Financial Highlights
(in thousands, except per share amounts)


                                                   Six       Six
                                                  Months    Months     Year
                                                  Ended     Ended     Ended
Selected            Years Ended November 30,      Nov. 30,  May 31,   Nov. 30,
Operating Data        1996      1995      1994      1993      1993      1992
------------------- --------  --------  --------  --------  --------  --------
Revenues            $122,435  $180,843  $168,723   $83,351   $76,555  $135,421
Gross profit          16,790    19,560    28,984    15,878     4,867     5,460
Income (loss)
 from operations       1,837    (1,225)    8,595     5,560   (15,593)  (25,630)
Income (loss)
 before income
 taxes and extra-
 ordinary gain         1,031    (2,307)    6,560     4,756   (56,494)  (38,611)
Income (loss)
 before extra-
 ordinary gain           453    (3,138)    4,193     2,872   (56,494)  (38,611)
Net income (loss)        453    (3,138)    4,193     2,872     1,817   (38,611)
Income (loss) per
 share before
 extraordinary gain      .02      (.12)      .16       .11     (1.67)    (1.14)
Net income (loss) 
 per share               .02      (.12)      .16       .11       .05     (1.14)

                                                               At        At
Selected Balance                At November 30,              May 31,  Nov. 30,
Sheet Data            1996      1995      1994      1993      1993      1992
------------------- --------  --------  --------  --------  --------  --------
Total assets         $88,757   $91,416  $122,144  $110,930  $117,462  $187,909
Total debt            43,945    46,227    69,398    62,792    70,242   141,828
Shareholders'
 equity (deficit)     28,086    27,013    29,045    23,893    21,000      (452)


The selected operating data for the years ended November 30, 1996, 1995 and
1994 and the six months ended November 30, 1993 and selected balance sheet data
at and subsequent to May 31, 1993 are separated by a black line since, due to
the adoption of fresh-start accounting and reporting to reflect the effects of
the Reorganization as of May 31, 1993, these amounts are not comparable to the
amounts reflected for prior periods.

                             -1-

Management's Discussion And Analysis Of Financial Condition
And Results Of Operations


RESULTS OF OPERATIONS
=====================

RESULTS OF OPERATIONS FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
--------------------------------------------------------------------

Revenues for the year ended November 30, 1996 were $122.4 million compared to
revenues of $180.8 million for the year ended November 30, 1995. Deliveries of
549 homes resulted in housing revenues of $110.3 million for the year ended
November 30, 1996. For the year ended November 30, 1995, the Company delivered
749 homes which generated $171.3 million of housing revenues. Housing revenues
decreased for the year ended November 30, 1996 by $61.0 million or thirty-six
percent (36%) compared to the year ended November 30, 1995 reflecting a
decrease in deliveries and average selling prices realized on the deliveries to
$201,000 in 1996 from $229,000 in 1995. Housing revenues decreased primarily
due to a fifty percent (50%) decrease in homes delivered by the Company's
Northeast division. The Northeast division deliveries were adversely impacted
by a significantly lower level of backlog entering 1996 compared to 1995, the
close out of seven communities during the year, and the opening and timing of
fewer replacement communities as a result of conserving cash, repositioning the
Northeast to one division and refocusing on the division's target markets.
These results were partially offset by a sixty-five percent (65%) and forty-two
percent (42%) increase in 1996 in the Florida division housing revenues and
home deliveries, respectively, compared to the prior year. The Florida division
benefited in 1996 from higher sales activity due to more communities open for
sale including five new communities opened during the first half of 1996 which
contributed to the improved delivery levels realized in the fourth quarter of
1996. The decrease in the average sales price is attributable to the greater
proportion of the Company's homes delivered in 1996 coming from the Florida
division, where average selling prices are typically lower than in the
communities served in the Northeast. Revenues include the sales of land,
options, and commercial land and buildings of $12.0 million for the period
ended November 30, 1996 compared to $8.5 million for 1995.

The Company's gross profit margin on homes delivered was approximately thirteen
percent (13%) during the year ended November 30, 1996, compared to a gross
profit on homes, excluding the $1.6 million provision for net realizable value,
of twelve percent (12%) in the year ended November 30, 1995. The gross profit
margin on homes delivered in 1996 was favorably impacted by the increased
deliveries and related gross profit from the Company's Florida division. The
Company's gross profit margin from the Northeast division also improved from
the prior year due to deliveries from new communities reflecting the division's
current strategy to focus on the second and third time move-up buyer and its
marketing strategy to emphasize quality, features and value. However, the
overall gross profit margin for the year reflects intensive competition and
sales incentives to homebuyers. Housing gross profit declined by $5.8 million
for the year ended November 30, 1996, due to the decreased deliveries in the
Northeast which was partially offset by the Florida division increases in
deliveries and related gross profit. Included in the Company's gross profit is
the profit from the sales of land and commercial land and buildings for the
years ended 1996 and 1995 of $2.3 million and $500,000, respectively. The
Company has continued to sell its commercial land and buildings and certain
inventory in markets where its land position is in excess of estimated demand
levels over two years.

During the year ended November 30, 1996, the Company resolved certain issues
relating to sales tax, litigation and construction obligations and, therefore,
reversed approximately $440,000 in accrued liabilities. These reductions are
reflected in Cost of revenues.

During the second quarter of fiscal 1995, as a result of the consolidation of
the New Jersey-North and New Jersey-South divisions and economic and market
conditions including a decreased sales pace, the Company decided not to incur
further preacquisition costs on nine properties controlled under option. These
actions resulted in a pre-tax charge of approximately $1.1 million that is
reflected in Cost of revenues. Also included in Cost of revenues is a
$1.1 million pre-tax credit realized from the reversal of a reserve previously
provided on a community completed in 1995. This reserve related to a
$1.1 million payable that the Company, in finalizing the accounting for this

                             -5-

community in the second quarter of 1995, determined, based upon further review
and advice of counsel, had been discharged by reason of the creditor's failure
to take certain actions in connection with the Company's bankruptcy
reorganization.

In the year ended November 30, 1995, the Company recorded non-cash charges to
the Provision for estimated net realizable value of $1.6 million to reflect
certain inventory, primarily two properties, at their estimated net realizable
value. This determination was based upon decreased sales absorption levels in
the Northeast which continued into the fourth quarter of 1995 and the
reevaluation of the ultimate use of a parcel in Florida. Estimated net
realizable value has been determined based upon the amount the Company expects
to realize through sale or development based on management's plans for each
property. The estimation process involved in the determination of estimated net
realizable value is inherently subjective since it requires estimates as to
future events and conditions. The estimated net realizable value of a property
may exceed the value which could be obtained through the immediate sale of the
property if development plans for such property support a higher cost recovery.
For 1996, there were no provisions recorded for estimated net realizable value.

Selling, general and administrative expenses decreased to $15.0 million (12% of
revenues) for the year ended November 30, 1996, compared to $18.9 million (10%
of revenues) for the year ended November 30, 1995, reflecting a $3.9 million
decrease. The decrease is principally due to a reduction in selling costs
resulting from lower levels of home deliveries and fewer communities open for
sales and deliveries in 1996, lower advertising and employee costs due to the
winddown of the Chicago operations, the consolidation of the Northeast division
and the continued efforts of management to reduce fixed costs. The increase in
selling, general and administrative expenses as a percentage of revenues is
principally due to lower delivery levels and related revenues for 1996.

