<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549
                                _______________

                                  FORM 10-KSB
                                _______________


[X]   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
      For the fiscal year ended December 31, 1997

                                 OR

[_]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
      For the transition period from                     to
                                     -------------------    -------------------

                        Commission file number 0-21378


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


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


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

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

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

                                     None


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

                                 Common Stock
                               (Title of class)


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


    Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
                                     ----

    Revenues of the issuer for the year ended December 31, 1997 were
$21,721,000.

    The aggregate market value of the voting stock held by non-affiliates of the
issuer on March 25, 1998 was $2,480,000.

    The number of shares outstanding of each of the issuer's classes of common
stock on March 25, 1998 was as follows:


           Common Stock (par value $.01 per share) 1,883,764 shares

                      DOCUMENTS INCORPORATED BY REFERENCE

    Definitive Proxy Statement relating to the Company's 1998 Annual Meeting to
be filed hereafter (incorporated into Part III hereof).

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

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


                                    PART I

ITEM 1.  BUSINESS.


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

General

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

    During 1997, prices for the Company's homes ranged from $59,990 to $227,990,
with an average sales price of $132,400. The Company believes that its focus on
affordable housing and history of developing and delivering these types of homes
since 1976 has helped it to develop a positive reputation in this market with
homebuyers.

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

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

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

The Homebuilding Industry

    The homebuilding industry is cyclical and is significantly affected by
changes in general and local economic conditions, such as employment levels,
availability of land, availability and cost of financing land acquisition,
development and construction, interest rates, consumer confidence and housing
demand, as well as changes in elected officials and changes in government
regulation. A variety of other factors affect the housing industry and demand
for new homes, including changes in costs associated with home ownership such as
increases in property taxes and energy costs, changes in consumer preferences,
demographic trends and the availability of and changes in mortgage financing
programs. Homebuilders are subject to various risks, including conditions of
supply and demand in local markets, availability and cost of land, building
materials and labor, weather conditions, delays in construction schedules, cost
overruns, the entitlement process, the effect of moratoriums and environmental
controls, decreased availability of homeowners insurance, and increases in real
estate taxes and other local government fees. The Company's business

                                       2
<PAGE>

could be adversely affected in the event the Company is not able to attract
qualified subcontractors for its projects. Certain of the Company's projects are
long-term in nature and are particularly susceptible to cyclical real estate
conditions and the other risks outlined above due to the significant up-front
expenditures required and the length of time required to achieve profits from
these projects.

Southern California Housing Markets

    The Company currently conducts all of its business in the Southern
California Counties of San Bernardino, Riverside and Los Angeles. The Company
believes that the depressed economic and real estate conditions in California
over the last several years have adversely affected its results of operations,
most particularly in the high desert region of San Bernardino County. Due to the
large number of defense contractors and major corporations located in
California, the state's economy has been adversely affected by military spending
cutbacks. The prolonged economic downturn in California continued in 1997 in
some of the geographic areas of Southern California in which the Company
conducted operations and had a material adverse affect on the Company's
business, financial condition and results of operations. See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

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

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

                                       3
<PAGE>

Summary of Residential Projects

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

<TABLE>
<CAPTION>
                      TABLE I - PROJECTS COMPLETED SINCE 1987
<CAPTION>
                                                                                          Total
                                                                                          Number
                                                                               Year         of        Sales Price
Project                                   City                 County        Completed     Homes        Range (1)
-------                                   ----                 ------        ---------    ------      -----------
<S>                                    <C>                 <C>               <C>           <C>       <C>
Liberty Village                        Victorville         San Bernardino      1987         784       $ 49,990-$85,990
Moreno Del Rey                         Moreno Valley       Riverside           1987         119         89,990-123,990
Atlantic Village                       Palmdale            Los Angeles         1988         127         92,990-105,990
Catalina Collection                    Moreno Valley       Riverside           1989         124         99,990-155,990
Southlake                              Moreno Valley       Riverside           1989         185        104,990-154,990
Pacific Village                        Palmdale            Los Angeles         1991         283        112,990-210,990
Liberty Village                        Victorville         San Bernardino      1991         446         80,990-108,990
Country Village                        Victorville         San Bernardino      1991         189         85,990-135,990
Mustang Series at Northfork            Murrieta            San Bernardino      1992         123        129,990-198,990
Hunter Classic at Northfork            Murrieta            San Bernardino      1992          77        194,990-255,990
Paloverde at Eagle Ranch               Victorville         San Bernardino      1992         116        112,990-147,990
American Traditions                    Palmdale            Los Angeles         1993          89         99,990-127,990
Estates of Chaparral at Eagle Ranch    Victorville         San Bernardino      1994          88        169,990-219,990
Summerplace                            Indio               Riverside           1994         156         84,990-108,990
Dakota at Eagle Ranch                  Victorville         San Bernardino      1995          79        102,990-133,490
Spirit at Eagle Ranch                  Victorville         San Bernardino      1995         104        119,990-153,990
Pride at Eagle Ranch                   Victorville         San Bernardino      1995          39         89,990-127,990
American Traditions                    Adelanto            San Bernardino      1995         401         79,990-100,990
Harmony                                Adelanto            San Bernardino      1995          25         97,990-130,990
Hometown                               Adelanto            San Bernardino      1995         526          72,990-85,990
Victory Lenwood                        Lenwood             San Bernardino      1995          24          53,990-63,990
Pride at Wildrose                      Corona              Riverside           1995         102        126,990-151,490
Spirit                                 Murrieta            Riverside           1995         261        133,990-171,990
Pride at Tradition East                Chandler            Maricopa            1995          73 (2)     91,990-121,990
Reunion at Tradition East              Chandler            Maricopa            1995         103 (2)     85,990-110,990
Victory at Amberlea                    Phoenix             Maricopa            1995          55 (2)      66,990-91,990
Hometown                               Las Vegas           Clark               1995          63 (2)     84,990-105,990
Reunion                                Las Vegas           Clark               1995          58 (2)     99,990-122,990
Victory                                Las Vegas           Clark               1995          22 (2)      72,990-94,990
Ventana                                Victorville         San Bernardino      1996         196        136,990-169,990
Reunion                                Adelanto            San Bernardino      1997          72         91,990-118,990
Spirit                                 Corona              Riverside           1997         102        170,000-219,000
                                                                                          -----
  Total                                                                                   5,211
                                                                                          =====
</TABLE>

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

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

                                       4
<PAGE>

     Table II presents information as of December 31, 1997 relating to the
Company's projects in which construction is either in progress or is in the
planning process.  All homes are single-family detached homes. In all cases the
Company either owns the land or has a contract or option to acquire the land,
and all such land is entitled.


                    TABLE II - CURRENT AND PLANNED PROJECTS

<TABLE>
<CAPTION>

                                                            Estimated Number of         Homes            Homes Sites
                                                                 Homes at            Closed as of       Remaining as
              Project                    Location (1)          Completion(2)           12/31/97          of 12/31/97
              -------                    -----------        -------------------     ------------        ------------
<S>                                      <C>                <C>                     <C>                 <C>
HIGH DESERT - San Bernardino and Los Angeles Counties
-----------
Eagle Ranch
   Freedom (5)                            Victorville              166                    16                  150
   Additional Land (6)                    Victorville              888                     0                  888
                                                                 -----                   ---                -----
        Total Eagle Ranch                                        1,054                    16                1,038
                                                                 -----                   ---                -----
Adelanto
   Victory Lane                           Adelanto                 331                   330                    1
   Winners Circle                         Adelanto                  12                    10                    2
                                                                 -----                   ---                ------
   Total Adelanto                                                  343                   340                    3
                                                                 -----                   ---                ------
Other
   Spirit                                 Palmdale                  81                    67                   14
   Triumph                                Palmdale                 180                     0                  180
   Triumph (7)                            Lancaster                 78                    41                   37
   Vista Verde (8)                        Victorville              756                     0                  756
                                                                 -----                   ---                -----
   Total Other                                                   1,095                   108                  987
                                                                 -----                   ---                ------
   Total High Desert                                             2,492                   464                2,028
                                                                 -----                   ---                ------

INLAND - San Bernardino and Riverside Counties
------
Bella Vita                                Fontana                   42                     7                   35
Wildwood                                  Fontana                   62                     0                   62
Falcon Pointe (9)                         Fontana                   76                     0                   76
Hometown (formerly Reunion)               Lake Elsinore             63                    47                   16
Desert Pride (formerly Reunion)           La Quinta                150                    27                  123
Hidden Oaks (10)                          Moreno Valley            139                     0                  139
                                                                 -----                   ---                ------
              Total Inland                                         532                    81                  451
                                                                 -----                   ---                ------

TOTAL COMPANY                                                    3,024                   545                2,479
                                                                 =====                   ===                =====
</TABLE>

<TABLE>
<CAPTION>
                                                            Anticipated or
                                                             Actual Year
                                                              of Initial               Sales Price
              Project                                         Closings(3)                Range(4)
              -------                                       --------------          -----------------
<S>                                                         <C>                     <C>
HIGH DESERT - San Bernardino and Los Angeles Counties
-----------
Eagle Ranch
   Freedom (5)                                                    1997               $106,990-128,540
   Additional Land (6)                                             n/a                            n/a

        Total Eagle Ranch
Adelanto
   Victory Lane                                                   1993                   59,990- 82,990
   Winners Circle                                                 1996                   89,990-119,990

   Total Adelanto

Other
   Spirit                                                         1995                  139,000-166,000
   Triumph                                                        1998                   89,990-109,990
   Triumph (7)                                                    1996                   75,990- 92,990
   Vista Verde (8)                                                 n/a                            n/a

   Total Other

   Total High Desert

INLAND - San Bernardino and Riverside Counties
------
Bella Vita                                Fontana                 1997                  181,990-221,990
Wildwood                                  Fontana                 1998                  107,990-144,990
Falcon Pointe (9)                         Fontana                 1998                  149,000-169,000
Hometown (formerly Reunion)               Lake Elsinore           1995                   99,990-141,990
Desert Pride (formerly Reunion)           La Quinta               1995                  121,990-149,990
Hidden Oaks (10)                          Moreno Valley           1998                   89,990-119,990

              Total Inland

TOTAL COMPANY
</TABLE>

_____________________________

(1)  Victorville, Adelanto and Fontana are located in San Bernardino County.
     Palmdale and Lancaster are located in Los Angeles County. Lake Elsinore, La
     Quinta and Moreno Valley are located in Riverside County.
(2)  Estimated number of homes at completion is subject to change and there can
     be no assurance that the Company will build these homes.
(3)  Anticipated year of initial closing is based on the Company's current
     planning estimates and forecasts, new orders and the status of construction
     at these projects, and therefore is subject to change.
(4)  Sales price range reflects estimated base price, excluding any lot
     premiums, buyer-selected options and incentives, which vary from project to
     project.
(5)  The Company is the managing general partner of, and has a 50% interest in,
     Freedom-Eagle Ranch Housing Partners ("FERHP"), the limited partnership
     that owns this project.
(6)  Represents land sold by the Company in June 1997 to various investors
     provided by USA Commercial Real Estate Group ("USA Real Estate").  The
     investors granted the Company a six-year option to periodically repurchase
     portions of the property, subject to annual minimum repurchase thresholds,
     for the development of single-family homes.  If the Company fails to
     repurchase the minimum number of lots in any year, the option terminates.
     The investors are to receive one half of the cash generated upon the sale
     of these single-family homes constructed by the Company on the repurchased
     lots, and USA Real Estate is to receive a fee of $1,000 for each home sold.
     If the Company approves a bulk sale of these lots by the investors, the
     Company is to receive one half of any profits earned.  Thomas A. Hantges, a
     member of the Company's Board of Directors, owns 67% of USA Real Estate.
     See "Item 7.  Financial Statements and Supplementary Data, Note 10" herein,
     and "Certain Relationships and Related Transactions" in the Company's Proxy
     Statement for its 1998 Annual Meeting of Stockholders (the "1998 Proxy
     Statement"), which, when filed pursuant to Regulation 14A under the
     Securities Act of 1934, will be incorporated by reference in this Annual
     Report on Form 10-KSB.
(7)  The Company is the managing general partner of, and has a 50% interest in,
     Triumph-Lancaster Housing Partners ("Triumph"), the limited partnership
     that owns this project.  The Gibbs Family Trust, of which Thomas E. Gibbs,
     Jr. a former member of the Company's Board of Directors is a beneficiary
     and a trustee, holds a 50% limited partner's interest in Triumph.  See
     "Item 7.  Financial Statements and Supplementary Data, Note 10" herein, and
     "Certain Relationships and Related Transactions" in the Company's 1998
     Proxy Statement.

                                       5
<PAGE>

(8)  Represents additional land owned by the Company, which may be used for
     future projects or may be sold in a bulk sale.
(9)  USA Commercial Mortgage Company, Inc. ("USA") has opened an escrow to
     purchase the land for this project. Negotiations are in process with the
     Company and USA regarding the Company's participation in developing this
     property and fees and/or profits to be earned. Thomas A. Hantges owns 67%
     of USA. See "Item 7.  Financial Statements and Supplementary Data, Note 10"
     herein, and "Certain Relationships and Related Transactions" in the
     Company's 1998 Proxy Statement.
(10) In October 1997, the Company entered into a Development and Marketing
     Agreement with a third party to develop, construct, and market these lots
     owned by the third party.  All financing and bonding will be the
     responsibility of the third party.  The Company will receive compensation
     in the form of overhead draws, development fees and sales and marketing
     fees totaling approximately 8.0% of the gross sales price of the homes.
     The Company will assume the home warranty costs for which it will be paid
     $750 per house.

