.   LEGAL PROCEEDINGS

The Company is not subject to any currently pending legal proceedings other than
those arising in the ordinary course of business.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
             DURING FOURTH QUARTER OF FISCAL YEAR.

There were no matters submitted to a vote of the Company's shareholders during
the three-month period ended December 31, 1997.

                                     PART II

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

The Company's common stock is held of record by five persons and is not actively
traded. The Company paid no dividends on its common stock during the three-year
period ended December 31, 1997. The terms of certain of the Company's debt
agreements restrict the payment by the Company of dividends on its common stock.


ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA

         The following selected consolidated financial data of the Company as of
and for the years ended December 31, 1993, 1994, 1995, 1996, and 1997 are
derived from consolidated financial statements of the Company. The independent
auditors' report on the consolidated financial statements as of December 31,
1996 and for the years ended December 31, 1995 and 1996 of Coopers & Lybrand
L.L.P., and independent auditors' report on the consolidated financial
statements as of December 31, 1997 and for the year ended

<PAGE>


December 31, 1997 of Deloitte & Touche L.L.P. are included elsewhere in the Form
10-K. The consolidated statement of operations data, as they relate to each of
the three years in the period ended December 31, 1997, and the selected
consolidated balance sheet data, as of December 31, 1996 and 1997, should be
read in conjunction with the Consolidated Financial Statements, including the
Notes thereto, set forth elsewhere in this Form 10-K and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," which
follows.

<TABLE>
<CAPTION>

                                                               YEARS ENDED DECEMBER 31,
                                                --------------------------------------------------------
                                                  1993        1994        1995        1996        1997
                                                  ----        ----        ----        ----        ----
                                                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                             <C>         <C>         <C>         <C>         <C>     
SELECTED STATEMENT OF OPERATIONS DATA:
Revenues(2) .................................   $ 58,955    $ 75,814    $ 65,217    $ 69,798    $ 68,658
Cost of revenues ............................     50,233      64,004      55,591      59,052      60,839
                                                --------    --------    --------    --------    --------
Gross profit ................................      8,722      11,810       9,626      10,746       7,819
Operating expenses ..........................      5,994       7,858       7,429       7,238       6,528
                                                --------    --------    --------    --------    --------
Operating income ............................      2,728       3,952       2,197       3,508       1,291
Other income (expense), net .................       (727)       (706)     (1,608)     (1,643)     (2,427)
                                                --------    --------    --------    --------    --------
Income (loss) from continuing operations
  before income taxes .......................      2,001       3,246         589       1,865      (1,136)
Income tax provision (benefit) for
  continuing operations .....................        817       1,308         253         709        (489)
                                                --------    --------    --------    --------    --------
Income (loss) from continuing operations ....      1,184       1,938         336       1,156        (647)
Cumulative effect on prior years of
  change in accounting method ...............       --          --           763        --          --
Income (loss) from discontinued operations(1)         62        (740)         86        (145)       --
                                                --------    --------    --------    --------    --------
Net income (loss) ...........................   $  1,246    $  1,198    $  1,185    $  1,011    $   (647)
                                                ========    ========    ========    ========    ========
Income (loss) per share (basic and diluted):
  Continuing operations .....................   $    111    $    182    $     32    $    109         (61)
  Cumulative effect of change in
    accounting method .......................       --          --            72        --          --
  Discontinued operations ...................          6         (69)          8         (14)       --
                                                --------    --------    --------    --------    --------
    Net income (loss) .......................   $    117    $    113    $    112    $     95    $    (61)
                                                ========    ========    ========    ========    ========

</TABLE>

                                               AS OF DECEMBER 31,
                                ------------------------------------------------
SELECTED BALANCE SHEET DATA:    1993       1994       1995       1996       1997
                                ----       ----       ----       ----       ----
Inventories .............    $23,903    $30,246    $34,166    $37,828    $35,614
Total assets ............     35,825     42,619     47,763     51,695     52,784
Long-term debt ..........      7,219     10,664     10,766     15,739     16,337
Total liabilities .......     31,823     37,419     41,378     44,299     46,035
Stockholders' equity.....      4,002      5,200      6,385      7,396      6,749

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

(1)  Discontinued operations reflect the discontinuation of the remodeling
     business in November 1996.

(2)  Revenues from lot and home sales are recognized on the closing date of the
     property sale. See Note 1 of Notes to Consolidated Financial Statements.

<PAGE>


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

The following analysis of the Company's consolidated financial condition and
results of operations as of December 31, 1996 and 1997, and for the years ended
December 31, 1995, 1996, and 1997 should be read in conjunction with the
Company's Consolidated Financial Statements, related Notes thereto, and other
information presented elsewhere in this Form 10-K.

GENERAL

     The Company operates in the new homes business segments which includes land
acquisition and development, home building and home sales, inventory management
and painting, staining and drywall services. In 1995 and 1996 the Company also
operated in the remodeling segment, which was discontinued in November 1996, and
which consisted of home remodeling design and construction services.

     The Company's revenues are derived from its interrelated activities of land
development and home building, providing painting, staining and drywall
services. When a home sale is closed, the revenues are allocated both to the
home (home construction revenues) and to the lot on which the home is
constructed (lot revenues). In 1997, home construction and lot revenues were
$65.5 million or 95% of total revenues. Revenues from painting, staining and
drywall (excluding those to the Company's new home construction operations) were
$3.1 million or 5% of total revenues. The 1997 percentages are consistent with
the percentages for 1996. The Company sells finished lots to other builders when
the Company has excess finished lot inventory and when a subdivision is nearly
sold out. In 1997, sales of lots to other builders accounted for less than 1% of
total revenues.

     The Company's gross profit on home construction revenues and lot revenues
for 1997 was $7.3 million or 93% of the total gross profit. Of the $7.3 million
gross profit, $5.3 million was derived from the sale of homes and $2.0 million
from the sale of lots on which such homes were built. The gross profit margins
experienced by the Company are historically higher on lot revenues than on home
construction revenues when the lot and house are sold together. In 1997 the
gross profit margin on home construction revenues was 10%, while the gross
profit margin on lot revenues was 14%. The gross profit margin on homes varies
significantly from development to development. The Company's painting, staining
and drywall business had gross profit margins (excluding those derived from the
Company's new home construction operations) of 17% in 1997.

     The Company generally enters into a purchase agreement with a potential
home buyer prior to commencing construction of a home, except where the Company
is building a house to be held in inventory or to be used as a model home. The
Company does not recognize a sale for accounting purposes until construction is
completed and the sale is actually closed. The time period from execution of a
purchase agreement with a home buyer to the closing of the home sale generally
ranges from three to six months. This time period varies due to many factors,
including the purchaser's mortgage approval process, the status of the home's
construction when the purchase agreement is executed and the removal of the
contingencies, if any, contained in the purchase agreement. At December 31,
1997, the Company had signed purchase agreements for the sale of 70 homes,
compared to 41 homes at December 31, 1996. The

<PAGE>


Company considers these signed purchase agreements to constitute its backlog.
The Company's business is significantly affected by local and national general
economic conditions, in particular by mortgage interest rates and the
availability of mortgage financing. The Company believes that trends in general
economic conditions, mortgage interest rates and consumer confidence levels in
the Twin Cities metropolitan area are currently more favorable than at the end
of 1996. Any substantial increase in mortgage interest rates or decrease in
consumer confidence levels could cause a decrease in future home sales. Such a
decrease in sales would be offset in part by decreased development and
construction costs and overhead.

RESULTS OF OPERATIONS

1997 Compared to 1996

      Revenues decreased $1.1 million or 1.6% in 1997 compared to 1996. The
Company closed on sales of 204 homes in 1997, compared to 198 closings in 1996.
The average selling price of homes closed decreased by 5.3% in 1997 from the
average selling price of homes closed in 1996. The decrease in average selling
price is due to a change in the mix of homes closed in 1997 compared to 1996,
the sale of 14 model homes at lower than their appraised value under
sale-leaseback agreements in May and December 1997 and the effect of a special
promotion on pricing offered in late 1996 through the first quarter of 1997.

      Gross profit margin decreased to 11.4% in 1997, compared to 15.4% in 1996.
The Company believes that this decrease in gross profit margin is primarily due
to the sale and leaseback of 14 model homes at no profit, and to a lower average
sales price as a result of the special promotion in late 1996 through the first
quarter of 1997 on sales of the Company's completed house inventories. The
decrease in gross profit margins was also due to changes in the mix of homes
sold and increases in the cost of land developed by the Company due to
competition for, and reductions in the availability of, raw land within the Twin
Cities metropolitan area. The Company expects that the increased costs of land
could continue to negatively impact the gross margins in the future, unless such
increased costs can be passed on to homebuyers.

      Operating expenses (which include selling, general and administrative
expenses) decreased by $710,000 in 1997 compared to 1996. As a percentage of
revenues, these expenses decreased to 9.5% in 1997 compared to 10.4% in 1996.
The decrease is mainly due to a $592,000 decrease in discretionary officer and
management bonuses, a decrease in land option fees and abandoned projects, and a
decrease in consulting fees in 1997. These decreases are partially offset by an
increase in personnel costs through the hiring of additional personnel during
1997.

OTHER INCOME (EXPENSE), NET

      Interest expense increased by $639,000 in 1997 compared to 1996. The
increase is mainly due to higher interest rates and increased borrowings on the
Company's lines of credit to finance increased working capital needs.

        Other income (expense), net decreased $145,000 in 1997 from 1996. The
decrease is mainly due to a gain in 1996 on the sale of an investment in a land
development partnership of $123,000 which is partially offset by a increase in
interest income.

<PAGE>


INCOME (LOSS)  FROM CONTINUING OPERATIONS

     Loss from continuing operations in 1997 was $647,000 compared to income
from continuing operations of $1.2 million in 1996. This decrease in 1997 is
primarily due to a decrease in gross profit margins and increase in interest
expense in 1997.


1996 Compared to 1995

      Revenues increased $4.6 million or 7.0% in 1996 compared to 1995. The
Company closed on sales of 198 homes in 1996, compared to 202 closings in 1995.
The average selling price of homes closed increased by 9.0% in 1996 from the
average selling price of homes closed in 1995. The increase in average selling
price is due to general price increases as a result of inflation and changes in
the mix of homes closed in 1996 compared to 1995.

      Gross profit margin increased to 15.4% in 1996, compared to 14.8% in 1995.
The Company believes that this increase in gross profit margin is due to changes
in the location of the home developments, improvements to the Company's cost
controls, changes in methods of construction, and an increase in the mix of
homes sold on land developed by the Company versus lots purchased from other
developers.

      Operating expenses (which include selling, general and administrative
expenses) decreased by $191,000 in 1996 compared to 1995. As a percentage of
revenues, these expenses decreased to 10.4% in 1996 compared to 11.4% in 1995.
The decrease is mainly due to a $540,000 decrease in discretionary officer
bonuses and a decrease in fees paid for mortgage commitments in 1996. These
decreases are partially offset by an increase in advertising costs for special
promotions in 1996, and increases in real estate taxes as a result of increased
land and house inventories.

