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, 1998

                                       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 nonaffiliates
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 nonaffiliates 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 April 15, 1999, there were 594 voting and 10,031 non-voting
shares of the registrant's no par value common stock outstanding.


                                       1
<PAGE>


                                 FORM 10-K INDEX

PART I
    Item 1.   BUSINESS.........................................................1
    Item 2.   PROPERTIES......................................................15
    Item 3.   LEGAL PROCEEDINGS...............................................15
    Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............15

PART II
    Item 5.   MARKET FOR REGISTRANT'S COMMON EQUITY 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.............................17
    Item 7A.  QUANTITAVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
              RISK............................................................27
    Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................27
    Item 9.   CHANGES IN, AND DISAGREEMENTS WITH ACCOUNTANTS ON,
              ACCOUNTING AND FINANCIAL DISCLOSURE.............................27

PART III
    Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE
              REGISTRANT......................................................28
    Item 11.  EXECUTIVE COMPENSATION..........................................31
    Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
              AND MANAGEMENT..................................................33
    Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................35

PART IV
    Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES
              AND REPORTS ON FORM 8-K                                         37

SIGNATURES                                                                    46

EXHIBIT INDEX                                                                 47


                                       ii
<PAGE>


                                     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 2,893 lots. On December 31, 1998, the Company controlled 17 parcels of
land under Land Acquisition Agreements for future development of an estimated
1,490 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 $140,000 to $800,000 for both the home and lot, with an
average selling price of approximately $311,000 in 1998. 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 2,934 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 282 homes in 1998, and as of December 31, 1998, had purchase agreements
for the sale of 115 homes, representing approximately $38.7 million in sales. In
1997, the Company closed the sales of 204 homes, and as of December 31, 1997,
had contracts for the sale of 70 homes, representing approximately $21.5 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.

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


                                       1
<PAGE>


OPERATING STRATEGY

      The Company's operating strategy is to attempt to achieve the following
interrelated 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 homebuyers 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 homebuyers 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 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


                                       2
<PAGE>


efforts on the western and southwestern suburbs of Minneapolis, in the
communities of Eden Prairie, Chanhassen, Chaska, Minnetonka, Medina,
Minnetrista, Plymouth, Shorewood, Maple Grove, Eagan, Watertown and Elko. 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. In some cases, 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 non-recourse
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.

      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


                                       3
<PAGE>


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 that 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 controls 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 anticipated land
requirements for the next two to three years, and attempts to control land
sufficient for its anticipated 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 2 counties in Wisconsin, in
that it is involved in both land development and home building. Land development
has been historically the most profitable portion of the Company's business and
an essential element to the success of the Company's home building business.

      During 1998, 62.8% of the homes delivered by Lundgren were built on lots
developed by Lundgren, compared to 79.9% in 1997 and 84.8% in 1996. 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 122 residential subdivisions,
ranging in size from 2 to 94 lots, in the Twin Cities MSA. In 1997, the Company
commenced the development of five new residential subdivisions and, in 1998,
commenced the development of nine new subdivisions.


                                       4
<PAGE>


      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 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 predevelopment costs
substantially reduces the risks of greater costs and capital expenditures
associated with owning land that cannot be developed. 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, water main, storm sewer, 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 those 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, 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 2,893 lots, for which the sales
of 2,591, or 89.6%, had been closed as of December 31, 1998. The remaining lots
are subject to purchase agreements or are available for sale. The development of
all but 33 lots is substantially complete. The Company expects to complete the
33 lots in 1999.


                                       5
<PAGE>


HOME BUILDING AND HOME SALES

      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,
                        --------------------------------------------------------
                          1994        1995        1996        1997        1998
                          ----        ----        ----        ----        ----
                         (Dollars in thousands, except numbers of homes closed)

Homes Closed                 247         202         198         204         282

Average Selling Price
   of Homes(1)          $    297    $    311    $    339    $    321    $    311

Total Volume of Closed
   Homes                $ 73,471    $ 62,796    $ 67,079    $ 65,549    $ 87,541

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

(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, 1999 will
      be higher compared to 1998.

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

      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, television, illustrated
brochures, billboards, on-site displays, realtor programs and furnished model
homes. Based on 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
with a vast number of pre-priced options, some of which 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


                                       6
<PAGE>


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 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
usually have limited or no experience. Accordingly, the Company has developed a
system to educate its customers as to the Company's procedures and a 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 appropriate 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


                                       7
<PAGE>


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 homebuyers. The Company is currently
implementing a system whereby it will telephone its homebuyers at four different
times during the term of its relationship with the homebuyers. These telephone
calls are designed to get the homebuyers' 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 homebuyer.

(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.

      In order to provide home customers the price advantage of a standardized
product line while still providing them with some flexibility to customize their
homes before the final plan review, the Company has integrated its construction
process with a schedule for the customers' required decision-making, contained
in the book "Building a New Home with Lundgren Bros." The book coordinates the
customers' 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 pre-construction meeting; a pre-drywall
orientation; a pre-closing 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 homebuyers
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


                                       8
<PAGE>


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 $140,000 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 pre-priced
options, 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 that 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.

      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 homebuyer. 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
cabinetmaker 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 departments may seek the advice of
suppliers and subcontractors with respect to


                                       9
<PAGE>


better or more cost efficient ways to design and build the home so as to create
more value for the homebuyer. 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 that 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
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 the reason 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.

      Over the last year and a half, Lundgren Bros. has developed an Intranet
based system that will allow all Lundgren Bros. employees the ability to access
a secure, central database from any


                                       10
<PAGE>


point within the Company and via the Internet using a standard web browser. This
central database will store information from the initial point of customer
contact, during the build cycle and on through warranty and service. Each user
is defined in the security module and given access via a graphical user
interface to the areas they need to perform their job. The system will allow
interaction with real-time data in a format that requires minimum user training
and PC configuration. Some of the major benefits of this system will be the move
from a paper based system to fully electronic exchange of information. For
example, a change during construction was previously handled by using several
paper forms and routing them through manually via hand, fax, mail, etc. The new
system allows the user to initiate the change electronically. The system then
forwards the information through the proper approvals and returns it to the
initiator for customer review with full details (i.e., pricing, drawings, etc.)
all without using paper. If the change is approved, the information will be
communicated to the field via an electronic notice, thus creating a more
efficient and traceable route through the Company. Other benefits include less
administrative maintenance for distributing changes (new lots, base and option
prices, etc.) because as soon as the information is entered it is available to
all who need it; previously, time-intensive distribution routines were
necessary. This system allows a continuos flow of information into and out of
one data system as opposed to tracking information through many separate
sub-systems. It prevents duplication of data and increases speed, security, and
accuracy.

(e) DESIGN CENTER.

      All of the Company's homebuyers can choose from the Company's various base
floor plans and elevation combinations or design a custom plan for themselves.
Homebuyers can further customize their homes 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 homebuyers can visit this
center as many times as they like. The Company employs interior designers 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 homebuyers on an
appointment basis when it is convenient for the homebuyers to make selections,
or homebuyers can visit the design center, which is open weekdays as well as
during convenient evening and weekend hours. Normally, homebuyers purchasing
homes 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 homebuyers will receive at each of these
different suppliers. The Company's homebuyers 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.


                                       11
<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 nonrecourse 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 or
two 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 homebuyers. 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, 1998, the Company had 40 houses built or under
construction to be held as inventory which represents 33.1% 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 40 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 40 houses in inventory as of December 31, 1998 were located in 21
different subdivisions. Houses in inventory are generally marketed to transferee
homebuyers. Transferee homebuyers 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 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 homebuyers 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.

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.


                                       12
<PAGE>


      Brush Masters currently services approximately 21 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 52.2% of Brush Masters' sales in 1998.

      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. Home Corporation (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 developer 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.

EMPLOYEES

      At December 31, 1998, the Company employed 216 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


                                       13
<PAGE>


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.