Land Acquisition and Development

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

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

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

    The Company historically has conducted some residential development
activities through partnerships in order to fund a portion of the Company's land
acquisition, model complex development costs and initial marketing expenditures.
The Company expects to continue to utilize such partnership arrangements when
management perceives a favorable opportunity. In 1996, the Company formed three
such limited partnerships, FERHP, Triumph and Spirit Corona 77, L.P. ("Spirit
77"), for certain projects in which the Company is the general partner and has a
50% interest. Additionally, in 1996 the Company was the maker of Secured
Participation Notes with ALG 1996-1 ("ALG") and Hunters Ridge Investment
Partners ("HRIP"), providing the holders with 45% and 50%, respectively, of a
certain project's net income. Thomas E. Gibbs, Jr., a former member of the
Company's Board of Directors, holds partnership interests in each of Triumph,
ALG and HRIP. See "Item 7. Financial Statements and Supplementary Data, Note 10"
herein, and "Certain Relationships and Related Transactions" in the Company's
1998 Proxy Statement.

    With respect to its landholdings, the Company maintains the flexibility to
sell parcels of land adjacent to existing phases of a project to other builders
in a single transaction or a series of transactions.  Sales of land and lots,
which are not the Company's principal business focus, are made to take advantage
of market opportunities that might exist from time to time or to generate needed
cash.  Accordingly, these sales vary from year to year depending on market
conditions.  Revenue from land sales totaled $933,000 in 1997.  The Company had
no land sales in 1996. Additionally, parcels of land owned by the Company and
adjacent to its residential projects may be zoned for

                                       6
<PAGE>

commercial use. To date, the Company has never built on commercial land, but
may later sell, lease or joint venture such land with commercial property
developers. See "Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Construction

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

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

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

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

    As a result of the limited amount of available working capital,
relationships with certain of its subcontractors have weakened due to the
Company's inability to pay all of its subcontractors and their suppliers on a
current basis. Numerous subcontractors and suppliers have filed liens, and some
are pursuing further legal action, including the initiation of lawsuits. The
Company has negotiated payment arrangements, as appropriate, in an effort to
settle these claims and release the liens. The Company does not believe that any
of these claims, in the aggregate, will have a material adverse financial effect
on the Company's business. However, if the Company continues to have disputes
with its subcontractors and suppliers, in the future it may be difficult for the
Company to attract and retain qualified subcontractors and suppliers who are
willing to work with the Company and the Company's business could be adversely
affected.

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

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

                                       7
<PAGE>

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

    The Company generally provides a one-year limited warranty of workmanship
and materials with each of its homes. In addition, California law provides a
ten-year period during which consumers can seek redress for structural defects
in new homes. The Company reserves against the possibility of charges relating
to its one-year warranty. In 1994, certain homeowners in one of the Company's
Southern California projects filed a complaint against the Company alleging
construction defects. See "Item 3. Legal Proceedings."

Marketing and Sales

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

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

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

    The Company maintains a design center in Southern California to provide
homebuyers with a greater visual presentation of the available amenities and
options, primarily in the area of flooring and window treatments.  Most of the
Company's homebuyers that have upgraded their flooring and window treatments
have utilized the Company's design center.

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

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

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

                                       8
<PAGE>

Customer Financing

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

    Substantially all homebuyers utilize long-term mortgage financing to
purchase a home and lenders generally make loans only to borrowers who earn
three to four times the total amount of the mortgage payment plus insurance and
property taxes. Therefore, adverse economic conditions such as increases in
unemployment and high mortgage interest rates can eliminate a substantial number
of potential homebuyers from the market. When necessary, the Company will pay a
fee to subsidize interest rates to assist homebuyers with financing. Under such
programs, lower interest rates on mortgages are provided to the Company's
homebuyers than would otherwise prevail under then-current market conditions.
Although mortgage financing for qualified homebuyers was readily available
during 1997, there can be no assurance that mortgage financing will remain
readily available to the Company's customers as a result of changing general
economic conditions and any restrictions of the ability of mortgage finance
markets to provide financing for the purchase of homes by homebuyers. The
Company attempts to minimize its exposure to interest rate fluctuations by
purchasing mortgage financing commitments that lock in the availability of funds
and interest rates at specified levels for a certain period of time and by
entering into hedging contracts, as it deems necessary. See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

    Most of the Company's current projects meet applicable Federal Housing
Administration ("FHA") or Veteran's Administration ("VA") requirements. In 1997
and 1996, FHA or VA financing was provided to a substantial number of purchasers
of the Company's homes. FHA and VA financing generally enables homebuyers to
purchase homes with lower down payments than the down payments required by
conventional mortgage lenders. The principal reason why certain of the Company's
projects may not meet applicable FHA or VA requirements is that the base price
of homes in those projects exceeds established FHA or VA maximum home prices.
The Company believes that the availability of FHA and VA financing broadens the
group of potential purchasers for the Company's homes. The VA financing limit is
$203,000. The FHA financing limit is $152,362 in San Bernardino and Riverside
Counties, and $170,362 in Los Angeles County. The FHA generally permits loans
for up to 97% of the value of the home.

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

Customer Service and Relations

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

  The Company provides each homebuyer with a Homebuyer's Information Booklet
describing area amenities and services, such as schools, health services and
emergency services. A Warranty and Information Guide identifies the appliances,
fixtures and heating/cooling and other systems installed in the house, and
provides information on warranties, maintenance and manufacturer information.
The Company's utilization of these sales and closing programs are designed to
reduce the prospective homebuyer's anxiety over relocating and to help the
homebuyer settle into the new neighborhood.

                                       9
<PAGE>

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

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

Competition and Market Forces

    The development and sale of residential properties is highly competitive.
Homebuilders, such as the Company, compete for desirable properties, financing,
raw materials and skilled labor. The Company competes for residential sales on
the basis of a number of interrelated factors, including location, reputation,
amenities, design, quality and price, with numerous large and small
homebuilders, including some homebuilders with nationwide operations and greater
financial resources than the Company. The Company also competes for residential
sales with individual resales of existing homes and condominiums and with
available rental housing. New entrants into the markets in which the Company
operates increases competition in those markets. As a result, at some of the
Company's projects, the Company has been required to provide homebuyers with
price discounts and other sales incentives in order to remain competitive. This
has resulted in reduced profitability or losses from some of the homes that the
Company has sold. Continued sales of homes and land at deeply discounted prices
by competitors, lenders and similar institutions in the markets where the
Company operates could have a material adverse effect on the Company's business,
financial condition and results of operation.

    The housing industry is cyclical and affected by consumer confidence levels
and prevailing economic conditions in general and by job availability and
interest rate levels in particular. A variety of other factors affect the
housing industry and demand for new homes, including changes in costs associated
with home ownership such as increases in property taxes and energy costs,
changes in consumer preferences, demographic trends and the availability of and
changes in mortgage financing programs.

Government Regulation and Environmental Matters

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

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

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

  The Company is also subject to a variety of local, state and federal statutes,
ordinances, rules and regulations concerning protection of the environment. The
particular environmental laws that apply to any given community vary

                                      10
<PAGE>

greatly according to the community site, the site's environmental conditions and
the present and former uses of the site. These laws may result in delays, cause
the Company to incur substantial compliance costs, and prohibit or severely
restrict development in certain environmentally sensitive regions or areas.
Homebuilding projects in California are especially susceptible to restrictive
government regulations and environmental laws. Environmental regulations can
also have an adverse impact on the availability and price of certain raw
materials such as lumber.

Bonds and Other Obligations

    The Company is frequently required, in connection with the development of
its projects, to post performance, maintenance and other bonds. The amount of
these bonds outstanding at any time varies in accordance with the Company's
pending development activities. In the event any such obligations are drawn upon
because of the Company's failure to build required infrastructure, the Company
would be obligated to reimburse the issuing surety company or bank. The Company
has never defaulted on any such bond. At December 31, 1997, there were
approximately $11,230,000 in outstanding bonds for such purposes.

Employees

    At December 31, 1997, the Company employed 51 persons. None of the Company's
employees are covered by collective bargaining agreements. The Company believes
that its relations with its employees are good. Certain of the subcontractors
that the Company engages are represented by labor unions or are subject to
collective bargaining arrangements.

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

    At March 25, 1998, Ira C. Norris, Thomas A. Hantges and Ronald L. Neeley,
directors of the Company, owned beneficially approximately 21.6%, 12.8% and 7.6%
of the Company's Common Stock, respectively. Due to this ownership position, Mr.
Norris, Mr. Hantges and Mr. Neeley acting together may be able to control the
affairs and policies of the Company and may be able to elect a sufficient number
of directors to control the Company's Board of Directors and to approve or
disapprove any matter submitted to a vote of stockholders. Furthermore, Mr.
Norris, Mr. Hantges and Mr. Neeley may have conflicts of interest with other
stockholders with respect to the affairs and policies of the Company. The
ownership positions of Mr. Norris, Mr. Hantges and Mr. Neeley, together with the
anti-takeover effect of certain provisions contained in the Company's Restated
Certificate of Incorporation and Restated Bylaws, may have the effect of
delaying, deferring or preventing a change in control of the Company. These
factors could have an adverse effect on the market price of the Company's Common
Stock.

Executive Officers of the Registrant

    The following are the names and respective ages as of December 31, 1997 of
the executive officers of the Company. The Company's executive offers are
elected by, and serve at, the discretion of the Board of Directors.


<TABLE>
<CAPTION>
Name                               Age                 Position
----                               ---                 --------
<S>                                <C>     <C>
Ira C. Norris.................      61     Chairman of the Board, President and
                                           Chief Executive Officer
David A. Fogg.................      47     Chief Financial Officer
Norman B. Gold................      45     Director of Finance
Lynn C. Parkes................      45     Controller and Secretary
Gary E. Sorley................      43     Vice President of Operations and Forward
                                           Planning
Sue Monaco....................      36     Vice President of Sales and Marketing
Michael L. Hendrix............      49     Vice President of Production and Customer
                                           Relations
</TABLE>

                                      11
<PAGE>

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

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

    Norman B. Gold has served the Company since September 1994 in various
capacities, most recently as Director of Finance, a position he has held since
November 1997. Prior to joining the Company, Mr. Gold was Financial Vice
President of Barclay Associates, Inc., a builder/developer in Newport Beach,
California, from 1985 to 1994.

    Lynn C. Parkes has been the Controller since June 1992 and the Secretary
since January 1997. She served as the Director of Human Resources from early
1989 until she became Assistant Controller in December 1989, and served in that
position until she was promoted to Controller. Ms. Parkes joined the Company in
1980, serving in various capacities.

    Gary E. Sorley has served as the Company's Vice President of Operations and
Forward Planning since January 1998. He also served as Vice President of
Operations since 1997 and served as the Director of Purchasing since 1994. Prior
to joining the Company in 1994, Mr. Sorley worked for Brock Homes, a
builder/developer in Laguna Hills, California, from 1984 to 1994.

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

    Michael L. Hendrix has served as the Company's Vice President of Production
and Customer Relations since January 1998. He also served as the Vice President
of Production since 1986. He was the Company's Production Manager from 1983 to
1986 and a Superintendent from 1982 to 1983.

ITEM 2.  PROPERTIES.

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

ITEM 3.  LEGAL PROCEEDINGS.

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

    In May 1994, the owners of 11 homes sold by the Company at its 201-home
Northfork project located in Murrieta, California filed a complaint against Inco
Development Company, a wholly-owned subsidiary of the Company ("Inco
Development"), in the Superior Court of California in Riverside County. Through
October 1996, various owners of additional homes in this project filed separate
complaints. All complaints were subsequently consolidated into one complaint
involving 40 homeowners. The alleged damages related primarily to the
performance of the concrete slabs of the homes. The matter was resolved in
mediation, which concluded on March 2, 1998, in the agreed upon amount of
$2,100,000. Payments of the settlement amount will be shared by three of the

                                      12
<PAGE>

Company's primary insurance carriers, and by various subcontractors against whom
the Company had filed cross-complaints. Settlement documents are being prepared,
which include all necessary releases and dismissals of all complaints.
Management believes that any obligations the Company may have relating to the
self-insured retentions included in its insurance policies will not be material.

    As a result of the limited amount of available working capital,
relationships with certain subcontractors have weakened due to the Company's
inability to pay all of its subcontractors and their suppliers on a current
basis. Numerous subcontractors and suppliers have filed liens, and some are
pursuing further legal action, including the initiation of lawsuits. The Company
has negotiated payment arrangements, as appropriate, in an effort to settle
these claims and release the liens, but various claims and lawsuits are pending
and unresolved. Management does not believe that any of these claims, in the
aggregate, will have a material adverse financial effect on the Company's
business. However, if the Company continues to have disputes with its
subcontractors and suppliers, in the future it may be difficult for the Company
to attract and retain qualified subcontractors and suppliers who are willing to
work with the Company and the Company's business could be adversely affected.

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

  No matters were submitted during the fourth quarter of 1997 to vote of
security-holders, through the solicitation of proxies or otherwise.

                                      13
<PAGE>

                                    PART II

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

Price Range of Common Stock

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

<TABLE>
<CAPTION>

                                       High     Low
                                       ----     ---
<S>                                   <C>      <C>
Quarter ended March 31, 1996.......   $8.25   $5.25
Quarter ended June 30, 1996........    6.375   3.00
Quarter ended September 30, 1996...    5.625   2.625
Quarter ended December 31, 1996....    4.095   1.125
Quarter ended March 31, 1997.......    5.25    1.75
Quarter ended June 30, 1997........    5.125   2.625
Quarter ended September 30, 1997...    4.00    1.00
Quarter ended December 31, 1997....    4.00    1.25
</TABLE>

    As of March 25, 1998, there were approximately 153 holders of record of the
Company's Common Stock, whose record ownership, management believes, was for
approximately 564 beneficial holders.

Pending Proceedings Regarding Nasdaq SmallCap Listing

    The Company's Common Stock is currently trading on the Nasdaq SmallCap
Market. The Securities and Exchange Commission (the "Commission") has approved
new rules that became effective on February 23, 1998 for the listing of
securities on Nasdaq, including new standards for maintenance of such listing.
For continued listing on the Nasdaq SmallCap Market, a company, among other
criteria, must now have at least $2,000,000 of total net tangible assets (or
$35,000,000 of market capitalization or $500,000 in net income in two of the
last three years), 500,000 shares in the Public Float, a market value of its
Public Float of $1,000,000 and a minimum bid price of $1.00 per share.