OTHER INCOME (EXPENSE), NET

      Interest expense increased by $86,000 to $1.8 million in 1997 from $1.7
million in 1996. Other income (expense), net increased $51,000 in 1996 from
1995. The increase is mainly due to a gain on the sale of an investment in a
land development partnership of $123,000 which is partially offset by a decrease
in interest income.

INCOME FROM CONTINUING OPERATIONS

     Income from continuing operations was $1.2 million, an increase of 244.0%
in 1996 from $336,000 in 1995. This increase is primarily due to improved gross
profit margins and a decrease in operating expenses in 1996.

<PAGE>


NET INCOME (LOSS)

      Net income in 1996 was $1.0 million, a decrease of $174,000 from $1.2
million of net income in 1995. This decrease is mainly due to the increase in
1995 income for the 1995 change in accounting for land acquisition and
development costs of $763,000 and a loss in 1996 from the discontinued
operations of the Company's remodeling division of $145,000, which is partially
offset by an $820,000 increase in income from continuing operations.


LIQUIDITY AND CAPITAL RESOURCES

1997 Compared to 1996

      Cash increased $726,000 to $2.0 million in 1997 from $1.3 million in 1996.

      Cash flows provided by operating activities were $2.1 million in 1997, an
increase of approximately $3.1 million from the $1.0 million used in 1996. In
1997, cash was provided by a decrease in cash invested for land and model home
inventories of $4.2 million and a $1.4 million increase in accounts payable.
These cash provisions were partially offset by cash used for an increase in
restricted cash of $875,000; a $486,000 decrease in estimated costs to complete
sold homes; a $456,000 increase in prepaid expenses; a $647,000 loss from
continuing operations and $1.0 million related to other changes in operating
assets and liabilities.

      Cash flows used in investing activities were $756,000 in 1997, an increase
of approximately $104,000 from $652,000 cash used in 1996. The increase was
primarily due to an increase in expenditures for property and equipment and to
the effect of proceeds from the sale of an investment in a land development
partnership 1996.

      Cash flows used in financing activities were $594,000 in 1997, an increase
of approximately $544,000 from the $50,000 used in financing activities in 1996.
The increase was primarily due to increased net borrowings on the Company's bank
lines of credit to finance increased working capital needs.

1996 Compared to 1995

      Cash decreased $1.7 million to $1.3 million in 1996 from $3.0 million in
1995.

      Cash flows used in operating activities were $1.0 million in 1996, a
decrease of approximately $2.0 million from the $3.0 million used in 1995. In
1996, cash was used for a $871,000 increase in deposits and prepaid expenses,
principally for expenses incurred in research of potential land projects, a
reduction of accounts payable of $1.3 million, and $374,000 for discontinued
operations. These uses of cash were partially offset in 1996 by $1.2 million in
cash provided by income from continuing operations, an increase in accrued
expenses, principally for bonuses to employees other than stockholders, of
$431,000, and other changes in operating assets and liabilities.

<PAGE>


      Cash flows used in investing activities were $652,000 in 1996, an increase
of approximately $78,000 from $574,000 cash used in 1995. The increase was
primarily due to an increase in cash surrender value of life insurance and
expenditures for property and equipment, which were partially offset by proceeds
from the sale of an investment in a land development partnership.

      Cash flows used in financing activities were $50,000 in 1996, a decrease
of approximately $3.3 million from the $3.2 million provided by financing
activities in 1995. The decrease was primarily due to a reduction in net
borrowings on the Company's bank lines of credit as a result of a decrease in
cash used in operating activities and a reduction in cash and cash equivalents
in 1996 compared to 1995. These decreases were partially offset in 1996 by $3
million of additional subordinated debenture debt.

Financing

     The Company believes that internally generated funds, amounts available
under its four lines of credit and borrowing arrangements, including the
Subordinated Debentures, will continue to be the primary sources of capital for
liquidity. However, the Company may seek additional long-term financing.

     The Company's financing needs depend primarily upon sales volume, asset
turnover, land acquisition and inventory balances. The Company presently
finances substantially all of its land acquisition and development and home
construction activities through borrowing arrangements for individual projects
or homes under construction. The borrowing arrangements evolve with each stage
of the process from land acquisition, to development, to construction of a home,
and to the sale of the home and lot. During 1997, the Company entered into
arrangements involving the sale of raw land to other entities for which the
Company has an option to subsequently purchase back as developed lots.

     The Company also utilizes secured lines of credit to finance its
operations. The Company has approved aggregate credit of $10.4 million, subject
to a borrowing base. At December 31, 1997, the aggregate maximum credit
available under the lines of credit was $9.7 million, of which $7.5 million was
utilized and $2.2 million was available.

     The Company's outstanding indebtedness as of December 31, 1997, included
$19.3 million due within one year. The Company has historically operated with a
substantial amount of its outstanding indebtedness due within one year and has
historically paid such debt out of earnings or through refinancing, where
applicable. The Company believes that the amounts available under its lines of
credit, borrowing arrangements, and amounts generated from operations will be
sufficient to satisfy its debt obligations due in the next year. However, there
can be no assurance that the Company will be able to continue to obtain adequate
short-term financing, including bank financing, in the future.

INFLATION AND THE EFFECTS OF CHANGING PRICES

     Real estate and residential housing prices are affected by inflation, which
can cause increases in the price of land, raw materials and subcontracted labor.
Historically, the Company has been able to pass most increased costs due to
inflation on to its customers and expects to be able to do so in the future.
Unless such costs are recovered through higher sales prices, gross profit
margins will decrease. Interest rate fluctuations also affect gross profit
margins by increasing or decreasing financing costs for land, construction and
operations. The Company believes that product demand and sales are impacted by
mortgage interest rates.

<PAGE>


The Company benefited from low mortgage interest rates from mid-year 1995
through early 1996, and then again in late 1997. As interest rates increase,
construction and financing costs, as well as the cost of borrowed funds, also
increase and can result in lower gross profits. In addition, as interest rates
continue to rise, customers may be discouraged from purchasing a home, due to
the increased cost, decrease in buying power and possible difficulty in
qualifying for a mortgage. Seasonality is generally not a significant factor in
the Company's operations, in part because homes can be constructed year-round.

The forward-looking statements contained in this annual report on Form 10-K,
including without limitation forward-looking statements contained in
Management's Discussion and Analysis, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Certain
important factors could cause results to differ materially from those
anticipated by some statements made herein. You are cautioned that all
forward-looking statements involve risks and uncertainties. Among the factors
that could cause results to differ materially are the following: cyclical
economic conditions; fluctuations in operating results; continuing need to
acquire land for future development; substantial leverage; reliance on financing
and no assurance of availability of credit; extensive government regulation; and
environmental factors. Reference is also made to the risk factors contained in
the Company's Registration Statement on Form S-1, as filed with the Securities
and Exchange Commission on October 18, 1996.

IMPACT OF ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED IN THE FUTURE

     In December 1996, the Financial Accounting Standard's Board (FASB) issued
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No.
125." SFAS No. 127 delayed the effective date of certain provision of SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." The Company will adopt the deferred provisions
of SFAS No. 125 in the first quarter of 1998. The Adoption of this standard will
not have a material effect on the results of operations of the Company.

     In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes new rules for the reporting and display of
comprehensive income and its components in a company's financial statements. The
Company will adopt SFAS No. 130 in the first quarter of 1998. The adoption of
this standard will not have an effect on the results of operations of the
Company.

     In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
and Enterprise and Related Information." SFAS No. 131 requires a company to
utilize a "management approach" to reporting segment information. The Company
will adopt SFAS No. 131 in the first quarter of 1998. The adoptions of this
standard will not have an effect on the consolidated results of operations of
the Company.


YEAR 2000 COMPLIANCE

The Company has and will continue to make certain investments in its software
systems and applications to ensure the Company is year 2000 compliant. The
financial impact has not been and is not anticipated to be material to its
financial position or results of operations in any given year.

<PAGE>


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Item 14 and Index to Consolidated Financial Statements beginning on page 43.

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

Previously reported on Forms 8-K filed with the Securities and Exchange
Commission on October 15, 1997 and November 21, 1997.

<PAGE>


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The current executive officers and directors of Lundgren are as follows:

Name                Age  Title
----                ---  -----

Peter Pflaum         55  President and Director, Executive Committee Member

Terrance M. Forbord  47  President - Land Development Division, Executive
                         Committee Member

William O. Burgess   33  Vice President - Purchasing, Executive Committee Member

James L. Weaver      44  Vice President - Construction, Executive Committee
                         Member

Allan D. Lundgren    55  Vice President, Secretary/Treasurer
                         and Director, Executive Committee Member

Richard W. Denman    47  Vice President - Sales and Marketing, Executive
                         Committee Member

Peter T. Beucke      39  Director of Design, Executive Committee Member

Laurie A. Vercnocke  48  Controller, Executive Committee Member

Michael A. Pflaum    53  Vice President - Land Development

Marc S. Anderson     49  Vice President -  Land Development

Edmund M. Lundgren   59  Vice President and Director

Gerald T. Lundgren   58  Vice President

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

      PETER PFLAUM has been President and a Director of the Company since
October 1972 and serves as the chief executive officer. In addition to his
executive duties, Mr. Pflaum supervises the land acquisition and land
development activities, negotiates the Company's credit facilities, manages the
Company's lot inventory, and supervises sales, marketing and product
development. He is the brother of Michael A. Pflaum, a vice president of the
Company.

      TERRANCE M. FORBORD has served as President - Land Development Division
since August 1996 and Vice President - Land Development of the Company since
April 1988. In this position, he

<PAGE>


supervises the land acquisition and land zoning activities of the Company. Prior
to joining the Company, he was Vice President of Residential Development for the
Scotland Company and a sales manager/broker for Scott Realty and Coldwell
Banker's Scott Real Estate.

      WILLIAM O. BURGESS has been Vice President - Purchasing since February
1997. In this position, he is responsible for purchasing, estimating and
overseeing the Company's Design Center and related operations. Prior to joining
the Company, Mr. Burgess was Director of Purchasing for Cambridge Homes, Inc. in
Chicago, Illinois, where he supervised the Purchasing and Estimating functions.

      JAMES L. WEAVER has been Vice President - Construction since August 1995
and was a production manager from February 1994 to August 1995. In the position
of Vice President - Construction, he is responsible for daily construction
activities, coordination with project managers assigned to each community,
training and development of construction staff, and oversight of the service and
estimating departments. From October 1983 until March 1993, Mr. Weaver served in
various positions with Pulte Homes, most recently as a production manager. From
March 1993 until February 1994, Mr. Weaver worked as an independent contractor
and consultant doing building, remodeling and consulting on building projects.

      ALLAN D. LUNDGREN has been Vice President and Secretary/Treasurer since
October 1972 and was previously Vice President - Purchasing and Construction. He
has been a Director of the Company since October 1972. He is the brother of
Edmund M. Lundgren and Gerald T. Lundgren.

      RICHARD W. DENMAN has been Vice President - Sales and Marketing since
February 1998 and previously from August 1987 through February 1992. In this
position, he supervises all sales and marketing activities of the Company. Mr.
Denman has been with the Company as a sales representative and has participated
in the Company's product design since June 1982.