In November 1995, the Company decided to wind down the Chicago division due to
unfavorable results and prospects. As a result, a primarily non-cash
$1.1 million charge was recorded in the fourth quarter of 1995 and is included
in Restructuring charges. Also included in Restructuring charges in 1995 is
$840,000 in severance benefits, $200,000 of which resulted from the March 1995
rightsizing, primarily from the consolidation of the New Jersey-North and New
Jersey-South divisions, that resulted in the reduction of approximately twenty
percent (20%) of the Company's workforce; and $640,000 that resulted from a
severance arrangement entered into with the Company's former President in
November 1995, which required the Company to make a lump sum payment and pay
the remaining premium on a whole life insurance policy in January 1996.

During 1996, the Company substantially completed the winddown of the Chicago
division by the build out and sale of certain lots and bulk sale of the
remaining finished lots. As of November 30, 1996, four homes remain to be sold
and delivered which the Company believes will be completed in the first half of
1997.

Gross interest cost was approximately $5.5 million for the year ended
November 30, 1996, compared to $7.1 million for the year ended November 30,
1995, respectively. The decrease in gross interest cost for the year ended
November 30, 1996 resulted from substantially lower average loan balances
throughout the year compared to the year ended November 30, 1995. The weighted
average debt outstanding under the Company's Revolving Credit Facility was
$45.4 million for the year ended November 30, 1996 compared to $58.1 million
for the prior year. Interest capitalized in the year ended November 30, 1996
was $4.1 million compared to $5.0 million in the year ended November 30, 1995.
The decrease in capitalized interest is primarily a result of lower inventory
levels. The capitalized amounts will reduce future gross profit levels assuming
no relative increases in selling prices.

Included in Other income (expense) for the year ended November 30, 1996 is
$460,000 that represents payments received during the year on a note previously
reserved. During 1995, the Company received $890,000 that represents payments
received primarily in the fourth quarter in connection with the dissolution and
liquidation of Talcon, L.P. ("Talcon") in complete satisfaction of Talcon's
debt obligations to the Company. The Company had previously established a
reserve for all amounts owed to it by Talcon due to the uncertainty of
collection that resulted from the fact that Talcon had commenced dissolution
proceedings in 1994 and was in default with respect to approximately
$8.3 million of borrowings under a loan agreement with its bank lender.

The Company, primarily as a result of the adoption of fresh-start accounting
and reporting in connection with its reorganization in 1993 (the
"Reorganization"), has a tax basis in its assets held as it exited its

                             -6-

Reorganization substantially in excess of the carrying value of these assets
used for financial reporting purposes. As a result of this difference in basis,
the Company will realize a tax benefit over time against future earnings. In
accordance with The American Institute of Certified Public Accountants
Statement of Position 90-7, the Company is required to provide a provision in
lieu of taxes notwithstanding the fact that there are no significant taxes
payable. Results for the year ended November 30, 1996 reflect a provision in
lieu of taxes for financial reporting purposes of $578,000 which is primarily
non-cash and, therefore, does not impact the Company's cash position, tangible
net worth or earnings before interest, taxes, depreciation and amortization
("EBITDA"). In 1995, a provision in lieu of taxes was also recorded in the
amount of $831,000. The net operating loss carryforwards and other deferred tax
assets are subject to utilization limitations as a result of the changes in
control of the Company that occurred in 1993 and 1995. The Company's ability to
use the annual net operating loss ("NOL") to offset future income is
approximately $1.6 million per year or approximately $26.5 million.

Net sales contracts of $114.5 million (548 homes) were recorded by the Company
during the year ended November 30, 1996, representing increases in the dollar
value of contracts of five percent (5%) and contracts of ten percent (10%)
compared to $108.7 million (496 homes) in the same period in 1995. At
November 30, 1996, the backlog of homes under contract totalled 165 homes
having an aggregate dollar value of $40.2 million, compared to 166 homes at
November 30, 1995 having an aggregate dollar value of $36.0 million
representing an increase of twelve percent (12%) in backlog value. Current year
net sales activity benefited from the opening of seven new communities in the
Florida division contributing to a fifty-six percent (56%) and sixty-nine
percent (69%) increase in net home sales and dollars, respectively, compared to
1995. At November 30, 1996, the Florida division represented approximately
fifty percent (50%) and thirty-two percent (32%) of total backlog homes and
backlog value, respectively, compared to thirty-one percent (31%) and twenty-
two percent (22%) of total backlog homes and backlog value, respectively, at
November 30, 1995. Partially offsetting these increases is the reduction in
Northeast division net sales during 1996 from 1995 attributable to the winddown
of seven communities during the year, the opening of fewer replacement
communities and the timing of such openings. As of November 30, 1996, eight
active communities were open for sales in the Northeast division compared to
eleven at November 30, 1995. The average price per home in backlog at
November 30, 1996 increased by twelve percent (12%) to approximately $244,000
from $217,000, which is primarily attributable to higher-priced homes in the
Northeast division resulting from net sales associated with the division's four
new communities opened in the fourth quarter of 1995 and during 1996 which
reflects the division's focus on the second and third time move-up buyer and
its marketing strategy to emphasize quality, features and value. The backlog in
both years includes contracts containing financing and other contingencies
customary in the industry, including contracts that are contingent on the
purchaser selling their existing home. Due to changes in product offerings, the
uncertainty of future market conditions and the general economic environment,
the sales backlog, homes delivered, average selling prices and gross profit
achieved in the current and prior periods may not be indicative of those to be
realized in succeeding periods.

The Company has begun its entry into the active adult housing market in Ocean
County, New Jersey, in a community that will be marketed under the name
Renaissance. The Company has the contractual right to purchase up to 2,000
finished lots on a rolling option basis, with the land seller funding the
construction of the amenities that will be offered in this 600 acre community.
The Company expects Renaissance, which will be a major part of the Northeast
division's new focus on both the active adult community and move-up buyer
markets, to be a significant contributor to the division's future results.

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. The
provisions of this statement are effective for fiscal years beginning after
December 15, 1995. If the Company adopted this statement currently, it would
not have a material effect on the Company's financial position, results of
operations or cash flows.

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation." The provisions of this statement are effective for fiscal years
beginning after December 15, 1995. The Company intends to implement the

                            -7-

disclosure-only provision of this statement. Accordingly, if the Company
adopted this statement currently, it would not have a material effect on the
Company's financial position, results of operations or cash flows.


RESULTS OF OPERATIONS FOR THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
--------------------------------------------------------------------

Revenues for the year ended November 30, 1995 were $180.8 million compared to
revenues of $168.7 million for the year ended November 30, 1994. Deliveries of
749 homes resulted in housing revenues of $171.3 million for the year ended
November 30, 1995. For the year ended November 30, 1994, the Company delivered
899 homes which generated $165.5 million of housing revenues. Housing revenues
in 1995 increased four percent (4%) reflecting an increase in average selling
prices to $229,000 for the homes delivered during the year compared to $184,000
for the homes delivered in 1994. This increase in average revenue per home is
consistent with the Company's plan to position itself in middle and upscale
market segments in the Northeast and Orlando, Florida markets with enhanced
margin potential and reduce its former concentration in entry level, multi-
family products because of unfavorable demographic trends and increasing
regulatory costs. Deliveries in the Northeast division comprised seventy
percent (70%) of the Company's total deliveries in fiscal 1995 where average
selling prices increased to $265,000 from $226,000 in 1994. Deliveries in the
Orlando division comprised twenty-four percent (24%) of total deliveries in
fiscal 1995, where average selling prices increased to $125,000 in 1995 from
$109,000 in 1994. The seventeen percent (17%) decrease in home deliveries in
fiscal 1995 is primarily attributable to a thirty-nine percent (39%) decrease
of home deliveries in the Orlando, Florida division primarily due to the timing
of new community openings.