    In its Form 10-Q filed with the Commission on November 26, 1997 for the
quarter ended September 30, 1997, the Company reported net stockholders' equity
of $1,981,000 as of September 30, 1997. By letter dated February 26, 1998, the
Company received notice from Nasdaq stating Nasdaq's intention to delist the
Company's Common Stock from the Nasdaq SmallCap Market effective after March 13,
1998 unless the Company requested a temporary exception to the new requirements
and thereafter pursued Nasdaq's appeal procedures relative to seeking exception
or to show compliance with the new requirements. Before March 13, 1998, the
Company notified Nasdaq of its intent to appeal Nasdaq's determination of the
Company's non-compliance with the new SmallCap Market listing requirements and
thereafter made a written submission to Nasdaq so appealing. The Company's
submission stayed Nasdaq's delisting action pending the outcome of the Company's
appeal. In its submission, the Company pointed out that it believed that Nasdaq
had failed to adjust net tangible assets for the sum of $667,000 which the
Company carried on its balance sheet at September 30, 1997 for minority
partners' investment in the Company's consolidated partnerships and that when
such partners' equity in the Company's partnerships was added to the
stockholders' equity, total net tangible assets were $2,648,000, well above the
$2,000,000 threshold for continued listing on the Nasdaq SmallCap Market.
Moreover, the Company furnished Nasdaq with its balance sheet at December 31,
1997, which shows that its net tangible assets at December 31, 1997 were
$4,090,000 even with no adjustment given to net tangible assets for minority
partners' investment in the Company's consolidated partnerships of $545,000 at
December 31, 1997.

    Based on its submission, the Company believes it will succeed in its appeal
of Nasdaq's determination of the Company's non-compliance with the new SmallCap
Market listing requirements and that its Common Stock will not

                                      14
<PAGE>

be delisted as a result of the pending proceedings. If, however, the Company's
appeal were not successful for any reason or if in the future the Company was
unable to comply with Nasdaq's new requirements to maintain its Common Stock on
the SmallCap market, the Company's Common Stock could be dropped from listing on
the Nasdaq SmallCap Market. In that event, trading, if any, in the Company's
Common Stock would thereafter be conducted in the over-the-counter market in the
so-called "pink sheets" published by the National Quotation Bureau or the OTC
Bulletin Board of the National Association of Securities Dealers, Inc. A
consequence of such delisting would be that a stockholder would likely find it
more difficult to sell, or to obtain quotations as to the price of, the
Company's Common Stock.

Dividends

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

Recent Sales of Unregistered Securities

    In December 1997, the Company sold an aggregate of 204,122 shares of Company
Common Stock to Institutional Equity Partners, LLC ("IEP"), an entity owned 67%
by Thomas A. Hantges for consideration equal to $306,183. Mr. Hantges became a
director of the Company in January 1998.

    In December 1997, the Company issued an aggregate of 2,340 shares of Series
A Cumulative Preferred Stock to the Norris Living Trust in consideration of
cancellation of debt of the Company to the Norris Living Trust in the amount of
$2,340,000. Ira C. Norris, the Company's Chairman of the Board, President and
Chief Executive Officer and a principal shareholder, is a beneficiary and
trustee of the Norris Living Trust.

    The above-described sales of securities were not effected through any
broker-dealer, and no underwriting discounts or commissions were paid in
connection with such sales. Exemption from registration requirements is claimed
under the Securities Act of 1933 (the "Securities Act") in reliance on Section
4(2) of the Securities Act, Regulation D promulgated thereunder or Section
3(a)(9) of the Securities Act. No brokers' commissions or fees were paid in
connection with any of the foregoing transactions. The recipients of securities
in each such transaction represented that they were accredited investors under
Regulation D of the Act and their intention to acquire the securities for
investment only and not with a view to, or for sale in connection with, any
distribution thereof and appropriate legends were affixed to the certificates
evidencing the securities in such transactions. All recipients had adequate
access to information about the Company. No consideration or other remuneration
was paid or given, and no solicitation was made, in connection with the
conversion of the indebtedness involved in the various sales.

                                      15
<PAGE>

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

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

OVERVIEW

    The Company's results of operations for the periods presented reflect the
cyclical nature of the homebuilding industry and the Company's historical focus
on the Southern California housing market. The most recent peak in the industry
cycle occurred in 1988 and 1989, which was followed by a downturn in 1990,
coinciding with the general national recession and the depressed economic and
real estate conditions in Southern California. These conditions continued in
1997 in some of the geographic areas of Southern California in which the Company
conducted operations and had an adverse impact on the Company's results of
operations. Although the Company has experienced improved sales at certain of
its projects, the Company continues to provide homebuyers with price discounts
and other sales incentives at some of its projects in order to remain
competitive. This has resulted in reduced profitability or losses on some of the
homes that the Company has sold.

Results of Operations - 1997 vs. 1996

    The following discussion of financial condition and results of operations
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto, appearing elsewhere in this report.

     The following table sets forth, for the periods indicated, selected
information regarding home sales made for the years ended December 31, 1997 and
1996:

<TABLE>
<CAPTION>

                                                                  For Year Ended December 31,
                                                                  --------------------------
                                                                     1997           1996
                                                                  -----------     -----------
<S>                                                               <C>             <C>
          Number of Home Sales Closed:
           High Desert of San Bernardino and Los Angeles Counties         100              89
           Inland San Bernardino and Riverside Counties                    57              55
                                                                  -----------     -----------
                      Total                                               157             144
                                                                  ===========     ===========
          Average Sales Price                                        $132,400        $136,000
                                                                  ===========     ===========
          Revenue from Home Sales                                 $20,788,000     $19,591,000
                                                                  ===========     ===========
</TABLE>

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

<TABLE>
<CAPTION>

                                                                  For Year Ended December 31,
                                                                  ---------------------------
                                                                     1997            1996
                                                                  -----------      ---------
<S>                                                               <C>              <C>
          Revenues from home sales                                     100.0%          100.0%
          Cost of homes sold                                            95.5%           93.2%
          Loss form sale of land and lots                                0.8%            0.0%
                                                                  -----------      ----------
          Gross profit                                                   3.7%            6.8%

          Provision for write-down of real estate                       44.6%            4.0%
          Selling expenses                                               7.5%            7.5%
          Marketing expenses                                             8.9%            8.0%
          General and administrative expenses                            7.6%           10.5%
                                                                  -----------      ----------
          Opeating loss                                               (64.9)%         (23.2)%
                                                                  ===========      ==========
</TABLE>






                                      16
<PAGE>

Revenue from Home Sales

    Revenue from home sales in 1997 was $20,788,000, an increase of $1,197,000
from $19,591,000 during 1996. The total number of home sales closed in 1997 was
157 at an average sales price of $132,400, compared to 144 home sales closed at
an average sales price of $136,000 in 1996, an increase of 9.0% in number of
home sales closed and a 2.6% decrease in average sales prices. Management
attributes the increase in revenue during the year ended December 31, 1997 to
the increase in the number of home sales closed and attributes the decreased
average sales price to a change in the mix of homes offered for sale and sold.

Revenue from Land and Lot Sales

    Revenue from land and lot sales, which are not the Company's principal
business focus, is generated when such sales are made to take advantage of
market opportunities that might exist from time to time or to generate needed
cash. Accordingly, these sales vary from year to year.

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

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

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

     The Company had no land sales in 1996.

Cost of Homes Sold

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

    Cost of homes sold during the year ended December 31, 1997 was $19,852,000,
an increase of $1,592,000, or 8.7%, from $18,260,000 during the year ended
December 31, 1996. Cost of homes sold as a percentage of revenue from home sales
increased to 95.5% in the year ended December 31, 1997 from 93.2% in the same
period in 1996. The increase in cost of homes sold as a percentage of revenue
for the year ended December 31, 1997 is primarily the result of the write-off of
previously capitalized costs due to the Company's reduction of scope of one
community in the high desert of San Bernardino County and one community in
Riverside County. This increase is partially offset by the large amount of
closings occurring in one of the Company's newer, lower cost subdivisions as
well as in an existing lower cost subdivision.

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

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

                                      17
<PAGE>

Provision for Write-Down of Real Estate Assets

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

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

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

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

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

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

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

    In 1996, the Company also determined that the undiscounted cash flows
estimated to be generated by various real estate holdings were less than the
assets' carrying amounts. An impairment allowance, writing these assets down to
fair value was established at December 31, 1996 totaling $785,000, of which
$255,000 related to properties in the high desert of San Bernardino County and
$530,000 related to a property in Riverside County.

    In 1994, the Company began concluding that certain seller-financed parcels
were no longer economically viable based on then current financing terms.
Accordingly, several measures were initiated, including requests that certain
sellers substantially restructure the terms of their debt (including extending
the maturity date, reducing or eliminating payment and accrual of interest and
deferring principal payments). The Company also identified certain properties
that should be deeded back to the sellers in full satisfaction of the remaining
debt outstanding. In 1995 the Company commenced negotiations with six land
sellers from whom the Company purchased land in the high desert of San
Bernardino County. The Company owned these properties subject to seller loans
that had current or approaching maturity dates. In 1996, the Company deeded
property with a book value of $2,045,000 back to four of these land sellers in
satisfaction of indebtedness in that amount. In March 1997, the Company deeded
back property with a book value of $720,000 to the seller of the land in
satisfaction of indebtedness in that amount. Continuing negotiations may result
either in deferral of interest payments and/or other adjustments to the seller
note, or deed back to the seller of the one remaining property with a book value
of $320,000 in satisfaction of indebtedness in that amount outstanding at
December 31, 1997.

                                      18
<PAGE>

    During 1995 the Company reduced the scope of one project in Riverside
County. As of December 31, 1997, the Company was still in the process of deeding
back land to the seller from whom the Company purchased the property. This
transaction is expected to result in a reduction of real estate inventories of
$396,000 in satisfaction of indebtedness in that amount outstanding at December
31, 1997.

    In 1994, the Company commenced the process of deeding back property to nine
other land sellers from whom the Company also purchased land in the high desert
of San Bernardino County. Deed backs of real estate with a book value and
related indebtedness of $1,558,000 and $280,000 occurred in 1996 and 1997,
respectively.

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

Selling and Marketing Expenses

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

    Selling expenses were $1,552,000 and $1,462,000 for the years ended December
31, 1997 and 1996, respectively, representing a 6.2% increase. This increase
resulted primarily from payments to an independent sales and marketing company
utilized by the Company from January 1997 to September 1997 to manage its sales
force. Selling expenses as a percentage of revenue from home sales were 7.5% for
each of the years ended December 31, 1997 and 1996.

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

    Marketing expenses were $1,859,000 and $1,577,000 for the years ended
December 31, 1997 and 1996, respectively, representing a 17.9% increase. As a
percentage of revenue from home sales, marketing expenses were 8.9% and 8.0% for
the years ended December 31, 1997 and 1996, respectively.

  The increase in marketing costs for the year ended December 31, 1997 is
primarily the result of the write-off of previously capitalized model home costs
due to the reduction of scope of one community in the high desert of San
Bernardino County and one community in Riverside County.

    During 1997, the Company had grand openings for two new projects and was
delivering homes from eight active projects compared with three grand openings
and nine active projects in 1996.

General and Administrative Expenses

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

    General and administrative expenses were $1,578,000 and $2,066,000 for the
years ended December 31, 1997 and 1996, respectively, a decrease of $488,000 or
23.6%. As a percentage of revenue from home sales, general and administrative
expenses were 7.6% and 10.5% for the years ended December 31, 1997 and 1996,
respectively. The decrease in general and administrative expenses is primarily
the result of reductions in salary expense in 1997.

Minority Partners' Share

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

                                      19
<PAGE>

    The minority partners' share of losses was $331,000 and $214,000 for the
years ended December 31, 1997, and 1996, respectively.

Provision (Benefit) for Income Taxes

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

    In 1997, the Company offset a deferred tax benefit of $4,380,000 against a
valuation allowance of an equal amount. In 1996, the Company offset a deferred
tax benefit of $3,946,000 against a valuation allowance of an equal amount. See
"Item 7. Financial Statements and Supplementary Data, Note 7" herein. In order
to fully realize the recorded net deferred tax asset of $18,285,000, the Company
will need to generate future taxable income of approximately $45,700,000. The
deferred tax asset is based on current applicable corporate income tax rates.
Future changes in tax rates will be reflected in the valuation of the deferred
tax asset in the period of change.

    Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes ("SFAS No. 109") requires, among other things, the recognition of deferred
tax assets for the estimated future tax effects attributable to net deductible
temporary differences and net operating loss carryforwards. SFAS No. 109 further
requires the reduction of deferred tax assets by a valuation allowance if, based
on the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The future
realization of the deferred tax assets must be evaluated along with the
accumulated differences caused by other tax and book basis differences.
Uncertainties exist due to the reduced level of closings, revenues and earnings
resulting from the sale in December 1995 of the Company's Phoenix and Las Vegas
divisions, the need to raise capital for new land acquisitions and current
business operations. Accordingly, the Company has provided a cumulative
$16,085,000 valuation allowance to reserve against the deferred tax asset as a
result of these uncertainties. At such time as it becomes more likely than not
that portions of the additional tax asset will be realized in the future, the
valuation allowance can be adjusted. The Company believes that during the time
period in which the deferred tax asset can be utilized it will generate
sufficient income to realize the net deferred tax asset. It is difficult to
assess the ultimate timing of the realization of the deferred tax asset.
Additionally, no assurances can be given regarding the realization of the
deferred tax asset or that the Company will not have to record a further
valuation allowance against future tax benefits.