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.


                                       14
<PAGE>

RECENT DEVELOPMENT

      On February 16, 1999, the Company's shareholders entered into a nonbinding
agreement with a third party to sell all of the issued and outstanding shares of
the Company. Among other things, the transaction is subject to the execution of
a definitive agreement and satisfactory completion of due diligence. There can
be no assurance that the transaction will be completed as contemplated.


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        3,330(1)        4/30/99

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

(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

      There were no matters submitted to a vote of the Company's shareholders
during the three-month period ended December 31, 1998.


                                       15
<PAGE>


                                     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, 1998. 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, 1994, 1995, 1996, 1997, and 1998 are
derived from consolidated financial statements of the Company. The report of
independent accountants on the consolidated financial statements for the year
ended December 31, 1996 of PricewaterhouseCoopers LLP, and independent auditors'
report on the consolidated financial statements as of December 31, 1998 and 1997
and for the years then ended of Deloitte & Touche LLP 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, 1998, and the selected
consolidated balance sheet data, as of December 31, 1997 and 1998, 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,
                                                          --------------------------------------------------------
                                                            1994(3)     1995(3)     1996        1997        1998
                                                            ----        ----        ----        ----        ----
                                                                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                       <C>         <C>         <C>         <C>         <C>
SELECTED STATEMENT OF OPERATIONS DATA:
   Revenues(2) ........................................   $ 75,814    $ 65,217    $ 69,798    $ 68,658    $ 91,296
   Cost of revenues ...................................     64,004      55,591      59,052      60,839      80,323
                                                          --------    --------    --------    --------    --------
   Gross profit .......................................     11,810       9,626      10,746       7,819      10,973
   Operating expenses .................................      7,216       7,429       7,238       6,528       7,816
                                                          --------    --------    --------    --------    --------
   Operating income ...................................      4,594       2,197       3,508       1,291       3,157
   Other income (expense), net ........................       (706)     (1,608)     (1,643)     (2,427)     (2,072)
                                                          --------    --------    --------    --------    --------
   Income (loss) from continuing operations
      before income taxes .............................      3,888         589       1,865      (1,136)      1,085
   Income tax provision (benefit) for
      continuing operations ...........................      1,308         253         709        (489)        372
                                                          --------    --------    --------    --------    --------
   Income (loss) from continuing operations ...........      2,580         336       1,156        (647)        713
   Income (loss) from discontinued
      operations(1) ...................................       (740)         86        (145)         --          --
                                                          --------    --------    --------    --------    --------
   Net income (loss) ..................................   $  1,840    $    422    $  1,011    $   (647)   $    713
                                                          ========    ========    ========    ========    ========
   Income (loss) per share (basic and diluted):
      Continuing operations ...........................   $    243    $     32    $    109    $    (61)   $     67
      Discontinued operations .........................        (70)          8         (14)         --          --
                                                          --------    --------    --------    --------    --------
         Net income (loss) ............................   $    173    $     40    $     95    $    (61)   $     67
                                                          ========    ========    ========    ========    ========
</TABLE>


                                       16
<PAGE>


<TABLE>
<CAPTION>
                                                                        YEARS ENDED DECEMBER 31,
                                                          ----------------------------------------------------
                                                            1994(3)    1995       1996       1997       1998
                                                            ----       ----       ----       ----       ----
<S>                                                       <C>        <C>        <C>        <C>        <C>
SELECTED BALANCE SHEET DATA:
   Inventories ........................................   $ 30,246   $ 34,166   $ 37,828   $ 35,614   $ 39,601
   Total assets .......................................     43,703     47,763     51,695     52,784     59,487
   Long-term debt .....................................     10,664     10,766     15,739     16,337     14,714
   Total liabilities ..................................     37,861     41,378     44,299     46,035     52,025
   Stockholders' equity ...............................      5,842      6,385      7,396      6,749      7,462
</TABLE>

(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 to the Consolidated Financial Statements.
(3)   1994 and 1995 are restated to retroactively reflect for periods prior to
      January 1, 1995 a change in accounting method for capitalized land
      acquisition and development costs. The impact of the retroactive
      restatement is as follows:

<TABLE>
<CAPTION>
                                                                           1994      1995   
                                                                           ----      ----
      <S>                                                                  <C>       <C>
      Income from continuing operations ..............................     $642     $  --
      Cumulative effective of change in accounting ...................       --      (763)
                                                                           ----     ----- 
      Net income .....................................................     $642     $(763)
                                                                           ====     ===== 
      
      Income (loss) per share (basic and diluted):
         Continuing Operations .......................................     $ 60     $  --
         Cumulative effect of change of accounting ...................       --       (72)
                                                                           ----     ----- 
         Net Income (loss) ...........................................     $ 60     $ (72)
                                                                           ====     ===== 
</TABLE>

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, 1997 and 1998, and for the years
ended December 31, 1996, 1997, and 1998 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 segment, which includes
land acquisition and development, home building and home sales, inventory
management and painting, staining and drywall services. In 1996 and prior, 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 1998, home construction and lot revenues were
$87.6 million or 96% of total revenues. Revenues from painting, staining and
drywall (excluding those to the Company's new home construction operations) were
$3.7 million or 4% of total revenues. The 1998 percentages are consistent with
the percentages for 1997. 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 1998, 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 1998 was $9.8 million or 90% of the total gross profit. Of the $9.8 million
gross profit, $7.8 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 were historically higher on lot revenues than on home
construction revenues when the lot and house are sold together, but in 1998 they
moved


                                       17
<PAGE>


closer together. In 1998 the gross profit margin on home construction revenues
was 11%, while the gross profit margin on lot revenues was 11%. 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
31% in 1998.

      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,
1998, the Company had signed purchase agreements for the sale of 115 homes,
compared to 70 homes at December 31, 1997. The 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 1997. 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

1998 Compared to 1997

      Revenues increased $22.6 million or 32.0% in 1998 compared to 1997. The
Company closed on sales of 282 homes in 1998, compared to 204 closings in 1997.
The average selling price of homes closed decreased by 3.1% in 1998 from the
average selling price of homes closed in 1997. The decrease in average selling
price is due to a change in the mix of homes closed in 1998 compared to 1997.

      Gross profit margin increased to 12.0% in 1998, compared to 11.4% in 1997.
The Company believes that this increase in gross profit margin is primarily due
a decrease in sales incentives given to homebuyers due to a strong housing
market slightly offset by higher land costs.

      Operating expenses (which include selling, general and administrative
expenses) increased by $1,288,000 in 1998 compared to 1997. The increase is
mainly due to a $726,000 increase in discretionary bonuses to substantially all
employees, an increase in rental expense of $258,000, increase in staffing due
to increased volume, and an increase in legal and consulting fees in 1998. As a
percentage of revenues, these expenses decreased to 8.0% in 1998 compared to
9.0% in 1997 due to the substantially higher increase in revenues than the
increase in operating expenses.


                                       18
<PAGE>


OTHER INCOME (EXPENSE), NET

      Interest expense decreased by $182,000 in 1998 compared to 1997. The
decrease is mainly due to lower interest rates and decreased borrowings for land
acquisition and development due to purchasing finished lots from other
developers.

      Other income (expense), net increased $173,000 in 1998 from 1997. The
increase is mainly due to an increase in interest income.

INCOME (LOSS) FROM CONTINUING OPERATIONS

      Income from continuing operations in 1998 was $713,000 compared to loss
from continuing operations of $647,000 in 1997. This increase in 1998 is
primarily due to increases in both revenues and gross profit.

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.


                                       19
<PAGE>


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 an increase in
interest income.

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 the decline in revenues, together with a decrease in gross
profit margins and increase in interest expense in 1997.