      PETER T. BEUCKE has been a Director of Design since July 1995. In this
position, he is responsible for product design and coordination of product
implementation. From 1989 until 1995, Mr. Beucke was Regional Architectural
Manager for Kaufman & Broad in California.

      LAURIE A. VERCNOCKE has been Controller since May 1996. In this capacity,
she is responsible for supervising the financial management, accounting,
information systems and office management. From 1987 until 1996, Ms. Vercnocke
was Controller for Cambridge Homes, Inc. in Chicago, Illinois, where she
supervised the accounting and finance areas. From 1982 until 1987, she was
Controller-Treasurer of Westfield Development Co., another Chicago area
homebuilder.

      MICHAEL A. PFLAUM has been Vice President - Land Development of the
Company since January 1988. In this position, he supervises all of the
construction activities related to land development and also aids in the
approval process for such development. He is the brother of Peter Pflaum.

      MARC S. ANDERSON has been Vice President - Land Development of the Company
since May 1997 and Director of Land Development from February 1994 to May 1997.
In the position of Vice President - Land Development, he is responsible for land
acquisition, governmental approvals and aids in project finance and land
development construction activities. From 1982 to 1994, Mr. Anderson served as
Real Estate Director at Opus Corporation in Minneapolis, MN.

<PAGE>


      EDMUND M. LUNDGREN has been Vice President and a Director of the Company
since October 1972. In this capacity, he currently is involved with the
Company's quality control process. He is the brother of Gerald T. Lundgren and
Allan D.
Lundgren.

      GERALD T. LUNDGREN has been Vice President of the Company since October
1972. In this capacity, he currently is a construction project manager. He also
served as a Director of the Company from October 1972 to December 1989. He is
the brother of Allan D. Lundgren and Edmund M. Lundgren.

      The Executive Committee is a group of the senior management of the Company
that meets weekly to solve problems, make major decisions, formulate goals and
act on plans for the Company. Each member of the group is responsible for a
functional area of the Company.

      The officers of the Company are elected annually and serve at the
discretion of the Board of Directors. None of the Company's officers is employed
pursuant to a written employment contract.

<PAGE>


ITEM 11.   EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE
      The following table sets forth the compensation paid by the Company to its
five most highly compensated executive officers for the last three fiscal years.

<TABLE>
<CAPTION>

                                          ANNUAL COMPENSATION
                              -----------------------------------------
     NAME AND                                          OTHER ANNUAL (1)    ALL OTHER (2)
PRINCIPAL POSITION     YEAR   SALARY ($)   BONUS ($)   COMPENSATION ($)   COMPENSATION ($)
------------------     ----   ----------   ---------   ----------------   ----------------
<S>                    <C>      <C>                <C>      <C>               <C>  
Peter Pflaum           1997     200,000            0        3,968             2,000
President              1996     200,000      112,500        2,174             1,875
                       1995     191,848      380,000            0             1,875

Richard W. Denman      1997     185,000            0        3,000                 0
Vice President-        1996     289,000            0        3,000             1,619
Sales and Marketing    1995     317,000            0        3,000             1,875

Terrance M. Forbord    1997     176,154            0        4,800             2,000
President - Land       1996     158,577       68,000        4,800             1,875
Development Division   1995     140,962      130,000        4,800             1,875

James L. Weaver        1997     110,000            0          718              1,699
Vice President -       1996      110,000      25,000          629                825
Construction           1995       96,926      40,000        6,000                  0

William O. Burgess     1997     110,000            0        9,018                  0
Vice President-        1996           0            0            0                  0
Purchasing             1995           0            0            0                  0
-------------------------------------------
</TABLE>

(1)   Consists of fringe benefits for annual car or house allowances, personal
      use of Company-owned vehicles or insurance premiums paid on behalf of the
      officer.

(2)   Consists of a matching contribution by the Company to the Company's 401(k)
      plan.

      The Company traditionally pays bonuses to certain executive officers, as
specified in the Summary Compensation Table above. The amount of bonus paid an
officer is related to (a) the Company's performance and (b) that individual
officer's performance, for the fiscal year just ending. Therefore, the amount of
bonus paid to an individual officer, and the aggregate amount of bonuses paid,
will vary from year to year. The terms of the 1993 Senior Subordinated
Debentures of the Company restrict aggregate bonuses paid to executive officers
who are also shareholders in a year to 50 percent of the Company's income before
provision for income taxes and such bonuses for that year.

      The Company does not have a Compensation or Audit Committee of the Board
of Directors. Peter Pflaum performs the functions equivalent to a Compensation
Committee in that he makes decisions and recommendations regarding compensation.

      Directors of the Company are not compensated for their services as
directors.

<PAGE>


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the ownership of
Lundgren's common stock as of December 31, 1997 by each person who is known by
Lundgren to beneficially own more than 5% of Lundgren's common stock, by each of
Lundgren's Directors, and by all Directors and executive officers as a group.

<TABLE>
<CAPTION>

    NAME AND ADDRESS                      TITLE OF          NUMBER OF SHARES      PERCENT OF CLASS
   OF BENEFICIAL OWNER                      CLASS         BENEFICIALLY OWNED(1)   OUTSTANDING(1)(2)
   -------------------                      -----         ---------------------   -----------------
<S>                                     <C>                      <C>                 <C>  
Peter Pflaum                            Voting Common              297               50.0%
935 East Wayzata Boulevard
Wayzata, MN  55391                      Non-voting Common        4,166               41.5%

Patrick C. Wells
935 East Wayzata Boulevard              Non-voting Common        1,845               18.4%
Wayzata, MN  55391

Edmund M. Lundgren                      Voting Common               99               16.7%
935 East Wayzata Boulevard
Wayzata, MN  55391                      Non-voting Common        1,340               13.3%

Allan D. Lundgren                       Voting Common               99               16.7%
935 East Wayzata Boulevard
Wayzata, MN  55391                      Non-voting Common        1,340               13.4%

Gerald T. Lundgren                      Voting Common               99               16.6%
935 East Wayzata Boulevard
Wayzata, MN  55391                      Non-voting Common        1,340               13.4%

All officers and directors as a group   Voting Common              594              100.0%
(8 persons) and total shares
outstanding                             Non-voting Common       10,031              100.0%
----------------------------------
</TABLE>

(1)   Each person named has sole voting and investment power with respect to all
      of his outstanding shares.

(2)   The percentage calculation is based upon 594 shares of voting common stock
      and 10,031 shares of non-voting common stock outstanding on December 31,
      1997.

<PAGE>


STOCK PURCHASE AGREEMENT

      The outstanding shares of common stock of the Company are subject to the
terms of the Amended and Restated Stock Purchase Agreement, dated February 1,
1993 (the "Agreement"), as amended on April 1, 1993 and January 1, 1994. The
Agreement provides that members of the "Lundgren Block" (Edmund M. Lundgren,
Gerald T. Lundgren and Allan D. Lundgren) have the first option to purchase
shares of other Lundgren Block members in the event of a voluntary sale,
involuntary transfer or termination of employment of other members of the
Lundgren Block, with the "Pflaum-Wells Block" and the Company having successive
options to purchase the shares if the previous option holders fail to do so.
Members of the "Pflaum-Wells Block" (Peter Pflaum and Patrick Wells) have a
similar first option to purchase shares of the other Pflaum-Wells Block member.
The Company must purchase the non-voting shares of any shareholder in the event
of a shareholder's disability or death. Members of a disabled or deceased
person's Block have the right to purchase such disabled or deceased Block
member's voting shares and, if the right is not exercised, the Company must do
so.

      The purchase price for shares of stock under the Agreement is the lesser
of twice the book value per share or $282.35 per share, but shall not exceed
$658.82 per share in the event of a death or $470.58 per share in the event of
disability. A purchase by the Company in the event of disability or death is
fully funded by disability or life insurance, respectively, payable entirely at
closing or, in the event of Peter Pflaum's disability, a portion being payable
at closing with the balance of insurance payments being payable in 60 equal
monthly installments. The price per share payable by the Company in the event of
a shareholder's disability or death may never exceed the amount of insurance
proceeds the Company is to receive divided by the number of shares that it is
required to purchase. In the event of a voluntary sale, involuntary transfer or
termination of employment, twenty-five percent of the purchase price will be
paid at closing with the balance payable in 60 equal monthly installments.

         An option held by any shareholder upon an occurrence giving rise to an
option is assignable with the consent of all shareholders.

         On March 1, 1998, the Company, Patrick Wells and Peter Pflaum entered
into an agreement (the "Wells Option") whereby Mr. Wells has granted first to
Peter Pflaum and then to the Company the right and option to purchase his 1,845
shares of non-voting stock over a 7-year term expiring September 1, 2005. The
Wells Option creates the right, but not the obligation, first in Peter Pflaum,
and then in the Company, to purchase the shares. In order to keep the option
alive, the optionees must make certain minimum purchases per year. In 1998,
option payments will total just under $200,000. The initial purchase price for
the shares under the Wells Option is $696.30 per share, which is the book value
per share calculated as of December 31, 1996. The purchase price increases 6%
per year. The Wells Option also terminates a number of other provisions relating
to Patrick Wells' employment. He ceased employment as an officer and director of
the Company on January 2, 1997.

<PAGE>


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The Company leases its corporate office building from Glenbrook Office
Building Partnership ("Glenbrook") under a lease which expires March 31, 2009.
The annual rental payments made by the Company under this lease are
approximately $150,000, including property tax escrow payments. Peter Pflaum and
Patrick C. Wells are each general partners of Glenbrook, with partnership
interests of 3.75% and 1.5%, respectively. The limited partners in Glenbrook are
as follows: the Company owns 15.23%; Allan D. Lundgren, a director and officer
of the Company, owns 3.75%; Edmund M. Lundgren, a director and officer of the
Company, owns 3.75%; Gerald T. Lundgren, an officer of the Company, owns 3.75%;
Rosalynd C. Pflaum, the mother of Peter Pflaum, owns 47.26%; and Stuart Wells,
the brother of Patrick C. Wells, owns 21.01%.

      The Company owns, as a limited partner, a 52.17% interest in Tealwood
Limited Partnership, a partnership of which Peter Pflaum and Patrick C. Wells
are general partners holding 10.16% and 6.78% interests, respectively. Gerald T.
Lundgren and Michael A. Pflaum, officers of the Company, each own 3.52%. The
balance is owned by unrelated third parties. This partnership currently holds
approximately $120,000 in cash and two parcels of land available for the
construction of four to six townhomes. This partnership has not been active
since 1987.

      The shareholders of the Company have loaned money to the Company from time
to time. The Company has used the proceeds of such loans for working capital.
Such loans bear interest equal to the highest rate the Company is then paying
under its credit facilities with banks, institutional and specialized industry
lenders. The loans are generally repaid by the Company before the end of the
following fiscal year. In 1997, the shareholders did not loan money to the
Company. In 1996, the shareholders loaned an aggregate of $107,000. The
shareholders are not obligated to make any such loans to the Company in the
future. The Company currently has sufficient capacity under its Credit
Agreements to fund its operations without utilizing these loans.