Backlog

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


<TABLE>
<CAPTION>

                                                                          December 31,
                                                                  --------------------------
                                                                     1997            1996
                                                                  -----------     -----------
<S>                                                               <C>             <C>
          High Desert of San Bernardino and
               Los Angeles Counties                                        22              52
          Inland San Bernardino and Riverside
               Counties                                                    21              30
                                                                  -----------     -----------
          Total Number of Homes                                            43              82
                                                                  ===========     ===========
          Aggregate Sales Value                                    $6,078,000     $10,316,000
                                                                  ===========     ===========
          Average Sales Price                                        $141,300        $125,800
                                                                  ===========     ===========
</TABLE>


                                      20
<PAGE>

    The Company's backlog at any particular date is subject to substantial
variation and is dependent upon several factors including the number of homes
then available for sale, prevailing market conditions and the length of time
necessary to complete the closing of home sales subject to pending contracts.
The Company has generally experienced a rapid increase in backlog during periods
in which it holds a grand opening for one of its projects. In 1997 the Company
had two grand openings compared to three grand openings in 1996. The Company's
backlog decreased 47.6%, to 43 homes at December 31, 1997 from 82 homes at
December 31, 1996 and management believes this was due to a fewer number of
grand openings, fewer active projects and slower than expected sales in certain
of its projects. The aggregate sales value of the units in backlog decreased by
$4,238,000 or 41.1%, due to the decrease in number of homes under sales
contracts. The average sales price of homes in backlog increased by $15,500 or
12.3% due to a change in the mix of homes offered for sale.

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

Net Orders

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

    During 1997, the Company had received 118 net orders, of which 70 were in
the high desert of San Bernardino and Los Angeles Counties and 48 were in inland
San Bernardino and Riverside Counties. This compares to 149 net orders in 1996,
of which 96 were in the high desert of San Bernardino and Los Angeles Counties
and 53 were in inland San Bernardino and Riverside Counties, a decrease of
20.8%.

    The decrease in net orders received for the year ended December 31, 1997 is
attributable to slower than expected sales in certain of the Company's projects,
the close out of one of the Company's high desert projects in San Bernardino
County and the reduction of scope of one project in the high desert of San
Bernardino County and one project in Riverside County.

Variability in Quarterly Results

    The Company has experienced, and expects to continue to experience,
significant variability in its operating results. This variability may cause the
Company's overall results of operations to fluctuate significantly on a period-
to-period basis, and revenues anticipated to occur in a fiscal period may not be
earned until subsequent fiscal periods. Many factors contribute to this
variability, including: (i) the timing and mix of home deliveries; (ii) the
Company's ability to continue to acquire additional land on favorable terms for
future developments; (iii) the condition of the real estate markets and the
economy in general; (iv) the cyclical nature of the home building industry and
changes in prevailing interest rates; (v) cost and availability of materials and
labor; and (vi) delays in construction schedules caused by timing of inspections
and approvals by regulatory agencies, strikes at subcontractors and adverse
weather conditions. The Company's historical financial results are not
necessarily a meaningful indicator of future results and, in general, the
Company expects its financial results to vary from project to project. The
Company's revenue and net income may also vary substantially as a result of
variations in the number of projects at which the Company is closing the sale of
homes at any one time.

Inflation

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

                                      21
<PAGE>

Adoption of Accounting Standards

    In the fourth quarter of 1997, the Company was required to adopt the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS No. 128). SFAS No. 128 replaces the previous presentation of
earnings per share on the Consolidated Statements of Operations with dual
presentation of Basic Earnings per Share and Diluted Earnings per Share. Basic
Earnings per Share are computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted Earnings per Share reflects the potential dilution that
could occur if stock options and other contracts to issue Common Stock were
exercised or converted into Common Stock or resulted in the issuance of Common
Stock that shared in the earnings of the Company. SFAS No. 128 requires
restatement of all prior-period earnings per share presented. Since losses have
occurred in all periods presented, the inclusion of potential shares would be
anti-dilutive. As a result, Basic and Diluted Earnings per Share do not differ
from earnings per share as previously and currently reported.

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

Year 2000 Issue

    Management does not anticipate material costs, problems and uncertainties
associated with the Year 2000 issue.

Liquidity and Capital Resources

    The homebuilding industry is capital intensive and often involves high
leverage and significant up-front expenditures to acquire land and begin
development. Accordingly, the Company incurs substantial indebtedness to finance
its homebuilding activities and its business and earnings are substantially
dependent on its ability to obtain bank or other debt financing on acceptable
terms The Company plans for substantial future expenditures relating to the
acquisition and construction of new projects, as well as the continued
construction of existing, ongoing projects. Additionally, the Company continues
to experience shortfalls in working capital and has payables from prior periods
and closed-out projects in excess of $2,000,000, most of which have been
outstanding for more than 90 days. As a result of the limited amount of
available working capital, the Company has not paid all of its subcontractors or
suppliers on a current basis. Numerous subcontractors and suppliers have filed
liens, and some are pursuing further legal action, including the initiation of
lawsuits. The Company has negotiated payment arrangements, as appropriate, in an
effort to settle these claims and release the liens, but various claims and
lawsuits are pending and unresolved.

    In its efforts to seek funding for working capital shortfalls and to reduce
old payables, as well as to finance the acquisition of additional land for the
delivery of future homes, the Company is discussing with various sources of
capital their investing additional funds in the Company. No material agreements
between the Company and these potential sources of capital have been signed, and
no assurances can be given whether or when the Company may enter into an
agreement with any source or, if entered into, what the precise terms of the
agreement will be.

    If the Company is not successful in obtaining sufficient capital to fund its
planned expenditures, the Company's ability to continue its current level of
business operations could be impaired, and the Company may not be able to
conduct operations as presently anticipated. This could have a material adverse
affect on the Company's business, financial condition and results of operations.

    Historically, the Company has financed its operations from a combination of
limited partner capital contributions, cash generated from operations, purchase
money financing of land purchases, borrowings from various banking institutions,
borrowings from related parties, deferring accounts payable and sales of its
capital stock. The Company is also exploring alternative methods of financing.
Management believes that existing cash and capital resources, cash flow from
operations as well as the financial sources upon which it has historically
relied, similar to those discussed in more detail below, will be sufficient to
fund the Company's cash requirements for at least the next 12 months at the
Company's presently anticipated level of operations.

                                      22
<PAGE>

    The Company is in the process of making a private offering (the "Offering")
of up to $5,000,000 of Subordinated Investment Notes ("Investment Notes')
bearing interest at the rate of 15% per annum. The Investment Notes will have an
18 month maturity date and no prepayment penalty. The face value of each
Investment Note will be $10,000. The Offering will terminate on February 9,
1999, but may be extended by the Company to a date not later than July 31, 1999.
It is presently anticipated that the Company conduct the Offering through its
employees and will employ, on a best efforts basis, the services of a placement
agent to assist it in the Offering. Net proceeds, if any, from the Offering will
be used for working capital.

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

    In 1997, the Company established a relationship with USA, which has provided
loans and arranged for individual lenders to provide loans to the Company
secured by Company projects in amounts totaling $12,120,000 though December 31,
1997. Funds have been utilized to refinance projects, to purchase additional
land for future homes, and to develop some of this land. Additionally, in June
1997, USA Real Estate arranged for an additional group of investors to purchase
the Company's Eagle Ranch project in the high desert for $2,400,000. Funds from
this sale helped the Company repay portions of matured loans with a commercial
bank secured by this project. The investors granted the Company a six-year
option to periodically repurchase portions of the property, subject to annual
minimum repurchase thresholds, for the development of single-family homes. If
the Company fails to repurchase the minimum number of lots in any year, the
option terminates. The investors are to receive one half of the cash generated
upon the sale of these single-family homes constructed by the Company on the
repurchased lots, and USA Real Estate is to receive a fee of $1,000 for each
home sold. If the Company approves a bulk sale of these lots by the investors,
the Company is to receive one half of any profits earned. Thomas A. Hantges owns
67% of both USA and USA Real Estate. Mr. Hantges became a director of the
Company in January 1998.

    USA has earned fees totaling $1,087,000 for providing these loans to the
Company, of which $878,000 has been paid. The balance is secured by notes and is
to be paid from proceeds from sales of completed homes in certain of the
Company's projects. The interest rates on loans provided by USA range from
12.25% for certain loans secured by a first deed of trust to 20.25% for certain
subordinated land loans. The outstanding balance of these loans at December 31,
1997 was $6,922,000.

    In December 1997, the Company sold an aggregate of 204,122 shares of Company
Common Stock in a private transaction to IEP, an entity owned 67% by Thomas A.
Hantges. See "Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters." The total consideration was $306,183, paid as follows: (i)
payment to the Company of $100,000 in cash, (ii) reduction by $200,000 of a
$347,500 note payable to the principals of USA by the Company for fees related
to a loan arranged by USA with respect to one of the Company's projects and
(iii) $6,183 for consulting services provided by the principals of USA to the
Company. The shares were issued in January 1998. Including the shares owned by
IEP, Mr. Hantges beneficially owned 12.8% of the Company's Common Stock as of
March 25, 1998.

    From September 1996 through November 30, 1997, the Company received advances
of $2,747,000 from Ira C. Norris, of which the Company had repaid $460,000. The
advances were unsecured, bore interest at 10% and were due on March 31, 1998.
The balance of these advances at December 23, 1997 was $2,462,000, which
included accrued interest of $171,000. On that date, Mr. Norris agreed to
convert $2,340,000 of this debt into 2,340 shares of Series A Cumulative
Preferred Stock of the Company. The Company issued these shares on December 30,
1997 to the Norris Living Trust, of which Mr. Norris is a beneficiary and
trustee. See "Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters." An unsecured note to the Norris Living Trust, bearing
interest at 10% and maturing on December 23, 1998, evidences the balance of
indebtedness not converted in the amount of approximately $122,000.

    The Series A Preferred Stock has a par value of $0.01, has no voting rights,
is non-participating, and has no conversion features. The stock is redeemable at
the option of the Company for cash at the redemption price of $1,000 per share
plus accumulated but unpaid dividends. The established dividend rate on the
Preferred Stock is $100 per share per annum payable quarterly from available
working capital.

                                      23
<PAGE>

    In addition to the loans described above, in June 1997, the Norris Living
Trust loaned the Company $500,000 secured by undeveloped land owned by the
Company in Victorville and Palmdale, California. This note bears interest at 10%
and is due in June 1998. The balance owing under this note at December 31, 1997
was $526,000, which includes accrued interest of approximately $26,000.

    In June 1997, the Company signed a note and deed of trust in connection with
a loan of $500,000 from the Neeley Revocable Family Trust. Ronald L. Neeley, a
director of the Company, is a beneficiary and trustee of this trust. The note
bears interest at 15%, is due in June 1998, and is secured by the same
undeveloped land owned by the Company in Victorville and Palmdale, California
which secures the Norris Living Trust loan of $500,000 mentioned above. The
balance owing under this note at December 31, 1997 was $539,000, which includes
accrued interest of approximately $39,000.

    In December 1996, the Company issued a warrant to purchase 200,000 shares of
Common Stock in a private transaction to Overland Company, Inc. ("OCI"), a
corporation affiliated with Overland. Overland owned 10.6% of the Company's
Common Stock at March 25, 1998. The warrant was issued as compensation for
services to be performed pursuant to a consulting agreement entered into with
OCI in December 1996. The consulting agreement is for a term of two years during
which OCI, on a non-exclusive basis, is to seek out, investigate and pursue
residential development projects and present them to the Company for its
consideration and approval. The warrant was exercisable within eighteen months
of the date of the agreement at a price of $5.25 per share. Beginning in
November 1997, the Company offered OCI the opportunity to exercise the warrant
for an exercise price of $2.00 per share. From November 1997 through February
1998, OCI assigned portions of its total interest in the warrant to third
parties. The Company received $350,000 in 1997 and $50,000 in 1998 from these
third parties as deposits pursuant to the exercise of the warrants for all
200,000 shares. The Company is awaiting receipt of final documentation before it
effectuates the sale of the shares.

    Due to much slower than expected sales at the Company's Winners Circle high
desert project, and based upon the Company's review of the market and
competition in the area, the Company decided in the second quarter of 1997 not
to proceed with any more development in this project beyond the 11 homes and 3
models previously constructed. ALG was the holder of the participating loan
secured by the remaining 148 unbuilt lots and the 2 remaining models in this
project. In August 1997, ALG filed a notice of default as a result of the
Company's delinquent payments of interest on this loan. As a result, Mr. Gibbs
resigned as a member of the Company's Board of Directors, effective August 1,
1997. A non-judicial sale of the property was completed on December 11, 1997,
and the Company was relieved of $680,000 of debt.

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

    In October 1996, the Company entered into a Development and Marketing
Agreement with a third party to develop, construct, and market 139 lots owned by
the third party in Moreno Valley, California. All financing and bonding will be
the responsibility of the third party. The Company will receive compensation in
the form of overhead draws, development fees and sales and marketing fees
totaling approximately 8.0% of the gross sales price of the homes. The Company
is to assume the home warranty costs for which it will be paid $750 per house.

    Spirit 77 was formed to develop lots in a project in Riverside County and
sell those finished lots to the Company for the construction of single family
homes at its Spirit Corona project. The Company was the general partner of, and
had a 50% interest in, Spirit 77. Due to slower than expected sales as a result
of intense competition in the vicinity of the project, the partners of Spirit 77
agreed to sell the remaining 35 finished lots owned by Spirit 77 to a third
party homebuilder at a reduced price. This transaction was consummated in July
1997. The Company received approximately $200,000 from Spirit 77 as a result of
this sale and the subsequent dissolution of the partnership.

    The Company often acquires land with an initial down payment, with the
balance financed by seller non-recourse notes. The notes typically include
partial reconveyance provisions, which allow the Company to obtain the necessary
development financing on a phased basis. The Company also occasionally uses
options to acquire property. At December 31, 1997, the Company had land seller
indebtedness outstanding of $716,000. See "--Provision for Write-Down of Real
Estate Assets."