NET INCOME (LOSS)

      Net loss in 1997 was $647,000, a decrease of $1.7 million from $1.0
million of net income in 1996. This decrease is mainly due to a decrease in
sales of $1.1 million, a decrease in gross profit margins of $2.9 million, a
decrease in operating expenses of $710,000, an increase in interest expense of
$639,000, and a decrease in tax provision of $1.2 million which are offset by a
decrease in loss in 1996 from the discontinued operations of the Company's
remodeling division of $145,000.

LIQUIDITY AND CAPITAL RESOURCES

1998 Compared to 1997

      Cash increased $278,000 to $2.3 million in 1998 from $2.0 million in 1997.

      Cash flows provided by operating activities were $1.7 million in 1998,
which was approximately equal to the $1.6 million provided in 1997. In 1998,
cash was provided by a $713,000 profit from continuing operations, a $1.4
million increase in accounts payable, a $0.2 million increase in estimated cost
to complete sold homes, a $1.0 million increase in accrued expenses, a $1.1
million increase in income tax payable, a $1.1 million increase in customer
deposits and $399,000 related to other changes in operating assets and
liabilities. These cash provisions were partially offset by cash used for an
increase in restricted cash of $715,000; a $3.1 million increase in land and
model home inventories; and a $746,000 increase in land options and earnest
money deposits on land.

      Cash flows used in investing activities were $510,000 in 1998, an increase
of approximately $194,000 from $316,000 cash used in 1997. The increase was
primarily due to an increase in expenditures for property and equipment.


                                       20
<PAGE>


      Cash flows used in financing activities were $884,000 in 1998, an increase
of approximately $290,000 from the $594,000 used in financing activities in
1997. The increase was primarily due to a $3.1 million increase in repayment of
borrowings on the Company's bank lines of credit offset by a $4.0 million
increase in borrowings for land acquisition, land development and home
construction.

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 $1.6 million in 1997, an
increase of approximately $3.1 million from the $1.5 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 $316,000 in 1997, an increase
of approximately $150,000 from $166,000 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 in 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.

Financing

      The Company believes that internally generated funds, amounts available
under its four lines of credit and borrowing arrangements, including the 1993
and 1996 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 1998, the Company entered into an
arrangement involving the sale of raw land to a non-affiliated entity 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 $9.9 million, subject
to a borrowing base. At December 31, 1998, the


                                       21
<PAGE>


aggregate maximum credit available under the lines of credit was $8.9 million,
of which $3.5 million was utilized and $5.4 million was available.

      The Company's outstanding indebtedness, as of December 31, 1998, included
$20.7 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. The Company benefited from low mortgage interest rates
from mid-year 1995 through early 1996, and then again in late 1997 through 1998.
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 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME. Comprehensive


                                       22
<PAGE>


income includes net income and several other items that current accounting
standards require to be recognized outside of net income. This standard requires
enterprises to display comprehensive income and its components in financial
statements, to classify items of comprehensive income by their nature in
financial statements, and to display the accumulated balances of other
comprehensive income in stockholders' equity separately from retained earnings
and additional paid-in capital. The Company adopted SFAS No. 130 during 1998,
and there were no items of other comprehensive income for all periods presented.

      In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION, replacing SFAS No. 14 and its amendments.
This standard requires enterprises to report certain information about products
and services, activities in different geographic areas, reliance on major
customers, and to disclose certain operating segment information in their
financial statements. Operating segments are components of an enterprise for
which financial information is available and evaluated by the enterprises chief
operating decision-maker in allocating resources and assessing performance. The
Company adopted SFAS No. 131 during 1998. The Company has determined that it
operates in one segment. In addition, all long lived assets are located in, and
all revenue is derived from, customers within Minnesota.

      During 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which is effective for the Company in 2000.
The Company is currently evaluating the impact, if any, of this statement.

YEAR-2000 COMPLIANCE

PROJECT PHASES

The Company's IS department has developed a year-2000 (Y2K) Project Plan
consisting of four phases:

Phase 1. Inventory and Assessment involves identifying all date-impacted systems
and equipment and establishing procedures for modifying and maintaining a
current inventory of equipment. This phase is complete, other than the ongoing
assessment of new systems and gathering final data from vendors.


                                       23
<PAGE>


Phase 2. Detection involves identifying compliance status of all date-impacted
systems and equipment, identifying connections between the Company and its
business partners, setting priorities on systems and equipment based on business
risk, developing a plan and cost estimate to repair, retire or replace each
noncompliant system and product and establishing a testing approach. This phase
is complete, except for the ongoing assessment of new systems and the phaseout
of noncompliant hardware.

Phase 3. Correction involves repairing, retiring or replacing noncompliant
systems and products, preparing detailed testing plans and cost estimates,
establishing testing organization and environment, conducting unit testing and
preparing integration testing plans. The Company has completed this phase, and
has scheduled a full audit by an outside technology firm to be conducted in May
1999.

Phase 4. Testing involves conducting internal integration testing of hardware
and software. The Company is currently in this phase and is on schedule to be
substantially completed by May 31, 1999. This phase also includes maintaining
compliance throughout 1999 to insure our year-2000 preparedness remains intact.
Testing will be done with various tools such as the Ymark 2K test and other test
software and equipment provided by outside manufacturers.

Total compliance with a status of "ready for live test" will be completed by May
31, 1999. The Company has scheduled an outside company to facilitate the "live"
test during the first week of June, 1999. Any issues found as a result of these
tests will be dealt with in the same manner as items found during the original
inventory.

PROJECT DETAILS

The following details outline the standings of the Company's information systems
regarding the year-2000 rollover with regard to each aspect.

Levels of Compliance

Hardware/System BIOS  level
      Servers - All netware and NT 4.0 Servers have been addressed and current
      patch levels are continually applied, which address remaining minor
      year-2000 issues. Netware Client 32/Intranetware has been updated on all
      client workstations. All hardware is compliant.
      Plan: Continue to keep current on version and patch levels as they are
      released from Novell and Microsoft.

Client/User Computers - 90% of all networked computers are compliant. The
      remaining computers are older and have only a BIOS level issue that is
      currently being upgraded or replaced. Compaq has issued a compliance
      statement for all computers purchased after October 1997, the 10% still
      outstanding are those purchased before this date.
      Plan: Compaq has issued BIOS upgrades at no cost for some of these models.
      The computers that fall within the noncompliant range will get either a
      bypass chip or a upgraded BIOS prior to May 31, 1999.

Communications/Voice Equipment - The primary phone system in use by the Company
      was upgraded in the Fall of 1998 to meet Y2K compliance levels. This
      upgrade also included the voicemail system.
      Plan: Fax machines and stand alone phone equipment verification is in
      process and will be addressed as needed to meet compliance levels prior to
      May 31, 1999.


                                       24
<PAGE>


Operating System Level:
      Servers - All Netware and NT 4.0 Servers have been addressed an current
      patch levels are continually applied, which address remaining minor
      Year-2000 issues. Netware Client 32/Intranetware has been updated on all
      client workstations. All hardware is compliant.
      Plan: Continue to keep current on version and patch levels as they are
      released from Novell and Microsoft.

      Client/User Computers - 98% of all networked computers are compliant.
      There are 6 computers on the Company's network that are operating at DOS
      levels that are not compliant. All other computers are running Operating
      Systems that are compliant (Windows 95, Windows NT 4.0).
      Plan: The noncompliant machines will be replaced before May 31, 1999 with
      new compliant machines running a compliant operating system as part of a
      departmental upgrade.

      Peripherals - All Network printers are compliant (HP LaserJet, InkJet,
      DesignJet). The Company uses Jet-Direct cards to allow these printers to
      interact over our network and these are also compliant. The software used
      to manage these printers is also compliant. All stand-alone printers are
      also compliant including those with fax, scan and copy capability.
      Plan: Compliant; no outstanding issues.

      Communications/Voice Equipment - The primary phone system in use by the
      Company was upgraded in the Fall of 1998 to meet Y2K compliance levels.
      This upgrade also included the voicemail system hardware and software.
      Plan: Fax machines and stand-alone phone equipment verification is still
      in process and will be addressed as needed to meet compliance levels.