      The Company and its shareholders have entered into a Contribution
Agreement whereby each shareholder has agreed to contribute funds to the Company
in the event of the Company's default under certain of its unsecured
indebtedness, including the 1993 Subordinated Debentures and any Parity
Indebtedness (as defined in the Indenture under which the 1993 Subordinated
Debentures were issued). The obligations of the shareholders under the
Contribution Agreement terminated when the consolidated tangible net worth, as
defined, of the Company exceeded $4.5 million. This occurred as of December 31,
1994 when the consolidated tangible net worth of the Company was $4.7 million.
Thereafter, under the terms of the Contribution Agreement, during any period in
which the consolidated tangible net worth of the Company falls below $4.5
million, the Company will defer payment of bonuses to executive officers who are
also shareholders of the Company.

      In May 1997, the Company sold approximately $1 million of undeveloped land
and related research costs to Marsh Pointe, L.L.C. ("Marsh Pointe") ,which is
owned by the shareholders of the Company, in exchange for a $768,000 note
receivable and Marsh Pointe assumed two land mortgages totaling $182,000. The
note receivable is due on demand and matures on December 31, 1999 with interest
payable at 1% above prime rate. The outstanding balance as of December 31, 1997
was $689,000. Marsh Pointe will develop the land and the Company has an option
agreements with Marsh Pointe that

<PAGE>


gives the Company exclusive rights, but no obligation, to purchase the developed
lots under terms similar to other agreements with non-related parties.

      In September 1997, the Company sold approximately $377,000 of research
costs for a parcel of undeveloped land to Plum Tree 3rd, L.L.C. ("Plum Tree"),
which is owned by the Shareholders of the Company, in exchange for a $377,000
note receivable. The note receivable is due on demand and matures on December
31, 1999 with interest payable at 1% above prime rate. The outstanding balance
as of December 31, 1997 was $377,000. Plum Tree will develop the land and the
Company has an option agreements with Plum Tree that gives the Company exclusive
rights, but no obligation, to purchase the developed lots under terms similar to
other agreements with non-related parties.

<PAGE>


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

(a)   The following documents are filed as part of this report:

      1.    Consolidated financial statements of the Company.

                  Report of Independent Accountants as of and for the year ended
                  December 31, 1997

                  Report of Independent Accountants as of and for the years
                  ended December 31, 1995 and 1996.

                  Consolidated Balance Sheets, December 31, 1996 and 1997

                  Consolidated Statements of Operations and Retained Earnings
                  for the Years Ended December 31, 1995, 1996 and 1997

                  Consolidated Statements of Cash Flows for the Years Ended
                  December 31, 1995, 1996 and 1997

                  Notes to Consolidated Financial Statements

      2.    The following consolidated financial statement schedules of the
            Company required to be filed by Item 8 and Paragraph (d) of this
            Item 14:

                  None.

      3.    The following exhibits are hereby incorporated by reference or filed
            herewith as indicated.

         (1)3.1   Articles of Incorporation of Lundgren in effect on the date
                  hereof.

         (1)3.2   Bylaws of Lundgren on the date hereof.

         (1)4.1   Form of Debenture (included as Sections 202(A) and (B) of
                  Indenture filed as Exhibit 4.2 hereto).

         (1)4.2   Form of Indenture by and between Lundgren and National City
                  Bank Minnesota, as Trustee, including a Form of Debenture.

         (7)4.3   Form of Debenture (included as Sections 2.2(A) and (B) of
                  Indenture filed as Exhibit 4.4 hereto).

         (7)4.4   Form of Indenture by and between Lundgren and National City
                  Bank Minnesota, National Association, as Trustee, including a
                  Form of Debenture.

         (1)10.1  Lease by and among Lundgren, as lessor, Glenbrook Office
                  Building Partnership, and Peter Pflaum and Patrick C. Wells,
                  general partners, dated September 28, 1978.

         (1)10.2  Amended and Restated Stock Purchase Agreement, dated February
                  1, 1993, by

<PAGE>


                  and among Lundgren, Peter Pflaum, Patrick Wells, Edmund M.
                  Lundgren, Gerald T. Lundgren and Allan D. Lundgren.

         (3)10.3  Revolving Credit Line Agreement between the Company and
                  Builders Development & Finance, Inc., dated March 18, 1994.

         (3)10.4  Mortgage Note, dated March 18, 1994, of the Company payable to
                  Builders Development & Finance, Inc.

         (3)10.5  Combination Mortgage, Security Agreement and Fixture Financing
                  Statement between the Company and Builders Development &
                  Finance, Inc., dated March 18, 1994, including all amendments
                  thereto.

         (1)10.6  Guaranty by Peter Pflaum, Patrick C. Wells, Allan D. Lundgren,
                  Edmund M. Lundgren and Gerald T. Lundgren for the benefit of
                  Builders Development & Finance, Inc., dated July 27, 1990.

         (1)10.7  Demand Discretionary Revolving Credit Agreement between the
                  Company and Norwest Bank Minnesota, National Association,
                  dated November 30, 1990.

         (1)10.8  First Amended and Restated Revolving Note, dated May 1, 1992,
                  of the Company payable to Norwest Bank Minnesota, National
                  Association.

         (1)10.9  Assignment of Life Insurance Policy as Collateral by the
                  Company in favor of Norwest Bank Minnesota, National
                  Association, dated November 30, 1990.

         (1)10.10 Assignment of Life Insurance Policy as Collateral by the
                  Company in favor of Norwest Bank Minnesota, National
                  Association, dated May 1, 1992.

         (1)10.11 Guaranty by Peter Pflaum, Patrick C. Wells, Allan D. Lundgren,
                  Edmund M. Lundgren and Gerald T. Lundgren for the benefit of
                  Norwest Bank Minnesota, National Association, dated November
                  5, 1990 and all extensions thereof.

         (5)10.12 Commercial Lease, dated June 1, 1995, by and between Koecheler
                  & Olson Leasing and Lundgren Bros. Plumbing.

         (5)10.13 Lease Agreement, dated April 10, 1995, by and between B.M.
                  Acquisitions Corporation (Brush Masters, Inc.) and John J.
                  Day.

         (1)10.14 Loan Agreement, dated as of May 8, 1992, by and between the
                  Company and Builders Development & Finance, Inc.

         (1)10.15 First Mortgage Note, dated May 8, 1992, of the Company payable
                  to Builders Development & Finance, Inc.

         (1)10.16 Second Mortgage Note, dated May 8, 1992, of the Company
                  payable to Builders Development & Finance, Inc.

         (1)10.17 First Mortgage, dated May 8, 1992, by the Company in favor of
                  Builders Development & Finance, Inc.

         (1)10.18 Second Mortgage, dated May 8, 1992, by the Company in favor of
                  Builders

<PAGE>


                  Development & Finance, Inc.

         (1)10.19 Guaranty, dated as of May 8, 1992, by Peter Pflaum, Edmund M.
                  Lundgren, Gerald T. Lundgren, Allan D. Lundgren and Patrick C.
                  Wells for the benefit of Builders Development & Finance, Inc.

         (1)10.20 Construction Loan Agreement, dated as of July 22, 1992, by and
                  between the Company and Scherer Bros. Financial Services Co.

         (1)10.21 Mortgage and Security Agreement, dated July 22, 1992, between
                  the Company and Scherer Bros. Financial Services Co.

         (1)10.22 Promissory Note, dated July 22, 1992, of the Company payable
                  to Scherer Bros. Financial Services Co.

         (1)10.23 Guaranty, dated as of July 22, 1992, by Allan Lundgren for the
                  benefit of Scherer Bros. Financial Services Co.

         (1)10.24 Guaranty, dated as of July 22, 1992, by Patrick Wells for the
                  benefit of Scherer Bros. Financial Services Co.

         (1)10.25 Guaranty, dated as of July 22, 1992, by Peter Pflaum for the
                  benefit of Scherer Bros. Financial Services Co.

         (1)10.26 Guaranty, dated as of July 22, 1992, by Edmund Lundgren for
                  the benefit of Scherer Bros. Financial Services Co.

         (1)10.27 Guaranty, dated as of July 22, 1992, by Gerald Lundgren for
                  the benefit of Scherer Bros. Financial Services Co.

         (1)10.28 Development Loan Agreement, dated May 15, 1992, by and between
                  the Company and Construction Mortgage Investors Co.

         (1)10.29 First Mortgage Note, dated May 15, 1992, of the Company
                  payable to Construction Mortgage Investors Co.

         (1)10.30 First Mortgage, dated May 15, 1992, by the Company in favor of
                  Construction Mortgage Investors Co.

         (1)10.31 Guaranty, dated May 15, 1992, by Peter Pflaum, Patrick C.
                  Wells, Allan D. Lundgren, Edmund M. Lundgren and Gerald T.
                  Lundgren for the benefit of Construction Mortgage Investors
                  Co.

         (1)10.32 Contribution Agreement, dated as of February 17, 1993, by and
                  among the Company, Peter Pflaum, Patrick C. Wells, Allan D.
                  Lundgren, Edmund M. Lundgren and Gerald T. Lundgren.

         (5)10.33 Shopping Center Lease, dated February 9, 1994, by and between
                  Oakdale Mall Associates and Lundgren Bros. Construction, Inc.
                  d/b/a Lundgren Bros. Remodeling.

         (1)10.34 Form of Option to Purchase Land.

         (1)10.35 Form of Contingent Purchase Agreement.

<PAGE>


         (5)10.36 Amendment No. 1 to Amended and Restated Stock Purchase
                  Agreement, dated April 1, 1993.

         (2)10.37 Amended and Restated Demand Discretionary Revolving Credit
                  Agreement, dated March 18, 1994, by and between Norwest Bank
                  Minnesota, National Association and Lundgren Bros.
                  Construction, Inc.

         (4)10.38 Fourth Amended and Restated Revolving Note (Demand), dated
                  March 14, 1995, of the Company payable to Norwest Bank
                  Minnesota, National Association.

         (4)10.39 Consent and Reaffirmation of Guaranty, dated March 14, 1995,
                  by Peter Pflaum, Patrick C. Wells, Edmund M. Lundgren, Allan
                  D. Lundgren and Gerald T. Lundgren in favor of Norwest Bank
                  Minnesota, National Association.

         (3)10.40 Satisfaction of Combination Mortgage, Security Agreement and
                  Fixture Financing Statement executed by Builders Development &
                  Finance, Inc. on March 29, 1994.

         (3)10.41 Letter Agreement, dated February 17, 1994, between Builders
                  Funding Corporation and Lundgren Bros. Construction, Inc.

         (4)10.42 Amendment, Extension and Reaffirmation Agreement, dated March
                  14, 1995, by and among Lundgren Bros. Construction, Inc.,
                  Patrick C. Wells, Peter Pflaum, Edmund M. Lundgren, Allan D.
                  Lundgren and Gerald T. Lundgren and Norwest Bank Minnesota,
                  National Association.