The Company's gross profit margin on homes delivered excluding the provision
for net realizable value of $1.6 million was approximately twelve percent (12%)
during the year ended November 30, 1995, compared to seventeen percent (17%) in
the year ended November 30, 1994. The gross profit margin on homes delivered in
1995 was impacted by increased competition in a difficult market while the
homes delivered in 1994 reflected the revaluation of the Company's inventory as
a result of the application of fresh-start accounting and reporting in
connection with the Company's 1993 Plan of Reorganization. In addition, gross
profit margins have been, and will continue to be, unfavorably impacted by
increased carrying costs resulting from lower absorption rates. Gross profit
margins have also been impacted by the fact that the Company's land pipeline,
which was severely depleted when it completed its Reorganization in May 1993,
had been refilled in a transitional market environment that reflected upward
price pressures on land that could not be entirely passed along to buyers.
Pursuant to management's continued focus on its core homebuilding business, the
Company sold two of its commercial properties in 1995 for approximately
$8.1 million in addition to the sale of one of its commercial properties in the
fourth quarter of 1994 for $800,000. The 1995 sales resulted in an aggregate
pre-tax gain of approximately $500,000 and provided approximately $850,000 of
additional cash for operations after retirement of $6.9 million of mortgage
debt.

Selling, general and administrative expenses decreased to $18.9 million (10% of
revenues) for the year ended November 30, 1995, compared to $20.4 million (12%
of revenues) for the year ended November 30, 1994. The decrease is principally
due to lower employee costs resulting from reductions in employee levels and
consolidation of operations in the Northeast completed early in the second
quarter of 1995.

Gross interest cost was approximately $7.1 million for the year ended
November 30, 1995, compared to $5.5 million for the year ended November 30,
1994, respectively. The increase in gross interest cost for the year ended
November 30, 1995 resulted from higher interest rates and, to a lesser extent,
higher average loan balances compared to the year ended November 30, 1994.
Interest capitalized in the year ended November 30, 1995 was $5.0 million
compared to $4.0 million in the year ended November 30, 1994. The increase of
capitalized interest is primarily a result of higher interest rates. The
capitalized amounts will reduce future gross profit levels assuming no relative
increases in selling prices.

Included in Other income (expense) in 1995 is $890,000 which represents
payments received primarily in the fourth quarter in connection with the
dissolution and liquidation of Talcon, in complete satisfaction of Talcon's
debt obligations to the Company. The Company had previously established a
reserve for all amounts owed to it by Talcon due to the uncertainty of

                             -8-

collection that resulted from the fact that Talcon had commenced dissolution
proceedings in 1994 and was in default with respect to approximately
$8.3 million of borrowings under a loan agreement with its bank lender.

The Company recorded a charge against earnings of $800,000 in fiscal 1994
relating to a proposed offering of securities and related working capital
facility. The proposed offering was terminated due to unfavorable conditions in
the financial markets.

Results for the year ended November 30, 1995 reflect a provision in lieu of
taxes for financial reporting purposes of $831,000 compared to $2.4 million in
1994, which is primarily non-cash, and, therefore, does not impact the
Company's cash position, tangible net worth or EBITDA. Goodwill was fully
extinguished during the year ended November 30, 1994 and an increase of
$719,000 was recorded to Paid in capital. The effective rate of the 1994
provision in lieu of taxes was reduced by approximately $700,000 as a result of
a reduction in tax reserves that was appropriate when the Company obtained
clearance on a state tax position with the New Jersey Division of Taxation. The
net operating loss carryforwards and other deferred tax assets are subject to
utilization limitations as a result of the changes in control of the Company
that occurred in 1993 and 1995.

Net sales contracts of $108.7 million (496 homes) were recorded by the Company
during the year ended November 30, 1995, representing decreases in the dollar
value of contracts of 42% compared to $188.9 million (951 homes) in the same
period in 1994. Due to market conditions, the number of new communities opened
for sales during fiscal 1995 decreased forty-two percent (42%) to seven
communities, six of which were in the Florida market. This resulted in fewer
communities open for sales during 1995 and a reduction in the amount
outstanding under the credit facility by $15.0 million to $45.0 million by
November 30, 1995.


LIQUIDITY AND CAPITAL RESOURCES
===============================

During the past several years, the Company has financed its operations
primarily from internally generated funds from home deliveries, land sales and
sales of commercial land and buildings. In April 1997, the Company and its
lenders amended the Company's revolving credit facility (the "Facility") to
extend the term of the Facility through February 28, 1998 and, if certain
conditions are satisfied, August 31, 1998. The amended Facility (the "Amended
Facility") reduced the loan commitment level to $46.0 million initially and
requires amortization of $3.0 million by July 15, 1997, another $3.0 million by
August 31, 1997 and a further reduction of $10.0 million by November 30, 1997.
In addition, the Amended Facility increased the interest rate charged to the
Company to the lender's prime rate (8.25% at November 30, 1996) plus two and
one-half percent (2.5%). The Company is required to pay the lenders, in five (5)
installments, a commitment fee, which the Company will amortize over the
extension period ending February 28, 1998, equal to three percent (3%) of the
lenders' initial commitment level under the Amended Facility. The Amended
Facility provides the Company an option to extend the term to August 31, 1998
if outstanding borrowings and the commitment level are reduced to $20.0 million
or less by February 28, 1998. In such event, the interest rate charged to the
Company will be reduced to prime plus two percent (2%).

The Amended Facility changed various restrictions and financial covenants with
which the Company is required to comply, including covenants relating to cash
basis interest coverage, EBITDA and tangible net worth, and continues to impose
limits on the amount which can be expended on land acquisition and land
development. For the year ended November 30, 1996, the Company's EBITDA was
$7.3 million compared to $8.6 million in 1995. Purchase money financing from
other sources continues to be limited to $5.0 million under the Amended
Facility. Certain subsidiaries of the Company are guarantors of the obligations
under the Amended Facility. The lenders have a security interest in
substantially all of the assets of the Company and its subsidiaries, subject
only to certain permitted liens approved by the lenders. The Amended Facility
prohibits the payment of dividends by the Company.

Although the Amended Facility will restrict the Company's ability to expand its
business, the Company believes, based upon its business plan, that it will be
able to comply with the financial covenants and other terms contained in the
Amended Facility; however, there can be no assurance that if market or other
conditions deteriorate, that the Company will meet the covenant levels.

The Company is pursuing and will continue to pursue long-term financing to
replace the Amended Facility. Pending such replacement, the Company believes

                             -9-

that funds generated by operating activities, income tax payment reductions
derived from NOL utilization, the sale of certain assets during fiscal 1997 and
borrowing availability under the Amended Facility will provide sufficient
capital to support the Company's operations through the term of the Amended
Facility. If a more favorable long-term credit facility is not obtained, the
rate at which the Company can open new communities may be adversely affected
and the Company would be required to effect sales of substantial assets in
order to obtain an extension of the Amended Facility beyond February 28, 1998.

Interest rate increases will continue to impact the Company's cost of capital
and related interest costs. Increases in capitalized interest could reduce
future gross profit levels assuming no relative increases in home selling
prices. EBITDA, however, would not be adversely impacted.

CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------

Inventories amounted to $65.5 million at November 30, 1996 compared to
$64.2 million at November 30, 1995. The increase of $1.3 million was primarily
the result of $23.3 million of land acquisitions, of which approximately
$4.7 million was financed by purchase money mortgages and $2.2 million of
inventory accruals, partially offset by a $22.0 million reduction due to home
deliveries and land sales. Commercial properties were reduced by $1.9 million
from the sale of commercial land and buildings in 1996. Inventories decreased
$24.6 million in 1995 primarily due to home deliveries offset to a lesser
extent by land acquisitions totaling $10.5 million. Commercial properties were
also reduced by $7.2 million in 1995 as a result of the sale of two commercial
buildings. The increase in inventory from November 30, 1993 to November 30,
1994 of $10.6 million was a result of land acquisitions of $25.8 million during
the year which were offset by reductions in inventory levels through
deliveries. Of the $25.8 million in land acquisitions, approximately
$2.5 million was financed with purchase money mortgage debt.