      Data Connection/Routers - All Cisco routers used at the Company are
      compliant. Cisco has confirmed that all IOS software releases at 11.0 or
      higher are Y2K compliant.

Software Compliance:
      Server Level:
      Email/Collaboration - MS Mail and Exchange Server are fully compliant with
      regard to components being used by the Company.
      Database Systems - SQL Server 6.5 is fully compliant.
      Inoculation/Anti-Virus Systems - McAfee Netshield and Virusscan are fully
      compliant as long as systems that software is run on are compliant. Date
      and time tracking is noncritical to software function.
      Backup Systems - Arcserve 6.5 is fully compliant on both NT and Netware
      Servers.
      System Management - Current system management is run through default and
      standard interfaces provided by software manufacturer. No compliance
      issues at this point.
      Middleware - Allaire ColdFusion is the only middleware used that is
      related to Company applications. It is compliant with no issues.


                                       25
<PAGE>


      Software Level:
      TOM System (fully integrated Accounting, Estimating, Purchase Order,
      Warranty system) - The Company will install the latest release in April
      1999 that will bring the entire system to a Y2K compliant level.
      Microsoft Office 4.3 and 97 - The Company is in the process of evaluating
      Excel worksheets for potential date formula issues and those will be dealt
      with on an individual basis.
      HomeBase Intranet System - Fully compliant with no issues.
      Monticello Estimating Interface with TOM - The Company received the latest
      release and will implement in April 1999.
      ADP Payroll - Compliant, the system was upgraded in 1998 to latest
      version.
      Norwest Bankties - Compliant.
      Other Non-Critical Software - The Company uses Adobe Photoshop, Allaire
      Homesite, CD Writing Software and other miscellaneous scanning and media
      software that is not impacted by date/time issues related to Y2K.

      All costs incurred to date by the Company have been expensed
(approximately $2,000). The Company anticipates future costs to be less than
$5,000, including hardware costs of less than $500, with the exception of 6 PCs
that are being updated primarily for other reasons, audit and related testing
costs of less than $1,000 in total, and no additional software costs, as all
patches are free of charge and others are included in support agreements.

      The Company is in the process of identifying and assessing third party
relationships that could have an impact on the Company's operations. The Company
has identified certain relationships, such as with title companies, banks and
lumber suppliers, that if they were unable to perform in January 2000, could
have a material impact on the Company. The impact would not be loss of revenue,
but postponement of revenue recognition to possibly the second quarter of 1999,
and therefore the cost would be related to cost of funds. The Company has not
yet quantified this amount. Beginning in May 1999 all purchase agreements
between the Company and homebuyers will include a disclaimer relating to
possible delays caused by Y2K events. The Company therefore anticipates no
potential liability due to legal actions for breach of contract or other harm.
The Company has formed a Y2K Committee represented by employees from various
departments in the Company, who will investigate third party relationships and
will establish contingency plans.


                                       26
<PAGE>


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

      The Company is subject to interest rate risk on its long-term debt and
runs the risk of interest rate fluctuations. At December 31, 1998, the Company
has fixed and variable rate debt of approximately $9.4 million and $26.0
million, respectively. The interest rates for the Company's variable rate debt
are based on the respective lender's base rate, plus an additional percentage
rate ranging from 0.5% to 5.0% at December 31, 1998. A one percentage point
increase or decrease in the respective lender's base rate would increase or
decrease annual interest expense by approximately $260,000 at December 31, 1998.

      The Company believes that fair value approximates recorded values for such
financial instruments as cash and cash equivalents, trade receivables and
payables, short-term debt and option deposits because of the typically liquid,
short-term nature, market rate terms and lack of specific concentration of these
instruments. The fair value of the 1993 and 1996 subordinated debentures cannot
be readily determined as they are not actively traded on the open market.

      The Company does not have any transactions denominated in foreign
currencies and does not purchase or hold any derivative financial instruments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      See Item 14 and Index to Consolidated Financial Statements beginning on
page 37.

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.


                                       27
<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            56    President and Director, Executive Committee Member

Terrance M. Forbord     48    President - Land Development Division, Executive
                              Committee Member

William O. Burgess      34    Vice President - Purchasing, Executive Committee
                              Member

James L. Weaver         45    Vice President - Construction, Executive Committee
                              Member

Allan D. Lundgren       56    Vice President, Secretary/Treasurer
                              and Director, Executive Committee Member

Richard W. Denman       48    Vice President - Sales and Marketing, Executive
                              Committee Member

Peter T. Beucke         40    Director of Design, Executive Committee Member

Laurie A. Vercnocke     49    Vice President of Finance, Executive Committee
                              Member

Michael A. Pflaum       54    Vice President - Land Development

Marc S. Anderson        50    Vice President -  Land Development

Edmund M. Lundgren      60    Vice President and Director

Gerald T. Lundgren      59    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.


                                       28
<PAGE>


      TERRANCE M. FORBORD served as President - Land Development Division from
August 1996 until February, 1999 and Vice President - Land Development of the
Company since April 1988. In this position, he supervised 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 Vice President of Finance since 1998 and was
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


                                       29
<PAGE>


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.

      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.


                                       30
<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.

                                     ANNUAL
                                  COMPENSATION

<TABLE>
<CAPTION>
        NAME AND                                               OTHER ANNUAL(1)      ALL OTHER(2)
   PRINCIPAL POSITION      YEAR      SALARY($)     BONUS($)    COMPENSATION($)    COMPENSATION($)
   ------------------      ----      ---------     --------    ---------------    ---------------
<S>                         <C>       <C>          <C>              <C>                <C>
Peter Pflaum,               1998      207,692      156,000          4,064              1,588
   President                1997      200,000            0          3,968              2,000
                            1996      200,000      112,500          2,174              1,875

Richard W. Denman,          1998      138,908       46,000         37,787              2,209
   Vice President -         1997      185,000            0          3,000                  0
   Sales and Marketing      1996      289,000            0          3,000              1,619

Terrance M. Forbord,        1998      176,538       20,000          4,800              2,267
   President - Land         1997      176,154            0          4,800              2,000
   Development Division     1996      158,577       68,000          4,800              1,875

James L. Weaver,            1998      117,692       10,000            987              1,483
   Vice President -         1997      110,000            0            718              1,699
   Construction             1996      110,000       25,000            629                825

William O. Burgess,         1998      114,231       20,000         23,251              1,283
   Vice President -         1997      110,000            0          9,018                  0
   Purchasing               1996            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.


                                       31
<PAGE>


      The Company has a Compensation Committee made up of Peter Pflaum, Allan
Lundgren, James Weaver, Laurie Vercnocke and Linda Freiboth, Human Resources
Manager. The Committee establishes guidelines for the managers of the Company in
regard to compensation and makes all final decisions and recommendations
regarding compensation of non-Executive employees.

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


                                       32
<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, 1998 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
Wayzata, MN  55391                    Common                1,845                   18.4%

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     Voting Common             594                  100.0%
group (8 persons)
                                    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,
      1998.


                                       33
<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, 25 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 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 created 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 were required to make certain minimum purchases per year. In 1998,
option payments totaled just under $200,000. The initial purchase price for the
shares under the Wells Option was $696.30 per share, which was the book value
per share calculated as of December 31, 1996. The purchase price increased 6%
per year. The Wells Option also terminated 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. On February 15, 1999, the Company, Patrick Wells
and Peter Pflaum signed a termination of the Wells Option and Patrick Wells
refunded the $200,000 of option fees to the Company.