                                      24
<PAGE>

    The Company typically obtains its infrastructure, development and
construction funding and various other land loans from commercial lenders and
other financing sources. Lenders generally provide interim construction loans
for each phase of homes within a project for a term of up to 12 months, with
extension provisions. The development loans typically are repaid with proceeds
from these interim construction loans. Commercial lenders and USA each provided
approximately one half of the Company's project financing for the year ended
December 31, 1997. The loan agreements include customary representations and
covenants. All outstanding indebtedness under these facilities is secured by a
lien on the project real property. At December 31, 1997, aggregate borrowings of
$14,945,000 were outstanding under these facilities and $8,391,000 was available
for further qualified project finance borrowing. Interest rates on these loans
range from 7.625% to 20.25%. The weighted average interest rate was
approximately 12.29% during 1997 and approximately 12.18% as of December 31,
1997.

    At December 31, 1997, total indebtedness secured by real estate totaled
$15,661,000. Peak month-end borrowing during 1997 was $17,297,000.

    The Company also has an unsecured $1,000,000 revolving line of credit with a
commercial bank that bears interest at the prime rate plus 1.0%. The net
outstanding balance under this line of credit at December 31, 1997 was $330,000.
At the time a homebuyer enters into a sales contract with the Company, meets
certain loan pre-qualification requirements with a third party mortgage lender,
and opens an escrow, the bank advances funds to the Company under this line at
an amount equal to 60% of the net cash proceeds estimated by the Company that it
would receive at the close of the homebuyer's escrow. The escrow company repays
the lender directly from net proceeds when the escrow closes. The line of credit
and expires in April 1998 and the Company is currently in negotiations with the
bank for an additional extension.

    In December 1997, the Company restructured a secured line of credit with an
outstanding principal balance of $2,891,000 from a commercial bank, which had
become due. Pursuant to a series of agreements, the bank's note was purchased
for $1,750,000 by a group of lenders ("new lender") provided by USA. The bank
forgave accrued interest of $92,000 and canceled its rights under a warrant to
purchase 41,667 shares of the Company's Common Stock that was issued to the bank
pursuant to an agreement made in June 1996 extending and modifying the line of
credit. The resulting obligation of the Company to the new lender is $2,350,000,
which includes the $1,750,000 paid to the bank, fees earned by USA, an interest
reserve and a payoff made by the new lender to an unrelated commercial bank of
another loan to the Company. The loan is secured by undeveloped land owed by the
Company in Victorville and Palmdale, California and by an assignment of the
Company's rights under the Eagle Ranch repurchase option agreement previously
described. Since the land in Palmdale was owned by Palmdale Vistas Housing
Developments, Ltd. ("Palmdale Vistas"), in which the Company was the managing
general partner and had a 51.3% interest, the new lender required the
dissolution of Palmdale Vistas pursuant to an Agreement signed by the partners
of Palmdale Vistas. The limited partners of Palmdale Vistas, which include a
former director of the Company (see "Item 7. Financial Statements and
Supplementary Data, Note 10" herein), received title to a 17 acre undeveloped
commercial site owned by Palmdale Vistas. The Company, as general partner of
Palmdale Vistas, received title to the balance of the partnership assets
consisting of three completed model homes, 11 completed homes for sale, and
approximately 180 unimproved residential lots. Additionally, the Company has
agreed to repay the bank the $1,141,000 principal amount not paid by the new
lender when it purchased the bank's note. This payment is unsecured, non-
interest bearing and payable from 15% of profits earned annually by the Company
commencing with the fiscal year ending December 31, 1999. Certain non-
operational changes in the Company's net worth in excess of $3,500,000 and
certain changes in control of the Company will also require additional payments
to the bank.

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

                                      25
<PAGE>

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

                                      26
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.



                         INDEX TO FINANCIAL STATEMENTS

                                                                         Page
                                                                         ----

Report of Independent Accountants.....................................    F-2

Consolidated Balance Sheets as of December 31, 1997 and 1996..........    F-3

Consolidated Statements of Operations for the years ended
  December 31, 1997 and 1996..........................................    F-4

Consolidated Statements of Stockholders' Equity for the years ended
  December 31, 1997 and 1996..........................................    F-5

Consolidated Statements of Cash Flows for the years ended
  December 31, 1997 and 1996..........................................    F-6

Notes to Financial Statements.........................................    F-8

                                      F-1
<PAGE>

                       Report of Independent Accountants



To the Board of Directors and Shareholders of
Inco Homes Corporation


  In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Inco Homes
Corporation at December 31, 1997 and 1996 and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.  These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit.  We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.  We believe that our
audit provides a reasonable basis for the opinion expressed above.



/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP

Costa Mesa, California
March 27, 1998

                                      F-2
<PAGE>

INCO HOMES CORPORATION
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                December 31,
                                                          ----------------------
<S>                                                       <C>          <C>
(Dollars in thousands, except share data)                    1997         1996
                                                             ----         ----

ASSETS

Cash                                                      $    736      $    586
Real estate inventories - Note 3                            27,329        36,752
Deferred tax asset - Note 7                                  2,200         2,200
Investment in non-consolidated partnership - Note 2              -           428
Other assets                                                   669           666
                                                          --------      --------
     Total assets                                         $ 30,934      $ 40,632
                                                          ========      ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable and accrued liabilities                  $  5,580      $  7,133
Notes payable - Note 4                                      19,202        15,360
Lines of credit - Note 5                                       330         4,303
Notes to stockholders - Note 6                               1,187           676
                                                          --------      --------
     Total liabilities                                      26,299        27,472
                                                          --------      --------

Minority partners' investment in consolidated
 partnerships - Note 2                                         545           876

Commitments and contingencies - Note 9

Stockholder's Equity
  Preferred stock - $.01 par value; 1,000,000 shares
   authorized, 2,340 shares issued and outstanding for
   1997 - Note 6                                             2,340             -
  Common stock - $.01 par value; 20,000,000 shares
   authorized, 1,637,096 and 1,437,096 shares issued
   and outstanding for 1997 and 1996, respectively -
   Note 1                                                       16            14
  Additional paid in capital                                42,876        41,763
  Deficit                                                  (41,142)      (29,493)
                                                          --------      --------
     Total stockholders' equity                              4,090        12,284
                                                          --------      --------
     Total liabilities and stockholders' equity           $ 30,934      $ 40,632
                                                          ========      ========
</TABLE>

See accompanying notes to financial statements.

                                      F-3
<PAGE>

INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                              For the Year
                                                           Ended December 31,
                                                         ----------------------
                                                            1997         1996
                                                         ---------    ---------
<S>                                                      <C>          <C>
Revenue from home sales...............................   $  20,788    $  19,591
Revenue from land and lot sales.......................         933          --
                                                         ---------    ---------
                                                            21,721       19,591
                                                         ---------    ---------
Cost of homes sold....................................      19,852       18,260
Cost of land and lots sold............................       1,094          --
                                                         ---------    ---------
                                                            20,946       18,260
                                                         ---------    ---------
  Gross profit........................................         775        1,331
                                                         ---------    ---------
Provision for write-down of real estate - Note 3......       9,270          785
Selling and marketing expenses........................       3,411        3,039
General and administrative expenses...................       1,578        2,066
                                                         ---------    ---------
                                                            14,259        5,890
                                                         ---------    ---------
  Operating loss......................................     (13,484)      (4,559)

Other income..........................................          79           77
                                                         ---------    ---------
  Loss before minority partners' share and provision
   (benefit) for income taxes.........................     (13,405)      (4,482)

Minority partners' share..............................        (331)        (214)
                                                         ---------    ---------
  Loss before provision (benefit) for income taxes....     (13,074)      (4,268)

Provision (benefit) for income taxes - Note 7.........         --           --
                                                         ---------    ---------
  Loss before extraordinary items.....................     (13,074)      (4,268)

Extraordinary items - Note 8..........................       1,425          --
                                                         ---------    ---------
  Net loss............................................   $ (11,649)   $ (4,268)
                                                         =========    =========
Basic and Diluted net loss per common share - Note 2
  Loss before extraordinary items.....................   $   (8.03)   $   (3.01)
  Extraordinary items.................................        0.88          --
                                                         ---------    ---------
  Net loss per common share...........................   $   (7.15)   $   (3.01)
                                                         =========    =========
Weighted average number of common shares outstanding
 - Note 2.............................................   1,628,694    1,417,794
                                                         =========    =========
</TABLE>

See accompanying notes to financial statements

                                      F-4
<PAGE>

INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                            Additional
                                          Preferred Stock- Note 6   Common Stock - Note 1     Paid-In
                                            Shares      Amount        Shares     Amount       Capital    Deficit     Total
                                          ---------   -----------   ----------  ---------   ----------   --------   --------
<S>                                       <C>         <C>           <C>         <C>         <C>          <C>        <C>
Balance - December 31, 1995                   --         --          1,346,218       13        40,744     (25,225)    15,532

Common stock issued - Note 12                 --         --             90,878        1           527         --         528

Value of warrants issued to bank pursuant
 to extension of line of credit - Note 4      --         --                --       --            111         --         111

Value of warrants issued pursuant to
 consulting agreement - Note 12               --         --                --       --            131         --         131

Cash received from common stock
 subscription                                 --         --                --       --            250         --         250

Net loss - 1996                               --         --                --       --            --       (4,268)    (4,268)
                                            -----     ------         ---------     ----       -------    --------   --------
Balance - December 31, 1996                   --      $  --          1,437,096     $ 14       $41,763    $(29,493)  $ 12,284

Preferred stock issued - Note 6             2,340      2,340               --       --            --          --       2,340

Common stock issued                           --         --            200,000        2           463         --         465

Cash received and debt relieved from
 common stock subscriptions - Note 12         --         --                --       --            300         --         300

Cash received pursuant to pending
 exercise of warrants - Note 12               --         --                --       --            350         --         350

Net loss - 1997                               --         --                --       --            --      (11,649)   (11,649)
                                            -----     ------         ---------     ----       -------    --------   --------
Balance - December 31, 1997                 2,340     $2,340         1,637,096     $ 16       $42,876    $(41,142)  $  4,090
                                            =====     ======         =========     ====       =======    ========   ========
</TABLE>

See accompanying notes to financial statements

                                      F-5
<PAGE>

INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                              For the Years
                                                            Ended December 31,
                                                         -----------------------
(Dollars in thousands)                                      1997         1996
                                                         ----------   ----------

<S>                                                      <C>          <C>
Cash flows from operating activities:
  Net loss..............................................  $(11,649)    $ (4,268)
  Adjustment to reconcile net loss to net cash provided
     by (used in) operating activities:
     Extraordinary items................................    (1,425)         --
     Provision for write-down of real estate............     9,270          785
     Minority partners' share...........................      (331)        (214)
     Proceeds from sale of divisions....................       --         1,713
     Decrease (increase) in real estate inventories.....     1,196         (711)
     (Increase) decrease in other assets................       (68)         371
     Decrease in accounts payable and accrued
       liabilities......................................      (657)      (1,019)
                                                          --------     --------

            Net cash used in operating activities.......    (3,664)      (3,343)
                                                          --------     --------

Cash flow from financing activities:
  Proceeds from notes payable secured by real estate....    28,278       19,008
  Repayments on notes payable secured by real estate....   (25,431)     (16,716)
  Proceeds from lines of credit.........................     1,481          --
  Repayments on lines of credit.........................    (4,313)        (444)
  Proceeds from notes to stockholders...................     2,992          768
  Repayments on notes to stockholders...................      (368)         (92)
  Distributions from non-consolidated partnership.......       260          --
  Contribution to non-consolidated partnership..........       --          (355)
  Contributions from minority partners..................       --         1,090
  Proceeds from sale of common stock....................       500          --
  Costs of stock issuance and reverse stock split.......       (35)
  Proceeds from common stock subscriptions..............       450          250
                                                          --------     --------

            Net cash provided by financing activities...     3,814        3,509
                                                          --------     --------

Net increase in cash and cash equivalents...............       150          166

Cash and cash equivalents at beginning of year..........       586          420
                                                          --------     --------

Cash and cash equivalents at end of year................  $    736     $    586
                                                          ========     ========
</TABLE>

See accompanying notes to financial statements

                                      F-6
<PAGE>

INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS


Supplemental schedule of non-cash activities

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

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

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

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

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

     [6]  During 1996, the Company deeded back property with a book cost basis
          of $3,603,000 to land sellers in satisfaction of indebtedness in that
          amount - see Note 3.

     [7]  During 1996, the Company issued 90,878 shares of Common Stock to
          creditors in exchange for relieving the Company of $539,000 of
          accounts payable - Note 12.

     [8]  During 1996, the Company issued a warrant to purchase 41,667 shares of
          Common Stock to a lender in connection with the extension of a line of
          credit - see Note 4. The value of this warrant was estimated at
          $111,000.

     [9]  During 1996, the Company issued a warrant to purchase 200,000 shares
          of Common Stock to a third party as compensation for services to be
          performed pursuant to a consulting agreement - see Note 12. The value
          of this warrant was estimated at $131,000.


See accompanying notes to financial statements


                                      F-7
<PAGE>

INCO HOMES CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996


NOTE 1.  BACKGROUND AND ORGANIZATION

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

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

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

     The investment in non-consolidated partnership represents the Company's
investment in Spirit Corona 77, L.P. ("Spirit 77") and its share of profits and
losses allocated to the Company in accordance with the provisions of the
Partnership Agreement, based upon the equity method of accounting.  Spirit 77
was dissolved in July 1997.