The Company will continue to seek opportunities to obtain control of land for
future communities at advantageous prices and terms. Funds generated by the
Company's operations will be utilized for the acquisition of such properties.
In addition, borrowings from the Facility will be utilized for acquisitions as
needed, and to the extent available. Also, options will be utilized to the
extent possible to minimize risks, conserve cash and maximize the Company's
land pipeline.

Receivables increased approximately $310,000 from November 30, 1995 to
November 30, 1996 primarily due to an increase in mortgages and notes
receivable in connection with the sale of a land parcel in the third quarter,
partially offset by the timing of home closings. Receivables increased by
approximately $1.1 million during 1995 primarily due to the timing of home
closings, offset to a lesser extent by reductions in cash collateral held for
performance guarantees for communities that were completed during the year. The
$900,000 increase in receivables in 1994 is attributable to the timing of home
closings.

The decrease in accounts payable, accrued expenses and other liabilities from
November 30, 1995 to November 30, 1996 of $1.4 million is primarily
attributable to the decreased level of homebuilding in the Northeast division,
the payment of severance to the Company's former President and the reduction of
the Company's business insurance. The $5.5 million decrease in accounts
payable, accrued expenses and other liabilities from November 30, 1994 to
November 30, 1995 is primarily attributable to the decreased level of
homebuilding operations and communities under development and a $1.1 million
credit taken in the second quarter of 1995 from the reversal of a reserve
provided during the delivery period of a community that closed out in early
1995. A decrease in accounts payable, accrued expenses and other liabilities of
$600,000 from November 30, 1993 to November 30, 1994 was attributable to a
$2.4 million increase in accounts payable from the increased level of
homebuilding operations and communities under development offset by a decrease
in accrued expenses of $3.0 million as a result of payments made in conjunction
with litigation settlements, the Talcon dissolution and the California division
winddown. In addition, a $700,000 reserve related to a certain tax issue was
reversed.

                            -10-

CASH FLOWS FROM INVESTING ACTIVITIES
------------------------------------

During 1996, the Company received $725,000 from the liquidation of a joint
venture in which it previously participated. 

In 1995, Talcon, a limited partnership formed by the Company in 1987, paid the
Company $890,000 in full satisfaction of its debt obligations to the Company.
The Company had previously established a reserve for all amounts owed to it by
Talcon and, as a result, the payment received in 1995 was classified in Other
(income) expense.


CASH FLOWS FROM FINANCING ACTIVITIES
------------------------------------

The aggregate principal amount of loans outstanding under the Facility was
$39.5 million at November 30, 1996, $45.0 million at November 30, 1995 and
$60.0 million at November 30, 1994. The $5.5 million decrease since
November 30, 1995 occurred during the second half of 1996 in conjunction with
the Company's strategy to reduce its debt obligation and improve the Company's
financial condition.

The Company utilizes mortgages payable, when available and within the covenant
restrictions of the Facility, to finance a portion of its acquisitions.
Mortgages payable increased to $4.4 million at November 30, 1996, from
$1.2 million at November 30, 1995, representing two purchase money mortgages
used to acquire new land.

The 1995 sales of commercial land and buildings resulted in approximately
$850,000 of cash for operations after the reduction of outstanding mortgages
payable of $6.9 million.


INFLATION
=========

The Company, as well as the homebuilding industry in general, may be adversely
affected by inflation, which can cause increases in the price of land, raw
materials and labor. Unless cost increases are recovered through higher sales
prices, gross margins can decrease. Increases in interest rates result in
higher construction and financing costs which can also adversely affect gross
margins. In addition, increases in home mortgage interest rates make it more
difficult for the Company's customers to qualify for mortgage loans,
potentially reducing the demand for homes. Historically, the Company, in
periods of high inflation, has generally been able to recover increases in
land, construction, labor and interest expenses through increases in selling
prices; however, the Company believes that its gross margins in 1995 and 1996
were adversely impacted by increased costs which could not be entirely passed
through to buyers. See "Results of Operations."


FORWARD LOOKING STATEMENTS
==========================

All statements, other than statements of historical fact, included in this
Annual Report, including without limitation the statements under "To Our
Shareholders" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," are, or may be deemed to be, "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements (including statements relating to the Company's
ability to comply with covenants contained in the Amended Facility) involve
assumptions, known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such potential risks
and uncertainties, include without limitation, matters related to national and
local economic conditions, the effect of governmental regulation on the
Company, the competitive environment in which the Company operates, changes in
interest rates, home prices, availability and cost of land for future growth,
the timing of land acquisition and product development, availability of working
capital and the availability and cost of labor and materials, and other risk
factors detailed herein and in the Company's Securities and Exchange Commission
filings.

                              -11-


Consolidated Balance Sheet
November 30, 1996 And 1995
==========================


                                                     1996            1995
Assets                                           ------------    ------------
 Cash and cash equivalents                       $  4,292,000    $  5,161,000
 Receivables                                        9,274,000       8,964,000
 Inventories                                       65,525,000      64,246,000
 Commercial land and buildings                      7,512,000       9,439,000
 Investments in joint ventures                             --         850,000
 Prepaid expenses and other assets                  2,154,000       2,756,000
                                                 ------------    ------------
   Total assets                                  $ 88,757,000    $ 91,416,000
                                                 ============    ============


Liabilities and Shareholders' Equity
 Revolving credit agreement                       $39,500,000     $45,000,000
 Mortgages payable                                  4,445,000       1,227,000
 Accounts payable                                   4,811,000       3,270,000
 Accrued expenses and other liabilities            11,915,000      14,906,000
                                                 ------------    ------------
   Total liabilities                               60,671,000      64,403,000
                                                 ------------    ------------

Commitments and contingent liabilities

Shareholders' Equity
 Common stock, $.01 par value, 53,700,000 shares
  authorized; issued and outstanding 26,527,000
  in 1996 and 26,371,000 in 1995                      265,000         264,000
 Paid in capital                                   23,441,000      22,822,000
 Retained earnings                                  4,380,000       3,927,000
                                                 ------------    ------------
 Total shareholders' equity                        28,086,000      27,013,000
                                                 ------------    ------------
   Total liabilities and shareholders' equity    $ 88,757,000    $ 91,416,000
                                                 ============    ============



See accompanying notes to consolidated financial statements.

                             -12-

Consolidated Statement Of Operations
====================================

                                              Years Ended November 30,
                                          1996          1995          1994
                                      ------------  ------------  ------------
Revenues                              $122,435,000  $180,843,000  $168,723,000
                                      ------------  ------------  ------------

Costs and expenses
 Cost of revenues                      105,645,000   159,690,000   139,339,000
 Provision for estimated
  net realizable value                          --     1,593,000       400,000
 Selling, general and administrative    14,953,000    18,845,000    20,389,000
 Restructuring charges                          --     1,940,000            --
                                      ------------  ------------  ------------
                                       120,598,000   182,068,000   160,128,000
                                      ------------  ------------  ------------

Income (loss) from operations            1,837,000    (1,225,000)    8,595,000

Other charges (credits)
 Interest expense, net                   1,266,000     1,847,000     1,235,000
 Other (income) expense                   (460,000)     (765,000)      800,000
                                      ------------  ------------  ------------
Income (loss) before income taxes        1,031,000    (2,307,000)    6,560,000
Provision in lieu of income taxes          578,000       831,000     2,367,000
                                      ------------  ------------  ------------
Net income (loss)                     $    453,000  $ (3,138,000) $  4,193,000
                                      ============  ============  ============

Net income (loss) per share           $        .02  $       (.12) $        .16
                                      ============  ============  ============



See accompanying notes to consolidated financial statements.