                                       34
<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 $129,000 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 1998 and 1997, the shareholders did not loan money to
the Company. 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 $1.0 million of undeveloped
land and related research costs to Marsh Pointe, LLC ("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


                                       35
<PAGE>


December 31, 1999 with interest payable at 1% above prime rate. The outstanding
balance as of December 31, 1998 was $689,000. Marsh Pointe will develop the land
and the Company has an option agreement with Marsh Pointe that gives the Company
exclusive rights, but no obligation, to purchase the developed lots under terms
similar to other agreements with nonrelated parties.

      In September 1997, the Company sold approximately $377,000 of research
costs for a parcel of undeveloped land to Plum Tree 3rd, LLC ("Plum Tree 3rd"),
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, 1998 was $377,000. Plum Tree 3rd will develop the land and
the Company has an option agreement with Plum Tree 3rd that gives the Company
exclusive rights, but no obligation, to purchase the developed lots under terms
similar to other agreements with nonrelated parties.

      In May 1998, the Company sold approximately $230,000 of research costs for
a parcel of undeveloped land to Plum Tree 4th, LLC ("Plum Tree 4th"), which is
owned by the shareholders of the Company, in exchange for a $230,000 note
receivable. The note receivable is due on demand and matures on December 31,
2000 with interest payable at 1% above prime rate. The outstanding balance as of
December 31, 1998 was $230,000. Plum Tree 4th will develop the land and the
Company has an option agreement with Plum Tree 4th that gives the Company
exclusive rights, but no obligation, to purchase the developed lots under terms
similar to other agreements with nonrelated parties.


                                       36
<PAGE>


                                     PART IV

ITEM 14. EXHIBITS, 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
                        Years Ended December 31, 1997 and 1998

                        Report of Independent Accountants for the Year Ended
                        December 31, 1996

                        Consolidated Balance Sheets, December 31, 1997 and 1998

                        Consolidated Statements of Operations and Retained
                        Earnings for the Years Ended December 31, 1996, 1997 and
                        1998

                        Consolidated Statements of Cash Flows for the Years
                        Ended December 31, 1996, 1997 and 1998

                        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.


                                       37
<PAGE>


        (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 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.


                                       38
<PAGE>


        (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 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.


                                       39
<PAGE>


        (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.

        (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.


                                       40
<PAGE>



        (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. 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.


                                       41
<PAGE>


        (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 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)10.67 Acquisition and Closing Agreement, dated as of May 16, 1997, by
                 and between the Company and Marsh Pointe LLC 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)10.68 Form of Option Agreement between the company and Marsh Pointe
                 LLC 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)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.


                                       42
<PAGE>


       (10)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)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)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)10.73 Loan Agreement, dated as of November 13, 1997, by and between
                 the Company and Norwest Bank Minnesota, National Association.

       (10)10.74 Revolving Real Estate Note, dated November 13, 1997, by the
                 Company in favor of Norwest Bank Minnesota, National
                 Association.

       (10)10.75 Master Sale and Rental Agreement, dated as of December 31,
                 1997, by and between the Company and National Model Homes, Inc.

       (10)10.76 Agreement, dated March 1, 1998, by and between the Company,
                 Patrick Wells and Peter Pflaum.

       (11)10.77 Second Amendment and Extension of Promissory Note, dated March
                 21, 1998, of the Company and U.S. Bank National Association.

       (11)10.78 Second Amendment to Letter Agreement, dated March 21, 1998,
                 between the Company and U.S. Bank National Association.

       (11)10.79 Letter Agreement, dated March 26, 1998, between the Company and
                 Builders Development & Finance, Inc.

       (12)10.80 Partial Assignment of Option, dated May 29, 1998, between the
                 Company and Plum Tree 4th LLC.

       (12)10.81 Form of Option Agreement between the Company and Plum
                 Tree 4th LLC.

       (12)10.82 Third Amendment to Letter Agreement, dated April 29, 1998,
                 between the Company and U.S. Bank National Association.

       (12)10.83 Third Amendment, Extension and Reaffirmation Agreement, dated
                 as of May 31, 1998, by and between the Company and Norwest Bank
                 Minnesota, National Association.

       (12)10.84 Sixth Amended and Restated Revolving Note, dated as of May 31,
                 1998, by and between the Company and Norwest Bank Minnesota,
                 National Association.


                                       43
<PAGE>



       (12)10.85 Consent and Reaffirmation of Guaranty, dated as of May 31,
                 1998, by and between the Company and Norwest Bank Minnesota,
                 National Association.

       (12)10.86 Acquisition and Closing Agreement, dated as of June 9, 1998, by
                 and between the Company and BF Holding Company.

       (12)10.87 Form of Option Agreement between the Company and BF Holding
                 Company.

       (12)10.88 Revolving Construction and Development Loan Agreement, dated as
                 of July 13, 1998, by and between the Company and U.S. Bank
                 National Association.

       (12)10.89 Development Note, dated as of July 13, 1998, by and between the
                 Company and U.S. Bank National Association.

       (12)10.90 Revolving Note, dated as of July 13, 1998, by and between the
                 Company and U.S. Bank National Association.

           10.91 Amended and Restated Revolving Construction and Development
                 Loan Agreement dated December 23, 1998 by and between the
                 Company and U.S. Bank National Association.

           10.92 Fourth Amendment and Restatement of Promissory Note, dated as
                 of December 23, 1998, of the Company and U.S. Bank National
                 Corporation.

           10.93 Fourth Amendment to Letter Agreement, dated December 24, 1998,
                 between the Company and U.S. Bank National Association.

           10.94 Letter dated March 1, 1999, from Patrick C. Wells to the
                 Company, rescinding his Option Agreement and Option Provisions.

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

            27.0 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.


                                       44
<PAGE>


(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.

(10)     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,
         1997.

(11)     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,
         1998.

(12)     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,
         1998.

(b)      Reports on Form 8-K.

         None.


                                       45
<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: April 15, 1999
      ---------------------------

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


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

/s/ Peter Pflaum                 President and Director           April 15, 1999
-----------------------------    (Principal Executive Officer)
Peter Pflaum                     (Principal Financial Officer)

/s/ Edmund M. Lundgren           Vice President and Director      April 15, 1999
-----------------------------
Edmund M. Lundgren

/s/ Allan D. Lundgren            Vice President, Secretary/       April 15, 1999
-----------------------------    Treasurer and Director
Allan D. Lundgren

         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.


                                       46
<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
       -------

         10.91    Amended and Restated Revolving Construction and Development
                  Loan Agreement dated December 23, 1998, by and between the
                  Company and U.S. Bank National Association.

         10.92    Fourth Amendment and Restatement of Promissory Note, dated as
                  of December 23, 1998, of the Company and U.S. Bank National
                  Association.

         10.93    Fourth Amendment to Letter Agreement, dated December 24, 1998,
                  between the Company and U.S. Bank National Association.

         10.94    Letter dated March 1, 1999, from Patrick C. Wells to the
                  Company, rescinding his Option Agreement and Option
                  Provisions.

         27.0     Financial Data Schedule.


                                       47
<PAGE>


LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES

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

                                                                          PAGE
                                                                          ----

INDEPENDENT AUDITORS' REPORT AS OF DECEMBER 31, 1997
   AND 1998 AND FOR THE YEARS THEN ENDED                                   49

REPORT OF INDEPENDENT ACCOUNTANTS
   FOR THE YEAR ENDED DECEMBER 31, 1996                                    50

CONSOLIDATED FINANCIAL STATEMENTS:
   Consolidated Balance Sheets as of December 31, 1997 and 1998            51
   Consolidated Statements of Operations and Retained Earnings for
      the Years Ended December 31, 1996, 1997, and 1998                    52
   Consolidated Statements of Cash Flows for the Years Ended
      December 31, 1996, 1997, and 1998                                    53
   Notes to Consolidated Financial Statements                            54 - 65


                                       48
<PAGE>



INDEPENDENT AUDITORS' REPORT


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


We have audited the accompanying consolidated balance sheets of Lundgren Bros.
Construction, Inc. and Subsidiaries (the Company) as of December 31, 1997 and
1998, and the related consolidated statements of operations and retained
earnings and of cash flows for the years 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 audits. The
consolidated financial statements of the Company as of December 31, 1996 and for
the year then ended were audited by other auditors whose report, dated March 7,
1997, expressed an unqualified opinion on those statements.