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

     Basis of Presentation.  The Company has incurred net operating losses which
have significantly impacted its working capital levels and its ability to pay
its obligations.  Management's current business plan reflects that, in addition
to future profits, sales of real estate inventories provide a return of equity
in the form of cash flow to the Company to help meet operating requirements.
During 1998, the Company will also need to extend the maturity dates of certain
notes payable and to raise capital for acquisitions of additional land for
future projects and working capital needs. Management's plans and anticipated
results are dependent on future events and economic market conditions which are
inherently uncertain.  No assurances can be given that anticipated cash flows
from operations and the Company's ability to borrow from various sources will be
sufficient to fund all of its planned expenditures. In its efforts to seek
funding for working capital shortfalls and to reduce old payables, as well as to
finance the acquisition of additional land for the delivery of future homes, the
Company is discussing with various sources of capital their investing additional
funds in the Company.  No material agreements between the Company and these
potential sources of capital have been signed, and no assurances can be given
whether or when the Company may enter into an agreement with any source or, if
entered into, what the precise terms of the agreement will be.

     If the Company is not successful in obtaining sufficient capital to fund
its planned expenditures,  the Company's ability to continue its current level
of business operations could be impaired, and the Company may not

                                      F-8
<PAGE>

be able to conduct operations as presently anticipated. This could have a
material adverse affect on the Company's business, financial condition and
results of operations.

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

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

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

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

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

     Earnings Per Share. In the fourth quarter of 1997, the Company was required
to adopt the provisions of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128). SFAS No. 128 replaces the previous
presentation of earnings per share on the Consolidated Statements of Operations
with dual presentation of Basic Earnings per Share and Diluted Earnings per
Share.  Basic Earnings per Share are computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted Earnings per Share reflects the potential
dilution that could occur if stock options and other contracts to issue  Common
Stock were exercised or converted  into Common Stock or resulted in the issuance
of Common Stock that shared in the earnings of the Company. SFAS No. 128
requires restatement of all prior-period earnings per share presented.  Since
losses have occurred in all periods presented, the inclusion of potential shares
would be anti-dilutive.  As a result, Basic and Diluted Earnings per Share do
not differ from earnings per share as previously and currently reported.

     Fair Value of Financial Instruments.  The carrying amounts reported on the
balance sheet for the Company's cash equivalents and accounts payable and
accrued liabilities approximate fair value due to the short-term nature of these
items.  The carrying amounts of the Company's notes payable secured by real
estate, lines of credit, and notes to stockholder approximate fair value based
on a comparison with current market rates for loans of similar risks and
maturities.

                                      F-9
<PAGE>

NOTE 3.  REAL ESTATE INVENTORIES

     Real estate inventories consist of the following:
<TABLE>
<CAPTION>
                                                                      December 31,
                                                           ---------------------------------
                                                                 1997              1996
                                                           ---------------    --------------
<S>                                                        <C>                <C>


     Land                                                     $ 16,929,000      $ 24,299,000
     Land development and construction in progress              18,366,000        25,520,000
     Completed inventory not subject to pending sales
         contracts (unsold)                                      2,552,000         2,030,000
     Allowances for write-down of real estate                  (10,518,000)      (15,097,000)
                                                              ------------      ------------
     Total                                                    $ 27,329,000      $ 36,752,000
                                                              ============      ============
</TABLE>

     As of December 31, 1997 and 1996, the Company owned title to approximately
1,600 and 3,300 lots, respectively.  As of December 31, 1997 and 1996,
approximately 200 and 700 lots, respectively, were in the process of being
deeded back to land sellers (see below).

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

     In 1996, the Company also determined that the undiscounted cash flows
estimated to be generated by various real estate holdings were less than the
assets' carrying amounts.  An impairment allowance, writing these assets down to
fair value was established at December 31, 1996 totaling $785,000, of which
$255,000 related to properties in the high desert of San Bernardino County and
$530,000 related to a property in Riverside County.

     In 1994, the Company began concluding that certain seller-financed parcels
were no longer economically viable based on then current financing terms.
Accordingly, several measures were initiated, including requests that certain
sellers substantially restructure the terms of their debt (including extending
the maturity date, reducing or eliminating payment and accrual of interest and
deferring principal payments).  The Company also identified certain properties
that should be deeded back to the sellers in full satisfaction of the remaining
debt outstanding.  In 1995 the Company commenced negotiations with six land
sellers from whom the Company purchased land in the high desert of San
Bernardino County. The Company owned these properties subject to seller loans
that had current or approaching maturity dates.  In 1996, the Company deeded
property with a book value of $2,045,000 back to four of these land sellers in
satisfaction of indebtedness in that amount.  In March 1997, the Company deeded
back property with a book value of $720,000 to the seller of the land in
satisfaction of indebtedness in that amount.  Continuing negotiations may result
either in deferral of interest payments and/or other adjustments to the seller
note, or deed back to the seller of the one remaining property with a book value
of $320,000 in satisfaction of indebtedness in that amount outstanding at
December 31, 1997.

     During 1995 the Company reduced the scope of one project in Riverside
County. As of December 31, 1997, the Company was still in the process of deeding
back land to the seller from whom the Company purchased the property. This
transaction is expected to result in a reduction of real estate inventories of
$396,000 in satisfaction of indebtedness in that amount outstanding at December
31, 1997.

                                     F-10
<PAGE>

  In 1994, the Company commenced the process of deeding back property to nine
other land sellers from whom the Company also purchased land in the high desert
of San Bernardino County.  Deed backs of real estate with a book value and
related indebtedness of $1,558,000 and $280,000 occurred in 1996 and 1997,
respectively.

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

<TABLE>
<CAPTION>

                                               For the Years Ended December 31,
                                               --------------------------------
                                                      1997           1996
                                                  -----------    ------------
<S>                                               <C>            <C>

Interest incurred and capitalized                  $3,686,000     $1,635,000
                                                  ===========    ===========

Amortization of capitalized interest included
  in cost of homes sold, cost of land and lots
  sold, and provision for write-down of real
  estate                                           $2,827,000     $1,153,000
                                                   ==========     ==========
Unamortized capitalized interest included in
     real estate inventories at year end           $3,572,000     $2,713,000
                                                   ==========     ==========
</TABLE>

NOTE 4.  NOTES PAYABLE

     Notes payable consist of the following:
<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                       ---------------------------------------------
                                                                                1997                     1996
                                                                       --------------------     --------------------
<S>                                                                       <C>                      <C>

Various land acquisition loans secured by real estate bearing interest
 at fixed rates ranging from 7.0% to 10.0% per annum.  Principal
 payments are required on fixed schedules or as land is taken down.
 The loan balance at December 31, 1997 can be reduced to zero as
 properties are deeded back to land sellers (see Note 3).                       $   716,000              $ 1,796,000




Various infrastructure, development, construction and other land loans
 secured by real estate with an aggregate maximum amount of
 $23,336,000 of which $8,391,000 is available as of December 31, 1997
 to finance construction.  Interest rates on these loans range from
 7.625% to 20.25% and are due primarily in 1998 and 1999.  Principal
 payments on construction loans are generally required as homes are
 closed.  The prime rate as of December 31, 1997 was 8.50%.
                                                                                 14,945,000               13,564,000
                                                                       --------------------     --------------------

Total notes payable secured by real estate                                       15,661,000               15,360,000
Repurchase option for property sold in June 1997 (see Note 10)                    2,400,000                       --
Unsecured loan payable to commercial bank                                         1,141,000                       --
                                                                       ====================     ====================

                                                                                $19,202,000              $15,360,000
                                                                       ====================     ====================
</TABLE>

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

  The weighted average short term borrowing rate for infrastructure,
development, construction and other land loans was 12.29% and 10.13% for the
years ended December 31, 1997 and 1996, respectively.

                                     F-11
<PAGE>

  The minimum future principal payments due on the notes payable secured by real
estate at December 31, 1997 are as follows:

<TABLE>
<S>                                                  <C>
               1998                                  $ 7,276,000
               1999                                    7,388,000
               2000                                           --
               2001                                      320,000
               Thereafter                                677,000
                                                     -----------
                                                     $15,661,000
                                                     ===========
</TABLE>

  In December 1997, the Company restructured a secured line of credit with an
outstanding principal balance of $2,891,000 from a commercial bank, which had
become due.  Pursuant to a series of agreements, the bank's note was purchased
for $1,750,000 by a group of lenders ("new lender") provided by USA.  The bank
forgave accrued interest of $92,000 and canceled its rights under a warrant to
purchase 41,667 shares of the Company's Common Stock that was issued to the bank
pursuant to an agreement made in June 1996 extending and modifying the line of
credit. The resulting obligation of the Company to the new lender is $2,350,000,
which includes the $1,750,000 paid to the bank, fees earned by USA, an interest
reserve and a payoff made by the new lender to an unrelated commercial bank of
another loan to the Company.  The loan is secured by undeveloped land owed by
the Company in Victorville and Palmdale, California and by an assignment of the
Company's rights under a repurchase option agreement (see Note 10).
Additionally, the Company has agreed to repay the bank the $1,141,000 principal
amount not paid by the new lender  when it purchased the bank's note.  This
payment is unsecured, non-interest bearing and payable from 15% of profits
earned annually by the Company commencing with the fiscal year ending December
31, 1999.  Certain non-operational changes in the Company's net worth in excess
of $3,500,000 and certain changes in control of the Company will also require
additional payments to the bank.

NOTE 5.  LINE OF CREDIT

  The Company also has an unsecured $1,000,000 revolving line of credit with a
commercial bank that bears interest at the prime rate plus 1.0%.  The net
outstanding balance under this line of credit at December 31, 1997 was $330,000.
At the time a homebuyer enters into a sales contract with the Company, meets
certain loan prequalification requirements with a third party mortgage lender,
and opens an escrow, the bank advances funds to the Company under this line at
an amount equal to 60% of the net cash proceeds estimated by the Company that it
would receive at the close of the homebuyer's escrow. The escrow company repays
the lender directly from net proceeds when the escrow closes.  The line of
credit expires in April 1998 and the Company is currently in negotiations with
the bank for an additional extension.

NOTE 6.  NOTES TO STOCKHOLDERS

  From September 1996 through November 30, 1997, the Company received advances
of $2,747,000 from Ira C. Norris, of which the Company had repaid $460,000.  The
advances were unsecured, bore interest at 10% and were due on March 31, 1998.
The balance of these advances at December 23, 1997 was $2,462,000, which
included accrued interest of $171,000.  On that date, Mr. Norris agreed to
convert $2,340,000 of this debt to 2,340 shares of Series A Cumulative Preferred
Stock of the Company.  The Company issued these shares on December 30, 1997 to
the Norris Living Trust, of which Mr. Norris is a beneficiary and trustee.  An
unsecured note to the Norris Living Trust, bearing interest at 10% and maturing
on December 23, 1998, evidences the balance of indebtedness not converted in the
amount of approximately $122,000.

  The Series A Preferred Stock has a par value of $0.01, has no voting rights,
is non-participating, and has no conversion features. The stock is redeemable at
the option of the Company for cash at the redemption price of $1,000 per share
plus accumulated but unpaid dividends. The established dividend rate on the
Preferred Stock is $100 per share per annum payable quarterly from available
working capital.

                                     F-12
<PAGE>

  In addition to the loans described above, in June 1997, the Norris Living
Trust loaned the Company $500,000 secured by undeveloped land owned by the
Company in Victorville and Palmdale, California.  This note bears interest at
10% and is due in June 1998.  The balance owing under this note at December 31,
1997 was $526,000, which includes accrued interest of approximately $26,000.

     In June 1997, the Company signed a note and deed of trust in connection
with a loan of $500,000 from the Neeley Revocable Family Trust.  Ronald L.
Neeley, a director of the Company, is a beneficiary and trustee of this trust.
The note bears interest at 15%, is due in June 1998, and is secured by the same
undeveloped land owned by the Company in Victorville and Palmdale, California
which secures the Norris Living Trust loan of $500,000 mentioned above.  The
balance owing under this note at December 31, 1997 was $539,000, which includes
accrued interest of approximately $39,000.


NOTE 7.  INCOME TAXES

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

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

<TABLE>
<CAPTION>
                                           For the Years Ended December 31,
                                           -------------------------------
<S>                                        <C>                <C>
                                                 1997              1996

  Current provision (benefit)               $         --      $         --
  Deferred provision (benefit)                (4,380,000)       (3,946,000)
  Valuation allowance                          4,380,000         3,946,000
                                            ------------      ------------

        Total                               $          0      $          0
                                            ============      ============
</TABLE>

  Statement of Financial Accounting Standards No. 109 ("SFAS No. 109")
"Accounting for Income Taxes", requires, among other things, the recognition of
deferred tax assets for the estimated future tax effects attributable to net
deductible temporary differences and net operating loss carryforwards.  SFAS No.
109 further requires the reduction of deferred tax assets by a valuation
allowance if, based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
The future realization of the deferred tax asset must be evaluated along with
the accumulated differences caused by other tax and book basis differences.
Uncertainties exist due to the reduced level of closings, revenues and earnings
resulting from the sale of the Company's Phoenix and Las Vegas divisions, the
need to raise capital for new land acquisitions and current business operations.
Accordingly, the Company has provided a cumulative $16,085,000 valuation
allowance at December 31, 1997 to reserve against the deferred tax asset as a
result of these uncertainties.  At such time as it becomes more likely than not
that additional portions of the tax asset will be realized in the future, the
valuation allowance can be adjusted.  The Company believes that during the time
period in which the deferred tax asset can be utilized it will generate
sufficient income to realize the net deferred tax asset.  It is difficult to
assess the ultimate timing of the realization of the deferred tax asset.

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

                                     F-13
<PAGE>

<TABLE>
<CAPTION>
                                                    December 31,
                                         -----------------------------------
                                             1997                   1996
                                         ------------           ------------
<S>                                      <C>                    <C>
Deferred tax asset:
  Net operating loss carryforwards       $ 13,573,000           $  6,882,000
  Write-downs of real estate                4,207,000              6,060,000
  Accrued expenses                            505,000                963,000
                                         ------------           ------------
  Total deferred tax asset                 18,285,000             13,905,000
Valuation allowance                       (16,085,000)           (11,705,000)
                                         ------------           ------------

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

       At December 31, 1997, the Company has net operating loss carryforwards
for federal income tax purposes of $33,931,000 that are available to offset
future federal taxable income.  Of these federal net operating losses,
$3,695,000, $5,046,000, $7,830,000, and $17,360,000 expire in the years 2009,
2010, 2011 and 2012, respectively.