                             -13-


Consolidated Statement Of Cash Flows
====================================


                                              Years Ended November 30,
                                          1996          1995          1994
                                      ------------  ------------  ------------
Cash Flows from Operating Activities
------------------------------------
Net income (loss)                     $    453,000  $ (3,138,000) $  4,193,000
Adjustments to reconcile net income
 (loss) to net cash provided (used)
 by operating activities
  Depreciation and amortization          1,418,000     1,741,000     1,877,000
  Provision in lieu of income taxes        578,000       831,000     2,928,000
  Issuance of stock under 401(k) Plan       42,000       213,000       198,000
  Restructuring charges                         --     1,940,000            --
  Provision for estimated net
   realizable value                             --     1,593,000       400,000
  Option abandonments                           --     1,050,000            --
  Reserve reversal                        (440,000)   (1,113,000)           --
  Increase in receivables                  (37,000)   (1,141,000)   (1,460,000)
  Decrease (increase) in inventories     4,561,000    19,739,000   (13,499,000)
  Decrease in commercial land
   and buildings                         1,868,000     7,158,000     2,154,000
  Decrease in accounts payable,
   accrued expenses and
   other liabilities                    (2,997,000)   (5,508,000)   (1,138,000)
  Decrease (increase) in prepaid
   expenses and other assets               237,000      (555,000)      721,000
                                      ------------  ------------  ------------
                                         5,683,000    22,810,000    (3,626,000)
                                      ------------  ------------  ------------

Cash Flows from Investing Activities
------------------------------------
 Distribution from joint venture           725,000            --            --
 Increase in property and equipment        (58,000)     (237,000)      (88,000)
                                      ------------  ------------  ------------
                                           667,000      (237,000)      (88,000)
                                      ------------  ------------  ------------

Cash Flows from Financing Activities
------------------------------------
 Repayment under revolving
  credit agreement                      (9,500,000)  (19,500,000)   (9,500,000)
 Proceeds under revolving
  credit agreement                       4,000,000     4,500,000    14,500,000
 Decrease in mortgages payable          (1,719,000)   (8,171,000)     (882,000)
                                      ------------  ------------  ------------
                                        (7,219,000)  (23,171,000)    4,118,000
                                      ------------  ------------  ------------

 Net (decrease) increase in cash and
 cash equivalents                         (869,000)     (598,000)      404,000
 Cash and cash equivalents at beginning
  of year                                5,161,000     5,759,000     5,355,000
                                      ------------  ------------  ------------
 Cash and cash equivalents at
 end of year                          $  4,292,000  $  5,161,000  $  5,759,000
                                      ============  ============  ============



See accompanying notes to consolidated financial statements.

                              -14-

Consolidated Statement Of Shareholders' Equity
==============================================



                                                      Retained       Total
                   Common    Preferred   Paid In      Earnings   Shareholders'
                    Stock      Stock      Capital     (Deficit)      Equity
                 ----------  ---------  -----------  -----------  ------------
Balance,
 Nov. 30, 1993   $  234,000  $ 260,000  $20,527,000   $2,872,000  $ 23,893,000
Net income               --         --           --    4,193,000     4,193,000
Conversion of
 preferred stock     26,000   (260,000)     234,000           --            --
Issuance of stock
 under 401(k) Plan       --         --      198,000           --       198,000
Tax adjustment           --         --      719,000           --       719,000
Amortization of
 deferred compensation
 related to stock
 option plan             --         --       42,000           --        42,000
                 ----------  ---------  -----------  -----------  ------------
Balance,
 Nov. 30, 1994      260,000         --   21,720,000    7,065,000    29,045,000
Net loss                 --         --           --   (3,138,000)   (3,138,000)
Issuance of stock
 under 401(k) Plan    4,000         --      209,000           --       213,000
Provision in lieu
 of income taxes         --         --      831,000           --       831,000
Amortization of
 deferred compensation
 related to stock
 option plan             --         --       62,000           --        62,000
                 ----------  ---------  -----------  -----------  ------------
Balance,
 Nov. 30, 1995      264,000         --   22,822,000    3,927,000    27,013,000
Net income               --         --           --      453,000       453,000
Issuance of stock
 under 401(k) Plan    1,000         --       41,000           --        42,000
Provision in lieu
 of income taxes         --         --      578,000           --       578,000
                 ----------  ---------  -----------  -----------  ------------
Balance,
 Nov. 30, 1996   $  265,000  $      --  $23,441,000  $ 4,380,000  $ 28,086,000
                 ==========  =========  ===========  ===========  ============


See accompanying notes to consolidated financial statements.

                             -15-

Notes To Consolidated Financial Statements
==========================================


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
==============================================

Principles of consolidation
---------------------------

The consolidated financial statements include the accounts of Calton, Inc. and
all of its wholly-owned and majority-owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated.

The Company designs, constructs and sells single family detached homes
primarily in central New Jersey and central Florida.

Certain reclassifications have been made to prior years' financial statements
in order to conform with the 1996 presentation.

Liquidity and capital resources
-------------------------------

During the past several years, the Company has financed its operations
primarily from internally generated funds from home deliveries, land sales and
sales of commercial land and buildings. In April 1997, the Company and its
lenders amended the Company's revolving credit facility (the "Facility") to
extend the term of the Facility through February 28, 1998 and, if certain
conditions are satisfied, August 31, 1998. The amended Facility (the "Amended
Facility") reduced the loan commitment level to $30,000,000 at November 30,
1997. The Amended Facility provides the Company an option to extend the term to
August 31, 1998 if outstanding borrowings and the commitment level are reduced
to $20,000,000 or less by February 28, 1998. The Amended Facility changed
various restrictions and financial covenants with which the Company is required
to comply (see Note 5).

The Company is pursuing and will continue to pursue long-term financing to
replace the Amended Facility. Pending such replacement, the Company believes
that funds generated by operating activities, income tax payment reductions
derived from NOL utilization, the sale of certain assets during fiscal 1997 and
borrowing availability under the Amended Facility will provide sufficient
capital to support the Company's operations through the term of the Amended
Facility. If a more favorable long-term credit facility is not obtained, the
rate at which the Company can open new communities may be adversely affected
and the Company would be required to effect sales of substantial assets in
order to obtain an extension of the Amended Facility beyond February 28, 1998.

Income recognition
------------------

Revenue and cost of revenue on sales of homes are recognized when individual
homes are completed, and title and other attributes of ownership have been
transferred by means of a closing to the buyer. Revenue and cost of revenue on
land sales are recognized when all conditions precedent to closing have been
fulfilled, a specified minimum down payment has been received and it is
expected that the resulting receivables will be collected.

Cash and cash equivalents
-------------------------

Cash equivalents consist of short-term, highly liquid investments, with
original maturities of three months or less, that are readily convertible into
cash.

Inventories
-----------

Inventories are stated at the lower of cost or estimated net realizable value
for each property. Estimated net realizable value has been determined based
upon the amount the Company expects to realize through sale or development
based on management's present plans for each property. In a buildout of a
community, certain assumptions are made concerning future sales prices and
absorption of sales and closings in the community's life span. There is an
inherent risk that those assumptions made may not occur. The estimated net
realizable value of a property may exceed the value which could be obtained
through the immediate sale of the property if development plans for such
property support a higher cost recovery. Cost includes direct and allocated

                             -16-

indirect costs. Land and land development costs generally include interest and
property taxes incurred. Interest is capitalized using interest rates on
specifically related debt and the Company's average borrowing rate.
Construction costs are accumulated during the period of construction and
charged to Cost of revenues under specific identification methods. Land, land
development and common facility costs are amortized based upon the number of
homes to be constructed in each community utilizing a relative sales value
allocation method. The marketing costs for model homes are capitalized and
depreciated over the life of the community's deliveries on a per unit basis.