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 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 1998, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.



/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 25, 1999 


                                       49
<PAGE>


                       REPORT OF INDEPENDENT ACCOUNTANTS


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

We have audited the accompanying consolidated statements of income and retained
earnings and cash flows of Lundgren Bros. Construction, Inc. and Subsidiaries
(the "Company") for the year ended December 31, 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 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 consolidated results of operations and
cash flows of Lundgren Bros. Construction, Inc. and Subsidiaries for the year
ended December 31, 1996 in conformity with generally accepted accounting
principles.



/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 7, 1997




                                       50
<PAGE>


LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES

<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------------------

                                                                          1997        1998
<S>                                                                     <C>         <C>
ASSETS

   Cash and cash equivalents                                            $  1,979    $  2,257
   Restricted cash                                                         1,947       2,662
   Receivables, net                                                        1,410       1,660
   Notes receivable - affiliates                                           1,066       1,465
   Deposits and prepaid expenses                                           3,042       2,528
   Inventories                                                            35,614      39,601
   Income taxes receivable                                                   334          --
   Land option and earnest money deposits                                  1,138       2,166
   Property and equipment, net                                             1,517       1,620
   Deferred income taxes                                                     206         513
   Other assets                                                            4,531       5,015
                                                                        --------    --------
                                                                        $ 52,784    $ 59,487
                                                                        ========    ========

LIABILITIES AND STOCKHOLDERS' EQUITY

   Obligations under bank lines of credit                               $  7,457    $  3,499
   Debt obligations                                                       27,730      31,905
   Obligations under capital leases                                          447         424
   Accounts payable                                                        7,185       8,619
   Cost to complete sold homes                                               469       2,676
   Customer deposits                                                       1,060       2,200
   Accrued expenses                                                        1,687       1,889
   Income taxes payable                                                       --         813
                                                                        --------    --------
                                                                          46,035      52,025

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                                                       6,650       7,363
                                                                        --------    --------
                                                                           6,749       7,462
                                                                        --------    --------
                                                                        $ 52,784    $ 59,487
                                                                        ========    ========
</TABLE>

See notes to consolidated financial statements.


                                       51
<PAGE>


LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------------------------------------

                                                                 1996         1997         1998
<S>                                                            <C>          <C>          <C>
REVENUES                                                       $ 69,798     $ 68,658     $ 91,296

COST OF REVENUES                                                 59,052       60,839       80,323
                                                               --------     --------     --------
            Gross profit                                         10,746        7,819       10,973

OPERATING EXPENSES:
   Selling                                                        2,728        2,712        3,192
   General and administrative                                     4,510        3,816        4,624
                                                               --------     --------     --------

                                                                  3,508        1,291        3,157

OTHER INCOME (EXPENSES):
   Interest                                                      (1,811)      (2,450)      (2,268)
   Other, net                                                       168           23          196
                                                               --------     --------     --------
            Income (loss) from continuing operations before
               income taxes                                       1,865       (1,136)       1,085

INCOME TAX PROVISION (BENEFIT)                                      709         (489)         372
                                                               --------     --------     --------
            Income (loss) from continuing operations              1,156         (647)         713
                                                               --------     --------     --------

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

NET INCOME (LOSS)                                                 1,011         (647)         713

RETAINED EARNINGS AT BEGINNING OF YEAR                            6,286        7,297        6,650
                                                               --------     --------     --------

RETAINED EARNINGS AT END OF YEAR                               $  7,297     $  6,650     $  7,363
                                                               ========     ========     ========

INCOME (LOSS) PER SHARE - basic and diluted:
   Continuing operations                                       $    109     $    (61)    $     67
   Discontinued operations                                          (14)          --           --
                                                               --------     --------     --------

   Net income (loss)                                           $     95     $    (61)    $     67
                                                               ========     ========     ========

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

See notes to consolidated financial statements.


                                       52
<PAGE>


LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------------------------------------

                                                                              1996         1997         1998
<S>                                                                         <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                                        $  1,011     $   (647)    $    713
   Loss from discontinued operations                                             145           --           --
                                                                            --------     --------     --------
            Income (loss) from continuing operations                           1,156         (647)         713
   Adjustments to reconcile income (loss) from continuing operations to
         net cash (used in) provided by continuing operating activities:
      Depreciation and amortization                                              386          331          402
      Amortization of debt issuance costs                                         68          120          120
      Increase in cash surrender value of life insurance                        (486)        (440)        (437)
      Deferred income taxes                                                      (55)        (140)        (307)
      (Gain) loss on disposal of property and equipment                           (3)          --           10
      Gain on sale of investment                                                (123)          --           --
      Changes in operating assets and liabilities                             (2,084)       2,527        1,171
                                                                            --------     --------     --------
            Net cash (used in) provided by continuing
               operating activities                                           (1,141)       1,751        1,672

   Net cash used in discontinued operations                                     (374)        (115)          --
                                                                            --------     --------     --------
            Net cash (used in) provided by operating activities               (1,515)       1,636        1,672

CASH FLOWS FROM INVESTING ACTIVITIES:
   Expenditures for property and equipment                                      (343)        (365)        (522)
   Proceeds on disposal of property and equipment                                  4           57            7
   Proceeds from sale of investment                                              159           --           --
   Other                                                                          14           (8)           5
                                                                            --------     --------     --------
            Net cash used in investing activities                               (166)        (316)        (510)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from bank lines of credit                                         34,616       32,705       36,548
   Payment of principal on bank lines of credit                              (35,279)     (28,235)     (40,506)
   Proceeds from debt obligations                                             45,914       40,687       58,784
   Payment of principal on debt obligations                                  (44,786)     (45,669)     (55,687)
   Payment of principal on capital lease obligations                              (6)         (52)         (23)
   Payment of debt issuance costs                                               (509)         (30)          --
                                                                            --------     --------     --------
            Net cash used in financing activities                                (50)        (594)        (884)
                                                                            --------     --------     --------

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                              (1,731)         726          278

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                 2,984        1,253        1,979
                                                                            --------     --------     --------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                    $  1,253     $  1,979     $  2,257
                                                                            ========     ========     ========
</TABLE>

See notes to consolidated financial statements.


                                       53
<PAGE>


LUNDGREN BROS. CONSTRUCTION, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(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 99% of these funds
          being held in the Company's principal banking institution at December
          31, 1997 and 1998. 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 development and construction costs
          onto its customers and expects to be able to do so in the


                                       54
<PAGE>


          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 - The Company measures any impairments of its inventories
          of land held for future development, land under development, developed
          land, and homes under construction as the amount by which carrying
          value exceeds the fair value of the asset. Fair value is the amount at
          which a property could be bought or sold (less transaction costs) in a
          current transaction between willing parties. Model home inventories
          are homes which are constructed for showcasing and marketing the
          Company's product offerings. Model home inventories are measured for
          impairment based upon the amount by which carrying value exceeds fair
          value less costs to sell. Provisions to reduce land and housing
          inventories to the lower of cost or fair value less costs to sell were
          not significant for all periods presented. Sold units are expensed on
          a specific identification basis as cost of sales. Included in
          inventories are related interest and property taxes.

          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.

          LONG LIVED ASSETS - Impairment of long-lived assets is reviewed
          annually or when events and circumstances warrant an earlier review.
          In accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
          LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.

          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


                                       55
<PAGE>


          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.

          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
          weighted average outstanding shares of common stock for 1996, 1997,
          and 1998 are 10,625 shares. The basic and diluted amounts are the same
          because the Company had no dilutive securities outstanding 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.