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

<TABLE>
<CAPTION>
                                           For the Years Ended December 31,
                                        --------------------------------------
                                             1997                    1996
                                        --------------          --------------
<S>                                     <C>                     <C>
Percent of pre-tax loss at current
     federal statutory income tax rate           (34.0%)                 (34.0%)
                                        --------------          --------------
State and local income taxes net of
     federal benefit                              (4.7)                   (4.7)
Increase in valuation allowance                   38.7                    38.7
                                        --------------          --------------
Net increase (reduction)                          34.0                    34.0
                                        --------------          --------------

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

NOTE 8.  EXTRAORDINARY ITEMS

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

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

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

NOTE 9.  COMMITMENTS AND CONTINGENCIES

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

                                     F-14
<PAGE>

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

     As a result of the limited amount of available working capital,
relationships with certain subcontractors have weakened due to the Company's
inability to pay all of its subcontractors and their suppliers on a current
basis. Numerous subcontractors and suppliers have filed liens, and some are
pursuing further legal action, including the initiation of lawsuits. The Company
has negotiated payment arrangements, as appropriate, in an effort to settle
these claims and release the liens, but various claims and lawsuits are pending
and unresolved. Management does not believe that any of these claims, in the
aggregate, will have a material adverse financial effect on the Company's
business.

     In May 1994, the owners of 11 homes sold by the Company at its 201-home
Northfork project located in Murrieta, California filed a complaint against Inco
Development Company, a wholly-owned subsidiary of the Company ("Inco
Development"), in the Superior Court of California in Riverside County. Through
October 1996, various owners of additional homes in this project filed separate
complaints. All complaints were subsequently consolidated into one complaint
involving 40 homeowners. The alleged damages related primarily to the
performance of the concrete slabs of the homes. The matter was resolved in
mediation, which concluded on March 2, 1998, in the agreed upon amount of
$2,100,000. Payments of the settlement amount will be shared by three of the
Company's primary insurance carriers, and by various subcontractors against whom
the Company had filed cross-complaints. Settlement documents are being prepared,
which include all necessary releases and dismissals of all complaints.
Management believes that any obligations the Company may have relating to the
self-insured retentions included in its insurance policies will not be material.

     Commitments and contingencies also include the usual obligations incurred
by real estate developers in the ordinary course of business, including the
securing of financing, performance bonds, entitlement and water rights.
Outstanding performance bonds at December 31, 1997 and 1996 were $11,230,000 and
$8,927,000, respectively.

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

     The Company is committed under various operating leases for office space
and equipment. Rental expense relating to operating leases of $148,000 and
$274,000 for the years ended December 31, 1997 and 1996, respectively, is
included in general and administrative expenses. The minimum future payments due
on the lease contracts payable at December 31, 1998 are $262,000 for 1998,
$142,000 for 1999, $137,000 for 2000, $123,000 for 2001 and $109,000 for 2002.

NOTE 10. RELATED PARTY TRANSACTIONS

     For the years ended December 31, 1997 and 1996, the Company incurred
$45,000 and $47,000, respectively, in model home design fees and $108,400 and
$153,000, respectively, as reimbursement for the cost of the model home
furnishings to Nancy Orman Interiors. Nancy Orman Interiors is owned by Nancy
Norris, the wife of Ira C. Norris.

     For the years ended December 31, 1997 and 1996, the Company incurred
$102,000 and $107,000, respectively, for the use of office space, to Inco Plaza,
Ltd. Inco Plaza, Ltd. is a limited partnership owned 80% by G&N Investments,
Ltd., its sole general partner. G&N Investments, Ltd. is a limited partnership
owned 70% by Nancy and Ira C. Norris, its sole general partners. Inco Plaza,
Ltd. sold the office building it owns in which the Company leases office space
to a third party buyer in December 1997. The Company's lease was assumed by this
third party buyer. The Company owed Inco Plaza, Ltd. $91,000 at December 31,
1997.

     In May 1996, the Company assigned an unsecured non-interest bearing
receivable in the amount of $293,000 from Victor Valley Commercial Properties to
Ira C. Norris in exchange for a cash payment of $293,000.

                                     F-15
<PAGE>

Victor Valley Commercial Properties is a limited partnership owned 50% by G&N
Investments, Ltd., its sole general partner.

     Thomas E. Gibbs, Jr., a former director of the Company, held a 1.3% limited
partner's interest in Palmdale Vistas prior to the dissolution of the
partnership in December 1997. Mr. Gibbs also holds a 23% general partner's
interest and a 1.4% limited partner's interest in Palmdale Vistas Housing
Investments, which held a 47.4% limited partner's interest in Palmdale Vistas.
Mr. Gibbs also holds a 56.3% general partner's interest in HRIP. Additionally,
the Gibbs Family Trust, of which Mr. Gibbs is a beneficiary and trustee, is a
50% limited partner in Triumph. Mr. Gibbs also holds a 25% interest in ALG. ALG
provided a $600,000 secured participation loan to the Company in June 1996 to
develop 151 single family homes in the high desert. The Company did not proceed
with the development of this project. In connection with ALG's filing a notice
of default on its loan, Mr. Gibbs resigned as a member of the Company's Board of
Directors, effective August 1, 1997. ALG completed a non-judicial foreclosure of
the property secured by its note in December 1997.

     Thomas A. Hantges, a director and stockholder of the Company, owns
approximately 67% of both USA and USA Commercial Real Estate Group ("USA Real
Estate").  USA has provided loans and arranged for individual lenders to provide
loans to the Company secured by Company projects in amounts totaling $12,120,000
through December 31, 1997.  USA has earned fees for these loans totaling
$1,087,000, of which $878,000 has been paid.  The balance is secured by notes
and is to be paid from proceeds from sales of completed homes in certain of the
Company's projects.  The interest rates on these loans range from 12.25% to
20.25%.  The outstanding balance of these loans at December 31, 1997 was
$6,922,000.  Additionally, in June 1997, USA Real Estate arranged for an
additional group of investors to purchase the Company's Eagle Ranch project in
the high desert for $2,400,000.  Funds from this sale helped the Company repay
portions of matured loans secured by this project with a commercial bank.  The
investors granted the Company a six-year option to periodically repurchase
portions of the property, subject to annual minimum repurchase thresholds, for
the development of single-family homes.  If the Company fails to repurchase the
minimum number of lots in any year, the option terminates.  The investors are to
receive one half of the cash generated upon the sale of these single-family
homes constructed by the Company on the repurchased lots, and USA Real Estate is
to receive a fee of $1,000 for each home sold.  If the Company approves a bulk
sale of these lots by the investors, the Company is to receive one half of any
profits earned.

     One of the owners of Overland Opportunity Fund, LLC ("Overland"), which
owned 10.6% of the Company's outstanding Common Stock at March 25, 1998 holds a
5.6% limited partnership interest in FERHP and is an owner of two entities with
which the Company has signed Development and Marketing Agreements.

NOTE 11. EMPLOYEES' PROFIT SHARING PLAN

     The Company has an employee profit-sharing plan covering substantially all
employees. Contributions are made annually on a discretionary basis. No
contributions have been made for the years ended December 31, 1997 and 1996.

NOTE 12.  STOCKHOLDERS' EQUITY

Common Stock Issued

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

     In December 1996, the Company issued a warrant to purchase 200,000 shares
of Common Stock in a private transaction to Overland Company, Inc. ("OCI"). OCI
is affiliated with Overland. The warrant was issued as compensation for services
to be performed pursuant to a consulting agreement entered into with OCI in
December

                                     F-16
<PAGE>

1996. The consulting agreement is for a term of two years during which OCI, on a
non-exclusive basis, is to seek out, investigate and pursue residential
development projects and present them to the Company for its consideration and
approval. The warrant was exercisable within eighteen months of the date of the
agreement at a price of $5.25 per share. Beginning in November 1997, the Company
offered OCI the opportunity to exercise the warrant for an exercise price of
$2.00 per share. From November 1997 through February 1998, OCI assigned portions
of its total interest in the warrant to third parties. The Company received
$350,000 in 1997 and $50,000 in 1998 from these third parties as deposits
pursuant to the exercise of the warrants for all 200,000 shares. The Company is
awaiting receipt of final documentation before it effectuates the sale of the
shares.

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

Stock Options

     In November 1992, the Company's Board of Directors adopted the Stock
Option/Stock Issuance Plan (the "Plan").  Under the plan, 100,000 shares of
Common Stock were authorized for issuance.  The discretionary option grant
program provides for the grant of options to purchase shares of the Company's
Common Stock to key employees (including officers and directors) and consultants
of the Company.  The options issued to employees are subject to certain vesting
requirements.  The options issued to directors may be exercised in full six
months after the grant date.

     The Company has adopted Statement of Financial Accounting Standards No. 123
("SFAS No. 123") "Accounting for Stock-Based Compensation."  In accordance with
the provisions of SFAS No. 123, the Company applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plan and does not recognize compensation expense for its
stock-based compensation plan.  If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for awards
given in 1997 and 1996 under this plan consistent with the methodology
prescribed by SFAS No. 123, the Company's net loss and net loss per share for
the years ended December 31, 1997 and 1996 would not change materially from what
is presented.

     During 1997, 3,752 options were granted at prices ranging from $1.563 to
$2.622 per share.  As of December 31, 1997, 41,023 options were outstanding at
prices ranging from $1.563 to $56.25 per share, none of which had been
exercised.

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

NOTE 13.  SUBSEQUENT EVENTS

     The Company is in the process of making a private offering (the "Offering")
of up to $5,000,000 of Subordinated Investment Notes ("Investment Notes')
bearing interest at the rate of 15% per annum.  The Investment Notes will have
an 18 month maturity date and no prepayment penalty.  The face value of each
Investment Note will be $10,000.  The Offering will terminate on February 9,
1999, but may be extended by the Company to a date

                                     F-17
<PAGE>

not later than July 31, 1999. It is presently anticipated that the Company
conduct the Offering through its employees and will employ, on a best efforts
basis, the services of a placement agent to assist it in the Offering. Net
proceeds, if any, from the Offering will be used for working capital.

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

                                     F-18
<PAGE>

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

            None.

                                 PART III

        The Company's Proxy Statement for its 1998 Annual Meeting of
Stockholders, which, when filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, will be incorporated by reference in this Annual Report on
Form 10-KSB and provides the information required under Part III (Items 9, 10,
11, and 12), except for the information with respect to the registrant's
executive officers who are not directors, which is included in "Item 1.
Business--Executive Officers of the Registrant."


                                      27
<PAGE>

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


(a)  Exhibits.


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

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

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

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

 *4.2     Preferred Stock Certificate issued to Norris Living Trust.

 *4.3     Certificate of Designations, Preferences and Rights of Series A
          Cumulative Preferred Stock of Inco Homes Corporation.

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

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

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

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

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

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

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

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

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

                                      28
<PAGE>

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

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

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

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

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

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

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

+10.16    Employees' Incentive Compensation Plan. (Incorporated by reference to
          Exhibit 10.49 of the Company's registration statement under the
          Securities Act on Form S-1, Registration Statement No. 33-58050.)

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

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

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

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

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

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

                                      29
<PAGE>

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

+10.23    1992 Stock Option/Stock Issuance Plan. (Incorporated by reference to
          Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q dated
          March 31, 1994.)

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

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

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

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

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

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

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

 10.31    Amendment Agreement between Union Bank and Inco Homes Corporation,
          dated October 7, 1994; Loan No. 3779915092 0021-00-0-001.
          (Incorporated by reference to Exhibit 10.15 of the Company's Quarterly
          Report on Form 10-Q dated September 30, 1994.)

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

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

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

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


                                      30
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

                                      31
<PAGE>

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

 10.48    Development and Marketing Agreement by and between Victorville 163
          Partners, L.P., a California Limited Partnership and Inco Homes
          Corporation, dated November 15, 1996. (Incorporated by reference to
          Exhibit 10.48 of the Company's Annual Report on Form 10-K dated
          December 31, 1996.)

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

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

 10.51    Business Loan Agreement by and between Desert Community Bank and Inco
          Homes Corporation, dated February 10, 1997. (Incorporated by reference
          to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q dated
          March 31, 1997.)

 10.52    Promissory Note by and between Desert Community Bank and Inco Homes
          Corporation, dated February 10, 1997. (Incorporated by reference to
          Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q dated
          March 31, 1997.)

 10.53    Loan Agreement by and between USA Commercial Mortgage Company, Inc., a
          Nevada Corporation, et al., and Inco Homes Corporation, dated February
          10, 1997. (Incorporated by reference to Exhibit 10.3 of the Company's
          Quarterly Report on Form 10-Q dated March 31, 1997.)

 10.54    Promissory Note Secured by Deed of Trust by and between USA Commercial
          Mortgage Company, Inc., a Nevada Corporation, et al., and Inco Homes
          Corporation, dated February 11, 1997. (Incorporated by reference to
          Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q dated
          March 31, 1997.)

 10.55    Deed of Trust, Assignment of Rents, Security Agreement and Fixture
          Filing by and between USA Commercial Mortgage Company, Inc., a Nevada
          Corporation, et al., and Inco Homes Corporation, dated February 10,
          1997. (Incorporated by reference to Exhibit 10.5 of the Company's
          Quarterly Report on Form 10-Q dated March 31, 1997.)

 10.56    Placement Agreement by and between USA Commercial Mortgage Company,
          Inc., a Nevada Corporation and Inco Homes Corporation, dated February
          10, 1997. (Incorporated by reference to Exhibit 10.6 of the Company's
          Quarterly Report on Form 10-Q dated March 31, 1997.)

 10.57    Promissory Note by and between USA Commercial Mortgage Company, Inc.,
          a Nevada Corporation and Inco Homes Corporation, dated February 10,
          1997. (Incorporated by reference to Exhibit 10.7 of the Company's
          Quarterly Report on Form 10-Q dated March 31, 1997.)