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. The
provisions of this statement are effective for fiscal years beginning after
December 15, 1995. If the Company adopted this statement currently, it would
not have a material effect on the Company's financial position, results of
operations or cash flows.

Commercial land and buildings
-----------------------------
Commercial land and buildings, stated at estimated fair market value, include
certain assumptions in their ultimate disposition such as future cash flow, the
ability of the Company to obtain certain zoning changes and regulatory or
governmental approvals. There is an inherent risk that those assumptions may
not be realized.

Income taxes
------------

Deferred income taxes are determined on the liability method in accordance with
Statement of Financial Accounting Standards No. 109 (see Note 8).

Prepaid expenses and other assets
---------------------------------

Prepaid expenses and other assets consist primarily of property and equipment,
prepaid architect fees and prepaid insurance. Prepaid architect fees are
amortized on a per unit basis as homes are delivered.

Risks and uncertainties
-----------------------

The preparation of 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 disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses for the periods reported. Actual
results could differ from those estimates.

The Company, as well as the homebuilding industry in general, is very sensitive
to economic conditions. Inflation, interest rate fluctuations, available
capital and consumer confidence impact the ability of the Company to market,
sell and build homes.

Per share computations
----------------------

Per share computations are based upon the weighted average number of shares of
common stock outstanding during each period presented (26,491,000, 26,281,000
and 26,095,000 for the years ended November 30, 1996, 1995 and 1994,
respectively).

                             -17-


2.  RECEIVABLES
===============

Receivables consist of the following (amounts in thousands):

                                                         November 30,
                                                     1996            1995
                                                 ------------    ------------
Closing proceeds due                                   $3,850          $4,946
Due from municipalities                                 2,446           2,573
Mortgages and notes receivable, net                     1,491             557
Other                                                   1,487             888
                                                 ------------    ------------
                                                       $9,274          $8,964
                                                 ============    ============


3.  INVENTORIES
===============

The components of inventories are as follows (amounts in thousands):

                                                         November 30,
                                                     1996            1995
                                                 ------------    ------------
Land and land development costs                       $22,969         $20,496
Homes, lots and improvements in production             33,819          39,251
Land purchase options and cost of projects
 in planning                                            8,737           4,499
                                                 ------------    ------------
                                                      $65,525         $64,246
                                                 ============    ============

Homes, lots and improvements in production represent all costs of homes under
construction including model homes, land and land development costs and the
related carrying costs of these lots.

Interest capitalized in inventories is charged to interest expense as part of
Cost of revenues when the homes are delivered or land sales close. Interest
incurred, capitalized and expensed for the years ended November 30, 1996, 1995
and 1994 is as follows (amounts in thousands):

                                                   Years Ended November 30,
                                                 1996        1995        1994
                                               --------    --------    --------
Interest expense incurred                      $  5,472    $  7,114    $  5,543
Interest capitalized                              4,067       5,016       4,005
                                               --------    --------    --------
  Interest expense - net                          1,405       2,098       1,538

Capitalized interest amortized
 in cost of revenues                              3,616       4,123       2,203
                                               --------    --------    --------

Interest cost reflected in pre-tax income      $  5,021    $  6,221    $  3,741
                                               ========    ========    ========


In the years ended November 30, 1995 and 1994, the Company recorded provisions
of $1,593,000 and $400,000, respectively, to state inventory to estimated net
realizable value. These charges are reflected in the provision for estimated
net realizable value. No such charges were recorded in 1996. During 1996, the
Company acquired $23,300,000 of land and land options, $4,730,000 of which was
financed by purchase money mortgages. During 1995, the Company acquired
$10,511,000 of land and land options.


4.  COMMERCIAL LAND AND BUILDINGS
=================================

During 1996, the Company disposed of commercial land and buildings representing
three parcels of land and a commercial building for total revenues of
$3,169,000 that provided $1,780,000 in cash for operations and a pre-tax gain
of $1,100,000.

For the year ended November 30, 1995, the Company completed the sale of two
commercial buildings for combined proceeds and pre-tax gains of $8,080,000 and
$500,000, respectively. The sales provided approximately $850,000 in cash for
operations after the repayment of mortgage debt of $6,900,000 and contributed
to the reduction of Commercial land and buildings for the year.

                             -18-

In the last month of 1994, the Company sold a commercial building for $800,000
in cash which reduced Commercial land and buildings by $770,000. The net
proceeds of approximately $750,000 were used to reduce mortgages payable. The
sale of this building did not result in a significant gain or loss.

The Company's remaining commercial properties consist primarily of land located
in Pennsylvania, New Jersey, Florida and California. These properties are
available for sale as a result of management's focus on residential
homebuilding. One of such properties has certain acreage currently under
contract for sale, subject to certain contingencies.


5.  REVOLVING CREDIT AGREEMENT
==============================

In April 1997, the Company and its lenders amended the Company's revolving
credit facility (the "Facility") to extend the term of the Facility through
February 28, 1998 and, if certain conditions are satisfied, August 31, 1998.
The amended Facility (the "Amended Facility") reduced the loan commitment level
to $46,000,000 initially and requires amortization of $3,000,000 by July 15,
1997, another $3,000,000 by August 31, 1997 and a further reduction of
$10,000,000 by November 30, 1997. In addition, the Amended Facility increased
the interest rate charged to the Company to the lender's prime rate (8.25% at
November 30, 1996) plus two and one-half percent (2.5%). The Company is required
to pay the lenders, in five (5) installments, a commitment fee, which the
Company will amortize over the extension period ending February 28, 1998, equal
to three percent (3%) of the lenders' initial commitment level under the
Amended Facility. The Amended Facility provides the Company an option to extend
the term to August 31, 1998 if its outstanding borrowings and the commitment
level are reduced to $20,000,000 or less by February 28, 1998. In such event,
the interest rate charged to the Company will be reduced to prime plus two
percent (2%).

The Amended Facility changed various restrictions and financial covenants with
which the Company is required to comply, including covenants relating to cash
basis interest coverage, EBITDA and tangible net worth, and continues to impose
limits on the amount which can be expended on land acquisition and land
development. For the year ended November 30, 1996, the Company's EBITDA was
$7,300,000 compared to $8,600,000 in 1995. Purchase money financing from other
sources would continue to be limited to $5,000,000 under the Amended Facility.
Certain subsidiaries of the Company are guarantors of the obligations under the
Amended Facility. The lenders have a security interest in substantially all of
the assets of the Company and its subsidiaries, subject only to certain
permitted liens approved by the lenders. The Amended Facility prohibits the
payment of dividends by the Company.

Management believes that it will be able to comply with the covenant levels and
other terms set forth in the Company's agreement with the lenders based upon
meeting the levels anticipated in its business plan. However, there can be no
assurance that if market or other conditions deteriorate, that the Company will
meet the covenant levels. If a more favorable long-term credit facility is not
obtained, the rate at which the Company can open new communities may be
adversely affected and the Company would be required to effect sales of
substantial assets in order to obtain an extension of the Amended Facility
beyond February 28, 1998.