          FINANCIAL INSTRUMENTS - The Company believes that fair value
          approximates recorded values for such financial instruments as cash
          and cash equivalents, trade receivables and payables, short-term debt
          and option deposits because of the typically liquid, short-term
          nature, market rate terms, and lack of specific concentration of these
          instruments. The fair value of the 1993 and 1996 subordinated
          debentures cannot be readily determined as they are not actively
          traded on the open market.

          NEW ACCOUNTING STANDARDS - In June 1997, the Financial Accounting
          Standards Board (FASB) issued Statement of Financial Accounting
          Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME.
          Comprehensive income includes net income and several other items that
          current accounting standards require to be recognized outside of net
          income. This standard requires enterprises to display comprehensive
          income and its components in financial statements, to classify items
          of comprehensive income by their nature in financial statements, and
          to display the accumulated balances of other comprehensive income in
          stockholders' equity separately from retained earnings and additional
          paid-in capital. The Company adopted SFAS No. 130 during 1998, and
          there were no items of other comprehensive income for all periods
          presented.

          In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
          OF AN ENTERPRISE AND RELATED INFORMATION, replacing SFAS No. 14 and
          its amendments. This standard requires enterprises to report certain
          information about products and services, activities in different
          geographic areas, reliance on major customers, and to disclose certain
          operating segment information in their financial statements. Operating
          segments are components of an enterprise for which financial
          information is available and evaluated by the enterprise's chief
          operating decision-maker in allocating resources and assessing
          performance. The Company adopted SFAS No. 131 during 1998. The Company
          has determined that it operates in one segment. In addition, all long
          lived assets are located in, and all revenue is derived from,
          customers within Minnesota.


                                       56
<PAGE>


          During 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
          INSTRUMENTS AND HEDGING ACTIVITIES, which is effective for the Company
          in 2000. The Company is currently evaluating the impact, if any, of
          this statement.

          RECLASSIFICATIONS -- Certain reclassifications were made to the 
          December 31, 1997 consolidated financial statements in order to 
          conform to the presentation of the December 31, 1998 consolidated 
          financial statements. These reclassifications had no impact on 
          consolidated net income or retained earnings as previously reported.

2.        SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                               December 31
                                                                            -----------------
                                                                             1997      1998

<S>                                                                         <C>       <C>    
          Receivables:
             Trade                                                          $ 1,014   $   724
             Escrows                                                            336       623
             Contracts and notes                                                  6         3
             Employees and officers                                              37        16
             Other                                                               72       399
                                                                            -------   -------
                                                                              1,465     1,765
             Less allowance for doubtful accounts                                55       105
                                                                            -------   -------
                                                                            $ 1,410   $ 1,660
                                                                            =======   =======

          Approximate amount of receivables due within one year             $ 1,410   $ 1,660
                                                                            =======   =======

          Inventories:
             Homes under construction                                       $13,808   $19,813
             Model homes                                                        492     2,138
             Developed lots                                                  12,338    10,741
             Land under development                                              --     1,057
             Land held for future development                                 8,976     5,852
                                                                            -------   -------
                                                                            $35,614   $39,601
                                                                            =======   =======

          Property and equipment:
             Land                                                           $   193   $   193
             Building and leasehold improvements                              1,427     1,452
             Furniture and fixtures                                           1,080     1,449
             Equipment                                                          687       742
                                                                            -------   -------
                                                                              3,387     3,836
             Less accumulated depreciation and amortization                   1,870     2,216
                                                                            -------   -------
                                                                            $ 1,517   $ 1,620
                                                                            =======   =======

          Other assets:
             Cash surrender value of life insurance                         $ 3,545   $ 3,982
             Debt issuance costs, net of accumulated amortization of
                $320 and $440 at December 31, 1997 and 1998, respectively       758       638
             Other                                                              228       395
                                                                            -------   -------
                                                                            $ 4,531   $ 5,015
                                                                            =======   =======
</TABLE>


                                       57
<PAGE>


<TABLE>
<CAPTION>
                                                                                                          December 31
                                                                                                ------------------------------
                                                                                                    1997              1998

<S>                                                                                             <C>               <C>
          Accrued expenses:
             Payroll, bonuses, and payroll taxes                                                $        609      $      1,147
             Other                                                                                     1,078               742
                                                                                                ------------      ------------
                                                                                                $      1,687      $      1,889
                                                                                                ============      ============
</TABLE>

<TABLE>
<CAPTION>
                                                                                                 December 31
                                                                              ------------------------------------------------
                                                                                  1996              1997              1998

<S>                                                                           <C>               <C>               <C>
          Interest expense:
             Interest                                                         $      3,578      $      4,104      $      4,380
             Less capitalized interest                                              (1,835)           (1,774)           (2,232)
             Amortization of debt issuance costs                                        68               120               120
                                                                              ------------      ------------      ------------
                                                                              $      1,811      $      2,450      $      2,268
                                                                              ============      ============      ============

          Other income (expense):
             Gain on sale of investment                                       $        123      $         -       $        -
             Other, net                                                                 45                23               196
                                                                              ------------      ------------      ------------
                                                                              $        168      $         23      $        196
                                                                              ============      ============      ============
</TABLE>

<TABLE>
<CAPTION>
                                                                                                 December 31
                                                                              ------------------------------------------------
                                                                                  1996              1997              1998

<S>                                                                           <C>               <C>               <C>
          Changes in operating assets and liabilities:
             Restricted cash                                                  $       (256)     $       (875)     $       (715)
             Receivables                                                              (229)             (144)             (209)
             Deposits and prepaid expenses                                            (871)             (456)              (18)
             Inventories                                                               420             4,203            (3,099)
             Land option and earnest money deposits                                    126              (343)             (746)
             Other assets                                                              (11)              (91)             (172)
             Accounts payable                                                       (1,294)            1,359             1,434
             Cost to complete sold homes                                              (256)             (486)            2,207
             Customer deposits                                                        (157)             (189)            1,140
             Accrued expenses                                                          431              (213)              202
             Income taxes                                                               13              (238)            1,147
                                                                              ------------      ------------      ------------
                                                                              $     (2,084)     $      2,527      $      1,171
                                                                              ============      ============      ============

          Cash paid (received) for:
             Interest, net of amount capitalized                              $      1,408      $      2,224      $      2,299
             Income taxes                                                     $        816      $       (112)     $       (468)
</TABLE>

          The Company acquired land for development under promissory notes with
          the sellers aggregating $4,318, $2,242, and $305 for the years ended
          December 31, 1996, 1997, and 1998, respectively.




                                       58
<PAGE>


3.        DISCONTINUED OPERATIONS

          Effective November 30, 1996, the Company adopted a plan to discontinue
          operations of its remodeling division. Accordingly, the 1996 statement
          of operations reports separately the operating results of the
          division.

          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 year ended December 31:

                                                                   1996

          Sales                                                  $ 3,772
          Loss before income taxes                                 (169)
          Loss from discontinued operations                        (104)

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. In May 1998, the Company accepted a note receivable
          from another related LLC for land development costs totaling $229. 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 was $1,066 and $1,297 as of December 31, 1997 and 1998,
          respectively. The LLCs will develop the land and the Company has
          option agreements with the LLCs that gives the Company exclusive
          rights, but no obligation, to purchase the developed lots under terms
          similar to other agreements with nonrelated parties.

5.        EQUITY INVESTMENTS

          At December 31, 1997 and 1998, 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
          accounted for by the equity method. The Company's aggregate investment
          in these partnerships was approximately $136 and $164 at December 31,
          1997 and 1998, respectively. The Company's share of the partnerships'
          operating results was approximately $11, $13, and $33 for the years
          ended December 31, 1996, 1997, and 1998, respectively.