         (4)10.43 Supplemental Assignment of Life Insurance Policies as
                  Collateral, dated March 14, 1995, by Lundgren Bros.
                  Construction, Inc. in favor of Norwest Bank Minnesota,
                  National Association.

         (4)10.44 Second Supplemental Assignment of Life Insurance Policies as
                  Collateral, dated March 16, 1995, by Lundgren Bros.
                  Construction, Inc. in favor of Norwest Bank Minnesota,
                  National Association.

         (5)10.45 Third Amendment to Combination Mortgage, Security Agreement
                  and Fixture Financing Statement and Amendment to Revolving
                  Credit Line Agreement, dated January 25, 1995, by Lundgren
                  Bros. Construction, Inc. and Builders Development & Finance,
                  Inc.

         (6)10.46 Second Amended and Restated Mortgage Note, dated May 20, 1996,
                  of Lundgren Bros. Construction, Inc. payable to Builders
                  Development & Finance, Inc.

         (6)10.47 Eighth Amendment to Combination Mortgage, Security Agreement
                  and Fixture Financing Statement and Second Amendment to
                  Revolving Credit Line Agreement and Reaffirmation Agreement,
                  dated May 20, 1996, by Lundgren Bros. Construction, Inc. and
                  Builders Development & Finance, Inc.

         (6)10.48 Promissory Note, dated March 21, 1996, of Lundgren Bros.
                  Construction, Inc.

<PAGE>


                  payable to First Bank National Association.

         (6)10.49 Letter Agreement, dated March 21, 1996, by Lundgren Bros.
                  Construction, Inc. and First Bank National Association.

         (6)10.50 Pledge Agreement, dated March 21, 1996, by Lundgren Bros.
                  Construction, Inc. for the benefit of First Bank National
                  Association.

         (6)10.51 Control Agreement (With Broker or other Securities
                  Intermediary), dated March 21, 1996, by Lundgren Bros.
                  Construction, Inc., First Bank National Association and FBS
                  Investment Services, Inc.

         (6)10.52 Guaranty, dated March 12, 1996, by Edmund M. Lundgren for the
                  benefit of First Bank National Association.

         (6)10.53 Guaranty, dated March 12, 1996, by Allan Lundgren for the
                  benefit of First Bank National Association.

         (6)10.54 Guaranty, dated March 12, 1996, by Peter Pflaum for the
                  benefit of First Bank National Association.

         (6)10.55 Guaranty, dated March 12, 1996, by Patrick C. Wells for the
                  benefit of First Bank National Association.

         (6)10.56 Guaranty, dated March 12, 1996, by Gerald Lundgren for the
                  benefit of First Bank National Association.

         (8)10.57 Fifth Amended and Restated Revolving Note (Demand), dated
                  February 24, 1997, of the Company payable to Norwest Bank
                  Minnesota, National Association.

         (8)10.58 Consent and Reaffirmation of Guaranty, dated February 24,
                  1997, by Peter Pflaum, Patrick C. Wells, Edmund M. Lundgren,
                  Allan D. Lundgren and Gerald T. Lundgren in favor of Norwest
                  Bank Minnesota, National Association.

         (8)10.59 Second Amendment, Extension and Reaffirmation Agreement, dated
                  February 24, 1997, by and among Lundgren, Patrick C. Wells,
                  Peter Pflaum, Edmund M. Lundgren, Allan D. Lundgren, Gerald T.
                  Lundgren and Norwest Bank Minnesota, National Association.

         (8)10.60 Ninth Amendment to Combination Mortgage, Security Agreement
                  and Fixture Financing Statement, dated November 25, 1996, by
                  Lundgren Bros. Construction, Inc. and Builders Development &
                  Finance, Inc.

         (9)10.61 Revolving Construction and Development Loan Agreement, dated
                  April 18, 1997, by and between Lundgren Bros. Construction,
                  Inc. and First Bank National Association.

         (9)10.62 Revolving Credit Note, dated April 18, 1997, by Lundgren Bros.
                  Construction, Inc. in favor of First Bank National Association

         (9)10.63 Mortgage and Security Agreement and Fixture Financing
                  Statement, dated

<PAGE>


                  April 18, 1997, by Lundgren Bros. Construction, Inc. in favor
                  of First Bank National Association.

         (9)10.64 Guaranty, dated April 18, 1997, by and among Edmund M.
                  Lundgren, Allan D. Lundgren, Peter Pflaum, Patrick C. Wells
                  and Gerald T. Lundgren to First Bank National Association.

         (9)10.65 Indemnity Agreement, dated April 18, 1997, by and among
                  Lundgren Bros. Construction, Inc., Edmund M. Lundgren, Allan
                  D. Lundgren, Peter Pflaum, Patrick C. Wells, and Gerald T.
                  Lundgren, and First Bank National Association.

         (9)10.66 Amendment and Restatement of Promissory Note, including
                  Consent, dated March 21, 1997, by Lundgren Bros. Construction,
                  Inc. in favor of First Bank National Association.

         10.67    Acquisition and Closing Agreement, dated as of May 16, 1997,
                  by and between the Company and Marsh Pointe L.L.C.
                  Incorporated by reference to the Exhibit 10.1 to the Company's
                  Quarterly Report on Form 10-Q for the quarter ended June 30,
                  1997.

         10.68    Form of Option Agreement between the company and Marsh Pointe
                  L.L.C. Incorporated by reference to the Exhibit 10.2 to the
                  Company's Quarterly Report on Form 10-Q for the quarter ended
                  June 30, 1997.

         10.69    Building Loan Agreement, dated as of June 26, 1997, by and
                  between the Company and CWM Mortgage Holdings, Inc., d/b/a
                  Construction Lending Corporation of America. Incorporated by
                  reference to the Exhibit 10.3 to the Company's Quarterly
                  Report on Form 10-Q for the quarter ended June 30, 1997.

         10.70    Master Sale and Rental Agreement, dated as of May 27, 1997, by
                  and between the Company and National Model Homes, Inc.
                  Incorporated by reference to the Exhibit 10.4 to the Company's
                  Quarterly Report on Form 10-Q for the quarter ended June 30,
                  1997.

         10.71    Acquisition and Closing Agreement, dated as of June 10, 1997,
                  by and between the Company and BF Holding Company.
                  Incorporated by reference to the Exhibit 10.5 to the Company's
                  Quarterly Report on Form 10-Q for the quarter ended June 30,
                  1997.

         10.72    Form of Option Agreement between the Company and BF Holding
                  Company. Incorporated by reference to the Exhibit 10.6 to the
                  Company's Quarterly Report on Form 10-Q for the quarter ended
                  June 30, 1997.

         10.73    Loan Agreement, dated as of November 13, 1997, by and between
                  the Company and Norwest Bank Minnesota, National Association.

         10.74    Revolving Real Estate Note, dated November 13, 1997 by the
                  Company in favor of Norwest Bank Minnesota, National
                  Association.

<PAGE>


         10.75    Master Sale and Rental Agreement, dated as of December 31,
                  1997, by and between the Company and National Model Homes,
                  Inc.

         10.76    Agreement, dated March 1, 1998, by and between the Company,
                  Patrick Wells and Peter Pflaum.

         (4)18.1  Letter on accounting change, Coopers & Lybrand, LLP, dated May
                  12, 1995.

         27       Financial Data Schedule.


(1)      Incorporated by reference to the Exhibit of the same number to the
         Company's Registration Statement on Form S-1, Registration No.
         33-58934.

(2)      Incorporated by reference to the Exhibit of the same number to the
         Company's Annual Report on Form 10-K for the year ended December 31,
         1993.

(3)      Incorporated by reference to the Exhibit of the same number to the
         Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
         1994.

(4)      Incorporated by reference to the Exhibit of the same number to the
         Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
         1995.

(5)      Incorporated by reference to the Exhibit of the same number to the
         Company's Annual Report on Form 10-K for the year ended December 31,
         1995.

(6)      Incorporated by reference to the Exhibit of the same number to the
         Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
         1996.

(7)      Incorporated by reference to the Exhibit of the same number to the
         Company's Registration Statement on Form S-1, Registration No.
         333-12137.

(8)      Incorporated by reference to the Exhibit of the same number to the
         Company's Annual Report on Form 10-K for the year ended December 31,
         1996.

(9)      Incorporated by reference to the Exhibit of the same number to the
         Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
         1997.


(b)   Reports on Form 8-K.

      The Company filed two reports on Form 8-K: the first, filed on October 15,
1997 announced that the Company has dismissed Coopers & Lybrand L.L.P. as its
accountant, and the second, filed on November 21, 1997 announced that the
Company has engaged Deloitte & Touche L.L.P. as its independent auditors to
audit its financial statements for the year ended December 31, 1997.

<PAGE>


                                   SIGNATURES



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


                                    LUNDGREN BROS. CONSTRUCTION, INC.


                                    By:      /s/ Peter Pflaum
                                            Peter Pflaum

                                            Its President

                                    Date:    March 27, 1998


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


Signature                                   Title                 Date
---------                                   -----                 ----


/s/ Peter Pflaum               President and Director         March 27, 1998
----------------               (Principal Executive Officer)
Peter Pflaum                   (Principal Financial Officer)



/s/ Edmund M. Lundgren         Vice President and Director    March 27, 1998
----------------------
Edmund M. Lundgren


/s/ Allan D. Lundgren          Vice President, Secretary/     March 27, 1998
---------------------          Treasurer and Director
Allan D. Lundgren

<PAGE>


         SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.

         As of the date of this filing, no annual reports or proxy material has
been sent to the holders of Lundgren's securities. At such time as annual
reports are sent to Lundgren's security holders, Lundgren will also file copies
of such reports with the Securities and Exchange Commission.

<PAGE>


                        LUNDGREN BROS. CONSTRUCTION, INC.
                                    FORM 10-K

                                INDEX TO EXHIBITS


         The following exhibits are hereby filed as part of this Annual Report
on Form 10-K:

Exhibit                                                                     Page
-------                                                                     ----

10.73      Loan Agreement, dated as of November 13, 1997, by and between
           the Company and Norwest Bank Minnesota, National Association.

10.74      Revolving Real Estate Note, dated November 13, 1997 by the
           Company in favor of Norwest Bank Minnesota, National
           Association.

10.75      Master Sale and Rental Agreement, dated as of December 31,
           1997, by and between the Company and National Model Homes,
           Inc.

10.76      Agreement, dated March 1, 1998, by and between the Company,
           Patrick Wells and Peter Pflaum.

<PAGE>


LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES

TABLE OF CONTENTS
--------------------------------------------------------------------------------

                                                                           PAGE

INDEPENDENT AUDITORS' REPORT AS OF DECEMBER 31, 1997
   AND FOR THE YEAR ENDED DECEMBER 31, 1997                                 44

INDEPENDENT AUDITORS' REPORT AS OF DECEMBER 31, 1996
   AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996                       45

CONSOLIDATED FINANCIAL STATEMENTS:
   Consolidated Balance Sheets for the Years Ended December 31,
     1996 and 1997                                                          46
   Consolidated Statements of Operations and Retained Earnings
     for Years Ended December 31, 1995, 1996, and 1997                      47
   Consolidated Statements of Cash Flows for the Years Ended
     December 31, 1995, 1996, and 1997                                      48
   Notes to Consolidated Financial Statements                              49-59

<PAGE>


INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
Lundgren Bros. Construction, Inc.