 10.58    Purchase Agreement and Escrow Instructions by and between the Adelanto
          School District, a California public school district, and Inco Homes
          Corporation, dated February 24, 1997. (Incorporated by reference to
          Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q dated June
          30, 1997.)

 10.59    Loan Agreement by and between USA Commercial Mortgage Company, Inc., a
          Nevada Corporation, et al., and Inco Homes Corporation, dated April
          15, 1997. (Incorporated by reference to Exhibit 10.2 of the Company's
          Quarterly Report on Form 10-Q dated June 30, 1997.)

 10.60    Promissory Note Secured by Deed of Trust by and between USA Commercial
          Mortgage Company, Inc., a Nevada Corporation, et al., and Inco Homes
          Corporation, dated April 15, 1997. (Incorporated by reference to
          Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q dated June
          30, 1997.)

                                      32
<PAGE>

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

 10.61    Deed of Trust, Assignment of Rents, Security Agreement and Fixture
          Filing by and between USA Commercial Mortgage Company, Inc., a Nevada
          Corporation, et al., and Inco Homes Corporation, dated April 15, 1997.
          (Incorporated by reference to Exhibit 10.4 of the Company's Quarterly
          Report on Form 10-Q dated June 30, 1997.)

 10.62    Placement Agreement by and between USA Commercial Mortgage Company,
          Inc., a Nevada Corporation and Inco Homes Corporation, dated April 15,
          1997. (Incorporated by reference to Exhibit 10.5 of the Company's
          Quarterly Report on Form 10-Q dated June 30, 1997.)

 10.63    Promissory Note by and between USA Commercial Mortgage Company, Inc.,
          a Nevada Corporation and Inco Homes Corporation, dated April 15, 1997.
          (Incorporated by reference to Exhibit 10.6 of the Company's Quarterly
          Report on Form 10-Q dated June 30, 1997.)

 10.64    Letter Agreement by and between Overland Opportunity Fund, LLC, a
          California Limited Liability Company and Inco Homes Corporation, dated
          May 27, 1997. (Incorporated by reference to Exhibit 10.7 of the
          Company's Quarterly Report on Form 10-Q dated June 30, 1997.)

 10.65    Agreement for Purchase of Real Property by and between Palomino
          Partners Limited Partnership, a Nevada Limited Partnership, et al.,
          and Inco Homes Corporation, dated June 12, 1997. (Incorporated by
          reference to Exhibit 10.8 of the Company's Quarterly Report on Form
          10-Q dated June 30, 1997.)

 10.66    Residential Property Option Agreement by and between Palomino Partners
          Limited Partnership, a Nevada Limited Partnership, et al., and Inco
          Homes Corporation, dated June 12, 1997. (Incorporated by reference to
          Exhibit 10.9 of the Company's Quarterly Report on Form 10-Q dated June
          30, 1997.)

 10.67    Estoppel Certificate by and between Overland Opportunity Fund, LLC, a
          California Limited Liability Company and Inco Homes Corporation, dated
          June 11, 1997. (Incorporated by reference to Exhibit 10.10 of the
          Company's Quarterly Report on Form 10-Q dated June 30, 1997.)

 10.68    Placement Agreement by and between USA Commercial Real Estate Group, a
          Nevada Corporation and Inco Homes Corporation, dated June 12, 1997.
          (Incorporated by reference to Exhibit 10.11 of the Company's Quarterly
          Report on Form 10-Q dated June 30, 1997.)

 10.69    Promissory Note Secured by Deed of Trust by and between USA Commercial
          Mortgage Company, Inc., a Nevada Corporation, et al., and Inco Homes
          Corporation, dated September 12, 1997. (Incorporated by reference to
          Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q dated
          September 30, 1997.)

 10.70    Deed of Trust, Assignment of Rents, Security Agreement and Fixture
          Filing by and between USA Commercial Mortgage Company, Inc., a Nevada
          Corporation, et al., and Inco Homes Corporation, dated September 12,
          1997. (Riverside County). (Incorporated by reference to Exhibit 10.2
          of the Company's Quarterly Report on Form 10-Q dated September 30,
          1997.)

 10.71    Deed of Trust, Assignment of Rents, Security Agreement and Fixture
          Filing by and between USA Commercial Mortgage Company, Inc., a Nevada
          Corporation, et al., and Inco Homes Corporation, dated September 12,
          1997. (San Bernardino County). (Incorporated by reference to Exhibit
          10.3 of the Company's Quarterly Report on Form 10-Q dated September
          30, 1997.)

 10.72    Loan Agreement by and between Dean Peterson, Trustee, and Inco Homes
          Corporation, dated September 22, 1997. (Incorporated by reference to
          Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q dated
          September 30, 1997.)

                                      33
<PAGE>

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

 10.73    Promissory Note Secured by Deed of Trust by and between Dean Peterson,
          Trustee, and Inco Homes Corporation, dated September 22, 1997.
          (Incorporated by reference to Exhibit 10.5 of the Company's Quarterly
          Report on Form 10-Q dated September 30, 1997.)

 10.74    Deed of Trust, Assignment of Rents, Security Agreement and Fixture
          Filing by and between Dean Peterson, Trustee, and Inco Homes
          Corporation, dated September 22, 1997. (Incorporated by reference to
          Exhibit 10.6 of the Company's Quarterly Report on Form 10-Q dated
          September 30, 1997.)

 10.75    Placement Agreement by and between USA Commercial Mortgage Company,
          Inc., a Nevada Corporation and Inco Homes Corporation, dated September
          22, 1997. (Incorporated by reference to Exhibit 10.7 of the Company's
          Quarterly Report on Form 10-Q dated September 30, 1997.)

 10.76    Promissory Note by and between Thomas Hantges and Joe Milanowski and
          Inco Homes Corporation, dated September 22, 1997. (Incorporated by
          reference to Exhibit 10.8 of the Company's Quarterly Report on Form
          10-Q dated September 30, 1997.)

 10.77    Construction Loan Agreement by and between Michael Peterson and Inco
          Homes Corporation, dated September 11, 1997. (Incorporated by
          reference to Exhibit 10.9 of the Company's Quarterly Report on Form
          10-Q dated September 30, 1997.)

 10.78    Promissory Note Secured by Deed of Trust by and between Michael
          Peterson and Inco Homes Corporation, dated September 11, 1997.
          (Incorporated by reference to Exhibit 10.10 of the Company's Quarterly
          Report on Form 10-Q dated September 30, 1997.)

 10.79    Deed of Trust, Assignment of Rents, Security Agreement and Fixture
          Filing by and between Michael Peterson and Inco Homes Corporation,
          dated September 11, 1997. (Incorporated by reference to Exhibit 10.11
          of the Company's Quarterly Report on Form 10-Q dated September 30,
          1997.)

 10.80    Construction Loan Agreement by and between Carlene E. Pointer, et al.,
          and Inco Homes Corporation, dated September 11, 1997. (Incorporated by
          reference to Exhibit 10.12 of the Company's Quarterly Report on Form
          10-Q dated September 30, 1997.)

 10.81    Promissory Note Secured by Deed of Trust by and between Carlene E.
          Pointer, et al., and Inco Homes Corporation, dated September 11, 1997.
          (Incorporated by reference to Exhibit 10.13 of the Company's Quarterly
          Report on Form 10-Q dated September 30, 1997.)

 10.82    Deed of Trust, Assignment of Rents, Security Agreement and Fixture
          Filing by and between Carlene E. Pointer, et al., and Inco Homes
          Corporation, dated September 11, 1997. (Incorporated by reference to
          Exhibit 10.14 of the Company's Quarterly Report on Form 10-Q dated
          September 30, 1997.)

 10.83    Promissory Note Secured by Deed of Trust by and between USA Commercial
          Mortgage Company, Inc. a Nevada Corporation and Freedom-Eagle Ranch
          Housing Partners, a California Limited Partnership, dated September
          26, 1997. (Incorporated by reference to Exhibit 10.15 of the Company's
          Quarterly Report on Form 10-Q dated September 30, 1997.)

 10.84    Deed of Trust, Assignment of Rents, Security Agreement and Fixture
          Filing by and between USA Commercial Mortgage Company, Inc. a Nevada
          Corporation and Freedom-Eagle Ranch Housing Partners, a California
          Limited Partnership, dated September 29, 1997. (Incorporated by
          reference to Exhibit 10.16 of the Company's Quarterly Report on Form
          10-Q dated September 30, 1997.)

                                      34
<PAGE>

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

 10.85    Deed of Trust, Assignment of Rents, Security Agreement and Fixture
          Filing by and between USA Commercial Mortgage Company, Inc. a Nevada
          Corporation and Inco Homes Corporation, dated September 26, 1997.
          (Riverside County) (Incorporated by reference to Exhibit 10.17 of the
          Company's Quarterly Report on Form 10-Q dated September 30, 1997.)

 10.86    Deed of Trust, Assignment of Rents, Security Agreement and Fixture
          Filing by and between USA Commercial Mortgage Company, Inc. a Nevada
          Corporation and Inco Homes Corporation, dated September 26, 1997. (San
          Bernardino County) (Incorporated by reference to Exhibit 10.18 of the
          Company's Quarterly Report on Form 10-Q dated September 30, 1997.)

*10.87    Development and Marketing Agreement by and between Capital Mutual
          Moreno Valley, LLC., a California Limited Liability Company and Inco
          Homes Corporation, dated October 21, 1997.

*10.88    Letter Agreement by and between Overland Company, Inc. a California
          Corporation and Inco Homes Corporation, dated November 4, 1997.

*10.89    Common Stock Purchase Agreement by and between Thomas Hantges and
          Joseph D. Milanowski and Inco Homes Corporation, dated November 14,
          1997.

*10.90    Letter Agreement by and between Stephen Daniels Commercial Brokerage,
          Inc., G&N Investments, Inc. a California Limited Partnership, and Inco
          Homes Corporation, dated November 17, 1997.

*10.91    Promissory Note by and between Frank Reale, et al., and Inco Homes
          Corporation, dated November 18, 1997.

*10.92    Construction Deed of Trust, Security Agreement, Assignment of Leases
          and Rents and Fixture Filing by and between Frank Reale, et al., and
          Inco Homes Corporation, dated November 18, 1997.

*10.93    Promissory Note by and between Hunter's Ridge Investment Partners, a
          California Partnership, and Inco Homes Corporation, dated November 18,
          1997.

*10.94    Deed of Trust, Security Agreement, Assignment of Leases and Rents and
          Fixture Filing by and between Hunter's Ridge Investment Partners, a
          California Partnership, and Inco Homes Corporation, dated November 18,
          1997.

*10.95    Subordination and Reconveyance Agreement by and between USA Commercial
          Mortgage Company, Hunter's Ridge Investment Partners, a California
          Partnership, and Inco Homes Corporation, dated November 18, 1997.

*10.96    Promissory Note by and between Marilyn Carter, et al., and Inco Homes
          Corporation, dated November 26, 1997.

*10.97    Construction Deed of Trust, Security Agreement, Assignment of Leases
          and Rents and Fixture Filing by and between Marilyn Carter, et al.,
          and Inco Homes Corporation, dated November 26, 1997.

*10.98    Construction Loan Agreement by and between Marilyn Carter, et al., and
          Inco Homes Corporation, dated November 26, 1997.

*10.99    Agreement by and between City National Bank and Inco Homes
          Corporation, dated December 1, 1997.

*10.100   Promissory Note by and between Sara Katz, et al., and Inco Homes
          Corporation, dated December 31, 1997.

                                      35
<PAGE>

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

*10.101   Deed of Trust, Security Agreement, Assignment of Leases and Rents and
          Fixture Filing by and between Sara Katz, et al., and Inco Homes
          Corporation, dated December 31, 1997 (Los Angeles County).

*10.102   Deed of Trust, Security Agreement, Assignment of Leases and Rents and
          Fixture Filing by and between Sara Katz, et al., and Inco Development
          Corporation, a California Corporation, dated December 31, 1997 (San
          Bernardino County).

*10.103   Restructuring Agreement by and between Sara Katz, et al., Palmdale
          Vistas Housing Developments, a California Limited Partnership, Inco
          Development Corporation, and Inco Homes Corporation, dated December 4,
          1997.

*10.104   Agreement and Escrow Instructions by and between Palmdale Vistas
          Housing Investments, a California Limited Partnership, Palmdale Vistas
          Housing Developments, a California Limited Partnership, and Inco
          Development Corporation, dated December 19, 1997.

*21.1     Subsidiaries of the Registrant.

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

*27.1     Financial Data Schedule
________________
* Filed herewith
+ Management contract, compensatory plan or arrangement


(b)  Reports on Form 8-K.


            None.

                                      36
<PAGE>

                                 SIGNATURES


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


                              INCO HOMES CORPORATION



                              By  /s/ Ira C. Norris
                                  -------------------------------------------
                                  Ira C. Norris
                                  Chairman of the Board, President and
                                  Chief Executive Officer

Dated:  March 31, 1998

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


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

 /s/ Ira C. Norris        Chairman of the Board, President and    March 31, 1998
----------------------      Chief Executive Officer (principal
     Ira C. Norris          executive officer)


 /s/ David A. Fogg        Chief Financial Officer (principal      March 31, 1998
----------------------      financial officer)
     David A. Fogg


 /s/ Norman B. Gold       Director of Finance (principal          March 31, 1998
----------------------      accounting officer)
     Norman B. Gold


 /s/ Robert H. Daskal     Director                                March 31, 1998
----------------------
     Robert H. Daskal


 /s/ Thomas A. Hantges    Director                                March 31, 1998
----------------------
     Thomas A. Hantges


 /s/ Ronald L. Neeley     Director                                March 31, 1998
----------------------
     Ronald L. Neeley


 /s/ John Seymour         Director                                March 31, 1998
----------------------
  John F. Seymour, Jr.


                                      37