6.        LINES OF CREDIT AND DEBT OBLIGATIONS

          The Company has a working capital line of credit of $4,750 subject to
          renewal May 31, 1999, 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, 1998, borrowings under the line of credit
          are limited to $4,482, which is the sum of



                                       59
<PAGE>

          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 $3,083 and $658 at December 31, 1997 and 1998, 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 $3,500, expiring June 30, 1999, with interest at 3% over the
          prime rate, due on demand. At December 31, 1998, borrowings under the
          line of credit are limited to $2,767 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 $3,344
          and $1,536 at December 31, 1997 and 1998, respectively.

          The Company also has a working capital line of credit of $1,500, due
          on demand, subject to renewal May 31, 1999, with interest at 1% over
          the prime rate. At December 31, 1998, borrowings under the line of
          credit are limited to the lesser of $1,500, or 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
          personally guaranteed by the stockholders. The Company had an
          outstanding balance on the line of credit of $930 and $1,230 at
          December 31, 1997 and 1998, respectively.

          A subsidiary of the Company has a working capital line of credit of
          $125 subject to renewal April 15, 1999, with interest at 4.5% over the
          three-month U.S. treasury bill interest rate (5.5% and 4.5% at
          December 31, 1997 and 1998, respectively), due on demand. The Company
          had an outstanding balance on the line of credit of $100 and $75 at
          December 31, 1997 and 1998, respectively.

          The prime rate was 8.50% and 7.75% at December 31, 1997 and 1998,
          respectively.

          Other debt obligations at December 31, 1997 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                                                                               December 31
                                                                                                     ------------------------------
                                                                                                         1997              1998

          <S>                                                                                        <C>               <C>
          Construction loans on single family homes, with interest at 1%
             to 3% above the prime rate                                                              $      9,253      $     15,254
          Development loans, with interest at 2% to 5% above the prime rate,
             but not to be less than 8% or more than 18%                                                    6,128             7,282
          Promissory notes, with interest at 6% to 10.5%                                                    4,658             1,961
          1996 subordinated debenture series, with interest at 11%                                          3,000             3,000
          1993 subordinated debenture series, with interest at 10%                                          2,945             2,945
          Street, sewer, and water assessments on land under development
             and lots held for sale, with interest at 7% to 11%                                             1,047               864
          Installment loans, with interest from 5.9% to 11%                                                   622               599
          Other                                                                                                77                -
                                                                                                     ------------      ------------
                                                                                                     $     27,730      $     31,905
                                                                                                     ============      ============
</TABLE>


                                       60
<PAGE>

          The construction loans, development loans, and promissory notes are
          collateralized by substantially all of the Company's inventories, and
          in some instances, the personal guarantees of the 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 beginning in 1999. 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.

          The weighted average interest rate on short-term borrowings was 10.02%
          and 9.82% at December 31, 1997 and 1998, respectively.

          The approximate principal payments on obligations, based on the
          scheduled maturity dates at December 31, 1998, are set forth by year
          below.

          1999                                                $      17,191
          2000                                                        3,463
          2001                                                        2,338
          2002                                                        2,637
          2003                                                        2,945
          Thereafter                                                  3,331
                                                              -------------
                                                              $      31,905
                                                              ==============


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 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.



                                       61
<PAGE>


          CAPITAL LEASES - Minimum future lease obligations under capital lease
          for the Company's primary office building as of December 31, 1998, are
          as follows:

<TABLE>
          <S>                                                                                           <C>         
          Year ending December 31:
             1999                                                                                       $        117
             2000                                                                                                117
             2001                                                                                                117
             2002                                                                                                117
             2003                                                                                                117
             2004 to 2009                                                                                        682
                                                                                                        ------------
          Total minimum lease payments                                                                         1,267
          Less amount representing interest and consumer price index adjustment                                  843
                                                                                                        ------------
          Present value of minimum lease payments                                                       $        424
                                                                                                        ============
</TABLE>

          Capital lease and real estate tax payments to the affiliated
          partnership were $141, $150, and $153 for the years ended December 31,
          1996, 1997, and 1998, respectively.

          The cost and accumulated amortization of a building and equipment
          under capital leases were $607 and $369 at December 31, 1997, and $607
          and $389 at December 31, 1998, respectively.

          OPERATING LEASES - The Company leases model homes, agreements under
          which the Company is committed to rentals of $83 in 1999. The Company
          also leases vehicles, for which rentals are committed of $42 in 1999.
          In addition, the Company leases an office and warehouse building with
          annual base rentals of approximately $40 through April 1999. Certain
          equipment is leased under operating leases with terms of one year or
          less. Rental expense was approximately $217, $397, and $764 for the
          years ended December 31, 1996, 1997, and 1998, 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
                                                      ------------------------
                                                         1997           1998

          Option payments                             $   1,138      $   2,066
          Earnest money deposits                             -             100
                                                      ---------      ---------
                                                      $   1,138      $   2,166
                                                      =========      =========

          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 $3,630 at December 31, 1998, related to the earnest
          money deposits.



                                       62
<PAGE>


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 $260
          and $398 for the years ended December 31, 1996 and 1998, 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 $54, $45, and $61 were made for the years ended
          December 31, 1996, 1997, and 1998, 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, 1996, 1997, or 1998.




                                       63
<PAGE>


10.       INCOME TAXES

          The components of the provision for income taxes for the years ended
December 31, 1996, 1997, and 1998 are as follows:

<TABLE>
<CAPTION>
                                                                                                   December 31
                                                                                            -------------------------
                                                                                            1996       1997     1998

<S>                                                                                         <C>       <C>       <C>
Currently payable (receivable):
   Federal                                                                                  $ 579     $(355)    $ 605
   State                                                                                      185         6        74
Deferred                                                                                      (55)     (140)     (307)
                                                                                            -----     -----     -----
      Income tax provision for continuing operations                                          709      (489)      372

Income tax provision for:
   Discontinued operations                                                                    (90)       --        --
                                                                                            -----     -----     -----
                                                                                            $ 619     $(489)    $ 372
                                                                                            =====     =====     =====
</TABLE>

          Net deferred income tax assets include the following:

<TABLE>
<S>                                                                                         <C>       <C>       <C>
Depreciation                                                                                $  95     $  97     $ 136
Accrued bonus pay                                                                              38        --        --
Discontinued operations                                                                        25        --        --
Interest expensed on land mortgages                                                          (259)     (291)     (299)
Estimated costs to complete lots sold                                                          90       108       411
Accrued vacation pay                                                                           44        48        67
Inventory capitalization                                                                       53        86       116
Allowance for doubtful accounts receivable                                                     21        22        46
Accrued warranty                                                                               19        19        38
State net operating loss carryforward (expiring 2012)                                          --       115        --
Other                                                                                           4         2        (2)
                                                                                            -----     -----     -----
                                                                                            $ 130     $ 206     $ 513
                                                                                            =====     =====     =====
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                                    December 31
                                                                                             -------------------------
                                                                                             1996      1997      1998

<S>                                                                                          <C>      <C>        <C>
          Statutory income tax rate                                                          35.0%    (35.0)%    35.0%

          Increase (reduction) in tax resulting from:
              State taxes, net of federal benefits                                            7.2      (9.8)      5.8
              Increase in cash surrender value of life insurance
                 policies in excess of policy premiums paid                                  (3.6)     (4.0)     (3.4)
              Effect of graduated rate                                                       (1.0)      1.0      (1.0)
              Other                                                                            .4       4.8      (2.1)
                                                                                             ----     -----      ----
                                                                                             38.0%    (43.0)%    34.3%
                                                                                             ====     =====      ====
</TABLE>




                                       64
<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 statements of the
          Company.

13.       SUBSEQUENT EVENT

          On February 16, 1999, the company's shareholders entered into a
          nonbinding agreement with a third party to sell all of the issued and
          outstanding shares of the Company. Among other things, the transaction
          is subject to the execution of a definitive agreement and satisfactory
          completion of due diligence. There can be no assurance that the
          transaction will be completed as contemplated.

                                   * * * * * *


                                       65