At November 30, 1996, approximately $40,900,000, including $1,400,000 of
letters of credit, was outstanding under the Facility. The Facility includes a
borrowing base, based upon a percentage of the Company's eligible inventory,
which restricted borrowings to $42,300,000 at November 30, 1996. The unused
Facility commitment of $8,300,000 was available as of November 30, 1996 to the
Company for investment in inventory that results in the corresponding growth of
its borrowing base. As of November 30, 1996, approximately $1,400,000 was
available to be borrowed under the borrowing base restriction. Substantially
all of the Company's assets are pledged as collateral under the Facility.

Amounts borrowed under the Facility during the year ended November 30, 1996
bore interest at the lenders prime rate (8.25% at November 30, 1996) plus two
percent (2%). The weighted average interest rates for the years ended
November 30, 1996 and 1995 were 11.3% and 11.1%, respectively. The weighted
average amounts borrowed for the corresponding years were $45,445,000 and
$58,105,000, respectively.

The total amount of interest paid, net of amounts capitalized, in the years
ended November 30, 1996, 1995 and 1994 was $1,445,000, $2,124,000 and
$1,440,000, respectively.

                             -19-


6.  MORTGAGES PAYABLE
=====================

Mortgages payable at November 30, 1996 and 1995 were $4,445,000 and $1,227,000,
respectively. Approximately $6,700,000 of inventories are pledged as collateral
for purchase money mortgages to land sellers at November 30, 1996 compared to
$1,885,000 at November 30, 1995. During 1996, the balance of the purchase money
mortgage from year end 1995 was satisfied by payments in exchange for mortgage
releases. During 1996, the Company used purchase money mortgages, in the amount
of $4,730,000, to finance the acquisition of two parcels of land. The interest
rate on each of the purchase money mortgages is at prime (8.25% at November 30,
1996) and is payable on a monthly or semi-annual basis beginning in 1997.
Mortgages payable mature as follows: 1997 - $1,013,000, 1998 - $2,370,000 and
in 1999 - $1,062,000. The weighted average interest rate for mortgages payable
for the years ended November 30, 1996 and 1995 were 8.7% and 10.4%,
respectively.


7.  SHAREHOLDERS' EQUITY
========================

The Company's Certificate of Incorporation provides for 53,700,000 authorized
shares of Common Stock (par value $.01 per share), 2,600,000 shares of
Redeemable Convertible Preferred Stock (par value $.10 per share) and
10,000,000 shares of Class A Preferred Stock (par value $.10 per share). None
of the Preferred Stock is issued or outstanding.

In May 1993, the Company adopted the Calton, Inc. 1993 Non-Qualified Stock
Option Plan (the "Plan") under which a total of 1,493,000 shares of Common
Stock were reserved for issuance. As of November 30, 1996, options with respect
to 1,383,000 shares have been granted, net of cancellations, 941,000 of which
were exercisable and none of which have been exercised. Under the terms of the
Plan, options may be granted at an exercise price designated by the Board of
Directors. The exercise price of options granted range from $.31 to $.50 per
share. Options granted under the Plan have a maximum term of ten years.

In April 1996, the Company's shareholders approved the Company's 1996 Equity
Incentive Plan under which a total of 2,000,000 shares of Common Stock were
reserved for issuance. As of November 30, 1996, options with respect to
1,224,000 have been granted, net of cancellations. Under the terms of the plan,
options may be granted at an exercise price equal to the fair market value of
the Common Stock on the date of grant (110% of such fair market value in the
case of an incentive stock option granted to a 10% shareholder). The exercise
prices of outstanding options range from $.34 to $.41 per share with vesting
ranging from one to five years. The exercise period is up to ten years. Of the
vested shares, none have been exercised.

In October 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock Based Compensation." The provisions of this
statement are effective for fiscal years beginning after December 15, 1995. The
Company intends to implement the disclosure-only provision of this statement.
Accordingly, if the Company adopted this statement currently, it would not have
a material affect on the Company's financial position, results of operations or
cash flows.


8.  INCOME TAXES
================

The components of the provision in lieu of income taxes are as follows (amounts
in thousands):

                                                  Years Ended November 30,
                                                1996        1995        1994
                                              --------    --------    --------
Federal
Current                                       $     --    $     --    $     --
Deferred                                            --          --          --
Provision in lieu of income taxes                  351         479       2,537

State
 Current                                            --          79          24
 Deferred                                           --          --          --
 Provision/(benefit) in lieu of income taxes       227         273        (194)
                                              --------    --------    --------
                                              $    578    $    831    $  2,367
                                              ========    ========    ========

                              -20-

The following schedule reconciles the federal provision in lieu of income taxes
computed at the statutory rate to the actual provision in lieu of income taxes
(amounts in thousands):

                                                  Years Ended November 30,
                                                1996        1995        1994
                                              --------    --------    --------
Computed provision/(benefit) in lieu
 of income taxes at 34%                       $    361    $   (784)   $  2,231
Expenses for which deferred tax benefit
  cannot be currently recognized                    --       1,258         409
State and local tax provision                      227         352         346
State tax reserves                                  --          --        (695)
Other, net                                         (10)          5          76
                                              --------    --------    --------
Total provision in lieu of income taxes       $    578    $    831    $  2,367
                                              ========    ========    ========

Fresh-start accounting and reporting requires the Company to report a provision
in lieu of income taxes when the Company recognizes a pre-reorganization
deferred tax asset. This requirement applies despite the fact that the
Company's pre-reorganization net operating loss carryforward and other deferred
tax assets would eliminate the related federal income tax payable. The current
and future year tax benefit related to the pre-reorganization net deferred tax
asset is recorded as a direct increase to paid in capital. The net deferred tax
asset of $19,628,000 is primarily attributable to pre-reorganization deductible
temporary differences.

Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at November 30, 1996 and 1995
are as follows (amounts in thousands):

                                     November 30, 1996       November 30, 1995
                                  Deferred     Deferred    Deferred    Deferred
                                    Tax        Tax Lia-      Tax       Tax Lia- 
                                   Assets      bilities     Assets     bilities
                                  --------     --------    --------    --------
Fresh-start inventory reserves    $    402     $     --    $  1,114    $     --
Income from joint ventures             416          452         328         417
Inventory and other reserves         1,344           --       2,064          --
Preproduction interest                  --          536          --         536
Capitalized inventory costs            150          972         438         782
Federal net operating losses         9,083           --       7,568          --
State net operating losses           8,991           --       6,647          --
Depreciation                           382          373         285          89
Deferred state taxes                   735           --       1,691          --
Other                                  495           37         374          38
                                  --------     --------    --------    --------
                                    21,998        2,370      20,509       1,862
Valuation allowance                (19,628)          --     (18,647)         --
                                  --------     --------    --------    --------
Total deferred taxes              $  2,370     $  2,370    $  1,862    $  1,862
                                  ========     ========    ========    ========


Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
For federal and state tax purposes, a valuation allowance was provided on the
deferred tax assets due to uncertainty of realization. Federal tax effects of
deferred tax assets were recognized to the extent of existing available
deferred tax credits.

The federal net operating loss carryforward for tax purposes is approximately
$26,500,000 at November 30, 1996 and $22,000,000 at November 30, 1995. The
Company's ability to use its deferred tax assets, created prior to the change
in the Company's ownership, to offset future income is $1,627,000 per year
under Section 382 of the Internal Revenue Code as a result of the change in
control of the Company in November of 1995. These federal carryforwards will
expire between 2007 and 2011. The Company received an income tax refund of

                             -21-

$50,000 in 1995. No such amounts were received in 1996 and 1994.