We have audited the accompanying consolidated balance sheet of Lundgren Bros.
Construction, Inc. and Subsidiaries (the Company) as of December 31, 1997, and
the related consolidated statements of operations and retained earnings and cash
flows for the year then ended. 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 in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lundgren Bros.
Construction, Inc. and Subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.




Deloitte & Touche LLP

Minneapolis, Minnesota
March 18, 1998

<PAGE>


INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
Lundgren Bros. Construction, Inc.


We have audited the accompanying consolidated balance sheet of Lundgren Bros.
Construction, Inc. and Subsidiaries (the Company) as of December 31, 1996, and
the related consolidated statements of operations and retained earnings and cash
flows for the years ended December 31, 1995 and 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above presents fairly, in
all material respects, the consolidated financial position of Lundgren Bros.
Construction, Inc. and Subsidiaries as of December 31, 1996, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1995 and 1996, in conformity with generally accepted
accounting principles.


As discussed in Note 13 to the consolidated financial statements, the company
changed its method of accounting for capitalized land acquisition and 
development costs effective January 1, 1995.

Coopers & Lybrand L.L.P.

Minneapolis, Minnesota
March 7, 1997

<PAGE>


LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES

<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------------------------------------------------------
                                                                          1996       1997
<S>                                                                     <C>        <C>    
ASSETS

   Cash and cash equivalents                                            $ 1,253    $ 1,979
   Restricted cash                                                        1,072      1,947
   Receivables, net                                                       1,276      1,410
   Notes receivable - affiliates                                           --        1,066
   Deposits and prepaid expenses                                          3,663      3,042
   Inventories                                                           37,828     35,614
   Income taxes receivable                                                   32        334
   Land option and earnest money deposits                                   795      1,138
   Property and equipment, net                                            1,564      1,517
   Deferred income taxes                                                    130        206
   Other assets                                                           4,082      4,531
                                                                        -------    -------
                                                                        $51,695    $52,784
                                                                        =======    =======

LIABILITIES AND STOCKHOLDERS' EQUITY

   Obligations under bank lines of credit                               $ 2,987    $ 7,457
   Debt obligations                                                      30,673     27,730
   Obligations under capital leases                                         499        447
   Accounts payable                                                       5,996      7,185
   Cost to complete sold homes                                              995        469
   Customer deposits                                                      1,249      1,060
   Accrued expenses                                                       1,900      1,687
                                                                        -------    -------
                                                                         44,299     46,035

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
   Common stock, no par value; authorized, 12,000 shares; issued and
     outstanding, 594 voting shares and 10,031 nonvoting shares
     (all stock is redeemable)                                               99         99
   Retained earnings                                                      7,297      6,650
                                                                        -------    -------
                                                                          7,396      6,749
                                                                        -------    -------
                                                                        $51,695    $52,784
                                                                        =======    =======
</TABLE>

See notes to consolidated financial statements.

<PAGE>


LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------------------------------------------------------
                                                               1995        1996         1997
<S>                                                         <C>          <C>          <C>     
REVENUES                                                    $ 65,217     $ 69,798     $ 68,658

COST OF REVENUES                                              55,591       59,052       60,839
                                                            --------     --------     --------
         Gross profit                                          9,626       10,746        7,819

OPERATING EXPENSES:
   Selling                                                     2,442        2,728        2,712
   General and administrative                                  4,987        4,510        3,816
                                                            --------     --------     --------

                                                               2,197        3,508        1,291

OTHER INCOME (EXPENSES):
   Interest                                                   (1,725)      (1,811)      (2,450)
   Other, net                                                    117          168           23
                                                            --------     --------     --------
         Income (loss) from continuing operations before
           income taxes                                          589        1,865       (1,136)

INCOME TAXES PROVISION (BENEFIT)                                 253          709         (489)
                                                            --------     --------     --------
         Income (loss) from continuing operations                336        1,156         (647)
                                                            --------     --------     --------

CUMULATIVE EFFECT ON PRIOR YEARS OF CHANGE
   IN ACCOUNTING METHOD, NET OF INCOME TAXES                     763         --           --

DISCONTINUED OPERATIONS, NET OF INCOME TAXES:
   Income (loss) from operations                                  86         (104)        --
   Estimated loss on disposal                                   --            (41)        --
                                                            --------     --------     --------
         Income (loss) from discontinued operations               86         (145)        --
                                                            --------     --------     --------

NET INCOME (LOSS)                                              1,185        1,011         (647)

RETAINED EARNINGS, BEGINNING OF PERIOD                         5,101        6,286        7,297
                                                            --------     --------     --------

RETAINED EARNINGS, END OF PERIOD                            $  6,286     $  7,297     $  6,650
                                                            ========     ========     ========

INCOME (LOSS) PER SHARE - basic and diluted:
   Continuing operations                                    $     32     $    109     $    (61)
   Cumulative effect of change in accounting method               72         --           --
   Discontinued operations                                         8          (14)        --
                                                            --------     --------     --------

   Net income (loss)                                        $    112     $     95     $    (61)
                                                            ========     ========     ========

SHARES USED IN COMPUTING INCOME (LOSS)
   PER SHARE - basic and diluted                              10,625       10,625       10,625
                                                            ========     ========     ========
</TABLE>

See notes to consolidated financial statements.

<PAGE>


LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------
                                                                              1995        1996         1997
<S>                                                                        <C>          <C>          <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                                       $  1,185     $  1,011     $   (647)
   Cumulative effect of change in accounting method                            (763)        --           --
   (Income) loss from discontinued operations                                   (86)         145         --
                                                                           --------     --------     --------
         Income (loss) from continuing operations                               336        1,156         (647)
   Adjustments to reconcile income (loss) from continuing operations to
       net cash (used in) provided by continuing operating activities:
     Depreciation and amortization                                              396          386          331
     Amortization of debt issuance costs                                         51           68          120
     Deferred income taxes                                                      253          (55)        (140)
     Gain on disposal of property and equipment                                 (35)          (3)        --
     Gain on sale of investment                                                --           (123)        --
     Changes in operating assets and liabilities                             (4,542)      (2,084)       2,527
                                                                           --------     --------     --------
         Net cash (used in) provided by continuing
           operating activities                                              (3,541)        (655)       2,191

   Net cash provided by (used in) discontinued operations                       553         (374)        (115)
                                                                           --------     --------     --------
         Net cash (used in) provided by operating activities                 (2,988)      (1,029)       2,076

CASH FLOWS FROM INVESTING ACTIVITIES:
   Expenditures for property and equipment                                     (257)        (343)        (365)
   Proceeds on disposal of property and equipment                                95            4           57
   Proceeds from sale of investment                                            --            159         --
   Increase in cash surrender value of life insurance                          (368)        (486)        (440)
   Other                                                                        (44)          14           (8)
                                                                           --------     --------     --------
         Net cash used in investing activities                                 (574)        (652)        (756)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from bank lines of credit                                        24,528       34,616       32,705
   Payment of principal on bank lines of credit                             (21,644)     (35,279)     (28,235)
   Proceeds from debt obligations                                            40,494       45,914       40,687
   Payment of principal on debt obligations                                 (40,133)     (44,786)     (45,669)
   Payment of principal on capital lease obligations                            (17)          (6)         (52)
   Payment of debt issuance costs                                              --           (509)         (30)
                                                                           --------     --------     --------
         Net cash provided by (used in) financing activities                  3,228          (50)        (594)
                                                                           --------     --------     --------

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                               (334)      (1,731)         726

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                  3,318        2,984        1,253
                                                                           --------     --------     --------

CASH AND CASH EQUIVALENTS, END OF YEAR                                     $  2,984     $  1,253     $  1,979
                                                                           ========     ========     ========
</TABLE>

See notes to consolidated financial statements.

<PAGE>


LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS)
--------------------------------------------------------------------------------

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        BUSINESS DESCRIPTION - Lundgren Bros. Construction, Inc. and
        Subsidiaries (the Company) are in the business of land acquisition and
        development and single family home construction in the Minneapolis and
        Saint Paul, Minnesota metropolitan area.

        BASIS OF PRESENTATION - The accounting and reporting policies of the
        Company conform to generally accepted accounting principles and general
        practices within the land development and single family home
        construction industry.

        PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
        include the accounts of Lundgren Bros. Construction, Inc. and its wholly
        owned subsidiaries. All significant intercompany accounts and
        transactions are eliminated in consolidation.

        CASH EQUIVALENTS - The Company considers all highly liquid investments
        purchased with an original maturity of three months or less to be cash
        equivalents.

        RESTRICTED CASH - Restricted cash includes customer deposits maintained
        in a restricted trust account and certain debt proceeds obtained for
        specific development purposes. Customer deposits are held in a
        restricted trust account until all purchase agreement contingencies are
        cleared, at which time the customer deposit is transferred to the
        Company's unrestricted cash account. The debt proceeds are maintained in
        a restricted cash account and disbursed as certain development costs are
        incurred and project approvals are obtained.

        CONCENTRATION OF ASSETS AND CREDIT RISK - The Company holds
        substantially all of its cash, cash equivalents, and restricted cash in
        two financial institutions with approximately 88% and 99% of these funds
        being held in the Company's principal banking institution at December
        31, 1996 and 1997, respectively. At times, these balances may be in
        excess of the FDIC insurance limit. In addition, substantially all of
        the cash surrender value of life insurance policies is with one
        insurance company.

        Credit risk related to the Company's primary business of constructing
        residential homes and sale of lots is not significant because the
        Company generally requires earnest money deposits and payment is
        received upon closing the sale of the property. For other business
        activities, including painting, the Company retains a collateral
        interest in the property until the receivable is collected in full.

        The Company's business is impacted by local and national general
        economic conditions and, in particular, by mortgage interest rates and
        the availability of mortgage financing. Any substantial increase in
        mortgage interest rates or decrease in consumer confidence levels could
        cause a decrease in future home sales. Historically, the Company has
        been able to pass increased

<PAGE>


        development and construction costs onto its customers and expects to be
        able to do so in the future; however, if costs increase substantially,
        and at an accelerated rate, the Company may be unable to recover all of
        the increased costs through higher sales prices.

        INVENTORIES - Inventories consist principally of homes under
        construction, lots held for sale and land, including land acquisition
        and improvement costs, and are valued at lower of cost or market, with
        cost determined on a specific identification basis.

        DEBT ISSUANCE COSTS - Debt issuance costs associated with obtaining
        subordinated debenture financing are deferred and amortized to interest
        expense over the terms of the related debt using the straight-line
        method, which approximates the effective interest rate method.

        FORWARD COMMITMENT COSTS - Costs incurred in obtaining customer
        financing to facilitate more favorable interest rates for home buyers
        have been capitalized and are being amortized on the straight-line
        method, which approximates the effective interest rate method, over the
        shorter of the term of the forward commitment or the commitment of the
        available mortgage funds.

        Upon the sale of the related forward commitments, the unamortized cost
        is removed from the accounts and any gain or loss thereon is included in
        other income (expense) in the year of the sale.

        PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
        Depreciation and amortization are provided by charges to operations over
        the estimated useful lives of the assets of three to ten years for
        equipment and fifteen to thirty years for leasehold improvements, using
        straight-line and accelerated methods.

        The cost and related accumulated depreciation or amortization on asset
        disposals are removed from the accounts and any gain or loss thereon is
        included in operations in the year of disposal. Maintenance and repairs
        are charged to expense as incurred.

        REVENUES AND RELATED COSTS - Revenues and related costs of lot and home
        sales are recognized on the closing date of the property sale. Costs to
        complete sold homes, including costs of estimated warranty work, are
        accrued and included in the cost of revenues at the same time.
        Historically, warranty costs have not been significant. Customer
        deposits received on home sales are reflected as liabilities until the
        closing or completion of the project.

        CAPITALIZED ACQUISITION, DEVELOPMENT AND CONSTRUCTION COSTS - Option,
        land acquisition and development costs, which include direct land
        acquisition and development employee payroll, are capitalized as land
        project costs. Interest and real estate taxes are also capitalized as
        inventory during the development period for land under development and
        during the construction period of homes under construction. These
        capitalized costs are included as cost of revenues when the lots and
        homes are sold.

        INCOME TAXES - Deferred income tax assets and liabilities are recognized
        for the expected future tax consequences of differences between the
        financial statement and tax bases of assets and liabilities using
        currently enacted tax rates in effect for the years in which differences
        are expected to reverse. Income tax expense/benefit is the tax
        payable/receivable for the year and the change during the year in
        deferred tax assets and liabilities.

<PAGE>


        PER SHARE AMOUNTS - Per share amounts are computed by dividing net
        income or loss by the weighted average number of shares of voting and
        nonvoting common stock outstanding during each period. The number of
        outstanding shares of common stock for the 1995, 1996, and 1997 are
        10,625 shares. During the fourth quarter of 1997, the Company adopted
        SFAS No. 128, EARNINGS PER SHARE. This statement establishes standards
        for computing and presenting basic and diluted earnings per share (EPS).
        The adoption of this statement did not effect the Company's reported EPS
        for all periods presented.

        USE OF ESTIMATES - The preparation of the Company's 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, disclosure of contingent assets and
        liabilities, and the reported amounts of revenues and expenses during
        the reporting period. Actual results could differ from those estimates.
        The most significant areas which require the use of management estimates
        relate to the determination of the cost to complete sold homes, land
        development projects, and accrued unbilled construction costs.

        RECLASSIFICATIONS - Certain reclassifications were made to the December
        31, 1996 consolidated financial statements in order to conform to the
        presentation of the December 31, 1997 consolidated financial statements.
        These reclassifications had no impact on consolidated net income or
        retained earnings as previously reported.

2.      SELECTED FINANCIAL DATA

                                                             December 31
                                                         ------------------
                                                          1996        1997

Receivables:
  Trade                                                  $   961    $ 1,014
  Escrows                                                    202        336
  Contracts and notes                                         18          6
  Employees and officers                                      11         37
  Other                                                      139         72
                                                         -------    -------
                                                           1,331      1,465
  Less allowance for doubtful accounts                        55         55
                                                         -------    -------
                                                         $ 1,276    $ 1,410
                                                         =======    =======

Approximate amount of receivables due within one year    $ 1,313    $ 1,410
                                                         =======    =======

Inventories:
  Homes under construction                               $11,939    $13,808
  Model homes                                              3,783        492
  Developed lots                                          15,069     12,338
  Land under development                                     337       --
  Land held for future development                         6,700      8,976
                                                         -------    -------
                                                         $37,828    $35,614
                                                         =======    =======

<PAGE>


                                                                  December 31
                                                                ---------------
                                                                 1996     1997

Property and equipment:
  Land                                                          $  193   $  193
  Building and leasehold improvements                            1,437    1,427
  Furniture and fixtures                                           915    1,080
  Equipment                                                        807      687
                                                                ------   ------
                                                                 3,352    3,387
  Less accumulated depreciation and amortization                 1,788    1,870
                                                                ------   ------
                                                                $1,564   $1,517
                                                                ======   ======

Other assets:
  Cash surrender value of life insurance                        $3,105   $3,545
  Debt issuance costs, net of accumulated amortization of
    $200 and $320 at December 31, 1996 and 1997, respectively      848      758
  Other                                                            129      228
                                                                ------   ------
                                                                $4,082   $4,531
                                                                ======   ======

Accrued expenses:
  Payroll, bonuses, and payroll taxes                           $  958   $  609
  Other                                                            942    1,078
                                                                ------   ------
                                                                $1,900   $1,687
                                                                ======   ======


                                                           December 31
                                                  -----------------------------
                                                    1995       1996       1997

Interest expense:
  Interest                                        $ 3,179    $ 3,578    $ 4,104
  Less capitalized interest                        (1,505)    (1,835)    (1,774)
  Amortization of debt issuance costs                  51         68        120
                                                  -------    -------    -------
                                                  $ 1,725    $ 1,811    $ 2,450
                                                  =======    =======    =======

Other income:
  Gain on sale of investment                      $  --      $   123    $  --
  Other, net                                          117         45         23
                                                  -------    -------    -------
                                                  $   117    $   168    $    23
                                                  =======    =======    =======

<PAGE>


                                                        December 31
                                               -----------------------------
                                                 1995       1996       1997

Changes in operating assets and liabilities:
  Restricted cash                              $  (679)   $  (256)   $  (875)
  Receivables                                      (69)      (229)      (144)
  Deposits and prepaid expenses                    290       (871)      (456)
  Inventories                                   (2,183)       420      4,203
  Land option and earnest money deposits          (198)       126       (343)
  Other assets                                    --          (11)       (91)
  Accounts payable                              (1,741)    (1,294)     1,359
  Cost to complete sold homes                      676       (256)      (486)
  Customer deposits                                444       (157)      (189)
  Accrued expenses                                 (27)       431       (213)
  Income taxes                                  (1,055)        13       (238)
                                               -------    -------    -------
                                               $(4,542)   $(2,084)   $ 2,527
                                               =======    =======    =======

Cash paid (received) for:
  Interest, net of amount capitalized          $ 1,619    $ 1,408    $ 2,224
  Income taxes                                 $   790    $   816    $  (112)


        The Company acquired land for development under promissory notes with
        the sellers aggregating $1,538, $4,318, and $2,242 for the years ended
        December 31, 1995, 1996, and 1997, respectively.

3.      DISCONTINUED OPERATIONS

        Effective November 30, 1996, the Company adopted a plan to discontinue
        operations of its remodeling division. Accordingly, the 1995 and 1996
        statements of operations report separately the operating results of the
        division.

        Net assets of the discontinued operation at December 31, 1996, consisted
        of current assets of approximately $96 and property and equipment of
        approximately $29 after deducting an allowance for the estimated loss on
        disposal, and liabilities of $218, including estimated operating losses
        through the anticipated disposal date.

        In 1996, the Company recognized a loss on disposal of $41, net of income
        taxes of $25, consisting of an estimated loss on disposal of business
        assets of $1 and a provision of $40 for anticipated operating losses
        until disposal. The disposal of the discontinued operation was completed
        in early 1997 without incurring additional losses.

        The following is a summary of operating results of the discontinued
        operation for the years ended December 31:

                                                 December 31
                                             -----------------
                                               1995      1996

Sales                                        $ 4,443   $ 3,772
Income (loss) before income taxes                151      (169)
Income (loss) from discontinued operations        86      (104)

<PAGE>


4.      RELATED PARTY TRANSACTIONS

        In May and September 1997, the Company sold $1,330 of undeveloped land
        and capitalized land development costs to two Limited Liability
        Corporations (LLC) related through common ownership, in exchange for
        $1,145 notes receivable and one LLC assumed two land mortgages totaling
        $182. The notes receivable are due on demand and mature in December 31,
        1999 with interest payable at 1% above the prime rate. The outstanding
        balance as of December 31, 1997 was $1,066. The LLC's will develop the
        land and the Company has option agreements with the LLC's that gives the
        Company exclusive rights, but no obligation, to purchase the developed
        lots under terms similar to other agreements with non-related parties.

5.      EQUITY INVESTMENTS

        At December 31, 1996 and 1997, the Company had a minority ownership
        interest in a land investment partnership and a partnership which owns
        the office building the Company leases (Note 7). During 1996, the
        Company sold its minority interest in another land investment
        partnership and recognized a gain of $123. These investments are
        recorded on the equity method of accounting. The Company's aggregate
        investment in these partnerships was approximately $128 and $136 at
        December 31, 1996 and 1997, respectively. The Company's share of the
        partnerships' operating results was approximately $21, $11, and $13 for
        the years ended December 31, 1995, 1996, and 1997, respectively.

6.      LINES OF CREDIT AND DEBT OBLIGATIONS

        The Company has a working capital line of credit of $4,250 expiring May
        31, 1998, with interest at 0.5% over the prime rate on borrowings up to
        the aggregate net cash surrender value of life insurance policies
        pledged and 1.25% over the prime rate on additional borrowings. At
        December 31, 1997, borrowings under the line of credit are limited to
        $4,045, which is the sum of the current amount of cash surrender value
        of assigned life insurance plus $500. The line is due on demand, term
        life insurance on the major stockholder and the cash surrender value of
        other life insurance are pledged as collateral, and the line is
        personally guaranteed by the stockholders. The Company had an
        outstanding balance on the line of credit of $1,907 and $3,083 at
        December 31, 1996 and 1997, respectively. The agreement prohibits the
        payment of dividends and requires at least 90% of the Company's cash and
        cash equivalents to be held in accounts of the lending financial
        institution.

        The Company also has a working capital line of credit, based on a
        borrowing base formula of finished lots held in inventory not to exceed
        $4,500, expiring April 1, 1998, with interest at 3% over the prime rate,
        due on demand. At December 31, 1997, borrowings under the line of credit
        are limited to $4,191 based on the borrowing base formula. Lots held in
        inventory are pledged as collateral and this line also is personally
        guaranteed by the stockholders. The line of credit is subordinated to
        other debt on the lots held in inventory. The Company had an outstanding
        balance on the line of credit of $300 and $3,344 at December 31, 1996
        and 1997, respectively.

        The Company also has obtained a working capital line of credit of
        $1,500, due on demand, expiring March 21, 1998, with interest at 1% over
        the prime rate. At December 31, 1997, borrowings under the line of
        credit are limited to $1,352, which is the sum of the aggregate fair
        market value of cash equivalents deposited at the financial institution
        plus $300. The cash equivalents deposited at this financial institution
        are pledged as collateral and this line is

<PAGE>


        personally guaranteed by the stockholders. The Company had an
        outstanding balance on the line of credit of $780 and $930 at December
        31, 1996 and 1997, respectively.