9.  COMMITMENTS AND CONTINGENT LIABILITIES
==========================================

(a)  In July 1994, an action was filed against Calton Homes, Inc., the Township
of Plainsboro, New Jersey and its planning board, certain real estate brokers
and certain unnamed officers of Calton Homes, Inc., by approximately 60
purchasers in the Company's Princeton Manor development seeking compensatory
and punitive damages arising out of an alleged failure to disclose that a
portion of the property adjacent to the community could be developed by
Plainsboro Township as a public works site. The Company is vigorously
contesting this matter and, although there can be no assurances, does not
believe that the case will have any material effect on the financial position,
results of operations or cash flows of the Company. In addition, the Company
believes that it is contractually entitled to indemnification from Plainsboro
Township in the event that any liability should arise.

(b)  In June 1996, the Federal Deposit Insurance Corporation (the "FDIC"), in
its capacity as Liquidating Agent/Receiver of Eliot Savings Bank, instituted an
action in the United States District Court, District of Massachusetts, seeking
recovery of amounts owed under a $5,700,000 promissory note (the "Note") issued
to Eliot Savings Bank by the Residences at the Surf joint venture (the "Joint
Venture"), an entity in which a Talcon, L.P. ("Talcon") subsidiary had an
interest. This action relates to a loan on property owned by the Joint Venture.
The loan was placed on the property before Talcon was formed. Accordingly, in
connection with the creation of Talcon, the interest in the Joint Venture was
transferred upstream to Calton, Inc. and then transferred downstream into
Talcon, and eventually into the Talcon subsidiary. In its suit, the FDIC
alleges, among other things, that Calton, by virtue of the assignment of the
interest in the Joint Venture to Calton in 1987, has liability as a general
partner in the Joint Venture and is seeking to collect approximately
$8,700,000 in principal and interest from Calton and other parties. While no
discovery has occurred to date, based upon a preliminary analysis of this
matter, Calton believes that the FDIC's position is contrary to applicable law
and that Calton does not have any obligations under the Note by virtue of the
assignment of the interest in the Joint Venture to Calton or otherwise. The
Company will vigorously contest this matter but there can be no assurances that
the case will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.

(c)  The Company is involved from, time to time, in other litigation in the
ordinary course of business. Management presently believes that the resolution
of any such matter should not have a material, adverse effect on the financial
condition, results of operations or cash flows of the Company.

(d)  The Company is obligated under two operating leases, in New Jersey and
Florida, for office space expiring in November 1997 for the corporate office
facility and in December 2000 for the Florida space, with total annual rentals
of approximately $298,000 in 1997 and $56,000 through the year 2000,
respectively. Rental expense for the years ended November 30, 1996, 1995 and
1994 amounted to $726,000, $781,000 and $715,000, respectively.

(e)  The Company has a qualified contributory retirement plan (401(k) Plan)
which covers all eligible full-time employees with a minimum of one year of
service. Employees may contribute up to eighteen percent (18%) of their annual
compensation with employer matching at the Company's discretion. The Company's
contribution to the plan was $42,000 in 1996, $213,000 in 1995 and $198,000 in
1994. The Company's matching contribution, in the form of registered Common
Stock of the Company, for 1996 was 5% of participant contributions. The
Company's matching contribution, in the form of registered Common Stock of the
Company, for 1997 will be 15% of participant contributions.

(f)  Commitments include the usual obligations of housing producers for the
completion of contracts in the ordinary course of business.


10.  INVESTMENTS IN JOINT VENTURES
==================================

During 1996, the Company received $725,000 from the liquidation of a joint
venture in which it previously participated. In addition, the Company received
$460,000 on a fully reserved note receivable from a previous joint venture. The
payment on the fully reserved note is classified as non-operating Other
(income) expense.

                             -22-

The Company previously wrote off its entire equity investment in Talcon. In
connection with Talcon's dissolution and liquidation, it paid the Company
$890,000 in 1995 in full satisfaction of its debt obligations. This payment was
classified as non-operating Other (income) expense.


11.  QUARTERLY FINANCIAL RESULTS (UNAUDITED)
============================================

Quarterly financial results for the years ended November 30, 1996 and 1995 are
as follows (amounts in thousands, except per share amounts):

                                   Three Months Ended
               ------------------------------------------------------------
               February 29,       May 31,       August 31,     November 30,
                   1996            1996            1996            1996
               ------------    ------------    ------------    ------------
Revenues       $     19,456    $     28,675    $     33,355    $     40,949
Gross profit          2,074           3,455(b)        4,746(c)        6,515(c)
Net income (loss)      (649)           (294)(a)         385(a)        1,011(a)
Net income (loss)
 per share             (.02)           (.01)            .01             .04




                                   Three Months Ended
               ------------------------------------------------------------
               February 28,       May 31,       August 31,     November 30,
                   1995            1995            1995            1995
               ------------    ------------    ------------    ------------
Revenues       $     38,215    $     38,836    $     60,362    $     43,430
Gross profit          4,411           4,403(e)        7,418           3,328
Net income (loss)      (375)(d)        (316)          1,008          (3,455)(f)
Net income (loss)
 per share             (.01)           (.01)            .04            (.13)


(a)  Includes income in the second, third and fourth quarter of $110,000,
$150,000 and $200,000, respectively, from the partial collection of a note
previously reserved.

(b)  Includes a $150,000 reversal of a sales tax estimate accrued in the fourth
quarter of 1995 and resolved in the second quarter of 1996.

(c)  Includes a reversal of accruals in the amount of $105,000 and $185,000 in
the third and fourth quarters of 1996 due to the resolution of certain
construction obligations and litigation exposures.

(d)  Includes a $200,000 charge for costs primarily associated with the
consolidation of the New Jersey-North and New Jersey-South divisions.

(e)  Includes a $1.1 million charge resulting from abandoning nine properties
under option and a credit of $1.1 million realized from the reversal of a
reserve previously provided on a community substantially completed in the
second quarter of 1995.

(f)  Includes $1.6 million writedown of inventories to estimated net realizable
value, $1.1 million of restructuring charges related to the wind down of the
Chicago division and $640,000 in executive severance, partially offset by the
$820,000 collection of a note previously reserved. Of the $1.1 million charge,
$727,000 was applied as a reduction to inventory as a result of the anticipated
market reaction to the wind down and not proceeding with the scheduled lot
takedowns at the division's two communities. The wind down was substantially
completed by the end of fiscal 1996.


                             -23-

Report Of Independent Accountants
Board of Directors and Shareholders of Calton, Inc.
===================================================

We have audited the accompanying consolidated balance sheet of Calton, Inc. and
Subsidiaries as of November 30, 1996 and 1995 and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended November 30, 1996, 1995 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Calton, Inc. and
Subsidiaries as of November 30, 1996 and 1995 and the consolidated results of
their operations and their cash flows for the years ended November 30, 1996,
1995 and 1994 in conformity with generally accepted accounting principles.


/s/ Coopers & Lybrand, L.L.P.

Princeton, New Jersey
January 10, 1997, except for
Notes 1 and 5 as to which the
date is April 11, 1997



Calton, Inc. Common Stock
=========================

Calton, Inc. common stock is traded on the American Stock Exchange ("AMEX")
under the symbol CN. The following reflects the high and low sales prices of
the common stock during fiscal 1996 and 1995.

Fiscal 1996          High          Low
                     ====          ====
1st Quarter          7/16          5/16
2nd Quarter          3/4           3/8
3rd Quarter          1/2           5/16
4th Quarter          3/8           1/4



Fiscal 1995          High          Low
                     ====          ====
1st Quarter          1-1/8          5/8
2nd Quarter          11/16         3/8
3rd Quarter           1/2          3/8
4th Quarter           9/16         5/16


At March 14, 1997, there were approximately 650 record holders of the Company's
common stock. On that date, the last sale price for the common stock as
reported by AMEX was $.375.

                             -24-