        A subsidiary of the Company has a working capital line of credit of $125
        expiring April 15, 1998, with interest at 4.5% over the three-month U.S.
        treasury bill interest rate (5.5% at December 31, 1996 and 1997), due on
        demand. There were no outstanding borrowings on the line of credit at
        December 31, 1996. The Company had an outstanding balance on the line of
        credit of $100 at December 31, 1997.

        The prime rate was 8.25% and 8.5% at December 31, 1996 and 1997,
        respectively.

        Other debt obligations at December 31, 1996 and 1997 are as follows:

<TABLE>
<CAPTION>

                                                                         December 31
                                                                      ----------------
                                                                      1996      1997
<S>                                                                  <C>       <C>    
Construction loans on single family homes, with interest at 1%
  to 3% above the prime rate                                         $10,692   $ 9,253
Development loans, with interest at 2% to 5% above the prime rate,
  but not to be less than 8% or more than 18%                          6,243     6,128
Promissory notes, with interest at 6% to 10.5%                         5,231     4,658
1996 subordinated debenture series, with interest at 11%               3,000     3,000
1993 subordinated debenture series, with interest at 10%               2,951     2,945
Street, sewer, and water assessments on land under development
  and lots held for sale, with interest at 7% to 11%                   1,471     1,047
Installment loans, with interest from 5.9% to 11%                        978       622
Other                                                                    107        77
                                                                     -------   -------
                                                                     $30,673   $27,730
                                                                     =======   =======
</TABLE>

        The construction loans, development loans, and promissory notes are
        collateralized by substantially all of the Company's inventories, in
        addition to the personal guarantees of all stockholders on the
        development loans. The installment loans are collateralized by
        transportation and computer equipment.

        The 1996 subordinated debenture series is due in 2004 and includes terms
        for early redemption by the Company after 1998. The indenture is
        subordinated to all of the Company's senior indebtedness, as defined in
        the agreement. Under terms of the indenture, the Company is prohibited
        from declaring or paying any dividend on its stock or making any other
        distribution on any equity securities of the Company. In addition, the
        indenture includes covenants that require the Company to maintain a
        minimum tangible net worth and a ratio of debt to tangible net worth as
        defined in the indenture and certain restrictions on business mergers
        and sale or acquisition of assets.

        The 1993 subordinated debenture series is due in 2003 and includes terms
        for early redemption by the Company. The indenture is subordinated to
        all of the Company' senior indebtedness, as defined in the agreement.
        Under terms of the indenture, the Company is prohibited from declaring
        or paying any dividend on its stock or making any other distribution on
        any equity securities of the Company. In addition, the indenture
        includes certain restrictions on business mergers, sale or acquisition
        of assets and compensation of executive officers.

<PAGE>


        The weighted average interest rate on short-term borrowings was 10.48%
        and 10.02% at December 31, 1996 and 1997, respectively.

        The approximate principal payments on obligations, based on the
        scheduled maturity dates at December 31, 1997, are set forth by year
        below.

        1998                                                   $  11,840
        1999                                                       5,023
        2000                                                       3,071
        2001                                                         558
        2002                                                         399
        Thereafter                                                 6,839
                                                               ---------
                                                               $  27,730
                                                               =========

        The fair value of the debt obligations approximate their carrying value
        at December 31, 1997.

7.      LEASING ARRANGEMENTS

        The Company is obligated for the rental of its primary office building
        from an affiliated partnership (Note 5), other office and warehouse
        buildings and certain equipment and software under noncancelable capital
        and operating leases which expire at various dates to 2009. The rent on
        the primary office building is escalated based on changes in the local
        consumer price index.

        CAPITAL LEASES - Minimum future lease obligations under capital leases
        for the office building and equipment as of December 31, 1997, are as
        follows:

<TABLE>
<CAPTION>

        Year ending December 31:
          <S>                                                                   <C>      
          1998                                                                  $     117
          1999                                                                        117
          2000                                                                        117
          2001                                                                        117
          2002                                                                        117
          2003 to 2009                                                                799
                                                                                ---------
        Total minimum lease payments                                                1,384
        Less amount representing interest and consumer price index adjustment         937
                                                                                ---------
        Present value of minimum lease payments                                 $     447
                                                                                =========
</TABLE>

        Capital lease and real estate tax payments to the affiliated partnership
        were $135, $141, $150 for the years ended December 31, 1995, 1996, and
        1997, respectively.

        The cost and accumulated amortization of a building and equipment under
        capital leases were $607 and $349 at December 31, 1996, and $607 and
        $369 at December 31, 1997, respectively.

        OPERATING LEASES - The Company leases model homes, agreements under
        which the Company's committed to rentals of $307 and $83 in 1998 and
        1999, respectively. The Company has an option to repurchase these homes
        at the end of these rental periods. The Company also leases vehicles,
        for which rentals are committed of $76 and $42 for 1998 and 1999,
        respectively. In addition, the Company leases an office and warehouse
        building with annual base rentals of approximately $36 through April
        1998. Certain equipment and software are leased under operating leases
        with terms

<PAGE>


        of one year or less. Rental expense was approximately $251, $217, and
        $397 for the years ended December 31, 1995, 1996, and 1997,
        respectively.

8.      LAND OPTION AND EARNEST MONEY DEPOSITS

        The Company has entered into option and purchase agreements to acquire
        lots in residential housing development and land for future development.
        Payments and deposits made under these agreements are as follows:

                                                             December 31
                                                       ----------------------
                                                         1996         1997

        Option payments                                $    665     $   1,138
        Earnest money deposits                              130            --
                                                       --------     ---------
                                                       $    795     $   1,138
                                                       ========     =========

        On exercise of the option, option payments are generally applied to the
        purchase price of land acquired in accordance with the terms of the
        agreement.

        Earnest money deposits are to be credited against future purchases. The
        Company had contingent land purchase commitments totaling approximately
        $1,486 at December 31, 1996, related to the earnest money deposits.

9.      BENEFIT PLANS

        DISCRETIONARY BONUS PLAN - The Company has discretionary bonus programs
        for certain officers and key management employees. The executive
        committee of the Board annually determines the amounts of the bonuses to
        be paid. Bonuses paid under these programs were $800 and $260 for the
        years ended December 31, 1995 and 1996, respectively. There were no
        bonuses paid in 1997.

        RETIREMENT PLAN - The Company has a qualified contributory retirement
        plan (the Plan) under Section 401(k) of the Internal Revenue Code which
        covers all full-time employees who meet certain eligibility
        requirements. Voluntary contributions are made to the Plan by the
        employees and Company matching contributions are made at the discretion
        of the Board of Directors. Company matching contributions of
        approximately $62, $54, and $45 were made for the years ended December
        31, 1995, 1996, and 1997, respectively.

        In addition, the Plan allows the Company to make discretionary
        profit-sharing contributions to the Plan up to the maximum amount
        deductible for income tax purposes. No profit-sharing contributions were
        made for the years ended December 31, 1995, 1996, or 1997.

<PAGE>


10.     INCOME TAXES

        The components of the provision for income taxes for the years ended
        December 31, 1995, 1996, and 1997 are as follows:

                                                             December 31
                                                        -----------------------
                                                        1995      1996     1997

Currently payable (receivable):
  Federal                                               $--      $ 579    $(355)
  State                                                  --        185        6
Deferred                                                  253      (55)    (140)
                                                        -----    -----    -----
    Income tax provision for continuing operations        253      709     (489)

Income tax provision for:
  Change in accounting method                             527     --       --
  Discontinued operations                                  65      (90)    --
                                                        -----    -----    -----
                                                        $ 845    $ 619    $(489)
                                                        =====    =====    =====

Net deferred income tax assets include the following:

Depreciation                                            $ 106    $  95    $  97
Accrued bonus pay                                        --         38     --
Discontinued operations                                  --         25     --
Interest expensed on land mortgages                      (204)    (259)    (291)
Estimated costs to complete lots sold                      54       90      108
Accrued vacation pay                                       26       44       48
Inventory capitalization                                   19       53       86
Allowance for doubtful accounts receivable                 22       21       22
Accrued warranty                                           25       19       19
State net operating loss carryforward (expiring 2012)    --       --        115
Other                                                       2        4        2
                                                        -----    -----    -----
                                                        $  50    $ 130    $ 206
                                                        =====    =====    =====


        The reconciliation of the statutory federal income tax rate with the
        effective income tax rate for continuing operation is as follows:

                                                            December 31
                                                       -----------------------
                                                       1995     1996      1997

Statutory income tax rate                              35.0%    35.0%    (35.0)%

Increase (reduction) in tax resulting from:
  State taxes, net of federal benefits                  6.9      7.2     (9.8)
  Increase in cash surrender value of life insurance
     policies in excess of policy premiums paid        (2.7)    (3.6)    (4.0)
  Effect of graduated rate                             (1.0)    (1.0)     1.0
  Other                                                 4.8       .4      4.8
                                                       ----     ----     ----
                                                       43.0%    38.0%    (43.0)%
                                                       ====     ====     ====

<PAGE>


11.     STOCK PURCHASE AGREEMENT

        Under the terms of a stock purchase agreement, in the event of the death
        or total disability of any stockholder, the Company is obligated to
        purchase and the stockholder is obligated to sell all nonvoting stock
        held by that stockholder for an amount that, subject to the limitations
        described below, is the lesser of twice the book value per share or
        $658.82 per share in the event of a death or $470.58 per share in the
        event of disability. Certain other stockholders have the first option to
        purchase not less than all of the voting stock held by a stockholder at
        the time of death or total disability, and the Company is obligated to
        purchase such voting shares only if those other stockholders fail to
        exercise their option. Under the agreement, the amount payable by the
        Company for voting and nonvoting stock is limited to the amount of
        insurance proceeds received (after reductions, if necessary, because the
        cash surrender value is pledged as collateral on a bank line of credit)
        under policies owned by the Company covering the lives and possible
        disability of each stockholder.

        At any other time, the stockholder may offer his stock for sale to the
        other stockholders or the Company at a formula price in accordance with
        certain provisions of the agreement.

12.     COMMITMENTS AND CONTINGENCIES

        The Company is a defendant in a number of lawsuits arising out of the
        normal course of business of the Company. In the opinion of management,
        the ultimate resolution of such litigation will not result in any
        material adverse impact to the financial position of the Company.

13.     CHANGE IN ACCOUNTING METHOD

        Effective January 1, 1995, the Company changed its method of accounting
        for capitalized land acquisition and development costs to begin the
        capitalization of interest and real estate taxes on land development
        projects when initial activities to prepare the property for its
        intended use commence, and to capitalize all option costs and land
        acquisition and development employee payroll costs as land project
        costs. The Company previously capitalized interest and real estate taxes
        on land development projects when physical land development commenced,
        and option costs (that do not apply to the purchase price of the land)
        and land acquisition and development employee payroll costs were
        accounted for as general and administrative expenses. The Company
        believes that the new method better matches these costs with related
        revenues. The adjustment for the cumulative effect of this change as of
        January 1, 1995 of $763, net of income taxes of $527, is included in
        1995 income. The effect of applying the new accounting method for the
        year ended December 31, 1995, was to increase net income approximately
        $210, net of income taxes of $144.